Microbix Biosystems Inc. (MBX) Earnings Call Transcript

Thanks again for joining us. Today we have an update with Microbix, talking about their year-end and Q4 numbers that were released just before the holidays. With me, I have Cameron Groome, CEO; Ken Hughes, COO; and Jim Currie, CFO. We will do a little bit of an overview of the year and the quarter and then open things up for questions. [Operator Instructions] And as always, this will contain forward-looking statements. If you'd like to know more about those, you can find them on the company's presentation on their website. And with that out of the way, I'd like to open it up for Cameron Groome to give us a little bit of an overview of Q4 and year-end results. Hi, Cameron.

Hi, Deborah. Happy new year, everybody. Thank you very much to all the participants for joining us on an update call. We're going to run through a little bit the year just ended, give some operational updates and a little bit of an outlook for what we see emerging in fiscal 2023. I would urge everybody to read from the Microbix' website, our full Q4 disclosures package, which consists of the news release describing our year-end and Q4 results. The CEO letter narrated to shareholders, the management discussion and analysis and the full financial statements of the company, which -- for the year ended and fourth quarter, which constitute the full corporate disclosure alongside the annual information form of the company, which has also been filed. With regards to Q4, I'll just briefly touch on a few high points and then hand it over to Jim for a little bit more context in detail. We had a reasonable Q4 top line bolstered by some better antigen and cap sales, but those were offset by the lack of any viral DxTM brand viral transport medium in the quarter. And those of you that are monitoring the virus may have seen that and new CEO was appointed to Supply Ontario just on December 23. So there's a lot influx with regards to procurement in the province, and we continue to work with the authorities on directing that for DxTM product line. In terms of our -- so sales mix, strong on antigens at QAPs in the quarter and no DxTM sales in the quarter, so a little bit lighter than the prior year that had each of those 3 constituents. In terms of gross margin, that is affected by a heavy weighting of lower-margin antigen sales, specifically sales of lower-margin antigens in the quarter that pushed down margins a little bit along with some cost pressures not yet passed through to customers. SG&A was up. There's an increase in the quarter, and that's largely due to increase in selling expenses as we resume participation in trade shows and events for customer acquisition purposes and the lack of grant offsets. Net-net, a reasonable quarter, not our best, but ends another firmly profitable year for the fiscal year ended 2022. It's not quite what we were targeting. And that's, as outlined in my CEO letter, largely due to the major contract we signed in August and that top 10 diagnostics company continuing unexpectedly to iterate on the final design of its point-of-care testing instrument and assays related to that, that was frankly unexpected by us and it continues to impact the timing of revenue realization of that customer, although we are seeing quite a reasonable amount of service revenues as we've worked with them on this process of perfecting assays for that important instrument. And those same factors are likely to influence our Q1 and our Q2 of this year as well. We foresee fiscal 2023 as being very firmly profitable as well, but that profit would be certainly generated in the back half as opposed to the front half of the year. So overall, I would say that 2022 has been a year of transition from full on pandemic in 2021 to a post pandemic or at least endemic world in 2023. And whereby we generated another year of record revenues and another year of convincing positive net earnings for the full year. So Jim, maybe I can ask you to provide a little more color in relation to Q4 and the full year. Jim, you're on mute, the immortal words.

Forever, on mute. Sorry about that. Yes, I think my focus on comments here is on the fiscal year performance. Strong revenues, that was a record -- another record year of revenues. Profitable revenues, as Cameron said, it was a meaningful profit year as well. We continued with our strong margins. We saw some improvement in margins in our antigen business. And we certainly have stronger margins in our QAPs and VTM business, which led us to 58% margin and we're -- our expectations for margins are probably in the 60% range. So we're not that far off where we had expected to be in terms of our margins for the year. It was a year where we've made a number of investments. Our cash position improved. We were at $13.5 million at the end of the year. However, we did make some sizable investments during the year. We paid off approximately $3 million in debenture and long-term debt, that decreased our interest load on an annualized basis by over $0.25 million. We invested $1 million in equipment, both new and replacement of aging equipment. We also invested in new labs and facilities over $1 million. And we've also invested in some of the key areas that Cameron was talking about, sales and marketing. We invest -- continue to invest in that area as well as research and development. It's a key for us to be on top of what our customers need and invest in new products that come along and IT infrastructure. So we've had a sizable investment in staffing as well as ERP solutions. We're in the process of implementing a new ERP solution and an EQMS system as well. So we're investing for the future. And we've made those investments. A large chunk of them in fiscal '22, and we will continue to make them in fiscal 2023 as well. We've got a strong balance sheet. We've got current ratio for the year. We've improved from 3.68 to 8.45. Our debt equity ratio improved from 0.55 to 0.33. So I think we're well positioned for the growth that we've been indicating or -- on the cusp of for fiscal '23 and beyond.

