Microbix Biosystems Inc. (OTCQX:MBXBF) Q1 2023 Earnings Conference Call February 14, 2023 11:00 AM ET
Company Participants
Deborah Honig – Investor Relations, Adelaide Capital
Cameron Groome – Chief Executive Officer
Jim Currie – Chief Financial Officer
Ken Hughes – Chief Operating Officer
Conference Call Participants
Deborah Honig
Good morning. Thanks for joining us today. We have an update with Microbix Biosystems to discuss their Q1 2023 results.
With me, I have Ken Hughes, COO; Jim Currie, CFO; and of course, Cameron Groome, CEO.
As always, this presentation will contain forward-looking statements. If you’d like to know more about those, you can find them on the presentation on the website. And as Cameron just reminded me, we will have an updated presentation later on today. So, feel free to check that out probably this afternoon.
And as always, the session will start with an overview of the quarter by management, and then we’ll get into Q&A. So, if you have any questions, feel free to input them in the box at the bottom of the screen, and I have received some in advance that we will address as well.
With that out of the way, I’d like to introduce Cameron. Hi, Cameron.
Cameron Groome
Hello. Good morning, Deborah. Thank you for teeing this up. And thank you for joining us, as well as Jim and Ken appreciate your support, as always.
I’ll just launch into it a little bit and make some point. I know we’ve got a goodly number of folks on the call. So, thank you very much, and we want to allot as much time as possible for questions.
Q1 is simply a weak quarter. It is the weakest revenue quarter we’ve seen in about three years, and that was impacting each of the revenue streams associated with the business in different ways.
Our QAPs business performed relatively well year-over-year, but not what we were looking for due to some delays on the part of the major customer that we signed and announced an agreement with in August. They have continued optimizing. They’re certain of their tests far longer than we’d anticipated. So, we did not have some validation orders that we were looking for in the first quarter that would have given us somewhat better QAPs revenue numbers.
In antigens, we had two things. One was merely scheduling of deliveries. We did not have certain deliveries that enabled us to recognize sales occurring during the quarter, and we had a margin — negative margin impact due to a supplier quality failure that caused a series of batch losses that, although we would not likely recognize revenues from those batches in Q1, we certainly had to expense the failed batches in the quarter where we realized those issues have had occurred, and we have terminated use of the — of that problematic product and resumed past practice, so that will not recur.
And finally, Ontario has been rejigging its entire procurement system with the announcement of new agency named Supply Ontario, created at the end of December. So that has led to a pause in ordering of the DxTM product.
So, really those three things led to right — light revenue number of $2.5 million for Q1 and frankly, just not enough margin — gross margin dollars to cover expenses and resulted in our incurring the first material net loss we’ve seen in some time.
Perhaps I’ll ask — I’ll roll through and then we can get into more specifics around the quarter, Jim, then you may choose to supplement to respond to any questions.
So, I’d say that quarter is a poor one. And sometimes this happens in a business, we don’t have a perfect upward straight line in terms of our growth and revenue generation for the company, and this is just that occasional bad quarter that happens. It is not, in our view, indicative of any sustained negativity associated with the business.
Quite contrary, we believe Microbix is still benefiting and continue to benefit from very positive trends in the global diagnostics industry and those being specifically renewal of broader testing activity as COVID goes from pandemic to endemic, we are seeing the return of a broader spectrum of testing, doctors seeing patients, patients seeing doctors, and this is leading to a resumption of demand for our antigens or immunoassay ingredients business that we see now returning to closer to [$1 million] (ph) a month run rate that we’ve had prior to the pandemic. And, in fact, for our major products, we see ourselves going flat out in that business now for the foreseeable future, and we’ll start to see that impact in Q2 and forward.
We’re also seeing a broadening of usage of molecular diagnostics, just the same way many people did not know what an antigen was pre-pandemic or what PCR was pre-pandemic, everybody certainly does know those terms now. And we’re seeing a broader application of PCR-based molecular diagnostic test that includes for rapid testing and screening for infectious diseases and also for such matters as cervical answer screening, upgrading the means of detecting those by looking for the virus — signatures of virus causes the cancer rather than waiting cancer to occur.
And we’re also seeing accelerating uptake, I believe, for the point-of-care test. These can be instruments that are tabletop instruments anywhere from the size of a conventional tower computer through to — down to the size of a toaster and even down to the size of the brick that being a conventional missionary brick that can conduct sophisticated antigen-based or PCR testing on a tabletop. So, you can literally walk into a clinic, get a diagnosis definitively of what an organism is that is — cause of infection and direct therapy much more readily, sometimes referred to test, treat and go philosophy point-of-care testing. We see ourselves benefiting from all of those as Microbix is really supporting many of the goliaths of the industry. We’re not looking to be the David slaying the, rather we’re looking to be a company that supports them with best-in-class services for the specific areas where we have expertise.
