CA - Microbix Biosystems Inc. (MBXBF) Q4 2023 Earnings Call Transcript

2024-01-03 15:56:10 ET

Microbix Biosystems Inc. (MBXBF)

Q4 2023 Earnings Conference Call

January 03, 2023, 11:00 AM ET

Company Participants

Deborah Honig - Investor Relations

Cameron Groome - Chief Executive Officer and President

Jim Currie - Chief Financial Officer

Ken Hughes - Chief Operating Officer

Presentation

Deborah Honig

Good morning. Thanks for joining us with our first webinar of the year. Picking things off again, Microbix giving us an update on their year end and Q4 results. That's fiscal Q4, fiscal year end. With me today I have Cameron Groome, CEO; Ken Hughes, COO and Jim Currie, CFO.

They're going to give a little bit of an overview on the quarter and year end and then we'll jump into some Q&A. As always, even though we're not working off a presentation, this session will contain forward-looking statements.

If you'd like to know more about those, you can find them on the presentation on the website, which was updated this morning. So, feel free to check that out. And as I mentioned, there will be questions, so feel free to input your questions in the Q&A box or you can email them to me. With all of that out of the way, I'd like to introduce Cameron Groome, CEO.

Hi, Cameron.

Cameron Groome

Good morning, Deborah. Good morning, everyone. Thank you all for joining us. And I'll in turn introduce Jim Currie, our Chief Financial Officer, and Ken Hughes, our Chief Operating Officer, who are also on the call today with us.

So great, I guess, Deborah, I'll launch in. I mean, this is to discuss principally our results for Q4 and the full year of fiscal 2023. That's the quarter and year ended September 30th, 2023, which capped off what I would call a year that was both challenging and fulfilling. We successfully adapted to post-pandemic conditions.

We added a number of important new customers and products. We signed a fully funded redevelopment deal for our biological drug Kinlytic urokinase and we maintained our financial strength.

However, we did see a pause in our sales growth in 2023 due to a lack of new orders for our DxTM viral transport medium, which we've been selling for about 5 million a year over the previous two years. And net of other new revenue and expenses led us to a small net loss for the full year fiscal 2023.

But again, in light of the changes that we've been undertaking and the investments we've been making to support the longer term growth of the business, I think we're satisfied with that result in light of the challenges that we faced through the year. I might ask Jim now to speak a little bit about the top line gross margins, net earnings, influences of the year, and just touch on Q4 and the full fiscal year, if you don't mind, Jim.

Jim, we'll have to get you off of mute, it'll be more compelling if you do.

Jim Currie

I haven't even noticed that. Thank you, Cameron.

Cameron Groome

No worries.

Jim Currie

Apologize. Yeah I'll start off with fiscal '24 as Cameron indicated. It's been --

Cameron Groome

2023, you mean?

Jim Currie

2023, yeah, I'm already into 2024. And I'm starting Q1, so, I apologize. Yeah, 2023 was a challenging and interesting year, let's just say. I think from a top line perspective, we were down versus prior year, predominantly due to the fact that we had the lack of DxTM revenues. And that was about $5 million to our top line differential from fiscal 2022.

So that had a large impact both on the top line and on our bottom line for the year. We also had some impact during the year and at year end related to our Kinlytic transaction which concluded with Sequel in May.

So we saw some revenue recognized in the, I guess, third quarter related to that transaction and at year end we also saw the reversal of the impairment of the Kinlytic asset for just over CAD3 million occur. That impacted not our top line, but did impact our net earnings for the year.

As far as the rest of our business, though, I think once you took out the impact of VTM and Kinlytic, the rest of our business actually grew 8% during fiscal 2023, which was a good sign. We saw growth from both the QAPs business as well as our Antigens business, which is starting to recover from where it was back before the pandemic. That was a good sign during the year.

From a margin perspective, it was a weaker year for margins than it was in the prior year. And again, it more relates to product mix. We didn't have the VTM business, the DxTM business that had fairly strong margins. We also the mix of products within the Antigen business was different and affected our margins for the year.

And also we had a write-off. Not only did we not have the revenues from DxTM and the margins, we also had to close to a million dollar write-off of inventory related to DxTM during the year. So all-in-all, when you look at our bottom line, the net income was pretty much break even, but that was impacted very strongly by the reversal of the impairment of the Kinlytic asset.

And that offset some of the losses that we had from our core businesses during the year and again some of the write downs that we had related to DxTM impacted that as well. For the fourth quarter, we saw a fairly level result in the top line year-over-year. We had what I would call, we have quarters where all the stars align in terms of what we actually sold from a product mix standpoint.

And we've had a few of those over the years. This was not one of them in Q4. Unfortunately, the stars didn't align with the product mix. We had some fairly significant sales of one of our lower margin Antigen products in the fourth quarter. And that had a significant impact. We've also got increased, continued increased costs, both from labor, but also on materials and our supply chain costs that are impacting us.

We also had some batch failures occur in the fourth quarter and an increased procurement level of supplies for our quality control and manufacturing team during the quarter. Now all of that was again offset by a reversal of the impairment of the Kinlytic asset and actually produced a net income during the quarter and again brought us to fairly close to break-even a year from a net income standpoint.

So again it was a very mixed bag during 2023 I would say. Our timing with Kinlytic was good and strong and we will continue to see the impact from that transaction in fiscal 2024 and obviously beyond fiscal 2024.

So, again, challenging and interesting year in 2023, but we are looking forward to a stronger 2024 both from a top line and bottom line perspective. Cameron?

Cameron Groome

Very good. Thanks, Jim. Did you want to touch on the ERP Go-Live, Jim? I just know that's been a big push through closing of the year as well.

Jim Currie

Yeah, thanks for that, Cameron. Talking about challenging. We went live with NetSuite on August 1st and its timing was interesting from a year end and audit perspective, let's just say. So, but we were very, it was a very strong implementation.

