Earnings Call: Q2 2021

Sep 9, 2021

Earnings release

Good morning, everyone, and welcome to the Trinity Biotech Q2 20 21 Financial Results Conference Call. All participants will be in a listen only mode. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Joe Diaz with Witham Partners. Sir, please go ahead. Thank you, Jamie, and thanks to all of you for joining us today to review the financial results of Trinity Biotech for the Q2 of 2021, which ended on June 30, 2021. Joining us on today's call is Ronan O'Cooib, Chairman and Chief Executive Officer of Trinity Biotech and John Gillard, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question and answer session. Before we begin, I must inform you that statements made in this conference call may be deemed forward looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include, but are not limited to, those set forth in the Risk Factors section of our annual report on Form 20 F filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise these forward looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. With that said, I will now turn the call over to John Gillard, CFO of Trinity Biotech, for a review of the results of the quarter, and he will be followed by Chairman and CEO, Ronan O'Caoiv, for an update on sales, marketing and revenue. John, please proceed. Thank you, Joe. Good morning, everyone. Thank you for joining. As Joe mentioned, I will now take you through the results for Q2, 2021. You will notice from our press release that a non cash impairment charge has been recognized this quarter and is discussed in the press release. I will give further details on that charge later in the call. The income statement metrics I will quote exclude the impact of that impairment charge. Starting with revenues, total revenues for the quarter were $25,800,000 compared with $16,000,000 in Q2 2020. As Joe pointed out and is our typical approach, Ronan will discuss revenues in further detail later on the call. As such, I will move on to discuss other aspects of the income statement. Gross margin for the quarter 42.7%, which is broadly similar to the 42.9% achieved in Q2 2020. The small decline in overall margin is driven by a lower comparative margin from VTM products, partially offset by a higher margin from our core products in Q2 2021 when compared to Q2 2020. As ever, our gross margin remains susceptible to product mix changes, geographic spread, currency fluctuations and product level variation. Other operating income increased from $2,000 in Q2 2020 to $2,900,000 in Q2 2021. This income relates to loan funding received in 2020 under the U. S. Government's Paycheck Protection Program. 4 Paycheck Protection Program loans received by the company in 20 totaling $2,900,000 were forgiven during Q2 2021 and have therefore been recognized as income this quarter. These four loans were treated as short term liabilities at March 31, 2021. Moving on to R and D expenditure, this decreased slightly to $1,100,000 compared to $1,200,000 in Q2 2020. Meanwhile, SG and A costs have increased from $5,000,000 in Q2 2020 to $6,300,000 in Q2 2021. It is important to note that SG and A expenses were unusually low in Q2 2020 due to the furloughing of employees as a result of the pandemic. Government payroll supports related to COVID-nineteen which are not available in 2020 and sorry in 2021 and other cost savings. In addition, Q2 2021 SG and A costs reflect increased professional fees plus additional sales and marketing team costs reflecting the expansion of our international sales and marketing team. These results in an operating profit for Q2, 2021 of $6,300,000 compared to $500,000 reported in Q2, 2020, an increase of $5,800,000 This increase in operating profit is primarily driven by increased revenues and the forgiveness of the Paycheck Protection Program loans, partially offset by higher SG and A expenses and a slightly lower margin. Moving on to financial expenses, this includes the quarterly cash interest costs for exchangeable notes of $1,000,000 $200,000 relates to notional finance charges associated with lease facilities. These notional finance charges are required by the relevant accounting standard IFRS 16. You will note that there is also non cash financial net income of 900,000 dollars which is made up of accretion interest of $100,000 in the accounting carrying value of the exchangeable notes less of 1,000,000 fair value to the derivatives embedded in the exchangeable notes as required by the relevant accounting standard. Profit after tax before impairments, one off items and non cash expenses was $4,400,000 compared to a loss of $800,000 in Q2 2020. As in prior and as said out in the press release, we quote earnings per ADR effectively our equivalent of EPS on standard basis and also before the impact of impairments, one off charges and non cash financial items. Using that modified measure, earnings per ADR have increased to $0.212 from a loss of $0.036 in Q2, 2020. Our diluted earnings per ADR have also increased. In this case, the $0.203 from $0.01 in Q2, 2020. I will now provide you with more information on the aforementioned impairment charge of $6,100,000 This charge results from the accounting standard driven impairment review we are required to carry out under