So, I would represent that it should be expected for Microbix to continue securing new business with large established companies and new and emerging companies across the spaces. We’re continuing to target record sales and earnings for — including for fiscal 2023, although with this weak Q1, that will certainly be more back-ended in the current year.
And a few things I’ll mention that have been commented to me specifically. One is just the level of commitment of management directors. It’s noteworthy that the SEDI system, the system for electronic disclosure trading by insiders, doesn’t pick up all trades. So, if management is exercising options and committing new capital to the business, that doesn’t show up on SEDI. If we’re having to sell a very few shares to pay cash taxes, that does show up on SEDI, and balances — not on SEDI, but on some of the insider — the online insider reporting systems. So, one has to go deeper in and access the SEDI systems to see that.
Looking at our annual information forms for the past three years, 2022, which was filed in late December, 2021, 2020, I would like to call out that our six independent directors and three C-level managers that you see here have collectively increased our ownership in Microbix shares by about 6 million shares over the past two years. So, we are very committed with our capital and with our skill and our efforts to continue building this business. I think you’ll see that commitment continuing to increase as we move forward. And if anybody has any questions, on specifics, please do address to Deborah or [ourselves] (ph).
Another thing I’ll mention is just straight line tracking our EBITDA, some people look at that non-GAAP or non-IFRS measure, that’s great and EBITDA is important, but it’s not the end all be all, because we are consciously increasing our investment in infrastructure. Some of that flows through the P&L. It’s expensed. And this is specifically, I’ll call out not just investments in equipment, but also investment in systems such as our enterprise resource planning software that tracks the full acquisition of raw materials through the caustic labor through to inventorying and releases of finished product.
We are upgrading those systems along with digitizing our quality management system tracking so-called eQMS in order that we can successfully scale the business and we do not have logistical fracs hearing in our systems as we’re [moving] (ph) to make more of a wider range of products. These are not optional investments. These are essential investments. And they are absorbed and they do, in the shorter term, have an effect of depressing our EBITDA margins, but they are essential for enabling the kind of growth that we’re targeting moving from around the $20 million range to be able to support revenues of $100 million. Those cannot be done with paper-based systems and investments we are making are not only prudent, but they’re also necessary. And those benefits will accrue in future quarters and future years. But in medium term, it obfuscates the real strength that we’re showing.
Last point I’ll make before we — I’ll ask Jim and Ken to make a few comments, and then we’ll move to questions is just to note, we’ve effectively built two successful new business lines amid a global pandemic over the past two years, those being QAPs, much broader than the prior narrow segments to the proficiency testing and accreditation agencies [indiscernible] but broadening that out to include clinical laboratories in Canada and internationally and to support directly major global diagnostics companies through in-kit inclusion and to start-up [onboarding] (ph) kits, as well as the very successful creation of our DxTM viral transport medium.
These are not trivial tasks to create new $5 million a year business lines where they’ve ended in 2022. And I’d just like to put it in context, as we look at weak Q1, those are not trivial accomplishments that we’ve done. Now imagine, as we’re now able to travel physically, resume business development that people are looking at resumption or normal testing and patterns, just what growth our company will be able to realize on a go-forward basis and to take a bad quarter into context.
So, with that, Jim, is there anything you want to supplement about Q1 or our outlook for — into 2023?
Jim Currie
Sure, Cameron. Yes, Q1 was disappointing for us as well. And it has historically been our weakest quarter. So, it’s not unusual for Q1 to be a weaker quarter. I think with our core antigen business, I think that was the biggest impact in the quarter. And a lot of our orders are fairly large orders, and we don’t control the timing of when our customers want these orders. And so, we had a fairly low level of antigen sales just over $1 million. That is not representative of historical or where we are going forward. And I would expect to see that more than double or triple in the coming quarters for the antigen business.
And again, historically, it’s been our QAPs/PT business that in Q1 has been the weaker part of our business. But in fact, it wasn’t this time around. Our QAPs business continues to grow, and we expect to see it continue with that growth trajectory. So, I think the outlook going forward is strong. We’ve just got to get through this weaker quarter and start growing all aspects of our business.
We’re in a good position from a cash standpoint, so we can fund the growth. Cameron’s talked about some of the areas where we’re investing. So, it has not stopped us from continuing to invest in the business from a capital as well as from some of these key operating systems that we’ve got, the implementation going on in fiscal 2023.
So, I’m looking forward to the coming quarters and to showing much better results towards the year-end as opposed to what we have seen in Q1.
Cameron Groome
Thank you, Jim. That’s a great summary. I think it’s good that you call out that Q1 previously, looking back a couple of years had been a softer quarter due to the proficiency testing and lab accreditation companies, they typically run programs that test the labs three times a year. So, our deliveries could be somewhat lighter in Q1 than the rest of the year, but we’re seeing very material revenues across our more fulsome spectrum of QAPs customers now. And more of a one-off for the — just the scheduling of antigen deliveries in this Q1.
