Quanterix Corporation (QTRX) Earnings Call Transcript & Summary

Hi, everybody. Good morning. Thanks for joining us. My name is Matt Sykes, the life sciences tools and diagnostics analyst at Goldman Sachs, and I have the pleasure of having senior management team from Quanterix here, Masoud Toloue, CEO and Mike Doyle, CFO. Masoud and Mike, thanks for joining me.

Thanks for having us, Matt.

Thanks, Matt.

Great. Maybe if we could just start out and have you kind of set the stage first, talk about the most recent results and some of the trends you're seeing in your business as we kind of enter the second half of this year.

Yes. Maybe I can speak to that. The -- obviously the first quarter was strong quarter, and we were very pleased to start to see a lot of the implementation of the redevelopment program and transformation program beginning to get absorbed in the quarter. So very pleased and happy about that. We did a modest increase in our guidance for the year. And I think we're beginning to see some of the early benefits of the transformation program in the quarter and then we don't expect to see -- but what we expect to see the biggest benefit in 2024, but we're starting to see some of that trickle in this year.

Got it. Before we get to the transformation plan, maybe it would help the audience just to kind of give a very brief background of Quanterix, and what you guys do and what you're focused on?

Yes. So Quanterix is a technology company, life science tools company that was formed in 2007, our -- inventor of the technology is Dr. David Walt, who is also a founder of Illumina. And the technology really is focused on ultra-sensitivity. So we don't compete. We're not an average protein detector. But if you take a look at things that are hard to measure, Quanterix does a very good job at that where a digital measurement of these proteins that are very low in concentration in blood. And because we're able to go to that boundary of where the technologies can't see something, and we can see something, has been very productive in the research side. We're able to see proteins of interest early in the disease cycle. We're able to see proteins that are just hard to measure from a research perspective, things that are being diluted by blood or hard to see in blood. That's why people use our Simoa platform. So it's been really great in research that has over 2,000 publications has gone to more of a translation, where pharma is now taking a lot of the biomarker discoveries that were done in research and those 2,000-or-so publications and now translating that to more and more therapies, clinical trials in the clinic. And so I think when you kind of look at that, we're very much in that research and translation space and starting to look at what we can do towards supporting clinical therapy.

Got it. Thanks for overview, Masoud. Maybe getting back to the transformation plan for the company. A lot of it was addressing gaps in industrial manufacturing, improving stability and the scale of the assay components. Maybe give us an update on where you are with the plan. I know you set a goal for sort of the end of this year, but talk a little bit about where we are in that transformation plan, how you feel about it in terms of meeting sort of the time line that you had set out?

Yes. Yes. So we began this transformation plan back in June, July timeframe, we did a big strategic review of the company and then we announced that at our August earning's call last year. And we call today a big transformation in the company and within that larger corporate transformation, we said we were going to do something very specific called a assay redevelopment program. That active redevelopment program was around redeveloping the assays, I am sorry, simply. In other words, taking all of our assays and going from scratch, and they were like developing them to scale. So identifying the gaps to what's going to be required for industrialized assays and putting that industrialization in our operations lines. So that required not just a scale, that required actually going down to the base level of components of every single assay, redeveloping, putting them together and then reinjecting them to the operations line. We said that would take 6 quarters to accomplish. We're in the fourth quarter of that 6-quarter plan, and we continue to say that we're on track. And we've been very clear that as we make these improvements, our gross margin is going to improve, and we're going to see our ability to deliver consumables to the market in a lot more efficient way. And then we've been successful with that. We're very pleased with the progress of the program, and I'm happy to say that is on track.

Great. And just following up on the previous question, any update on customer feedback as you've been going through this? I mean you've talked about sort of managing revenue as you're kind of redeveloping the assays, it's a pretty comprehensive plan of what you've done on the manufacturing side. But any kind of customer feedback that you've gotten during this process, and how you've been able to manage the revenues throughout this process?

