Quanterix Corporation

To raise your hand during Q&A, you can dial star 1-1. Good day, and thank you for standing by. Welcome to the Quinterix Corporation's third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Michael Doyle, CFO. Please go ahead.

Thank you very much. Good afternoon, everyone, and thanks for joining us today. With me on today's call is Masoud Toulou, President and CEO of Quantarix. Before we begin, I would like to remind you about a few things. The call will be recorded and will be available on the Investor Resources section of our website. Today's call will contain forward-looking statements that are based on management's beliefs and assumptions and on information available as of the date of this call. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks and uncertainties that we face are described in our most recent filings with the Securities and Exchange Commission. To supplement the company's financial statements presented on a GAAP basis, the company has provided certain pro forma financial measures. Management uses these pro forma measures to evaluate the company's operating performance in a manner that allows for meaningful period-to-period comparison and analysis of trends in its business. Management believes that such measures are important in comparing current results with other period results and are useful to investors and financial analysts in assessing the company's operating performance. The pro forma financial information presented here should be considered in conjunction with and not as a substitute for the financial information presented in accordance with GAAP. Investors are encouraged to review the reconciliation of these pro forma measures to their most directly comparable GAAP financial measures set forth in the appendix of this presentation and in the earnings release issued earlier today. With that, I will turn the call over to Masoud.

Thank you, Mike. Good afternoon. Before we begin the discussion of our results, I'd like to take a few minutes and provide a brief overview of our strategic alignment and its progress. As we shared in our last earnings call, Quanterix is at a pivotal juncture where our ability to scale with quality hasn't kept up with customer demand for our Samoa technology. So last August, we announced a comprehensive plan to improve the company's quality and operations. In addition, last quarter we made a number of changes to the way we report gross margin that we feel better reflect our current cost equality and will provide much better visibility into the progress of the assay remediation program we recently launched. Starting with that program, one quarter in, I am pleased to say we are on track. The first phase was heavily focused on evaluation of reagent components to streamline across assays for improved manufacturability and reduction in variability. This will help with lot-to-lot performance issues we were experiencing, ultimately leading to improved gross margin. We also executed on our restructuring plan, which reset focus on our three principal objectives shared in August. Number one, quality, innovation, and positioning Quanterix to unlock the value of translational markets. As anticipated, with initial efforts, we saw 700 basis points of gross margin improvement, with a Q3 22 pro forma gross margin of 35% versus 28.3% in Q2 2022. We expect continued improvement as we enter the next phases of our redevelopment program, and we'll keep you updated on its progress. Moving on to the third quarter performance, we delivered 26.6 million in total revenue, a 4% decline versus third quarter prior year, but a sequential increase of 13% versus prior quarter when our quality and scaling efforts began. We continue to manage demand while addressing quality and expect revenues to improve as process improvements are implemented over the next several quarters. Increased demand for services offered in our accelerator lab continue to partially offset consumable decline and have been an important lever as we balance that demand. As our redevelopment program progresses, we continue to strengthen our leading position in ultra-sensitivity space, particularly in neurology. Our Samoa technology has been key to showing pTau217 to be one of the most prominent biomarkers being presented Neurological Clinical Studies, recently demonstrated at AEIC in July. TAMOA noninvasive and cost-effective blood-based testing can enable identification of patients more likely to benefit from disease-modifying therapy, accelerating trial enrollment, and increasing probability of approval. Our publications continue to grow, providing evidence of the industry's reliance on our ultra-sensitive technology for breakthrough discovery in research and clinical applications. In the third quarter of 22, we added 159 publications, bringing total Samoa-specific inclusions to over 2,000. We continue to see steady demand for our instruments and have placed approximately 130 instruments year-to-date aligned with 21, bringing our total of placements to over 800. It's no secret that high rates of discovery follow those who are testing and measuring in domains others don't participate. Those domains are at the single molecule and digital level empowered by our Samoa technology. Geographically, while North America represents 65% of our revenues, we continue to expand our regional capabilities most notably a recent strategic IBD partnership with UltraDx in China. We believe we're in the beginning of a neuro decade of research and clinical testing, not just in North America, but in China, Asia, Europe, and around the world. Now, shifting to our progress on trials and test development, as we shared it in May, We have received funding from the Alzheimer's Drug Discovery Foundation, ADDF, to accelerate Alzheimer's disease diagnostic test development. We've kicked off our efforts with the Amsterdam University Medical Centers on four phases of a clinical trial to validate Quanterix's multi-analyte test. 50% through phase one, we're already showing promising results for Alzheimer's detection and differential diagnosis of memory complaints which have resulted in four abstracts at international conferences. The BioHermes trial we are participating in is nearing completion at the beginning of 23. BioHermes is a prospective trial in partnership with the Global Alzheimer's Platform Foundation. The trial spans 17 US sites and will include around 1,000 early Alzheimer's patients. These patients will have amyloid PET scans All the sites are in the U.S., and the trial will include underserved populations and cognitively unimpaired subjects. This prospective validation trial for PTAL 181 will generate data in support of our existing FDA filing for clearance of the test. Now, I'm going to turn it over back to Mike to discuss some more financial details. Mike?

