Trinity Biotech PLC (TRIB) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Trinity Biotech Third Quarter Financial Results conference call. (Operator Instructions) Please note that this event is being recorded.

Now I'd like to turn the conference over to Mr. Kevin Tansley, CFO. Please go ahead.

Thanks very much, Nick. Good morning, everybody. I'm joined today as well by Ronan O’Caoimh, our Chief Executive Officer; and also John Gillard, our new CFO, as you'll have seen from the release.

Before we begin with our prepared remarks, we submit, for the record, the following statements. Statements made by the management team of Trinity Biotech during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify those forward-looking statements. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, but not limited to, the results of research and development efforts, the effect of regulation by the U.S. Food and Drug Administration and other agencies, the impact of competitive products, product development, commercialization and technological difficulties and other risks detailed in the company's periodic reports filed with the Securities and Exchange Commission. Forward-looking statements reflect management's view only as of today, the company undertakes no obligation to publicly release the results of any revision to these forward-looking statements. In addition, there is uncertainty about the spread of the COVID-19 virus and the impact it will have on the company's operations, the demand for the company's products, global supply chains and economic activity in general.

So moving on then. Today, I'll be taking you through the financial results for quarter 3 2020.

Beginning with our revenues. This quarter, we saw a substantial increase in revenues from $24.6 million to $32 million, and this represents an increase of over 30% compared to the equivalent quarter last year, and Ronan will take you through the makeup of this later in the call.

Obviously, an increase in revenues at this level would have significant impact on the income statement. Firstly, you'll notice that our gross margin has increased from 41% to 52.4% and by far, the biggest factor driving this was the increase in revenues that I've just mentioned. As well as the underlying margin inherent in these sales, the overall gross margin has also benefited from the spreading of the company's fixed costs over a wider base. Other factors at play this quarter were the impact of fewer instrument sales and a lower depreciation charge, partly offset by adverse FX movements. But both individually and combined, these are much smaller than the revenue effect.

Moving on to our indirect costs. Our R&D expenses for the quarter grew very slightly from over $1.2 million to just under $1.3 million. However, more significantly, our SG&A expenses fell from $7.3 million to $6.3 million. In this regard, we are seeing the benefit of cost-cutting measures that were implemented in quarter 2 in response to the onset of the pandemic. In response to the expected severe decline in revenues at the time, we implemented a series of measures aimed at significantly reducing or eliminating all discretionary expenditure. This includes lower T&E and sales and marketing costs, for example, trade show costs. Though it is fair to say that some of these costs would have reduced naturally at any rate given the pandemic-related restrictions that have been put in place.

Meanwhile, our share option expense for the quarter dropped from $252,000 to $156,000. Thus on an overall basis, our total indirect costs fell from $8.8 million to $7.7 million for the quarter, a reduction of over 12%. The net result from this is that our operating profit for the quarter grew from nearly $1.3 million to close to $9.1 million. This increase was achieved through all of the key metrics moving in a positive direction, namely higher revenues and improved gross margin and lower indirect costs.

Moving on to our financing costs. Our financial income for the quarter was lower than in the comparative period due to lower levels of cash deposits and lower interest rates. Meanwhile, our financial expenses were broadly in line at $1.2 million quarter-on-quarter, and this consisted of $1 million of interest due on our exchangeable notes and approximately $200,000 relating to notional interest imputed into lease transactions, which have become a feature of our income statement since the introduction of IFRS 16 last year.

Further down the income statement, you will see an additional noncash expense of $161,000, which represents the noncash accretion interest arising on our notes. Tax charge for the quarter was $400,000, and this represents a nominal effective rate of 4.5% of operating profit. This is lower than normal due to our eligibility for R&D tax credits. On an overall basis, the profit after tax for the quarter was over $7.3 million compared to close to breakeven last year. And this equates to an EPS of $0.35 or nearly $0.36 when noncash financial charges are excluded. Meanwhile, fully diluted EPS for the quarter was just over $0.32 compared to $0.443 for quarter 3 last year.

