Quotient Limited

Thank you, Kate. Good morning, everyone, and welcome to Quotient’s earnings conference call for our fiscal second quarter ended September 30, 2015.

Joining me today is Paul Cowan, Chairman and Chief Executive Officer of Quotient. Today’s conference call is being broadcast live through an audio webcast and a replay of the conference call will be available later today at www.quotientbd.com.

During this call, Quotient will be making forward-looking statements including guidance and projections as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Quotient’s filings with the U.S. Securities and Exchange Commission, as well as in last night’s release.

The forward-looking statements including guidance and projections provided during this call are valid only as of today’s date, November 3, 2015, and Quotient assumes no obligation to publically update these forward-looking statements. With that, I’d like to turn the call over to Quotient’s Chairman and Chief Executive Officer, Paul Cowan.

Thanks, Steve, and good morning, everybody. Thank you for joining this call to review Quotient’s operational and financial results for quarter ended September 30, 2015.

We made substantial progress on the commercial scale up of MosaiQ over the last quarter. This culminated in Quotient presenting a working prototype of the MosaiQ instrument to 90 attendees from 47 organizations at the 2015 AABB Conference held in Anaheim, California on October 24 to 27.

Attendees in these showings ranged from Chief Executive Officers of donor collection agencies to hospital laboratory managers, with overwhelmingly positive feedback received. Subject to obtaining required marketing clearances, we remain on schedule to deliver a licensed platform to these prospective customers over the next 12 to 24 months.

At the same time and in addition to supporting the MosaiQ project our conventional reagent business achieved above-plan operating results during the second quarter of fiscal 2016. While adverse exchange rate movements continue to weigh on both revenues and gross profit, we continue to expect both growth and profitability for this business to improve during the remainder of fiscal 2016 and beyond.

Moving to Slide 4, we continue to make substantial progress against all of our key goals for MosaiQ during the second quarter, which are primarily focused on advancing MosaiQ to commercial launch in Europe during the second-half of 2016. Conversion of the Eysins, Switzerland facility is now complete.

Manufacturing and bio-processing systems are now largely installed. The instrument design is now locked.

Assay development is now focused on transferring assays from development to manufacturing. Manufacturing validation has commenced and field trials are being planned for the first-half of calendar 2016.

At the end of October, we showcased a working prototype of the MosaiQ instrument in the 2015 AABB Conference. MosaiQ certainly created quite a buzz around the conference with 90 delegates, including Chief Executives, Senior Operational Managers and Hospital Laboratory Managers from 47 organizations across the United States and Europe, far more than we have planned for, viewing the instrument and receiving a progress update for the development of MosaiQ.

The feedback we received was overwhelmingly positive with favorable reactions to the following, namely: the increased level of automation and scalability offered by MosaiQ; eliminating the need for routine manual testing, the expanded breadth of MosaiQ’s testing menu, particularly its ability to offer comprehensive antigen typing utilizing a single sample and a single consumable; MosaiQ’s rapid turnaround time and a known time to result of under 35 minutes for a comprehensive antigen type and antibody identification, a capability unmatched by any other commercially available blood grouping platform today; and the ease of the MosaiQ work-flow and its ability to integrate with existing laboratory work practices. With the tremendous progress that continues to be made on MosaiQ, we remain very confident of our ability to deliver project to commercial launch in the second-half of calendar 2016.

There is clearly today a lot of focus and emphasis on MosaiQ, but we should not underestimate the key role being played by the conventional reagent business in supporting the MosaiQ development program. While this is being undertaken, the conventional reagent business continues to progress to plan financially and operationally with year-to-date and second quarter revenues both ahead of plan.

Slide 5 serves as a reminder of the potential offered by MosaiQ, particularly in the field of transfusion diagnostics. MosaiQ is a highly innovative and novel diagnostic solution that will be capable of delivering major cost savings to our customers through full automation and increased testing efficiency through multiplex testing.

Each MosaiQ consumable will be capable of undertaking up to 132 assays on a single consumable. In terms of development, manufacturing and use, MosaiQ will be highly scalable.

