Microbix Biosystems Inc. (MBX) Earnings Call Transcript & Summary

Okay. Our first presenter today is Microbix. And the Microbix Biosystems was founded more than 30 years ago to provide viral antigens to the global diagnostics industry. In 2017, after many years of kind of low growth and the Board appointed Cameron Groome, the CEO of the company, and Groome leveraged Microbix expertise in its highly regulated industry to develop 2 new higher-margin product lines. In just a few years, Microbix has transformed from a low-growth, money-losing company to a fast-growing, highly profitable and more diversified corporation. We're honored to have Cameron Groome, CEO of Microbix, with us today. And as a reminder, once again, if you have questions during this presentation, click the Q&A button at the bottom of the screen, and we'll get to them after his presentation. Cameron, thanks for being here. The floor is yours.

Well, thank you very much, Ian. That's a great intro and really sets up for what we're doing at Microbix. We've been, as you said, involved in the field of infectious diseases for over 30 years now, starting with the company being founded by a virologist whose father was a country doctor working with public health laboratories across the province of Ontario. And he started the business making growth media for those labs to culture up different bacterial strains and viruses circulating in the community. And as they found, he was very good at making the growth media. Some of them said, "Hey, why -- can you do some of the culturing for us?" And the company began in the business of growing up bacterial and viral cultures. And that, in turn, flagged different diagnostics companies who require highly purified and inactivated bacteria and viruses to manufacture certain kinds of tests to approach the company as an ingredients -- test ingredients manufacturer. And that's where the company stayed with different departures and adventures for a number of years. And ultimately, what we've been doing in the past few years is exactly what you've described: transforming the company from just being a maker of ingredients where our name would never appear on the label of a leading company's test, to making products ourselves that are branded, innovative and proprietary and, in fact, our medical devices. And we'll talk about what those devices are, their relevance to the industry, and where they're providing a lot of value added and supporting the growth rates 80% plus revenue growth that we're experiencing this year and will sustain going forward. So I'm going to pull up our presentation deck with that intro, and I will share slides on that basis. So very much, as I mentioned, Microbix is specialized in the field of infectious diseases. And prior to the COVID pandemic, I would have peers ask me, "Cameron, why are you involved in infectious diseases? Why aren't you doing something sexy like orphan drugs or oncology?" And my response was always, "We lived in a biological world and these organisms, whether it's emerging viruses such as COVID, whether it's antibiotic and antimicrobial resistance that's emerging or even resistance to antivirals and antifungals, this remains a very important part of public health." And we're honored to be involved in it, certainly supporting public health response to the pandemic, but equally, in working much more broadly. Now you can tell we have very good lawyers and very bad ones because we have a very short safe harbor statement, but I'll just reference it and it does cover the essentials. So where we are today? We work -- we're based out of Ontario, Canada. Not too far from the Pearson International Airport, which is a wonderful global transshipment point. It's one of the best transportation hubs in North America. And we ship to many customers in North America, Europe, Asia and, in fact, in other markets increasingly as well. And the 3 product categories that are all revenue-generating that I'll focus on today are our quality assessment products. And these are more commonly referred to as Controls, but that's a particular regulated subset of the category. And what these do is help to ensure the accuracy of tests. And certainly with COVID, we've heard a lot more about the very negative consequences that happen if you have false-negative results. In other words, if you miss actual COVID cases or false-positive results, if you call somebody who's having a disease they don't have, banning them from the workforce, community lockdowns and so forth. And we're all about preventing those errors and helping the diagnostic OEM manufacturers and the clinical labs and the lab accreditation agencies, which all define in helping that. And this is a big and important growth area for us that we're selling directly and via a network of distributors that we've built. We're also leveraging our expertise. I mentioned that the company began in manufacturing growth media, and we've continued to make tens of thousands of leaders of very complex media for cell culturing to support our virology business every year, bacterial culture media as well. So we had very good expertise to start making the viral transport medium. This is the vials of stuff that you see, the nasopharyngeal swab snapped off and put into. And that's to stabilize the sample so it can be tested not in minutes or hours, but in hours or days, at the clinical labs. This quality media with the secure supply has been at shortage everywhere, and we approached our province and said, "We believe you're going to have issues. Would you like us to help?" They said, "Hell, yes." Even provided us a grant of $1.45 million to move forward with that program, and we received the first material order of $4.25 billion in April that we're now concluding the shipment of that first order. And we'll be seeing, we believe, subsequent orders. And then, of course, there's our supplying antigens for test manufacturer. Prior to COVID, again, very few people knew what an antigen was, relatively speaking. But these are the proteins that your body can recognize via antibodies. And there are certain tests where you're looking for what is the titer of antibodies or the level of antibodies in some of its blood to define whether they've been exposed, whether they have immunity, and those are very essential tests. And we support more than 100 companies globally with infectious disease tests manufactured by providing our antigens. So with the combination of these 3 areas, we are very much demonstrating and continue to be primed for strong sales growth. We're seeing a very much increased pace of product development where these are branded proprietary and innovative products. We're seeing and demonstrating expansion of gross margins. We've increased them by 20% over the last couple of years, where we've moved, as Ian referenced, from a loss to -- from material losses to material profits. And we're