Quanterix Corporation (QTRX) Earnings Call Transcript & Summary

Great. Welcome, everybody. I'm Matt Sykes, the life science tools and diagnostics analyst at Goldman Sachs, and I have the pleasure of welcoming Quanterix to our conference this morning. We have Masoud Toloue, the Chief Executive Officer; and Mike Doyle, the Chief Financial Officer. Masoud, Mike, thanks for joining us today.

Matt, we appreciate being here.

Great to see in person.

Yes, finally a long time. Mike, I don't know if you have any forward...

Quick comments that, obviously, our discussions today are covered by our forward-looking statements and it's on our website. So if you look into the disclosure, it's there. So I'll turn it back to you, Matt.

And I actually turn it back to you guys because I think maybe starting big picture, just maybe talk a little bit about some of the accomplishments you guys have achieved over the past couple of months. And how things are looking for over the course of this year, just to give us a brief overview.

Yes. Perfect. So Matt, I would look at this as, hey, in terms of a big picture, 2 major themes of sort of come out in the last 12 months. One is sort of more market and science. And that's, hey, there's this whole meta set of information above the central [indiscernible]? DNA, RNA and protein. And I think you saw that in liquid biopsy, you see methylation and these markers on DNA. And then on the protein side, you're seeing these post-translational modification, as phosphorylation, these other markers. And their importance in things like Alzheimer's and being hyperphosphorylated. And where our exquisite technology comes into place is being able to detect that middle layer of proteins, which is what we call phosphorylation. And we're seeing a lot more of that in the last 12 months. So from an a application perspective, that [ hey ] application perspective that will be grown tremendously. On the end market standpoint, we sort of categorize this as academia, translational partners and then in the future diagnostics. And on the academia side, I would say, last quarter, we had probably the largest number of publications we've had in our history. So over 1,700 publications in academia. On the center category, we call those translational [ hey ] partners as the pharma and CRO space. Lot of great results. Obviously, we announced the Lilly collaboration that was very big for us, and we continue to progress that. And then we've begun to touch on translation, which is beginning to take what our partners in the pharma, in the clinical testing and the trials are using, but moving that to a more diagnostic application and making that available more broadly. So a lot of progress in the last 12 months.

Yes. No, it certainly has been. And maybe staying with the big picture, Masoud, you've been in the role for a short period of time, but the company for over about a year. What do you see as your key goals in getting Quanterix the next stage? And what areas do you think you can improve upon?

Yes. So first, I want to say that we've brought on an amazing team, probably 80% of our executive team is new. So we've recently brought on everywhere from HR, our CIO, to our operating Commercial Officer. Mike. Mike has been here within the last year, a lot of great execution, and we're in the midst of a strategic review company-wide right now to look and say, "Hey, where is the focus of the organization going to be." Nothing is going to change in terms of our tiers and our end markets, but where are we going to be putting the resources of the company over the next several years, 3-year strategy. And we're going to be talking more about that on subsequent calls. But in the sort of -- our objectives remain the same. First objective is scaling with quality. Now we're a company with over $100 million in revenues. And taking that from to our next phase is going to require identifying things with our platforms, our instruments, shifting to this higher level of TAM and these translational customers is going to require some different efforts within the company that are going to have to be put into place. Second is innovation, right? Quanterix is known on the innovation side. We need to continue to develop new biomarkers. pTau-217, very exciting biomarker that is differentiated in the sense of we can actually identify Alzheimer's disease and separate it from frontotemporal dementia and lewy bodies, very exciting. A lot of folks want access to that test. And then on the platform side, we talked about 100x coming on the accelerator and other multiplex tests that could be coming out in the future. So we have to continue that innovation path. And then finally, is the translation, hey, what's the opportunities for taking this and making it available to a broader swath of the population. We've made some progress there as well.

Got it. Unlike other proteomics company, Quanterix's really advanced in diagnostics far faster at an earlier stage than many others. What kind of advantage do you think does that give you? And what will likely be over time in increasingly competitive industry?