That's great. And I think it's worth noting that on top of the considerable investments that Jim has highlighted that we've been making for capabilities and capacity along with debt reduction and share buybacks, even, we're still ending the year with a very strong cash position and its over approximately $13.5 million. And as Jim has indicated, very, very strong and meaningfully improved financial rates, strength ratios, liquidity and leverage.

Sorry to interrupt, Jim, I had a clarifying question. What is the EQMS system?

It's a quality management system, electronic quality management. This is taking -- Ken can better describe what it is.

Well, with that, we will let Ken do so. But this is converting the company from paper-based quality management records into a fully digitized system for complex biologicals as we make. There's tremendous detailed records for each individual batch of product, and those are literally telephone book size documents that are now being moved into digital form. And Ken, maybe I can ask you to start your comments with a bit of a description of what that is and why we're doing it.

Yes. I mean the cumbersome nature of a paper-based system, which is fully integrated and repeatedly audited and we get great feedback from our auditors in that regard. I guess everybody is aware that we're ISO 13485 accredited, ISO 9001 accredited, and we operate a total quality management system anyway to be a regulated provider of biological solutions. But it gets to a point where there's a critical mass of paper that would just -- it would become an impediment to the growth that we're pursuing. And so to kind of get ahead of that, we've been digitizing our systems, and we have a program for the electronic nature of the quality management system where paper documents are transferred into digital form, and therefore, easy to handle and manage going forward and also with that, the enterprise resource planning software that fully integrates into that to manage the financial aspects of the business. This creates an efficiency which allows growth. We're investing in this, as we said we would. It's part of building capacity and capabilities for the growth trajectory we're on.

Very good. And what other comments would you want to make from an operational point of view, Ken?

Yes. I mean, from operations, I mean, the stated objective before 2022 and including 2022 was to build flexible capabilities and capacity. And we've done that. We've commissioned a number of labs and manufacturing suites. We've built teams and capabilities and this has been illustrated in how we pivoted in the face of the pandemic. For instance, the clear examples would be all our QAPs, which are on the various variants of COVID-19 or indeed pivoting to make our VTM product portfolio, which will continue into the future. But as a consequence of the activity and creating our infrastructure, we have additional capacity on antigens, QAPs and viral transport medium and other special projects that may come up as we move forward with a very integrated R&D, quality control, quality management and manufacturing group to allow us to pursue these capabilities going forward. So as we grow to that -- as our business continues to grow, we now have the capacity in place to realize that. It's not going to be a problem in terms of the facilities, and we continue to add capabilities as we move forward as we continue to build and diversify the business. So operationally, things are going very well, and we've been basically done -- what we said we would do is what we did.

Yes. And I think that's a great point to make, Ken, that if anyone looks back over the history of our disclosures and the forward-looking statements made in them, we're very much executing consistently on what we say we're setting out to do. Our QAPs business over the past 3 years has tripled. Our antigen business has increased margins, as we said we were targeting, and we created out of nothing the opportunity of our DxTM business, our viral transport medium where we've realized over $10 million in grant and product sales income associated with identifying that acute need through the pandemic and now exiting it. So timing is -- and certain aspects of our customers' behavior is beyond our control but the things within our control, I think we're certainly executing on. And -- sorry, go ahead, Ken.

Yes. I mean we have an excellent scientific and technical production and testing team, which we've been building to address all these diverse opportunities and being able to pivot so well and build that capacity going forward. And we specifically put that capability in place. I mean, examples would be, we're currently launching a monkeypox cap by -- which really illustrates the type of technical acumen we have. But also all the production processes we put in place are deliberately flexible and have capacities we can pivot in the new product opportunities as we need to and because obviously, we're on a very rapid growth trajectory, that's in QAPs, also in the DTM -- DxTM portfolio and with the antigens as well. So we're continuing in on that route.