Our initial focus is on the provision of panels for blood grouping and donor disease screening. Beyond this, there are considerable number of other potential applications on MosaiQ, some of which we expect to report on in the first-half of 2016.

We very much see the target addressable market for MosaiQ exceeding $20 billion. What is most important though to the adoption of MosaiQ is the significant value it would deliver for end-users in terms of cost efficiencies and improved outcomes for patients.

Slide 6, is a reminder of the utility of the MosaiQ platform for blood grouping which is unmatched by any single instrumentation or automation platform for blood grouping available in the market today. For the first time, MosaiQ will allow for the comprehensive characterization of donor or patient blood with the simultaneous identification of up to 39 blood group antigens and 31 blood group antibodies.

By offering a fully automated solution, MosaiQ will eliminate the need for routine manual testing, delivering major operational efficiencies and cost savings to our customers. This will be achieved using a single consumable and a single sample from either patients or donors.

With a known time to result of less than 35 minutes, MosaiQ will also offer considerable operational advantages in a patient testing environment. In parallel with the development of MosaiQ’s blood grouping consumable, development of the disease screening consumable for donor screening is ongoing and results continue to be very positive.

Slide 7 sets out in more detail the final menu of assays to be included on MosaiQ for transfusion diagnostics. Assays, where we cannot guarantee long-term stable supplier reagents for inclusion on the consumable have now been excluded.

MosaiQ will offer the most - will continue to offer the most comprehensive automated testing solution for blood grouping and serological disease screening available on a single instrument in the market today. Moving onto Slide 8 of the presentation, we continue to make substantial progress against all of our key goals during the quarter.

Manufacturing and bioprocessing systems are now largely installed with the last element final assembly of the consumable due to be delivered in December of this year. Commissioning of the print system is progressing to plan and I’m pleased to say, we’re now successfully printing red cells on a subset of print-heads on the print system.

Commissioning of the wet process used for preserving antibodies in red cells printed on to the glass substrate is now largely complete. Assays to be included on the blood grouping consumable and the disease screening consumable are now being transferred production, which we expect to complete before year end.

First production lots of MosaiQ consumables for field trials is forecast for late in the first quarter of 2016. Design of the MosaiQ instrument has been locked and remaining efforts are focused on final software development and manufacturing scale up.

Field trial instruments have been ordered and our scheduled to be built by the end of 2015, with final software development to be completed prior to commencement of field trials. We expect to begin formal field trials in Europe for MosaiQ in the first half of calendar 2016, with initial usability studies commencing towards the end of the first quarter.

Field trials in the United States are expected to start immediately following completion of the European field trials. Site selection for field trials both in the U.S.

and in Europe is now complete and field trial protocols have been defined and are under discussion. Pre-submission meetings to discuss the field trial protocols have been scheduled with U.S.

and European regulators. And we plan to file the necessary regulatory submissions in the second half of calendar 2016 to obtain required marketing clearances.

Slide 8 highlights the activities currently underway in Eysins to install and validate the initial manufacturing facility. We expect this culminate in the manufacture of MosaiQ blood grouping and the initial disease screening consumables for field trials towards the end of the first quarter 2016.

On Slide 9, development of the MosaiQ instrument with our partner Stratec Biomedical, continues to progress very well. Final prototypes instruments have been received from Stratec that are meeting our functional requirements and are now being used process MosaiQ consumables for development purposes.

The current focus in on software development and manufacturing scale up for the instrument. With that, I’d now like to hand back to Steve, who will present the financial overview.

Thanks, Paul. Looking at Slide 11, our fiscal second quarter, total revenues and product sales were $4.3 million, a decrease of 6% from last year’s second quarter.

The decrease was attributable to a $200,000 negative impact of the stronger U.S. dollar relative to the British pound and euro and lower shipments of bulk antisera to OEM customers.