Yes. So that's a very interesting question. We've made a lot of progress in the last 6 to 8 months with the FDA. So we got the pTau-181 breakthrough. We talked about the NFL breakthrough, and I think the key for us is the partnerships that we've made on the translation side have really given us a very close learning of what's going to be required to take something from a clinical trial and make that more broadly available in a diagnostic strategy. And so having that research, clinical research information background has propelled us on the diagnostic side, and sort of kind of jumping board because we have that, we're getting more research clients and customers coming to us because we've now outlined our diagnostic and our future strategy towards taking the test and making it more broadly available. So they've been working and helping each other out. At the same time, we're taking, as I said, we're doing the strategic review, look inside the company, as we're moving more from academia to translation, what are the quality systems, robustness, precision that's going to be required for the next -- for the future for where we're moving and where we're -- our TAM is growing.

Got it. You've kind of really set the lead in terms of sensitivity in low plex targeted market. It's a market where we frankly see the most commercial opportunity long term, just given its role in biopharma and diagnostics. And I know you have the ability to move up in plex 6 to 10, even 20 over time and even increase that sensitivity, which you've got sort of in your plan a hundredfold increase. How do you think about the desire to expand the TAM, but at the same time, maintain your core competency in sort of the segment that you're in. How do you balance that equation?

Yes, I wholeheartedly agree with your first statement there, Matt, that if you look at reimbursed tests in the market today, multi marker our tests. First of all, there's not that many, right, probably 50% to 75%. Most of them are on the genomic side, very few today on the protein side. So when you look at those, they're under -- most of them are 5 plex, a couple that are of 10, maybe at the most 20 plex. I think it's a signal and noise issue. When you want to go after precision and accuracy, you have to have something that's more in the low plex. And I think that's already known. If you look at pharma, majority of that, I mean diagnostic companies are looking at single analyte test. That's the majority, we think we're in the sweet spot, and we want to continue that. There's a lot of work to do to continue there. Where we increase that TAM is a shift more towards translation. So we're heavily focused on the discovery side. As we do more clinical testing, work with pharma partners, we're now going into preclinical discovery, preclinical testing, Phase I through Phase IV trials, that enables to increase our neuro TAM. And then in the future, as we said, we've announced some effort in the diagnostic side with our LDT, starting with our LDT with 181 or NFL. So the focus continues to be on neuro. We increased the TAM by doing more work with end markets that are going to be doing more work on neuro. And then we also -- I think we've previously announced that on the innovation side, we're looking at technologies that would increase the number of multiplex. But again, we're very focused on what's going to be applicable in the clinic, and we don't think that's more than a 10 plex or 20 plex.

Got it. Understood. Maybe shifting over to some of the revenue segments. Accelerator Lab is something that we've focused on, just because we kind of see this as sort of the gateway into the Quanterix ecosystem. How can you use accelerators of growth drivers and then translate that into instrument and eventually consumables growth?

Yes. Accelerator is a great vehicle because customer comes in and we speak to that customer as a scientist speaks to another scientist. And we identify the customers' need requirements, their capabilities? Can they get -- they need HD-X in their lab right now? Or do they need our accelerator services? Do they need something more customized where our scientific staff work with them to come out and identify what they need? And a lot of times, that's the glue for people who need a little bit of effort to get to where they need. And so Accelerator helps with that. It also is an early environment, hey, try it, get the results, understand the exquisite sensitivity before you buy the platforms. And you can see that. We announced that the Lilly collaboration, they have over 10, 15 HD-Xs in their lab, while we continue to do work in our laboratory. And so it's a little bit of a mixed situation where some people are getting the platforms after working with us on the Accelerator and then some continue to work with the accelerator, but it's an important part of our value proposition.

Got it. And then maybe you've mentioned Accelerator this year to be 1 of the fastest-growing segments for your business. Maybe talk about the rate of growth you're expecting there? What are some of the key drivers from that growth? And then, Mike, I've got a follow-up for you on sort of the margin profile of the Accelerator segment.