Yes. So we've done some early process improvements. And I want to just be cautious that a lot of the main improvements we won't see until the beginning of 2024 until the program ends, but we can start to see are that some of the process improvements have improved the customer experience. They've been able to get some more product than the last year. They've started to see that on a quarter-over-quarter basis. So I think that's a good sign. Whenever you can get product to your customer, that's good. The second thing I would say is that a lot of the work we do is, hey, a clinical trial that's going to start in 6 months. Will there -- will the supply be there? Will there be the lot-to-lot? Will there be the clinical validation and specific requirements for a test -- for a clinical trial? And the answer to a lot of that is yes. And so we're starting to see that pick up as well. So the feedback has been very positive. The -- we are in a very unique position where the customers communicate very openly with us through our Accelerator programs, we get to learn about what the requirements are. So we speak with them on a regular basis. And the feedback has been positive, hopefully, getting more and more positive towards the end of the year and then the beginning of 2024.

Got it. And then maybe just talk a little bit about -- I mean, one area that you pivoted towards where your technology really resonates because the sensitivity is neurology and specifically Alzheimer's, which, as we all know, is a very large unmet need, and we've had some really exciting news on the therapy front as of late. We're just over a month since Lilly's top line data readout in early May, how do you think that validates the Simoa platform? And what do you think that means for the company moving forward to get that kind of top line data?

Yes. I mean I think the neuro market was probably a little bit of a lonely market. And the company's focus had always been in neurology, not that it can't be used in immunology or other areas, but neurology is a unique market where you need a proxy for brain health. And there's not a lot of easy ways to access the brain, right? You have to do a surgery or very costly image of the brain and how can you do that in a unique way. Well, you can look at blood and blood is noninvasive. And so you can do a liquid biopsy of blood to serve as a proxy for brain health and normal protein detection technologies can't do that. You have to use Simoa to be able to get that sensitivity. And so that's one of the reasons we've been putting a lot of effort in neurology, a lot of focus. And then I think you see a lot of diseases in neuro that haven't had happy stories, right? Not many therapies in the market for -- or any for Alzheimer's, Parkinson's and ALS. We're starting to see some more now and more breakthrough discovery and accelerated approvals, and that's sort of changing the dynamic of the market. And so people come to Quanterix and people come and use our platform for sort of 3 main broad areas in neuro. One, enrollment. I want to design a clinical trial where I have patients who have the very early symptoms of a neurological condition or neurological disease. If you measure something too late, then the therapy is not going to be as efficacious. And so if you can catch someone very early, where the early beginnings of protein in the blood, then there's going to be an impact, and you have to use Simoa for that. So for patient enrollment, you want to start a trial. People are using the Simoa platform. And sort of the second phase is how efficacious is the marker. So a lot of good news out there with the FDA accelerated approval using NfL, the first neuro biomarker for a therapy where the therapy wasn't successful in the clinical trial, but the biomarker showed great results. So this is being used as an efficacious marker for these therapies. And then finally, for enablement of the therapy. I think that's where there's a lot of excitement. Anytime there's a new therapy that's in the market, there's going to be positive data that how do we get -- enable access to this therapy. And today, in relation to Alzheimer's, you need a PET scan or CSF test for a confirmatory answer, and it's very costly and expensive to the whole system and a blood test just makes a lot of sense for the patient, the provider and the payer. And it's a rare sort of instance when you get the trifecta when a test is beneficial for all parties.

One of the important biomarkers that you guys measure is tau, and there's various biomarkers within tau. But one of the things that the Lilly drug, and there's been some debate about it, and we won't really find out the answer for a while. But if tau will be included on the donanemab label, which would actually probably be a pretty significant positive because therefore, you're going to have to test for it in order to check those levels. Do you have any view on whether that should or would be included? I know it's really early, but just kind of any view on that.

Yes. I'd probably can't make any comments. We'll have to refer that one to Lilly themselves. But I think you can take a look at what happened with the accelerated approval of Leqembi. And in that label, there were obviously exploratory blood biomarkers, which goes to the importance of these markers. So I think the need is going to be confirming amyloid pathology, but hard to say right now what's there, and what's not on there.

Got it. Also, shifting away from Alzheimer's for a minute. The FDA also granted accelerated approval for tofersen recently, which is an important drug for ALS and one of the important biomarkers for that is NfL where you have a breakthrough designation for one of your tests. Maybe talk a little bit about how that you think validates the Simoa platform? And what role do you think NfL can play? And how can you help in terms of the diagnosis or the enrollment on the research side for ALS or for tofersen.