driving share price appreciation, although we're still dramatically undervalued compared to peers. So these are the things that I'll speak to in the remaining time and go through slides. Management team, you can look at bios. I won't dwell on them. Mine consists of embarrassingly long number of years, working in life sciences and starting as a sell-side equity research analyst where I did that successfully for a decade. Followed by 6 years as a Managing Director at a major Canadian bank-owned investment dealer. And then moving into life sciences operations starting in a vice presidential role and then moving into CEO roles. We've got a great team working with me. I won't dwell on all their bios, but to say that there are levels beneath this initial slide that are just as talented, wonderful executives. We have a remarkable bench strength for a company of our size, which is about 100 employees currently. We also have a great Board of Directors that takes governance very seriously. Our independent Chairman is Martin Marino, who comes out of Merck Generics Group and Apotex. Peter Blecher, prolific entrepreneur and medical doctor specialized in pain control and emergency medicine. Mark Cochran, recently retired as Executive Director, Johns Hopkins, which is certainly well known to all of us. Vaughn Embro-Pantalony, Audit Committee Chair, who has great experience in life sciences with Bayer, Novopharm, is my predecessor as CEO. Anthony Giovinazzo, some of you may know from his very successful exit of $840-odd million on a neurological company that successfully developed and FDA registered Parkinson's therapy. And Joe Renner, who is Co-founder and Chairman of Zydus Pharmaceuticals, which is a very successful generics company, about #4, I believe, in terms of prescriptions filled in the United States. So again, serious people running a serious company. In terms of our cap table, we have a market cap that's been balancing between CAD 70 million and CAD 80 million. Enterprise value is approximately the same. And we do have -- due to the long history of the company, we do have a substantial number of warrants outstanding from prior financings and a number of which will be expiring in October. So now may not be a bad entry point for the shares. Good. I should just mention reasonable liquidity, too. We're working -- we are listed on Toronto on the TSX Big Board symbol MBX, and we've upgraded our listing to the OTCQX level. And we're working with -- as well as Ian and Mike, we're working with Torrey Hills Capital to build our visibility in the United States, out of California, and we work with Adelaide Capital on Investor Relations in Canada for some time. These 3 categories I've mentioned are all exciting, but we'll spend, I think, most time on our Controls businesses, that is the one that has the most logarithmic potential. And this is providing these test controls. So we'll go into what those are, and then we'll spend a little bit of time on VTM and antigens as well to round it off. So what is the Control exactly? Well, when you're running tests, let's say, for COVID, but it can just as equally be for flu or chlamydia for that matter. When you're running tests in a medical setting, if a lab is doing 100 or 1,000 tests in a day, the question becomes how do you have certainty that nothing went wrong through the day, that the technician didn't get tired and started making procedural errors, that the reagents that you're using haven't spoiled or the test cartridges gone bad or some manufacturing issue, that the instrument that you're running on hasn't drifted out of calibration or have some blocked port or software issue with it. Well, those consequences can be catastrophic. And they can be particularly so if you don't catch them and they persist for a long time. You could have many missed positive diagnosis. And if we look at that in the context of COVID, that can be sending a nurse back into a hospital or a nursing home, long-term care home with a positive case of COVID, literally killing people or you could be giving false-positive diagnoses leading to schools or businesses or even communities to be shut down with the economic and mental health consequences of that. So the best way to avoid that is to have controls. And these are known positive and known negative samples that look to a test exactly like that [ passed ] for negative patient sample. And that's what we create. So Microbix is using all of the expertise that we've developed over 30 years in growing organisms, how do we inactivate them without destroying them, augmenting them, sometimes using leading-edge biological tools, formulating them, formatting them, and we've even struck an alliance -- you'll see behind me the swab of a company called Copan Italia, that is -- provides the best sampling swaps in the world, and they've even permitted us to co-brand with them. It's a little bit like having Coca-Cola permit you to use their brand for our controls because of our expertise. How to stabilize those? So their room temperature stable for long periods and then, of course, having all the quality systems including the ISO 13485 medical devices accreditation and medical devices establishment license for Canada, FDA establishment registration, Therapeutic Goods Administration in Australia and whatnot. So we have this line of products, including COVID, and I'll talk a little bit about what we have there, but far from limited, too. We have over 70 different control products now that we have available. And these go into 3 different markets, and the first of which is principally white label at a lower price. And these are to the groups that do the accreditation of labs and test their proficiency and give them their accreditations to test on behalf of governments and be reimbursed by insurance companies as well. And this work that we do with these organizations gives us tremendous input and expertise on how to develop our products because these groups will go in and they'll give -- 3x a year in the U.S., they give a box, for example, 20 different respiratory pathogens that are all coded and the labs have to tell what each of them are and get them all correct in order to get their accreditation renewed. If they don't get them all right, there's an investigation as to why and they can lose their ability to function. So we gain all the intelligence on what a sample has to look like to work not just on one company's instrument or test, but on all of them. So for example, our COVID molecular test controls that we've developed have been shown to work across more than 50 -- five-zero different companies, COVID tests. So we don't have to be concerned particularly whether which company becomes most successful in the market, we're not trying to be 1 of the top 3 or 4 that dominates market share. We want to be working with all of them. And so we can literally go down the alphabet and demonstrate