OEM sales of $2.8 million, was down a 11% year-over-year and represented 65% of product sales, while direct and distributor sales of $1.5 million was up 6% year-over-year and represented 35% of product sales. OEM sales growth was impacted by the stronger U.S.

dollar relative to the British pound and euro and lower shipments of bulk antisera, which were expected. Direct sales in the United States decreased 1% year-over-year as an extra shipment of reagent red cell products was included in our fiscal first quarter of this year versus its inclusion in our fiscal second quarter last year.

Direct sales outside of the United States increased 26% year-over-year, despite our decision to rationalize our product offerings in Europe. Product sales from standing orders in the quarter were 71% versus 70% last year.

Gross profit on total revenues and product sales was $2.1 million compared with $1.8 million last year. Gross profit on product sales was impacted by the stronger U.S.

dollar, but this was more than offset by efficiencies achieved in our manufacturing operations, primarily through increased production volumes. Gross margin on product sales was 50.3% compared to 40.2% last year.

In the second quarter, the operating loss was $13 million compared with $8.2 million last year. Operating expenses increased $5.1 million from last year to $15.1 million with a $2.9 million increase in R&D expenses to $8.4 million and a $2.0 million increase in general and administrative expenses to $6 million.

Sales and marketing expenses of $0.8 million, increased $0.2 million from the prior year. The increase in R&D expenses reflects incremental costs associated with the commercial scale up of MosaiQ including initial production costs which are currently expensed as research and development.

The increase in general and administrative expenses reflects greater personnel related costs, increased facility rental charges and greater corporate costs. Stock compensation expense was $477,000 in the second quarter versus $283,000 last year.

In the second quarter, net other income was $8.5 million compared with net other expense of $3.5 million last year. Net other income consisted of interest expense of $1.1 million and a $10.3 million unrealized gain related to the change in fair value of the warrants issued with our IPO.

We also recognized $0.6 million of previously deferred costs as a result of the refinancing of our credit facility. Overall our net loss for the quarter was $4.4 million or $0.25 per ordinary share.

Looking at Slide 12, our fiscal first half total revenues were $9.1 million, a decrease of 13% from last year’s first half. Product sales were $9.1 million, a decrease of 7% from last year.

A decrease in product sales was attributable to [Technical Difficulty] negative impact of stronger U.S. dollar relative to the British pound and euro and lower shipments of bulk antisera to OEM customers.

We also recognized $650,000 of product development fees in last year’s fiscal first quarter, which did not repeat this year. OEM sales of $6.2 million, was down 10% year-over-year and represented 68% of product sales, while direct and distributor sales of $2.9 million, was up 1% year-over-year and represented 32% of product sales.

OEM sales growth was impacted by the stronger U.S. dollar and lower shipments of bulk antisera.

Direct sales in the United States increased 7% year-over-year, direct sales outside of the United States decreased 12% year-over-year given our decision to rationalize our product offerings in Europe. Product sales from standing orders in the first half were 73% versus 71% last year.

Gross profit on total revenues in the first half was $4.2 million compared with $5.3 million last year. Gross profit on product sales was $4.2 million compared with $4.6 million last year.

Gross profit on product sales was negatively impacted by the stronger U.S. dollar.

Gross margin on product sales was 46.6% compared to 47.3% last year. In the first half, the operating loss was $23.5 million compared with $12.6 million last year.

Operating expenses increased $9.8 million from last year to $27.7 million with a $6.1 million increase in R&D expenses to $15.2 million and $3.6 million increase in general and administrative expenses to a $11.1 million. Sales and marketing expenses of $1.4 million increase $0.1 million from the prior year.

The increase in R&D expenses reflects incremental costs associated with the commercial scale up of MosaiQ including initial production costs which are currently expensed as research and development. The increase in general and administrative expenses reflected a greater personnel related costs, increased facility rental charges and greater corporate costs.

Stock compensation expense was $814,000 in the first half versus $509,000 last year. In the first half, net other income was $8.9 million compared with net other expense of $1.7 million last year.

Net other income consisted of interest expense of $1.9 million and $12 million unrealized gain related to the change in fair value of the warrants issued with our IPO. We also recognized $0.6 million of previously deferred cost as a result of the refinancing of our credit line and incurred $0.7 million of foreign exchange losses.

