IXICO plc (IXI) Earnings Call Transcript & Summary

Welcome to the IXICO interim update for the first 6 months of the 2020 financial year. My name is Giulio Cerroni. And as IXICO's CEO, I'm delighted to be able to indicate that despite the uncertainties of the C-19 pandemic, that we're reporting significantly enhanced profitability over prior year. We're going to highlight how our technology platform has allowed us to adapt quickly to the new business environment. As usual, I'm joined by our CFO, Grant Nash, who will present on the H1 financial performance. But today, I'm also joined by our Chief Business Officer, Lammert Albers, who will be presenting on the market opportunities ahead including consideration for the C-19 business environment. In recent years, tremendous progress has been made in creating value for all our stakeholders and I'm proud of our achievements and to be able to describe IXICO today as a high-growth, profitable debt-free, well-capitalized technology company. Before describing the drivers behind our continued profitable growth momentum and how we are adapting to the new business environment, a quick reminder of what we do. Put simply, IXICO develops and deploys advanced AI-driven data analytics services for the global pharmaceutical clinical trials market looking to develop new therapies for neurological diseases, such as Alzheimer's, Parkinson's and Huntington's disease. IXICO creates significant value for our clients by enabling better interpretation of the meaning of the increased amounts of data obtained from medical images in brain scans and data now being collected from wearable biosensors used in clinical trials. Three key elements to our success in gaining market share had been the following: As a specialist compared to the largely generalist CROs, our scientists work closely with clients and academic key opinion leaders to select the right biomarkers in study protocols. Our technology services can and are used across all phases of development and at scale in later Phase III studies. This all means that by adopting our proprietary technology in the early phases that our clients are able and likely to continue to use IXICO for several years, which results in IXICO achieving significant client loyalty levels and the prospect of being eventually deployed at scale into the larger multimillion-dollar Phase III contracts. This has been evidenced in a number of recent Phase III contract wins including the GBP 10.5 million Phase III Huntington's contract announced in April. As a technology company, our technology business model underpins our growth and is enabling us to scale the business quickly. And this is evident from the financial metrics that Grant will be presenting. The 3 key pillars of the IXICO model are as follows: firstly, innovation, innovation in AI algorithms for the analysis of imaging and digital biomarkers for an increasing portfolio of neurological diseases. Lammert will describe how we have successfully diversified into radiological diseases to become a market leader in diseases such as Huntington's disease. The ability to deploy our technology remotely, which allows patient data to be gathered without having to travel clinical image centers is fundamental and, of course, very pertinent in the current C-19 environment. Being a proven and trusted technology partner is important to the conservative pharma clinical trials market and difficult to achieve for potential new entrants. IXICO has demonstrated a track record of managing commercial-sponsored projects and had been revenue-generating now for over a decade, resulting in our technology services being deployed successfully all over the world. Next, I'd like to highlight how our capabilities in innovating in AI is an important differentiator. This slide, at the top of the slide, indicates a cross-section left to right MRI scan of a single patient. Traditionally, this will be reviewed by a highly trained expert reader to identify any potential changes in the brain suggesting disease progression by comparing similar images from the earlier MRI scale. So an expert reader would often be looking to identify small changes, i.e., less than 1% over a long period such as 6 to 9 months between those patient visits. The bottom of the slide represents the same patient images but by analysis of deployment of our proprietary LEAP fully automated AI algorithms. Typical benefits of fully automated AI algorithm processing that we often observe include speed, analysis in a matter of minutes instead of hours; accuracy, variation is prevalent between expert readers on different days but also between different reasons and setups. Also, we're able [ to get to ] more information from the same number of images. We can extract more information from medical images than can be done by the naked eye, which reduces the potential number of visits required by the patient, again, significant in the current climate. And finally, greater utility. Often, we find that we're able to deploy algorithms on other therapeutic areas, which is driving our diversification, where a similar biomarker [ might be ] identified as important. Consequently, we achieved a high-return investment on our R&D dollars. And so to wrap up my section, I'd just like to update you on the key actions we took in response to COVID-19 and the actions we're taking to adapt to the new business environment. First of all, starting with our employees. We've got well-being of our employees first and foremost in our planning. And I'm delighted to report that to date, we've had no reported cases and no staff sickness due to COVID-19. We're also very quickly able to transition to 100% remote working with minimal disruption and want to thank and praise our staff for their agility and commitment to ensuring client service levels were not impacted during this period of uncertainty. Recruitment was put on hold, but no staff reductions, salary reductions or furloughs were implemented. In our second half and going forward, we now have a plan to increase the remote working as a long-term approach for the business. And also, we are now resuming our recruitment plans. Next, clients. We clearly did a very robust and detailed study-by-study impact assessment. And I'm very pleased to say that to date, less than 20% of our sponsors reported a suspension or delay to their plans. This is significantly lower than many other organizations served in the clinical trials market. And I'm also pleased to say that our larger studies have not been affected. And looking forward, we're in preparation mode for a significant restart and ramp-up in demand that we expect to take place towards the end of this calendar year. In referring to our business model, our TrialTracker remote site support model, that allows gathering patient data without having to travel to clinical imaging sites, meant that we are ideally positioned to respond to the immediate impact on our clients' clinical trials. Consequently, looking forward, we plan to fully and further leverage our remote site management model, and we continue to invest in [ next-generation ] TrialTracker and transition to cloud, as we see this as a fundamental means of scaling our business going forward. And finally, we included a close look at our discretionary spend in those initial weeks and reviewed our investment priorities, so that in the second half this year, we will very much focus on operational improvements and continued investment in R&D, commercial and technology capabilities for the medium and long term. And with that overview, I'd now like to hand over to Grant to present on the financial performance and strategic KPIs for the business.

