MBXBF - Microbix Biosystems Inc. (MBXBF) Q3 2023 Earnings Call Transcript
2023-08-14 14:49:08 ET
Microbix Biosystems Inc. (MBXBF)
Q3 2023 Results Conference Call
August 14, 2023 11:00 AM ET
Company Participants
Deborah Honig - Investor Relations
Cameron Groome - Chief Executive Officer and President
Kenneth Hughes - Chief Operating Officer
James Currie - Chief Financial Officer
Presentation
Deborah Honig
Good morning. Thanks everyone for joining us today. We are going to have a review of Microbix's Q3 numbers, as well as an update on some of the catalysts that happened over the past quarter. With me as always, I have Cameron Groome, CEO, Kenneth Hughes, COO, and Jim Currie, CFO.
We won't be working off a presentation. There will be quite a bit of Q&A in the session. But this presentation will contain forward-looking statements, which you can find on the presentation on the website, which has been updated after the quarter. And as I mentioned, there will be Q&A, so feel free to enter those in the bottom of your screen, or you can email them to me.
With that out of the way, I would like to introduce Cameron. Hi, Cameron.
Cameron Groome
Good morning, Deborah. Thank you very much and thank you for joining us as I think, Jim and Ken. Q3 was relatively noisy quarter, so I thought we would take some time this morning to unpack the results as well as touch on some of the milestones we achieved over the months since our last investor call in mid-May around our Q2 results. And one of the first things I would bring to the four would be our execution of an alliance for Kinlytic urokinase, our drug asset that was announced on May 16 th .
And this partnership really achieves our goal of fully funding the return of Kinlytic with the use of third-party funds and resources, so that we are not in any way leading away resources from Microbix's informations, but rather adding to them and our partners on that alliance Sequel Pharma is a portfolio company one of the world's leading private equity investors in life sciences.
And well, we are not allowed to mention who that is. Anyone intrepid enough to do a little digging can probably sleuth that out and it is worth of course, mentioning that they have conducted considerable due diligence around Kinlytic and liked what they saw.
There is one gating matter that we need to pass before they fully turn on the taps, which would involve an investment of totaling about 50 million Canadian, about $35 million prior to the re-approval or the supplemental BLA approval to enable sales to begin on this project. So that is some pretty meaningful sums, and that is to determine and make certain that the FDA has not vastly changed its pre-COVID position on the project.
And we will know that outcome by the end of November, I expect, which should lead to further revenues to Microbix from upfront milestone payments, as well as the reversal of the impairment that we took on this asset going into COVID at the end of fiscal 2020. So we are very pleased with the outcome of this partnership agreement and we certainly hope you are too.
And maybe I ask Ken to elucidate a little bit on the nature of the interactions going forward.
Kenneth Hughes
Yes. Sequel is a highly sophisticated group well, finances already discussed and with them deep understanding of biologics and biological drugs and so the due diligence was very detailed and very collegial and ended up in a good place.
We will be indeed reconfirming the council that FDA provided to us in 2017, before we move forward. There is no reason to believe it will change, but, you know, there are vague reason in this, and so we will, it is a milestone that we need to get to. But the analytics have moved on.
The product is every bit as, as good as it ever was, and the market is crying out for thrombolytics at the moment. And there are rises in clots in is an aging population, a post COVID population, and there are shortages of other, the other thrombolytic TPA in the marketplace. And we would be actually going head to head with that. So that is a great poll. We have also heard from the European regulators who one have an interest in this too.
So we are moving forward the relationship with Sequel’s is extremely collegial. In fact, we are already visiting and this, and next week we are actually going to visit the CRO that we will be working with in terms of the analytics. So we are getting ahead of the curve here. Everybody expects a fine outcome and that we are moving forward from there.
As Cameron says, detailed due diligence, we have been involved in this file for a long time. Microbix will be supporting their technical and scientific team and we will be paid to do that actually, so cost recovery so we will not be bleeding any resources from Microbix. Whatsoever as we realize it is a very important product and bring it back to the marketplace.
Cameron Groome
Thank you very much, Ken. Jim, maybe I can ask you just to touch on a little bit of some of the accounting entries and funds flows that we may see from what that we did see and what we may see from Kinlytic going forward if the FDA responds positively as we hope and expect.
James Currie
Sure, Cameron. In Q3, we saw recognition of a million dollars worth of million U.S. of revenues with just over 1.3 million in revenues in Q3 related to a two million cash upfront payment that we received. one million of which is returnable if they decide if the, our partner decides not to proceed, which we are not anticipating at this point in time, but we can't recognize that until we have gained their approval to proceed, which will happen after the FDA guidance meeting.
We also had to recognize, there was a advisory fee that was associated with the signing of the agreement, a portion of which $250,000 was payable upon the initial signing of the agreement. So that was booked in Q3 as well.