IFRS. There are a number of factors taken into account in calculating the impairment, including the company's period end share price, calculation of the company's cost of capital and future projected cash flows from individual cash generating units in the business. In addition, the company examines individual project costs for indicators of impairment. The non cash impairment charge of $6,100,000 has been recognized against the following assets. Intangible assets $3,900,000 property, plant and equipment of $1,900,000 and current assets of $300,000 I will now move on to talk about the significant balance sheet movements since the end of March 2021. There was a decrease in property, plant and equipment of $2,100,000 Additions in this quarter were $400,000 and this was offset by depreciation of $600,000 and the aforementioned impairment charge of $1,900,000 In the same period, our intangible assets decreased by $2,300,000 This was made up of additions of $1,800,000 offset by an amortization charge of $200,000 and an impairment charge of 3,900,000 Moving on to inventories, you would have seen we have decreased these have decreased by 2.9 $9,000,000 and now stand at $34,700,000 In Q1, 2021, we reduced the level of production of our PCR viral transport media, VTM, in line with projected demand and this is the main reason for the reduction in inventory this quarter. Meanwhile, trade and other receivables have increased by $500,000 to $15,400,000 reflecting slightly lower cash collections. Our trade and other payables reduced by $9,600,000 compared to March 2021. This reduction was mainly driven by the aforementioned forgiveness of the PPP loans and a reduction in trade creditors and accruals that the company paid VTM suppliers for previously supplied raw materials. While reducing the level of purchases of raw materials to reflect the reduced demand for new VTM orders as the quarter continued. You will see from the balance sheet that we have presented the exchange of a notes liability and the related embedded derivatives within current liabilities. Previously, this has been reported within non current liabilities. The reason for the change this quarter is because the notes have a put option on 1 April 2022, As the company does not have an unconditional right to defer settlement of liability for at least 12 months after reporting period, the accounting standards requires to show the exchange note as a current liability as at June 2021. Finally, I will discuss our cash flows for the quarter. Cash generated from operations during the quarter was $1,300,000 Non operating cash outflows during the quarter included capital expenditure of $2,200,000 and payments for property leases of $700,000 In addition, the company paid $2,000,000 of interest on exchangeable notes. Overall, this resulted in a cash balance of $28,600,000 at the end of Q2, 2021. Thank you. I will now hand over to Ronan, who will bring you through our revenues. Thanks, John. I'm now going to review the revenues for quarter 2 and for the corresponding quarter in 2020 before opening the call to question and answer session. Our revenues for quarter 2 were $25,800,000 compared with $16,000,000 in the corresponding quarter, which is an increase of 61%. Point of Care revenues in quarter 2 were $2,000,000 compared with $1,300,000 in corresponding quarter, which is an increase of 55%. Despite this increase, our HIV revenues are lower and normalized levels due to delays in the issue of HIV rapid test orders from Africa as a result of COVID-nineteen and that is further exacerbated by difficulty maturing airfreight transport into Africa. However, we are seeing evidence of these COVID-nineteen driven delays abating and we expect that point of care HIV revenues will quickly return to normalized levels. In March 2021, we announced that we had submitted our Trin Screen HIV product to the World Health Organization for approval. This product once approved will allow the company to enter for the first time the HIV screening market in Africa, which at 170,000,000 tests annually is a 12 fold bigger market by value and the confirmatory test market where Trinity Biotech has for many years had a dominant market share with our product UNIGOLD. During the last week, the company received an update from the WHO on the approval process, where the WHO confirmed that the final assessment phase is now well advanced. The company is confident of receiving an approval over the next number of months and then quickly leveraging the quality of its product given its advantages over the competition, given also its experienced sales and marketing team on the ground in Africa, given also our reputation for excellence with Unigold and also given our high volume automated production capacity capability in Ireland. And we believe that all these factors will enable us to quickly take market share in screening HIV African markets. Moving now on to our clinical laboratory business, our revenues for quarter 2 were $23,900,000 compared to $14,800,000 in the corresponding quarter in 2020, which is an increase of 62%. This increase is primarily explained by strong COVID-nineteen related product revenues with our PCR viral transport media product being the most significant contributor. We have developed and continue