Yes. So the Accelerator becomes interesting, and we believe the rate of growth in that will grow. I mean we announced the collaboration on the 217 antibody, right? And so whenever we develop a new platform as we did with NFL, a new biomarker, a new assay, whether it's our 4 plex, NFL recently 2017, we see a lot of demand and interest in the Accelerator because of the fastest way to get to a result is through the accelerator program, right, versus immediately in selling the HD-X, getting the system, getting the platform. And we released a lot of new things through our Accelerator, whether it's 100x, access to 217, that's going to come through Accelerator. So that's why we see a lot of shift and a lot of movement and a lot of growth in the next several quarters on the Accelerator side versus some of the areas of the business. So I think it's very tied to what's happening and what we're developing.

Got it. And then, Mike, maybe my assumption is the Accelerator Lab just more people, a little bit more capital equipment, therefore, margins lower, certainly, obviously, than consumables, but maybe on the instrument side. Maybe talk about if that is going to be the fastest-growing part, how that doesn't maybe impact margins going forward? And what is the margin potential for the Accelerator lab. Can you actually start to expand those from where they are today? And what are the drivers behind that?

I think it's a good question, Matt. I think you're right. Your observation is , particularly last year, we invested a lot in an Accelerator. We brought in Mike Miller, new guy to run the Accelerator. And we made the necessary investments really to elevate that, and I think that's going to continue. So what we saw last year, in particular, was necessarily get great utilization. So margins were suppressed. I do think and probably at or below the instrument levels, I do think that over the longer term, we absolutely can see Accelerator margins that would exceed instrument margins. I think the key there is going to be utilization and the kind of business we bring in, are we getting at a good price and can we do that? So I think the potential is there. I mean, this year, you're going to see it in part because of the Lilly activity that we want to get sustained utilization and Accelerator in '22, that's going to help margins meaningfully. So it's going to be a good story this year. And I think the key is can we keep that we fall with this, but go into '23 and beyond.

Got it. And maybe shifting to the instrument side, growth has moderated a little bit in the last quarter, and I know that it's not necessarily always linear. But how should we think about the instrument growth cadence over the course of this year? And then following on from that, the consumables growth that should start to grow beyond that as those instruments [ placements ] grow.

Yes. From a quarter-on-quarter basis, I would say there was a little bit of just mix change in the type of platform, but nothing significant, I would say, in terms of is the market changing? Is something happening in the environment? I would say, just a quarter-on-quarter change. Placements for their platforms over the last 5 quarters haven't changed significantly. Our focus moving forward is going to be on that utilization of the platform. There is a pretty nice delta between the most high-throughput customer and those with the highest utilization, those that are just getting up and running and have just installed the platform. And so adding new biomarkers, adding new innovation to get that HD-X running as our most high throughput customers are using it is going to be a key focus of ours in the future. And I think that is going to generate a lot. And is the right way to be generating and running a business through us.

Got it. And then maybe talk about sort of product development. You've had a number of different products and then transitioning folks from 1 on to the next version trade in things like that you guys have accommodated that been able to manage it pretty well. How do you think about that as sort of you think about the product road map, but then you think about the customers and their usage and making sure that it's a seamless transition, but they're getting the most out of the technology you're developing.

Yes, Matt, I think the key for us on this product development is this product development engine that we have, which is, thankfully, part of it is our customers, right? So our 1,800 publications, the biomarkers that they use, that they identify. We work with them very closely. We learn. We set the cutoff with them. And that is a key part of the next generation of biomarkers and tests that we're developing and it's from that customer base. So we continue to want to work and nurture and collaborative, develop relationships with those customers to be able to feed our next generation of development -- next generation of product development and growth. A key part of our focus, key part of our business. And then on the center side, hey, what we've learned with Lilly, what we've learned with other pharma partners is telling us what are the changes structurally, what are the changes product-wise that are going to be required to deliver the next level of growth. I think out of a lot of this came under 100x, right? And we talked a little bit about this macro of meta information on top of the protein that actually is becoming critically important, and that sensitivity required to look at a phosphor-related site on a protein, that's going to require sensitivity, especially in blood. And so that was another product development that came out that said, hey, there's a whole metal layer that's probably potentially even more important than the protein itself, and it's going to require more and more sensitivity before people said, hey, sensitivity is not as important. We're understanding in blood critically important. And so I would say that those collaborations and that close interaction with both the academia and the translational customers are giving [ slot and cite ] and are going to help us start to do things on the diagnostics side in the near term.

