Microbix Biosystems (ticker: MBX) has announced strong fiscal Q1 results for 2024, with record revenues reaching CAD 8.4 million, driven by robust sales in Antigens and Quality Assessment Products (QAPs). The company reported net earnings of $2.5 million for the quarter, excluding an investment banking fee. With sales of QAPs reaching $2.25 million, Microbix expressed a positive outlook for fiscal 2024 and beyond, backed by a growing product pipeline and development work. The company's stock repurchase program is active, with a significant number of shares already bought back, and plans to continue up to the 5% threshold.
Key Takeaways
- Record Q1 revenues of CAD 8.4 million, with a net earning of $2.5 million excluding an investment banking fee.
- Strong sales in the QAPs segment, totaling $2.25 million for the quarter.
- Continued growth expected in both QAPs and Antigens sales.
- Active stock buyback program with an intention to repurchase up to 5% of outstanding shares.
- Positive progress on the Kinlytic drug, with discussions for expanding into new markets and indications.
Company Outlook
- Microbix anticipates ongoing orders and robust organic sales for QAPs.
- The company is expanding its product pipeline, including the launch of the H. pylori QAPs portfolio.
- Expectations of record full-year revenue, even without Kinlytic revenue.
- Plans for marketing to U.S. investors in 2024.
- Confidence in the success of the Kinlytic relaunch and potential expansion into various cardiovascular indications.
Bearish Highlights
- The company has faced challenges with government procurement processes.
- Kinlytic revenue is not expected to contribute to earnings immediately, with royalties anticipated to begin in approximately three years.
- Slower Antigen sales in Q1 due to customer inventory management.
Bullish Highlights
- Microbix is involved in point-of-care testing categories and supports lab-based assays internationally.
- The company is confident in its expertise in oncology, sexually transmitted infection testing, and antimicrobial resistance profiling.
- Positive developments in Kinlytic's production methods and market opportunities.
- The company is exploring opportunities to provide reagent manufacture for private industry customers.
Misses
- Full automation of the flexible SCD line for the VTM project is not yet complete.
Q&A Highlights
- The company addressed expenses in the G&A department, including one-time expenses related to the Kinlytic transaction.
- Implementation of digital systems is expected to lead to long-term efficiency and cost savings.
- The company is not considering uplisting on NASDAQ at the moment due to the costs involved.
Microbix's fiscal Q1 2024 has set a positive tone for the year, with record revenues and a confident outlook for continued growth. The company's strategic initiatives in product development, market expansion, and operational efficiencies are key factors in its optimistic forecast. With an active approach to stock buybacks and a clear focus on both diagnostic and therapeutic sides of the business, Microbix is poised for profitable growth. The company's management has conveyed a strong commitment to maintaining high gross margins and leveraging operating efficiencies as revenues increase. As Microbix continues to innovate and expand its reach, the market will be watching its progress closely, especially in the areas of PCR tests, point-of-care technology, and antimicrobial resistance work.
InvestingPro Insights
Microbix Biosystems (ticker: MBXBF) has shown a strong start to the year with promising fiscal Q1 2024 results. To further understand the company's financial health and future prospects, here are some insights based on real-time data from InvestingPro and InvestingPro Tips:
InvestingPro Data:
- Market Cap: Microbix Biosystems currently has a market capitalization of 41.56 million USD, reflecting its value in the market.
- Revenue Growth: Despite a decrease in revenue growth over the last twelve months by -13.43%, the company has managed to maintain a gross profit margin of 45.3%.
- Stock Performance: The company's stock has seen a significant return over the last three months, with an 86.09% price total return, indicating strong investor confidence.
InvestingPro Tips:
- Share Buybacks: Management's aggressive share buyback strategy is a positive signal about the company's valuation, as reflected by the active repurchase program mentioned in the article.
- Financial Health: Microbix holds more cash than debt on its balance sheet, which is a reassuring sign for investors concerned about the company's solvency.
These metrics and strategic moves by Microbix Biosystems are in line with the company's positive outlook and its focus on maintaining high gross margins and leveraging operating efficiencies. Investors looking for more in-depth analysis and additional InvestingPro Tips can find them at https://www.investing.com/pro/MBXBF. There are currently 10 additional tips available, providing a comprehensive view of the company's potential. For those interested in a yearly or biyearly Pro and Pro+ subscription, use the coupon code PRONEWS24 to get an additional 10% off.
Full transcript - Microbix Biosystems (MBXBF) Q1 2024:
Deborah Honig: Good morning, and thanks for joining us today. We’ve got an update from Microbix. They just reported their fiscal Q1 results this morning, so feel free to check those out if you haven’t seen them yet. With me today, I’ve got Cameron Groome, CEO; Jim Currie, CFO; and Ken Hughes, COO. And they’re going to do a little bit of a presentation, then answer some questions for us. If you’ve got any questions, feel free to submit them at the box at the bottom or you can e-mail them to me. And as always, this presentation will contain forward-looking statements. So feel free to check those out on the presentation on the company’s website, which was updated today. We might make a couple of changes and update it again later this week, but all the financial numbers are in the new deck if you want to check that out on Microbix’s website. And with that out of the way, I’d like to introduce the management team. Hi, gentlemen, Happy Valentine’s Day.
Cameron Groome: Thank you. Thank you. Hopefully showing shareholders a little love.
Deborah Honig: Yes, I think this is like the third or fourth Valentine’s Day we’ve all spent together. So yes, it’s quite a nice surprise. So yes, looking forward to hearing about the quarter.
Cameron Groome: Thank you so much, Deborah, and good morning, and good morning, Jim and Ken as well.
Jim Currie: Good morning.
