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Edited Transcript of OXFD earnings conference call or presentation 11-Mar-19 8:30pm GMT

Q4 2018 Oxford Immunotec Global PLC Earnings Call

ABINGDON Mar 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Oxford Immunotec Global PLC earnings conference call or presentation Monday, March 11, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Karen C. Koski

Oxford Immunotec Global PLC - Head of Strategy & IR

* Peter Wrighton-Smith

Oxford Immunotec Global PLC - CEO & Executive Director

* Richard M. Altieri

Oxford Immunotec Global PLC - CFO

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Conference Call Participants

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* Catherine Walden Ramsey Schulte

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Chris Lin

Cowen and Company, LLC, Research Division - Research Associate

* Ruizhi Qin

JP Morgan Chase & Co, Research Division - Analyst

* William Robert Quirk

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Welcome to the Oxford Immunotec Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Karen Koski, Vice President, Strategy and Investor Relations. You may begin, ma'am.

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Karen C. Koski, Oxford Immunotec Global PLC - Head of Strategy & IR [2]

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Good afternoon, and thank you for joining us to review Oxford Immunotec's financial results for the fourth quarter and full year 2018. Joining me on today's call are Oxford Immunotec's Chief Executive Officer, Dr. Peter Wrighton-Smith; and Chief Financial Officer, Rick Altieri.

Before we begin, I would like to caution listeners that comments made and financial information provided during this conference call as well as the presentation containing supplemental pro forma financials that has been posted to our website includes certain statements and information that are estimates, forward-looking and/or subject to various risks and uncertainties. This information is based on the best information available and assumptions that management believes are factually supportable and reasonable. However, actual results could differ materially from those stated or implied by these forward-looking statements due to the 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, 2018, which will be filed with the Securities and Exchange Commission later this week.

For a discussion of these risks and uncertainties I encourage you to review our SEC filings. The company disclaims no -- any obligation to update or revise any forward-looking statements. 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 U.S. GAAP financial measures, provide useful information for both us and investors to evaluate the company's performance. These include pro forma revenue, gross margin, operating expenses, loss from operations and adjusted EBITDA. Reconciliations between certain U.S. GAAP and non-GAAP results, such as adjusted EBITDA, are presented in the tables accompanying our earnings release, which can be found on the Investor Relations section of our website and in the Form 8-K filed with the SEC this afternoon.

As a reminder, in early November, we completed the sale of our U.S. laboratory services business to Quest Diagnostics. As such, the now divested U.S. laboratory services business is shown as discontinued operation in our press release and forthcoming 10-K. Amounts for the prior periods in the press release and our 10-K have been reclassified to conform to this presentation. The discussion of our results and business updates on today's call will be focused on our continuing operations and to assist investors in understanding the underlying performance of the company's continuing operations. We will be referencing certain pro forma non-GAAP financials. These non-GAAP financials which were also filed as an exhibit on Form 8-K this afternoon reflects the company's estimated revenue and cost of revenue as of the closing date of the sale of our U.S. laboratory services business to Quest had occurred prior to the respective period and that our long-term supply agreement with Quest has been in effect for the full respective period. The pro forma adjustments in these tables are based on the best information available and, again, assumptions that management believes are factually supportable and reasonable. However, such adjustments are subject to change and the methodology used may not be indicative of our future consolidated results of operations or the future timing of revenue.

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

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [3]

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Good afternoon. On today's call, I'll provide a brief overview of our operating performance for the fourth quarter and full year 2018. Rick will then take over to discuss our financials, before handing the call back to me to discuss our strategic priorities for 2019, and to provide our 2019 financial guidance. We'll then open up the lines to take your questions.

Before I begin, as many of you may have seen, we filed an 8-K this afternoon announcing that Rick Wenstrup has left the company. Rick came to us with many years of experience in the U.S. laboratory services business from his time at Myriad Genetics. He joined us to help prepare the company for the next phase of growth, particularly within our own service business. With the company having recently transformed to a pure-play IVD products company, Rick and I agreed that it's the appropriate time for him to step down and pursue other interests. I'd like to thank Rick for his contribution to the company and we wish him well in his future endeavors.