We had a good support from a consulting standpoint. The team internally worked hard too with the implementation and it went by my previous experiences with ERP implementations very well. And even from an audit perspective and having to audit both our existing previous systems and our current system, NetSuite, while it was challenging, I think I can see the light ahead for, again, the audit for 2024 being simpler and easier from a system standpoint than it was in 2023.

So a lot of hard work put together by all areas, not just finance, but manufacturing, QA, QC as well.

Cameron Groome

Thanks, Jim. And maybe that's a good segue over, Ken, to you and starting with the eQMS that we've been implementing same time as the ERP. And maybe just remind everyone what that is.

Ken Hughes

Yeah, absolutely. And from an operational perspective, largely, we've really continued to execute and do what we said we were going to do, which is to build that capacity to support the growth going forward.

On the ERP side, the IT department, the new IT department was pretty functional in that regard too. And a comment on that would be going through the first year end with the new NetSuite ERP, Enterprise Resource Planning Software, we'll just facilitate the next one.

And the truth of the matter is, by going digital, we're going to support the growth in the company going forward, which leads into a discussion of the Electronic Quality Management System, which went live at about the same time as the ERP.

Again, we're adding new functionalities and have added new functionalities as we move forward. It's operating very well right now, starting to integrate the ERP with functionality from the eQMS, the Electronic Quality Management System, to allow us to support efficiencies in growth of the business.

So that's really been a very successful initiative in 2023 and in 2024. We're going to continue to add capabilities. Right now, as we are growing, we'll have an electronic system and a legacy paper system in parallel as we continue to evolve through and implement more and more, less paper, more electronics, more growth and more support, and higher end activities for all staff and margins that go with that. So that's been a really successful implementation.

Other stuff with regards to operations, we've had a very successful year in implementing quality systems with regards to the in vitro diagnostic regulations on our QAPs products to allow us to sell medical devices in this area into Europe. We were audited by our notified body, the regulators in Europe in August and the group will be enterprise, then we passed the flying colors. We operate a very integrated quality management system already, ISO 13485, ISO 9001.

We take the whole business very seriously. And we were impressed with our use of our new eQMS in this regard as well. So we expect to be able to access the European markets fulsomely through 2024. And we have a lot of stuff already going on in the US and Canada as well and previous legacy medical devices already being sold in the Europe so that's not going to preclude any growth in the next year and facilitate growth beyond that.

Cameron Groome

Yeah, this is a little inside baseball for people in the industry, but there's a big heightening of regulatory requirements in Europe moving from the in vitro diagnostic directives which is a looser standard to the in vitro diagnostic regulations, IVDR, a much tighter standard, and Microbix is chinning up to that bar to make sure that we continue to have full access in the European markets going forward. So very critical for all of our global customers of course.

Ken Hughes

And because we have such an excellent eQMS anyway, the stretch is not too far and well within capabilities as evidenced by the quality of the audit and how we're moving forward with our technical files, which are more involved in IVDD, the directives, but well within our capabilities.

Cameron Groome

Yeah, now Ken, you know Jim spoke a little bit about the DxTM and you know the fact we've not had recurring revenues from that in 2023. I think maybe it's worth touching on a little bit about where we're going with our capabilities on filling, capping, labeling, customer agents, and so forth, and how that continues to advance.

Ken Hughes

Right, everybody knows that we got a lot of funding from external sources, grant funding, and incessantly loan funding from FedDev to implement capabilities to do that. And as a result of that, we've built facilities and currently have a capacity of about 100,000 miles a week in this regard.

That's a very flexible situation that we've been deploying into QAPs as well as creating other products in the DxTM related space, elution buffers, sample buffers, things of that nature. In parallel, or finally, a more fully automated system is going to be delivered and installed this very quarter at Microbix, which will take away a lot of the drudgery of the semi-manual situation, make it highly automated, and will increase capacity further from there.

There are a lot of opportunities in these types of elution media, sample media, going forward and we're pursuing them with all sorts of vigor. Of course it would be very nice if Ontario would order another million units of VTM, but that's not required for us to build forward with a, we're already making sales in this regard and we're developing new products like sample elution buffer with different tests going forward.

So that capability and capacity is flexible and is being expanded as we said we would and we're putting together the necessary quality control because the new product lines require development and quality control as well, which leads me, I guess, to my final operational point. Again, 66% funded by government.

We're building a new QC R&D and manufacturing lab in building three, which we acquired in the last couple of years to basically allow the testing and development capacity to fill this pipeline, but also increase efficiencies in our Antigen development business, which I'm sure we're going to come on to soon, and then move on from there.

So from an operational perspective, it's been pretty good here. We've built capacity, we've successfully implemented ERP and eQMS, capabilities have expanded and there are new opportunities we're very well ready to address. And that I would say that -- that's how I look at the operational component of 2023.

Cameron Groome

No, thanks, Ken. That's a great run through. I'll spend a few minutes now just speaking on some of the alliances that we've announced more recently.

Since our Q3 webinar in mid-August, we've actually disclosed five new corporate alliances. The first one in October relates to the HPV screening program of the Republic of Ireland. People will recall that earlier in the year we did global troubleshooting of the Becton and Dickinson system workflow, their core system in Prince Edward Island, the first jurisdiction in Canada to go live with molecular testing for HPV or cervical cancer screening. And there's actually reference to the PEI Go-Live in a -- in national post article on the 31st.

No mention of Microbix but maybe we'll change that and then we were baked into the national screening program in the Netherlands earlier in the year. But in Ireland in October is interesting because it's on the Roche Cobas system is what they're using. So again, another major international company system baking in Microbix controls for its workflow.