I'd like to remind you that the profit figures that I have mentioned so far do not include any element of forgiveness of the $4.5 million loans received under the Paycheck Protection Program. While we expect that these loans will be forgiven, we are waiting for the validation process to be completed before reflecting this in the financial statements. Finally, on the income statement. Earnings before interest, tax, depreciation, amortization and share option expense for the quarter amounted to $10 million. And the constituent parts of this can be seen in the release.

I will now move on and talk about the significant balance sheet movements since the end of June. Property, plant and equipment increased slightly from $9.3 million to $9.5 million, and this is due to additions of $600,000 being offset by depreciation of $400,000. In the same period, our intangible assets increased by $1.1 million. This was made up of additions of $1.4 million, offset by amortization charges of $300,000.

Moving on to inventories. You'll see these have decreased by approximately $1.8 million to $29.6 million, this was due to lower level of COVID-related inventories. As expected, trade and other receivables have increased significantly from $17 million in June to $21.7 million at the end of September. This was obviously due to the strong increase in sequential revenues. So the fact that the percentage growth in receivables significantly lags the increase in revenues from quarter 2 to 3 demonstrates that cash collection rates have remained strong. Meanwhile, our trade and other payables, including both current and noncurrent have remained broadly flat at approximately $39 million.

Moving on to our cash flows for the quarter next. Cash generation from operations for the quarter was just over $7.2 million. Not surprisingly, this was impacted by working capital outflows, especially in relation to accounts receivable following on from the steep change in our revenues from quarter 2 to quarter 3. Obviously, the biggest single factor in the increase in cash flows were the enhanced revenues that we are reporting today, but we are also seeing the impact of the closure of our Carlsbad facility, which occurred at the end of June.

Meanwhile, capital expenditure in the quarter was $1.9 million versus $3.8 million last year, thus continuing the trend of lower capital expenditure in recent quarters. The other principal cash flow movement in the quarter was the repayment of $800,000 in relation to the capital element of leases, which under IFRS 16, are now treated as a financing item. This has resulted in an increase in cash balances of $4.3 million for the quarter, bringing the cash balances at the end of September to just under $20 million.

I will now hand over to Ronan.

Thank you, Kevin. I'm going to review our revenues for quarter 3 before opening the call to a question-and-answer session.

Our revenues for quarter 2 were $32 million compared with $24.6 million in the comparable quarter last year, which is an increase of 30%. Point-of-Care revenues were $2.1 million compared with $3.9 million in the comparable quarter, which is a decrease of 47%. Clinical laboratory revenues were $30 million compared to $20.7 million in the corresponding quarter, which is an increase of 45%.

Going back to Point-of-Care, our revenues decreased 47%, but this reflects the fact that HIV [revenues] arising from COVID-19. The reduction compared with last year also reflects the quarter 3 2019 was an unusually high quarter for Point-of-Care revenues. Our expectation is that HIV revenues in the current quarter will be at normalized levels.

Moving back to Clinical Laboratory. Our revenues increased 45% to $30 million compared with $20.7 million in the comparable quarter. During the quarter, all of the company's product lines recovered significantly from quarter 2 2020 levels, which had reflected the most severe impact of COVID-19. However, as expected, revenues in quarter 3 2020 did not fully return to their pre COVID-19 levels, particularly in our diabetes business, where instrument placements were slow with 40 placements. This is hardly surprising as hospitals and clinics were unlikely to purchase new capital equipment in the midst of a pandemic. However, we are confident that these placements will recover in a post pandemic environment.

Meanwhile, our autoimmune business was approximately 10% short of normal levels. As due to COVID-19, many patients defer hospital and doctor visits, except when absolutely necessary. However, these factors were more than offset by strong sales of COVID-19 related products, which include: firstly, our COVID-19 IgG ELISA antibody test; secondly, our FDA-approved PCR viral transport media products; thirdly, our monoclonal antibodies through our life science supply business [have surged]; and fourth and lastly, the very significant boost of demand that we've experienced for our rapid respiratory products, which include strep pneumonia and Legionella urinary antigen.