Turning to our 2018 fourth quarter and full year results. As Karen noted, I'll be referencing non-GAAP pro forma financial measures in some of my commentary. These non-GAAP measures will enable you to compare our performance in the fourth quarter and full year 2018 on a like-for-like basis to the pro forma financials that we filed with the SEC on Form 8-K on January 7, 2019.

For the fourth quarter of 2018, our global non-GAAP pro forma TB revenues were $15.6 million, representing year-over-year growth of approximately 14% over the fourth quarter of 2017. Our performance was slightly ahead of our internal expectations and the qualitative commentary we provided on the last quarterly call.

Looking at TB revenue by geography. As anticipated, U.S. TB test volume demand remained strong, with both volume and revenue growth in the mid-to-high teens. As expected, U.S. TB -- sorry, Asia TB revenues fell back sequentially from a strong Q3, not just because of order patterns but also due to this disruption in testing in Japan caused by the powerful typhoons. Nonetheless, Asia continued to show strong year-over-year revenue growth of 13%. In Europe and rest of world, our expectations for a small sequential increase in absolute revenue and for the region's year-over-year growth rate to pick up modestly from Q3 were exceeded. We posted a record quarter in Europe and rest of world TB revenues, which grew 11% off another difficult comp.

In summary, we're pleased to see that our TB business posted another strong quarter with double-digit pro forma revenue growth in all major geographies.

For the full year, 2018, our global non-GAAP pro forma TB revenues were $63 million, representing year-over-year growth of approximately 13% over 2017. Pro forma U.S. TB revenues grew in the mid-teens with momentum and growth accelerating throughout the year. Asia TB revenues grew 11%, and Europe and rest of world TB revenues grew 15% off a difficult comp last quarter. We sold nearly 3.5 million tests during the year, setting a new high watermark for TB volumes and bringing the cumulative number of tests we've now sold to nearly 16 million. Broad-based double-digit volume growth seen across all our major geographies continues to support our strategy of displacing the skin test and converting customers to our superior product.

As a management team, we're focused on growth. However, we also strive to ensure that such growth is sustainable, and therefore, we also advanced the company towards profitability during 2018. We continue to drive down TB cost of goods through economies of scale and operational improvements, and this, coupled with the full year benefit from the reduction in royalty obligations negotiated in 2017, resulted in nearly 500 basis points of pro forma product gross margin expansion for the year. We also gained meaningful leverage across each of our operating expense lines, making significant progress towards profitability as measured by adjusted EBITDA.

In summary, I was particularly pleased to see the core company execute so well throughout the year on both the top and bottom lines, alongside the very significant amount of work involved in successfully completing the Quest transaction.

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

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Richard M. Altieri, Oxford Immunotec Global PLC - CFO [4]

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Thank you, Peter. Our full year GAAP financial results are available in the press release that was issued earlier today. However, for the reasons that both Peter and Karen have described, I will be referencing non-GAAP pro forma financial measures as filed with the SEC on Form 8-K this afternoon in most of my commentary. This will enable the comparison of our fourth quarter results and full year 2018 financials on a like-for-like basis to the pro forma financials filed on Form 8-K with the SEC on January 7, 2019.

Starting with some comments on pricing and volume in our TB business, including both continuing and discontinued operations to enable a comparison on a like-for-like basis, we sold nearly 275,000 tests in the U.S. via both kit sales and tests processed in the ODL service business. We sold nearly 600,000 tests in our OUS region, both via kit sales and tests processed in our U.K. ODL service business. In-country pricing generally remained stable for the fourth quarter, although ASPs for the OUS region as a whole vary from quarter-to-quarter due to geographical revenue mix and foreign currency movements.

Shifting to the P&L. GAAP revenue for the fourth quarter of 2018 was $15.4 million. GAAP gross margin was 74.3%, and operating loss from continuing operations was $4.3 million. Due to the complexity of the accounting related to discontinued operations, we're still finalizing our GAAP numbers, including the allocation of the tax provision between continuing and discontinued operations. All final adjustments will be reflected in our 10-K, which will be filed by the due date later this week.