So as we go forward and again, it is entirely dependent upon the timing of the approval from our partner of the FDA guidance, which can go as late as, I guess it is November the 14 th is the latest, but it could be sooner than that. So when we do -.
Cameron Groome
I think Jim, I would say end of November rather than this specific day, but, thank you. Go ahead.
James Currie
Okay. We will see, once we see that payment, what will happen and that approval, there will be two things that happen. One, we will recognize the million dollars of deferred revenue that from the initial upfront payment, and we will also recognize another $2 million of, from the milestone payment that will be due at that point in time.
Offsetting that slightly will be, an additional advisory fee that was payable upon FDA guidance, and we are expecting to see that each of these, it could be as early as Q4, but fiscal Q4 or early Q1 - fiscal 2024. We will also, then - it will then move into an agreement where we will see with the confirmation of the proceeding moving forward with this product.
We will also, from an accounting standpoint be required to, we reverse our impairment on this asset that we did a couple of years back. And we will at that point in time reverse the better part of CAD3.1 million, which was what we had impaired back a couple of years-ago.
So that will show up as a credit a below the operating income line credit when that reversal takes place. And again, that is going to be based upon the timing of the FDA guidance and approval as well.
Cameron Groome
Jim, I think it is worth mentioning that there is a maximum level. Certainly we view the asset with this positive guidance is worth a lot more than $3 million, but we are limited to the recovery of what we would previously written off in the fourth quarter of 2020 fiscal, as to what it can be marked up to.
But there is a sponsored research analysis on Kinlytic that has been now made public and urge everyone to read that by KRC insights discussing what Kinlytic is the nature of the market on Kinlytic and its potential impact today and going forward for Microbix. So, some good reading that we had there. Sorry, Jim, go ahead, please.
James Currie
And beyond that, there will obviously - there will be milestones in the future based upon the progress of getting FDA approval for this, for Kinlytic. Obviously that will take time, before we are starting to see the royalties that we royalty stream that we expect to see as we move forward.
Cameron Groome
Very good. Great. Well, thank you. Certainly, we will have time for further questions about the Kinlytic project as we move into the Q&A portion of this meeting. And from here, just say, this is very material for us and I think it is very material for folks health to have a very effective thrombolytic returning to market in a few years time.
During Q3, we also announced multiple areas of progress with our caps programs, specifically for disclosures across June and July. The first being June 13 th disclosure on work we have done on antimicrobial resistant sexually transmitted infections research results posted at the ASM Microbe conference, the American Society of Microbiology.
So this is again peer reviewed poster presentations of results with our partners. We also announced on June 20th a novel program with one of our proficiency testing and accreditation agency partners, lab quality of Helsinki, Finland, the World's Spur.
We announced with them the world's first program for qualifying labs to do testing for genital ulcer diseases, which is very important that labs have appropriate proficiency and accreditation to do those sorts of tests.
Then in early July, we announced that Microbix is supporting the National Cervical Cancer Screening Program of the Netherlands, which is one of the countries in the world, leading the move from 1950s Pap testing technology is frontline screening, where you are actually waiting for cells to be transforming or have transformed into cancer to detect cancer at an early stage, rather moving five-years or more upstream and saying, do you have a high risk type of HPV infection that may lead to cancer some years from now.
So a real big leap in the quality of care and are caps for high risk strains of HPV have been selected to support that program across that country. And that is just the kind of thing that we are looking to do to lock in ongoing streams of revenues associated with our caps and really assert technical leadership.
And we also announced at the AACC or American Association of Clinical Chemistry, major industry meeting takes place every year. Just been rebranded the American Diagnostics and Laboratory Medicine Conference, but everybody still will know it as AACC for some years. But we announced and presented data of novel 4-plex STI, Sexually Transmitted Infection Test Controls at that meeting, extremely well received. So all of these programs becoming revenue generators for our company and incrementally building our sales and caps as well as demonstrating our technical leadership to industry.
And finally, another major achievement in the quarter that I will ask, Jim and Ken to add further color on is achieving the go lives on our - both our new enterprise resource planning or ERP software systems that control everything from and track everything from initial raw materials, inventory ordering to collect collection of receivables.
So the control system for the whole business as well as our electronic faulty management system software upgrades, moving from countless binders of batch records paper documentation, which we have done very effectively, but becomes impractical as we expand the scope of activities and the frequency of production.
So both these big achievements that we announced we were targeting and have now achieved the go lives that were announced on August 4 th . And maybe I can ask, Jim to talk a little bit about the ERP system importance and, and Ken, I can ask you to touch on the eQMS.
A - James Currie
Thanks, Cameron. I guess technically the ERP was, this quarter being the fourth quarter, but because we just announced it, we just went live a couple of weeks ago and, it is been an interesting process, preparing for the, the go live and since go live.