Dealing with these 4 factors individually. Firstly, during the quarter, the company filed its submission to the FDA for an Emergency Use Authorization for its COVID-19 IgG ELISA antibody test and we are currently awaiting EUA authorization. However, as permitted under EUA regulations, the company has already launched this product in the USA. Meanwhile, we expect to obtain a CE mark for the product within the next 2 weeks, those allowing us to sell the product throughout the European Union.

The product has specificity in excess of 98% and sensitivity in excess of 95% in samples drawn at least 14 days from symptom onset. These percentages comfortably exceed the requirements of the FDA Emergency Use Authorization pathway. The product is manufactured in our facility in Jamestown, New York, and is capable of being run on a wide range of instrumentation platforms, allowing access to virtually every testing laboratory in the world.

As the utility of this product is to detect individuals with an antibody response to COVID-19, indicating past exposure and potential immunity, the specificity is the key performance metric. A high percentage specificity means that there are virtually no false positives. And therefore, for example, patients are not given the false impression that they may be immune. The test may potentially be used for the screening of people prior to vaccination to avoid vaccinating individuals who already have a circulating antibody response. Individuals who have doubts about the vaccine may choose this path. The test can be used to prove further that an individual had previously had COVID-19 and is now assumed immune and can also be used by governments to manage the prevalence of COVID-19 immunity in the population. Additionally, the test can be used to monitor patients' serological response in the weeks and months following vaccination as their immune system builds an antibody response to the virus. So in summary, we believe that with the onset of vaccinations, the use of antibody testing will be much more prevalent.

Moving back to the development of COVID-19 tests. We have previously indicated that the company is also developing a rapid Point-of-Care COVID-19 test to detect IgG antibodies. The test can run in 12 minutes, using 1 drop of whole blood procured by a spring-loaded lancet or a finger prick.

Like the ELISA test, this test will determine which individuals within a population have been exposed to COVID-19 and are, therefore, regarded as immune. We expect to complete the development of this test and file an Emergency Use -- Emergency Use Application in the EUA with the FDA thereby clearing products for sale during next February. We already have in place existing and substantial automated manufacturing capability for such a test, given that we already manufacture every year, many millions of HIV tests on the same automated equipment.

Meanwhile, the company is benefiting from strong sales of its FDA-approved PCR viral transport media product. It's a sample collection device for COVID-19 PCR molecular testing which is used to store the nasopharyngeal swab, which contains the patient's sample, allowing it to be transmitted in a stable environment. The transport medium stabilizes the sample and prevents bacterial growth and maintains its integrity until such time as the test can be run in a laboratory. The company has scaled up its manufacturing capabilities for this product, and demand is expected to be strong as long as molecular PCR testing volumes remain significant. Meanwhile, the company has also experienced significant increased revenues of our COVID-19 monoclonal antibodies. These monoclonal antibodies are the key raw material used in the manufacture of COVID-19 antigen tests.

Lastly, as a consequence of COVID-19, we have experienced a very significant increase in revenues from our respiratory Point-of-Care products, which includes strep pneumonia and Legionella urinary antigen.

So at this stage, I'm going to hand back to Nick for a question-and-answer session, please.

(Operator Instructions) First question comes from Jim Sidoti of Sidoti & Company.

Can you hear me?

Loud and clear.

Okay. Well, first of all, I just want to say, congrats. Good luck to Kevin, in whatever you do. And congratulations, John, and welcome to Trinity.

Thanks very much.

Thanks very.

You called out 4 items related to COVID that really helped in the quarter, the IgG test, the media, the antibodies and the respiratory products. Can you give us some quantities, how much revenue they generated? And if you think that they'll continue to generate revenue in the fourth quarter and into 2021?

Yes. I think the revenue numbers was around at around -- I think it was around $13 million, Kevin, was it?

Yes.

$12 million to $13 million. I on -- I won't break down like between the 4 categories. But what I want to say is that it's difficult to predict where we're going here. I mean, we're not going to give guidance. But -- and that may seem unusual, given that we are halfway through the quarter. But given all the COVID factors, both related to our existing business, our traditional business and these new elements of our businesses, it's very difficult to predict.