Cameron Groome: Well, a pleasure to communicate the results for our fiscal Q1 of – Q1 of fiscal 2024 which is the quarter ended December 31, 2023. We have a September fiscal year-end, so this is our Q1 of fiscal 2024. Very strong revenues, obviously a record by far at CAD8.4 million of revenues for the quarter. That is notable based on the Kinlytic milestone payments that were recognized in the quarter of US$3 million. But I think it’s very important to point out in addition to that, that our sales were up substantially – the product sales were up substantially from the quarter as well at $4.2 million versus $2.5 million in the prior year Q1. And that comprised a 95% year-over-year increase for the quarter in our sales of Antigens and a 69% increase year-over-year in our sales of quality assessment products, our test controls. So very strong overall revenues associated with partnering and organic product sales and those numbers led to a very strong record sales number. They also led to a record bottom line number as well, whereby we reported net earnings of $2.5 million for the quarter. And I’ll call out certainly that within the quarter we also absorbed in our G&A US$500,000 investment, banking fee, success fee to our agent Torreya Partners whom we thank, that helped with our Kinlytic partnering. And this is the final – last and final payment of advisory fees associated with the Kinlytic partnering transaction. But that did increase our G&A in quarter beyond what we’re generating on or what we’re requiring on an ongoing basis and should be recognized as a cost, that is IFRS handling of those matters. It is not taken into a cost of goods sold associated with milestone payment, rather added into G&A. So if you pull that out, of course our profit would have been higher. We similarly recorded a very strong set of financial ratios. Our current ratio is back up over 8 times, and our debt to equity was zero 0.35, which continues to come down as we continue to generate earnings and cash flow. Jim, what would you want to call out further in terms of the financial numbers for the quarter?
Jim Currie: Well, I think you’ve covered most of the more significant ones. I think we’re starting to see some good rebound from our Antigens business. We went into the – let’s call it the doldrums during COVID with our Antigens business, and we’re starting to see a bounce back in Q1, and we should continue to see that come through in Q2 as well. Our QAPs businesshad a strong quarter, I mean, traditionally if you look at our Q1, it’s generally our weakest quarter historically. So it’s unusual for it to be our strongest quarter at this point in time. But I think as you’ve outlined as well. We’re also investing, our operating expenses and our cost of goods for that matter, include our continued investment in people, in equipment, IT infrastructure, to support the ongoing growth that we expect as we move forward.
Cameron Groome: Very good. Thank you, Jim. Ken, what would you want to bring forward?
Ken Hughes: Obviously, the Kinlytic success is manifested in this quarter and continues and talk a little bit more later, I suppose on Kinlytic and our relationship with Sequel and team, which is very strong. But also to Jim’s point, we continue to invest in infrastructure necessary to support growth. We have had a really strong Q1 from a historical perspective in the core business as well, respect to go from there. The technical aspects that we’ve been implementing too. For instance, an example would be the mycoplasma product, where we’ve adapted that from standard culture techniques into a bioreactor system. Therefore, throughput is increased as demand is increasing, which will be a key antigen as we move through 2024 and beyond is illustrative of the success we’re doing from an operational and scientific perspective, but also the eQMS and the ERP transformation to support growth costs upfront, but the benefits down the line in terms of scalability and understanding of what we’re doing and ultimately reducing cost of goods sold is clear and we’ll continue to invest in that. So, yes, very strong, and the growth potential going forward is great.
Cameron Groome: Very good. Thank you. Thank you, Ken. Thank you, Jim. I’ll call out one other thing I think is relevant, in Q1, we also reported a record in terms of our sales of QAPs, our test control products. Sales of QAPs for the quarter were $2.25 million. That’s far and away, I’m just thinking far and away a record of product sales in that category as well. And reflective of some major orders coming out of the PT category, we announced a record of a single batch of shipments of a million dollars of proficiency testing oriented products, as well as a million dollar order from one of our major QAPs clients as well. So really things moving forward there, and while we don’t provide formal guidance going forward, I was running through our quarter in progress, and I know we have close to 20 active QAPs customers that are now ordering product from us in that quarter. So that business continues to grow. And as Ken and Jim were both indicating, our Antigens business as doctors are seeing patients and patients are seeing doctors in a more regular basis, there’s quite a bit of strong demand in our Antigen business as well with it reporting a good quarter, always a bit of quarter-to-quarter volatility on the Antigen business just based on large order deliveries. But we see that smoothing out between Antigens and QAPs and a more regular order flow as our number of products and number of customers continues to grow. That should start to smooth quarter-to-quarter. But certainly we’re looking at a revenue record by far for our fiscal 2024. And we have modeled out, of course, looking at the Kinlytic project will not record revenues each quarter because it’s a development project. But we see revenue growth in 2025 even beyond Kinlytic, whereby we won’t record revenues for Kinlytic in fiscal 2025. But we do see year-over-year sales growth being quite strong regarding this. So very positive outlook for our business, I don’t think there’s anything negative that I can call out in this particular quarter or in our 2024 outlook. So things really moving along much as we have targeted and continue to drive forward too. So with that, Deborah, are there any questions that you have specifically before we sort of break for our audience?
Deborah Honig: No. I’m good, but we already have a few audience questions. If you want to jump into those.
Cameron Groome: Okay. Why don’t we? I think that’s a great use of everyone’s time. And please, I see a lot, some familiar shareholders and friends in that have logged on. So thank everybody for spending your morning with us. Happy Valentine’s Day and let’s have at it.
A - Deborah Honig: Okay. So what is the value of the QAPs sales delayed in Q4 2023 due to the timing of shipment to customers that’s now included in this quarter?
Cameron Groome: Don’t know that we had a lot of QAPs sales delayed in the quarter. We did have some Antigen sales that might have slipped out of Q1, but by and large I think we’re on pace with our QAPs deliveries. Antigens can be a little more tricky because it’s a multi-month production cycle and often you have multiple batches being pooled, have to be validated and released. So if there’s been any slippage from one quarter to the other, it would be on Antigens, not QAPs, Deborah.