We then announced in November an alliance with Ulysses Biomed on another HPV extended genotyping assay to clients, so furthering our reach in that emerging segment, which is very large. Then we announced an alliance with US-based BioGX in early December supporting benchtop point-of-care testing a syndromic test portfolio that organization is advancing with Seegene USA on the 14th of December for lab-based multiplex PCR test support.

So again, you know, further alliances. And of course, in September, we were able to make a dual disclosure both to reference a million dollar order of QAPs from a customer, the alliance customer we disclosed in August 2022, and with their consent we're able to reveal their identity that in fact it is the company QuidelOrtho that we were working with and continue to work with on their Savanna point-of-care testing PCR multiplex test instrument.

Big mouthful there, but bear with me. And certainly if you review QuidelOrtho past disclosures, they were hoping to get that instrument and its initial assays approved in late 2022. And as with all things regulatory timelines can get pushed back. But we're very pleased that on December 20th of 2023, QuidelOrtho was able to disclose that they have gotten 510K approvals of Savanna for the instrument itself.

And for the first assay on that instrument, a fourplex genital ulcers test panel, herpes simplex 1 and 2, varicella zoster and treponema pallidum or syphilis better known as, and that is the first of eight disclosed assets. And if anybody wants to go into it, there is a disclosed presentation from QuidelOrtho's December 2022 Investor Day presentation, where they speak to eight assays, the first eight assays on Savanna and then please that Microbix is supporting development on all eight of those assays.

So one can imagine the number of instruments that they hope to place and the number of tests that they hope to sell to run on those instrument placements and the math starts to become very favorable for Microbix and speaking of favorable math I'll just also point to a news release that was issued this morning. And this is a different segment of the QAPs business, the proficiency testing and external quality assessment side of our business.

These are the sales to the agencies that do the testing and accreditation of clinical laboratories. And we were pleased to announce for the first time we shipped a single set of orders totaling CAD1 million. So again starting to get million dollar order batches from test makers, notably QuidelOrtho in September and shipping million dollar orders to lab accreditation customers, such as we announced this morning.

So the ambitions that we talked about for a while with QAPs you are now starting to be realized and we certainly have a positive outlook for the balance of 2024 and beyond in that segment of our business, as well as the Antigen side, which has come back very smartly, and on Kinlytic.

And maybe with that, I can ask Ken who's been that point on Kinlytic and just to provide a bit of a reminder of some of the positive developments that transpired there.

Ken Hughes

Absolutely, Kinlytic is our long held by a pharmaceutical drug, a thrombolytic which breaks down blood clots. And the first iteration we're looking at is already approved indication of unblocking blocked biomedical catheters in patients.

So we have this product for a while but you know you'll be aware of course that we partnered it with a group called Sequent out of the UK, a very well-financed niche by a pharmaceutical company. We've been working closely with them ever since. This is to bring back, this is not a new product, it is to bring back a product which has 20 plus years of clinical safety.

And it's well worth stating ahead of time that there's absolutely no chance of clinical failure with this product. This is simply a site transfer implementation, upgraded to a process to contemporary standards, and then re-launch.

So we actually hadn't talked to the FDA since 2017 about this when we first hooked up with Sequent and we then went back to the, we spent the summer putting together a redo of that communication which was very well received back then, with some upgrades to contemporary standards and went back to the FDA in September.

And the response from the FDA was extremely supportive of our strategy for bringing this vital product back. The consequence of that was that we got the second milestone payment to initiate the process from our partners, which was US$2 million, which has also been announced.

And right now we're moving forward, and that's obviously had an impact on revenue, of course, but now we're moving forward interviewing and working with a number of highly adept contract manufacturing and development organizations to install the process, do the process upgrades, potentially do clinical trials if necessary, it may not be necessary based on our consultation with the FDA, then re-launch this product, initially into the US, then globally, and then for bigger indications around the world.

So this is a very exciting initiative, it's going extremely well, and I'm really having a lot of fun with it. And the collaborating team is superb.

Cameron Groome

Yeah, great relationship. And we very appreciative of our partners Sequel and their backers as well for the just very constructive relationship. Everybody's quite excited about it. And, you know, of course they're making investment of a number of tens of millions of dollars, US dollars into the program to bring this together. So again, it would have been too heavy a lift financially for Microbix to do on our own given Canadian access to capital. So very good to have partners to work with here.

Ken Hughes

I just realized in my excitement, I call them Sequent, not Sequel. And I know I do know the difference but we've worked with companies with both of those names. I've been working very closely with Sequel and it's been going extremely well.

Cameron Groome

Very good. No. Thank you. And we'll certainly be working on next steps in terms of project as milestone disclosures. Of course, as our partner is private, their brothers would be just say nothing and pop up one day with an FDA approval and sales.

We'll have to disclose a little more along the way, but that will be a subject of ongoing discussion, what we disclose and when to keep Microbix shareholders properly priced. Well, you know, with that and Kinlytic, we believe, certainly it adds immense value for Microbix shareholders, whereas we unwind the net present value of royalties that we're likely to see going forward and sales-driven milestone payments.

It's quite a dramatic addition to the value that we continue to build in our core business. So good on both fronts there. Speaking of building value, sorry, Ken, I was going to transition over to Jim, but go ahead.

Ken Hughes

No, no. What is the point?

Cameron Groome

Okay. I was just -- while we don't provide sort of formal financial guidance. We do, do quite a budgeting exercise internally looking at the outlook of our business and sometimes we even do hit the mark with our projections. Other times, you know, external events can impact those.

But Jim, without sort of straying into the formal guidance area, maybe you can just give a broad outlook on what we're seeing going into fiscal 2024 and as we just are in the process of wrapping up our Q1.

Jim Currie

Sure, Cameron. Certainly, and as I indicated in my previous comments, we're looking forward to 2024. Certainly our Antigen business continues to grow, even I would say beyond what our expectations would have been a year ago, we're starting to see some growth finally coming out of our Asian distributor and that's starting to get some real legs on it.