Overall, our net loss for the first-half was $14.6 million or $0.85 per share. Moving to the balance sheet, cash and cash equivalents were $25.7 million on September 30, while long-term debt was $28.5 million, reflecting the $15 million expansion of our credit line.

As a part of our initial public offering in April 2014, we issued 5 million warrants, each to acquire 0.8 of an ordinary share for a price of $8.80 per whole share. 99.6% of these warrants were exercised prior to their expiration on October 26, 2015.

As of September 30, 2015 we raised cash proceeds of $13.9 million from the exercise of these warrants. In addition, we raised a further $21.2 million from exercises completed after September 30, 2015 through their expiration on October 26, 2015.

As a result, our available cash resources this quarter increased to $46.9 million. Accounts receivable totaled $2.1 million and inventory totaled $5.8 million at the end of our fiscal second quarter.

Capital expenditures totaled $7.2 million in the second quarter and $14.1 million in the first-half. Moving to Slide 13 in our updated guidance, our outlook for fiscal 2016 is unchanged from last quarter and reflects the stronger U.S.

dollar relative to the British pound and euro, which we expect to have a meaningful negative impact on product sales relative to the prior year. Our revenue forecast currently assumes an exchange rate of $1.52 per British pound and $1.12 per euro.

For fiscal 2016, we forecast full-year revenue in the range of $19 million to $20 million, which includes $1.9 million of product development fees that we expect to recognize as other revenue in our fiscal fourth quarter. We anticipate product sales revenue in the range of $17 million to $18 million, which includes a $1 million or 5% drain on growth from the stronger U.S dollar.

We forecast an operating loss in the range of $50 million to $55 million, which includes R&D expenses of $35 million to $40 million. For fiscal 2016, we forecast capital expenditures of $30 million, which includes expenditures associated with the replacement of our Edinburgh manufacturing facility.

For our third quarter, we expect product sales in the range of $3.7 million to $4.2 million compared with $4.0 million in the third quarter of fiscal 2015. This includes a 5% or $0.2 million drain on growth from the stronger U.S dollar.

I would now like to briefly reiterate our comments from last quarter regarding our intermediate term outlook. In fiscal 2017, we are anticipating a significant reduction in our reported operating loss with planned completion of initial product development and preproduction activities from MosaiQ in the middle of that year.

Our preliminary forecast for fiscal 2017 includes total revenues in excess of $45 million, which includes revenues related to MosaiQ in excess of $25 million. MosaiQ revenues include product sales starting in the fiscal fourth quarter and milestone receipts with respect to our agreement with Ortho Clinical Diagnostics.

In fiscal 2018, we are planning for total revenues in excess of $100 million and a positive operating profit for the full fiscal year. Our preliminary forecast for fiscal 2018 include revenues relating to MosaiQ in excess of $75 million and that includes product sales in Europe and in the United States and further milestone receipts with respect to our agreement with OCD.

I’ll now turn the call back to Paul.

Thanks, Steve. We have an established presence in transfusion diagnostics with over 30 years’ experience in developing, manufacturing and commercializing transfusion diagnostic products worldwide.

MosaiQ represents a clear advance in the field of transfusion diagnostics, delivering a highly disruptive and transformative solution to our customers. MosaiQ is also of an advanced stage of commercial scale up, with initial markets to be addressed by Quotient being the $2-billion-plus donor testing market where 20 customers account for the testing of over 38 million donations annually.

Our partnership with Ortho Clinical Diagnostics validates MosaiQ both technically and commercially and we plan for European commercial launch for MosaiQ in the second-half of 2016 with U.S. commercial launch one year later.

With that, I’d like to thank everyone at Quotient and our partners for their continued efforts, hard efforts and I’ll now ask the operator to begin the Q&A session.

Yes, hi. It’s Maryana Breitman for Andrew Peters.

Thank you very much for taking my call, and congratulations on a great quarter. I have a couple of questions.

One of them is what role is Ortho playing so far? And do you see, sort of like, do you expect greater involvement further down the road?