Deborah Honig: Okay. I had another QAPs question. How much of the QAPs revenue were actually due to stocking orders from Quidel?
Cameron Groome: There’s – with Quidel (NASDAQ:QDEL), there is several layers to that. There’s development work that we have conducted for them and are conducting for them and other customers, I should add. There then one so, there is research and development associated revenues where we’re optimizing a product formulation really keying in, in the truest sense of the word, the levels on a multiplex control. Once that keying in is completed to the customer’s satisfaction, then for a commercial product, for a full IVD, FDA approved product, there then have to be three validation lots in commercial scale that are produced, and then there are orders for stocking on an ongoing basis thereafter. So there’s a layering effect that goes on. With respect to that specific customer, I believe they – I know they have announced publicly that they are working on eight multiplex assays in association with their instrument. We certainly are aware of those and pleased to be associated across a full portfolio of assays. There are multiple other customers, of course, that we’re supporting, some of whom are announced companies like SpeeDx, BioGX, and Ulisse BioMed, and others, where we’re supporting them on different new and existing assays. So we do see quite a bit of activity. And our activity is involved in both the point of care testing categories where we’re looking often at in-kit controls, where our swab based QAPs are included in kits of test cartridges. But we’re also supporting companies on onboarding new customers of their point of care instruments or lab based instrumentation through our onboard kits for training, validation, verification, training and we’re also supporting, of course, lab based assays, such as our announced support for cervical cancer screening programs based on molecular tests for HPV, such as we’ve announced for the Netherlands in support of the Becton Dickinson (NYSE:BDX) core system, and such as we have announced for the Republic of Ireland based on the Roche Cobas system in its assays. So quite a bit of work going on, lab based and point of care, and proud to be affiliated with a whole bunch of such great companies and sites.
Deborah Honig: Okay. I think that was pretty much answered the second part of that question, which was an update on QAPs contracting. Is there anything else you can add?
Cameron Groome: Very, very active, lots of discussions ongoing and development work ongoing. Our team is extremely busy up and down the line from sales and business development, customer service through our product management, through product development, R&D manufacturing, QC, QA, I don’t think finance. I don’t think there’s a department that isn’t working at a hell of a clip right now.
Ken Hughes: We continue to develop our product pipeline. People would have seen the announcement of the H. pylori QAPs portfolio, but we’re continuing to work diligently in the laboratory to maintain what is, in fact, global leadership position this particular area, lots of proprietary expertise and a growing portfolio of products to support this particular area, which we obviously consider to be something we’re going to see a lot of growth in the next little while.
Cameron Groome: Yes. Thank you, Ken. I think that’s a great point. We really see just the breadth of our product development efforts coming out of COVID, everybody had respiratory viruses on the mind and thinking perhaps that our focus was limited to that area. We’ve certainly demonstrated that we’re involved in viruses related to oncology through HPV, involved with sexually transmitted infection testing, antimicrobial resistance profiling, and lately as well with not lately, but disclosed recently H. pylori, which is bacteria implicated as the cause of stomach ulcers, and very challenging to create controls to validate molecular testing for HPV and other Microbix first.
Ken Hughes: Yes. I mean, if you look at the Antigen portfolio we’ve been putting out for many years, there’s no particular focus on respiratory viruses there either. We have a diverse expertise here and a leadership expertise, and we’re applying it to the QAPs as well. We’ll continue to do that going forward.
Cameron Groome: Yes.
Deborah Honig: Do you expect any other large QAPs orders from Quidel going forward? Do you see similarly strong organic sales?
Cameron Groome: Yes. To be brief, yes. The – there is an ongoing order flow, including in the current quarter that is certainly material. We made the announcement of the first million dollar set of orders for QAPs and the first million dollar set of orders from QAPs from a point of care customer. And we also made the announcement of the first million dollar set of deliveries for a proficiency testing customer. Both of those categories continue to grow. We won’t be announcing order flow on a regular basis, other than if they hit material new milestones. So those were, I think, some foreshadowing of the growth that we’re seeing and just clarifying that providing proper ongoing disclosure of the progress of our business.
Deborah Honig: Staying on the QAPs theme, is Microbix supplying QAPs for British Columbia as part of their announced transition to HPV screening and at home testing.
Cameron Groome: We’ve certainly reached out to British Columbia. We haven’t seen what they’re doing in terms of control for their system and the ongoing quality assurance. We’re certainly connecting with British Columbia on those matters, but I’d have to check with our sales and business development team as to the precise engagement on that. But certainly, it is – it did not escape our notice. And we will be endeavoring to make sure that, frankly, that every province has a robust quality management system in place. This is incredibly critical for the effective use of molecular testing for HPV screening as the interval moves to five years between tests. PCR is very accurate, if it’s run well, but we do not and cannot permit the health system to let people slip through with a false negative test result and go five years with potentially an infection progressing towards cancer that would be devastating. So this needs to be very much top of mind. Anybody in the region, if you’ve got contacts, don’t be shy about feeding them over to us, and we’ll pull those threads very firmly to make sure that each province responsibly rolls out molecular testing as they do. And that really applies for any uses of PCR. It’s got to be validated on a regular basis or systemic errors can, will, and do slip in.
Deborah Honig: Can you provide more details on the extraordinary expenses in G&A this quarter? In other words, what is the cash G&A run rate to expect going forward, excluding one-time expenses, share-based comp and depreciation and amortization?
Cameron Groome: Well, I’m going to ask Jim to go through line by line each [indiscernible] Jim, just off the top of your head, please.
