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Good morning. Thanks for joining us today. We have Microbix presenting their Q3 results. With me I have Cameron Groome, CEO; Jim Currie, CFO; and Ken Hughes, COO. As always, this presentation will contain forward-looking statements. If you'd like to know more about those, you can find them on the company's presentation on their website. And there will be a Q&A section at the end, so feel free to enter any questions you have in the box at the bottom of your screen, or you can e-mail them to me. With that out of the way, Cameron, nice to see you.
Great to see you, too, Deborah. Thank you so much for putting this together, and for everyone on the line for joining us. Thank you for your interest and your support. And likewise, Jim and Ken.
Yes. Looking forward to hearing more about the Q3 numbers, as well as I think you've got a new presentation to unveil.
Well, exactly. And we'll have to see how much we want to page through that, but we'll certainly I think touch on a few slides in that deck.
It should be on the website later today, too.
Perfect. Perfect. Thank you so much. Well, I'll make a few comments, maybe, and then I can ask what Jim and Ken might want to supplement. And Deborah, you can certainly -- please do step in with any particular questions that you've gotten from shareholders. And I understand that shareholders can also submit questions on the Q&A section of Zoom that certainly we'll address to the best of our ability, as long as it's not jeopardizing any delicate ongoing discussions. So I'd summarize by saying, certainly from management's perspective, we're very much executing according to plan. Q3 I would classify as a solid quarter within range of our top line and bottom line expectations. And to the extent that anybody's asking, forecasting, I think it was within range of those forecasts as well. By business units, I would say very much the highlight would be our first major and multiyear agreement to provide QAPs to a multinational diagnostics company. And as everyone who's perhaps attended prior presentations would know, one of our objectives for our quality assessment products, or QAPs, has been to secure alliances whereby those QAPs would be included in fixed ratios in the kits of test cartridge consumables of major multinationals, particular for point of care diagnostics. So that if someone's selling, for example, a million cartridges a month, and our QAPs are included in ratios of 1:25, for example, that would be 40,000 units a month of sales for Microbix and at certainly very favorable pricing. And this alliance that we announced just before the quarter on August 10, where we had been working this that party for a long time, many, many months before securing this purchase and supply agreement, really showcases exactly that kind of business we've been working to achieve. Business that is recurring, relatively high margin, a very sticky business associated with these companies. And it's been our objective all along to lock that in. And this is a contract, as we hope to secure many others, that starts in several million dollars of incremental sales a year. Certainly on the order of $5 million for this contract and grows thereafter across its 5-year initial term. And I'd also want to highlight very much the breadth of that relationship. We're very much absolutely the furthest thing from any kind of COVID-19 play. The infectious disease area is so much more broad in our biological world. And this purchase and supply agreement really reflects that breadth. This is an alliance that covers a portfolio of cutaneous or skin lesion diseases. Covers gastrointestinal infections. Covers a whole panel of respiratory diseases, viruses, and sexually transmitted diseases. Literally addressing dozens of pathogens and showcases the breadth of our expertise and just the breadth of what is circulating in our communities and continues to circulate, whether or not they're in the headlines on a day-to-day basis. So this is exactly the type of customer agreement that we wanted, that we've spoken about and that we're committed to replicating and many times. And I was looking at the definition of many earlier just to confirm. So this is again -- and it speaks to why we've been investing in our people, our systems, our equipment and our facilities. It's all in order to support this emerging growth from a top line basis. From a gross margin dollars basis and from a net earnings and cash flow basis, you're targeting, and I'll just again emphasize that a top line of at least $100 million within the next several years. That's what we're building to support our infrastructure for. And in fact, we soon see Microbix moving from its current level of about $5 million of sales per quarter, plus or minus that we've talked about, to a run rate closer to $10 million a quarter with our objective of getting to that run rate by the end of fiscal 2023. And that sounds like a lot of growth, extraordinary sales growth. But in fact, just requires more ongoing success in locking in new QAPs purchase and supply agreements, alongside relatively status quo top line for our antigen and VTM businesses, which certainly we'll hope to exceed or those 2 businesses as well. So numbers that are achievable. And of course, there are external elements such as supply chain disruptions that we don't control, particularly when they're on behalf of our customers. And that's why at some levels you've seen us delivering, but not precisely on the time lines that we've originally spoken about because we can only control the internal factors that affect our business. I think we've been very successful in managing through a great deal of economic, market and healthcare turbulence over the past several years, and are committed to keep achieving for shareholders and keep delivering very real and sustained value creation. And ultimately, that gets reflected in the visibility of the company and the success of the company and in the multiple at which it trades. Which right now is certainly lower than we might have expected, but it is reflective of a general risk-off approach in the market where the investors are generally staying away from smaller capitalization companies. And although we're in an incredibly strong position with revenues, with positive EBITDA, with positive cash flow, positive net earnings and an incredible balance sheet strength, I think we get bucketed in a little bit with that small cap -- or tarred with that small cap brush, even though we are indisputably strong in our financial position and are very much a healthy, strong operating business getting bigger, getting stronger and ultimately will achieve visibility and the market recognition that is justified by our performance. So that'd be my general comment in characterizing the quarter. And maybe, Deborah, would you like to address some questions from shareholders? Or perhaps we should have Jim and Ken supplement my comments with a few of their own.
I'm happy to extend what you said there, Cameron. As we've been talking about for a long time, COVID, our COVID product portfolio is basically exemplifier of what we do. It's not even close to the entirety of what we do. And this new opportunity in terms of a full portfolio of QAPs in multiple disease states illustrate our intellectual property and our scientific and production capabilities that we've been building up in Microbix. We spent the last little while -- and I've used the term future proofing and capacity building many times here. And we're set up with the necessary capacity to service this and multiple other opportunities now and going forward. And we continue to build that capacity and the necessary systems and expertise and teams to make sure we can meet these opportunities as they come our way. The supply chain thing applies to everybody, including us, but we've managed supply chain very well. A lot -- it is all slightly. It's something that will be slight. It will be associated with supply chains elsewhere. Our capacity is in place both with people, with science, with facilities and what we can do going forward. And I hope everybody recognizes this opportunity that we're very, very much more than a COVID play, which we've been saying over and over again in the last year or so.