But what I would say is that I think that antibody testing, I think, is going to become more prevalent, as we said already, with the onset of vaccinations. I think people in general seem to realize at this stage that COVID is not going away in any real sense. I mean, it's going to be with us for many, many years. And I mean, clearly, we have come to terms with it, but there will be -- but it's going to be here for a long time. But -- and I do think that PCR testing will continue in significant volume, certainly right throughout 2021. So in those circumstances, I would expect that our COVID-related revenues will remain strong, but it's very difficult to predict with any degree of certainty. And that's why I think in this instance, we are going back to our traditional approach of not giving guidance.

What I would simply say is that I think our quarter 4 will be strong. Beyond that, I don't really want to go further, Jim.

Okay. So do you anticipate that even once the vaccine is out, that patients will need to get antibody testing prior to the vaccine to make sure they're not already immune?

Well, it depends. Different governments may take different approaches. I think that people may want just -- governments may recommend blanket vaccinations or some may decide to try and identify who already is immune. But I'd imagine they'd go for blanket vaccination.

But having said that, individuals make feel, well, look, I already basically am immune, I remember I was -- even if I wasn't -- didn't do a PCR test, if I remember, I was sick 6 months ago, why would I risk a vaccine? There's going to be elements of that. And I do think -- I mean, I think there's many reasons, as I outlined in my prepared statements, why kind of the moment for antibodies will come and is coming now with the advent of vaccinations. There's numerous reasons why I think the antibody testing will increase. Because the focus then, it suddenly becomes on an immunity rather than actual live infections.

Okay. Understood. And then switching over to the HIV business. Any update on TrinScreen and the progress you're making in Africa to get that approved by the WHO?

So we have submitted all of the modules for the WHO approval of TrinScreen, with the exception of the actual clinical trials themselves. And what has happened there is that they, basically, have been stalled because of COVID and we are still, basically, a couple of months, probably, away from actually -- we've recommenced, in the last country in which we're operate in, and we're a few months away from the submission -- so -- of that clinical trial data. But it's difficult because, we have a lot of stop starts because of COVID.

My estimate at this stage is that we'd be into the market by the middle -- certainly by quarter 3 of 2021 with TrinScreen. So we're looking at something like a quarter 1 submission of the final piece for clinical trial data to WHO and then expecting the approval within 4 or 5 months. That comes with a warning just relating to -- it's still difficult to get trials done at the moment in hospitals.

Next question is from Paul Nouri of Noble Equity Funds.

For the COVID sales, are they all into the U.S. and Western Europe? Or is it all over the world?

Paul, they're over the world, but mostly in the United States.

Okay. And Jim just asked about the WHO submission, but is there anything else in terms of pipeline development or FDA submissions that you could update us on?

We are -- one thing is that our Premier Resolution variant instrument and test are basically at the very final stages for submission to the FDA. And again, we've been held up because of difficulty of our hospitals are not really wanting trials run at this time. But we're hoping to get an approval probably April there. That probably is the most significant thing in the pipeline other than TrinScreen.

Okay. And is the lab in Buffalo that's been -- since you purchased at a consistent growth story within the company. Is that still growing? Or has that stalled due to COVID?

Well, I mean, it's still growing, but I mean it's revenues. I mean -- I mean, were down 90% in the month of April and still probably down around 10%. One thing that we're just about to start doing is a PCR testing in the lab. Now you have, traditionally, would be in an autoimmune lab. So we have equipped ourselves and brought in personnel to run PCR testing. So that should give us a boost and we're hoping that will commence just before Christmas. So we're just waiting for some final authorizations.

We need to authorize individuals and certain certificates, et cetera, which are hard to get again. But -- so we're hoping to get up and running actual PCR testing for COVID. But it's taken a while. So that should give us a reasonably significant boost.