compatibility for everybody's tests with our controls. And we have controls for COVID molecular tests. We have controls for COVID antigen tests. We have controls for COVID serology tests that are all broadly applicable or what we call commutable across different companies' tests. We also work in this area with the diagnostic OEMs, and we work with them for the purposes of providing controls. And our controls can either be cited by those companies. For example, Abbott and Becton Dickinson, both site are COVID controls, molecular and antigen respectively, has good ways to onboard new instrument installations for ID NOW for Abbott and Veritor for Becton Dickinson, both are in their -- have issued technical notes to that effect. But some companies even go further and they directly purchase our controls to provide them to customers a box of a starter kit, if you will, to train the technicians and validate that the instrument is working properly in their lab setting. And we're also working with companies where we will actually become the manufacture of controls that are -- will be included in their tests at a fixed ratio. So a box of 30 to 50 test cartridges will include 2 to 4 Microbix controls, a couple of positives and a couple of negatives, for example, at a fixed ratio. So those are contractual ongoing revenues. And then the third category is also the most regulated. And this is where I've spoken of the book ending of test runs at a clinical lab where diligent lab will start the day with a known positive and known negative sample to make sure everything is working properly, build on their test through the day, then they will end the day with a known positive and known negative from a third-party such as Microbix to have greater confidence that all the tests in the middle were accurate. And we're doing this work and building that up with a network of distributors in the United States, Western Europe, Scandinavia, Central Europe and even Africa and South America. And this is building up quite rapidly for us. Relatively new, we've been doing -- working with the PT groups on our white label basis more in line with our ingredients business since 2008, but we really only started working with the diagnostic OEMs in 2018-'19 and working with the clinical labs in 2020. So this is very new for us and building very quickly where we generated considerable sales growth in 2021 with effectively tripling our sales at this category, and I expect will double or triple them again in fiscal 2022. So very strong, very promising. VTM, I've mentioned, I'm just going to run through quickly because I know we want to leave adequate time for questions. But viral transport medium, we've identified our skill sets and are now manufacturing hundreds of thousands of units even into the -- moving now to over 1 million mark. And you can see each one of these vials have a market value of $4 to $6. So this is a very good business for us and moving forward and delighted to be able to help in the context of the pandemic and coming out of the pandemic because all this diagnostic capacity gets redeployed more broadly. Still going to need VTM and going to need our broader catalog of controls. So that's very much what we're doing there. Antigens, this is where we started and still remains a very important component of our business. This is the Ingredients business where we're providing the antigens to make serology or immunoassay tests where you're looking to see if a patient has had past exposure to a pathogen or to assess their level of immunity to a pathogen. For those purposes, these sorts of immunoassays can't be replaced with PCR-based tests because you're not looking for viral genetic material, you're looking for antibodies from the patient, and will remain a very important component of our business, even though as a proportion of our revenues, it's come down dramatically. It was 90% of our revenues even a couple of years ago, and it's now down to under 50% principally because of the growth of the other components of our business. So we have a very sophisticated operation. We have 3 buildings now totaling 35,000 square feet that are adjacent to one another. We're approaching 100 employees and really positioning our systems for automation. It has been a big issue for us. We're automating now our VTM production. We're automating our controls, our QAPs production. And we've taken steps in our Antigen business to dramatically improve margins on that side. And that has been driving very strong sales growth. You can see from a revenue perspective, the bar for fiscal 2021, our 9-month revenues have exceeded our prior year 12-month revenues. And similarly, the dollars of gross margin that we're making available, the EBITDA and the net earnings, are very strong. Our Q3 of 2021 fiscal, we recorded sales of $5.5 million, net earnings of $1.5 million. So we're actually trading at a forward PE that looks to be under 10x if we achieve some of the numbers we're targeting. And interestingly, this was run by an analyst quite recently, we seem to be trading at a dramatic discount from peer companies on an enterprise value to EBITDA and enterprise value to revenue basis. This will be available on our website and for your review. So in terms of highlights, we have strong annual sales growth. I'm expecting we'll approach -- we'll certainly exceed $18 million in revenues for our fiscal year ended September 30, and that compares to $10.5 million in revenues the prior year. We've improved gross margin considerably. When I came in, gross margins were in the high 30s. Our Q3 recorded gross margin of 63%. We are generating cash, and we have a -- we closed Q3 with $8 million in the bank and an undrawn line of credit that is up to another $2 million. So we're well capitalized to do what we need to do. We've demonstrated record sales in Q1, record sales in Q2, and record sales in Q3. So we're on a pretty nice track. We are building out to expand. We're looking to -- right now, we're doing, in terms of swab-based controls, we're at somewhere around 24x to 30x the rate of sales of that new product categories as we did in 2020. And we're setting up for a further tenfold volume expansion of sales of those product categories. So a lot going on and all directed to driving value. And we also have, if you want to take a deeper dive, we have the rights to an FDA-approved biologic drug, but nowhere to make it. It's a big project and too big for us to take on, on our P&L. It's about $20 million to bring that back, but we'll undertake that by partnering. And if we do partner it successfully, that will be a $200 million-plus a year product. And we're looking to retain 1/3 to 1/2 of the project economics from that. So it's really an option value that you're not paying for with regards to Microbix's inherent value. So with that, I'll go off screen share, and we can address questions that may have been posed.