And another question that I had was with the set of the field trials, so how many machines do you have? And like once approved, will the machines remain at the locations and how many locations, just basically like more details on how the field trials are going to proceed?

Thank you.

Okay. Thanks a lot.

Clearly, under the collaboration agreement with Ortho Clinical Diagnostics we have set up appropriate dialogue and methods for interacting. That process has been very positive, very constructive to-date.

We have been left with the lead on the development of MosaiQ. And Ortho is providing comments and input from time-to-time, but they’re not directly involved per se.

And so, yes, so that’s really their level of involvement at this point in time. As we look at further instrument platforms in the future and the evolution of the instrument, Ortho, I think may well have more input into it in terms of design and scaling.

As regards to field trials, we’ve ordered 15 instruments for field trial testing purposes and they are expected to be built for us by the end of this year and software development completed before we start field trials. We got seven field trial sites lined up for in the U.S., three in Europe.

With certain of those sites, we do expect to leave field trial instruments on those sites for further evaluation after the formal field trial is complete. But those discussions are sort of underway and still in progress.

Hopefully, that answers your question.

Thank you. I see.

Thank you.

Thank you.

I’ll jump back into queue.

Thank you.

Thanks. Good morning.

Good morning.

Paul, could you elaborate through where you are in terms of the progress with printing the red cells on the print stations? How many of the - I believe 66 stations have you now validated?

And what is the process like going from the first station to the next in that 65?

So as far as the process is concerned, we got 66 print-heads on the print system. We start with essentially debugging and commissioning one print-head, which we’ve now completed.

We then move to four. And then, each of that print station or each print station is set up in units of four.

So once we got the four commissioned, the initial four commissioned, we then just roll that around the machine systematically. And then, very pleasingly, as I said, we got the four of the print-heads printing red cells very nicely for us now.

We’re very pleased with those results. And we will continue to sort of roll that out around the rest of the system and expect that will be completed by year-end.

Okay. So, in terms of the whole manufacturing workflow, what steps are remaining to be, I guess, implemented.

Now, they’re really just assembly. I’m trying to get a sense of the other remaining sort of gating factors...

Yes. Well, the next big system that’s - yes, the next big system that has been received and installed is the wet process.

That system is now fully commissioned and will commence validation once print systems up and running. And then, the only final piece is the final assembly, but the vast majority of the commissioning of the final assembly will actually take place in the factory before it’s delivered to us.

That will come in December. And then, that will be all elements in place at that point.

Super. And then, in terms of feedback from AABB, any comments or color from customers with the hospital or donor labs on the menu probe set?

One or two minor points about potential additional probes or assays that we might want to include, very few actually, probably [Vee and Donbrock] [ph]. But in both cases, you can’t actually test with those on any instrument platforms today at least serologically.

And there was an acceptance that they’re very rare, they’re very esoteric, and therefore not critical. So, in both cases, people were ended up being relaxed about those two not being on the platform, but overall, very positive feedback on the menu in terms of how comprehensive it is.

Super. And then, last one for Steve and in terms of the back-half of the year, could you remind us when you expect to recognize the milestones, the $1.9 million of non-product revenue, sort of just the timing between the third and fourth quarter?

Sure. So, there are two milestones that we expect to receive from Ortho Clinical Diagnostics related to our conventional reagent business and the development program that we have with them.

The first is, we expect both to be recognized in our fiscal fourth quarter. One is $1.4 million related to FDA approval, some rare antisera products that we develop for them.

And then, second one is $0.5 million, which are the same reagents approved on their VISION platform.

Super. Thank you.

They’re all in the fourth quarter. And again, we only recognize those milestones upon receipt of cash.

Great. Thanks.

Thanks.

Thanks, Brandon.

Yes. This is Chris Hamblett in for Josh.

And thanks for taking the questions and nice progress here on MosaiQ and AABB feedback et cetera. What do you foresee kind of as the biggest challenges ahead for the scale up phase between now, and not just the field testing, but commercial launch?

And then, as you think about the two regulatory processes in the EU and U.S. are there fundamentally any major differences with the requirement et cetera there?