Jim Currie: Not a problem. Well, I think you outlined, at least in the quarter, you outlined the fact that we’ve got incremental costs associated with the support we got from Torreya for the Kinlytic transaction. So that was about 600, and I think it’s 660. It was US$500,000. So about CAD670,000 was reflected in our G&A operating expenses. Also embedded in our G&A was an additional 75,000 of amortization relating to the reversal of the impairment of our intangible asset for Kinlytic. So that will be reflected. That $75,000 a quarter will be reflected going forward. But the 660 was a one-time transaction. That’s the most significant. I mean, certainly if you go quarter-over-quarter, we’ve also got some incremental costs associated with our implementation of our ERP and EQMS systems. So those two will be predominantly ongoing. We have gone through the majority of our implementation and consultative support. So it’s more the subscription based costs associated with those two systems that we’ll be incurring as we move forward.
Cameron Groome: No, thank you, Jim. That’s brilliant. So the big items in G&A, certainly the investment banking fee, US$0.5 million that was recorded in Q1 as an expense within G&A. And then Jim – as Jim mentioned, we are writing off amortizing the write up of Kinlytic over a ten-year period, which is reflective of an increase in our quarterly depreciation amortization.
Deborah Honig: Can you talk a bit about the build-up in working capital and drivers for that?
Cameron Groome: Sure. Certainly, our consumption of working capital is tied to the growth in sales. Obviously, we’ll have a greater level of activity as we continue to build the business. Our accounts receivable and inventory will increase as we continue to grow sales. But I don’t see a huge – an outsized level of consumption of working capital into those items. Our antigen business has a longer cycle time for production and is hungrier for inventory numbers in that respect. The QAPs business has a quicker production cycle and is a little less hungry, as I would call it, for working capital consumption. But Jim, I didn’t mentally remark a big jump in working capital consumption in this quarter. What would be your comments on that? Oh, Jim, are you on mute? There you go.
Jim Currie: Thank you. Yes. The only item of significance that was unusual in the quarter was we had US$1 million in deferred revenue. That was in since we received the initial payment for the upfront for Kinlytic back in May. That was pulled out of deferred revenue and moved into receivable – moved into revenue, sorry. So that was the better part of $1.35 million. And that occurred in Q1.
Cameron Groome: No, great, great point, Jim. Thank you.
Deborah Honig: Was the IT expense a one-time expenses? Will G&A expenses adjusted for one-time expenses continue to be high going forward?
Jim Currie: Well, I think the one-time the majority of what I would call one-time expenses, I think, as I explained in my previous comments on G&A, have predominantly gone, and we’re now into more of the ongoing operating expenses associated with the subscription based services that we’ve got for both Netsuite and our master control on our EQS side.
Ken Hughes: There will be some savings down the line is the requirement when you’re moving from a paper based system to a fully integrated digital system, a transition period and a learning period and an implementation period where both systems have to exist in parallel because we have to get product out the door. Those exist in parallel right now, and the transition gets more profound from paper to digital with time. So as we actually implement all of those systems and people get fully trained and familiar with them, efficiencies will go up and we’re not going to lose anybody. But as we grow, we won’t have to add more capacity and therefore the actual cost of the individual item will go down. So those savings are going to be realized as we move forward, and at the same time it will give us the capacity to sustain our growth without blowing up, which we would if we continued with a paper system. So there’s a little bit of that parallelism going on right now, but as we move forward, that’s going to change to the benefits of that.
Cameron Groome: Absolutely. This is all about reducing drudgery and decreasing error rates. Jim, you were going to say something?
Jim Currie: No, no, I was just going to say. That’s a good point, Ken. I think we’re not yet seeing the, call it, savings or the avoiding incremental costs that we would see as we move forward with the efficiencies and effectiveness of the staff based upon their utilization of the tools.
Ken Hughes: This is an investment for the upside we’re going to realize as we continue our growth.
Deborah Honig: You provide an update on the NCIB?
Cameron Groome: Yes. Yes, thank you. The NCIB restarted on December 8. As we announced on December 6, there was a gap of a couple of months there between the end of the previous NCIB and the restart of this NCIB. We did switch investment dealers. There was an issue with the prior dealer, did not like crossing blocks unless they had both sides of the trade. This investment dealer does not share that issue. So we have successfully transacted a block trade on the new NCIB. The delay probably exacerbated a bit of the downside move on the stock during the fall, but actually the delay ended up working out to our advantage because the added volume that was – trading volume that was recorded associated with the reconfirmation of our Kinlytic project funding in November was able to be calculated into the permitted daily buyback numbers for the NCIB when renewed. So we’re actually able to buy a little over 12,000 shares a day on a normal basis, plus one block trade per week. And we have been quite active. Jim, you’d have a better handle on the number we bought back on the NCIB to date, but I’m thinking we’re somewhere between 400,000 and 500,000 shares. Would that be in the ballpark?
Jim Currie: Yeah. We had 140 some odd thousand in Q1 and we had over 400,000 in January. So when I say Q1, it was actually, as you said, between December 8 and 31, but we’re closer to 600,000 shares that we’ve repurchased so far.
Cameron Groome: Yes. So we certainly intend to be active with the NCIB. Last year, we were able to buy back about 2%, even as limited under the conduct of the prior dealer. We have no complaints about other than that foible, but we certainly look to buy back, as the NCIB says, up to 5% as permitted under the rules, and continue to be active. And the great thing about that is certainly more than offsetting the ongoing use of the stock option plan, which is entails 2% potential options issued each year that, of course, have vest over three years staff have to stay on for a full three years more before those options awarded an any year vest. And those options have a five year life. So there is an evergreen element in plan, but with the NCIB, we’re seeing a net decrease in shares outstanding, not a net increase in shares outstanding. I’ll also mention there are 5.75 million warrants that expire in May with an $0.80 strike price and those will fall off the fully diluted cap table unless our shares appreciate significantly between now and the end of May. So we’ll do our best on that front. But I think unless market tone improves dramatically, we may see those fall away from the cap table.
Deborah Honig: On the same theme, I think that there’s some management options expiring soon. Do you want to give us a little bit of an update on that?