Turning to the non-GAAP pro forma financials that represents the company's estimated P&L as if the closing date of the Quest transaction had occurred prior to the fourth quarter and our long-term supply agreement with Quest had been in effect for the full quarter. Pro forma revenue for the fourth quarter of 2018 was $15.9 million, representing a 7% increase from the fourth quarter of 2017 pro forma revenue of $14.9 million. Excluding blood donor screening, pro forma revenue for the fourth quarter of 2018 was approximately $15.8 million, representing a 12% increase from the fourth quarter of 2017 revenue of $14.1 million. Overall, pro forma gross margin for the quarter was 71.2%, an increase of 190 basis points from the prior year period.

Turning to non-GAAP pro forma operating expenses, where we continue to drive operating leverage. Pro forma research and development expenses were $2.2 million in the fourth quarter, a 22% decrease compared to the fourth quarter of 2017. Our R&D expenses have come down as we have exited the blood donor screening business and eliminated the expense associated with seeking BLA approvals for those tests. Our R&D spend is now centered around our new cycle of product innovation in TB as well as reducing TB kit manufacturing costs, so that we can continue our long track record of reducing cost of goods sold.

Pro forma sales and marketing expenses were $5.8 million in the fourth quarter, a 15% decrease compared to the fourth quarter of 2017. The decrease was due to the implementation of a leaner leadership structure and a reduction in overhead and related support costs, given that our U.S. sales force is significantly smaller. Recall that some of our U.S. commercial organization became employees of Quest as part of the sale of our U.S. service laboratory, to create inside Quest a dedicated sales force focused on and expert in T-SPOT. TB.

Pro forma general and administrative expenses, excluding transaction expenses, were $5.7 million in the fourth quarter of 2018, a 5% decrease from the prior year period. Excluding transaction expenses, our pro forma operating loss from continuing operations for the fourth quarter of 2018 was approximately $3.5 million, a significant improvement versus a comparable net loss of approximately $12.8 million in the fourth quarter of 2017.

Capital expenditures for 2018 totaled approximately $5 million. This is about double what we'd expect on a go-forward basis because in 2018, we completed a major CapEx program related to the opening of our new headquarters in Oxford. This new facility expands our manufacturing capacity substantially, and we believe we now have ample runway to meet the demand for several years to come without any significant facility investments.

Fourth quarter 2018 depreciation and amortization expense of -- was approximately $750,000, including a full quarter of depreciation related to the new facility. We believe the fourth quarter run rate is indicative of what we'd expect in 2019 on an annualized basis. Pro forma adjusted EBITDA for the fourth quarter was a loss of $750,000 compared to an adjusted EBITDA loss of $3.4 million in the fourth quarter of 2017.

As a reminder, adjusted EBITDA excludes share-based compensation, unrealized foreign currency gains and losses and unusual items. Both EBITDA and adjusted EBITDA are non-GAAP measures. We finished the fourth quarter with a very healthy balance sheet with $193 million of cash and cash equivalents.

Now I'll hand it back to Peter, who will discuss our strategic priorities and financial guidance for 2019.

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [5]

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Thank you, Rick. 2018 was a transformational year for Oxford Immunotec and we exited the year a fundamentally changed company, with dramatically simplified operations, improved top and bottom line profitability and having significantly increased our financial and strategic flexibility with a markedly stronger balance sheet. We enter 2019 as a pure-play diagnostics product company, focused on tuberculosis. Tuberculosis remains the world's deadliest infection and is a top 10 cause of death worldwide. There's growing recognition that the global TB epidemics can only be controlled through the expansion of programs to identify those who are carriers of latent TB infection.

2018 was an unprecedented year in regard to the number of guideline updates to support the important role IGRAs will play in the global battle in TB. Highlights include a significant expansion by the WHO in the recommended populations for latent TB testing and treatment as well as the removal of a prior recommendation against the use of IGRAs in low and middle-income countries.