Yes. We have an awful lot of work to do and we’re staffed and absolutely laser focused on achieving it.

The biggest challenge now is just getting all of the final elements of the manufacturing system into place and commissioned and then validated. And our expectation is that, that should be achieved by the time we manufacture the field trial lots late in the first quarter of next year.

The regulatory process, I think we’re ahead of the curve there. In terms of the field trial site identification setting up, we’ve issued contracts.

We’re talking to the sites about the protocols now. So that’s ahead of plan or ahead of where we would expect to be at this point in time.

There will be a lot of work to do in the field trials and then finally wrapping up post-field trials and getting the submissions into place. But again we are staffed and we’re well aware of that.

As far as project risk is concerned, we do not at this point in time envisage any major challenges that will have a material impact on timing. Everything is progressing to plan, and we remain focused on achieving our milestones and delivering against it to the timetable we’ve set up.

As far as the regulatory processes, actually the protocol for Europe and it’s very similar to the protocol for the U.S. Any difference really is we only have three sites in Europe and four sites in the U.S., but we expect essentially the protocol the requirement to achieve 99% concordance for antigen type and 95% concordance for antibody ID, and then required sensitivity specificity for disease screening, is the same on both sides of the Atlantic, so that, no major differences on that front.

And the other big advantage that we have as well as is certainly with CE-Marking, we also have the ability through Ortho to market the MosaiQ product into the Japan Red Cross as well. So that - yes, nothing - no major differences between the two regulatory environments.

Okay. Thanks for the clarity and it’s interesting.

Yes.

And just one follow-up, if I may, I know you’re not giving specific details around the protocols for the field testing, but those four sites in the U.S. and three in the EU, is there going to be like a duration or any other metrics or color you can give us around kind of life of testing et cetera, anything with regard to those field trials?

Yes. At this point in time, we’re talking about a combined 5,000 to 10,000 sample volume in the U.S.

and in Europe. That’s also being refined.

So we expect that to take weeks rather [Technical Difficulty] actually commence, yes, we expect that to take weeks and not months or indeed years, given the [Multiple Speakers] testing by some of these sites.

Got it. Thank you very much.

Well done. Thanks.

Thanks for your questions.

Yes. Hi, it’s Maryana Breitman again.

I actually had a question about the development of MosaiQ disease screening for CMV. And I was wondering whether there is going to be - I mean, you mentioned before that you will commence the HBV, HCV, HIV, HTLV and Chagas.

But I was wondering if there is interest to also have sort of more, probably a rare virus screening like Epstein-Barr or - still common, but not as common, I guess, [indiscernible] or something like that?

Yes. The consumable that we’re developing is what is required from mandatory testing.

So the menu that you see there on whatever slide that is what’s required to-date both in Europe or/and in the U.S. So - and that’s really what we’re laser focused on.

There are some additional disease screens that we may look to work on subsequently. But our sole aim at the outset is to displace existing instruments, existing assays in these fields.

And so, we remain absolutely focused on that. And so, we’re not looking at any of these other rarer diseases at this point.

And what I would say is that we do expect to be in field trials with the full disease screen menu before the end of next year as well. So that side of the product offering is advancing very nicely for us.

But to add to that, Maryana, the disease screening consumable has a significant amount of conditional capacity for us to add additional diseases once we have the initial disease screening consumable on the market with the full probe-set. We would certainly look to add additional diseases if it makes sense.

Yes. It’s a good point.

Okay. What about like metabolic screening?

I think at this point in time, what we want to do is report to you on our current feasibility work that we’re doing around nucleic acid testing and quantitative immunoassay in the first-half of next year. And then, with that data we will then start to look at additional applications and report on targeted additional applications, again probably in the first-half of next year.

Okay. Thank you so very much.

Pleasure.

Thank you, everyone, for joining us today. It’s been a pleasure to update you on tremendous progress we’ve been making on MosaiQ.

As you will have sensed, we are absolutely laser-focused on delivering MosaiQ, getting it to market and to our customers as quickly as possible. And we look forward to reporting continued further positive progress over the coming quarters.

Many thanks.