I think it is incredibly important for us as Cameron identified that, and we have repeated that we are looking for, excuse me, for a hundred million in revenues within the five-year period. And the likelihood of being able to do that with the systems that we have had in place historically was probably not as strong.
So that it became essential for us to improve our systems. And broader from a manufacturing and financial, I'm looking forward to the getting a lot more information out of the system and being able to do a lot more analytics and be able to provide our team with guidance both tactically as strategically based upon that information.
So that is as I say, it is early stages, but I could already see the access to the data being much more readily available than it was with our previous systems.
Cameron Groome
Thank you very much Jim. No, I think that is great. And Ken, could you dive in a little bit on the eQMS side?
Kenneth Hughes
Sure. And we have talked a lot over the last little while about capacity building and future proofing of this company. We are a well regulated company, ISO 1345, ISO 9001. We are regularly audited and we have passed that superbly with an, essentially a paper-based system.
And that system is really as stretched as it could possibly be at the place we are now. And so we announced the intention to futureproof and build capacity in this area and that is exactly what we have done.
To Jim's point to allow us to build 50 million, a 100 million and beyond, there was no way we could do that with the systems we have. And now we have these systems in place and we are going to continue to realize efficiencies as we move forward.
So our manufacturing is now under a electronic quality management system is going to continue from the end testing as well and quality control. This is going to create great efficiencies and data integrity going forward and allow us to build our portfolio.
We are still a small and medium sized company with a very complex portfolio of products. So we need to have the necessary systems to manage that properly and to allow their growth as we stop being a small, medium-sized company and start being a medium big company. And we have to have the system to do that.
So I'm very pleased and thrilled that we put together an excellent IT group. We have been working closely with all the departments to implement the eQMS and the ERP upgrades necessary to allow us to continue our growth in the next little while. And that is why it is so important and pivotal to what we are trying to achieve.
Cameron Groome
I thought now maybe Deborah, we would move over to touch upon the results for Q3 and unpack those a little bit. We had a quite acceptable top-line of 5.5 million in revenues just shy of our all time prior record of 5.6 million. But this being achieved without any DxTM revenues.
So we, the revenues were comprised of 4.2 million of sales from ongoing sales of caps and antigens. Add to which was added 1.3 million of revenue recognition from the milestone first half of the first milestone on Kinlytic.
However there were a spate of relatively unusual expenses associated with the quarter that totaled 2.2 million that pulled us into a net loss for the quarter. And just going through those a little bit by order of magnitude, the largest was our decision to take a write down of our DxTM inventory and we will go into a little bit about why we did so.
But that totaled close to a million dollars followed by some adverse sales mix looking at Q3 over Q2, that meant a lower margin by about $0.5 half million on sales mix Kinlytic transaction expenses and fees and expenses that Jim mentioned of about 400,000 and some IT and FX matters totaling about - IT expenses and FX expenses foreign exchange totaling about 300,000.
So you had about 2.2 million in negative variants associated with the quarter, and those were what led to a net loss Q3 on essentially the same operating revenues of Q2 whereby we achieved breakeven results. So it is a frustrating quarter in many ways, but not a negative C change in terms of direction of business.
Jim, maybe I can ask you to dive a smidge deeper into that and just speak to it a bit.
James Currie
Sure. One of the - on the margin side of the business, we can see quite significant swings depending, especially in our antigens business. We can see quite significant swings depending on what products we are shipping, as the margins differential between some of the products are quite large.
Q2, we had a very favorable product mix, and it just happened in Q3 that we had a very unfavorable product mix and that accounted for a fair chunk of margin impact somewhere in the neighborhood of $400,000 during the quarter.
On the operating expense side, IT expenses, especially year-over-year, we were not spending much on the IT front a year-ago, versus where we are today, not only in staff, but as well in terms of subscription fees as well as consulting fees for the implementations of the new programs.
And the exchange FX exchange while again is, we try and do some hedging on our U.S. dollar side of things, not a 100% and that we saw a strengthening the Canadian dollar against the U.S. dollar, and that impacts our fairly high amount of U.S. dollar receivables that we have got at any point in time and or U.S. cash that we have in the bank. So that presented an FX loss versus an FX gain in the previous period.
Also within the operating expenses was the fee related to the Kinlytic deal of $330,000 plus legal fees associated with that were both total about 400,000 bucks. So there is some one-time stuff sitting in the operating expenses that we wouldn't have typically seen.
So while all things were favorable in Q2 at a similar non-Kinlytic level of revenues, the swing from both were quite wide between the quarters. And hopefully I don't expect that to repeat in Q4.
Cameron Groome
Yes, we are seeing by division, our antigens or ingredients business is effectively back at pre-pandemic levels running in the range of 2.5 million to three million a quarter, you will recall in 2019 that that had been around the 12 million a year revenue mark and then dropped as low as just under eight million. So, of a hit by about a third from the pandemic.