Got it. Maybe shifting to the 2 breakthrough designations that you've announced, which is pretty exciting for the company, one for the pTau-181and one for the NFL plasma for MS. Maybe talk about, one, the validation you think that brings to how has that resonated with the potential customer base in terms of creating visibility for you? And then any time line? I know it's very uncertain, but any time line you can kind of give us to kind of set expectations for that?

Yes. So the last year, I think it was the third quarter we received our pTau-181 breakthrough designation. When you receive the designation, you receive it because it's either going to provide an unmet need and improve patient care, and the platform is completely differentiated to a breakthrough platform, providing something in the market that is just unavailable today. And we met that standard. We received the breakthrough designation for that analyte, and we think it's an important validation for what we're trying to do. Now the whole diagnostic strategy is first on the LDT side. It's a laboratory developed test we announced in January that we're going to be developing a test and validating 181 and/or NFL this year for availability next year. So that's going to continue. So that's the first step on the 3-step staircase. And the second step is this 181 validation. So we did a de novo application for a 510(k) predicate. That with efforts around COVID and vaccines and where the FDA is busy, that is hard to predict time lines for when that is going to become available. Obviously, the team is working on that, and we're going to be putting energy behind that. And then finally, hey, how do you look at this sort of distributed standpoint. We're looking at partnerships. We announced the Abbott partnership a couple of years ago. We're looking at moving this forward ourselves on a distributed standpoint. So that's the third tier of the platform. But to your second part of the question, that definitely does help our research business. So we've outlined a path that we want to make 181 available, pTau-181, and that's also driven business to say, "Hey, let's do these research studies, let's do these clinical and preclinical testing studies because there is a pathway on the clinical side that's going to drive business for us in the future." So us outlining that path key part of our work with customers. And then NFL was the same, but just on the MS side, we announced the designation last quarter for relapsing remitting MS. And what's very exciting about that is as an aid to a diagnostic along with other clinical detection modalities such as imaging, we can identify relapsing patients and see whether there's a drug requirement or what's the chances of relapsing or remitting for this debilitating disease. So very exciting work on the NFL side and on that 181, big validation.

Great. One thing -- one topic that we've talked a lot about and I've been very interested in is, obviously, you have a very specific expertise in neurology and Alzheimer's, MS as well. But Alzheimer's. And I think the market had previously focused on sort of the success of the drug approvals and the commerciality of them in terms of tying it to your either revenues or success. And while that's important, I think the thing that's underappreciated about Quanterix is actually you generate the line share of your economics, not initially with the commercialization of drugs. It's actually all the work that's being done for ADUHELM and other potential candidates coming through. So if there's some element of having to go back to the drawing board and do more work and more clinical trials, that's actually the biggest benefit for you guys, and that's kind of what's happened. So maybe talk a little bit about where you sit in the development process, and perhaps within that year, growing relationship with CROs, which will become more and more important? Because I think that's something that I think is still underappreciated about the Quanterix story that actually the more work that's being done in Alzheimer's in drug development trials were there, the more work there is for you to do.

Right. Yes, that's a great point. When you first discover these proteins, and you this proteomic analysis, and you're looking at 20,000 or 10,000 or 5,000, we love that discovery work. That discovery work is key. The winners from that come to our platform and are used in preclinical testing, discovery research Phase I, Phase II, Phase III or Phase IV. And for us, that's the part of the TAM that we think is a lot larger than the discovery market, and it's going to be growing as more of these drugs come on to the market. And that whole area of research to get to drug or a validated drug is where our focus is, and we're putting a lot of effort and resources to achieve. So I think the broader term, the way we look at this is continue to offer these tests in our sweet spot, which is right now, 4 or 5 multiplex platforms and providing the answers and the test to the customers to be able to hopefully identify a drug that's going to be helpful for patients in the future.

Got it. Maybe shifting to the Lilly partnership, which we thought was sort of a landmark event for the company for the validation technology. Can you talk a little bit about the partnership, what it brings to Quanterix. And there was some commentary in the release and you talked about the potential to expand the scope of the relationship with Lilly.