Ken, what would you want to say?
Ken Hughes
Yes. From an operational perspective, I just wanted to extend what you were saying with regards to the investments we’ve made on a go-forward basis. I’ve used the term — we’ve all used the term capacity building a lot in various presentations we’ve made as we build out infrastructure to allow the growth trajectory that we’re on, be that antigens. We’ve seen that’s expecting to grow on QAPs and VTM and related products going forward to not only reinvest in capacity, we’ve invested in broadening capability to diversify our product offerings.
When we look at things like the ELP and the eQMS and all the automation and scale up we put in place, including the facilities and trained individuals, we have the opportunity to build on from there, and we intend to do that. So not only will we build capacity, we will improve capabilities. And when all of those investments come to fruition as we build, margins will go — and efficiencies will get better, so margins will go up as a result.
We’ve got the critical mass around $20 million with the systems we had can support it, but as we want to move on and we want to move on much higher than that, we need those additional capabilities. And that’s where the investment is going, and we’ll continue in that regard and there are multiple opportunities for us to pursue going forward. And I’m really looking forward to reaping the benefit of those. We’ve diversified our technical and manufacturing capabilities and testing capabilities, and we’re going to reap the benefits of that going forward in multiple product areas related to human infectious disease diagnostics.
Cameron Groome
Great. Thank you very much. Deborah, were there any callouts you’d like to make specifically? Or should we move to the Q&A?
Deborah Honig
I think moving into the Q&A makes sense, because I already see quite a few questions coming in.
Question-and-Answer Session
A – Deborah Honig
So, let’s start. Actually, this question came in and you somewhat dealt with it with point of care, but I think it’s worth touching on a little bit more. So, the question is big picture, has the shift away from PCR testing and towards at-home testing created a bigger structural headwind than you previously thought, and thus, go-forward revenue potential is much lower? I know you talked about point of care, but maybe you can elaborate on at-home?
Cameron Groome
At-home test — a lot of the at-home testing are different variants on the immunochromatography strip tests like this. They are not considered diagnostic. They are — they can screen a population if you want to look and say, “Do I have flu circulating in my nursing home?” When you test 50 patients, you will find out if there is flu within the nursing home, but they are not considered diagnostic for an individual patient. And because the accuracy through the piece, through from the early stages of infection through the full symptomology is typically only on the order of 80% or four out of five cases. So, we don’t see a shift away from PCR testing for diagnosis. We see, in fact, increased volume of PCR testing.
And for respiratory, for example, the migration we’re seeing is to the availability 4-Plex PCR-based testing in clinics, schools, nursing homes, cruise ships, prisons, where a portable PCR instrument can give a definitive diagnosis between influenza type A, influenza type B, COVID and Respiratory Syncytial Virus, RSV.
So, if folks go back through our records, you’ll see that in our news release disclosures, you’ll see the Microbix fully registered a 4-Plex QAPs PCR test controlling in December of 2021 in preparation for that migration that we are now seeing. So, having a product as a broad category, a full year ahead of the need and then defining specific needs for individual customers with more tuned tests that are close to the sensitivity level of the test customized products [indiscernible].
So, in fact, we’re — it’s great to have at-home tests and you say, gosh, but any number of times, I’ve heard people say, I’ve used — boy, I tested myself four times before I tested positive on that antigen strip test. Well, there’s a reason for that. And for health care, which is the professional levels that we’re supporting, we see it very much remaining PCR-based.
Ken, is that an accurate summation?
Ken Hughes
I would say that’s spot on there. There are multiple opportunities and the opportunities we’re never involved in. But I think the business area that we’re involved is going to continue to grow rapidly.
Deborah Honig
Makes sense. I’ve also heard that you can pour diet coke on those test strips and test positive for COVID.
Cameron Groome
I don’t know. I never spilled a diet coke on a test trip.
Deborah Honig
I might try it out later today. [Multiple Speakers]
Cameron Groome
Deborah, did you want to curate questions or should we just take them as they come?
Deborah Honig
I can keep asking them. I’ll keep them thematic, I think because there’s a lot of VTM, we’ll just stay on the VTM theme. So, we were told that Canada still imported $50 million worth of VTM and related supplies before COVID. But that figure doesn’t make any sense that they’re doing zero. So how do we make sense of that figure?
Cameron Groome
I’m kind of reminded of Mark Twain’s comment, he said truth is always stranger than fiction because fiction has to make sense. The — some of the practices within government [indiscernible]. The figures of, I believe, was $55 million, were rounded down to $50 million of imported VTM pre-COVID for Canada. I believe that to be accurate. Ontario is about 35%, 36% of the population. So, it should be approximately a third of that number, that squares with what intelligence we’ve had. We are aware that Ontario has qualified three suppliers of VTM. One is European, one is Asian and one is Ontarian. And we are the Ontarian.