Our Antigen manufacturing is going as fast as they can and we're adding equipment and making investments in facilities to help support the growth that we're seeing from the end of June business as well as our QAPs business and we're starting to. We expect to see the resumption of the targeted growth that we had for the QAPs business during our fiscal 2024.

You'll also have seen announcements related to Kinlytic. I guess it was back in November related to that transaction, which will have financial impact both in Q1 as well as fiscal 2024. So we're, I think, we're looking for record sales in 2024 and a positive bottom line.

As I said, we're continuing to make investments in a number of different areas, not just equipment, but again, continuing on beyond our eQMS and broader investment in our ERP solution as well as we add modules to help support the growth of the business and start to move towards our overall strategic target of a hundred million in sales and having the operations to support that hundred million.

Cameron Groome

Yeah, I think, it's worth mentioning is our 2024. We're certainly not turning down any reason to request for, you know, equipment and personnel from our team and continue to build capacity and capabilities and luck favors the prepared as the saying goes.

So the more we are able to respond to requests for support from our customers, the more we can deliver value for shareholders. So that really goes hand in hand. And one of the things we've also resumed recently, Jim, maybe you can talk about is our normal course issuer bid or share buyback program.

Jim Currie

Sure. We have re-initiated the NCIB. I believe it was December 8th when we re-initiated it. We've started buying back shares. We continue to believe that we're strongly undervalued and we believe that the NCIB is an appropriate measure for that.

It also provides us with, it tends to net off against some of the, and make an anti-dilutive against anything that we do from an options perspective. I want to note the fact that we've got we may see some insider sales happening in the spring.

We do have a large group set of options from 2019 that expire in mid to late February. So we will definitely see some transactions, exercises of options and potentially some sales from those happening at that point in time.

But again, we've got the NCIB in place as well, which should hopefully offset and net make it anti-dilutive of our share count. So I think we're putting the right things in place for our shareholders as well.

Cameron Groome

Yeah, I think, Jim, this is important to highlight. Part of our compensation plan is getting, encouraging managers and above to develop a financial stake in the company through long-term stock option participation.

And the normal course issuer bid or share buyback plan is intended to more than offset any number of options that's issued in a given year, so that we are reducing the overall counter shares outstanding rather than increasing and doing that in a way that does not deplete the cash resources of the company because we're net, a net generator of cash.

So it does put us in a good position, but as anyone will recall, you know, Revenue Canada demands, it’s a share of any option gains upfront. So those managers are putting up not just the cash to exercise the options but the cash to pay Revenue Canada.

So there's got to be some offsetting sales expected even as all of us continue to put more money at risk and into the company, demonstrating our support and commitment. So just worth mentioning is that going forward, that everybody understands that reality.

And interestingly, the SEDI insider reporting doesn't always highlight that managers have exercised options and increased their stake as readily as they do share sales. So if anybody sees something pop up as insider sales, reach out to us and we'll be able to tell you just how much people have increased their stake in a corresponding manner on a net basis. So worth highlighting that.

With that, just a couple of other things, I'll mention just before we move to questions. One, I just want to say, you know, one of the things that certainly happened this year was the passing of our Founder, Bill Gastle. And it's worth taking a moment just to reiterate just how much Bill's contributions continue to resonate through the organization from a scientific and from a cultural point of view.

It takes enormous guts to start a business and to start a biotech business literally in the basement of your home and build it over many years is just an immense accomplishment legacy and we just want to recognize that Bill and just reiterate that we miss him and continue to honor him with what we do.

And speaking of that, I also just want to call out just the wonderful staff we have. They've been just doing a tremendous job working hard and working smart to deliver these sorts of results that we're now seeing and going to see better and better results coming I've no doubt, but we've had full teams in here over the holidays, for example, working through to make sure deliveries made it out the door and handling international customs issues.

All sorts of work that's gone on uninterrupted here and we just, you know, can't overemphasize the appreciation we have for all the great people that are on deck here at Microbix. So thank you everybody. And also, you know, we couldn't do it without the ongoing support of shareholders, such as everyone that's on the call today.

So thank you very much for entrusting us with some of your capital. We take the responsibility very, very seriously, as I hope you can tell.

So with that, thank you. Happy New Year. And let's have at it with some questions.

Deborah Honig

Sure. Let's start with VTM. I've got a couple questions. So regarding VTM, there have been some comments in the AIF and investor presentations about redirecting capacity for custom reagents for international test makers. Can you provide any additional details?

Cameron Groome

I'd rather not go too deep into it right now. We are working with some customers that may want different reagents from us in parallel to other products that we sell and those are being piloted right now and those volumes could become quite material.

You know it certainly has been a disappointment, we're not going to throw stones at any of our customers, but you know it's been a bit peculiar in terms of the procurement practices that have gone on But we're making the best of that and certainly we're not going to let any resources remain idle for any longer, one moment longer than needed.

Ken Hughes

One of our operational expertise is building modular systems, which can be applied to multiple opportunities. So we've directed some of the DxTM related capacity into QAPs. We have other capacity that can be directed into the opportunities that Cameron's just talked about. So we build modular labs, we build modular processes, and we cross train people. So we don't expect anything to be a lying idol, except because we're so busy on something else. There's lots of opportunities to deploy everything we do, and we think that way all the time.

Deborah Honig

And any other additional updates on VTM that you could offer?

Cameron Groome

No, there are some matters ongoing and certainly we were not -- we've knocked down tools either on government procurement or on private industry. But at this stage I say we have a better record at predicting the actions of private industry that we do predicting the actions of government.

Deborah Honig

Moving on, excuse me, to Antigens. I had a few different questions there. We have lost this one now. Can you please comment on the increased batch failures and antigens which you highlighted in the Q4 2023 commentary? Was that the same problem you faced in Q1 2023 and has your production process changed?