The inclusion of IGRAs in the WHO's first ever listed essential in vitro diagnostics, updated guidelines from the American Academy of Pediatrics that includes specific recommendations for the use of IGRAs, and a lowering of the recommended age for IGRA use to 2 years old and the release of updated technical instruction for civil surgeons by the CDC requiring that an IGRA, rather than a tuberculin skin test, be performed in all applicants for the 2 years of age or older. Beyond these guideline updates, we've also seen renewed commitment from global organizations such as United Nations to scale up latent TB testing in an effort to get additional people on preventative treatments.

The UN, in fact, just recently set an aggressive goal to get over 30 million people onto preventative treatment by 2022. Together we feel these guideline changes continue to add further tailwinds to the displacement of the antiquated skin tests by newer IGRA technology.

During the year, we also saw the publication of some notable studies, which emphasized the superiority of our offering. In particular, there were 2 landmark publications in Lancet Infectious Disease, that reported the results of our tests in comparison to others in large-scale, multiyear follow-up studies where the accuracy of each test was assessed based on their ability to detect true infection as evidenced by the development of subsequent active TB disease and to correctly call uninfected individuals as evidenced by participants remaining disease-free. In these first-of-their-kind studies where test accuracy was assessed based on these gold standard, T-SPOT. TB was found to be the most accurate of the 3 commercial tests.

During the year, we also saw the publication of a large-scale study in over 40,000 children, which provided strong evidence on the utility of T-SPOT. TB in this important patient group and their publication of another large-scale study in over 600,000 subjects, which provides strong support for the FDA-approved borderline zone in T-SPOT. TB and this feature's impact on improving test reliability. We believe that the continued emergence of data like this is an important constituent in driving further market share gains and asserting our best-in-class performance.

With IGRA still representing only approximately 25% of the global market, we see tremendous headroom for continued growth through continuing to drive access to and adoption of T-SPOT. TB globally. Consequently, we remain focused on investing to drive continued revenue growth. There are 3 principal focus areas for 2019: firstly, getting off to a strong start with our partnership with Quest and working with them to accelerate adoption of T-SPOT. TB in the U.S.; secondly, further expansion of our commercial resources outside the U.S. to meet and drive broadening demand for our tests; and thirdly, continuing to invest in product development initiative that confer the augment our unrivaled simplicity of logistics advantages for customers and enable further automation of our tests.

Starting with the U.S., where our transaction with Quest has significantly increased the reaching competitiveness of T-SPOT. TB in the market. Since closing the transaction in early November, we've been working closely with Quest to integrate the acquired T-SPOT. TB service operation to Quest and implement our strategic collaboration agreement. The initial focus has been on bringing the former oxygen unit tank operation onto the Quest platform. Key to that is connecting the Memphis lab operations to Quest's software platform. This will allow physicians to order T-SPOT. TB directly from their EMR or Quest offering -- ordering interface just like any other Quest test and receive results the way they're used to. This also opens up access to Quest managed care plans, patient service centers and logistics capabilities. We're making good progress and expect connectivity to be in place during Q2 and the other benefits to be implemented by the end of 2019.

Once fully implemented, this will put T-SPOT. TB on a level playing field with any other test ordered by a physician from Quest. In parallel, we've been working closely with Quest sales and marketing teams to train them on the advantages of T-SPOT. TB. We've been very pleased with the amount of commitment shown on the Quest side and the quality of the collaboration between the 2 companies. However, it's still early and we're just starting hit our stride here.

All in all, the relationship is working well and we couldn't be more pleased with the high degree of engagement from Quest across all levels and functions. There's great strategic logic of this transaction and we believe that both organizations will capture significant benefits from this partnership in 2019 and beyond. Outside the U.S., we already are successful in developed markets such as Europe and Japan, where we are selling direct and which continue to grow.