So, we’d certainly like to see given all the discussion that’s been had about the importance of supply chain security and the importance of the economic impacts of the jobs and the taxation that results from domestic production, we would certainly like to have the lion’s share of production for Ontario. We believe that inventories are being consumed, but there are inventories to consume. Testing is still running. I think, 7,000 to 10,000 tests a day in the hospital and congregate living settings. So, even a third of that demand would be approximately what we sold in 2021 and 2022 in dollars and units.
So, we would like to see that resume and we’re committed to continue engaging at the highest levels to make that happen. But as self-important as we might be, we’re probably not the very first consideration of an entire retaking of health care supply chains [indiscernible] and so we can only push as quickly as much as we can for this specific product.
Deborah Honig
And since Ontario has run out of product by now considering that you expected a new order from them already a couple of quarters ago, when would you expect the — expect them to reorder simply taking into account the passage of time?
Cameron Groome
What — I can’t speak to what is presumed to have been expected. And we have not been given insight into the inventories within the different warehouses within Ontario. There has been an immense amount of turnover within all of these agencies and sub-agencies between the summertime and today. And we know who the responsible leadership folks are, and we’re committed to engaging with them to get clarity into all these matters.
Deborah Honig
And are you still in discussions with other provinces and other groups?
Cameron Groome
Yes, on different levels. It has not been, frankly, our biggest management priority. There have been other more urgent and higher potential opportunities that we’ve been engaged in negotiations.
Deborah Honig
Okay. And then, just looking for VTM questions, so we can stay thematically. Given the falloff in revenue, especially in VTM, will you have to write off a lot of inventory?
Cameron Groome
I don’t think so. It’s a possibility. We do have a significant amount of inventory, some of which was built up strategically and some of which was to qualify our third site under our ISO 1345 certifications. The product that we have now has dating extended out as far as 18 months. And as that starts to get short dated, we’ll look at what and where it will be sold and look to avoid any write-downs if it all possible.
Deborah Honig
Okay. And then, in hindsight, was investing so much of the company’s time and money in the VTM build-out and automation prudent, especially considering such a heavy reliance on a single unreliable customer? Can or should these resources be easily redirected into QAPs?
Cameron Groome
I would say with the benefit of hindsight, we would do the exact same thing. We identified a need, an urgent need for the province. We came up with very creative ways of doing semi-automated manufacturing to satisfy those needs. We were provided very significant support from the Ontario Together Fund as a grant $1.45 million to do that, which was intended to cover 50% of the cost of putting a full program, including automation in place. And we have received, we recall, just under $9 million of orders from the province thus far with reasonable margins associated with those.
So, we’ve ended up accruing net earnings associated with this program, and we’ll have a first-class automated filling line that can work on a number of different products, including with some working of mechanical jigs, filling different vial sizes, and that could do VTM, that could do a bunch of different things.
Ken Hughes
Yes. Just to supplement that, again, we’ve talked about capacity building and capability building. We have a whole new portfolio expertise in filling and manufacturing. We have a suite to do that, which is adaptable to multiple product lines. And to get to that point, we made a profit doing it. So, we’re well ahead on the investment we made anyway. So, even if we were never going to get another penny, we’re already way ahead, but we’re going to get more pennies. But the point is the capabilities now in the company have broadened to a point where new opportunities are going to come down the line. So absolutely, it was the right thing to do.
Deborah Honig
Okay. And then, shifting gears into QAPs. So, did any new — sorry, did any potential new QAPs customers walk away without signing a contract with you after you have been engaged in development work with them? If so, why?
Cameron Groome
I’d frame that slightly differently. We walked away from one potential QAPs customer that wanted us to do a lot of work for no money and no certainty. And we said, thank you, we have better places to use our time and our capabilities.
One of the things in the QAPs side point-of-care PCR, the regulators are really looking at test controls, determining not only outright failures of the instruments, but also degradation in the performance of the instruments. So if you recall the math of PCR testing, you’re going through different cycles, and each cycle doubles the detectable signal associated with PCR test.
Regulators are really looking for the controls to be within 5 times the limited detection of the test. So, roughly two PCR cycles. So, relatively tight banding to show that the instrument is really performing to spec. And it’s very challenging for companies to do that to generate particularly swap-based controls that are that tightly specked into the instrument. And it becomes that much more challenging when you’re balancing to meet multiple analytes like the 4-Plex respiratory control that I’ve indicated.