Yes. NfL is one of those very interesting generic markers. So NfL, we -- Quanterix really did a lot of work around NfL. We launched the first blood test around 6 years ago for NfL. And then we've been continuously working around NfL, developing publication base, developing normative databases, working with collaboration partners to develop a database where if you look at someone's age and you look at someone's body weight, you can get to a normal NfL level. And using these foundational pieces to enable NfL to be a marker that's going to be important in therapy or important proxy for brain health. So we call it the check engine light for the brain if you have a high NfL level. It's not going to tell you exactly what the problem is, but it's going to tell you that there's a problem and it needs to be investigated where companies like Ionis to Biogen doing the development work for tofersen, have been using NfL is that they've been taking the result of NfL and see if the therapy improves the situation for a patient. And so using that as a proxy for clinical efficacy. So the gene therapy itself isn't the marker for the clinical efficacy. It's the NfL measurement that's an important marker. And because it's a scaffolding protein, if you're starting to see more of it in blood then that -- the patient is probably not improving. But if you start to see less of that, then something is happening where there is an improvement, and there is something there. And so seeing the shifting stance and the positive results from the regulatory agency on tofersen was a big positive. And I think what I was alluding to is the first neuro biomarker that allowed for accelerated approval, and I think that -- we mentioned on the earnings call, I think that's a big tailwind for the industry and for what we're trying to do.

Got it. And maybe talk a little bit about the size and opportunity for Quanterix near term in the research market. And then longer term, the companion diagnostic market for Alzheimer's. I mean, there's obviously a cadence to this, and you've been doing a lot of work and generating revenues within the research market, and you kind of laid out how that works. But I think for the audience, just sizing those opportunities and in terms of the time line that you foresee for the company, as you move from research to potentially community diagnostics?

Yes. Yes. So I think I'll start -- I'm happy to talk about the research segment to start. Research is a big market for us. Right now, 100% of our revenues are research and clinical studies. And we're very optimistic about that because whenever you have a technology where you can see things that other technologies can't see, there's a high demand for that. And I think a big reason why customers have been very sticky and working with us through this year. And I think right now, as a company, our focus has always been on the neurology side, but that's a growing area of a 10% funded in NIH market. And I think the opportunity for that can grow. And we can look at other areas besides neurology, like, immunology and inflammation, where sensitivity is going to be critical and important. And so I see the opportunity just in research as being excellent and -- us being in an excellent position because we are not a commodity protein detector. We're looking at the boundaries of detection, so very bullish about that. And then how that translates into clinical trial and clinical trial work is also important. So a lot of companies are in the discovery phase, identify the biomarkers. They're very interesting. And then how do you translate that and take a protein signature to become a biomarker that has to be done in pharma. It's usually a few plex, that's been very positive. And I think the news in what's happening in the neuro side has been very positive. So that as a stand-alone entity business, we're very bullish about. We think that has legs on its own. And when we quantify our strong double-digit growth next year and everything that we're doing from a guidance perspective, that's just research and clinical trials. It has nothing to do with any upside on the diagnostic side. So then you go to the third tier that you're referring to, hey, what's happening in the Alzheimer's side, there's been several decades of failed drugs on the market, and now you have a drug that's we're going to hear a little bit more about in the future and the other therapies that are going to be coming out. And I think ultimately that the economics are going to require a blood test to scale any sort of therapy. And I could see a scenario that any patient who wants to get on to a therapy is going to be screened with a blood test. And that's very sort of simplistic math of one patient, one blood test as a screen. Now you layer on okay, while there's a screen and then there's a possibility for a confirmatory test and then there's a possibility for a prognosis and a possibility for therapeutic monitoring and prediction test, now you're adding additional layers. And I think everything we're talking about these days have been sort of a screen for Alzheimer's. So I think this enablement of the therapy. It's very clear that it's going to be a blood test, and it's going to be pretty material in the future. We're not the only company that has a blood test, there will be other companies that have blood tests, but I think the market size and the opportunity is large enough to grow the diagnostic infrastructure of blood testing.

Got it. And then maybe -- just following up on that, it seems like you touched on it briefly in your earlier comments, a lot of the tests that you have currently are running are single plex or just 1 biomarker. But it seems like as we move through this journey, that we're kind of moving towards multiplex that it might not just be 1 biomarker, it might be a combination of others. Do you feel that 1 multiplex test will be the preferred method? And how do you feel you're competitively positioned to offer multiplex relative to where everybody else is at this point?