Over the past year, we've strengthened our market leadership position in Japan, and we recently added more sales resources in Europe to support the positive momentum we've seen in that region. In China, we have helped facilitate the growth and expansion of T-SPOT. TB by complementing our distributor's efforts and guidelines advocacy of medical education. We continue to see the Chinese market as a significant source of growth and are dedicated to getting it right in China. We will be working with our distributor Fosun throughout 2019 to position us for future success and investing further in this market in order to do that. And ever more countries adopt latent TB testing and treatment, we will continue to expand geographically.

In 2019, we expect to evaluate and potentially execute on the addition of a direct presence and additional resources in multiple new countries. We'll also evaluate partnerships with the potential to give us significant reach in areas where it doesn't make sense for us to go direct in the near term. The ongoing commercial efforts and now that we can concentrate on only running one principal business model globally, we have the ability to focus our R&D efforts even more strongly on improvements to our T-SPOT. TB tests such as our T-Cell Select reagent. As we roll it out, using T-Cell Select for the first time ever, customers will have a fully automated solution for T-SPOT. TB. This will simplify workflow, improve throughput, reduce hands-on time and reduce labor costs in performing T-SPOT. TB. Furthermore, with T-Cell Select, blood samples collected in the single standard blood tube can be stored for up to 40 -- 54 hours at room temperature before use in the test. This further extends our unrivaled simplicity and logistics advantages for customers.

We believe that multiple advantages brought by this latest evolution of our tests will increase the use of T-SPOT. TB by new and existing customers, enable testing in new locations and create more formidable barriers to entry long-term. We're just in the early beginnings of this product, and our R&D efforts will remain focused on maximizing the reach of our technology and delivering all the benefits from this product's innovation over the coming years.

Another focus within R&D is the execution of a robust pipeline of COGS reduction initiatives. For example, we're investing in the further automation of our TB kit manufacturing, so that we can continue our long-term record of success in driving down COGS. On the spending side, we also expect to gain further leverage of our operating expenditures as we re-purpose the spending and deployment of capital in the company around our pure-play product business. Collectively, our continued revenue growth, work on COGS, leverage of OpEx will enable the company to move to profitability.

We expect adjusted EBITDA to get to breakeven once we've completed the remaining transition work for the U.S. laboratory service business sold to Quest. Additionally, in regard to 2019 priorities, we intend to capitalize on the options we have to utilize the cash from our balance sheet to improve returns to shareholders. In early January, we announced plans to seek shareholder approval for the ability to repurchase up to $100 million of the company's shares over 5 years. This plan has Board of Director approval and underlines our commitment to drive returns for shareholders. It also signals our discipline about getting the company to operating profitability. The share purchase program will be presented for shareholder approval at our upcoming Annual General Meeting of our shareholders on Tuesday, June 18, 2019.

Lastly, outside of our TB business, given the capabilities we have through a lot of options to grow the business over the longer term in new areas, both organically and inorganically, we believe there are 3 broad adjacencies where it makes sense for us to look to build the company over the longer term. Adding additional products in the TB continuum of care; building our presence in immunology based off our T-SPOT technology platform and our immunology expertise, and leveraging our channel through products that can utilize our global quality and regulatory experience, our manufacturing capabilities and our global commercial channel. Having said all this, our primary focus will remain on the fantastic opportunity ahead of us in TB, and we'll be very selective about executing on these opportunities.

Now turning to our financial guidance for 2019. For the full year 2019, we expect revenues of between $69 million and $72 million, representing 5% to 9% year-over-year growth on a pro forma basis or 8% to 12% year-over-year growth a pro forma basis when you exclude blood donor screening revenue. Based on the midpoint of the annual guidance, we expect approximately 19% to 20% full year revenues to fall in the first quarter. As seen in prior years Q1 is typically the weakest quarter of the year for Asia, although we still expect strong year-over-year growth, due to the seasonal pattern we expect revenues in Asia to fall back slightly, sequentially in Q1, before picking up throughout the remainder of the year. We also expect Europe to post year-over-year growth, but for revenues to be roughly flat sequentially to Q4, given that Q4 was so strong in that region.