Cameron Groome

Well one of the things we've done in our production is we've actually moved over a very skilled engineering group from R&D into manufacturing. You'll see that it reflected in our cost base if instead of being an R&D cost, it will come out of gross margins.

But we have a very good engineering group that's really looking at enforcing a high level of rigor on all manufacturing and that can be on both raw materials qualification and practices and the batch failures have really been a combination of both.

We've certainly had some occasions where raw material was contaminated and has caused a string of batch failures. And we've also had a few, you know, what I would call unforced errors where breaches of sterility or practice have cost us a batch. And some of that can occur with staff turnover as well.

So we're really looking at dialing in success rate, dialing in yield per batch and dialing in batch activity and getting really the best intercept of those three variables so that we have, we can have some pretty good increases in delivered yields of product. But again, sometimes when you get a failure, it isn't just one batch that goes down. You can have a string of batches go down for the same or similar reason, and it impacts you across a quarter or sometimes two quarters.

Deborah Honig

Should we expect more batch failures as you try to scale up production?

Cameron Groome

I hope we're going to see less as our team applies rigor and we have more experienced hands on deck, but we'll certainly be and we'll certainly be pushing in that direction. Ken, any comment you'd want to make on that?

Ken Hughes

I mean, most of our products aren't having batch failures, but there's a couple of particularly complex ones that have been challenging. We did indeed strategically increase the engineering capability of the manufacturing group to specifically address these matters and they're doing that.

We are operating a sterile process, and to Cameron's point, sometimes you get an infection in a raw material, it's nothing to do with you, and you don't find that until a few batches go down, but you do find it and you learn from it.

So we're basically eliminating errors, we're eliminating raw material risks systematically, so we don't expect them to recur, but they are complex systems and they are sterile and so they are on occasion of contamination because things happen. But we fully expect the percentage of proportion of batch failures in these complex processes to go down as we continue to expand, because we're literally knocking off problems one by one. That's what engineering groups do.

Deborah Honig

Is this resulted in issues with timely fulfillment of orders?

Cameron Groome

It occasionally has necessitated delay in order fulfillment. We try to maintain our schedules as best we can with customers, but again, these are complex biological systems, in fact, as well as products.

So this is not untypical. We've seen this, in fact, with the thrombolytic industry globally, where there's been persistent manufacturing issues in the competitor to Kinlytic. So we're not, this is not an issue that is unique to Microbix. I think anybody who is looking at a manufacturer of biological products does see occasional issues emerge.

What we're doing is really focusing down to, as Ken identified, eliminate, progressively eliminate sources of potential system failure and increase our reliability. You know, for many, yeah, go ahead, Jim.

Jim Currie

No, no, I was just going to say, at the same time, we'll also be investing in inventory as well.

Cameron Groome

Great point.

Jim Currie

And having inventory on hand in case of these situations as they occur, so we do not have any impact on our customer deliveries.

Ken Hughes

And right now, with the upswing in orders, that everything we make is sold. We want to build those inventories to one event, which may have nothing to do with us, but the raw material can impinge on that as the orders go up. But what I can tell you is we're building capacity and running at full speed and eliminating problems one by one and holding the time actually.

Cameron Groome

You know, as the saying goes, hindsight is 2020. And when the Antigen business had slowed down dramatically during COVID, during the height of the pandemic, we were requesting our customers visibility on when their demand might resume and they said, we have no idea.

So we carried a reasonable amount of inventory and then slowed down production, that inventory got scooped up faster than anyone expected them or us coming out of this and we've been working very hard to keep on top of demand since that time. So it's a high class problem and we're addressing it.

Ken Hughes

There's only a couple of products in the Antigen space. I mean we've got a lot of Antigen products that are being sold.

Cameron Groome

Yeah.

Deborah Honig

Just going back to utilization, what is your utilization of total capacity available in the Antigen business at the moment and do you plan to invest there to expand production capacity?

Cameron Groome

We're continuing. It's a bit of a multifactorial question because it's not just churning out one widget. We're making about 30 different products, so it really comes into a scheduling and workflow issues of what your capacity is.

To address the question square on though, we are continuing to make investments in the Antigen business and doing whatever we need to do to continue to meet growth and customer demand?

Ken Hughes

The lab we're building in Building 3 will support development and testing in the Antigen business. It will also liberate a tile in Building 1, which will house, in part, the long-awaited BSL3 suite for the Antigen area. And that will build a lot of capacity, a lot of capabilities to address new antigen unrelated product lines. So, yeah, we are continuing to build capacity to make sure that we can support the opportunities as they come to us, which they of course will.

Deborah Honig

And have you experienced cancellations from clients due to any of the production issues?

Cameron Groome

No.

Deborah Honig

And then I think this is my final Antigen question. We can move on. What margins should we expect in Antigens going forward if your account for batch failure?

Cameron Groome

There's quite a bit of variation across the product line in Antigens. So again it varies considerably quarter to quarter. I think we would see fluctuations depending on mix. You could have quarters coming in you know with plus or minus 10% on margins. So it's quite a bit of swing depending on mix.

Jim Currie

Yeah, I think as Cameron outlined, there is a big swing. I mean, we've got some products in the low 30s. We've got some products in the 90s. So it really depends, as I said, you can get a series of products that get sold that are all in the 80% to 90% range and you have a really strong quarter and then you can have a real bulk in the lower end that can impact you the opposite way. It's a difficult one to predict on a monthly and quarterly basis, but over the year, you know, I think we can do it.

Cameron Groome

Yeah, and the other thing is these margins aren't fixed. You know, some of the ones that Jim has indicated, they have rich margins, pressures downwards, and some of the ones with poor margins, we're doing our best to improve the engineering to get those.