Thank you, Ken. Jim, what would you want to comment on?
No, I think you've covered mostly. I can go into lots of details about the quarterly results and where they're from and what's happened. But I think what's probably best is maybe to wait some of the questions that people might have and respond to those questions as they came out.
Very good. And Jim, maybe you could comment just on some of the financial strength ratios. I think with the concerns about capital market conditions and so forth, could you comment on our balance sheet and a little bit of our directionality in terms of cash generation or uses?
Sure. Sure. I think what we've, as Cameron's alluding to, is we've spent a bit of time over the last, I'd say, 1.5 years, 2 years improving our balance sheet. And this current quarter, we're sitting with a current ratio of close to 8:1 and the debt/equity ratio of 0.35. Excellent numbers for a company like ourselves. We've continued to grow our cash, which is going to be utilized to support the strategic initiatives that we've got underway that both Cameron and Ken have identified. We're prepared and we're capitalized to support the growth, and we will have no trouble being able to generate the production and the sales that are reflected in some of these new agreements that we're seeing. We've got one. I've certainly, as Cameron indicated -- I think he indicated we certainly expect more and more in the coming months. And we are prepared to build against that order flow that we see going forward.
That's great. Thank you, Jim.
I have an audience question, if you guys are ready.
Sure thing.
So why would a large multinational diagnostics developer come to Microbix for test controls versus developing their own internally?
It comes down to so many things. And you know what, Ken, you're absolutely champing at the bit to go after that. So go, go, go. I'll do clean up on that one.
Well, we have deep expertise and intellectual property in this area. So from a scientific perspective, from a quality management system perspective, from a reduction and manufacturing perspective, this is what we do, and we do it very well. And our clients know we do it very well, and we do it better than they do. And so they come to us for our expertise. But they also come to us because we're a third party. From a regulatory perspective, using a third party control, say, for their testing platform gives them the assurity that -- or regulators the assurity that they're not gaming the system because we're not them. So they come to us for our expertise. They come first for regulatory requirements, and they come for us because we know we respond quickly. I think we've mentioned before the omicron controls that we developed in 8 weeks to fully develop IVDs. Nobody else can do that in a meaningful way, and they are well aware of that. They have audited us. They've been in our facilities and seen what we do. They know we're good at what we do, and we have the ability to build from there. So they want to form these relationships to support and secure their testing. And of course, they work with us because we're not their competitors. We don't make tests. We make everybody's tests better. And they're well aware of that and that's why they work with us.
Great answer, Ken. I'll -- boy, trying to improve on that, it's a good one, but I'll try to supplement it a little bit. It's -- we work with a tremendous breadth of organisms as well. So we have within our libraries internally, we have all the organisms or can access them. We know how to work with them and titrate to controls towards the limited detection of their assays. So it's a real challenge from a quality perspective of the test to say, hey, is it really working to the level it's supposed to. We have the formats that are required, whether it's liquid or on flocked swabs. We also have the ability to stabilize these samples and ensure they're -- of course, ensuring their non-infectious as well. So it's really the full toolkit, and as Ken was mentioning, all the quality systems and the scaling. And that's been a big thing we've done over the past few years as well. We used to make 100,000 vials a year of the small vial quality assessment products. And then of course more recently, we've moved to make 100,000 vials a week of our viral transport medium. So not only can we do this work of quality, we can do this work at scale. And somebody needs to know that they're not going to have their critical -- a critical piece of their overall value proposition fall down and prevent them from making any revenue. So they need to know that we're a secure partner. And that's one of the reasons why these relationships will be very sticky for us. So it's just the highest quality of business you want to get. Deborah, I think that pretty much -- Jim, is there anything we missed there?
And how is QAPs...
I'm just unmuting. But no, I can't answer on the technical side things. But I think one of the things that Ken did identify is that they just can't have -- be auditing themselves, or to be seen auditing themselves, to use an analogy. So that's why they want to use third party controls to make sure that their systems are working and functioning as they say they are.
And the clients are very, very well aware of the excellence of our R&D and scientific teams. And then that leads into the quality management system and the manufacturing at scale and the compliance we have, which is also excellent. So they're well aware of this continuum of support we can provide and then use it accordingly. There's no point reinventing the wheel when we have a better wheel and a third party wheel, as previously discussed.
And how is QAPs penetration going among clinical labs?
I think the clinical lab side has been slower penetration than we anticipated out of the gate. We've exceeded our expectations in working with the test manufacturers for providing in-kit controls, and I would say the penetration amongst labs has been slower. A large part of that has been due to COVID-related matters. More difficult to get in and physically see people, of course. And then the focus on COVID has limited the broader discussions that need to be had and should be had. So that would be curtailing our objectives on the clinical lab side. But I think that's a question of delay and not derailment.
Okay. I had a question to you, Cameron, actually. Maybe you can walk us through what happens if the U.S. decides that COVID is essentially over and removes the emergency designation for a lot of the testing. How does that impact Microbix?
Well, there are a lot of respiratory tests out there that were approved under the Emergency Use Authorizations, and effectively, the requirement for compliant controls was waived temporarily. So if the Emergency Use Authorizations are withdrawn or given a runoff time line, sunset, whatever you want to call it, those companies have a choice. They either need to get compliant with controls, or they have to withdraw their tests from the U.S. market. And if you built up a market in the U.S. for COVID testing or for respiratory multiplex testing, the last thing you want to do is have to tell your customers, sorry; we don't have a compliant control. We'll need to withdraw from market. So that's actually leading companies to Microbix to say, gosh, I know this is coming. I might not know precisely when, but I need to get serious about this. And we're seeing some discussions that have been simmering, certainly moving much closer to boil, if not already at a boil. So it should be very much a benefit for us in that respect.