In the U.S., because we will be recognizing Quest revenue on kit shipments on a go-forward basis, we expect the seasonality of our revenue in U.S. to shift slightly due to order timing and fluctuations in inventory and/or inventory build. Under our supplier agreement with Quest, we expect to have good visibility into these order patterns and that's reflected in our Q1 guidance.

To wrap up, I'm more excited about the company than I've ever been in 16 years I've had the privilege to be CEO. And that's because through all the foundations we've laid, we have a leadership position in the world's deadliest infectious disease. This is a very large, growing and underserved market. Our product in that market is based on world-leading immunology technology that's the foundation for growth in lots of different areas for the future. We have well-diversified revenue streams because of our geographical expansion, but also we have a recurring revenue model. We have very attractive gross margins and through the ability to achieve expense leverage, we now have a clear pathway to near-term profitability. And last but not least, we have a very strong balance sheet to create additional opportunities to build value for shareholders both by investing in the business and returning cash to shareholders. That concludes our formal prepared remarks.

We'll now open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Catherine Schulte from Baird.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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First just, Peter, you mentioned, talking about adding other potential tests to your offering. Given your position now as a kit business, are those pipeline tests something you consult with Quest on and their appetite to run those? Or is that a separate process?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [3]

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Sorry, we didn't quite understand the question. Would you mind repeating it?

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Yes. So for your pipeline tests, are those something you consult with Quest on, now that you are a kit business and their appetite for those tests? Or is your pipeline process just as a standalone company?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [5]

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Yes. That's certainly a consideration. In the strategic collaboration agreement we have with Quest, we have strong interaction across lots of different functions: sales, marketing, medical affairs, managed care, but one of them is also on product development. And so we do certainly talk about things coming up in the future, and that is definitely one of the considerations we would have in thinking about our pipeline, but not exclusively obviously, because there may be other channels in the U.S. and we also think globally as a business.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay. And then, as we think about incremental volume opportunities from Quest, do you know what kind of TB volumes Quest ran last year? Do you have any sense of what portion of that business could convert to T-SPOT?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [7]

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I'm not sure that it's public what volume of TB tests Quest ran last year, so I don't think I should comment on that. That's something that Quest should comment on, if they're willing to. I think it is clear, however, that they do run significant volume of our competitors test and yes, there may be reasons why they might prefer to run our tests in preference to that test. But that's certainly not something that we're banking on. It wasn't something that we assumed would happen in our deal model, and ultimately, that's Quest's decision, and their decision to make.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [8]

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Okay. And now with your strengthened balance sheet after the Quest deal, how should we think about investment priorities for you between R&D, investing in your commercial organization or M&A?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [9]

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Yes. So I think it should be clear from my comments that we're very focused around the TB business. We will clearly make incremental sales and marketing investments in that business to drive further growth. We are sitting on a fantastic market opportunity here, and we'll continue to make judicious investments we think have a good payback period in sales and marketing. Equally, we are also going to spend money on R&D in TB because we think that, clearly, COGS reductions have a very good payback in terms of adding shareholder value but also in terms of this major new cycle of product innovation we think that could be very important for the company in terms of share gains in the future. So there is a clear priorities for business, and we're definitely going to be investing in those. As it relates to M&A, I think longer term, we clearly feel that, that could make sense for the company. But we will be very selective about that, and making sure that it doesn't distract us from our core execution in TB.

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Operator [10]

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Our next question comes from the line of Doug Schenkel from Cowen.