to develop a strong suite of COVID-nineteen related products. As just mentioned, our FDA approved PCR viral transport media product performed well during It's a sample collection device for COVID-nineteen PCR molecular testing, which is used to store the nasopharyngeal swab, which contains the patient 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 is run-in the laboratory. In addition, the company has developed a COVID-nineteen ELISA automated antibody test, which is available for sale in the United States, which sells in modest volume. The company also developed another antibody test, which is a COVID-nineteen point of care antibody test and in June it made an emergency use authorization application to the FDA for the test. However, disappointingly, the FDA informed the company that given the volume of EUA requests that it is not prioritizing this type of test for review. Given the rapid adoption of COVID-nineteen vaccines and the focus on using evidence of vaccination rather than the presence of antibodies as proof of immunity, we believe that the use of antibody tests in this pandemic would be very limited and we will therefore make no further investment in antibody testing. Moving on then, as previously announced, the company is well advanced in the development of a COVID-nineteen rapid antigen test. Now that's an antigen test as opposed to an antibody test. It uses a nasopharyngeal swab, which will run-in 12 minutes. The test will be manufactured in our automated manufacturing facility in Ireland with a cassette, which is virtually identical to that of both HIV Unigold and HIV Trinscreen. The test which is largely developed is demonstrating excellent analytical results and the focus for the remainder of the development process will be on transfer to automated manufacture and to clinical validation. We now expect that we will have achieved CE Mark during Q2 2022, thereby enabling sale of the product throughout Europe. While we do expect to launch the product in the U. S, regulatory path for such products remains fluid thus the company will continue to assess what may be the most appropriate regulatory approval pathway to allow a U. S. Launch of the product. However, we do expect that that will be achieved within a short number of months after European approval. Given the evidence of breakthrough infections for those vaccinated and a continuing threat given the evidence of breakthrough infections for those vaccinated and a continuing threat of new variants, we believe that rapid antigen testing will have a continuing place in the overall public health response to COVID-nineteen and that this will be a significant market for Trinity into the future. As previously stated, our increase in revenues is mainly due to strong revenues from our COVID-nineteen PCR via transport media product. The company noted a significant reduction in demand for new orders of VTM during quarter 1 and quarter 2 of 2021. And despite the fluid situation, given Delta and the fact that over the past few weeks we are seeing increased interest in the product, we believe that our VTM sales in quarter 3 will be significantly lower than the prior quarters. And now moving back to our core business, meaningless, given that there was a virtual total shutdown during quarter 2 of 2020. Moving to our hemoglobin A1C business, we continue to have low instrument placements with just over 30 instruments placed during the quarter, which is less than 50% of normal placement levels. This was expected as hospitals and clinics are unlikely to purchase new capital equipment during the pandemic. However, we are confident that these placements will fully recover in a post pandemic environment. Meanwhile, hemoglobin reagents sorry, meanwhile hemoglobin reagent revenues and by this I mean the number of tests being run-in our diabetes business are running at about 90% of normal, again due to the fact that patients are less likely to perform discretionary tests during the pandemic. Meanwhile, anticipate launching our new mid sized hemoglobin A1c instrument in early 2022. This instrument will enable us for the first time to target thousands of smaller hospitals and diabetes clinics around the world, mostly outside of the U. S. And the EU. Previously, we had been unable to service this market as the processing capability of our premier instrument and also with its cost was too large for their requirements. Although we have designed and developed the instruments in Kansas City, it would be manufactured in China, thereby enabling us to make the instrument available in the market at a very attractive price. And lastly, our autoimmune business generated revenues approximately 7% lower than in the pre pandemic environment with reference laboratory volumes down approximately 10% and product revenues marginally down. We believe that this is entirely due to the pandemic as many patients defer doctor visits unless absolutely necessary and we are confident that these revenues will fully recover post pandemic. Could I now open the call to a question and answer session please? Our first question today comes from Jim Sidoti from Sidoti and Company. Please go ahead with your question. Hi, good afternoon Ronen and John. Can you hear me? Hi Jim. Yes. Hi Jim. Kevin here. Great. So