That is come back quite strongly, but as Jim mentions, there is quite a bit of revenue or margin fluctuation depending on the product mix within that unit. With caps, we are continuing to lock in customers and very much poised for growth.
And I know this is certainly a source of confusion if not frustration for many shareholders, but we are hearing quite a bit of FDA backlog on approval of instruments and assays. I don't have independent substantiated data on that, but this is what we are hearing from our customers and that has a knock on effect to us.
So we have been kind of thus far seeing that 1.5 million a quarter caps range and we are really pushing hard with our customers as their instruments and assays get approved, that we will see a break above that level, but has been a source of delay on the regulatory side with that. And then DxTM is really a problem child for us in the portfolio.
And we were selling product to Public Health Ontario, whose objectives were through university health networks, whose objectives were very much aligned with the policy objectives for security supply of the provincial government.
And that was handed back to other procurement groups that have no such strategic outlook on security of supply and frankly returned to the same importers from whom they been buying product without even us even having the opportunity to quote. So enormously aggravating on that basis, and we are continuing to work through those issues.
But we felt the most prudent thing as our DxTM inventory was becoming short dated, that we would take that write down, get it behind us, we can sell off product we will. If we can gain access to these less strategic procurement groups, we will.
And we are continuing to have those interactions, but we did not want anything hanging over us in terms of the value of inventory on our books. We would like to keep, a clean balance sheet and we bit the bullet and took that right down of nearly a million dollars in Q3.
So, where we are today, we have very much a strong pipe, very strong pipeline of business projects. I was requested to go to the AACC meeting in California relatively last minute to meet with a number of customers, very strong interactions and pipeline there.
But it is, again, this is a business to business sales in a highly regulated industry. It can go two years from first contact to real revenue generation and the Netherlands would be a prime example of that. Those discussions took nearly that long.
We have as been mentioned with the ERP and eQMS and many, many other aspects of production we have ever improving systems to execute on this. And we have a very robust balance sheet and financial position with a strong cash balances at the quarter and a very, very strong ratios as well. And the spend that we are doing is strategic. It is not just G&A bloat that we are generating. This is real operational improvement.
So, where we are today, I very much see our company prospering and continuing to execute on our approach of identifying winnable and defensible product categories in the diagnostics industry.
We are for now, within two of the three largest segments of that industry, those being immunologic testing and molecular testing. We are identifying and working to secure new million dollar plus accounts among major diagnostic test makers, accreditation agencies and labs.
And as Jim has mentioned and - Ken has mentioned, we are very much driving towards our objective of achieving a 100 million in sales top line within the next five-years and making certain we have the infrastructure and the teams of people to make that a reality. So that is very much what we are continuing to do.
And Q3, one has to dig into it a little bit to see that going on and then of course, that very healthy engine is turbocharged by what we are executing on Kinlytic and deriving value from that asset, which in and of itself may result in anywhere from 15 million to 25 million per year, 100% margin royalty streaming to Microbix in a few years time.
So, that would be, I think a pretty good summary and I know we probably have some questions outstanding and Deborah, maybe I can ask you to curate those.
Question-And-Answer Session
Q - Deborah Honig
Yes, sounds good. So I think we will start with VTM if that is okay with you, Cameron. So one, certainly, one audience question I had was please update on the status of reconnection efforts with Ontario's newly established purchase unit any progress there?
Cameron Groome
We have been in touch with government at various level - the provincial government at various levels, including the new Supply Ontario agency. The purchase of VTM, however has not yet come under the purview of that agency of supply Ontario that is, and the parties under whose purview it is, have gone back to what I presume were very comfortable in porter relationships that they had prior to COVID for the procurement of VTM for the province.
So you have a complete misalignment between the never again policy objectives of our elected officials and the, hey, I haven't received instructions to the contrary purchasing practices of the procurement authorities.
So it is a misalignment within government that we have certainly pointed out. And we would welcome the opportunity to match price within imports but have not even had that opportunity. So it just gives you some visibility that there is some dysfunction that needs to be corrected there.
Deborah Honig
And with inventories now being written off and COVID fading, what are the realistic annual sales volumes for the VTM business once Ontario reconnects, if they reconnect?
Cameron Groome
You could certainly be on an ongoing level, see the kind of revenues that we were generating previously. Namely 4.2 million in fiscal 2021 and 4.7 million in fiscal 2022. It would be in that nature of metric if we were called upon to provide about a third of the ongoing steady state needs.
The other issue is of course the equipment that and systems that we have brought in, we have kept and very much focused on VTM production, but going forward we will be looking for other opportunities, whether it is providing for our diagnostics clients.
Now that we have a very large production capacity that was paid for by the VTM we did sell and the grants we have received, that production productive capacity will be redirected, whether we are providing in-kit diluents or matching viral transport medium to go with test units.
