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Oxford Immunotec Global PLC (NASDAQ:OXFD)
Q2 2020 Earnings Call
Aug 4, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Oxford Immunotec Second Quarter 2020 Earnings Call. [Operator Instructions]

It is now my pleasure to turn the call over to Matt McLaughlin, Chief Financial Officer.

Matthew McLaughlin -- Chief Financial Officer

Good morning and thank you for joining us to review Oxford Immunotec's financial results for the second quarter of 2020.

Before we begin, I'd like to caution listeners that comments made and financial information provided during this conference call include certain statements that are estimates, beliefs, forward-looking and/or subject to various risks and uncertainties. Any statements made during this call that are not statements of historical or current facts are intended to be forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We want to emphasize that such forward-looking statements reflect our current expectations, assumptions and currently available data and are neither predictions nor guarantees of future events or performance. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those under the heading entitled Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 and in subsequent reports including our Quarterly Reports on Form 10-Q including the Form 10-Q being filed today, and our current reports on Form 8-K.

In addition, today we will make a number of comments about the impact of the COVID-19 pandemic on our business. We provide these comments to give investors insight into what we are observing. However, given the dynamic nature of the pandemic, there is a high degree of uncertainty around any forward-looking statements made. The company disclaims any obligation to update or revise any forward-looking statements except as required by applicable law.

During the call, we will also refer to certain financial information on a non-GAAP basis. We believe that non-GAAP financial measures taken in conjunction with GAAP financial measures provide useful information for both us and investors to evaluate the company's performance. These include constant currency comparisons EBITDA and adjusted EBITDA. Reconciliations between certain GAAP and non-GAAP results, such as EBITDA and adjusted EBITDA are presented in the tables accompanying our earnings release, which can be found in the Investor Relations section of our website.

Further, as a reminder in November 2018 we completed the sale of our US Laboratory Services business to Quest Diagnostics. As such the now divested US Laboratory Services business is shown as discontinued operations in our press release and forthcoming Form 10-Q.

With that, it's my pleasure to turn the call over to Oxford Immunotec's Chief Executive Officer, Peter Wrighton-Smith.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Good morning. On today's call, I'll provide a brief overview of our operating performance for the second quarter of 2020, before turning to an update on our business and our strategic priorities. Matt will then take over to discuss our financials before handing the call back to me to discuss the near term outlook for the business. We'll then open up the line to take your questions.

For the second quarter of 2020, we posted revenues of $5.8 million in line with the guidance we gave in May. US revenue was $1.2 million, reflecting both the weak testing demand due to the COVID-19 pandemic as well as reductions in stock levels by Quest. We believe we've now completed the plans destocking of Quest, meaning, this will no longer be a headwind to revenues and revenues for the back half of 2020, will now better reflect underlying consumption growth. Europe & Rest of World, revenue was $1 million reflecting the weak testing demand across the region as a result of the COVID-19 pandemic. Asia revenues were $3.6 million, again reflecting the weak testing demand across the region as a result of the COVID-19 pandemic and our desire to continue to normalize stock levels in Japan.

I'd like to take a few moments to talk about the impacts of the COVID-19 pandemic on the business and what we're seeing in various countries. Firstly, all our staff are safe and well. We've had limited cases of illness and absences from work. We have, in many cases put an additional protective measures over and above governor -- government advice and we've implemented social distancing measures for those employees who needs to work in our facilities. This allows natural firebreaks should we be unfortunate enough to have any cases. Staff morale is good. People are busy and productivity at the company is extremely high. We've had no supply interruptions. We are continuing to manufacture and ship kits and continuing to process samples in our UK ODL laboratory.

We have good levels of stock of raw materials and finished goods and consequently we feel we're well covered in the event of any future possible disruption to the supply chain. We sell to over 50 countries and as such, we're seeing the pandemic play out across the world in different ways. Starting first with China. We've continued to see volumes recover strongly since the low point in February. Consumption volumes are now running in line with our run rate of our business immediately post the transition to a more direct model and prior to corona virus. Travel within China and sales rep access is now returning largely to normal. We're starting to see the positive effects of our own sales and marketing teams in China. We have won a number of new accounts in the last few weeks and that bodes well for our ability to continue growing volumes for the remainder of the year.