Thank you, Giulio, and hello, everyone. So before I move on to the detail, really, I wanted to highlight 4 main points that I'm making within these financial slides. Firstly, at IXICO, we've had another strong half year of trading. We've grown strongly and in both revenues and in profits. Secondly, at IXICO, we have invested across the last 6 months in areas that we said that we were going to in our full year presentation that we gave back in December. We've invested in people, in systems and processes and specifically within R&D and sales and marketing. Thirdly, at IXICO, we have had -- we have a strong and indeed a strengthened balance sheet. As Giulio said, we're debt-free, and we have sufficient cash to support our organic growth plans. And then fourthly, COVID-19 has placed a drag across the clinical trial sector, and we are seeing some impacts on this as we progress through the second half of our year. However, with the strong order book that we have, the main impact is going to be delays in the signing and starting new trials. As a consequence, we expect to see the impact of COVID-19 most in our full year '21 year, as trials we would expect to start between now and early financial year '21 are likely to be delayed by a number of months. But with the order book that we have in place, we're very confident that we can maintain and continue to grow in a double-digit way beyond the end of this year. Turning to my slide on half 1 financial performance. The graph on the left shows our revenue performance in the first half of the year and across the last 4 years. By reporting GBP 4.6 million of revenues in the first half of financial year '20, we have achieved 3 things. We've achieved 33% revenue growth on the first half of 2019, so 1 year ago. At the same time, we've doubled the revenues that we achieved in the first half of 2017, just 3 years ago. And that gives us a compound annual growth rate of 31% across the first half over the last 4 years, a significant achievement by any measure. Moving to the middle graph. We're showing sustained strong gross margins, in the mid-60s, which continue to reflect the operational leverage and increased proportion of our revenues derived from data analytics. We continue to believe that this level of gross margin is sustainable as we scale. And then moving to the right. With a strong revenue growth and stable gross margins as well as carefully controlled operational expenditure, this graph shows that the impact on EBITDA has been significant. By being able to report GBP 700,000 of EBITDA across the first 6 months of the year, we've continued our trajectory of swift growth from substantial half year losses that we made back in 2016 to notable profits now in the first half of 2020. At an EBITDA margin of 15%, we've achieved a greater EBITDA value in 6 months and was achieved across the full year of 2019, our first year of profitability since listing. So overall, a very strong financial performance across the last 6 months. Looking and turning to our strategic KPIs. The graph on the left here shows our average FTE numbers and the revenue per FTE for the first half of 2020 compared to the previous 4 years. What this shows is that whilst we've invested in head count, moving from an average number of FTEs in the company of just over 60 in the full year to September '19, we're now at an average of just under 75 in the first half year 2020, an increase of over 20%. And we've been able to do that whilst not impacting the revenue per FTE peak that we achieved in financial year '19. This increase in heads is part of our investment in scalability and process improvement, and I'll come on to that in more detail. But in part, as a result, it's an investment in the future. As a result, to do so whilst maintaining existing productivity rates is particularly satisfying. The middle graph shows our contracted order book. This remains strong at GBP 15.3 million at the half year close, despite the greater than 30% compound annual growth rate of revenues across the last 4 years. The order book remains more than double our prior year revenues and gives us good visibility of future revenues. The order book has also been further strengthened by the signing of a significant Huntington's disease contract in April. Meaning that as of today, in May 2020, our contracted order book is well over GBP 20 million. Finally, on the right is a summary of both our half 1 revenues and order book split by client type. Lammert will provide further analysis on this during his section, but the reason for including these pie charts here is to provide you with visibility of our client mix. As you can see, we continue to show a mix of top 20 pharma, mid-pharma and biotech contracts, with early phase contracts tending more to biotech and later phase more to the top 20 pharma. This mix is important. As for a start, it shows we have traction. We have reputation, and we also have the confidence of all sectors of our market. But particularly in the current uncertain times, we have a customer list dominated by well-funded big pharmas, which is clearly a benefit to companies of our size to fall back on. In other words, we're not faced with significant client payments. So turning to operational expenditure. Over the last 12 months, we've been signaling 3 key messages in respect of operational expenditure. Firstly, we've been saying that we will be reincreasing our investment in R&D. And indeed, we have with programs in our core MRI imaging market, adjacent therapeutic areas, adjacent modalities