And of course, COVID's not going to go away, but let's say for the purposes of discussion it did. There's a whole portfolio of other testing, viral testing that needs to be done. One of the things that was delayed because of COVID was our full portfolio of human papillomavirus testing for cervical cancer and other cancers. That is taking off throughout the world now. And the capabilities to test is going to drive that market, and we're absolutely right there to support it. And we've talked about gastrointestinal, other sexually transmitted diseases, a whole portfolio of stuff which we develop in our labs for controls that will be needed down the line. And of course the respiratory portfolio on top of that. So if COVID miraculously disappeared, which it won't, there's a whole lot of opportunity for us down the line. But it will be incremental to COVID going forward, and we'll be able to service it all.
Okay. Great. Let's stay on the QAPs theme for now so we're not jumping around. Are there any risks or challenges to scaling the QAPs production capacity to several tens of millions of dollars over time?
I think there are always risks and challenges, but let's specifically identify them. One of those is the physical volume of production. And we've been looking carefully at our space needs for the physical spacing of that as well as laying in automation of pinch point steps so that we don't hit pinch points in an unanticipated fashion. So we're -- we've been looking at things like pouch handling and pouch sealing methods and making sure that those are bulletproof and scalable. And ultimately, we'll move in the direction of front-to-back automation, but that won't happen immediately. But we can produce now well into the millions of units per year. And we'll be looking at carefully to make sure we don't hit a pinch point without adding space or capacity well in advance of that point. In terms of -- so those would be really the scaling challenges. There are more technical elements that we need to keep watch of, such as making sure that there's no cross-contamination between product lines and there's proper line clearance and so forth, but those are more normal course of what we do. Ken, what would you want to flag there?
Well, we have additional capacity for the growth we're enjoying right now and we'll continue to enjoy for the next little while. We're basically back to future proofing and capacity building. We're staying ahead of the curve to make sure by the time the capacity needs are larger, we have the capacity to service them. We don't anticipate any sort of interruption in our capabilities to scale. The technologies involved are well understood to us since some of it becomes redundant and modular, and some of it is already in place as we move forward from that. So we don't anticipate any problems in scaling to meet the market trajectory we we're on, and again, we're getting ahead of that. Now the complexity of the business increases with multiple schemes as we start selling them, but that's why we're upgrading our QRS system to fully integrated EQNS. And also upgrading our ERP and integrating it fully now. That's why we hired the Director of IT to build that capacity, to manage those vials as we move forward, including more complex inventories and so on and so forth. All of that's in place. All of that's ahead of the curve for where we're going. And so we don't anticipate any particular problem. There'll always be nits, but in terms of what we do, we're very well positioned to service the growth we're going to enjoy in the next few years.
Well said. Jim, anything you want to comment on about control systems, ERP and so forth?
No. Other than the ERP systems, I think our investment in IT in general and our infrastructure is incredibly important as we go forward and grow. And again, it's something that again that we're putting into place well in advance of the need for it, but we've identified that need and desire.
Great. Thank you. Deborah, I'm getting frightened because I see the number of questions going up, not going down. But we've got time. So you curate and we'll address.
I'd like to stay on QAPs, but since we were talking about the automation, there's a few questions on, are you looking around for a fourth site? I think you provided a pretty clear update on automation for QAPs and VTM, but maybe we can address some of those questions quickly.
Sure. Gosh, with regards to a fourth site, we're actually having dialogue about that even as we speak. The operations and manufacturing team is doing a magnificent job of maximizing the utility of the spaces we have. We're looking, though, and saying what is the cost versus the -- what is the cost of having space versus the cost of not having space? And as our business is now really moving into a very strong growth phase, the cost of hundreds of thousands of dollars for having, for example, a fourth site might be offset against an opportunity cost of tens of millions, potentially, of not having a fourth site. So we are, in fact, actively looking at that potential now. And I think we'll be taking that decision within days to weeks as to which -- where we see -- we don't want to be getting too far ahead of ourselves, but we don't want risk falling behind either. So these are questions that are related to high-growth businesses, and we want to take good-reasoned judgment and make sure we're viewing the risks and the benefits and taking the right path on that. But yes, very much on our minds.
Okay. Going back to QAPs, I had a very specific question on the recent announcements. So sorry, it's just in my e-mail, so let me just read it out. In your most recent announcement on the QAPs supply agreement you stated, Microbix may generate incremental QAPs sales of approximately CAD 5 million related to this agreement in its initial fiscal year of 2023. Can you give us an idea of how big this potentially can get beyond 2023? And what would be supporting factors for the contract to get bigger? Is there a chance this contract turns out to be less than $5 million annually in the future?
I would be shocked if this contract turned out to be less than $5 million in the future. I expect that certainly its first year achievement will comfortably come in at or above that $5 million number or we would not have cited it in our news release. And I would look for it to grow substantially from there. So I could see this as the different tests that are going, into which our QAPs will be an integral part, gain traction and success in the marketplace. I would see it rising to multiples of that $5 million number over the 5-year initial term. And ideally, these are forever relationships. We're not getting into these with the intention of pulling a ripcord at the end of 5 years. These are relationships that I would hope will span multiples of that time.
Okay. And then maybe can you comment a little bit on the pipeline for QAPs for the second half of the year and maybe first half of next year and what the biggest hurdles to signing additional contracts are?
Some of the hurdles are concluding -- some of the hurdles are internal, certainly formulating products that are suitable for the individual companies' tests. Some of them are relatively off-the-shelf. Some of them require tuning for the specific limits of detection of different test assays. You want to come in to pose a genuine challenge to the test and say, is this towards the limit, the lower limit of detection so that you are checking truly if everything's working properly. So there can be that element of customization. I think our team is brilliant at that. I don't see that as a big hurdle. Likewise with multiplexing and formulating. Some of the challenges we've had, and frankly in this agreement, I think we were hoping that it might have been signed 6 months ago. But there are supply chain issues affecting our customers and technical issues in finalizing assays and regulatory filings that are not within our controls -- within our control; not within our controls. So those are the things. I think there are challenges at the level of our customer. Are they ready to roll out those tests? Are they ready to accept the incorporation of the controls? Those are some of the rate-limiting factors. And then, of course, because all of the companies are operating under quality systems, as much as we might be comfortable doing so, these sorts of agreements can't be done on a handshake. They have to be fully documented by both parties. And just the documentation elements of these agreements can take some time.