it sounds like you're in the final stages with the WHO for Trinscreen. Is the WHO similar to the FDA in that you're not allowed to talk about the test with potential customers until the approval is received or can you start to market the device now ahead of the approval? You could start to market the device ahead of the approval, but I don't think you'd be taken very seriously in the individual countries without the approval being in place. So I mean you can kind of warm people up a little bit, but you can't really seriously market it as such. So how should we think about the ramp in sales for this new test? Is this something that's going to take a couple of quarters to get going? Or do you think you'll be able to get orders within the Q1 or so after you receive the approval? Jim, unfortunately, it's not as simple as that. In order to have any meaningful sales, we will have to basically be put on to the algorithm for a particular country, right? So basically, each individual African country, despite the fact they don't actually pay for the test themselves, they actually decide what products they'd like to use. And after that, then the Americans and the Europeans actually make the payments. So basically what happens is that the individual countries will decide what test normally just one test will be the confirmatory will be the screening test, although they can't split it. And then they'd also decide what test would be the confirmatory test. And some countries review that every year, but typically it's every 2 years, right? And so but it's not a kind of end of year December thing. It's the varying times they review it. So in order to really in order to actually basically sell a meaningful volume, you need to basically be put on the algorithm as the screener of choice for a particular individual country. So that will take time. But those algorithms have been reviewed all the time. So there's always algorithms in the melting pot and whatever. And in each individual country, we have a distributor and we are involved with opinion leaders and we have technical people on the ground. So we'll be working the system all the time as each algorithm comes up for review. But it's not a straight out of the park. It's not like a 100 meter rate. It's not like you're straight out of the blocks. Understood. And then how will you handle ramping up production there? Have you started to build some inventory yet? Or are you going to wait until you actually receive some of these orders before you build up your inventory? Yes. So primarily Jim we'll wait until we receive orders or at least have I suppose significant line of sight. It's a as Ronen suggested, it's a relatively long sales process but we're lucky to have a very experienced team, both from Unigold and also some kind of key people we've got on board. So we have the team that are able to make those kind of judgment calls in terms of how solid orders are. While we have been spending a lot of our time is optimizing our manufacturing process here in Ireland to make sure that we can efficiently reach the levels of volume that we expect. So to Ronan's point earlier, the screening market is a much larger market. It's a much, much larger volume market. So in terms of our efficiency and the level of volumes for plants here, and it's really a step change for us and that's really where we're putting our focus to make sure that when those orders are ready, we are ready to be able to fulfill them. So is it reasonable for us to assume that you'll have some level of orders in 2022, assuming you get the approval in 2021? Well, absolutely. Absolutely. We believe we will get moving very quickly and we believe there's a couple of the bigger countries may actually decide to split the algorithm as in for the screening to take to basically put us in alongside Abbott. Okay. And then similar question for the hemoglobin device, the new A1C tester. Do you think you'll have some revenue from that product in 2022 or is that going to be further out? Yes, that will be. But I mean, it's difficult to estimate when we'll have the instruments fully approved. But I mean, I think mid-twenty 22 would be optimistic. In that order of timeframe. Got it. And then the last one for me. Yes. Can you tell us I'm sorry. Sorry, go ahead, Jim. Okay. Can you tell us what the VPM sales were in the Q2 and how they compared to a year ago? Well, I mean, I think our total COVID product sales would have been around 7 and change in this quarter. And where were you a year ago with that product? Were there any sales in June 2020? Yes. I think about 3,500,000 Okay. Our next question comes from Paul Nouri from Noble Equity. Please go ahead with your question. Did you say towards the end of your formal remarks that the COVID sales will be down for the Q3? I did Paul, yes. I mean, I think you're seeing this right across I think you're possibly seeing this right across all diagnostic companies that more and more people are vaccinated. I mean despite the fact that the Delta variant is proving very problematic, the reality is that the total volume of testing is actually is dropping. And what you'd also seen, I think we've signaled is that it was almost like panic buying towards the end of last year of PTMs and in general of COVID