So, when we’re doing that high — that kind of high-end work and creating these customer products, we don’t plan on doing that for nothing in terms of development, we don’t plan on doing for nothing in terms of margin. And if we can’t come to an agreement with a customer on those terms, which we consider very reasonable for what we’re doing, then sometimes people may choose to try something different. And so, we won’t be 100%, but I think we’ll be winning a lot more than not. So, it’s a two-way street, and sometimes you have to teach people how to treat them as well.
Deborah Honig
And can you please give us some numbers around the opportunities in cervical cancer screening and HPV testing?
Cameron Groome
Yes, absolutely. Cervical cancer is directly caused by certain subtypes of human papillomavirus. A human papillomavirus is a DNA virus. It’s very persistent and it’s been in human populations for probably damn near as long as there have been humans. And of the 100-odd types of the virus, 14 are known to be definitively cancer causing. And cervical cancer was very, very common prior to screening for cervical tumors and precancer lesions using the Pap tests developed in the 1950s. But of course, the Pap test is looking for cells that are already transforming in cancer or have been transformed into cancer. The molecular testing for HPV moves that at least five years early. So that rather than a tumor having developed, you’re looking at people at risk of developing a tumor some years in the future.
So, it’s a much better and more sensitive and less subjective way of screening for cervical — screening for those at risk for cervical cancer. And that’s rapidly tracking upwards towards $1 billion market. It’s about — estimated at about $800 million, I think, in 2022, and that’s tracking up quite considerably now to control those — support quality control of those testing systems, you really need to have all or most of those — controls for all or most of those 14 high-risk types of HPV.
And that’s a portfolio that Microbix is uniquely developed using, in fact, our own intellectual property and can readily create those controls and are offering those broadly. That’s really why you see some of the support we’ve done, such as the announced support for Prince Edward Island, which is the first Canadian province to roll out [indiscernible] virus testing now with a small population of Prince Edward Island in and itself is not that significant a customer, be a few thousand dollars a year, but it builds bridges to the major global diagnostics companies and demonstrates to other provinces as well as other countries the support that Microbix products and services provide at holding out their own HPV and cervical cancer screening programs.
So, $1 billion market for HPV today may mean a $50 million market for Microbix, but we’ll continue to grow with that. And we see ourselves chopping up jurisdiction after jurisdiction supporting different testing areas. And each one of those may individually be six-figure accounts, but you start to aggregate those quite quickly, it becomes a multimillion dollar HPV franchise for us relatively quickly, and we’re committed to pursuing.
Deborah Honig
Okay. I have a few more QAPs questions. So, listening to what you said in the past, there seems to be a land grab going on for QAPs contracts. While you were able to secure contracts, are you aware of who your competitors? And were they also able to secure QAPs supplier contracts?
Cameron Groome
Well, it’s interesting to contemplate that. It depends on exactly what we’re looking at. If we’re looking at a liquid form controlled, it’s — for an antigen test [indiscernible] positive in terms of the signal level, somebody can bang that out relatively straightforward. And that I would expect to be more price based.
When we’re looking at sophisticated multiplex controls on block swabs that are temperature stable for multiple years and very tightly controlled close to the level of detection of the tests, you run into problems with can you do it, first of all? And then can you do it without violating Microbix’s intellectual property rights or violating Copan intellectual property rights?
So, we may see some people trespassing on our territory. And if we do, we’ll decide what to do about it. Thus far, we’re not headbutting with anybody on the high-end work.
Deborah Honig
And any further clarity on when the single large QAP order will begin?
Cameron Groome
Yes, I can start to provide that. We believe now that specs have been locked in for some of the initial tests in that portfolio, and we’re working with multiple projects. This is — Ken and I use the analogy of — I’m not a gamer, but of video games. You don’t launch a video game console and then just have [Pong] (ph) supporting it. Sorry, I’m dating myself. Maybe we’ll move up 20 years and say, Tetris, still dating myself. But you don’t launch that console with just one application. You wouldn’t launch a computer nowadays with just one piece of software associated.
So, using those analogies, we’re supporting multiple assays for a particular platform. And they are locking in the specs now. Those then start when specs are locked in with qualification batches where usually three smaller manufacturing batches will be made to demonstrate lot-to-lot consistency and then it moves into stocking orders for launch and restocking and replenishment orders there.
So, I expect we’ll deliver some validation batches in the current quarter ending March 31, the last time informed otherwise, but that’s my current knowledge, and then we will see further qualification batches for new assays in Q3 and Q4 and stocking orders for assays in Q3 as well.
Jim or Ken, anything I’m missing that you’d want to supplement or correct there?
Ken Hughes
No. I mean we’re working closely with the major…
Cameron Groome
Don’t name any names.
Ken Hughes
No, no, I know. And everybody outside was asked to deal with regulatory agencies and their own quality systems and things of that regard. But in terms of our contribution and speaking to the competition area as well, we have a lot of proprietary expertise in this particular space, and our client base is well aware of this. So, we’re working closely with them, so we’ll expect things to move quickly in the next little while.