Pricing is coming in line with our expectations and meaningfully higher than last year as a result of going direct. Given all those factors, we expect China to post strong positive year-over-year growth in the second half. In Japan, testing demand has been more robust than we initially expected despite the COVID-19 lockdown restrictions imposed there. Test consumption is now back to 2019 levels and we hope to show year-over-year growth for the second half of the year as we drive test growth through our sales and marketing activities as well as the potential for some testing volumes that were deferred during the first half to come back in the second half.

In the US, volumes are recovering from the nadir and are currently running at about two-thirds of 2019 levels. Whilst there is some uncertainty, given the rise in cases in some parts of the US, we currently expect demand to continue to recover from here. We do however expect the US recovery to proceed more slowly than other jurisdictions due to the severity of the pandemic in the US and the likely duration of continued lockdown restrictions. We are not currently envisioning US volumes to return to growth over 2019 levels for this year.

In Europe and Rest of World, there's clearly a lot of diversity based on each country's epidemiologic situation. Volumes for our European lab customers and now at about 80% of 2019 levels and are rising. Some countries such as the UK, are further behind on the curve, but in general, our core markets are seeing end user demand on an upward trajectory. We currently expect volumes to get back to or close to 2019 levels by the end of the year.

Overall, we're seeing demand for our test recovering across the board with Asia leading the way. Obviously, our current views on the business could change rapidly especially if we have a sizable second peaks of disease or we reenter significant lockdowns, in light of those in many other continuing uncertainties over the end demand outlook and uncertainties over the global impact of COVID-19 more generally, we're not in a position to give reliable revenue guidance for the full year. However, I will comment later on the nearer term expectations for Q3 revenues.

As you may recall, we recently launched a research use only test, I made that available to measure T cell responses against SARS-CoV-2 the virus that causes COVID-19 based on our T-SPOT technology. This test provides a measure of the strength of T cell response against a wide range of SARS-CoV-2 antigens. We produced this test because we feel that T cells have an important role to play in the immune response to SARS-CoV-2 and we want to be well positioned to move quickly if a clinical use case for measuring T cells emerges. We've been taking a sequential approach toward the end goal.

Our first objective after having designed and made the test has been to support the gathering and publication of evidence to demonstrate the T cell responses can be found in those exposed to SARS-CoV-2 and to show how T cell responses differ from what we can learn from the current pathogen detection, i.e., molecular or antigen detection and serology methods. We're starting to see the first results come in from a 2.500 patient UK government's trial or test as expected detected T cell responses in a large number of people exposed to SARS-CoV-2 also as expected T cells are detectable in patients who do not have a measurable antibody response. In some cases these responses were very robust supporting the notion that we're seeing from other evidence in B-cell depleted patients, that T cells may be able to control the virus even in the absence of antibodies. We would like to get this data on our test published as soon as practical.

The next step is to learn more about the differences between T cell responses and the pathogen detection and serolotgy methods we currently have available. And then to see whether the use case emergence the T-cells in routine clinical practice to complement those tools we ready have. Should that use case emerge, then we will pursue more targeted collaborations and clinical trials for that use case and submit that data in support of regulatory approvals. Notwithstanding the understandable focus on corona virus right now, we believe this pandemic will be temporary. And when it abates, we believe the outlook for TB testing will remain as strong if not stronger than it was before corona virus, and there are several reasons for that. We know from history that whenever TBS neglected is being right now, it unfortunately comes back with a vengeance. Cases get undiagnosed, transmission accelerates unchecked and one can expect there will be a price to pay in terms of new cases and contact tracing one's public health resources are again able to focus on things other than COVID-2019.