But meanwhile, I mean, I will be confident that our testing volumes will return as the pandemic gets under control with vaccinations. But at the moment, the reality is that a lot of people are avoiding hospitals. And so the volumes of testing are down. But I mean, I think the core business, it's a growth model. And I think absent COVID, that will return immediately.

Okay. So where are you in getting PCR testing in the lab? Have you purchased all the equipment that you need already, and you need the validation and something like that?

We basically just need a certificate from New York State to proceed. So we have to -- we have to bring in especially qualified individuals who basically -- so -- and our focus has been autoimmunity. So basically most of our lab techs -- in the lab basically wouldn't be authorized to run PCR testing as needed. We need to bring in new people and new equipment.

Okay. Okay. And then last question...

So we're just waiting for state of New York authorization to proceed.

And the authorization is a COVID-specific authorization? Or it's a traditional New York state approval that you would need?

It's more a PCR test -- but like I said, basically that the individuals need to be certified for running PCR testing. PCR rather than COVID, it's a whole category, molecular testing.

Okay. And then my last question. I know you guys have been placing a good deal of instruments into Brazil, diabetes instruments. Has that proceeded? Or not yet because of the currency issue still?

We've really stopped placing instruments again in Brazil because the currency is disastrous from my point of view. It's moved out now -- it's $5.45 or something today. So it's been a relentless weakening of the Brazilian currency. So we have -- with rare exceptions, we're basically not placing any instruments on as we've got a very strong price. So effectively, we've stop placing instruments in Brazil.

Nick, just based on the listing here, I think we've got one more question, just to take.

That's correct. One last question. [Bill Lap], private investor.

I'm trying -- I'm sorry to hear your leaving, Kevin. I have to hear about that. Good luck to the new CFO. Anyway, of the 4 items you talk about on the COVID-19 update, you don't want to break it down, but can you say which one has got the most volume of the 4 there? Is the viral transport media the largest revenue producer at this time? Can you mention which one is for the $13 million?

Yes. So at the moment in time, the virus...

Pardon?

The virus transport is ahead antibody. I said, at this moment in time, virus transport media is ahead of antibody in terms of value.

Okay. And one other question. I know I'm limited to 2. How many tests do you think you'll be doing when you get authorization on the -- for the PCTR (sic) [PCR] test in the lab, how many can you do a day once you get -- is it just a matter of getting the personnel or you have enough volume? Is it test most people need the lab test right away? Do you have any estimate of how many of this you can do?

I think it has the potential to be like $3 million or $4 million a year, that kind of thing. It's not a transformational, Bill. We don't have monstrous capacity. So probably $3 million or $4 million a year, potential, is the kind of annualized level that we probably achieved.

And is it pretty profitable?

Yes, it's very profitable. It's just difficult to build. It's difficult to build, basically. It's very difficult to run big volumes quickly. It takes time, not caused by personnel.

Okay. I think that's it, good luck, but you're not giving any forecast. I thought last time you were going to give a forecast for the fourth quarter, but you're withholding any guidance for the fourth quarter, correct?

I'd say basic minutiae saved the day given that we're already -- we're halfway the quarter, but it's difficult given all the uncertainties the COVID has created in terms of our core business and so Jim said, It's difficult to give an accurate forecast for quarter 4. But I've already indicated that we're going to have a strong quarter 4. But rather than put a number on it, I think fair to return to a policy of not providing guidance. I mean the only reason that we did it last time, because we had a sudden very significant change, and we needed to (inaudible) of that.

I said we're confident of a strong quarter.

Thank you. This concludes our question-and-answer session. I'd like to turn the call back over to Mr. Ronan O’Caoimh for closing remarks.

Okay. I'd like to say thank you all for your continued support. I just -- on a personal level, I'd like to say that to wish Kevin well and to thank him for 15 years when we work together and for his professionalism and support, and I'm going to miss that. And so thanks, Kevin. And to say also that we are very pleased, and we've recruited a super CFO in John Gillard, and look forward, John, to working with you in the years ahead. So anyway, but -- so just to leave it at that. But thanks, Kevin. Thank you so much.

Thank you, Ronan.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.