And certainly, there’s no problem in our shop and not from anybody’s shop. But in terms of the vagaries of the regulatory process in global regulatory agencies and the internal quality systems appliance, there may be some stuff there or not. But we will support them going forward and expect revenues to pick up quickly.
Deborah Honig
How many potential QAPs contracts are we talking about longer term? Are we talking about in the 10s or the 100s?
Cameron Groome
It depends on the size. I think in terms of large ones, you’re talking about — well, you can go through sort of who the top 10, top 20 companies in the industry are and then there are myriad small ones. So, I think we have the potential to sign a half a dozen to a dozen contracts that would be in the $5 million to $10 million range, likely, and then any number of small ones that would be in the hundreds of thousands to a few million.
Deborah Honig
And you are still in discussions with multiple groups?
Cameron Groome
Yes. We had two business development teams on the road just last week in widely separated jurisdictions. So, these discussions are all proceeding and ongoing. But again, these are highly technical collaborations, and they don’t just happen in a bar over a handshake.
Deborah Honig
And then I had a question about the multiplex. So, if you have a control for a multiplex for indication test, does one control validate all four indications? Or do you have four controls for one multiplex test?
Cameron Groome
Best practices is to have one control for each signal. And there can sometimes be also a that’s a sample adequacy control as well. So, the best practices that you’re validating each channel or each signal in the test, and there was also have to — it has to be certain that those are not — those signals aren’t interfering with one another as well, which is another element of the technology they’ve got to be loaded, stabilized and noninterfering.
Ken Hughes
And that speaks again to our proprietary expertise. That’s something we do very well and our customers are well aware of that.
Deborah Honig
Okay. So, switching away from QAPs. What progress were you able to make in Kinlytic in the last quarter? Have you already found a partner? And what is the free cash flow opportunity per annum for Kinlytic for you?
Cameron Groome
Well, very, very interesting on Kinlytic. The word that we’re getting is that there is a shortage of thrombolytic material in North America, Asia and Europe. And this could be driven by any number of factors. It could be driven by deferred medical care, it could be driven by aging population post-COVID, other factors related to COVID. We’ll leave that to others to determine. But there seems to be very strong demand for both the catheter clearance indications as well as the systemic indications.
And this is certainly not diminished interest in Kinlytic, and we’re continuing to work towards what we’ve admitted to, which is a partnership agreement that would provide full third-party funding for the Kinlytic program in order that Microbix is not taking away necessary growth-oriented capital from our core business to drive that project. What we’d like to see is an arrangement where we have some sort of upfront financial commitment to ensure their partner is serious, the ability for them to fund the project fully, including all requalification expenses for the manufacturing, clinical equivalency and product relaunch costs, will providing us the potential to earn milestones and royalties.
And best estimate is just the catheter clearance alone is close to a $500 million market in North America. And if we were receiving a — achieving a reasonable market share and a reasonable royalty rate on those, you could be looking at a revenue stream to Microbix in the $20 million to $30 million per year range for us. And that’s an awful nice annuity to perpetuity that could be actually flowing to us within about four years.
Deborah Honig
Are those Canadian or U.S. dollar numbers?
Cameron Groome
Those will be U.S. dollar numbers.
Deborah Honig
Okay. And then, I had a question on antigen. So, in the shareholder letter, you write much of Microbix’s antigen production will be running flat out for the balance of 2023. How much of this future production will actually make up for the production losses in Q1 due to the quality failure? And how much is actual growth? Is it fair to assume that flat-out production could be associated with pre-COVID sales levels, i.e., something to the tune of $3 million per quarter?
Cameron Groome
I think that’s a reasonable ballpark level. We may not get to precisely $3 million in Q2, but it will be a hell of a lot greater than Q1. And we’ll see the impact of that. We are also looking at necessary price increases that we’ll be putting through. But I think the budget for the balance of 2023 fiscal is much closer to $3 million a quarter than it is to $1 million.
Ken Hughes
And the market is growing, although not at the exponential rate of QAPs. So, we’re building that capacity as well. So, when we talk about flat-out, flat-out for what we’ve got, we’re adding to it, and that’s going flat-out too.
Cameron Groome
Yes, quite right. So, we’re continuing to — we’re looking at adding to our bioreactor capacity as well as further refinement, streamlining of other processes so that not only will we be able to make more, but we get more margin out of what we do make. And again, this is very ticklish work and it has to be validated and revalidated any process change before it could be put into effect. So these things don’t happen overnight.
Deborah Honig
And can you touch on some of those growth drivers for the antigen side of the business?
Cameron Groome
Well, absolutely. One of the big ones is that people are going back to see their doctors and their doctors are willing to see them. So that leads to people getting more regular medical care and consequently more tests being done. And so that’s one driver.