We are already seeing a pent-up demand for contact investigations for TB which are waiting on public health resources being available. The longer transmission for TB remains unchecked, the larger the eventual outbreaks will be. We believe it's likely that there will be an increase in public health funding in general as governments painfully relearn the importance of public health staffing, funding and infrastructure in protecting populations, as TB is a leading cause of death from infectious disease and the increased funding for public health will likely benefit TB and TB testing programs. On a more specific level there is early evidence of the presence of TB may increase susceptibility to COVID-19 morbidity, and if proven this could provide a rationale for stepping up TB testing of infected patients, and those are the possible exposure to COVID-19. And we started to see certain countries talk already about screening COVID-19 patients for TB, for example.

We're also starting to see some shifts in behavior within TB screening programs. The skin test requires two patient visits and in a world where we're trying to eliminate unnecessary interperson contact. We've now seen accounts for example in the US, switch from the skin test to benefit from the single visit with our tests. As a consequence of these factors, we're extremely confident in the long-term demand outlook for our tests and therefore, once we're being mindful of opex and we are conserving capital where appropriate, we are continuing to spend in areas that we believe will maximize our growth and success as we come out of this.

Firstly, we continue to work on delivering automation. Although sales processes have been interrupted by COVID-19, we have a growing pipeline of customers seeking to automate the T-SPOT TB workflow. We continue to make good progress on our US submission for FDA approval. We're in the process of data cleanup and analysis and we expect to submit to the agency in a couple of months time. We continue to make good progress on platform development and are working toward providing automation in other jurisdictions.

As we've previously communicated, a major focus has been sales and marketing expansion, especially in China, where we've been in transition to a new business model away from our prior exclusive distribution partner to a model whereby we take more direct control of the sales, promotional and market development activities. We continue to add resources there, given the magnitude of the untapped opportunity. And we've also been strengthening our resource in targeted Southeast Asian countries.

We continue to seek to grow our commercial partnerships starting with Quest, who's a key partner for the company in the US. As you know, a principal rationale for the transaction with Quest was to significantly increase the reach and competitiveness of T-SPOT TB in the US market. The COVID-19 pandemic has interrupted the integration plans and this will unfortunately delay the full benefits of the partnership being realized until that work can resume. Nonetheless, Quest continues to make some progress on the integration. For example, T-SPOT TB is now available in almost all of Quest patient service centers nationwide and a fully integrated T-SPOT TB is being launched in the first of Quest regions. So while the full benefits of this partnership will be delayed due to COVID-19, we are nonetheless encouraged by the continued progress that Quest is making.

We continue to invest in programs to reduce our cost of goods, both to continue our long-term trend of gross margin expansion as well as to provide us with more pricing flexibility as we seek to penetrate more of the global market. We also continue to build solid foundations to support the company's growth. The planned capacity expansions at our Oxford facilities as well as the relocation of our two Massachusetts sites into one smaller site continue to progress. We've also initiated the project to replace on antiquated operating and financial system with a new ERP system, which will once implemented, give us new analytics and bring multiple efficiencies to current processes. So despite the significant disruption from the COVID-19 pandemic, the company continues to execute on this long-term growth agenda and we remain optimistic about the future growth of the business.

I'll now hand it over to Matt who will give you some more detailed comments on our financials.

Matthew McLaughlin -- Chief Financial Officer

Thank you, Peter. Our full GAAP results as shown in our press release issued today show the comparison of our Q2 2020 with Q2 2019. Total revenues in the second quarter of $5.8 million were down 70% versus revenues in Q2 2019. Breaking down our reported revenues on a regional basis. US revenue was $1.2 million, representing 20% of our revenue. Asia, revenue was $3.6 million, representing 62% of our revenue and Europe and Rest of World revenue was $1 million, representing 18% of our revenue.