Thanks, Massoud. I'm going to provide some additional financial details about our third quarter of 2022 performance. And for your reference, those following on the call, I'm starting on slide four. As Massoud noted, our total revenue in the third quarter of 2022 was $26.6 million, a 4% decrease versus the third quarter of 2021. Our third quarter revenue in 2021 included $1 million of RADx revenue. Excluding RADx, we were flat to Q3 2021. We had product revenue in the third quarter of $17.7 million, a decrease of 14% versus the third quarter of 2021. Within product revenue, consumables revenue was the biggest driver of the shortfall, declining 30% versus the third quarter of 21. As Massoud mentioned, we continue to manage production demand for consumables while we address asset quality. Instrument revenue increased 20% versus the third quarter of 2021, aided by the sale of instruments to AlterDX in China. Third quarter service revenue increased 42% versus the prior year third quarter to $8.4 million. Included within services revenue is $2.7 million recognized during the third quarter of 2022 from our collaboration agreement with Eli Lilly. I would now like to spend some time talking about gross margin for the business. As a reminder, during the second quarter, based on a deep dive review of the business, we made a few changes on how we captured costs in our P&L. We changed the cost allocation of three departments based on their focused activity on quality and operations. In addition, we are capturing freight costs not billed to customers and recorded as operating expenses as a pro forma adjustment to cost of goods sold. The pro forma adjustment is reflected in prior year comparisons. Both adjustments result in a move of cost from operating expense to cost of goods sold with no impact on the bottom line, but with a significant impact to gross margin. We have made these changes to give greater visibility in our quality activity and allow investors to better monitor our progress. Now let's review margin performance of the quarter versus prior year. In Q3 of 2022, our pro forma gross margin was 35% compared to 49.8% in the third quarter of 2021, a decline of almost 1500 basis points. There are a few factors that drove this change. First, our inventory reserve increased significantly versus last year to capture the impact of quality. This negatively impacted margin approximately 800 basis points. Second, the change in allocation of resources associated with quality and operations in the second quarter of this year negatively impacted the year-over-year margin by approximately 500 basis points. However, as Massoud pointed out earlier, our efforts are already resulting in improved gross margin. with an increase of approximately 700 basis points in pro forma gross margin from Q2 of 22 to Q3 of 22. As a result of reorganization actions taken in Q3 and the change in allocations to cost of goods sold, operating expenses, excluding the impact of restructuring and related expenses, decreased to $26.5 million in the third quarter of 2022, a decrease of $4 million versus the operating expenses in the third quarter of 2021. We had a few significant items hit restructuring and related charges during the quarter. First, we incurred restructuring charges for severance totaling $3.4 million. Second, as a result of the announced restructuring and reduced guidance in our Q2 call, the stock price dropped meaningfully, causing a review of our goodwill. The subsequent analysis resulted in an impairment of $8.2 million to goodwill, a non-cash charge to our P&L. Third, We incurred an impairment charge for our Bedford, Massachusetts real estate, which we will not be utilizing, and a write-down for abandoned software, totaling $8.7 million, a non-cash charge to the P&L. And finally, we incurred $600,000 related to other lease expenses related to the Bedford facilities. During the third quarter of 2022, our unrestricted cash balance decreased by $17.5 million in the end of the second quarter of 2022, which is detailed on slide five. Ending unrestricted cash balance was $343.7 million as of September 30, 2022. Basic weighted average shares outstanding for EPS purposes totaled $37 million for the third quarter of 2022. Cash outflow from operations was $14.5 million, driven by our net loss, severance expense, and CapEx partially offset by collections on past due balances. With over $9 per share in cash and no debt, our balance sheet is in excellent shape, and we are well positioned with adequate resources to pursue our strategic objectives. The decision made to restructure the business in August of this year right-sized the business for our projected near-term revenue, but still retained adequate resources to address the quality issues and build our business to scale in a profitable manner. We had a good quarter, meeting our internal revenue target and exceeding consensus. As Massoud discussed, we are making good progress on rebuilding our assays. As we head into the fourth quarter, we project Q4 revenue between $24 to $26 million and full revenue between $104 to $106 million, which would have us finishing the year flat to prior year, excluding the impact of RADx in 2021, which is consistent with our previous guidance.