We have the opportunity to go after that business. But again, these are fairly long business-to-business sales cycle, so it doesn't happen overnight. You don't just show up and say, hi, I have got capacity and turn it on a month later. It will take a number of quarters to be able to redirect that capacity successfully.
Deborah Honig
And are you trying to sell VTM to other provinces?
Cameron Groome
It is questionable the extent to which Quebec or Alberta or British Columbia will be enthused by having an Ontario supplier as opposed to trying to light off a supplier in one of their provinces. But those dialogues will happen and will continue.
Deborah Honig
That is all I see on VTMs. So let's move over to Kinlytic. I have a couple questions there. Jim, I think this one is for you, what are the tax implications of the impairment reversal? Will there be a tax payment required?
James Currie
Sounds like a good question for Cameron actually. No, no, I'm kidding.
Cameron Groome
I will answer.
James Currie
There shouldn't be any implications. It certainly will not be a payment. We are still sitting on a number of tax losses that would prevent any kind of payment being made at this point in time related to Kinlytic.
Cameron Groome
And that reversal will have an earnings impact.
James Currie
Yes.
Cameron Groome
Below the operating line, but it is legitimate earnings impact of that as well, of course, of a further $3 million inbound with an associated expense of $0.5 million outbound. So a net cash inflow of a further, well we already have a million of that, so a net cash inflow of a further million and a half U.S.
Deborah Honig
And can you give us an update on the ongoing Kinlytic FDA process, the next milestones to look out for as well as timelines involved?
Cameron Groome
Absolutely, I will give some top-line guidance in that and then ask Ken to go into some greater detail. We are not going to give specific dates because the FDA meeting has been booked and that will happen.
And then it becomes a question of getting a mutually agreed meeting minutes from that meeting, and then our partner analyzing those meeting minutes and reaching its decision. So, there is an expectation that by the end of November, we will certainly have clarity on all those points.
And the nature of meeting that we have booked for anybody that is a technical junkie is what is called a type C meeting. And a dick for that meeting has been secured. And Ken, maybe you can, I will leave you to talk to the documentation around that meeting and how that tends to unfold.
Kenneth Hughes
In 2017 when we met with the FDA, we provided a detailed package on the, how we are going to manufacture urokinase and Kinlytic and the analytics we were going to do and how we are going to kind of bring the process up to contemporary standards. And that meeting went very well and the FDA gave us a very specific guidance to positive guidance at that time.
And so six-years later, we are going back just to reconfirm that guidance, we actually updated the package a little bit, because analytics and their procedural things have improved as technology evolves. And I answered some of the more overarching questions that were left out from 2017 based specific stuff at a technical level.
So the purpose of this meeting is with our partners together to see the, to meet with the FDA and have them reconfirm the very strong and positive counsel they gave us in 2017, assuming they do that. And there is no reason to believe at this point that they won't, would be moving forward at a pace.
I mean, it is a very detailed dossier you provide to the FDA, which looks at raw materials, all processes, validation, analytics, clinical studies and non-clinical studies and animal pharmacokinetics and so on and so forth, which Microbix does have expertise in as do our partners now.
So we are moving forward collegially, we expect, we are looking forward to a good outcome and I think the timeframe's about right about the end of November, we should have had the back and forth with the FDA of a detailed plan of action, and we will be executing on that.
And with, again, back the capacity building, we are meeting with the CMO, with CROs, contract manufacturers and contract research organizations that we will be working with to bring this to fruition to initially address the U.S. markets and then the global markets from there.
Cameron Groome
No, thank you, Ken. Yes, so this is very much getting in and getting into the weeds and validating. Has anything changed adversely from the timelines of the prospective timelines for satisfying FDA objectives and moving forward to the filing of a Supplemental Biologics Licensing Application or SBLA associated with the product, validating all the things that Ken was speaking of.
What is the, what are the analytics, what is the manufacturing process? What is the drug substance? What is the drug product? Bringing all that forward back into a position where it can be relaunched into the U.S. market for catheter clearance initially, and then perhaps broadened out by clinical indication and by geography thereafter. And all our numbers, by the way, are just driven by U.S. Catheter Clearance. Everything else is gravy.
Kenneth Hughes
It is important to know that this is not a new product. I'm sure everybody probably knows this, but it is a supplement to the existing approved regulatory file that Microbix currently holds and now is partnering with SQL to bring this to fruition.
So it is, this product is well understood and as decades of clinical success, and we are just bringing it back in a new manufacturing situation with contemporary technologies that we are all very skilled at, at Microbix and at SQL and at other C and CMOs and CROs would be working with. And so we will execute appropriately.
Deborah Honig
Can you reference global markets? Have you already enhanced efforts to launch Kinlytic and other countries outside of North America?