Thanks, Cameron. I'd like to remind the participants that if you have a question, click on the Q&A button at the bottom and enter your question. The first question in regards COVID. What -- and it's 3 parts. What proportion of your current growth is driven by COVID? How has COVID impacted you in general? And how do you see things evolving beyond COVID?

Great questions. A significant chunk of our sales now are related to COVID. We're selling a good number of controls for COVID, although not just limited to COVID in the respiratory space. For example, we sell controls for Flu A, Flu B and RSV testing as well as a number of other respiratory pathogens. But a lot of the industry capacity, effectively all of the industry capacity, was grabbed to do COVID testing. And this has meant that a lot of other disease conditions are being given short drift, either for lack of testing capacity due them or that the patients are just staying away from more regular medical care for fear of getting COVID. And that's had some impacts as well in our Antigens business. Our sales of antigens have actually come down from about $12 million a year to closer to $9 million a year. Because of the breadth of our product offering, everything but respiratory has come off. And you'll see that on some of the numbers of lab testing companies have been impacted now. Coming out of the pandemic is going to be fascinating, because we have seen a massive expansion of the overall capacity of the diagnostics industry. And diagnostics are the best in -- well, with vaccines, they're the best value for dollars spent in the health care industry, but they were -- or for the health care system. But it was kind of the poor stepchild and we've had increasing ability to do sophisticated diagnostics, but the argument was always, well, who's going to -- who's going to spend the money to put all that capacity in place to do this sophisticated testing? Well, now it's there. So when COVID finally ebbs, I'm expecting that we're going to see, for example, multiplex testing. So if you show up with a respiratory ailment, you're in distress, it's not just going to be, "Well, we don't know what it is," and send you home. We now have the capacity to do multiplex testing and tell you is it COVID? Is it flu? Is it a virus? Is it a bacteria? What is it? And start to drive better treatment as a result. And similarly, with bacterial infections, not just identifying what organism it is, but having the capacity to identify whether it is resistant to certain antibiotics and direct therapy much more effectively and rapidly. And that's stuff we're working on today with leading diagnostic companies, and I'm very excited to be a part of what I think is going to be a golden age for diagnostics coming out of COVID. I hope that addresses that, Mike.