products. And so there was an element of stockpiling that had to be kind of washed through the system. So thing so having said that, on a positive so despite the fact that we said that, I also indicated that we were seeing renewed levels of interest just in the last short number of weeks. Again, so a very fluid situation, but yes, we have said that we quarter 3 will be down. Paul, I think what you've seen is, we're probably towards the end of the quarter. As Ronen said, we're seeing increased interest. To what extent that interest manifests itself into significant orders towards the end of this quarter is just unclear at this point. But we clearly don't have a full quarter of that renewed interest. Okay. And then for the autoimmune panel that you guys are running out of the lab, is that posting any significant sales yet? You mean actual COVID sales, like long COVID sales? No, it's really that's only at the commencement stage, Paul. Two volumes are probably down about 10%. And that's just because again, if people have a choice, they're going to stay away from a hospital or a doctor. So it's done as a problem is pressing and potentially get deferred. So we have the long COVID. Go ahead. I was going to say the long COVID products are with a very interesting range of products, but they're very much just being rolled out as we speak. Yes. What's going to be your strategy in terms of creating awareness about it among physicians? I mean, it seems like the type of physician that could order or that might order this kind of panel is just so wide ranging. So how might you go about marketing it? Well, Bob, I mean we have a U. S. Sales team involved in marketing those products. I mean, what we do is we do papers on it. We academic papers, we try and talk to opinion leaders, get them interested, direct sales efforts as well. That's the kind of message we're using. Okay. And I think you said earlier on the call that the sales team expanded. I was just wondering is that in anticipation of the WHO approval or is that for your current products on the market? No, when we said that we were referring only to Africa. So what's happened there basically is that so the Elear had basically had a dominant position within African HIV screening and they were acquired by Abbott a number of years ago, very fairly recently. And basically what's happened is that we have managed to basically recruit the senior management team that developed the business for Alaire. So, we have a really good team in place. So, senior people out of that team now work for us and they're the people that basically managed to have a kind of who built that 80 5% market share for Alire, now Abbott. So, I saw that argument is that we have a very, very marketing team. We have a good reputation with UNIGOLD. The product itself is performing excellently and is quicker than the Abbott test. I mean the WHO ran their own trials and they got 100% sensitivity in specificity on large sample sizes. And on top of that, we have this very sophisticated automated system in Ireland for manufacturer, which can be will be very easy will respond easily to demand at any level. Think it's to pull all those factors together, we're confident of taking meaningful market share with only the slightest kind of use of pricing. We'll come in marginally below the number one there. All right. Well, thank you. Thanks, Our next question comes from Bill Lapp. Please go ahead with your question. Good morning. I got just several questions, Ronen. What is the pricing on the Allure product right now for the test in Africa for the test? It recently moved from $0.80 to $0.90 so it's basically been $0.80 for about 12 years and it moved in the last year to $0.90 Okay. All right. Well, that sounds good. And you say there's 117,000,000 of those tests a year? Yes, 170. Yes. 170, not 117. Better. Thank you for the clarification. I have another question on the rapid on the COVID rapid antigen test. Now you've disbanded going forward for the antibody test, but you're still pursuing the antigen test. And it seems to me, if you go to Target or some of these stores in the United States, you can get that test for $23 without going to the doctors. Now they're talking about on TV yesterday at CNN about this guy from Harvard that's pushing that you should get it quicker. And the United States, I believe, is going to really wrap, is going to really accelerate the testing. So I mean, you have to go to a doctor to do your rapid test to get it done. And how are you going to compete? You're not even going to be in the ballgame until 2022 if you get there, you'll be in Europe, but you won't be in the United States. What's the thinking on this antigen test? I mean, you're already almost there, but your approval in the U. S. Will be at least a year away, correct? Yes, probably about a year away. I think by the time we get in and the only reason we can put a firm date on Europe because we know exactly what the regulatory pathway is. But in the USA, we're just being more cautious because the rules pertaining to the EUA, the emergency use authorization and then the notification status have changed and have changed and changed regularly. And for example, we're in a situation where on EUA notification basis, we can sell our antibody test. But