Microbix Biosystems Inc. (MBX) Earnings Call Transcript

Good morning, everyone. Thanks for joining us today. We have a webinar with Microbix, who just reported their Q3 results this morning. Good results showing progress in the business. With me today, I have Cameron Groome, CEO; Jim Currie, CFO; and Ken Hughes, COO. I don't believe that we'll be working off a presentation, but this session will contain forward-looking statements. If you'd like to know more about those, you can find them on the company's presentation on the website. And the format today is going to be a quick overview of the quarter and some other key items, and then we're going to get into Q&A. So if anyone has a question, feel free to enter that in the Q&A box at the bottom of your screen. And with that all out of the way, congrats, gentlemen.

Well, thank you very much, Deborah. Appreciate it.

And Cameron, I think I'll turn the mic over to you.

Sounds good. Thank you. Well, thanks to everyone for joining us this morning for the call to review our results for the third quarter of fiscal '26 and the 9 months ended June 30, 2026, recalling, of course, that Microbix has a September 30 fiscal year. In the Q3, we demonstrated, I think, solid year-over-year growth of 17% for the quarter, close to our goal of at least 20% year-over-year sales growth, and really putting us back on track following the 2 client -- specific client setbacks in midyear 2025. Antigen sales were up 20% year-over-year, and QAP sales were up 13% year-over-year in the quarter, with the balance being inbound royalties. Gross margins also improved to 54%, up from 41% in the prior year Q3, reflective of some good manufacturing mix and discipline. And we reported a controlled net loss that is reflective of some fairly strict cost controls that we put in place as we build back up on revenues. Our outlook in Q4 is for continued year-over-year and quarter-over-quarter revenue improvements and continuing to move us closer to our engineered breakeven point and reducing our net cash usage as we continue to execute on our mission, both with respect to growing our diagnostics-oriented business and advancing our therapeutic asset program back towards refiling and commercialization. I'll have some more comments about some strategic highlights in the quarter. But before we get to that, maybe I can ask Jim if he has any further information about the quarter or the outlook for the balance of the year that he'd like to share.

Great. Thanks, Cameron. As Cameron outlined, we saw some really good growth year-over-year, 17% in both businesses -- business product lines, antigens and QAPs, we saw good growth. From a gross margin standpoint, we also saw some improvement. A good chunk of that was product mix and the improved revenues and the absorption of the fixed manufacturing costs. We continue to control operating expenses. We're down from the prior year. We're in a -- continue to be in a good strong cash position with $7.2 million in cash. And we've been continuing to buy back our shares. So for our NCIB for the quarter, we bought back just under 800,000 shares at a cost of $209,000. And for the year-to-date, we bought back 2.3 million shares, and just about $571,000 for the year. We continue to be bullish. We have said that we're going to continue to try and grow on our what was, I guess, our new base a year ago, Q3 last year. And as Cameron indicated, we're expecting to see some growth in Q4 against last year's quarter certainly, and even against the third quarter of this year. So a good end to fiscal '26 that we're looking at for this year. That's it then. Cameron?