Another driver is we’re starting to see Asia reopen. And you’ll recall, we’ve done quite a bit of business development work through our distribution partner into Asia, where Microbix antigens were actually incorporated into the regulatory filings for quite a number of tasks looking for Chinese FDA approval. And as some of those tests now are working their way through the regulatory process, we’re actually starting to see — we’re getting signals to say get ready, it’s coming. And as those signals convert into orders, we see that unfolding as well.
But I don’t think too much of that blue sky is or any meaningful amount of that blue sky is in the numbers that we talk about of the balance of 2023.
Deborah Honig
Okay. And then just going on to sort of general questions. Jim, I think this one is for you. Would you expect to be free cash flow positive this year, including the drag from the difficult Q1 and what seems like another tough Q2?
Jim Currie
Yes, I would expect this. That’s for the year, yes, I would expect so. We should have a recovery from Q1. And I think Q2 is still to be determined. At this point in time, I wouldn’t think it’s going to be a huge drag, but certainly, Q1 was, but I would expect to be free cash flow positive for the year.
Deborah Honig
Okay. And then, any indication that margins are coming in as expected for QAPs contracts? Or did something change to the positive or negative as you get closer to signing new contracts?
Cameron Groome
No, I think what we’re seeing so far is satisfactory with regards to margins. Certainly, we are always targeting new product introductions to be at higher margins than our average current margins, that’s just a sensible business practice. And I’ve seen nothing to suggest that that is breaking trend now.
Part of the development of projects is we like to align expectations on pricing with customers very early in the development process. So, it’s actually part of the user-defined requirements that are baked into our ISO certifications that we have to ascertain that there’s an alignment of expectations on pricing product before we get deep into development and both parties — our customer has to say this is going to work in our marketplace, and we have to say to manufacture this, create the product and make it in a satisfactory margin. If we can’t connect on those basis, if there’s a misalignment, then the project doesn’t had for very early days. It’s a good discipline.
Deborah Honig
Okay. And then, you mentioned VTM not being a management priority. What are management’s top three priorities for 2023?
Cameron Groome
Great question. I like that one. One of them is certainly securing additional QAPs agreements and making sure that the ones we have are unfolding as they were.
Second is to, I believe, that we will see some success at long last with Kinlytic and we’re knitting a fair bit of effort on that from a business development support.
And third, I think we need to make certain that we have an anchor tenant back in place with respect to our DxTM, and getting full clarity with regards to Ontario and DxTM and making sure that there’s some longitudinal order flow from Ontario, then we can, I think, responsively reach out to other provinces.
So, those would be some of the things I’d be looking at as well, of course, is the broader logistical and operations side that you’re successfully implementing upgrades to systems and at the same time, managing our availability of and use of capital, the capital [entrusted] (ph) to us by shareholders.
Jim and Ken, anything I’m missing there you’d want to add in…
Ken Hughes
I mean, driving productivity in the antigen business on the upswing and making sure that our margins are maximized as a result, bringing the various innovations we’re working on right now to also maximize those margins. Also using the capabilities related to VTM, the new product lines in the same space and addressing that.
You made the comment about in the pandemic, we developed two big new product lines. We’re going to continue using new capabilities to build related product lines, nothing tangential, nothing out of the ordinary from our perspective but building on the capabilities we have. So, they’re going to be the focus. But I don’t think DxTM is not a management focus. We just — we have multiple focuses that we’ve articulated before, and we’re pursuing them all with an appropriate vigor.
Deborah Honig
And then I had a question just on the $100 million revenue target. Is that target still on the agenda? How long would you expect the company to take to get to that target?
Cameron Groome
At least one quarter longer based on Q1, but kidding aside. No, this is what we’re building. This is what we’re building the capability for. You can’t just ask people to work faster and do more. You’ve got to ask them to work smarter and give them the tools to work more efficiently. So that’s what we’re really doing is making sure that we can scale without cracks appearing.
It’s similar when we started with QAPs, for example, we were doing 100,000 vials a year of QAPs that were manually filled. And gosh, that was a hell of a lot of hard work for everybody. And with VTM, further to Ken’s earlier comment, we developed the capability of doing 100,000 vials a week without killing any. Now similarly, with QAPs, we’re at a position where we do really pushing hard to do probably 200,000 units a month right now for swap-based QAPs.
Some of our large potential customers may look at us and say, “Gosh, guys, show me how you’re going to get to 1 million a month. Show me how you’re going to get to 2 million a month.” But this is the systems work we’re preparing now to be able to demonstrate to big customers, we can support you, we have the ability to plan the infrastructure, quality infrastructure as well and management infrastructure, manufacturing infrastructure to support these higher levels.
We could squeeze every penny out of today’s EBITDA and never prepare for that or we can invest and be prepared for that and actually land those pieces of business. So, that’s the way we’re running it, and I hope everybody sees that.