when we submitted the rapid antibody test, they said that they didn't want to review it. So we're just being cautious when we say that we're just saying we don't we're not certain of what the pathway is because pathway is tending to change. But there's a huge market in Europe for us for the antigen tests and we believe although we're coming late to market, we're coming with something of really high quality. In terms of pricing, we can manufacture it arguably in around $0.50 and therefore there will be very strong margin on it. Whether the product is run by a doctor or individually, I think it's kind of almost like a sideshow In some jurisdictions, you can do some, but typically it doesn't have to be run by a doctor. But there are many instances where it can be run from home. As you know, many employers are doing it. My own daughter is working in London in Goldman Sachs. She's tested 3 times a week with an antigen test every week for month on end. So I think COVID is with us and we could debate how that what would the characteristics of COVID, how long it will endure. But I do believe we believe within this company that antigen testing is going to be with us for an extended period of time. I extended that in 2 years. And although we're coming to the party late, we believe that we have an excellent test. Okay. And is it 12 minutes fast enough? I mean, that's pretty fast test, but it doesn't have to be administered at doctor's office. So you now tell me I could buy that kit and administer it at home or the employer can, you don't need a clinician to do it? It depends. It depends on the jurisdiction, depends on the rules. I mean, obviously there's lots of antigen tests available for home use. And then there's tests where you can take the swab and you post it. And then the result is run-in a lab and then you so there's various ways of doing this. But suffice it to say, there's a very big market for antigen testing. I mean, they're selling the millions and millions and millions. And are they currently selling antigen rapid tests in Europe quite a bit? They are, right? Yes. I mean, I would just instance in Goldman Sachs in London, 8,000 employees and they're all tested 3 times a week. So it's 24,000. So it's 24,000. And I'm assuming many of those are doing that. Okay. And But there's many examples. And what are they using for their antigen tests? Are they just a competitor? Do you know what test they're using? Is it a Mostly Chinese tests. Okay. Mostly Chinese tests. Yes, and remember, all flights in and out of the UK require antigen tests now. Okay. All right. Well From the U. K. In and out of Europe, it requires an antigen test when you return back into the country. So there's lots, believe me, there's end of antigen test requirements. I think the way we think about it Bill is, the position has shifted again somewhat, given the level of breakthrough infections. Vaccination is no longer the strong signal that it was expected to be in terms about somebody not having COVID. And that can be either in terms of comfort from yourself, comfort to your employer, comfort to your coworkers, comfort to your co travelers around being free from infection. And I suppose the antigen test, we've seen lots of examples of employers pushing it, etcetera, is a way for people to get a level of comfort that they are not infectious or the people around them are not infectious. I suppose just a short time ago, we thought that vaccination was probably going to give that level of comfort, but with the Delta variant and the level of breakthrough infections, that doesn't seem to be the case anymore. I know that's probably the key driver as to why we think there'll be greater longevity in this test, these types of tests than we would have just a short while ago. Just some other examples Bill like for example in Dublin. In Dublin, Google and Facebook and Salesforce.com are all testing their employees weekly. And for example also, I'm sure you're reading about this. I'm not sure so much on top of it, but like for example in the U. S. Sorry, in Europe and admittance to concerts and to all sorts of social events require an antigen test. Really? Okay. All right. Well, with that so I mean, it's still it's something that's more of a bonus, but your real excitement is the WHO. You said that's your most exciting thing you've got going. I mean, besides other things that really make a change? I think we're excited about both. Okay. Okay. Well, that's good. All right. And there's nothing you can say further on the refinancing of the $100,000,000 loan at this point, right? Is there anything further you can add? Well, we've appointed professional advisors and we're confident that there are a number of options available to us to deal with the matter. But as you can imagine, it's very much in our thoughts and then in thoughts of the Board and we're working diligently on it. Okay. All right. Okay. Well, thanks so much. Thank you. Appreciate the quarter. Thanks, Bill. Lovely to talk to you. Thank you, Bill. There appears to be no more questions. So I think maybe we'll close the call. And thank you everybody and thanks for your support and your interest and talk to you soon. Thanks everybody. Have a good day. Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's