Okay. And does winning that big QAPs contract make it any easier or harder to win other contracts, i.e., other test manufacturers gaining comfort with you, or conversely, other test manufacturers don't want to use the same provider as a competitor?
It's a great question. I would say that it goes in on the comfort. We are still growing into this business. And folks that have done their due diligence checks and say, well, wow; yes, Microbix is a reliable strategic partner to have. Winning subsequent agreements and subsequent contracts, I see it getting progressively easier; not harder. And as Ken had indicated earlier, we're not competing with anybody here. We're not -- we don't have our own test that we're fighting to get market share on. We're trying to make everybody else's tests better. And defining our niches where we can be the best and say, let us take this off your hands. You may be dealing with cartridge construction and microfluidics and software and other elements. We will handle the quality side for you. Let us do that, take that worry away from you.
Okay. Couple more QAPs questions, then I think we should move on. Is the new QAPs agreement for partner tests with well-established market share or for testing systems to be launched or early in their launch?
Both. There are some within that portfolio that are existing and established and some that are new. And people were trying to do a little bit 20 questions on me as to nail that down. But I would urge people to take a deep -- take a long read of the news release, and I think you can start to piece together a short list. But I'm not going to go warmer and colder on who it is. It would not be respectful of them. And they're great, wonderful people. We love them dearly. They're great. And they said, guys, we'd love to disclose this with you, but we can't corporately set a precedent where major component suppliers, every one of them wants to do joint news releases or several whatnot with us. So we asked. They respectfully declined. But they were well aware of what we were putting out in advance.
So have they secretly dating you, Cameron. They don't want to make it official. I've got one for you, Ken. So I would assume the automation manufacturing of QAPs is going well. Do you feel that any bugs have already been worked out?
Oh, of course. We're continuing to knock them off one by one. And we have a process development group to address that very, very matter. We have certain processes which we've described as semi-automated, and we're working on full automated lines as well, which dovetail into discussions of capacity. I suppose it's most useful in this forum to say the automation we have online right now, which has been managed and has been validated by our team, is more than enough to deal with what we need right now and for the next little while. That same team is working on further expansion of capacities and capabilities going forward to be ahead of that curve. There's always little nits. There's always little things you have to work out. But we do it ahead of time, so when the rubber hits the road, we're ready to go. Mixed my metaphors there, but you know what I mean. So in terms of -- we just have an excellent process development team. There's no two ways about it. And our clients know that, and that's why they come to us. So I don't anticipate any particular problem in this regard. If we can move around a bit, we could talk about the bioreactor through Rubella and the types of yields we're getting right now, which are still far ahead of where we were before, which is another description of the process development excellence we have at Microbix. And that's going to continue. So I'm fully expecting to be able to support what we need to do on the business development side. I mean not easily, but efficiently and competently, which we always have.
Okay. Let's switch gears to something other than QAPs. Cameron, do you want to talk about something old or something new?
Either one. I'm game.
All right. Let's hit urokinase first. Maybe you can give us a bit of an update on what's going on there. I had one question that was asking to please recap why this product initially failed in the marketplace and why it could become a viable alternative. Maybe if we could just spend a few minutes there.
Sure. We're certainly going back in time in terms of matters. Urokinase was extremely -- we're talking about low molecular weight urokinase made in salt culture. It was the back in the day, branded as Abbokinase and later became Kinlytic. And the product was extremely well habituated in the marketplace. Millions of patients treated successfully for both the catheter clearance application, which is our focus area, and for pulmonary embolism and for other systemic clots. And product worked extremely well and was extremely safe and extremely effective. The then owner of the product was asked by the Food and Drug Administration, you just do normal course updates with the best practices of its manufacturing. And I think it was riding pretty high at the time and refused. So you can imagine that perspective to refuse to make manufacturing systems upgrades by a regulator is not a good place to be. So at the time, the regulator refused them to release subsequent batches to approve them for sale. So there was this deadlock, and the product came out of the market for a time. Cooler heads ultimately prevailed, and the then owner of the product said, yes, well -- oh gosh, we'll make those upgrades. They made the upgrades. Product started to come back on to the market successfully, again, safely and effectively. And then that company cruised into a big corporate restructuring whereby it sold off all of its hospital-directed products. And most of its products went into one basket. This one had just returned to market and got orphaned. And it was bought by another company that said, well, we'll sell off inventory and be able to set up manufacturing from self-generated cash flows. They weren't able to do so. And it's at that point that Microbix bought the full rights to this innovative drug. So we own effectively what we call the drug master file associated with this as well as its registration. But in turn, while we could make it at our facilities, no regulator in their right mind is going to let you manufacture a human therapeutic in a facility dedicated to growing viruses and bacteria. So we had to find another site, build it. And for different reasons, the company was going after the entire market, which would be a much more expensive endeavor, rather than going after the specific catheter clearance niche, which has been our focus. It's grown tremendously over the years. So now we're focused on partnering for catheter clearance, which is about a $400 million a year U.S. market and continued -- which continues to grow. And we would look to capture with our partner a portion of that market. So it gives you a bit of the back story. I won't go further down that rabbit hole. But there are very good reasons for it all. And discussions are still active about securing a partner for Kinlytic and bringing it back. But we're committed that it won't be at the expense of growing our revenue-oriented businesses, and we don't want to starve those businesses for capital. So we want to find a partner who will commit all or at least very much the lion's share of the commitment, and for us to secure a purely additive revenue or royalty stream associated with the reintroduction of that very clinically important product.
