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

Good morning, everyone. Thanks for joining us today to discuss Microbix's Q2 results, which they posted this morning. With me, I have Cameron Groome, CEO, Ken Hughes, COO; and Jim Currie,CFO. I think the format will be just a bit of an overview of the quarter and then Q&A, of course. So if you any questions, feel free to put them in the Q&A box at the bottom of your screen. Alternatively, you can e-mail them to me at deborah@adcap.ca. And we may not work off our presentation today, but just so you're aware, this session will contain forward-looking statements. You can find more about those on the company's presentation on their website, which we're hopeful to update later today with the financial results. With that out of the way, Cameron, why don't you take the mic and give us a little bit of an overview on the quarter.

Sure thing. Thank you so much, Deborah, and thank you, everybody, for taking the time to spend with us this morning. These results, of course, are for our second quarter of fiscal 2024. That's the quarter ended March 31, 2024. And we are very pleased to report strong results for the quarter. Our revenues were quite robust at $5.6 million for the quarter, a smidge over $5.6 million. This is, in fact, our best-ever quarter for product sales by a smidge and exceeds the previous high that was heavily weighted with DxTM sales to government. And there were no DxTM sales to government in the current quarter, but we beat that prior all-time record in spite of that. The overall sales were up quite strongly, a 34% increase year-over-year, driven by strength in, interestingly, both our antigens and test ingredients business and our quality assessment product, medical device business were both up strongly. Gross margins were acceptable. I think we could have done better if everything had clicked over perfectly in terms of manufacturing for the quarter, but at 52%, 53%, we were broadly satisfied with that. And really, dropping forward, we had good cost control on the selling, general and admin, R&D expenses and interest expenses. So with that level of revenues, very much in line with, I think, the loose guidance we provided that about $5 million in the quarter is our breakeven level for revenues with a reasonable product mix, and that approximately $0.50 of the dollar beyond that breakeven point has the potential to move to the bottom line with $377,000 in net earnings are about $400,000. It's a 7% net margin for the company in the quarter. And I think given this particular level of revenues, that's what we would hope to achieve with them. So I think, by and large, we're pleased with the quarter. The combination of strong revenues and spending control led to that margin. And obviously, good free cash flow and balance sheet position as well. Maybe I can invite Jim to supplement those comments, and if there's any further color you wanted to provide, Jim.

Sure. Thanks, Cameron. Maybe just a few points. One of the things that -- one of the areas that we saw some good strong growth, obviously, was in our antigens or test ingredients business, with over $4 million in sales in the quarter. And we're seeing good, excellent growth coming from our agent distributor. Of note is the fact that we've actually, in the first half of this year, quadrupled what we had last year for the first half, and we're up more than 50% from the second half of last year in terms of sales to that Asian distributor. So we've been talking about the fact that we've been starting to see a ramp up. We saw the start of the ramp-up in last year, and we're seeing the fruits of that ramp-up in the first quarter -- half of this year, and we're expecting some strong performance from that distributor in the second half of this year as well. We had a really good strong mix of all products. Often we get margins and bottom line impacted by the mix of the products that we had. But we had contributions from all of our more significant products this quarter. We've got a good strong order backlog. We're sitting at over $9 million in order backlog at the end of the half. Our cash position is still strong. We've got over $12 million to $13 million in cash and another $2 million in the credit facility. And we've also been using this cash in a couple of areas. One is in the purchase of capital equipment. So we added another $600,000 of capital equipment in the quarter, and that has been predominantly used for enhancing the equipment and adding equipment to further the growth in manufacturing. We also have used cash in share buyback program, and we've acquired close to 1.2 million shares in the first half of the year. We have added another sort of 100,000 or so in the last few months or a month and a half as well. So overall, good strong financial performance, good strong balance sheet at this point in time.

And Jim, just to recap the cash level, I think you mentioned it quarter end?

Yes, the cash position is $12 million to $13 million...

Perfect, thank you.

And this is, of course, illustrative of the capacity building we've been doing last little while. We've easily serviced the growth in the business with some new innovative products and innovative processes and also operational excellence, and we have the capacity now to take it on from there.