Cameron Groome
It is a great question, Deborah. Kinlytic is approved. It is an approved drug in the United States and in Canada. So bringing it back in the U.S. has been our primary focus. As we get the FDA guide, revised FDA guidance and confirm that we are moving forward on this. There will be engagement by our partners and ourselves with Canadian regulators to say, will you slipstream in with our program for FDA and that would be one of the first additional markets.
Europe will be slightly different. Kinlytic, low molecular weight urokinase is not an approved drug in the EU. So there may be additional work that needs to be done to bring it to the forefront of the - to bring it to market and make it available to patients in EU.
Now an encouraging element, this and a few dollars won't get you coffee, but it is helpful income. We have received contact outreach to Microbix from the European Medicines Agency saying, “hey, don't forget about us, and please use our small and medium sized enterprise support group to help you navigate the EU process because we believe this drug should be made, also made available in the EU and to the extent possible, while respecting our regulations, we would want that to happen in parallel with the U.S. process.”
So, that initial connection has been made. But frankly, our focus thus far has been on boatload of work to get prepped for the FDA meeting and start to activate prior discussions when we didn't have funding partner with groups about the analytics and the contract manufacturing and the clinical element. And Ken has been doing - the Canada and our partner have been doing a boatload of work around that.
Kenneth Hughes
People want to recognize that the current marketplace in the U.S. and in Europe and elsewhere is a monopoly for tissue plasma imaging activate, which is a good product, but it is in short supply and the need for thrombolytics is continuing to increase and so that is what drove the European Medicines Agency to reach out to us for security of supply and capacity and that applies in the U.S. as well. So clearly there is a market pull for this particular product.
Cameron Groome
And there have been, there is both shortages - the issue of shortages from more patients needing thrombolytics and more medicines being infused by catheter. There has also been a history of plant outages and batch failures in the production of TPA that make it quite nerve wracking for regulators to say, what the heck would we do if TPA goes off on.
Deborah Honig
And then moving on to caps, so please comment on the status of development work with additional medical device manufacturers for additional caps. How many opportunities are realistically close to signing a contract within the next six-months?
Cameron Groome
I would say we have several possibilities within the next six-months, taking the dictionary definition of several being three or more, but not many. And those are beyond contracts. There are a lot of companies that a number of companies that have said to us.
We may not have you manufacture in kit controls for us, but we will certainly be buying onboard kits from you to help qualify new instrument installations. Those we will buy from you directly and we will also be referencing your products in our instructions for use, for all purchasers of our tests and instruments.
So that is not the golden ticket that we are looking from a lot of customers. Whereby we are actually doing manufacturing for them and they are our purchaser at very high volumes. But it is tremendous progress and maybe million dollar a year accounts in its own right.
But not $10 million accounts and we are really pushing wherever we can to become an integral supply chain partner whereby each box of 2025 cartridges includes one or more micros controls in those kits. And that business we are seeing more of emerging as well.
But again the business development cycles are, of highly regulated products are not short. So, but we are seeing that happen and, one of our frustrations is, a partner says, well, you know, we are expecting our FDA approval anytime now and that anytime drags on and drags on and we get pulled with that. So, we do have a wonderful pipeline that is emerging, but the frustrations with regards to timing.
Deborah Honig
So the delays are mostly to do with FDA approvals?
Cameron Groome
Yes.
Deborah Honig
Okay. Moving on to some more caps questions. Do you anticipate additional agreements with other countries on the screening programs using the Netherlands as a template any large population countries?
Cameron Groome
Yes, we do anticipate, others such agreements and the same way that on one particular instrument system, we helped a - helped qualification of that instrument system workflow in Prince Edward Island.
And people quite correctly said, what the hell are you worried about Prince Edward Island for there is 140,000 people on the whole island. That directly led us to be able to support the Netherlands with the population a hundred times that of 14 million or more than 14 million.
So, we see that moving forward, and maybe the next step is a country with a population, multiples of that of the Netherlands, or maybe the next one to tip into the boat is another small country supporting another company's instrumentation and testing system that will in turn lead to other large population opportunities. So I think that question is right down the path - the strategic pathway that we are taking.
Embed ourselves work with and support leaders in the field. And then those large population countries will indeed come. And they will come for papillomavirus, cervical cancer screening programs. They will come for respiratory syndromic testing. They will come for STI multiplex testing. They will come for whole other opportunities of that nature where we see high volume usage of caps coming down the pipes.
Deborah Honig
And can you provide some more information on the lab quality initiative and opportunity there?
Cameron Groome
Yes, absolutely. So lab quality is a provider of external quality assessment programs. That is the European terminology for proficiency testing and laboratory accreditation programs. So they are a very sophisticated provider of those programs for Northern Europe and Scandinavia and a number of other countries. I think altogether, Ken, about 60 countries, they support, if I'm going, if my memory serves.
Kenneth Hughes
Something like that.