Okay. And there are active conversations and still potential buyers for the asset?
Yes, there are. I confirm that.
All right. Let's talk about monkeypox. Does this represent an opportunity? What kind of products can be manufactured around it? And more importantly, do I get to go live on a beach for a year again?
Sorry, which part of the question is from shareholders again? Yes. With regards to monkeypox, we've been watching it very carefully, obviously. And we were looking to see, does this go exponential, or does it continue with an aromatic? Or is it a slope line upwards or a line going vertical? We don't see it thankfully as something that goes exponential or becomes an incredible global pandemic. But it has become a new pathogen that's become endemic in Europe, the United States and other countries. So it will be an ongoing problem and pop up in different communities, in different geographies. And we do see a market for that. So we have evaluated that, and we're looking at what exactly would be the composition of an optimal test control for molecular testing for monkeypox. And we will, I think, likely introduce a product that will support that testing further our quality commitments. But it's something -- we're not -- we don't want to be chasing the headlines here. Everything we do is about real market opportunities. And as we have been working to define the real market opportunity, we'll create a real product for it that will generate real sales.
Makes sense. And while I clean up some of these questions, I know a lot of them are dealing with VTM. Maybe you can provide an update there on discussions with the Ontario government, other provinces, other countries.
Yes. We are having dialogue continuing, of course, with the Ontario government. We've had the election, cabinet shuffles, tremendous reassortment of the different levels of staff within the governments. So there is tremendous change over there in maintaining the continuity of relationships within departments. We do see an ongoing desire for domestic supply of VTM from the ministerial level, and we see a fundamental need for the product. We are working to broaden out the usages of Microbix's DxTM, as it's not just about COVID. This can support transport and sample plex of any virus. And of course, we're also reaching out to other provinces to make sure that they're aware of the existence of our DxTM and that it works very well for their own different viral testing needs. And really making Microbix a part of their supply chain certainly, likely not 100% of their supply, but a meaningful proportion so that we can support them for search capacity as well as baseline capacity also. With regards to other countries, of course a principal one would be the United States. That would be involving filing of what's called a 510(k) pre-market notification with the FDA. It's something we could do and can do. It's not hit our radar at this point of view as a priority, but we will continue to evaluate whether that is appropriate, it makes sense strategically for us.
Do you see this revenue line as potentially dropping? Obviously, it's been lumpy. But kind of on an annualized basis, do you still view this as a growth area?
Yes, we do. We'll have additional capacity coming online. I think what -- we're a bit damned if we do, damned if we don't. Because we created this business line so quickly, and shot from zero to sales of approximately 5 a year, the immediate criticism that comes with that is, well, you have customer concentration now. Well, yes, we had to start somewhere, of course. And now having a baseline -- a base customer with Ontario, we're looking to broaden out both the usages and the customers for that. But it's really reflective of the relative youth of that product line.
And what's the current capacity for VTM? And can you give us an update on capacity expansion, when it will be fully automated?
Certainly. Ken, why don't you jump in on it?
Yes. It's really easy for us to do 100,000 units a week right now, and capacity will go up 4x to 5x that in the next couple of months. So we're putting these lines together right now with Canadian-based groups that manufacture these types of throughput devices, but we'll be installing it in the next -- well, at the end of this month. And then subsequently in September and October, everything will be rolling. So the capacity's going to go up right now, so we're in really good shape from a capacity basis.
And other potential use cases beyond COVID?
Oh, absolutely. Ken, keep rolling. You're on it.
Yes. Before COVID existed, Canada imported over $50 million worth of VTM from various sources of variable quality. So there's opportunities outside of COVID, of course. Infectious disease testing, if anything, it's been exemplified by COVID. Everybody knows it's a good idea to do it because if you don't do it well, you suffer the consequences. So there's multiple opportunities in all sorts of different viruses and other pathogens in VTM, and VTM portfolio are going to be developing in the future. And of course, we have that expertise in manufacturing and development at scale to support that. So yes, there's going to be a number of SKUs coming out. There's going to be a number of pathogens that are going to be addressed with this going forward. And of course, we're providing a Canadian solution. So hopefully there won't be another pandemic, but if there is another one, we won't be caught with our trousers down again. So we really -- we have a Canadian secure supply for multiple applications going forward, and we're intending to build it accordingly.
I got nothing to add on that.
All right. I think that's all the questions that I had on VTM. I had a question about the R&D budget. So it looks like your R&D budget doubled in the quarter. What do you see as an ongoing rate? And there was a follow-up. And what direction is your R&D directed? I think that's meaning what are you investing in?
Great questions. Yes, our R&D budget is going up. And that really reflects an intensity of product development for diagnostics companies on the QAPs side that we're creating multiplex -- specific multiplex controls to support tests that will look for anywhere from 4 different pathogens to a dozen from one sample, and challenge each channel of those tests. So very important, very economic and very complex. So a lot of that work our R&D is directed to. We have ongoing work on improving the yields and reliability and consistency of yields with our antigen production that is ongoing R&D work. We have further applications and validations and it's perhaps formulations of viral transport medium. So all that is going up from an R&D commitment point of view. And all of that will be generating returns. We're not doing so much of the R part as we are the D. And all of the projects we undertake, we have very specific objectives in mind that are going to be additive to our revenues and our margins.
Just one other item. Just if people are comparing versus last year, we were still receiving funding from the Ontario government for some of our research and development activities, and that stopped at the end of last fiscal year. So that makes it look even larger, the gap. But we certainly have increased our investment in research and development, and we plan on doing so as we move forward.
Yes. Great, great point to make, Jim. Thank you very much for making that comparison. And you're looking at several hundred thousand dollars difference between the prior year in terms of the grant offsets in the prior year.
Yes.
Okay. Let's talk a bit about the antigen side of the business. I've got a great segue question into that. Would be great to get some color on the specific product mix and customers that drove the recovery of the antigen segment. Also, was the antigen segment recovered for the whole quarter, or did it improve throughout the quarter to get a sense of it's steady state or heading into Q4? I guess if it's accelerating or not.