Yes. So the relationship is a great one. We're very excited about it. We have a large team. In fact, this morning, we're just coming off a call to further bolster the relationship with them and a lot of work that's happening both in our Accelerator Laboratory, in collaboration with them. And we talked about the sort of scope this year and nothing is in the cards yet for next year or subsequent years. But obviously, we'd love to continue that relationship with them. I think the key piece and maybe for the folks that aren't aware of that relationship is that in our collaboration and working together with some of their trials and developing technology that eventually become a diagnostic, we received a nonexclusive license for the pTau-217 antibody from Lilly. We talked about the $11 million collaboration with them this year. And that pTau-217 will take -- we'll develop that as an accelerator service in our laboratory. So again, immediately, it's available, not as a product, it's available as a service, eventually becomes a product with collaboration with Lilly on pTau-217, and it's available to everyone else. It's not -- it's agnostic. It'll be a marker that's available to anyone else who is interested in using it and looking at it with the exquisite differentiation between identifying someone with Alzheimer's or FTD and Lewy bodies. So available, that was a big part of this agreement with them. And then continuing to collaborate on how you take this from these trials in the future to translating that to a test that's going to help identify patients for this test. I think the broader term, and maybe this goes to your other question is how do you take this technology and these biomarkers, identify patient cohorts. They're going to best be suited for the drug in the future. And I think for a lot of this, how do you identify patients early in the trajectory of Alzheimer's. If you can identify a patient early and you're going to fly that biomarker early, those are the ones that have the best chance for treatment and a successful treatment. And so lot of technology and is starting to become a way to identify that those patient cohorts that fit best for treatment and ultimately, reimbursement.

Got it. And how unique is this Eli Lilly partnership, meaning can you replicate this? And you're obviously probably looking to do that, but just kind of give us a sense of can this be repeatable in terms of these partnerships development?

Yes. That's a great point, Matt. And part of our strategic review that we're in the midst of right now is goes to that exact question. Great success with Lilly. What are the infrastructure quality, precision, robustness in Quanterix that we're going to start to implement to catch another partner to develop another partner and another partner beyond that. And that's the part that internally, we need to look at and scale within the organization to be able to do that very effectively. Can we start working with another partner today? Absolutely. We've begun working with others in the space who want access to our Accelerator want access to Simoa and some of the antibodies. So we're very open to that and actively aiming towards that. And then I think longer term, as we move and as our TAM expands because we're in this translational piece, we're going to put some infrastructure updates and improvements to be able to grow there.

Got it. Then Mike, maybe turning to you. In the first quarter, the gross margins came in a little bit below our expectations. There were a number of factors, many of which are going to resolve themselves. Maybe talk a little bit about the changes you made to the reserve accounting for obsolescence and some of the changes that happened with the gross margin accounting.

Sure. I think one of the things we looked at as we got into the first quarter, we opted to change the methodology. The previous methodology has been a 3-month look back. And when we did our analysis, it really wasn't capturing the kind of volatility we saw during the course of the year. So we went to this 12-month methodology look back that I think is going to better capture the noise that occurs in the system. So the quarter you make that change certainly has an impact on margin because you're making that bigger change and there's essentially an elevated charge you take. But I think going forward, it's going to result in less noise in the system as we have excess and obsolete write-offs. We also had a charge and then we also had a physical inventory that took us 8 business days in January versus 4 last year. So we lost some productivity. The inventory piece doesn't recur, obviously, in the upcoming quarters and nor does the methodology change. So I think we should see, as we talked about over the next 2 to 3 quarters, so the steady move back to getting ourselves back towards mid-50s is what we talked about in our call in April. So that's where we are.

Got it. And you kind of addressed it there, but just maybe a little more detail on sort of what should we expect the cadence of gross margins over the course of the year. And you said mid-50s, what do you think a long-term achievable gross margin is for this business? I mean that's kind of in the ballpark of where a lot of -- I know we told names are, but is there something different about your business or structurally where you think those margins could be?

I do think, and we've touched upon pieces and some of the points Masoud was making, I think the opportunity to with instruments to improve throughput with other customers and the consumables are highest margins. So as the mix continues to shift more there, that certainly will help us. We talked about Accelerator as we get better utilization move forward there. So I do think that there's an opportunity to get this business over time into the 60s from a margin perspective.