Deborah Honig
I had one other question going back to the QAPs contracts, which I think is interesting. Do you already have more QAPs contracts that we know of as you once said that you’re not just allowed to announce all of them? Or will you be able to announce all large contracts you close?
Cameron Groome
We’ll certainly announce anything material that we put to bed. We don’t announce — as a practice, we don’t announce things that are not baked — that are not fully baked. Similarly, somebody was criticizing me, why didn’t you announce monkeypox control when it was a new cycle [indiscernible] we didn’t have a monkeypox control of them. We announced it after we’ve done the evaluations. We said this isn’t going to be — we don’t think this is going to be a pandemic. We do see a business case for it. We completed validations across 33 independent sites and 11 different instrument platforms. And then, we announced that we have a product.
So, we follow similar practice on this with regards to contracts. We have multiple discussions ongoing in advance. And as we see those executed as agreements, some of them may — if they’re not a formal agreement, we don’t have anything to announce, but the ones that get to a formal purchase and supply agreement and are material, will be immediately disclosed to show.
Deborah Honig
Okay. We’re coming up on the hour. I have one last question for you, Cameron, before I ask you if there’s anything you wanted to cover. So, I guess my question is like management has been buying in the market recently, which is great to see. I also have been picking up shares. Coming out of a weak quarter like — why should investors be buying the stock now? What catalysts can you point to? What news flow can you point to? Give us some positive things to look forward to.
Cameron Groome
Certainly, we are working our tails off to get different things concluded and contracted and built in line. There’s a lot of work going on in different jurisdictions and collaborations where Microbix controls made calls to support even national level testing programs. And as some of those discussions come to fruition, we’ll disclose specifics when it’s signed, sealed and, in most cases, delivered quite literally. And we’ll continue to work on business development — work toward business development, the funded agreement on Kinlytic, we’ll continue to work on as well, and broadly strengthening and improving the business.
So, I think we’ve actually had a pretty quiet period for news flow between in the fall of 2022. And that’s not to say that there aren’t a whole bunch of things brewing. It’s just to say that they’re still brewing. So, when those are fully matured and we are in a position to responsibly announce formalized agreements, that’s what we’ll do. So, I think the period of calm is continuing to wind spring of potential energy and we’ll hopefully see some of that released a bit shortly.
Deborah Honig
Okay. Was there anything that you wanted to add to the session that we didn’t cover, Ken, Cameron, Jim?
Cameron Groome
I’ve got one thing, but Jim and Ken, why don’t you guys go ahead?
Ken Hughes
I was just going to comment that the fundamentals of what we’re doing in the areas we’re operating haven’t changed. Yes, we’ve just had a bad quarter, which is something of a conspiracy of circumstance. But the business areas we’re in continue to grow and continue to be opportunities.
In terms of picking up stock, why wouldn’t you? We have one quarter and it’s right down at the bottom. I’m here for the long term to drive those opportunities forward. So, I think there’s a great opportunity here, and that’s why you should be in the stock. This is not a pump and dump situation. We’re building something real here and that’s what I intend to be part of.
Jim Currie
Yes, we haven’t changed our strategic direction. In some of these areas, as we’ve identified, we don’t have complete control over some of these large diagnostics companies and the testing that they go through with FDA. So, while we’d love to know exactly when it’s going to come to fruition, we don’t. So, we can only go by with what is directly indicated by them to us. And sometimes they don’t meet their targets. And it’s unfortunate and it’s frustrating, but we still believe we’re heading in the right direction with these vendors.
Cameron Groome
Great comments, Ken and Jim. I’d emphasize, this is a company that has built some very real and unique capabilities. We’ve got the human resources within the broader team, Microbix team. We’ve got the physical equipment resources. We’ve got the financial resources that we’re going to continue to put all of those capabilities to intelligent use for building shareholder value. As I said, you see all of the independent directors and the senior level managers and down through the organization, all our commitment to the business and that continues unabated.
Deborah Honig
Okay. So, I think that’s a good spot to leave the session. We did have a lot of questions both in advance and during the session. If anyone felt that their question wasn’t fully answered, feel free to reach out, and I’d be happy to get an answer and set up a one-on-one call.
And thank you to Cameron, Ken and Jim for taking the time to do this session, and thanks to everyone who participated. And again, feel free to reach out with any additional follow-up.
Cameron Groome
Thank you, everybody.
Deborah Honig
And Happy Valentine’s Day.
Cameron Groome
Thank you. I didn’t dress in bright color like you did, Deborah, but that’s for the best, I think.
Deborah Honig
Well, I figured I’d bring some levity and sunshine into the session.
Cameron Groome
Good fun. Thank you, everyone. Bye.
Jim Currie
Thank you, everyone.
Ken Hughes
Bye-bye.
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