Turning to volumes. In the second quarter we sold over 60,000 TB tests in the US via kit sales and almost 250,000 tests in our OUS region, both via kit sales and test process in our UK ODL service business. Gross profit for the quarter of $3.7 million was down 74% from the gross profit in the prior year period. Overall gross margin for the quarter was 62.8%, a decrease of about 960 basis points from the prior year period, driven by the abnormally low volumes in the quarter and per precautionary reserves we've taken on inventory. As volumes recover, we expect to see strong gross margin performance driven by favorable ASP changes and manufacturing cost reduction efforts. We're also benefiting from the roll-off of royalties as we move to protecting our products through company generated IP. As a consequence, we continue to expect an expansion in gross margins for the total year versus 2019 total year. Turning to operating expenses. Operating expenses decreased 11% from the prior year period to $13.5 million. Sales and marketing expenses decreased to $5.5 million, primarily driven by cost control measures and the reduction in marketing and travel expense from the COVID-19 pandemic, which offset continued headcount additions, particularly in Asia. Research and development expenses increased to $2.5 million due to our continued investment in automation initiatives including clinical studies to support regulatory approvals. General and administrative expenses were slightly higher than last year at $5.6 million just due to natural variations in quarterly spend.

Operating expenses for the second quarter included approximately $610,000 of share-based compensation. Consistent with the low revenues in the quarter, net loss for the second quarter of 2020 was $9.7 million compared to net income of $590,000 in the second quarter of 2019. EBITDA for the second quarter of 2020 was a $9.5 million loss. Adjusted EBITDA which excludes share-based compensation, unrealized FX gains or losses and unusual items, if any, was an $8.9 million loss for the quarter. Both EBITDA and adjusted EBITDA are non-GAAP measures.

Turning to the balance sheet. We finished the second quarter with a very healthy cash position of $165 million, similar to the balance at the end of Q1. Despite losses in Q2, the relatively stable cash balance is a result of our receipt of the second escrow payment relating to the sale of our US Laboratory Services business to Quest, in addition to a reduction in our AR balance. We expect our AR balance to come back to more normal levels in Q3 given our current revenue forecast.

I'll now hand it back to Peter, who will discuss our business outlook.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Thank you, Matt. There's obviously considerable uncertainty for everybody over the business outlook and for that reason, we will not be giving full year revenue guidance. However, I would like to give some guidance for Q3 and make some directional comments on Q4. We are currently expecting Q3 revenues to fall between $18 million and $19 million. We are expecting sharp sequential increases in each of our three regions reflecting the recovery that we're seeing in test consumption globally. Barring a significant resurgence of COVID around the world and a substantial reemergence of lockdown protocols, we would expect Q4 revenues to be the same to slightly higher in Q3.

That concludes our formal prepared remarks. We'll now open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Tycho Peterson with JP Morgan.

Casey -- JP Morgan -- Analyst

Hi guys. This is Casey [Phonetic] on for Tycho. Is there an expected catch up in testing revenue in the back half of the year on tests that were deferred versus canceled? And can you give sort of some color around what you're seeing in terms of that dynamic?

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yes. Thanks, Casey. Thanks for the question. So, typically what we have seen in the past when we've had these kind of disruptions before is the test volumes don't really get a significant catch-up. In part that's because the healthcare systems in various countries are running pretty close to full capacity. Anyway, so even if there is pent-up demand it is not like the healthcare system can suddenly double the number of appointments. I did call out that I think in Japan, there is the potential for that. In Japan, specifically a part of our business there is annual health check kind of screening and some of that has just been deferred, and so we might expect some of that to come back in the second half. But other than that, as a general rule we don't generally see that kind of bounce back.

Casey -- JP Morgan -- Analyst

Okay. Has there been any sort of change to the T-Cell Select expected timeline for US approval given all the uncertainty around COVID?

Peter Wrighton-Smith -- Chief Executive Officer and Director

No. We're very much on track there. As I said, we've completed the -- we've got all the data in hand. We've locked the data down, analyzing it, when we'd expect to submit to the agency in a couple of months. We will obviously give more detailed timelines of launch dates when we have some feedback for the agency. Certainly in our more routine interactions with the agency, we are seeing it is business as usual. But clearly, COVID is up -- is making a disruption to everybody. So we'll have to see whether that persists and as I said, I'll give you more guidance when we actually have some interaction from the agency once we've submitted.