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Chris Lin, Cowen and Company, LLC, Research Division - Research Associate [11]

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This is Chris on for Doug today. I just wanted to start on the comment you made, Peter. When you finish -- when do you expect to finish training Quest sales reps on T-SPOT? Given that Quest was already selling a latent TB test, how much incremental work is there to do on training Quest reps? And just relatedly, when do you expect to see an acceleration in U.S. volume growth as part of the Quest agreement?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [12]

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Yes. I think there are a lot of things to do in training a new partner, Quest or anybody else. Obviously, we need to -- in the same way, we're training our own reps, it takes time, right. You need to educate them about the product and then you need to build a pipeline of opportunities and you then, as they execute, obviously, there are more detailed questions that come up. And so I would view that training their reps as in training any rep just takes some time. It's not something that happens in days. More generally, I would say that we'll start to feel the full benefits of the partnership with Quest when T-SPOT's fully integrated into Quest's channel. And as I said in my prepared remarks, we don't anticipate that being completed until the end of 2019. So we view 2019 as a year where we're focused on really seeding strong foundations in the partnership and are looking perhaps to 2020 before we start to see that meaningfully accelerate the U.S. revenue growth.

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Chris Lin, Cowen and Company, LLC, Research Division - Research Associate [13]

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Okay. And then, can you just elaborate on the strategic collaboration agreement with Quest? Really what does that entail in context with sales and marketing investments? And I think you previously talked about implementing a annual promotion plan with Quest, any more details you can share on that plan?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [14]

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Yes. That document is, I believe, public, but with some redaction. So generally speaking, what this strategic collaboration agreement is, is a document that governments have how the 2 companies are going to interact together to promote T-SPOT. TB. So there's a few elements to that, that I think are worth mentioning. The first is, it establishes close functional collaboration between various functions in the 2 organizations that -- to develop joint plans to work together to promote T-SPOT. TB, so that sales, marketing, medical affairs, managed care, et cetera. And secondly, it sets out a governance structure for administering that collaboration and we also will be working together on joint sales and marketing plans for the year. So that is a very top level of what that agreement covers.

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Chris Lin, Cowen and Company, LLC, Research Division - Research Associate [15]

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Okay. And then maybe just lastly, going back to acceleration in volume growth, should we see that more meaningfully in the physician office market? Or do you expect that to be meaningful in the hospital segment as well?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [16]

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Well, I think it's worthwhile pointing out that we've been very -- we had been very successful historically in the hospital segment. And I see no reason why that success can't continue. But equally, one of the great advantages of the partnership with Quest from our perspective is that they have a relationship with over 50% of doctors in the U.S. and they have a very large sales force that they would call on that. And so certainly, we're looking forward to this partnership, enabling us to access parts of the market that we weren't able to do ourselves before.

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Chris Lin, Cowen and Company, LLC, Research Division - Research Associate [17]

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Okay. And sorry, truly last question. Could you quantify the impact of the Japan's ICN? And do you expect to recapture the lost volume in 2019 at all?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [18]

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I don't have a number to give you -- a specific number to give you. What I can tell you, it did interrupt testing in a number of cities for a couple of weeks. Generally, we -- our history in these types of weather disruptions is that testing just gets deferred, it doesn't kind of catch up. So our expectation is that, that's just lost.

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Operator [19]

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Our next question comes from the line of Tycho Peterson with JPMorgan.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [20]

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This is Julia on for Tycho today. So first off, maybe, could you give us an updated view on the expected seasonality? And when do you think you'll have better visibility into the staffing dynamics from Quest? And do you expect a significant uptick in volume starting 2Q?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [21]

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Yes. So I think it's a little bit early to answer that question. What I can tell you is that we do have, obviously, near-term visibility on the orders and that's reflected in our Q1 guidance. But exactly what the seasonal pattern will be, it's a little bit unclear at this point in time. It really depends on -- we obviously know from our past history that Q3 is the highest quarter in terms of testing -- test performance. The question is, is that going to feed into Q3 being the highest in terms of kit shipments? Or are kit shipments going to kind of precede that? And if so, does that mean that some of that's going to shift to Q2? Yes, these are all conceivable, but we don't have -- we would like for it to play out a little bit before I comment more definitively.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [22]

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Okay. And then, on gross margin, 74.3%, I think that's the high-level we've seen and also higher than the 70% product gross margin that you previously called out, so just wondering outside of the sales and service business, obviously, how should we think about the path towards further growth margin expansion?