That's a fairly compound question, so I'll try to break that down a little bit. We're seeing that across a number of customers that are coming back and seeing their test flows start to normalize a little bit more, and that's very encouraging. And we're seeing that inclusive now of our distributor into China, which is good as well, as some of those Asian markets were one of the areas we were principally looking for growth on the antigen business side. I won't go into the specific quarter-by-quarter product mix other than to say there is a decent amount of variability in margins between our antigens. Some antigens have very high margins. Comparatively, some have lower margins. So the antigen area is the side of our business where there would be the most quarter-to-quarter flux in terms of the gross margins. And you can see that in the gross margin for Q3 is different if the prior year quarter had an 8-point difference in the gross margins year-over-year. And the better part of that is reflective of just the fluctuation of product mix of what shipped in antigens in a particular quarter. So it does inject some volatility in gross margins quarter-to-quarter. But we're continuing to work on improving the margins on each and every product in that portfolio. And that's through technical upgrades and improvements as well as making sure that we're putting through appropriate price increases to reflect changes to our input costs. And part of that includes becoming -- making sure we're staying competitive from a compensation point of view and that we're rewarding our staff appropriately.
In terms of gross margin, do you have a target that you're willing to share with investors?
Yes. I would say so. We like to see new products coming in above our current gross margin, aggregate gross margin, to keep nursing that up. And I think we're certainly would love to see margins start with a 7 integer. I think that's a bit of a stretch goal. But to get and keep margins in the 60s would certainly be something that we're pushing for.
Great. And staying on the antigen theme, you mentioned the Asian sales side of that business. Are you anticipating any disruptions to the antigens market following the acquisition of Meridian?
No, we're not. Interestingly, I think probably the most successful side of Meridian has been their ingredients sales business and different antibodies, antigens and reagents with whom we compete in some markets and collaborate in others. But all indications are that our relationships will continue both competitively and cooperatively.
Okay. Just scouring through for any other antigen questions. Maybe I can just move on to some general questions.
Please.
Are you still considering a stock buyback due to the continuing depressed stock price and potential for buyout?
Yes. That's a succinct answer. It's certainly been on our radar and on our minds. There's a lot of TSX requirements that need to be fulfilled. And frankly, even though I've had a 30-plus year career in life sciences and capital markets, a life science company doing a share buyback is probably as rare as hen's teeth, as the saying goes. So we've been familiarizing ourself with that. Looking to design things optimally for how we behave outside of quarterly blackouts, how we behave inside of quarterly blackouts and what the appropriate instructions to agents would be that are compliant with regulations. But it is very much something that we intend to do. We see it as an extremely appropriate use of our capital as we're generating strong cash flows right now. And certainly, if we start looking at any kind of potential forward multiple of where our shares are trading on a price to earnings basis, we see it as an effective use of shareholder capital. And also protecting the value of Microbix as a currency to make sure that any bid is in the course of one or a use of one. And if we were looking to make an accretive acquisition, that we protect the value of our currency. Jim, anything you'd want to supplement on that?
No, I don't think so. You covered everything off well, Cameron, related to that. I think it's, as we've continually indicated, that we truly believe that there's more value in our company than is reflected in the current market.
Okay. Another question. You recently hired Dr. Anu Rebbapragada. And I apologize to the doctor for probably butchering the name. They had quite an impressive resume. Can you give us an idea of their role within the company?
Yes. Anu is -- just has a mind-blowing resume. I'm not sure I'm at liberty to share that, but she is everything that is reflective of that. And brings deep operational expertise in clinical laboratory medicine, having been a senior director with a major multinational diagnostics company, having been I think national lab director for Dynacare. So it brings just a level of detailed operational knowledge and as well as tremendous relationships and a wonderful person. So we see Anu as helping us further our penetration and relationships within the clinical laboratory industry through her knowledge and contacts, as well as start building into a greater portfolio of services offerings that pair extremely well with things like the DxTM and QAPs and even our antigens, for that matter. So we see a tremendous number of opportunities, and we're just thrilled that it came together with Anu to have her join us. As it did with our IT Director, Dennis Haikalis, who came in with tremendous clinical laboratory expertise, as well as his IT expertise. So we see these 2 directors as fabulous hires, and are just delighted to add such great quality people from a capability as well as just a personality and great people as well as extremely well-trained professionals. So, delighted to add to the team in that way.
We're up on the hour, Cameron. I'm not sure if you've allotted extra time, but I do still have about 9 questions left. Do you...
I'm not going anywhere. I've got a hard stop at 1:00, but I'm good for now.
Okay. So a lot of these are now disordered because they came in after we moved on from sections. So maybe we just go rapid fire. Okay. So this question continues to keep coming up in different forms, so maybe we can just address it holistically. Talking about what percentage of current business is COVID related. Has this been impacted by a slowdown? Maybe we can go segment by segment and give us sort of what the outlook is in a post-pandemic world.
Repeat that question. Deb, I apologize. I was just double checking my schedule and realizing that I had a hard stop at 12:30; not 1:00. So apologies, but I'm back.
That's okay, Cameron. I'm used to being ignored. So the question was really just, I keep getting questions about COVID and what the end of the pandemic means. And I think we've addressed them in certain business lines, but maybe we can just look at the company holistically and go through each business line and say this is what it looks like. This is the outlook in a post-covid pandemic world. Challenges, opportunities, something like that.