So I think we'll see the dispersion of those margins perhaps move towards the center, closer to our average margin we've seen over multiple borders.

Deborah Honig

Okay. And then a follow-up question was, what's a reasonable range to expect going forward on a combined basis?

Cameron Groome

I would say in certainly we'll be fighting to keep our margins in the 50s on a gross basis and you know if we can keep those in the mid to high 50s, I think we'll be pretty satisfied with that.

Deborah Honig

Okay. I think we've beaten the Antigen horse to death. Moving onto QAPs. So QAP momentum is building, but it's fallen short of projections for some time now. What is your level of confidence in QAP revenue nearly doubling this year?

Cameron Groome

I would say it's pretty good. We've done a bottom-up by product by customer estimates for our targeted QAP sales, and I think we're pretty comfortable with those. Probably my biggest worry was whether there was something in the QuidelOrtho Savanna program that might prevent the instrument from getting approved.

And that would have been the biggest single impact, negative impact on us had that not gotten, ultimately gotten approved. Now that that's happened, that's certainly behind us and where we look is to say what are we doing in terms of development work, manufacturing validation batches, and those should support most of our planned revenue growth for 2024, irrespective of commercial launches, but just in terms of development work.

And as we have a growing list of customers, customers like SpeeDx that we signed a couple years ago now is ordering product. New customers like BioGx and Seegene USA. We certainly hope to see them come on stream towards the end of the fiscal year.

And then there are the lab-based testing systems such as the BD COR and the Roche Cobas, for example, where those companies don't necessarily buy from us directly, but if they're written into their instructions for use then clinical laboratories will be the ones buying from us directly and each one of those placed systems becomes an annuity of sales for Microbix but sales those sales made the labs rather than the test makers.

So we've got multiple irons in the fire for the QAPs business as well as growth continuing in the proficiency testing and external quality assessment segment of the business, which was the historic $1 billion a year we were doing on that.

It's now multiples of that level. So I would say where we're pleased in the QAPs business, certainly the proficiency testing side, where we remain pleased, the test maker side, we're getting happier about.

And where it's been a much slower penetration has been into the clinical lab customers as you really penetrate those with new assays rather than displace incumbents with older tests. But it's indicative of how sticky the business is once you get it.

Deborah Honig

I had a question specific to Savanna approval. The Savanna approval with three different test kits instead of the eight they officially seem to aim for meet expectations projected by QuidelOrtho when you sign the supply agreement with them?

Cameron Groome

I'll just make a correction there. The instrument has been approved with one fourplex test currently. They are targeting eight multiplex tests on that instrument that they've identified in their public disclosures.

Certainly, I think if you reviewed their disclosure history, they were hoping to get the instrument approved much earlier than it was. I'm just delighted to see it now approved and we'll continue to support them on multiple test rollouts.

Ken Hughes

And if the system is approved, multiple tests are going go onto the one system. And the system is approved. That was the delay associated with the process and that's in part at least, why we're quite comfortable that we're going to see some decent growth in this particular area as well.

Cameron Groome

Yeah, I understand that they'll be presenting at JPMorgan. So perhaps we'll get some updates in terms of their public disclosures over the next few weeks. They did do an investor day in 2022 December. They did not do one in 2023, but we'll see what they're comfortable disclosing. Certainly we're not going to say anything beyond where our customer is comfortable with referencing.

Deborah Honig

Makes sense. And are you engaged in any QAPs development work with any other big OEMs outside of Quidel? If so, could you please help us understand further timelines better? Any additional contract announcements possible this year?

Cameron Groome

It's a bit of a compound question, but our practice is that we disclose alliances when they're fully formalized. We don't disclose work in process. So, you know, whether it's with QuidelOrtho, SpeeDx, Seegene USA, BioGx, Ulisse BioMed, all of these are relationships that have been germinating for quite some time and have gotten to the point where both parties are comfortable disclosing.

So quick answer, yeah, we're working with a lot of other companies too. And would we expect further business alliances to be disclosed in 2024? Absolutely. Precisely when? You know, we'll see.

Deborah Honig

Okay. Moving on to Kinlytic. What are the major risks on your remaining way to introduce, sorry, what are the remaining risks to reintroducing Kinlytic in your opinion?

Cameron Groome

Well one of the big gating items that was disclosed in May was of course making sure the US Food and Drug Administration did not repudiate the past very encouraging guidance that provided Microbix in 2017.

And following the execution of the agreement in May, our team and Sequel worked together on providing a briefing package, requesting a refresh consult with FDA. That consultation took place and was very positive and resulted in Sequel getting funded by its partners and in turn, confirming to us that the project would move forward and providing us a milestone payment.

And that was our trigger for the disclosure in November, that yes indeed that was moving forward. So that funding risk I believe has largely been eliminated and the regulatory alongside of it of course now it really comes down to us identifying the right partners for development work.

We want to move quickly so we're not building facilities adjacent or within Microbix. We're working with parties that already have available facilities or near to available facilities to do critical components of the work. So I think now it would come down to if, you know, if a contractor that we work with meaningfully drop the ball, but that's really more of an operational delivery risk.

It's not a clinical or regulatory or financial risk. Ken or Jim, would you like to comment on that?

Ken Hughes

Completely agree. This is an approved product. As I said earlier, there's no chance of clinical failure with this. We know exactly how to make it and what we're going to do to update the processes.

To Cameron's point, we're going to work with third party and some very highly qualified contract manufacturing and development organizations. If by some reason they drop the ball, that's a temporal risk, it'll extend the timeline a bit.

Have no risk on whether or not urokinase will be safe and efficacious, Kinlytic will be safe and efficacious in the clinic or whether we will eventually subsequently get to the end game, which is to re-launch this product in the US and then subsequently around the world. So it's pretty, as a biopharmaceutical player, this is about the risk as you could possibly get. I would say.