Casey -- JP Morgan -- Analyst

Okay. And maybe just one last one from me. You mentioned earlier that the switch from skin testing to using T-SPOT from the impacts of COVID. Do you think that could be a net tailwind once regular volumes recover?

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yes. I mean, it's a small a number of cases right now, but certainly we think that is a message that we can go wider on. The fact is that our testing requires one patient visit, whereas the skin test requires two, and in a world where we're trying to maximize social distancing and where obviously we're trying to maximize the number of physician visits for really productive work, it doesn't make sense for that to be another reason why people switch from the skin test to an IGRA and that's certainly something we're communicating in the market.

Casey -- JP Morgan -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Sung Ji Nam with BTIG.

Sung Ji Nam -- BTIG -- Analyst

Hi. Thanks for taking the questions. Just a couple of quick ones. Peter, could you talk about the STOP TB partnership with global drug facility? What the addressable market opportunity is and when do you see that potentially ramping up?

Peter Wrighton-Smith -- Chief Executive Officer and Director

Thank you, Sung Ji for the question. Yes. So the backdrop here is that the World Health Organization and kind of the broader global public health machinery is really getting behind establishing latent TB screening programs in a whole host of higher burden lower income countries around the world. And one of the ways they seek to do that is to leverage the global drug facility, which is the largest provider of TB medicines and diagnostics to public health departments in those countries. And from our perspective, we're really excited to partner with the GDF because it gives us a very efficient channel to reach those countries and these are countries where we would ordinarily not really be expecting to put our own infrastructure, so it gives us an extremely efficient way to partner with the GDF to make sure test can be deployed there as those countries start to implement screening programs.

I think in terms of our expectations are that there is not a material, very near term impact. It would take time for those countries to get that programs off the ground, but this is certainly something that we view will be a tailwind to the company's revenues in the years ahead as those programs gear up.

Sung Ji Nam -- BTIG -- Analyst

Okay, great. And then for the Discovery TM Test kits for T-cell immune response measurement, could you talk about some of the vaccine developers already looking at T-cell response as part of measuring the effectiveness of their vaccines. I think Pfizer might be one of them. So I was curious if -- for those factors if there might be immediate utility for your -- for Discovery GM in return?

Peter Wrighton-Smith -- Chief Executive Officer and Director

So, yes, there is, it's an excellent question. So there has been, I think by rapidly growing appreciation of the importance now of measuring T cells in this disease and as it relates specifically to vaccine approaches there are really two indications here. The first is that we need to understand the participants in the study, whether they are genuinely -- have been generally exposed to COVID before, or whether they are COVID naive. And if we just use we already have evidence to show that if you just use serology you will miss people who actually have been exposed. They just haven't produced an antibody response, and that will confound the results of your studies, if you're not careful. So the first indication is to make sure that we are appropriately categorizing the cohorts that we're testing.

The second is to directly measure of course, whether the vaccine is promoting both an antibody and a T-cell response, because either one and/or both could be protective, we don't know what drives immunity at this point, but there is clearly some strong circumstantial evidence that the T-cells can provide a protective effect even in the absence of antibodies. And so I think what we'll see is more and more vaccine companies realize that measuring T cells makes a lot of sense. And certainly, we're starting to see some increased interest in our tests along those lines.

Sung Ji Nam -- BTIG -- Analyst

Great. Thank you so much.

Operator

Your next question comes from the line of Chris Lin with Cowen.

Chris Lin -- Cowen & Company -- Analyst

Hi. Thanks for taking my questions. Peter just starting with your Q4 revenue outlook commentary. Could you talk about what that assumes in terms of recovery rates. Does that outlook assume largely a continuation of recent trends or does that require some incremental improvement?