Sure. For us, we're not in the travel testing business for COVID. We're not in -- we don't support necessarily the little immunochromatography strip antigen test that people get in the pharmacy. That's not our business. So that has zero impact on us, the ebb and flow of those. We're much more about well-controlled point of care testing that may happen in a -- or laboratory testing that happens in a hospital or industrial setting where there's a quality system pended to that testing. And those tests have already migrated or are migrating to multiplex testing where you're not just looking at COVID, but you're checking somebody who might have respiratory symptoms for, at the very least, COVID, flu type A, flu type B and another common virus called RSV. So that shift has already happened. For DxTM, we're going to see, again, in the institutional settings, more multiplex testing roll out. We already know that DxTM is extremely suitable for testing for other viruses as well. So I think the --. And then for our antigen business, we don't sell COVID antigens. So we're selling every other type of antigen, or many other types of antigens. And as people go in for prenatal workups and people go in for other forms of infectious disease testing and are just seeing their doctor more often, those elements help us. So I don't see a very great impact. The only one notionally is DxTM. But we're still a minority portion of the overall supply to Ontario. And anybody looking at it strategically would be saying, keep your domestic supply and cut your importation; not the other way around. So we'll certainly work with policymakers to make sure that, that intelligent approach is undertaken. But for the rest of our business, I see nothing positive since we mentioned the Emergency Use Application -- Emergency Use Authorization, my apology. If those are sunsetting, that's actually going to help our QAPs business. And it just speaks to the breadth of the business and we are not a COVID play.
Yes. COVID is a great example of what we do. And it's not what we do. And so there's a whole load of activity that went on before COVID. I talked earlier about how much VTM was important before COVID was a thing. And we have HPV. We have multiplexing. We have gastrointestinal. We have all the sexually transmitted diseases that we've been involved in before COVID and subsequent to COVID. There's a whole amount of testing capacity now that needs to be deployed. It needs to have controls. It needs to have VTM. So we will be addressing all of those markets as we go forward, building the capacities to address them. So basically, the way to think about COVID is it was a nice exemplifier because everything else got shut down right at the height of the pandemic. But as we come out of it and everything opens up again, we've demonstrated how good we are at this, and our portfolio will take off from there.
Yes. That's a great point. HPV, human papillomavirus screening is a great case in point. Whole countries were finally getting ready to move to -- away from 1950s pap testing where you're actually looking for cancer cells on a microscope slide into PCR-based testing to look for the signatures of the viruses that actually drive the formation of the cancers. And that was delayed for 2 years-plus as COVID swallowed up all the PCR capacity and built far more than had ever existed. Now as COVID is starting to calm down, we are seeing all sorts of jurisdictions, including Ontario, finally getting back to saying, okay, we've got to roll out these HPV molecular PCR screening programs that we planned to do 2, 3 years ago. And Microbix is right in the thick of that as well. So these are things that will benefit us likely far more than COVID did.
You talked about multiplex testing. What are the barriers to adoption? And how do you see sales evolving for these new testing methodologies?
Well, good question. Price is always an issue. And price is -- you always have to look at price versus value. So if you're going in and you've got respiratory disease symptoms, for example, you can look in and you can probably get now a little COVID immunological antigen test for $10 at a pharmacy. Or you could get a multiplex PCR test for probably $50 that would distinguish between and tell you exactly what virus you have. And that has clinical implications. And as we see the availability of those, one is price, the other is value. And we need to see the policymakers globally recognizing the difference. And I think in many jurisdictions they do, and look and say, this is clinically relevant. And that applies in a whole bunch of areas. Somebody is going in and they've got symptoms of a genital infection, for example. Is that chlamydia? Is that gonorrhea? Is that trichomonas vaginalis? Is that mycoplasma genitalium? All of those have clinical implications. You want to know. And then you can take it to the next level and in some case -- and in all cases say, what does this mean from a patient treatment and cure point of view? And the next generation testing may even be looking at the antibiotic resistance profiles of the specific infections. So let's first type it. Then let's figure out how best to treat it. And boy, isn't that a lot better for everybody if you make those decisions quickly and accurately, and then don't have complicated morbidity and mortality associated with doing the wrong thing or not doing anything. The wonderful thing that I love about diagnostics is this is all about spending tens of dollars to save hundreds, thousands, tens of thousands, hundreds of thousands. These aren't ridiculous $1 million a patient treatment costs. These are talking about spending tens of dollars to save many, many, many, many times that amount. So again, I'd say cost versus value.
Got it. And then I guess a somewhat related question deals with point of care diagnostics. I think the question relates to not multiplex but just single use. Do you feel that the POC diagnostics will grow faster than the PCR market? Are they becoming more accurate and reliable?
Let me handle the back side of that question first. It's our job to make sure that they become more accurate and more reliable. And if Microbix has anything to say about it, then we'll be a part of those -- all of those tests, making sure that they're accurate and reliable. So that's why we're excited. And the other element is it's pretty widely thought -- I think everybody can google this pretty readily that most market research sources believe that point of care side of testing is growing at somewhere around double the rate of the laboratory-based testing market. Sorry, I grew up as a kid watching Star Trek and Dr. McCoy going around with the tricorder and you say, hey, isn't this great? What's wrong with you? Well, it's -- you probably didn't see McCoy stuffing a nasopharyngeal swab up anybody's nose. But we're moving closer to being -- having that lab in your hands in a real fashion. And it won't be something you carry around on a purse strap, but it may be available in the pharmacy, in a school, in an industrial setting. And to have a menu of tests that are all multiplex, that are all well-controlled for quality setting, and that can give you that rapid diagnostic information that we all want. So, very exciting times.
Ken, you look like you've got something to add.
Yes, I was going to say, we don't make tricorders. We just make everybody's tricorders better. Sorry, I couldn't resist it.
Well, okay. Well played. Well played.
Okay. So I think we've addressed this, but another question came in. What is the status of QAPs automation in the current building? When will full automation be completed? And are there still -- we already addressed plans for a fourth.