Deborah Honig

And when is the decision on a CMO expected and will finalization of an agreement be accompanied by a news release?

Cameron Groome

Good question. Certainly we're working full tilt on that to get it done sooner rather than later and I wouldn't see it dragging fast the current quarter frankly. When we'll, what we'll announce we've got to really sit down with our partner and go through and say, you know, and think it through ourselves as to what are disposable milestones from a Microbix shareholder point of view. And that's some work we have to do currently.

Ken Hughes

There's been very strong discussion of a number of extremely well qualified groups in this regard.

Cameron Groome

Yeah, the very positive thing there is certainly there's no shortage of parties that are interested and qualified in doing this work. So we do have bonafide proposals on the table and we're really working through them to determine what is the best path forward and make that decision in conjunction with Sequel.

Deborah Honig

Would you consider selling a fraction of the Kinlytic revenue stream and using the proceeds to buy back shares?

Cameron Groome

Not currently. There would be a considerable discount on any such cash flow stream currently. And much better to let some of that time value unwind, get the project through to the sBLA filing and it's a whole different ballgame in terms of the value of that royalty stream.

When those risks are more visibly eliminated, right now I think we'd be taking a very heavy discount on monetizing that royalty, but if that discount disappears, wow that could be interesting.

And you know again as we stated we should be looking at something in the US$15 million to US$25 million per year royalty range for Microbix several years down the road, and that starts to be quite material.

So, you know, even as we talk about our 100 million a year revenue ambitions, you start adding in those numbers to the organic growth in business suddenly that doesn't seem like such a audacious goal.

Deborah Honig

And I had a follow up question, will multiple CMOs be selected or just one?

Cameron Groome

I think you'll have multiple parties for different components. Some parties are better so they can offer multiple components of the project. Others are more specialized for single component. You could have up to I think seven different vendors involved, but from a management point of view, fewer may be better. Ken, is that fair?

Ken Hughes

Yeah, I mean, for actual manufacturing, when it's all done, it's actually turning out products, it could be at one site, and that's going to be the driver. Obviously, there's analytical to do, there's pre-clinical animal work to be done, maybe clinical trials to be done, things of that nature. There will be specialty outsource testing, which are all different types of CROs. But in terms of where you're going to make it, you just start with one very well-called product.

Cameron Groome

Absolutely, yeah. Yeah, there's, you know, the biggest key ones are who is making the drug substance and who is making the finished drug product. So those are the biggest components of the project.

Ken Hughes

And then you think about the drug substance manufacturing, that's where the art is, and that's where the search is going to do, the drug product manufacturing. There are many, many vendors that will fly a full idea of product and do what you need to do. That's a kind of nothing bundle of a --

Cameron Groome

You're going to hurt somebody's feelings there.

Ken Hughes

Yeah, yeah. Well, there's a lot of people very good at that, and they're easy to find. But really, the art will be in manufacturing of the drug substance. And as we said, there are a lot of well-qualified CDMOs for that purpose.

Deborah Honig

Okay. Moving on to some corporate questions. Does the company have the ability to call or redeem the convertible debentures early?

Cameron Groome

No, that is not in the contractual terms of the convertible debentures. Certainly that's a conversation that can and should be had and we'll evaluate that but it is not in the debenture terms of that convertible.

Deborah Honig

Okay. And then share consolidation. Has the company considered consolidating the shares one for 20, would take advantage of the TSX listing and make the shares marginable?

Cameron Groome

We have periodically batted around whether it made sense to do share consolidations. Our thinking around that, certainly my thinking around that, has been more about parties wondering whether we should be pursuing an NASDAQ listing, which sort of has the arbitrary price per share issues.

I've not considered the pros and cons of a share consolidation for marginability purposes and that's a separate and perhaps a more interesting argument towards a share consolidation, but again there has to be something beyond the pure, I like a higher share price versus I like more shares outstanding arguments.

You know, those seem to weigh equally. You have people that hate share consolidations and people that love share consolidations. So but we'll look into that marginability issue. That's an interesting argument for.

Deborah Honig

I think you can also note that a lot of institutions can't buy penny stocks. So that could be another positive argument for if it's something you're evaluating.

Cameron Groome

Well it's, you know, we know a lot of the small cap funds around, you know, and it hasn't seemed to be an issue for too many of them aware of. And there seem to be a few less small cap funds every year.

Deborah Honig

That is the truth.

Cameron Groome

I think for the small cap funds, Deb, my view would be it's more, you know, if we were TSX venture versus TSX I'm not sure the share price is so such a compelling argument.

Deborah Honig

And then you had a couple more here sorry I've got multiple screens open. Talking about the shares outstanding, do you have like a targeted shares outstanding level?

Cameron Groome

Yes, one and I want to own it. But I know, in the short term, I think we'd like to see a modestly anti-dilutive position. We bought back, Jim, about 2% of our shares outstanding last year, which offset the option plan usage.

We'd like to see it be more than 2% a year buyback. And that's one of the reasons why we changed service providers for the share buyback. So, you know, certainly in the 3% to 5% range of where we'd like to land in the 2024-2025 cycle.

Deborah Honig

And what's the annual yield that you got last fiscal year on cash and equivalents? Further, what's your view of returning some of it to shareholders in light of the overcapitalized balance sheet?

Cameron Groome

Jim, maybe you can answer the former and I'll touch on the latter.

Jim Currie

Yeah, on the short term investment perspective, we're probably somewhere in the, over the year, probably somewhere in the 4.5% range. And that's sort of the outlook that we've got going forward in the 4.5% to 5% on the cash investment.

Cameron Groome

Yeah. And in terms of returning cash to shareholders, I think, it's important to note that big companies that are asking us to provide QAPs for them or Antigens for that matter, we are providing a critical component of their overall test system.