With that, I'll turn it back to Massoud. Thank you, Mike. Before we get into questions, I want to share a few market developments. So over the last several months, we're seeing a ramp in new discoveries using Samoa Neurofilament Light, a key biomarker to monitor neural damage impact of a wide range of health developments and issues. Key recent applications include using serum neurofilament light levels as a predictor of stroke severity and recovery, the direct monitoring of common and critical neurological side effects from CAR-T therapy, and use as a biomarker to monitor critical chemotherapy side effects. Several more examples of using serum NFL as a secondary endpoint in the development of new therapeutics. and continued advances in the use of NFL as both a diagnostics and a treatment monitoring biomarker for MS. These, among many other publications, serve as direct evidence of the value of Samoa NFL as an important check engine light for the brain. You know, it's fair to call Quanterix unique, with over 800 instruments installed, strong IP, one of the very few commercial proteomics companies with revenues over 100 million. We are well positioned for the next big pharma market in neuro. Recent exciting data presented at the Alzheimer's Association International Conference in July demonstrated that plasma tau levels, particularly 217 and 231, as measured with Samoa, elevate early in cognitively unimpaired patients and correlate with A-beta pathology. This suggests that these Samoa biomarkers may be excellent tools for screening patients into new preventative trials instead of having to screen by PET or CSF. As these Samoa assays are being developed and validated by our pharma partners, we are just starting to see first published data that, in fact, lower p-tau-217 levels could be an ideal biomarker to advance these exciting new drugs. Later this month, at the Clinical Trials on Alzheimer's Disease, CTAD, in San Francisco, will participate in an all-day panel on the use of these blood-based biomarkers in clinical trials, where we expect to see and hear several top-line readouts and updates to ongoing Alzheimer's work. It's truly an exciting time for this space. The market opportunity in neurodegenerative research and the demand for ultra-sensitive tools for early biomarker detection have never been stronger. And the steps we are taking to ensure that we remain at the forefront of this market, we still have challenges, but we're meeting them head on and are confident that the steps we are taking will improve our quality and manufacturability of our assays, allowing us to both scale and improve our cost structure in preparation to accomplish our translational goals. It continues to be the single greatest priority of the company, and we believe that the conclusion of this transformation will be capturing a larger share of the proteomics market, innovating and growing at a much faster pace than before, and in a leading position to propel new discoveries advancing neurodegenerative disease research and diagnostics. Let's take some questions. Operator?

As a reminder, to ask a question, you'll need to press star 11 on your telephone. Please limit yourself to one question and one follow-up, and then re-queue. Please stand by while we compile the Q&A roster. We have a question from Puneet Sauda with SVB Securities. Your line is open.

Hey, thanks for the question. This is Phil Bond for Puneet. that you're still in the midst of assay redevelopment, but. Kind of given the progress you've seen so far, just wondering if you see any upside to the the flat year over year guidance.

Hey Phil, this is Massoud. Yeah, so as we said on the call, you know the assay redevelopment program and road map is on track and you know meeting our expectations that we set out from the beginning of last quarter. And so three months in, we don't see any sort of delay in our progress. We think it's on time and measured. And our guidance, we reiterated our guidance on the call that, hey, this is going to be similar to what we said last quarter, which is flat in 22 versus 21.