Very much the case. And I'll make some concluding remarks. But Jim, was there anything further you wanted to touch on before that just in...

I think I covered off everything I wanted to cover on, Cameron.

Okay. Very good. Well, to recap, I would say, again, we expect full year 2023 to be firmly profitable. We do foresee, due to customer issues, a softer first half followed by strength. The realization of sales growth is to a large extent driven by what we see in the point-of-care testing area and opportunities to supply in-kit QAPs for such major customers. And by nature, we're subject to their assay and instrument launch time that's associated with that. I think we're satisfied with the operational and strategic directions of the company. We have the balance sheet to execute on these plans and we're not as -- we're not certainly subject to market volatility -- capital markets volatility as we have no need to raise capital at this time. So we're not subject to the negative sentiment other than as it affects our share price in the shorter term. We are, as was mentioned, deploying capital as we generated, both on enhancing capabilities and capacity on debt reduction and as well our normal course issuer bid, otherwise known as a share buyback, is certainly active and in the first 3 months of that program, we have bought back over 0.75 million shares for cancellation. So that's certainly something that is being actively used not just as window dressing.

Yes, Cameron, how much of that program remains?

We have the ability to buy -- in theory, to buy back 5% of the shares outstanding, which is up to 7 million shares. There are, however, strict constraints on how this buybacks function imposed by the TSX. We can only buy back a portion -- a 1/4 of the average daily volume in the 6 months preceding the start of that normal course issuer bid, we're not able to buy on an uptick and so forth. So it does have some practical limitations on how you can use it, but we certainly put it in place with the intention to buy back shares up to that limit to the extent permitted. So those are, I think, the conclusion of our comments, but happy to move to addressing specific shareholder questions, Deborah or any that you've perhaps received off-line prior to the call as well.

Sure, sounds good. I've got. Let's start with 1 for Mr. Hughes. So when will the physical renovation of the third plant be complete? And when do you expect it to be operational?

It is and it is. It's the short answer. So yes, we have a production suite in the third facility already operational and it's being used. We actually have some plans to build out some further space into the warehouse to build some additional functionality and capacity in the next little while, but the production suites that we're just going into the third facility are there.

Yes. Our third facility is fully qualified under our ISO 13485 and 9001 quality systems and is fully functional for its intended uses. As Ken has indicated, that facility has a front end, which has office workstations for staff in different departments. The middle section of that building has been built out for DxTM production, and there's a considerable amount of warehousing space. So we're evaluating potential for other production at QC labs or other purposes in -- towards the back of that building.

Actually to allow the accreditation to -- for ISO 13485 accreditation, manufacturing has to be occurring in all buildings that are under the offices of that. And in 2022, we added our building 3, 275 Watline under our ISO 13485 certification.

In fact, we were looking at the potential to add a fourth building to our facility -- our facilities, but we felt with some of the customer time line delays, that was a little bit premature. We don't want to get, as sand goes too far ahead of our skies, so we elected to pull back on that for the time being. Deborah?

I got it. Well, let's go thematically then. I see a few questions on VTM. So let's start there. So from 1 investor, why no sales of VTM, especially to others beyond the government of Ontario?

A lot of testing practices have changed over the last short while as, for example, Ontario is moved from testing all comers for respiratory viruses to those in-hospital, entering hospital or in long-term care facilities. So patterns of consumption or renormalizing across not just Ontario, but multiple provinces. And in Ontario, specifically the whole supply chain has been reoriented in Ontario, the whole procurement practices are reorienting. In fact, if the new CEO of Supply Ontario was appointed on December 23. So we are on top of these matters. We are evaluating opportunities in Ontario and other provinces. But these things are very much influx. And our big advantage, of course, is domestic production. And the closer you can get it to home, the better it is. So Ontario, we expect will remain a principal client for DxTM for the foreseeable future. But it is not without lumps unfortunately.

In terms of VTM, like if you're going to try and access different markets, do you need to change the formulation of it? Or is it like a standardized product?