such as PET and in wearable biomarkers. We've also been saying that we'll be investing in sales and marketing, specifically by the appointment of Lammert as a CBO in the U.S. and an additional extra on-the-ground BD presence in the U.S., which is our biggest market. And thirdly, we've been saying that we will be tightening our belts in G&A to ensure that whilst as a listed company, we will always have a higher G&A for our size relative to a private company, the investments that we're making we need to ensure represent excellent value. And what you can see from this slide is that we've been delivering on all 3 of these fronts: Firstly, with R&D investment increased to 15% of revenues; sales and marketing to 20% of revenues; and G&A reduced to 30% of revenues. We believe we're bringing more balance to the investments that we're making from an operational expenditure point of view. My final slide shows that at IXICO, we have a very strong balance sheet for our size. With, at our half year point, cash of GBP 6.7 million, no debt, a growing working capital of GBP 7.6 million and a net asset position of GBP 8.5 million, this provides the basis for both underpinning our planned strategic investments and our organic growth plans and, in these changing times, allows us not only to be confident on weathering the current storm but also to invest rapidly to further suit the clinical trial market that we believe will increasingly demand its suppliers adopt operating models equivalent to our remote working data-driven approach. In summary, despite a share price increase of over 100% over the last 12 months, irrespective of the COVID-19 impact, we remain a company with an enterprise value in the mid-GBP 20 million once our cash position is discounted from our market cap. At the level of revenues and EBITDA that we've been able to present here today, plus the growth rate we are showing, this valuation continues to represent very good value. I'm now going to pass on to Lammert to take you through some of the commercial aspects.

Thank you, Grant. So I'd like to start by reminding everybody how exciting the central nervous system disease market is. Central nervous system diseases are the second largest therapeutic area after oncology. And as you can see from these data here, it's a therapeutic area that has been enjoying significant increase in investment over recent years. Many of these CNS indications do not have what we call a disease modifying treatment, but they merely have drugs available right now that provide symptomatic relief. Hence, this is a significant driver for further research and development and investment from pharma. Or in other words, there's a great prize for those that succeed in these indications. Over the last couple of years, we've also seen much improvement in terms of the understanding of these diseases. And with that, we've seen an increase in complexity in trial design and also an increase in complexity of execution. And that, in turn, has meant that pharmaceutical companies developing these drugs have required specialist hands, such as the ones of IXICO, to help them with the execution of said trials. IXICO has a legacy of supporting complex CNS trials and is well positioned to increase its market share in this attractive market. So we move on to the current pandemic situation and what's been happening from a trial perspective. I want to start by reminding you some of the differences between IXICO and the traditional CROs that we referenced in the call earlier. So whereas traditional CROs mainly interact with clinical investigator sites, IXICO interacts with ancillary imaging centers instead. So traditional CROs, they tend to send what we call clinical research associates to investigator sites to conduct what we call monitoring visits, and this is how traditional CROs generate most of their revenues. IXICO, however, generates revenue mainly through the analysis from data received from those imaging centers. So you may have seen some articles in the press lately referencing to the dramatic drop and decrease of activity pertaining to clinical sites. So it is really important to understand that those numbers reflected do not concur with what we have been seeing and what has been happening at the imaging centers. IXICO has seen some drop in what we call incoming data during the COVID period but certainly not to the same extent that we have seen reported in terms of clinical site closures or delays. So what we have seen, of course, is that there have been restrictions at clinical sites and imaging centers, and that was expected. We continue to see that. Hence, capacity going forward will come at a premium, and it will be very important that companies like ourselves coordinate very efficiently to schedule visits from specific patients to those sites. From a patient community perspective, we have seen that there's a strong desire to go back to clinical trials and to clinical trials' research centers. Clinical trials often are -- is deemed a critical care option, particularly in the United States. The regulators were very quick to issue guidance during this pandemic. So we've seen guidance from the FDA and from the EMA. And within that guidance, there has been particular focus on safety precautions at site. Hence, we have seen also an increased demand in remote-based delivery systems that are compliant with those regulations. As Giulio had mentioned earlier in the call, IXICO has always had a fully remote-based delivery model. And therefore, we have been able to leverage