Okay. Thank you very much, Jim. Let me speak to a few strategic developments during Q3 and some matters we continue to work on. First off, I'll point to our poster presentation and attendance at the ESCMID Conference Europe, that's the European Society for Clinical and Infectious Diseases (sic) [ European Society of Clinical Microbiology and Infectious Diseases ], major scientific congress and trade show in the EU that we attend each year. At ESCMID, we presented data on synthetic controls we created for controlling tests for RNA-based organisms, namely specifically RNA-based viruses. And this really expands the range of safe synthetic controls that we can provide -- we can build and provide to different test makers and really gives us some greater coverage and greater abilities to support our clients in a broader range of their diagnostics. So very important development, proving that and presented that very well attended presentations at the conference. In association with such developments, we continue some very intense pace of work with multiple major international diagnostics companies on QAPs-related projects. And that's really to support the commercialization of new assays on existing or new instruments by those companies. And several such discussions are quite material in their potential scale and each of them is advancing. And I certainly hope to be able to conclude some formal agreements and be in a position to discuss those over the balance of this year. But of course, the timetable is very much theirs more than ours in terms of how that drives forward. So it can only be advanced in collaboration with them, and is not entirely under our control from a timing point of view. Speaking of timing, we also see Kinlytic advancing satisfactory, and I'm sure Ken will want to talk about that a little bit more in his section with the drug substance and drug product work both progressing. And we, therefore, believe Microbix and our licensee are very much on track for filing an sBLA and subsequently bringing that product back to market with the timing for such still being reflective of what is in our Management's Discussion and Analysis forward-looking information. So the level of business activity has been very intense, and it's that level of support for clients, client visits of business and quality audit teams that have led us, in fact, to making fewer conference presentations and a little bit less announcements these past few months is not reflective of a lack of activity in our business, rather reflective of a very intense pace of activity that is engagement with multiple -- intense engagement with multiple clients that really have the potential to move the dial for us. So with that, Ken, maybe you want to take the baton and comment a little bit on some of the operational issues that you'd like to highlight.

Absolutely. I will talk about operational matters broadly and then focus in a little bit on Kinlytic, I'm sure everybody wants to hear about. From the operational side, everything is good at Microbix as it usually is. We're set up to satisfy all sales requirements and move forward. As usual, I will compliment the operational staff in all departments for manufacturing, R&D, QC, QA, IT facilities and others, et cetera, et cetera. And the manifestation of the excellence of the operational team is described in how often we sail through regulatory and client audits and we always do. That's because we have an excellent team associated with that. So as I say, we can satisfy the sales needs of Microbix and more going forward. And we've been focusing as well on increasing process efficiencies, implementing automation, reducing burdensome testing, exploiting new capabilities within the framework of our QMS, which is allowing to streamline processes as well. Implementing new technologies. We've talked a lot about recombinant technologies in synthetic biology. They are all ready to go, have been implemented, and will be servicing and supporting our sales efforts going forward. So from a general operational perspective, everything is great. I will lead then into Kinlytic, which is also going extremely well. The relationship with Sequel remains extremely strong and the drug substance, the active pharmaceutical ingredient work, has really taken off and is going extremely well. There have been some major breakthroughs in process development, which have increased yields, and therefore, will increase margins. And we're moving forward with that. We're moving forward with engineering batches leading into the GMP production batches of the drug substance, and we're in the process of developing the comparability protocols to compare the new product with the old product, which will be presented to the FDA. There were a few little things associated with supply chain and getting reagents in place, but they are being resolved, and we're moving forward at a pace. The drug product work is also going extremely well. Sequel's contract manufacturing organization is doing that work. The analytics are in place. We're putting together the finished formulation, and we'll be moving forward with that. I think to illustrate where Sequel heads at, they are just in the process of hiring senior executives in the drug product space. They've already got them in the drug substance space, and in the regulatory and quality assurance space. So they're driving on very forcefully and vigorously, and we will be going back to the FDA likely before the end of this calendar year to discuss our comparability protocols and our comparability strategy to show that our new updated and superior process for production of Kinlytic is the same or better than the process for Abbokinase as was the original market incumbent and with what Kinlytic is in our regulatory file. So in terms of Kinlytic, everything is moving forward as it should. In fact, the process is probably better than we could even have hoped for based on the excellent work that's been done at Sequel side drug substance CDMO and we're moving forward at a pace. We expect to see the FDA this year and file the -- refile the sBLA next year. So there you go. Ops is good. Kinlytic is good.

Thank you very much, Ken. Well, I think that's a pretty good summary of the quarter from our perspective. I can't think of too much more that I want to call out unless we start naming names and violating CDAs, so which we would never do, of course. So perhaps, Deborah, we could move over to the Q&A section of things. Very quiet, Deborah. But I ask that if anybody has anything -- any questions to put them in the chat or the Q&A section and then we can start to answer them.