Peter Wrighton-Smith -- Chief Executive Officer and Director

No. It's really a continuation of current trends. And just the key thing for us is that we don't -- the trends don't deteriorate, COVID doesn't come back very strongly. We don't have a reimposition of substantial locked downs and given our recovery is coming -- and all of our revenues come from Asia. Obviously Asia effects would disproportionately affect us. So it's really more continuation of current trends.

Chris Lin -- Cowen & Company -- Analyst

Okay. And, that's a good segue to my next question. What are the geographic assumptions behind your Q3 revenue outlook on a year-over-year basis. I mean it seems like you're assuming that US revenue is down somewhere around 30%, Asia is relatively flat and Europe is down around 20%. Is that fair? And could you also just talk about how much of your Q3 outlook is based on customer ordering patterns from Quest and Shanghai Pharmaceuticals?

Peter Wrighton-Smith -- Chief Executive Officer and Director

So as it relates to the second half of the year, yes, if I can just summarize what I -- in my prepared remarks in Asia. We're expecting to start to see year-over-year growth in Asia. And I expect that will strengthen as we go through the second half. In Europe, I think we expect we might get back to 2019 levels by the end of the year. I think in the US, because of the severity of the pandemic, there we're not expecting to get back to 2019 levels by the end of the year. So that should I think give you some views on how the revenues will shake out in Q3 and Q4. In terms of Q3 in particular, we have a strong confidence in the number we've given for Q3, not only to be as you know, get a very good window into underlying test consumption, but obviously given, we are part way through the quarter, we already have a number of the purchase orders in hand for the Q3 revenue guidance that we've given. And in fact a number of large orders already shipped in July.

Chris Lin -- Cowen & Company -- Analyst

Okay. And then could you also provide us an update on the Quest sales priorities. Their lives are clearly busy with running COVID-19 testing, but I'm curious if their sales and marketing efforts on T-SPOT is normalizing. Are there any metrics such as new prescriber additions that you could share?

Peter Wrighton-Smith -- Chief Executive Officer and Director

I don't have the latest data on that. I think it's clear that COVID-19 has been a very substantial disruption in many ways. And I am full of -- Kudos to Quest for what they've been doing in terms of standing on the high volume COVID testing, which has been a very significant effort on their behalf, clearly obviously that has distracted their organization from other matters such as all tests, but underlying that they are still making some good progress on the integration and they are still engaged on T-SPOT and from our perspective, we are still very positive on the relationship and the benefits that will accrue to both parties as we complete that integration.

Chris Lin -- Cowen & Company -- Analyst

Okay. And for my last question. Can you just talk about whether the results from a 2.5k patient trial on T-Spot discovery is driving incremental interest or demand for that products? And I'm curious is this an era in which you need to invest incrementally given that the research community has not historically been a key customer segment? Thank you.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yes. So at the moment that -- those specific results on driving demand, because they're not yet public domain, as in they are not published right in the peer review journal, we obviously hope to get them published as quickly as possible, although we're not obviously the sponsor that study and so it's not the timelines are not something that we can control there. I think what's driving the greater interest is the increasing research coming out of the academic community, showing the importance of T cells in the disease. And in terms of incremental expense, I think for us, what we are wanting to do here is to position the company strongly if a routine clinical use case emerges. And that hasn't happened yet. We're obviously wanting to make sure that we do everything we can at reasonable costs to bring that forward, but that's what we are waiting for and what will drive a significant further increase in spending commitment by us to go through the process of regulatory approvals globally.

Chris Lin -- Cowen & Company -- Analyst

Okay, great. Thanks for taking my questions.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Thank you, Chris.

Operator

And at this time there are no further questions.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Great, well thank you all for joining us to discuss our second quarter 2020 results. We look forward to updating you on next quarterly call.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Matthew McLaughlin -- Chief Financial Officer

Peter Wrighton-Smith -- Chief Executive Officer and Director

Casey -- JP Morgan -- Analyst

Sung Ji Nam -- BTIG -- Analyst

Chris Lin -- Cowen & Company -- Analyst

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