Yes. Multiplex is a very interesting sort of phenomenon and the reason where it might becomes interesting is that if you're looking at a sort of call that a proteo-isoform of tau, meaning a phosphorylated version of tau protein, and you're trying to measure it in blood, first of all, it's very difficult and Simoa is one of the only very few platforms around the world that can actually detect that. Now if you want to add additional markers to that, you're reducing the bandwidth that you put on the tau protein, but the Simoa platform has additional bandwidth to take on 3 or 4 additional markers. I think that the multi-marker test and this will play out either increases the correlation to PET or improves the sensitivity and specificity, it could improve the differential diagnosis for the patient. Let's say, you're a patient who come into the clinic and you don't have pathology -- amyloid pathology, but you have memory issues. A multi-marker test could differentiate frontotemporal dementia from Alzheimer's disease. And I think that could be very beneficial. So there are a few ways that a multi-marker could be better than single marker. And I think probably the result will be in these clinical trials that we're running and help sort of inform towards that. The other thing is, I think, that we're going to be getting to a stage in the next year or 2, where a blood biomarker just is in the screen. Right now, people are thinking about, hey, is the screen or an aid to diagnostic, which goes into a PET test. I think in a couple of years, we'll have enough information and data and acceptance that the blood test replaces the PET scan. And there, I think a blood biomarker that's multiplex could help.

Just following up on that last point because that's one thing that we've had a lot of questions from investors regarding sort of PET versus blood. And typically, I think in previous trial enrollment, it was sort of cognitive assessment PET scan. But if you can add a blood in between the cognitive assessment and PET scan, you're actually reducing -- you're ruling in/ruling out a decent population. So you're reducing the number of PET cans you have to do. PET scans are expensive and there's not a lot of capacity. So maybe talk about sort of the economic difference that you make by inserting that blood in there first. And then ultimately, as what you said, maybe replacing it, both from a cost standpoint, but also alleviating capacity of PET scans to be done for other reasons.

Yes. So if you look at there around maybe 2,000 PET centers today in the United States. And those are at capacity. You need a PET tracer, radioactive label. So if you talk about rural situations, it's even hard to get access to. And the PET test costs about $5,000 to $7,000 today, not reimbursed. We hope it does get reimbursed with the approval and reimbursement of a drug. But that's going to create a bottleneck. And I don't think PET is going to be the only way to get someone on to therapy. You're going to need some aids to the diagnostic to get on there. And I think a blood test that's just several hundreds of dollars just makes a lot of sense. One, to the patient, you are classifying different patients. You are looking at patients earlier potentially before something comes up on PET and giving them an opportunity to get enrolled. You are getting the physician an ability to identify patients and sort of contributing to a logjam of PET. I don't think patients who are going to be requiring that PET and getting them in the pipeline. And then the payers -- from perspective of payers, $5,000 to $7,000 that they can triage by a blood test, that just makes a lot of economic sense.

Got it. Moving a little bit more towards financials, and Mike can certainly chime in here, but if you look at sort of last quarter, you had Instruments down about 15%, that's about 19% of total revenue. There was some weakness in Asia Pac, but you also have very transparent about sort of this softness in Instruments over the course of this year. Could you may be talk about sort of the trends that you are seeing in the business Consumables versus Instruments. And then also talk about how the Accelerator lab -- may be describe that a little bit, Masoud or Mike, you can describe that. How that's helping offset these headwinds? Because, I think, an important thing to be able to understand is that as you're managing these revenues by doing the [ Accelerator ] development, you actually have the safety valve, with the Accelerator Lab that can service capacity, so you are not losing revenue, while you are managing revenues. That's a lot of questions into one, I understand, but maybe start with sort of the Instrument, Consumables dynamics over the course this year and then go into the Accelerator Lab.

It's your multi-analyte question, Matt.

Exactly, it's a multi-analyte question. Yes, that's good.