I think these are great points to make. We are continuing meaningfully depleting the financial strength of the business. So we're in a very strong financial and strategic position. And I think both of those are important for us at this stage. Our customers were seeing, as we've noted, a good surge in all categories, very strong in test ingredients businesses, manufacturers demand that continues to increase for those critical products. And we're also seeing very strong engagement and priming the pump for growth in our -- even for greater growth in our caps business with strong relationships with the laboratory proficiency testing and accreditation agencies. That segment of the business continues to build very strongly as does the relationships with major test manufacturers, particularly point-of-care side, but also in laboratory medicine as well. And last, but not least, the clinical laboratories, we're starting to see a greater -- a more meaningful number of sales directly to some of the major clinical lab chains, which is nice to see as our name gets out there a little bit more from our regular participation in conferences. And we're seeing revenues driven from that customer base as well. So I think we're broadly -- we're certainly not complacent, but I think we are seeing evidence of real progress in the fundamentals of our business. A few things I'll also mention, we're certainly continuing, as Jim mentioned, on the physical [indiscernible] progress with the final complete QC of products as well as for completion of automated vial filling, we're moving forward both those initiatives, and as is our practice, we'll make fulsome disclosures and those all are entirely complete. And we are also moving into novel -- additional novel formats for our QAPs products. I'll note the disclosures we made earlier in the spring, in March, concerning the paraffin format, the tissue sample pneumatics, which starts to move us into controls in oncology, which is another important area that I think we'll start to see revenues from over the coming quarters and years, extending the expertise we've built in infectious diseases into other exciting new markets as well. So we'll see that with product formats and test types also. So a lot of good things happening, and we're making them happen while keeping the company in a very good position of financial strength.

Yes. I mean we've been deploying government grant funding and interest-free loans from government to build capacity, including automation, scale up and so on and so forth, and that's been implemented and is now manifested in our ability to satisfy the market and continue with our growth. We have a number of labs coming online right now. And again, we have been 2/3 supported by external funding, plus we invest -- reinvest our own money to make sure they've been built going forward, and I think it's going very well in that regard.

Yes. Very, very much so. Good. Well, few of the -- this is principally about the [indiscernible] for the $5 million [indiscernible] of fiscal [ '24 ] for the record year of 2024. We'll see how our Q3 and Q4 shakeout, but we certainly see a very strong progression of quarters as we move forward with our customers in building markets and advancing the values. And speaking of which, another thing that we have been able to announce over the course of the spring is, of course, the Kinlytic CDMO engagement, which occurred in March as well, whereby our development partner Sequel Pharma has moved forward with engagement of a contract development and manufacturing organization to revitalize the main [indiscernible] strength of the drug substance. This is a very meaningful spend they are undertaking and arguably the most critical stage to advancing that product or critical contractor to engage. Ken, do you want to comment a little bit further on that as well?

Yes, sure. The CDMO that Microbix and Sequel ultimately commissions on is very sophisticated, and the work is going very well. We're very pleased with their technical acumen and experience in this particular area. I don't really see any problems associated with this. They clearly have a good handle on what we're trying to achieve here. As Cameron correctly says that the production of the drug substance is the really -- well, it's the most significant part of the entire program. There's no real risk associated with it, but there is a significant amount of expertise and our expertise is clearly there at the CDMO that we've commissioned. So we expect to move forward according to the plan we've disclosed previously. At this point in time, I don't see any particular problem with that. We're advancing quickly, and the technical -- as I say, the technical acumen is very much in place and work is underway. And our relationship with Sequel and their financial backers is maintained as strong and it's going very, very well. They have excellent technical expertise as well, and so, as I say, we're just moving forward, and I don't see any problems at this particular time.

Thank you, Ken. Yes, I think another thing I'll mention is just driving in the -- in these fields, in the test ingredients business, certainly we're the cutting edge of when you are actually growing, purifying it in that [indiscernible] organism to create tests [indiscernible] sensitivity and specificity and the innovations that we've produced [indiscernible] keep up with the growth in demand in fact [indiscernible] of novel techniques and technologies driven by the scale of our staff demonstrates a very good technical [indiscernible] industry. And whether that is our range of high-risk HPV controls that's taking us to the front [indiscernible] detection of the actual virus. This has been excellent for us. Our work in antimicrobial resistance tests and controlling those has been very perceived. More recently some of our work in mimicking tissue, infected tissue samples has been very well perceived as presented at a global conference in Scandinavia and additional work such as our work with room temperature stable controls for detection -- molecular detection of H. Pylori. Those of us in the business are aware of the discovery of H. Pylori as the cause for -- excuse me. Thank you. Okay. Thank you. Jim was just alerting me that we're having some Internet problems and that there is some stability of the feed. So I apologize if I am cutting in and out at all during this. The thing that I was mentioning was that in spite of this organism having been discovered a long, long time ago, there was -- there were problems with the controls being inadequate that were preventing the full transition of molecular testing of HPV that we are now addressing and again, demonstrating leadership in this nature. Just if we're bandwidth challenged, I don't need to interrupt, but it might be a good idea for Ken and Jim to turn off their cameras and spare some bandwidth.