Cameron Groome
Yes. So lab quality flagged that, there was an increasing need to test for genital ulcer diseases, things like herpes simplex virus one and two, varicella zoster, which is chickenpox, the consequences of syphilis, and moving into things, more emerging diseases like [M-OX] (Ph), AKA Monkeypox. And said there is no - to their knowledge no formal program to check the proficiency of labs for running those tests accurately and consistently.
So with our collaboration with them, they created such - first such program that we are aware of using Microbix controls. And that is the kind of program that we will start in five or six figures in the first year as labs familiarize themselves. Do I want to participate? Yes, I should. I need to. I have to.
And that will grow into seven figure annual potential for us and unless we screw it up from there becomes an annuity stream for both companies as it becomes well accepted by the labs who say, yes, now I can maintain my quality system by checking my procedures three times a year at a minimum.
And then if they say well and I'm going to do daily, weekly, monthly quality checks in addition to the formal proficiency program, then why wouldn't I buy the Microbix products and then that can be another seven figure revenue stream for us as well. So again, building our reputational franchise and awareness of micros within the lab is where we are still a relative unknown.
Deborah Honig
And one last audience question. So on the last call, Mr. Groome commented on the caps business pipeline saying that the number of new companies and new programs with existing clients was just wild. Has the business pipeline momentum continued, stabilized, or reversed?
Cameron Groome
I would say it is continued. We are having active collaborations with a number of the largest companies in the world, in the diagnostics industry. Our ongoing work is I converting technical collaborations into revenue streams.
And we have seen and do see, and I encourage anyone to pull down the four or the three posters of results that we - that I spoke of earlier the ASM Microbix conference, the AACC results as well as some of the data with regards to the Netherlands program.
These are indicators of the caliber of collaborators we are working with now and the size of the companies now similar to our Kinlytic partnership, when you are dealing with major global scale players, they don't - there would be a news release. There would be 10 news releases a day with them if they let every one of the collaborators necessarily publish, who they are working with.
So we have to be respectful that we are still a relatively small company, but we are working with giants now and I think that will ultimately accrue some very substantial benefits to Microbix and Microbix shareholders.
And part of this, of course, we also have a macro environment for equities and let's call a spade a spade. This has not been a kind market for small caps with extremely aggressive rate tightening cycle has meant that a lot of this fundamental progress that we are making isn't reflected in share price and makes us all a little cranky about it.
But we are building a real business with real customers, real sales, our Q3 results of 5.5 million, we are within a 100,000 of our all time record without any DxTM in sales in that number, and certainly I would like to, I hope we will realize a Q4 with similar or better revenue strength, possibly before with, before even any analytic revenues.
So, without giving any formal guidance, we are certainly targeting to continue our growth and we see before too long that are certainly targeting our cap sales to start to exceed our antigen sales, even while those have strongly recovered and there are promising to continue to grow as well.
Deborah Honig
I had another audience question. Last earnings, you thought it would be a photo finish, whether cap revenue hit 10 million this year. How are you feeling about this now? It seems like continued delays will cause you to fall material below the plan?
Cameron Groome
I think that is fair that it will be a stretch. We did not expect the extent of the regulatory delays in our partner's approvals and while those are breaking towards seven figure sales numbers from those partners they are not in multiples of that figure yet.
We are still in the pre-launch stocking phase for onboard kits and beginnings of their inventorying apps to support product launches. But those product launches have not happened yet. So that definitely plays.
Deborah Honig
Okay. And can you comment on your average burden cost per employee and if you see this remaining consistent or drifting upwards and at what pace?
Cameron Groome
I'm not sure. Could you re repeat the question? I'm not sure I understood the phraseology there.
Deborah Honig
So they are looking for your average burden cost per employee.
James Currie
I was looking at that question as well and wasn't quite sure what the question was referring to. Certainly if you look at - if they were referring to our manufacturing burden costs, certainly, we will have seen it go up slightly in the past year or two as we have made investments in our infrastructure to support the business, whether it is systems or processes.
We have made investments to grow the business and we have got the capacity for a much larger level of revenues than we are generating today and that is why as Ken indicated that we are building for the future.
So there are some costs today i.e. the, some of the consulting costs relating to this ERP solution that are more one-time costs and are, so they are burdened right now, but in next year, we would not see the same level of burden on the organizations. So my expectation is that over time we should see our average burden cost, if I understand it correctly, improve.
Cameron Groome
Yes. And part of the efficiencies that we are driving are certainly to not be increasing the headcount in a line, in a sort of linear fashion with revenues. We want to resist increasing headcount while we are growing revenues by having greater levels of automation, reducing the drudgery on our employees, and having everybody do their highest best use and their best work.
And I think we are doing that successfully. We are very much stronger in our processes and logistics and resources than would have been a few years ago. So we can support the large customers that we are targeting to become regular clients and be reliable supply chain partners to them.