Cameron Groome: Certainly. There were – in 2019, on the use of the stock option plan, and this was, I think, the first year that it was used as redesigned, there were 1.92 million options issued with a $0.23 strike price, and those expire at the end of the day on February 22. As it stands currently, the majority of those have been exercised. And of course, Canada Revenue Agency demands its pound of flesh up front. So there is always, not only our executives and managers and directors called to put up funds to exercise those stock options, they are immediately called to put up the funds for any taxable gain associated with those CRA immediately demands payment on those. So you always have executives needing to sell some of those shares in order to pay at a minimum the cash taxes and some portion of the exercise price. And I think we’ve seen a lot of those go through. I will personally be selling some shares over the next few weeks to partially fund my exercise. So full disclosure there, but all of us have increased our net positions and continue to increase our net positions and our net investment in the company. And I think that’s incredibly important for shareholders to know that senior management has skin in the game, that we have downside risk if we don’t deliver, not just the upside risk on options. So I haven’t calculated since I started as CEO. I bought in excess of 3 million shares using cash money that nobody’s required me to buy. So whether I’ve got more after tax dollars in than I’ve pulled out, I don’t know, but it’s probably pretty close to a wash.
Ken Hughes: I’ll make my little comment on this one that I also exercised some options recently. It’s not quite on the scale of the millions Cameron was talking about, but I’ve sold not one. I didn’t enjoy paying the taxes, let me tell you.
Cameron Groome: Yeah, yeah, exactly. Great fun.
Deborah Honig: One more question on the cap table. Any thought to doing a stock consolidation to get you out of the penny stock category?
Cameron Groome: It’s been brought up in a few things. There’s always pros and cons associated with share consolidations companies, certainly, in my experience, tend to trade down towards the prior share price, not up. And usually for every person that says it’s a great idea, there’s somebody vehemently opposed. Probably the only argument I’ve seen pro within the context of a TSX listing is to consolidate to the point where the shares become marginable. And that can be an advantage to some investors. So we continue to watch that, but we’ve not taken any steps to act upon it. But certainly if we had an overwhelming majority of shareholders suggesting we do it, we’d take it to the board. But to-date, opinion seems fairly evenly divided between whether that’s a good idea or not.
Deborah Honig: Have you thought much about potentially uplisting on NASDAQ? There’s been some incredible returns in the U.S. biotech space over the past year and seems to be money flowing into that sector. Is that something that you’re considering?
Cameron Groome: Not at the present time. The costs of maintaining a NASDAQ listing are quite considerable. There is the exemption, I forget for how many years it runs for companies with, I think, under a $750 million market cap from full Sarbanes-Oxley compliance. But you still have NASDAQ fees, you still have U.S. legal counsel fees, and then your – immediately whenever a company misses a quarter, there’s a whole bunch of ambulant to change since lining up to sue the company in the U.S. So, I think at the present time, there’s more downside than upside for us in that. But we do plan to do some marketing to investors in the United States over the course of 2024. Deborah, if you’ve got anyone in mind we could do some of that work with, let me know.
Deborah Honig: For sure. Yes, absolutely. Okay. Moving on to Kinlytic. I have quite a few Kinlytic questions. I think about 14 of them. So bear with me. I’ll try and make them…
Cameron Groome: Okay.
Deborah Honig: Always as logically as possible. So the first question, does your hope for record full year revenue include the Kinlytic licensing revenue received in Q1? I think what they’re asking is, is it going to be a record year removing that Kinlytic revenue?
Cameron Groome: Unless we wildly miss our budget, it will be a record even without Kinlytic revenue.
Deborah Honig: Okay. Are there any Kinlytic related consulting revenues associated with helping Sequel get to commercialization?
Cameron Groome: Yes. Yes, there will be. Our agreement with Sequel includes to avoid what’s called a multi-deliverable liability, includes full recovery of our costs for any support that we provide. I don’t know at this point, I haven’t gone over it with Jim as to whether we’d book that as revenue or an offset to expenses. But effectively what support we provide will be fully reimbursed by Sequel.
Deborah Honig: And timing of the rest of the $30 million from Sequel.
Cameron Groome: We will see some milestone payment on sBLA reapproval by FDA, and then we will see sales miles – sales driven milestones of up to $30 million, and we will see ongoing royalty payments on top of those sales milestones once the product is back into the market. Our principal objective with the Kinlytic agreement was a partner that is capable of assisting us with the post-approval marketing and with the regulatory filings and ongoing monitoring and post-approval matters is capable of certainly helping us manage the different contractors and do that work in advance of it, and not to have it bleeding out capital from Microbix in the pre-commercial period. We’ve fulfilled all those objectives, and I think Ken, who is the lead on the day-to-day relationship with Sequel and its financial partners can comment on the nature of that relationship and how that’s proceeding. Ken, do you want to comment on that?
Ken Hughes: Yes, I mean, it’s an excellent relationship to address the issue of costs going out. We are covered on an hourly basis to support the growth, and we maintain the necessary timesheets and activities going forward. The Sequel group are extremely sophisticated in business and commercialization and in the technical aspects. And so we’ve formed a very strong team to drive this forward. And it’s moving forward at a pace. I mean, really, we’re executing as we said we would. The timeline that Cameron’s alluded to is in place and the technical and business acumen is there. So we expect to be extremely successful in this regard and execute for the next couple of years and then realize the revenue.
Deborah Honig: What is the status of Kinlytic primary CMO review?
Cameron Groome: Okay, sure. This refers to, just so we’re describing or explaining the acronyms. CMO, or CDMO refers to contract manufacturing organization, or contract development and manufacturing organization. With the Kinlytic project, there are different contract organizations we’ll work with. One of which, the first of which is for, which I believe this question refers to, is for the production of new drug substance or the active ingredient, the active Kinlytic urokinase, low molecular weight urokinase enzyme. That is a first critical milestone of the project, and it is advancing quite satisfactorily.