Okay, great. Thanks. And just quick follow-up. I was just wondering if you could share any updates on how instrument orders have been trending. It looks like I think you said 20% growth here in the quarter. That's pretty good. So I was just wondering, like, has there been or do you expect kind of a negative impact from kind of the broader challenges and as a consumable business?

Yeah, Phil, you can see that we have some challenges in the consumable side. A lot of those were self-inflicted as we improved the quality of the processes, the stability, and variances of the assay. You see that instruments are on track versus what we did last year in 21. So they're per our expectations and nothing unusual.

Okay, thanks. I'll hop back. Thanks, Bill.

Our next question comes from Kyle Mixon with Canaccord Genuity. Your line is open.

Hi, this is Alex McKesson. I'm on for Kyle Mixon. Just a few questions. So I was wondering if you could discuss any geographic-related headwinds that you experienced during the quarter, whether it be consumables or insurance-related. Also, I was curious as to whether there's any further workforce reductions during the quarter as well. Thank you.

Yeah. So, I'll take the question. Maybe Mike can add some color on the regional breakdown. So, we announced the reduction in forests last quarter, and we don't have any plans for additional reductions. And I'd say that the realignment that we had in last quarter really brought focus to the quality, the innovation, and the translation initiatives that we announced. So that's progressing as expected. You can see some of the improvements in the P&L. And from a geographic perspective, I think Mike can go into it, but broadly speaking, major headwinds in any particular region. In fact, you know, we announced a partnership with UltraDx, and so we saw, you know, some growth from the instrument side in China. But, Mike, why don't you?

Yeah, I mean, if you look at it, you know, we're down slightly from a revenue perspective year over year. And, you know, it's spread almost evenly between North America and Europe. Asia-Pac to Massoud's point is up. double digits, driven primarily by the L2DX shipments of instruments to China. So that's pretty much the way it breaks out. It doesn't seem to be isolated to just, like I say, any one region. North America, obviously, is still our largest region at about 63%. But it looks like it's spread pretty evenly.

Got it. Thank you very much.

Thank you. And our next question will come from Matt Sykes with Goldman Sachs. Your line is open.

Hey, Massoud, Mike. Thanks for taking my questions. Good afternoon. Maybe just to start on the assay redevelopment operations, clearly this slide is very helpful to show the improvement you've seen. I'm just wondering, when you're talking about managing volume resulting in some of the declines we saw in consumables, how's that being communicated to customers? Meaning it sounds like demand is still there, but if you're managing volume, is there a risk that you're missing business? Is there some substitution risks for some of those assays where they could go elsewhere? Or is what you're providing onto a closed system and or unique in that they're able to wait as you manage that volume and work through the redevelopment?

Hey Matt, I'll take that. So the great news is that to achieve the ultra-sensitivity that you need. In a lot of cases, Samoa and our ability to measure with great limits of detection is unmatched. A lot of these customers, we have been able to manage the volume and say, hey, we want to validate things and we put up a quality wall so things aren't getting out to their hands as fast as we might expect. You know, I think a lot of it is managed. Will there be some customers that can't wait? Of course. But, you know, overall, we're trying to manage demand. We've moved some of our demand to the accelerator laboratory. So, you know, we've filled that, you know, in terms of capacity. You can see we have big projects with Lilly and, you know, other pharma partners that we've moved there. So when we say volume management, it's, you know, partly some orders are being delayed. Some orders are going to accelerator, and we've been doing a triage.

Got it. Thanks for that color. And then maybe just more of a high-level question on sort of end markets. I mean, you've talked a lot about the pharma partnerships and the work you're doing there. Early in the year, you talked a little bit about CROs and the potential there, and just given the slide you had up on the versus PET screens and kind of the lowering of costs you can provide from trial work with your eventual diagnostic, Any inroads into the CRO market? Do you see that as a market, if you look a few years out, as being an important one for Quanterix?