So, and now the flip side of that, the labor costs, we see particularly in the GTA housing costs are crazy for employees. Grocery costs are off the hook, so there is some upward pressure on wages as well. But again we won't be increasing headcount at the same rate as we are targeting to gross sales.
Kenneth Hughes
Deliberately bringing these systems in place to increase efficiencies. There is some costs associated in the short-term of actually doing that because you don't do anything, it doesn't cost anything. But if you actually do stuff, it costs something to do.
So we will put the systems in place as we grow and realize those efficiencies going forward. And it is not that we are going to lay people off, but as we grow, that efficiency will increase and everything else with that mistake, frequency will go down because it is not paper, it is all automated and we will move on from there. But that was a stated objective to get the systems in place to allow our growth, and that is what we have done and there is a cost associated with that.
Cameron Groome
Yes. And I think we have got, fabulous people working up and down the line and we cross-train people wherever possible and when people are ready and want to assume greater responsibilities, we want a bigger company to be able to accommodate those career objectives as well.
Deborah Honig
And what are you most optimistic about looking forward to fiscal 2024?
Cameron Groome
Well, to me our caps and dimmed in terms of the prospects there. It is annoying to have regulatory delays, slow things down. But we are, we have wonderful interactions with different large company perspective customers in our caps business. I think that is excellent.
Our antigen business and many elements is working at very high level, we go through 2023, we have added capacity in by necessity as things have snapped back quite hard there. So that is looking very good and we are continuing to look at ways to increase our efficiencies in the antigen business too that is an area of continued analysis and judicious investment force.
And then for Kinlytic as well. I mean this takes us into the therapeutics area where there are big potential upsides without potentially bankrupting our company by so doing is we often see companies try to undertake these spends without partners.
And if the access to capital dries up their debt, that is not an approach we have taken and we can participate very strongly in the economic upside of Kinlytic with somebody with much deeper pockets providing the funding for that project.
So I think those are the three elements I'm very optimistic about. And I'm not pessimistic about the DxTM or the prospect of redirecting that productive capacity, but I am realistic about the timelines for getting that clicking over to the same extent the other three elements of our business are.
Deborah Honig
One last question, Cameron. Have you thought about any acquisitions to grow the business? Is there anything that you are looking at doing in terms of inorganic growth?
Cameron Groome
Yes and yes. We have identified some opportunities that could be quite interesting and additive and synergistic with our business. We did not bring those into the fold this, thus far this year, because we frankly had our teams occupied up and down the line with the ERP system and eQMS upgrades and it really would have been a bridge too far to say we are in the midst of bringing new control systems online for our business. And by the way, here is another business we are trying to integrate simultaneously would not have been wise in my view.
So, as our ERP system is going live and we make sure that it is functioning without major bugs, and we have the quality management system modules rolling out through the organization, we are much better equipped to successfully integrate an acquisition. Any investors that have seen - failed in integrations of acquisitions will understand where I'm coming from here.
We need to make sure it is okay now, maybe the acquisition has a paper-based quality management system and we can teach them to come into the digital world with us, that our ERP system will successfully support their on-boarding and that we have management bandwidth to do all that.
So, 2023, we chose not to, 2024 we will see what terms are, and another element is of course, if our paper were more valuable, it would become more appealing for us to make acquisitions as well from a value exchange ratio. The fact that our currency is depressed makes it somewhat less appealing from the valuation point of view.
So really systems integration held us back, and let's have our breakout core see our equity a little bit stronger, and then we can evaluate when it is beneficial to Microbix shareholders to do something in terms of an acquisition and provide both growth and synergy through that. I hope that is a good explanation of our reasoning.
Deborah Honig
Makes sense. That is all the questions I have. I don't see any other audience questions. Was there something you wanted to talk about today that we didn't get around to?
Cameron Groome
No. I think we have gone through and covered off things fairly well. As I said, it is a solid order from a top-line point of view, a lot of noise in terms of the costs and expenses to go through. But, we are in a very strong, we continue to be in a very strong financial position.
We continue to be in a very strong strategic position to really capture a lot of the growth trends within the industry, the move to point of care, the move to greater use of molecular diagnostics, the greater syndromic testing, antimicrobial resistance testing, extended genotyping, viruses. All of these are things we are right in the thick of now and it is a great place to be.
Deborah Honig
Great. Well, thank you so much for your time. Thanks to the audience for participating. If anyone has any additional questions, feel free to reach out or if you would like a one-on-one call we can easily arrange that. And yes, I hope everyone has a great day and a great week.
Cameron Groome
Thank you so much, Deborah. Thank you, Jim. Thank you, Ken. and everybody for joining, everybody. Take-care everyone. Bye.
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Microbix Biosystems Inc. (MBXBF) Q3 2023 Earnings Call Transcript