this during the pandemic, where our payers have needed to adapt from an in-person-based or on-site-based delivery method. IXICO is already able to deliver and at scale and fit-for-purpose model in this new world. Of course, we remain focused on the patient's safety, as per these guidelines issued by regulators such as the FDA and the EMA. Now I want to move on to some of the details pertaining to our H1 revenue and bookings that Grant talked to you about earlier. So IXICO is the only full-service provider that focuses exclusively on CNS trials, and this has been part of our strategy for a number of years. And as a result, we've been able to provide a highly skilled workforce. We've been able to provide specific expertise in neuro, and we've had very few distractions by way of other indications. We've also managed to deliver much reproducibility and high quality in terms of the data that we provided back to our customers. And as a result, we provided a loyal customer base with some solid repeat business. Part of our strategy was to focus on rare diseases, rare neurological diseases, in fact. And as you can see from the data here, this strategy has now resulted in a large proportion of our business being in this indication group. What we've also seen over the last few years is that there was a slight decline in the number of Alzheimer's disease trials. And as of recently, we've actually seen a return to that indication, and that is reflected in our most recent bookings. The data on the right is the data that speaks to the diversity in terms of the clinical trial phases that we cover at IXICO. So the performance on the prior trials that we served that were mainly on the early-stage side has meant that we've been able to follow clinical assets into later stages of the development pipeline for either the original pharma company that was running the early-stage trials or the out-licensing partners that have taken on the clinical assets. We -- in addition to that, we've made significant investments to scale the business in order to be able to service those later-stage programs. And IXICO is now on the map as a true global development partner and is well positioned to take on more of that global late-stage clinical development work. Now I would like to turn to our pipeline of future opportunities. As Grant had mentioned previously in the call, after the closing of H1 and in the month of April, we did record a GBP 10.5 million order pertaining to a Huntington's disease program. And this has been recorded as our single largest booking in IXICO history. After this record win, we continue to have a healthy sales pipeline of future opportunities. And whilst we expect a number of additional bookings this fiscal period, we do expect some COVID headwinds for the remainder of H2. Having said that, CNS programs remained part of Tier 1 strategy for pharma throughout COVID. And therefore, we expect the return to normal and continued demand increase in the following fiscal periods. CNS continues to be an area of great unmet medical need, and there continues to be a chronic lack of disease-modifying treatments, hence, a driver for increased investment and further trials. If we model this out, with an example in Alzheimer's disease with a drug that is touted to potentially be the first disease modifying treatment, Biogen's aducanumab, you see a very interesting picture. Aducanumab is currently dosed at once a month, intravenously at a cost of $10,000. If 1% of 80 patients in the U.S. alone, 50,000 patients go on to aducanumab, then this will be a $6 billion drug for Biogen, and Biogen's revenues in 2019 were $14.4 billion. So imaging continues to be one of the most robust and objective tools to look after safety and efficacy in the CNS active compounds and trials. And we're starting to see the results of the importance of imaging in these trials, where imaging end points are becoming primary end points, including in some of the trials that IXICO is supporting. Now I'd like to turn it back to Giulio to wrap up his presentation.

Thank you, Lammert. As you would have heard from Grant and Lammert, the IXICO investment case continues to be resolute and robust despite the uncertainties of the C-19 pandemic. This has enabled us to drive very strong compounded top line growth over the past 3 years and grown profitability, whilst building a GBP 20 million order book underpinned by multiyear contracts that provide very good visibility to future revenues from a loyal client base that has adopted IXICO's technology within its clinical development programs. In particular, we've referenced to the information presented by Grant, it's evident that this management team has a proven track record of delivering growth. Finally, looking forward, the management team is clearly planning for continued success. The business fundamentals remain strong, and we have line of sight on a pipeline of opportunities. However, COVID-19 has resulted in some disruption, in particular, in delays in anticipated new contracts, which is expected to impact top line growth rates in the second half of this year and into the beginning of 2021. Consequently, we are focused on investing for the medium- to long-term growth whilst planning to be ready for anticipated demand later in the year, but always looking to gain further market share by extension of IXICO's to remote access business model and proprietary AI technology to deliver sustained double-digit profitable growth. And in closing, I'd like to say thank you for listening, and stay safe.