Ken Hughes: We have multiple well qualified CDMOs who have presented outstanding proposals to us. We’re very comfortable that they’ll be able to do everything, including site transfer implementation, updating of processes to contemporary standards, and then preparing GMP materials for clinical trials. That is the heaviest lift in the project, and we’ve had a number of, as I say, excellent proposals. We’re in the process of going through the contracting with one leader right now. It’s going very, very well, and we’re setting up the physical tech transfer materials as we hit the ground running. But there’s already a lot of technical discussions underway. We’re very well set up and very well supported by Sequel in this regard.
Deborah Honig: Can you comment on any efforts to either expand the approved indications for Kinlytic and any further geographic approvals? Will this effort happen concurrently with current buildout?
Cameron Groome: Great question. Kinlytic, of course, has current approvals in the United States for the Catheter Clearance indication, which is virtually an ex vivo use. The drug is instilled into the catheter at lumen to dissolve a blood clot that can then be sucked out of the catheter safely. The second indication for which it has approval is for the treatment, the systemic usage where the drug is infused into a patient’s circulatory system to – with the objective of dissolving the clots in pulmonary embolism indication. That is the second indication for which it is approved. It has approvals for those same two indications in Canada as well. Although we have not been engaged with Canadian regulators, this is much more U.S. centric, because of the larger market size. So the question relates to what about the other indication, pulmonary embolism? And what about other markets? So, we are certainly discussing both. With respect to other markets, we have been in touch with the European Medicines Agency due to issues with availability of the incumbent product and just the need for security and health of patients for there to be other options available. We are also looking at how manufacture of drug product can be optimized going forward to better support the more drug substance hungry or ATI [ph] hungry pulmonary embolism indication. And that would be using some of the very same expertise we use in our viral cell culture, viral antigen business for cell culturing, and employing that expertise to refine and further modernize and optimize Kinlytic production methods. Ken, I probably don’t want to go too far down a technical rabbit hole, but is there anything you want to add to that?
Ken Hughes: I mean, we’re staging this appropriately. We have an approved indication for Catheter Clearance, which we’re addressing right now in the U.S. It’s important to understand as well with the interactions with Europe, that they reached out to us to say, we hear you’re doing urokinase, don’t forget about us as you move forward. So it’s a regulatory pull, and there are shortages of this – products in this space that exist right now. And so people are motivated to accept the product that we’re making. In terms of the technical aspect, absolutely, we’ll deal with the North American market for catheters. We’ll deal with the world market for catheters, and in parallel look to increase scale to satisfy the systemic clots starting, which is exemplified by pulmonary embolism. But there’s also deep vein thrombosis, peripheral arterial occlusive disease, stroke, heart attack. There’s all manner of indications down the line that we can get into, and we have every intention to do that. And as we say in the world where cardiovascular issues are getting more profound post- COVID and with an aging, and how can I say this, less physically fit population, there’s a huge pull there, and we’re going to service all of those markets in due course.
Cameron Groome: Thank you, Ken.
Deborah Honig: Can you describe the likelihood of success versus failure regarding the Kinlytic relaunch?
Cameron Groome: Well, we don’t typically drive forward towards failure to us, and certainly to our partner, who will be investing on the order of $50 million before they – before revenues start to flow. We all believe that the risks associated with this project are quite small. It is already an approved drug. There are no visible technical or logistics hurdles that we can see, and the revalidations are all, to us, quite clear. So we believe the risk to be very manageable. It’s really a risk of execution that we watch carefully and manage carefully on the contractors doing the actual physical and intellectual work. Ken, is that a fair assessment in your view?
Ken Hughes: That’s a fair assessment from a technical perspective. We know how to make urokinase we’ve done it before. We know how to upgrade the system, and so does our CDMO counterparts, and so does Sequel. I guess the biggest way to illustrate the derisking or the lack of risk associated with what is effectively a biopharmaceutical program is that urokinase has been approved for decades. Clinical trial is straightforward. There is absolutely no chance of clinical failure in this project. And with a new chemical entity or a new biologic, the drugs, which enter Phase 1 clinical trials less than 10%, exit Phase 3 successfully. So you can see a risk there. We do not have that risk. There is no chance of clinical failure. And we have a deep understanding of how to manufacture this product. We’re simply installing a new site and bringing the systems up to contemporary standards and then doing, if we have to, a comparative clinical trial, which is very, very straightforward to do. And as I will say it again, there is no chance of clinical failure.
Cameron Groome: Yes. And that is, to be clear, the trial is looking, does the drug dissolve blood clots? So – and this is a trial versus placebo, whereby patients would see saline instilled in a catheter versus Kinlytic, and is Kinlytic dissolving blood clots the way it is expected to and should.
Ken Hughes: There’s a 90 minutes endpoint associated with that, you’d follow the patients for a month to make sure there are no adverse events. Again, decades of experience with no adverse events. But even if we have to do this study at all, and we’d move on forward from there, there are millions of catheters placed every year. We need 300 patients. The timelines associated with clinical trial, and the costs are very, very small. And again, not a chance it’s going to fail.
Cameron Groome: Yes. So bringing forward our product into a market that’s on the order of $500 million a year in sales is, and capturing a significant proportion of that unit volume is, what we’re looking to do, and we believe we’re on a very broad and firm track to doing so.
Deborah Honig: A couple more Kinlytic questions, if we can move on. When do you expect Kinlytic royalties to begin, and can you outline how you expect it to ramp up after it’s approved? Is the guidance still $15 million to $25 million eventually?
Cameron Groome: Sorry, could you repeat that?
Deborah Honig: Sure, sorry. When do you expect Kinlytic royalties to begin, and can you outline how you expect it to ramp up after it’s approved? And is the guided still $15 million to $25 million?