Yes. Sorry, Cameron. I'm in a hotel in Boston, and they have the worst Wi-Fi I've ever experienced. So if I cut in and out, I apologize to you 3 gentlemen as well as the audience. We do have a question. So why have your gross margins improved relative to fiscal Q1 despite similar revenues? Do you expect similar margins going forward?

Jim, why don't you take that one on? Some of it can be mix of the quarter, but it's an astute sales mix, but it's an astute question.

Yes. No, it's a good question. I think it is very much impacted by the product that is sold during the quarter. We do have all of our -- for instance, antigens don't have exactly the same margins. Some of them have much more significant margins than the others. So you will see quarters that benefit from it or go in the opposite direction sometimes. So I think a good portion of it was related to the product mix. We've also got the -- I think on the absorption of manufacturing fixed costs, the costs are down a little bit more this year versus that time frame. As Ken indicated, we're looking at efficiencies. And also we haven't been adding staff in the meantime. As we've indicated, I mean, this is a better quarter, but losing $800,000 in the quarter isn't what we're here for. So I think what we're looking for is to get the top line up and get it back to where it was about a year ago. And that's what we're targeting as we end the year and enter into fiscal '27.

A lot of the manufacturing overheads, of course, are fixed and those are allocated into product based on the number -- based principally on the number of labor hours that are expended in manufacture of that product. So that's a bit of that fluctuation that Jim can speak to or speak to depending on what's sold in the quarter. But I think generally speaking, we're seeing good efficiencies being realized in the manufacturing. And as we get sales back up through our breakeven level, we're going to see that -- those efficiencies reflected in better gross and net margins with similar revenues.

When you talk about the different margin profiles of the antigen product, is that related to how big the batches are, whether you're using roller ball versus bioreactors? Like is it a volume metric?

No, I would not say it's a volume metric, so to speak. It's -- and it's not the materials that are being used. I guess it's the process more so. I think we've seen some strength and growth and as Ken talked about efficiencies, there's one of our key products, we've probably doubled our yield in the last 2 years. So that's also starting to come through and improve margins as well on the antigen side. Ken, I don't know...

Yes. I think without getting too much into the weeds, it really depends on whether the product is large enough to justify investment in improving yields if there's going to be a meaningful return associated with that. All the methods that we look at, we develop, and we do have continuous improvement as a really philosophy, but you have to make the investment case for whether it's justified to make those improvements. So we see those realized and we like to do that in areas where we see the potential for real product sales growth. And that's where we'll make the investments.

Yes. And each individual organism we work on, each technology is idiosyncratic itself. And so the processes are different and some are more expensive than others and some are more amenable to efficiencies going forward. Obviously, we always want to make the maximum margin on each individual process, but cytomegalovirus is not the same as a flu virus, and you need to have different processes to do that by way of example. And that goes for all our products. We have a diverse portfolio. We have synthetic and natural biology brought to bear. So each product has its own idiosyncratic process, but we're always driving through automation and operational excellence to maximize margins.

And that's very much on the antigen side of the business. On the QAPs side of the business, there could be a diverse set of raw materials that go into a multiplex QAPs product, but we're really looking to have a template-driven methods of assembling those products, conducting the QC and QA release specs on those so that we've got something that's very efficient, and very reproducible, and very scalable for that genre of product.

Got it. And have you reduced your breakeven point from $5.5 million a quarter? Or is that an initiative that you're working on?