If we fail or failed financially, they would be devastating consequences to those companies. So for winning new business, there is a considerable value of having some cash on the balance sheet that new customers can look and say, okay, well, not only is this company, you know, generating positive cash flow and positive earnings, but they've also got some financial staying power and we're not going to make a mistake that will cost, you know, that executive their job and their whole product line problems if we make a misstep.

So there's a value of having some extra cash on the balance sheet in winning new business. Where we do deploy some extra cash and that we still have -- we do have some mortgage debt. We could certainly pay down early if we wanted to deploy some cash and close that spread a little bit that's something that we've certainly considered internally and you know equally there are other opportunities of that nature, buying back additional shares, for example, but just, you know, paying a dividend, it's not particularly tax efficient or graphs often.

Deborah Honig

You made a lot of investments into your various business lines over the last couple of years. Have we seen peak CapEx? And what is a normal CapEx to sales ratio going forward?

Cameron Groome

Good questions. Jim, we've certainly been, I guess it depends on our definition of CapEx too because we made some investments in ERP and eQMS that have been expensed rather than capitalized as well.

And then we've had investments in equipment and facilities that are clearly capitalized. So I'm just, you know, we will see, we're certainly planning to continue investing where we see it being justified. So I think you'd be looking at, Jim, what would you say 2 million, 3 million a year?

Jim Currie

Yeah, that would be the range. I think we certainly in the upcoming fiscal year, we're seeing some sizable investment in, as Ken outlined in one of our facilities in particular, but we will also be making other investments in our other facilities, but also in equipment to support those businesses as you get, you know, aging equipment that we want to have replaced and also adding new equipment. So, yeah, I think that spend probably in the 2 million on average range is probably where we are right now.

Cameron Groome

Yeah. And again, this continues to drive us forward towards attainable 100 million of attainable revenues.

Ken Hughes

Yeah, I mean, it builds top line capacity. It also creates efficiency to reduce costs and margins. That's really the driver. We have aging facilities, equipment we have to replace, there are better equipments available that we should use and deploy to increase our throughput, to increase our yields, and to reduce our costs. We're going to continue to do that. We're a highly technical scientific company and we're going to stay that way and that's why we're world leader in what we do.

Deborah Honig

Okay. One last question from me, it's a two-part. So what are your top three priorities in 2024 and your biggest potential risks?

Cameron Groome

Okay. Top priorities and biggest risks. I would say in terms, well, why don't we go around the table? Jim, let's start. You name a top priority and a biggest risk? Can you do the same? I'll do the same?

Jim Currie

Well, certainly for fiscal '24, I think the top priority for us is achieving the top line and bottom line performance that we set for ourselves. We do it we go through a you know fairly comprehensive budget process and I certainly have the expectations that we are going to hit the targets that we expect to achieve.

On the risk side there always seems to be external risk. Items that we don't have necessarily have control. If we're dealing with large customers and they're getting approvals for certain products before we can achieve the sales levels that we want to achieve with. That to me is a risk that we can't control.

Sometimes impacts, it has impacted our permits in the prior years.

Cameron Groome

Okay, Ken?

Ken Hughes

All right. I'm going to take two things I'm looking forward to doing. One is to building the top line in our core business, both QAPs and Antigens. I think we're well set up to do that and we'll continue to drive that way. The other thing is to significantly advance the Kinlytic project, which is extremely exciting.

And then we'll move forward. In terms of risk, I don't think there's a lot of risk. In either of those two things, I think, we're nicely set up to do that. We may lose the odd batch here and there.

In terms of the global goals, we're going to be successful, I agree with Jim, that it might be changes in customers and they may have regulatory problems that we're unaware of or reagents and raw material issues that we need to deal with. I think these are relatively minor possibilities and risks.

I think we have a great opportunity to build the core business and supplement that with a very successful year driving with Sequel and partners our Kinlytic program.

Cameron Groome

Thank you, great. Well, for me, I was just reflecting on this for as Jim and Ken were speaking, but for me, I would say, you know, top priority for me is to help our team with acquisition and retention of major customers to make sure that we're delighting our existing customers and our new customers and continuing to build and foster those relationships.

I think that's a big priority and a big opportunity for us as well. And I would say, you know, I wouldn't put it in the risk category, but I would put it in a priority category as well is making sure we're keeping the brilliant staff that we have. We've just got fabulous people internally and you know we're in an interesting environment with a lot of inflationary costs and just to make sure that we're staying treating our people as we should be treating them and making sure people you know are still having fun and paying their bills working with Microbix. So that's a big priority.

Deborah Honig

All right. That's it for me, it from audience questions. So thank you all for taking the time to give us an update and answer some questions. And thanks to the audience for some excellent questions today. I think we can end of the session there if you have any last thoughts, Cameron.

Cameron Groome

No. I think that is great. I would just say we're, you know, everybody up and down the line, everywhere in our organization is working hard to deliver the kind of results that we're showing and whether it's advancing the efficiencies on our Antigen business and the resume growth there, whether it's pursuing new opportunities for the reagent and filling and past customer reagent work that we've done, whether it's the innovations in QAPs and the different categories of customer there, Kinlytic, all of these things we're working very hard at. And we really appreciate the trust and support of our shareholders as we continue to manifest these opportunities. So thank you everybody. Thank you for your time today. Thank you, Deborah, Jim and Ken.

Jim Currie

Thank you. Thanks, Deborah.

Deborah Honig

Thank you all. Happy New Year.

Jim Currie

Happy New Year.

Ken Hughes

Thank you, everyone.

Cameron Groome

Excellent. Thanks so much.

Jim Currie

Bye-bye.

Cameron Groome

Bye.

Question-and-Answer Session

End of Q&A

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Microbix Biosystems Inc. (MBXBF) Q4 2023 Earnings Call Transcript