Cameron Groome: Sorry, just breaking it into three parts. So in terms of when, I believe, we would remain unchanged to look at around a three-year time frame for that. So we would be looking at calendar 2027 for the drug to reenter the market. I think that’s a reasonable timeline for the project, not a quarter away, but incredibly fast for real drug commercialization. In terms of the ramp, we believe that there will be a relatively rapid adoption of the product when it is launched, as we will be planning quite effective advantages versus the incumbent product. And in terms of guidance, I think we would remain unchanged in that $15 million to $25 million royalty range expectation. And that may not be achieved in year one of commercialization, but certainly should be in the ballpark for year two or three post-launch.
Deborah Honig: Thought I was done, but I’ve got some follow up questions for you, Cameron. Okay, so follow up on CMO question. Will CMO selection be accompanied by a press release?
Cameron Groome: Yes. Our disclosure policy on Kinlytic going forward, our partners are private company, funded by private equity. They’re consequently very private people. If they had their full druthers, nothing at all would be said further about Kinlytic until such time as the supplement to the biological licensing – biologic licensing application is reapproved or is approved by FDA. We as a public company don’t have that luxury. So, we will make disclosures on an ongoing basis as material project milestones are achieved, and those will be in addition to the continuous disclosure in our MD&A and regular filings. So expectation wise, we’ve mapped that out. We’ve discussed it with Sequel. We’re likely looking at two to three news releases a year on Kinlytic. We’re not going to disclose every time somebody goes to the washroom or, but in terms of major project milestones, we will disclose, and that will include the final signed, sealed, and delivered contracting of a drug substance CDMO.
Deborah Honig: Okay, and when do you expect regulatory clarity with respect to the need for clinical trials?
Cameron Groome: To answer that is, I think until and unless otherwise we determine otherwise, it should be assumed there will be some clinical work associated with the project, and if that changes, we’ll certainly advise.
Ken Hughes: Timeline includes that the clinical trial I talked about earlier. There is clarity in the regulatory process. The FDA guidance that we received last year was unambiguous. We will present the pre-clinical comparability analysis to FDA and then discuss whether or not we even need to bother doing a clinical trial, because the analytics will be so strong. If it is, it will be a very short process, as I said, with no chance of clinical failure, and will be basically a capping off of the comparability exercise with the previous Kinlytic product before we upgraded the systems. And the timeline we’re talking about now includes that clinical trial.
Deborah Honig: Got it. Okay, moving on, let’s go with VTM. We haven’t talked about VTM for a while. I’ve got two questions. So is full automation of flexible VTM SCD line complete? Can you provide any updates on SCD discussions with existing customers and VTM with Ontario or others?
Cameron Groome: Not sure what SCD is.
Deborah Honig: I was confused by that too. I was hoping that.
Cameron Groome: Let me just see if I can read the question directly here, just a second.
Jim Currie: Sample illusion [ph] buffer, which is a different use.
Deborah Honig: It’s fifth question, Cameron…
Cameron Groome: Thank you. I see it. No, the full automation of that is not complete. We have had just tortures with our – the manufacturer doing the engineering, design and construction of the filling line. We have now done off site testing of the filling line and we’re quite satisfied with the robustness of the instrument. Where we are still working through is to make sure that we have accurate CAD/CAM schematics for every single part within the machine so that as it goes into regular usage, we can have parts – replacement parts readily machined. We do see site delivery and site acceptance over the next weeks, not certainly over the next six weeks to eight weeks, I would say, in terms of actually having the equipment on delivered into our site, and that timing should be quite good for us. We have been enormously frustrated by the seeming capriciousness of some of the procurement processes in the government sense. We continue to work in establishing paths forward for government procurement, but frankly will deploy the instrument in use for private industry. And some of our private industry customers have expressed material and emerging interest in our doing reagent manufacture for them. So it will be very odd and unfortunate if the original objective of the instrument providing a secure supply of highest quality viral transport medium from a domestic source for Ontario and for Canada is not its ultimate destiny. But we will not have idle capacity standing by.
Ken Hughes: In the interim, it’s important to know that we still have the semi automated processes in place fully validated that we use to provide over 2 million units of viral transport begin to Ontario back in the day. It’s also perhaps [ph] interesting to know that we are receiving now orders from private companies for product, which is in the similar space to DxTM and using those capabilities to satisfy them while we get the fully automated system in place and we’ll be building that business line going forward.
Deborah Honig: Okay. And why are antigen sales typically slower in fiscal Q1 compared to the rest of the year? Are customers not spending remaining budgets end of year and getting ahead of any price increases?
Cameron Groome: Good question. It often just comes out to when customers want to receive product and we’re building towards those orders and delivery dates. Jim, are there any specific reasons that jump to your mind on that?
Jim Currie: Yes, I mean, we do have one of our larger customers that doesn’t tend to buy much in our first quarter, which by coincidence happens to be their fourth quarter. So, I think they’re probably concerned about build up of inventory. So that tends to be one reason why we might see it, doesn’t impact their annual spend, but it does tend to push more of it into Q2 through Q4. That’s just one example.
Cameron Groome: Could be somebody is, as the question poses, it could be somebody not wanting to carry too much inventory over a fiscal year end so, but it doesn’t affect things on an annual basis. But it does add to that quarterly shift.
Deborah Honig: And can you discuss the financial model going forward? I would like to get an appreciation for operating leverage as QAPs and antigen sales ramp up.
Cameron Groome: Should be very good operating leverage as we ramp up, our margin projections for products are depending on mix. We’re certainly looking to keep gross margins above the 50% mark and guide them towards 60% to the extent we can. There’s always quarter-to-quarter volatility and we have been slapped once or twice with some strings of batch failures in Antigens, such as we saw in 2023, that pulled down margins below target for some of the year. But if we look and add $2 million in revenues, for example, half that should immediately drop into, toward an EBITDA line. So, we won’t see a direct increase in G&A costs for example, or selling costs associated with revenue growth. So, we do see some good leverage coming forward on that. Jim, what would you want to comment on?