We have -- we've allowed some attrition of staff without replacing people to -- as we realized efficiencies. So our headcount has come down from the peak levels we've had. But we've done this without degrading our capabilities in any way. And there's really a minimum level of capability that's table stakes for being able to credibly be considered for major new projects. So we want very much to demonstrate a strong, robust, and resilient organization to our clients and prospective clients that they can rely on us for key deliverables. So that's where we've not tried to cut our way into prosperity. We're very much into growing our way into prosperity. And the nature of business development discussions that we're having with different groups in our proficiency testing, EQA programs, these are often starting in 6-figure type new projects that can grow into 7-figure projects and in the diagnostics support of new assays with QAPs. These go through a cycle where you're doing feasibility samples, then validation lots, and then going commercial. So it takes 2 to 3 years to get full stride on some of these projects. But those start at the 6-figure level and can move into 7 and 8 figures in terms of the scale of those. And that's the kind of business that we're pursuing, and I believe pursuing successfully at this point. But until we have formalized supply and quality agreements and really reach that disclosure threshold, that's normal course business and doesn't require nor would it be appropriate to make formal announcements of those kind of projects unless -- until they really are fully gestated and delivered.

I think you answered the other question, and I don't know if you have any more that you want to add there. It was -- is there a point in the development and commercialization process at which you will be able to start disclosing large QAPs customers and the products you're working on? And is there an expected time line for that?

Yes, I believe we should see the beginnings of such disclosures over the balance of this calendar year, calendar year 2026. Just how granular we'll be able to get or choose to get is going to be a bit of a negotiation. So it might -- a customer may say, great, we're happy to have you use our name or not. They may say, listen, we understand your disclosure obligation as a smaller and public entity, but we'd rather you not describe what client and perhaps what instrument platform and what assay you're working with. And I think as we get a greater diversity of clients, that makes sense for us, too. We don't necessarily want to be pointing our competitors in the directions of who exactly we're working with, and on what projects either. So it makes sense for our shareholders as much as it does for our counterparties. So I think in large part, you'll see with disclosures made by us without identifying the client is going to be our bias going forward unless there's a real reason for doing so.

Makes sense. You talk about competitors, Cameron. It's been a while since you've really laid out the competitive landscape. I know it would be product by product or line by line. Can you talk a little bit about who you view as competitors?

Yes. There aren't that many in each of the categories. Our competitors are really the life sciences tools companies that we would be described as with an orientation towards the diagnostics space. In the antigen business, there's -- we sort of talk if you want to buy a microgram or milligram of an antigen, you'll call a catalog -- scientific catalog company and order it out of a catalog. If you want to order a gram of antigen, 1,000 to 1 million times as much, the number of companies you can call and where you can go narrows, that funnel narrows quite dramatically. And in the native antigen business, there might be 3 companies of any consequence globally that might compete with us. We are the largest, I think, in volume of our major products that we produce by far. And in the controls business, there's half a dozen companies globally that are really involved in the controls, but deeply involved in the controls business. I think we are coming to be dominant in the infectious disease category, and virology specifically around that area with the abilities we have long-standing abilities in our antigens business that we're really driving that expertise in the controls business, whether with native products or synthesized synthetic products. And our bias is always towards controlling the whole process of the test and presenting the whole genome of the organism. So that it's not a control designed against really a specific test, but rather a control that could work for any test. And that's incredibly important for our proficiency testing and EQA or external quality assessment clients that our controls really do represent a clinical sample and will work with anyone's assay. When we get into in-kit controls where our patient sample mimetics are included in with a kit of test cartridges, then it may be more customized to challenge towards the lower limit of detection or the LOE (sic) [ LOD ] of the test for each of the channels for each of the pathogens it's testing for. Is the test maintaining optimal sensitivity towards detection for each channel, for each organism it's called to detect? And that's a more custom product, and has a different -- sometimes a different regulatory pathway as well.

Thank you. That's helpful. I have a follow-up question going back 2 questions ago about the -- when you make announcements about clients. Given the 2- to 3-year lead time on projects, where are you right now in the process with the largest clients?