Formulation is driven by application. Our DxTM is currently qualified as a viral transport medium. Its formulation makes it compatible as a universal transport medium, but some of the work to make those claims has not been, then that may or may not be important to end users. But we have to respect the appropriate regulatory pathways. We have certainly ambitions to sell the product more broadly in Canada and have done so in small quantities. We do not presently have ambitions to extend that product to international or U.S. sales, and that's something we'll certainly evaluate with our partners and stakeholders before we move forward on that.

And are you still producing 50,000 vials a week?

No, we are not. We have sufficient inventory for our purposes currently, and we are not in production at the present time.

Okay. I'm just seeing if there's any more VTM? Is $2 million a good estimate for top line fiscal 2023 for VTM? Or is it too optimistic?

We're still evaluating that. We have a conservative budget number for DxTM in mind. But certainly, we'd like to exceed our budgets to the extent as possible. And given that, certain discussions are ongoing with different purchasers. I think it would be strategically inappropriate to put a number on the table as to what our current expectations are. We do see, overall, '23 being another year of record sales for the company, but how that will be -- how that will be comprised between the 3 major operational lines of the company is something we'll see how it emerges. But we see -- we'd like to see certainly growth in all 3, if we can or as many out of the 3 as possible through the year.

Okay. Then moving on to QAPs. Have there been any changes in the point-of-care diagnostic market that would impact demand for QAPs? Are you seeing potential customers coming to you following the sunsetting of EUAs?

The EUA question, and this is the emergency use authorizations of the United States where tests were permitted to be put on the market without the perhaps same level of scrutiny that they would need to undergo under the customary 510(k), which is the predicate device approval pathway or the PMA, premarket authorization approval where there's no predicate device. So there are a number of tests that are out there under emergency use authorizations. And it's really a stage, I believe, certainly and can -- please step in if you've heard much different. But what I've been hearing is that companies right now are being encouraged strongly by FDA to get their files in order because the FDA doesn't want there to be a gap in tests to be unavailable. But as a certain number of people have gotten their files in order, the door will be shut on those that have not. And they're not setting a bright line or a firm date by which this has to happen, but we are seeing more companies entering into dialogue with us about whether we can help them get their houses into order. So short answer would be yes. But not as a -- but more of a process of persuasion rather than brute force on the part of the FDA.

Ken, you're nodding, did you have something to add?

Yes, I mean, that's exactly right. The traffic to Microbix has increased as a consequence of this reality. People are anticipating what's coming down the pike at them and if they're sensible enough to do that, and the use of our products to help them get it right is something that they're well aware of.

Yes. And some of the key points that we've highlighted in the corporate presentation, which, as you know, Deborah, we will be revamping to update in a short while. But there are some key points in there with, in particular, the flock swab-based QAPs are particularly well suited for point of care. The format, of course, emulates for many forms of testing, how the sample is collected, so it provides a streamlined and indicative simplicity to that use of controls. The long-term temperature -- room temperature stability that we've demonstrated with our QAPs is also very key because the controls under nonemergency use authorization utilization need to be able to be kept at the same room temperature storage conditions as the cartridges you can't have 1 needing be refrigerated or frozen where the other can be at room temperature. And they have to be very simple so that non laboratory -- people that are not trained laboratory technicians can run the controls as well as the tests. So those are key. Another element is the flock swab itself, whereby the very quick and consistent uptake in release of analyte is very important in the context of control as the regulators really want the control to really test the lower level of detection of the test to see that it's working not just barely, but optimally. And there's some real issues with other forms of controls where there's tremendous variability in the control, so you can't actually consistently test that lower threshold of detection, and that's a real advantage that we're finding -- is necessary for our customers.

The customers are well aware of Microbix's unique abilities in terms of infectious disease organism, growth purification and activation, stabilization, be it native, wild-type viruses and other pathogens or indeed viruses and [ opacities ] produced by synthetic biology techniques that we have in-house. So they're well aware of that. And then overarching on that is the quality management system we have to make sure the product behaves the same way every time. And the customers are well aware of that expertise, which is specific to Microbix and not unique to Microbix.

Okay. And then staying on the theme of QAPs. Looking at this year's shareholder letter, you don't mention the $100 million market opportunity in QAPs anymore. Why has this opportunity changed?