Jim Currie: Well, I think you’ve covered off most areas. Clearly we want to continue to focus on our core businesses as we have been doing historically, but certainly we’re starting to see the QAPs business continue to grow and it’s one of our key areas of growth. The antigen business, it’s not going to grow by 50% each year, but we should see some growth as the market expands. And we also hopefully add on some new clients in the antigen business. And the expansion in Asia/China is significant for us through our distributor in Asia.
Cameron Groome: No. Great points. Yes.
Ken Hughes: Based on the work we’re doing in the manufacturing development group as well, we expect the cost of an individual unit to go down as we continue with efficiencies. I would offer the transition of mycoplasma from standard culture to bioreactor as an exemplifier of that and we have a mandate to continue doing that. So in the antigen business we will see geographical and other growth, but we’ll also see bigger margins because of increasing inefficiencies.
Cameron Groome: Yes. Our breakeven certainly has increased and that’s by necessity and by design, not by accident. Our business is immeasurably stronger than it was a few years ago and continues to get stronger year-by-year to win business from major international customers who are looking at us as a critical sole source supplier. You do not win that business if you do not have state of the art systems, quality systems and control systems and processes, and invest in class pricing. So all of these are what we’re driving forward to successfully grow the bit, not just maintain the business, but grow the business and provide that operating leverage.
Deborah Honig: And what’s the outlook for cash taxes given we seem well on the way to consistent profitability.
Cameron Groome: Very good question, Jim, what would our remaining loss shields look like?
Jim Currie: They’re in the area of about $12 million. So, we’re a ways away from paying cash taxes. I’d love to work our way through them really quickly, but being reasonable, I think we’re a few years out.
Cameron Groome: Yes.
Deborah Honig: Sorry, go ahead.
Cameron Groome: I was going to say that’s a well – champagne kind of problem there.
Deborah Honig: Got to pay [indiscernible]. Four years ago Microbix was $0.40 and today it is again, how have the financials changed from then to now? i.e., where were annual sales four years ago versus today? Cameron, I’ll do you a favor and pull up that slide we put together yesterday while you answered.
Cameron Groome: Sure. Okay. Yes, thank you, Deb, that’s great.
Jim Currie: I just had a quick look up. Our revenues four years ago versus 2023 were about $13 million. So, we’re looking to hopefully be double that. And we continue to believe our stock is significantly underpriced.
Cameron Groome: Yes.
Jim Currie: And that’s why we’re buying back.
Cameron Groome: Yes, exactly. Thank you so much, Jim. Just on this, on revenues, you can see, well, if we look at the history of revenues, we’ve certainly been making efforts to grow our revenue substantially. We’ll be well through, well north of. We should, we might have to reset the Y-axis on the revenue graph for 2024 with any luck. So, we are continuing to grow sales substantially and overall revenues, our dollars of gross margin is increasing and we’re certainly making efforts to increase the percentage gross margins as well. You can see likewise, we’ve moved to consistently positive EBITDA for the business, and we have also greatly improved the liquidity and debt to equity ratios, the current ratio and debt to equity ratio over the period as well. So by all financial measures, I think we’re executing. We’re executing to the best of our ability and I think we’re executing well. Oh, Deborah, you’re on mute.
Deborah Honig: That’s what happens when I screen share. Can we expect updated analyst coverage reports in the near future?
Cameron Groome: I hope so. I have had some exchanges with David Martin, Bloom Burton’s very capable analyst, over the course this morning. So, I’m hopeful we’ll see some comments out of Bloom Burton about the quarter and about our outlook and the analyst whom we occasionally commission to independently comment. Bruce Krugel, KRC Insights, it’s intended that we’ll have some comment from him as well about Q1. So we should have at least two comments, one entirely independent, one independent of view, but commissioned by the company. And I believe there are some other analysts listening in on the call. And certainly to the extent that they see business reasons to initiate coverage on Microbix, we certainly welcome the additional attention.
Deborah Honig: Agreed. That’s it. We got through all the questions. Was there anything that we didn’t discuss today that you wanted to cover?
Cameron Groome: I think we’re very much in leading edge areas now, enabling use of better use and well controlled and well monitored use of exquisitely sensitive PCR tests in the clinical laboratory setting. We’re enabling the rollout of that same technology to point of care to be closer to the patient and be able to provide better health care to patient groups that are now underserved by centralized medicine. We’re also really on the cutting edge of multiplex testing, antimicrobial resistance work, all of these issues. What’s called syndromic testing is the other word for multiplex testing. So all of these are trends in medicine that are not going away, that we’re helping turn into a reality by really getting into the nuts and bolts of this stuff to make sure that it works properly. And that’s why we’re acquiring more and more customers and being called to develop a wider range of products and thereby build our sales. So certainly the outlook for Microbix is extremely positive in the diagnostic side of our business, and it is extremely positive in the therapeutics side of our business as well. And we remain committed to a profitable growth model.
Deborah Honig: Well, thank you all for your time today. Thanks to everyone who participated. If anyone would like a one-on-one call or have any additional questions, feel free to reach out. And I can get that either set up for you or answered for you. And yes, just appreciate everyone taking the time. Cameron, Jim, and Ken, congrats on a great quarter. It’s rare to see somebody put up 50% of the previous year’s revenue numbers in one quarter. So you’re well on your way to a good fiscal 2024, so congrats.
Jim Currie: Thank you very much, Deborah.
Cameron Groome: Thank you very much – and really appreciate your support. Jim, Ken and all you shareholders, thank you so much for your time and for entrusting us with a portion of your capital. We do take it seriously. Thank you all.
Deborah Honig: Happy Valentine’s Day.
Cameron Groome: And happy Valentine’s Day.
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