Yes, I think what we had in the first quarter, we're happy with that, but we saw as did the number of instrument companies, softness in Asia Pac, and I think that's something we think is going to persist for the full year, that said, coming out of it we feel comfortable is why we took up guidance that that's going to be more than offset by performance in Consumables and are Accelerator Lab, which is a -- we're getting couple of things going, just generally more activity, but also a phenomenon, which I think Masoud label sort of try before you buy. If you are debating whether you're going get an instrument this year, putt off that purchase, you can still run your work through the Accelerator Labs. I think that we're picking up there, and we feel good about the underlying trends for both Consumables and Accelerator. We are in this probably unique phenomenon where we made some decisions to redevelop or managing demand, and we're trying to sort of keep the balance working. And I think so far we feel really good about how it's going and I expect sometime next year, we will see a pickup backup in instruments. I think this is a shorter-term phenomenon, but I do think it will persist this year.

Got it. One thing I do want to touch on the Accelerator Lab is something that when we did our field trip to visit you guys, you guys talked about. So I think we're focused on a couple of different biomarkers that have been really important and relevant for the therapies that are being worked on today. But you have also kind of done a lot of work on lot of different biomarkers via your Accelerator Lab, and so your ability to potentially pick a different biomarker, which might have increased relevance later on and drop that into a test. I think is a differentiating factor for Quanterix. We don't want to get so narrow that you are focusing on 1 biomarker where the relevance for whatever reasons starts decreasing. So maybe talk about all the work that you have done over the years in Accelerator Lab and sort of what's sort of the menu of biomarkers that you have access too?

Yes. I think that's a great Matt. As Mike said, Accelerator can be a try before you buy and great edge if you see any sort of instrument pressure in the market. Hey, let me outsource R&D or let me outsource my assay development or even clinical trial with the Accelerator and will take that all the time and so that's, as you -- to your point, has been a good thing to have in the company in the last year or so and it continuous to be. And now the reason why it's so important for us in the future and it continues to be a good feeder into R&D is we tend to call it the best product manager ever in the whole world because you're in a conference room and throwing darts at biomarkers and saying, "Hey, I wonder what's the next biomarker is going to be." We are not that sophisticated to give you that answer, and I don't think anybody is, but the way you get to that is that this test and this publications and people work and then those consensus in conferences and we get to seen in the Accelerator Lab where that trend is going and so these are studies that are being done and designed for 3 years out, some cases 6 months out and we take that collection of what's hot in the field of neuro or immunology and that's what feeds our pipeline. That's what put the direction to our pipeline. So we are constantly developing and looking at new biomarkers. Biomarkers that we never end up talking it up because some of them don't -- aren't super exciting or it's too early for it to become a driver for our therapy. And then some which we're talking about today, including pTau217, including some of the NfL and some of these other neuro biomarkers that are going to become important drivers for assay revenues. So yes, best product manager in the world like that.

You've mentioned you plan to launch an additional LDT later this year. Would this be a single biomarker or multiplex? And if so, could you share any details or give us a better idea of the timing of that launch?

Yes. I think I'll say all of the above, timing is a little bit -- we won't be very clear on what it is. We're going to let the data kind of speak to it. But should we have a multi-biomarker LDT in the market? Absolutely, yes. Should we be looking at pTau217 as an LDT? Absolutely, yes. Could there be some combination of both? I think that's a possibility, and we're going to let the clinical trial work and those results sort of drive the timing of some of that decision.

And you have 2 breakthrough designations. And so you obviously have launched these LDTs. But what is sort of the IVD strategy moving forward in terms of how you're going to spend your time? What are you going to focus on? And obviously, for the breakthrough designations, they're kind of in that process. But how are you thinking about sort of the IVD strategy moving forward for the company?

Yes. I think the -- our focus and view has been, right now for a blood biomarker tester screen, we think that LDT mode is absolutely a valid mode, and we are going to be able to -- we have a clear laboratory now. Today, it mainly supports pharma customers and is going to be able to support patients and providers moving forward once there is approved therapy. But our sort of base business is to be the an [ arms ] dealer and make sure that we're enabling reference labs and specialty labs and anyone who wants to offer a test with the system, the platform and the assays and the menu to be able to do LDTs. That being said, we think that the IVD component is important, both from adding more substance and from a reimbursement standpoint, and that's why we -- the 2 breakthrough designations we have with the FDA are critical. We have a couple of prospective clinical trials that are ongoing to support those 2 submissions. One is the collaboration that we have with GAPF and BioHermes, which is going to support our 181 submission breakthrough designation. And then we have the collaboration with VUMC and working with ADDF on a multi-site multi-marker test that's going to look at thousands of patients, diverse patients over clinically impaired to nonclinically impaired sort of time frame, where they get the imaging and they get a blood test, and we do a sort of a comparison there. And we're in Phase Ib of that, and we're going to be looking at primary memory clinics and primary care sites at Phase III and Phase IV, which will sort of wrap up around 2024. So those support the IBD strategy, and it's a critical part of our plan.