Yes, it does. One other thing that might be related to that is somebody asked, what drove the revenue decline year-over-year in 2020? Was that pandemic related?

That was very much pandemic related. What we were seeing was a slowdown in sales of nonrespiratory antigens. We were, in fact, positioned to launch some very clinically important controls and for human papilloma virus infections, a $500 million-plus market, that's being held back in its growth by a lack of a comprehensive suite of controls for all of the types of HPV that drive human cancer. So we were set for whole countries to convert the use of our controls when COVID emerged and all of that test, all of those screening programs were put on hold because of COVID. So as some of those snap back, we're going to see a broadening of the source of our revenues, but that definitely hurt us in 2020.

Is Microbix involved in PCR testing?

Yes, absolutely. We don't manufacture our own tests. We manufacture the controls for a whole number of PCR tests. And we have literally a farm of different companies, PCR instruments, in our labs where we work to ensure the broad applicability or commutability of our controls across different companies' tests. And in fact, a number of those instruments have been given to us by companies with whom we're working. So we don't kiss and tell per se, but if you go down the alphabet, there are very few diagnostics companies that we're not engaged with sort of some level today.

So what are the barriers to entry in your Controls business that allow Microbix to maintain its high margins in the long term?

Great question. You've got to have access to the organisms or you've got to have very good experience -- you've got to have access to organisms and the ability to manipulate them to be able to do this work. There are perhaps half a dozen companies in the world that are very good at making controls where we believe leapfrogging the capabilities by virtue of creating multiplex controls that are formatted on to swabs and room temperature stable for long periods and creating controls for organisms that are multidrug resistant and not easily worked with or cultured. So we've created even our own IP and offline. Mike, I can certainly provide reference to some of the patent work we've done that's broken into the national phase, enabling us to make and control or maintain market control, I should say, of controls of unimagined complexity.

What do you feel is your sustainable competitive advantage?

I would say, skill. A combination of skills, trade secrets and intellectual property. And frankly, relationships. This is a business where -- this is an incredibly important element for labs and diagnostics companies and there has to be trust involved in anyone you're working with. And we have a 30-year track record in this business.

I would imagine that business is probably pretty sticky. Is that true or...

Very much so. For our Antigens business, it's a process of years for somebody to switch antigens in an approved test. And for our Controls business, people, once they have validated that something works, the incentive to keep on validating additional suppliers or to switch suppliers just isn't there and unless there's a huge price differential and that just isn't going to be on.

In the long term, are there other areas of the diagnostics industry where you could leverage your expertise to develop and launch new high-margin products?

Very much so. We could and can develop controls for different aspects such as a liquid biopsy in oncology for genetic diseases. There's a number of areas where we could certainly look at and pursue. Right now, our plate is more than full in infectious diseases, and we're gearing to be able to launch a new important infectious disease control every couple of months is what we're gearing up to be able to have the capacity to do. As we keep building our team and our resources, that's where we'll look and say, where are new needs emerging in the industry that we can also address.

Do some of your customers have their own development programs and controls or does that not make sense for them?

Some of them do and manufacture their own controls, some of those controls are relatively poor. They're just, for example, a probe sequence or a primary sequence rather than a full process control, which is something we're very conscious that we want to provide controls that control as many steps of the testing process as possible. So yes, some companies do manufacture their own controls. There are aspects though in the clinical laboratory where you don't want the company auditing its own books and you require the use of third-party controls, so where validated third-party controls are read into the regulation. And that's an area that it benefits us as well or regulation that benefits us.

Cameron, thanks for your time today. We appreciate you telling us more about the company.