As much as we love seeing you guys, maybe shut down the cameras and hopefully, that helps with the audio.

Very good.

I'll do mine.

Sure. I'm all alone here now. Okay. Well, with that, Deborah, maybe we could break for some questions from our attendees. We've got a number of shareholders and representatives of the capital markets on the call, so delighted to have everybody and to address questions to the best extent we can.

Sounds good. Okay. First question was, was distributor stocking a significant factor in the quarter. How do you monitor distributor inventory levels?

Most of our sales continue to be direct. All of our -- just making sure I don't misstate myself here. But yes, most of our sales are direct with the exception of our antigen distributor into Asia. And because of the abruptness with which demand has resurged on the ingredients business, certainly, all product that we're shipping is immediately being sold through to cut to end users. So there's definitely no element of channel stuffing in the test ingredients business. In our controls business, we have for the most part, our proficiency testing and lab accreditation agencies are taking product on a just-in-time basis for their regular program challenge events for the labs that subscribe to their services. And for other QAPs' customers, we don't see a significant amount of inventory going on, with the possible exception of validation lots generated prior to FDA registrations of assays, but those are relatively small production runs that we pulled through quite quickly on the approval of the assays. I hope that addresses the question.

I think so. We've got a couple of other questions that came in via e-mail. So I'm just going to switch over there. So first question, with QuidelOrtho withdrawing the 510(k) submission for the Savanna for virus respiratory test and developing a next-generation RVP4+ assay, that expects to be commercially available during the 2024, '25 respiratory season, how much revenue do you expect to get from Quidel for the remainder of this year and next, and how much revenue from other QAPs customers in those 2 periods? And I apologize, I butchered that question, Cameron.

There's a lot to unpack there. Okay. The -- I've got to make certain that I'm maintaining the required levels of confidentiality from our interactions with QuidelOrtho, which is a disclosed customer of ours.

It's also a lot questions in the Q&A box if you need to revisit.

Okay. Sure. Let me pull it up just for the purposes as well. Okay. Thank you. So QuidelOrtho, which is QDEL on NASDAQ, the fifth largest diagnostics company globally, has developed -- just for those that may not have followed this as precisely as this question, has developed a very capable, affordable, or point-of-care PCR testing instrument. It's about the size of the 2 slice toaster, maybe a smidge bigger, and fits a cartridge in about the size of the thick slice of toast into the front of it that can simultaneously test for as many as 16 different pathogens from one patient sample and can accept a few different formats of patient samples. So it's a very, very beautifully designed assay and has full PCR on the sample to generate those results. We are supporting the launch of all assays on that instrument. Thus far, there have been 2 assays in commercial -- commercially available. One is a respiratory virus 4-Plex panel that is available in Europe. The other is a 3-Plex genital ulcers panel that is available in North America. QuidelOrtho had filed for a second-generation respiratory 4-Plex panel for North America for 510(k) FDA approval and then withdrew that asset. Obviously, and as noted specifically in this question, from -- presumably from Quidel disclosures, they have not sat idly and do not intend to -- sorry, I'm just doing a double negative. They certainly don't intend to not participate in respiratory testing. So they are developing, as noted in the question, RVP4+ assay for launch, and that also has fallen under our relationship with them and we'll be supporting that. So there are other assays that Quidel has previously disclosed that it's also moving forward with a full pace. And certainly, we expect that QuidelOrtho will achieve multiple FDA registrations for the planned suite of assays, which I believe the disclosed suite is 8 multiplex assays that QuidelOrtho has targeted for use on the Savanna instrument. They have noted that they do not expect revenues from the Savanna to exceed this sort of the 5% threshold for materiality. That's a rule of thumb with their revenues of $2.8 billion. You can do the math on that. So while revenues may not be as significant for Quidel, they certainly continue to be significant for Microbix. And our 2024 budget is really about supporting QuidelOrtho with the development of novel multiplex controls for the Savanna and the validation orders. We don't have anything in our budget for 2024 in relation to commercial launches that will start to shake into our 2025 numbers as we see that. In spite of that, we're still on track to achieve record revenues and earnings in fiscal 2024, making no mistake. So hopefully, that addresses that question.