Got it. And then Mike, just on gross margins. There's been a number of headwinds that have compressed margins for the assay redevelopment program, some increased head count but excess costs in some of the initial runs of the new assays take place. Could you talk about sort of where we are in terms of gross margins in terms of troughing out? There were also a number of accounting changes and things like that, that were made last year. But maybe talk about sort of where you see trends in gross margins over the course of this year. And then maybe help highlight sort of what your mid- to long-term gross margin expectations for this business would be?

Sure. I think we saw the trough of gross margin last year when we sort of hit, I think, a bottom around 27%, 28%. And we had a strong first quarter, I think, driven in part by some onetime things. We did a lot of cleanup operation last year, which helped us. We attribute probably 500 basis points or about 1,000 basis point change to that. And I do think that we're going to see -- what we've got going on, we've got 2 phenomenon going on this year. One is, as we continue to make improvement in operations, we're going to get some benefit. The flip side, which is what we said in the first quarter, is we think in the back half of this year, we're going to potentially see higher scrap than normal as we're running basically 2 SKUs for every product we have old and new, so there's going to be some noise in the back half of this year as we finish up the redevelopment work. That said, we took our full year gross margin projections up in the first quarter. We're going to end this year higher than last year are longer term and really it's over the next 2 to 3 years. Our expectation, I think, we've said, Matt, is we'll be cash flow breakeven $170 million to $190 million in revenues, and that's with the gross margin in the low- to mid-60s. And so feel good about that projection. It's hard to gauge is that 25%, 26%, but it's going to be in that time frame.

Got it. And then these dynamics and your expectations for the sort of 10% cash burn reduction plan in 2023 for this year. Can we expect that dynamic to continue in 2024 in terms of the cash burn? And how should we be thinking about that?

Yes. I think that does get us right without getting specific to any sort of '24 guidance. But I think that we've said we think that the burn is going to continue to diminish. We're off to a good start this year. Actually, so I'm feeling good about where we are right now. But I think that should continue to diminish as we get leverage next year as we said, we'll drive top line in double digits -- healthy double digits next year. That's going to get more leverage in the business. Our cash burn is going to continue to improve. We expect a crossovers. I think we've mentioned previously at '25, '26 time frame. And we had projected then probably to still have about $175 million to $200 million of cash on the balance sheet. Excluding any big investment in Dx, but this is core [ RUO ]. So we're feeling good about it right now. We don't need to go to capital markets, very comfortable with our balance sheet position.

In terms of capital deployment, I think you're very internally focused right now. And in terms of sort of deploying that when you get sort of a comfort in terms of the asset redevelopment program is running scores, you've reset growth higher, you still have a cushion that you mentioned even post sort of breakeven. How are you thinking about capital deployment in terms of -- and Masoud please chime in, in terms of like where do you see sort of some of the strategic gaps that you might have either from a technology standpoint or from a services standpoint?

Yes. I think if there was something today, Matt, that would accelerate what we're doing today on the [indiscernible] program, which you talked a little bit about, right, the [ fix ], innovate, translate. We want to do it right away. I mean anything that would hasten or speeden up the -- what we're doing now would just make complete sense, we want to do that. And so we're paying attention to that, and we're keeping, obviously, our eyes open. And then I think that's kind of our focus. So it's been internal, but if we could speed any of that up, we try to do that. And then more sort of in a broader sense, you're at the boundaries of this detection. And if there was something else that could enable more detection that would enhance something that we're doing organically today from an innovation standpoint that will also be attractive to us.

Got it. With that, we're out of time. Masoud and Mike, thank you very much.

Thanks. Appreciate it.