Got it. And on the balance sheet, you raised money a pretty opportune time. You sit with a pretty comfortable balance sheet allows you to kind of reinvest in the business. In terms of capital allocation, how are you thinking about priorities at this stage. The macro environment has obviously changed pretty significantly. So how are you thinking about it now?

I'll give my comments, and Masoud can make his. I would say that -- and a lot of it is touched on, first is an internal investment around innovation. We've talked about innovation on biomarkers and instruments, and that's front and center for us. We've got obviously 100x that we're talking about getting implemented by end of the year. So that's an effort certainly that will continue. I think that if an opportunity presented itself in the marketplace, similar to Uman, where we picked up NFL, we certainly wouldn't be averse to that. And this may be an opportune time for that. And there's nothing right out there right now, but it may be opportune. And the other piece that we're looking hard at, as Masoud mentioned, we're doing a deep dive on strategic review. And I think the key here for us is where can we invest in to allow us to further penetrate the TAM we've identified. So I think that's going to come out of the strategic discussion and then what things that we need to do as a result of that. So that's how I'm thinking about it right now.

Yes. I totally agree. That's exactly how Mike and myself and the executive team is looking at this is what are the infrastructure components and capabilities that we add to access that TAM innovation and as we looked at translation. And obviously, with the environment that we're in, it's a wonderful company like Uman came with a biomarker that was critical to our business. We take a look at it. And fortunately, we have the ability to do that.

Great. And then maybe talk a little bit -- obviously there's so much focus on neurology for a good reason. There's also oncology in some of the areas that you're in. How are you thinking about balancing that because there's large opportunities within proteomics for a lot of different disease areas? It's sort of like the generalist versus specialist argument, and you don't want to spread yourself too thin, but would love to hear how you're thinking about that.

Our continued core focus is going to continue on the neurology side. No question. And majority of our research is going to go towards neurology because we see it's so expensive. We see the ability to increase and gain share in that market. We find ourselves a leader today. On the oncology side, we need to enable our partners. One of the first things I mentioned and probably one of the most interesting things are academic and biotech customers are using us for on the oncology side, are, hey, it's probably in a liquid biopsy more than just mutation or more than just methylation. And could we add protein onto that as a multi-omic approach? And can we look at phosphorylated protein. And so in a liquid biopsy. And when you look at liquid biopsies and protein and phosphorylation and post-translational modifications, some sits at a great place. Now how much effort are we going to put in identifying that and going there, probably not as much as we're doing in neurology, but we're going to enable those labs and the academic market to be able to do that research with Simoa. And that's why I think you see some recent growth on the oncology side, but mostly academic and biotech.

Got it. Maybe shifting back a little bit more to a high level, like one of the debates that we've had and we've had with investors is sort of the high plex versus low plex and you have some competitors that are going to be able to go across that spectrum. You have some that specialize in either or. And there seems to be an end market concentration academic in the high plex, just generalizing diagnostics platform in the low plex. I remember Kevin telling me a while ago that it's fine in the high plex, they can discover the proteins and when they want to really take a look at the close will come to us. What is your kind of philosophy on that? And how do you see the competitive landscape within proteomics? Because the other thing I'll say is that it's such a large TAM. There's not that many somebody's out there relative to maybe some other high-growth areas. So how do you feel about the competitive landscape? And how do you feel about your positioning within -- staying within that sort of low plex, low plex area?

Yes. I think it goes back to sort of what I touched on, on the translation side and that whole concept of signal and noise. And I think you get yeses and nos at 20,000 and 10,000, and we want to enable that the best way we can. We want to enable that research so that the 5 or 10 that do come out that do provide high signal that are important for measuring sensitivity that we own that space. And so for us to go into 10,000, probably be a little bit dilutive on what we're trying to do as a business kind of as a focus. We think that this translation part where you go do the discovery, you identify the 4, 5 that are important, maybe 5, maybe it goes to 10 in the future. It's not there yet. And where the signal is most important. We continue to put our resources and our focus and the company's efforts towards that. I think we're going to be not successful.

Great. Well, just been out of time, but thank you very much, Masoud, Mike. Really appreciate you guys being here.

Matt, pleasure.

Thank you.