I think we can't repeat the same things every time or it would be a pretty boring letter. I don't think our view on the scale of the opportunity has changed, perhaps our view and the timing of that opportunity has evidently, but we can continue to be very optimistic about our ability to realize very material revenues in that segment. So I wouldn't -- I wouldn't change that viewpoint. I think it's a question of industrial sales, acquiring customers, seeing them roll out more assays on that instrument. It's a little bit like -- so I'm going to date myself. I'm not a gamer, but I guess it's an Xbox or a PlayStation or the gaming consoles. You're going to have the best gaming console in the world, but if you don't have a game that needs to play on it, nobody is really going to buy it. And so what we're doing is helping enable them to have more games to run on those consoles, more tests to run on those instruments for each 1 of the tests that they plan to roll out. They need the accompanying controls if those point-of-care instruments are going to be permitted to be used outside of the clinical lab and point of care is meant to be used in settings where you don't have access to a full lab quality management system and controls that come with that. So those are doctors' clinics, those are pharmacies. Those are long-term care facilities, schools, workplaces. These applications require in kit controls with the instruments in those quasi institutional settings where there's going to be a relatively high volume of test usage on those instruments and you don't want errors persisting or problems persisting in giving you false positives or false negatives.

And does the HPV opportunities remain intact? And how is that...

Very much so -- yes. Yes, absolutely so. Microbix continues to be intensely active with human papillomavirus molecular testing. This is the virus that is the direct cause of cervical cancer in women. It's becoming a very common cause of head and neck cancers in men. It is a cause of other cancers in other geographies of the body. And historically, the means of diagnosing cervical cancer, in particular, was to examine cells from the cervix through a Pap test and then look to see if those have transformed into cancer cells or sometimes high-grade precancerous cells. Molecular technology, PCR technology enables you rather than to look at the confirmation of the cell and say this has transformed in the cancer to let you look years beforehand to say there is the presence of a form of the HPV virus that will or could cause cancer years down the road. So imagine the improvement to health care, to say, you were at higher risk of cancer. Let's watch closely to make sure that doesn't happen versus saying congratulations, you have cancer. Those are 2 very different outcomes. And I'm very pleased that Microbix is now very much at the front of that transformation from looking for cancer to looking for the viruses. And we're helping multiple companies in multiple jurisdictions on enabling that transformation, and that will be a very material revenue generator for us in the not-too-distant future. We believe forward looking.

And how are the delays with the large OEM affecting your revenue projections on this contract, previously $5 million in the first year?

We had certainly baked in some buffer in our own statements as to expectation. I think we've now used up that buffer. So we would still see around that number for fiscal 2023 from that agreement in our budget, but it will be certainly back ended. And that is unexpected. We did not foresee months of further iterating on that particular program. And that iterating is generating some service revenues for us, but it is not generating the high-volume recurring product revenues that we were targeting yet.

Are there near-term opportunities for QAPs supply agreements with other OEMs?

Yes, there are. And discussions are ongoing on multiple files in that.

Okay. And then I think there is one last QAPs question, and bear with me, it's a little bit long. If you want to look, Cameron, it's the third question in the box, right?

Let me open it up. If it's got a whole bunch of parentheticals, it may take me a moment to read. Just a moment.

It's all good. I'll read it out. But considering repeatedly discussed delays in QAPs orders and the share price development over the last few months, it seems the capital markets has lost confidence in management projections. What do you actively do to make those QAPs contracts happen? And what is your base case for guidance for revenue in 2023?

We don't provide formal revenue guidance. Let's get that off the table. It's not something we're in the business of doing. We do see revenues being a record and certainly in the 20s -- certainly well north of $20 million in revenues, perhaps not $30 million, but we are looking for another record. We are looking for another profitable full year. It's not to say we won't see quarter or quarters of negative net earnings, but those are not sea changes. Those are blips. Further to our confidence, what we see day-to-day is team -- our team working, supporting the teams of major multinationals to enable their very important new product launches happening and supporting existing and new products, tests and instruments. And that's really where we derive the confidence in our outlook. When teams are working side-by-side on a daily basis, we have, in some cases, double-digit numbers of companies, instruments in-house supporting their product development, and these are not commitments that are made lightly on either side. So well, it tests everybody's patience and sometimes faith when there are delays in realizing revenues. These are not -- these are very concrete relationships and commitments that we're working with and working on.