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Richard M. Altieri, Oxford Immunotec Global PLC - CFO [23]

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Yes, so if you look at -- 74.3% was our GAAP reported financials. And the GAAP numbers did include some allocations between continuing and discontinued operations. That's why we've directed you to the pro forma numbers, which we believe are more indicative of what the business will look like going forward. We'd expect our product gross margins to be in the neighborhood of 70% on a go-forward basis.

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Karen C. Koski, Oxford Immunotec Global PLC - Head of Strategy & IR [24]

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And just to clarify Julia, the pro forma gross margin was 71.2% in the quarter, so not a huge variance. But that's kind of the level we think makes sense going forward.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [25]

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Got you. And lastly, from me, regarding OUS expansion, I know you highlighted going through a distributor in China, but could you maybe elaborate on the efforts more broadly, in which countries outside of China or including China have you made the most progress? Are there any sort of imminent pending guideline extensions, like, tenders on the horizon? And how much of that is currently embedded in your guidance?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [26]

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For competitive reasons, I prefer not to get into too much detail there other than to say that we see, obviously, China and Japan have been strong growth drivers for the business historically, and we continue to see them as strong growth drivers for the business going forward. But outside of that, we see multiple opportunities in wider Asia and in fact, all over the world as the WHO stance has changed so significantly on IGRAs for further growth and we'll be looking at each of those in a disciplined way and in thinking about where it makes sense to put our own resources and where it may make sense actually to use partners.

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Operator [27]

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Our next question comes from the line of Bill Quirk from Piper Jaffray.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [28]

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So first question, Peter, is just thinking about the nature of the Quest relationship going forward and the comment that 2019 is going to be a big integration and training year for them, help us think, I guess, 2-part question is, help us think about the, I guess, the confidence that they're giving to you in terms of forecasting for 2019 given that there are a fair amount of moving parts vis-à-vis the integration? And then, maybe, just kind of a longer-term question is, is how to think about, again, integrating Quest into the forecast? Are they giving you some kind of annual numbers? Are they giving your quarterly forecast? Just trying to understand better the visibility on that relationship?

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [29]

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Yes, so I think our visibility is in 2 main areas. Under the supply agreement, we do get a forward forecast of expected purchases. And obviously, as in any such forecast, the numbers that are way out at the end of the forecast are less reliable than the ones right in front of us, where we do at least have some visibility going out beyond the current quarter. And the second thing we do is, under the strategic collaboration agreement we have data sharing so we have some indication of sell-through volumes or testing volumes in the market and that also enables us to kind of triangulate how things are going, which gives us a secondary check on whether the kit purchasing forecasts are tracking in line with what the growth is in the end market. So those are 2 things that we'll have and, obviously, it will take some time for us to triangulate those things and to learn to work together to get those things in sync, but we feel in a relatively good place as it stands in terms of the guidance we've set for this year, but it's clear that also we'll learn more as we -- as the relationship matures.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [30]

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Okay. Very good. And then secondly, is just, again, kind of a bigger picture question. Given the transition, can you talk a little bit about the mood internally at the company? I presume employees are kind of engaged in the business transformation, but would love to hear your comments and certainly appreciate the comment at the end of the prepared remarks about this being the most excited you've been in the 15 years you've been running Oxford.

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [31]

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Yes. I think when we announced the transaction internally, I think there wasn't a single person who didn't get it and understand the logic of doing this because it's really one of those rare situations where 1 plus 1 equals 3. This is great for Quest and it's great for us. It's great for T-SPOT. TB. It's great for patients. It's great for TB control. So it's just all around a great thing for the company, for our products and our future. And we're really excited about building that new future together.

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Operator [32]

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(Operator Instructions) And there are no further questions at this time. I would now like to turn the conference back to Mr. Peter Wrighton-Smith.

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Peter Wrighton-Smith, Oxford Immunotec Global PLC - CEO & Executive Director [33]

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Yes, thank you all for joining us to discuss our fourth quarter and full year 2018 results. We look forward to updating you on our next quarterly call. Thank you.

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Operator [34]

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This concludes today's conference call. Thank you for joining. Have a wonderful day. You may all disconnect.