Absolutely. We're very clear that through our own laboratory or through what we're doing here internally, we're not going to be able to ourselves match all of the demands in neurology. We absolutely want to enable the CRO partners, partners that are working with pharma companies. For us, it's, you know, let's enable them. They're a big part of the market. They account for, you know, anywhere from 40 to 50 to 60% of our business, depending on the quarter. And so, you know, we're a big fan and we'll continue to support CROs.

Got it. And then just one final follow-up from Mike. As we look at that sequential improvement in gross margins, that's fair to see that as apples to apples in terms of all the

um the exceptions and changes that you've made on an accounting basis i'm talking about sequential not year over year yeah no on a sequential basis that's absolutely right matt you know figure q2 and q3 captured the impact of the allocation changes captured the impact of the pro forma distribution so it's a real improvement you know primarily driven by you know expense reductions um that you know were the result of the restructuring And then we had some product mix bump up, and that pretty much offset some of the inventory reserves. So it's a real quarter-over-quarter improvement.

Got it. And you're not expecting any additional changes there in terms of your plan so we can see sort of Q2 as a base to work from going forward?

I think that's right. I think that's a good baseline to work from. You know, I think once we get beyond you know, Q1 of next year, the year-over-year comparisons are going to be easier as well. But we're going to try and call it out in each call just so people understand what's in and what's out.

Got it. Thanks very much. Appreciate it.

Thanks, Matt. Thanks, Matt.

We have a question from Max Masucci with Cowan. Your line is open.

Hi, this is Stephanie on for Max. Thanks for taking my questions. So, the results from the CLARITY-AD study is going to be presented at CTAD later this month. How do you expect the late November data readout and the Canimab PD USA to influence demand for product and service revenues in the acute phase following what will be a landmark catalyst for Alzheimer's patient care?

Hey, Stephanie. We're incredibly excited as well. I think that it's going to be a great conference. A lot of, as I said, as you mentioned, top line readouts and just progress in the whole neuro area. We really believe this is the neuro decade. In addition to the ALS readouts that we expect to hear at CTAD, there's also a lot of work happening in ischema stroke, MS, ALS, TBI, Parkinson's. We think that CTAD is a great start for Alzheimer's. Obviously, you're aware a lot of our tests in the market are being used in clinical trials. Our tests are being used for monitoring drug effects and prescreening, enrolling diverse populations, and really just improving the whole disease continuum. The readouts and the results, I think, is just great for the field, and we're incredibly fortunate that the technology and the products we have are going to really enable that disease improvement and continuum. So we're excited about the conference, and we're looking forward to the results.

Great. Thanks for that, Collar. And additionally, so Eli Lilly is president of neuroscience indicated during the company's earnings call last week that the company plans to launch a p-tile blood diagnostic next year. Could you, one, provide some additional context around Lily's comment, and two, should we assume that the test Lily is referring to will be run in your CLIA lab?

Yeah, so, Stephanie, we're not able to make comments on that on this call. But I can say publicly that we do have a partnership with Lilly that we have released, and that is public information. And we're very active in this space. But I wouldn't want to – I hadn't listened to that specific call. I wouldn't want to make comments on it.

Got it, understood. And just one more from me if I could squeeze one in. So on your PPAL 181 LDT that you commercially launched in late July to potential clinical users and researchers, was PPAL 181, the LDT, a legitimate revenue contributor exiting Q3? And can you describe the demand trends that you've seen from clinical customers versus research customers?

Yeah, that's a great question. We did launch the PTAL 181 LDT first of its kind in North America. It's an important test as an ATAG diagnostic for Alzheimer's. I would say very early innings, no, nothing material in terms of revenue for diagnostic side, but for clinical testing, for research applications, us having this as absolutely driven interest in us being able to provide a diagnostic pathway and ultimately something that could be regulated and we could get an FDA approval for in the future. So to answer your question, very minimal on the revenues. There isn't a drug available today. We anticipate the revenues would stay minimal until there was a drug approved. But the interest driven from biopharma to do testing and to do clinical trial screening pre-screening is high, and having that test helps.

Great. Thanks so much for taking my questions again.

Absolutely. Thanks, Stephanie.

Thank you, and there are no other questions in the queue. This concludes today's conference call. Thank you for participating. You may now disconnect. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.