Well, with our largest QAPs, our largest antigens clients, we are already embedded in their tests, and it's -- we can't be unembedded unless somebody goes back to formula and completely is redoing a test from scratch. So that business is very much ongoing and stable. We see ourselves being included in new tests that are being manufactured from the native antigen perspective and perhaps a recombinant -- new or recombinant category as well. With respect to QAPs for the PT/EQA clients, the agencies that do the quality checks on labs and accredited labs to do testing, we have ongoing sales and contacts with those companies, and we continue to add new programs or schemes with those companies. And those are typically a 2-year cycle. There's a first year where there's a pilot program where a smaller number of labs, usually in the order of 20 to 50, will be invited to pilot a program and see if it performs as hoped to work with all the different instruments in use and then that can expand into -- well into hundreds of labs, potentially thousands of labs in the second year or third year when that -- second year when that goes commercial and third year when it continues to get more labs accepting that. For the test makers, we have multiple large test makers for whom we're providing feasibility samples currently that they're testing. And then on the basis of those feasibility samples, that's what likely drives a formal contractual agreement, and those are things we're working on now. And then in the second year, there can be validation lots or clinical lots, if there's clinical work required on those. And then the third year, those can really hit full stride on global commercialization of an assay. Some of those test makers have thousands of instruments already in the field, in some cases, tens of thousands of instruments already in the field. So if a new -- it's similar to if you think about in a PlayStation or a Game Boy, well, if you have a many, many thousands of units out in the field and you put a new game into play on those and there's many, many of the consoles already installed, the uptake of the new game is much faster, and it's similar to what you see in the clinical assay field.

That's an interesting comparison, Cameron. When you say embedded, does that mean development is complete and the assay controls are now commercialized?

Well, when we said embedded, I was meaning more our test ingredients in the core of immunoassay, for example, but we can be equally embedded in different aspects of our QAPs business where our reagents might be part of the internal controls of an assay and part of the chemistry. We might be in the regulatory file for a control in kit where our controls are independent of the assays, but they're literally in a box of test cartridges and form part of that regulatory file. And we're also seeing sales of our QUANTDx product line. This is the newest product line we launched last summer, which are reference materials. And those reference materials can actually be used for quality control release of tests, and create an ongoing revenue stream on that basis. And arguing some effect, still small, still in the 6-figure range. But I think we're quite satisfied with the early progress of that product line as it's really an earlier-stage touch point for us with companies that are developing new assays. So the QUANTDx product line is proving as hoped and expected to be quite strategic for us.

Excellent. One last question here from the audience. Regarding the RNA virus control you mentioned, is that a naked RNA or in virus control? Ken, I guess that one is for you.

No, well, I could tackle it. But Ken, why don't you take that?

Sure. I'll start by saying that we don't need oligos for controls and whether it's an RNA oligo or a DNA oligo. So I won't give any particular technical details unless Cameron wants to, but suffice it to say that RNA is armored. So it's encapsulated. It looks like the product that it's supposed to be testing for as do all our QAPs.

Yes. One of the challenges for PCR-type assays, molecular diagnostics is actually cracking the shell of a virus or a bacteria and getting to the nucleic acids. And it's very important to validate that step of an assay. So as Ken said, all of ours are encapsulated. In the case of our RNA controls, we're encapsulating the shell of a type of virus called a phage and then we put an RNA payload into that shell so that the extraction process, which is critical to the function of the assay, is likewise controlled. So demonstrating that very sophisticated capability to take one form of organism and give it a custom payload so that it is a safe and fully safe control that's fully representative of the workflow of the test. So no, it's not naked. These are very sophisticated.

Yes. Our stated kind of mandate and direction is to make our QAPs as close to a facsimile of a genuine patient specimen as it's physically possible to do. So we challenge the entirety of the test from extraction to fluidics and everything else, not just whether or not the RT or PCR -- the PCR test reaction works, everything that supported that reaction also works. So all our samples look like as best possible patient specimens.

Good questions.

Yes. I know I'm going to age myself, but it feels like I'm in OAC biology class sometimes when I am doing webinars with you guys.

Yes, hopefully not bringing back any childhood traumas there. We won't ask you to do any square roots or anything like that.

I went to a French high school, and I do not speak French. So...