Yes. QAPs is now -- we've automated pinch points of QAPs production in the current building, in 235 Watline. And our manufacturing specialists are still looking at where do we hit capacity on a semi-automated basis. And we're -- best estimate I have right now, and these numbers are changing as we look and do more and more runs, but with visible contracts that we are hoping to have concluded or hope to conclude shortly, we may be at around 60% of the capacity at 235 sold through shortly. So that's where we think about what can we automate within 235 without having to shut down production at 235. So at some point we look and say, can we do that while still working and not disrupting flow? Or do we just need an empty tile for physical space to do that and then backfill with further automation? And again, this isn't about getting rid of people. This is about getting rid of drudgery and redeploying people progressively to higher value tasks and lower drudgery tasks so we can grow sales without dramatically growing headcount. And we'll always keep the semi-automated capacity for short-run custom products where it doesn't make sense to spool up a more automated production line. So you really want that flexible manufacturing depending on lot size is very effective. Ken, anything you'd want to supplement there?
Yes. On QAPs, there are multiple unit operations that can be automated, can be optimized and automated, and that's going on an ongoing basis. So we actually -- Cameron alluded to pouch sealing recently. There's labeling opportunities and various other unit operations that could be readily automated, and we're moving on that. It's not a case of dropping a full production line soup to nuts in any one particular time, although we're building towards that. The idea is really to have the capacity needed for where we are in the game right now, and we have more than enough capacity in QAPs. With VTM, we have the semi-automated system in place already.
It's very effective.
We can do that in parallel to continue increasing capacity. But then we'll drop the full line in soup to nuts. QAPs, however, is a little bit more diverse in its activities. And unit operations can all be optimized and operated, and that's what we're doing on an ongoing basis with our production development team.
How easily can the lines be retooled between the business segments?
Not sure what you mean by the question, Deborah. Could you rephrase?
Could you take QAPs production and change it into VTM or VTM production and switch it over to QAPs? Or are they totally separate?
Well, with the QAPs, if we had a demand for a large amount of liquid form QAPs, for example, their jigs we can swap out in the retool in the VTM line, moving from the larger VTM vial to a smaller QAPs vial would be certainly possible in that regard. With regards to the swab-formatted QAPs, those are their own specific format. And we'd be able to look at different swabs, for example, in an automated or semi-automated swab production line. So if we needed to go from a nasopharyngeal swab to a vaginal swab, for example, those are more trivial changes that would need to be made.
Okay. I've got another compound question for you, Cameron. Looking backwards, total quarterly revenue has stagnated for a year. From a high level, can you explain what we should be looking for that will tell us to anticipate what pace we should expect to get closer to capacity? You've been optimistic about top line growth for a number of quarters, and it hasn't fully materialized yet, other than the recent $5 million recurring QAPs deal. Just looking for some color on the pace of things.
Yes. Absolutely, there have been delays on the part of our customers in concluding, due to supply chain and other issues with their rulings. So we've been looking to see that break out from the sort of $5 million run rate moving towards the $10 million, and we see that beginning in Q4. And that will gain steam going into fiscal 2023 and through fiscal 2023 as we see different customers coming on -- what's the word I'm looking for -- coming online in terms of QAPs take-up from us. So certainly, that's been delayed, not derailed. And I think there were some other people who were looking for our revenues to fall off a cliff as if we were some travel testing company related -- in relation to COVID, and certainly that hasn't happened. So we've built the foundation, and now it's all starting -- it's all coming together in a planned way for us to move up to the next level of revenues.
Okay. And then I've got a couple of other small ones. What kind of inventory do you currently have on hand of VTM now? And as VTM order -- or sorry. As VTM capacity comes online, will you build product in advance of hopeful orders? Or will you wait for orders to materialize before ramping?
There's about a month long production cycle for VTM between production and a whole step to ensure sterility. So there is a time to build inventory. We have built some significant inventory for the fall, and we want that available on an as-needed basis. Certainly, we were able to respond very quickly last Christmas with a Christmas Eve delivery as the omicron wave moved through. And we want to show the same sort of value-added and responsiveness going into the fall this year. When the UV isn't so strong and people start to have to move indoors, we will see resurgence of respiratory viruses. And whether that's COVID or flu or something else, that's why you call it flu season.
Okay. And I had a follow-up question for urokinase. So I do not see any OEM or large medical supply company ever reselling urokinase without having an opportunity to own it outright. Can you provide some insights here?
Well, of course, that's opinion; not fact. For us, this is about a partner that's committed to provide the economic support to revalidate a new source of manufacturing of drug substance, the active ingredient and drug product, the finished format, and then to do the marketing. We're not a drug marketing specialist at knowing all the vagaries of regulation in Canada and the U.S. on that. We do know how to make the product. We will supervise a qualified contract. You're making product. Assist with the regulatory and assay revalidations and help that partner bring it forward. And whether that is somebody else owning the biological license application, the BLA, with us having a takeback right if they don't perform or fund or execute accordingly, or whether we own it, they have a license, frankly, that's 6 or half a dozen of the other to us, provided that there are performance requirements in that regard and that we're getting a significant slug of the economics once the product returns to market.
Okay. I have one final question, Cameron, and I think it's a good place to leave off. Somebody just asking kind of a better capital markets strategy and why there seems to be very little reaction to news lately, and what we're doing to promote the company to get more awareness. I could take the first part of it, which is last few months...
I was just going to say, I blame Adelaide Capital. But hey, that's just me, right?
Yes. Well, I mean, the fact that most of our webinars run for 90 minutes and there's 50 or so questions from the audience certainly suggests to me that we don't have a small, disengaged audience. But I would say for the last 6 to 8 months, the markets have been really tough, especially for small caps. So a lot of news items have been liquidation events, not just for Microbix but for all small caps. And in terms of more awareness, I know that we're doing a few new conferences and trying to focus more on the U.S. market right now. Yes, I mean, always trying to get out and do new things and meet new shareholders. We picked up coverage from a couple investment banks over the last few years. I feel like we're just on the cusp of being able to really reach the institutional investors that probably takes some top line growth and market cap growth to get the rest of the way. Cameron, your thoughts?
Yes. I'd agree with you, Deborah. Certainly, we've taken a hit with the broader small cap market on coming down from our 52-week high. I think the difference is we are continuing to gain strength. If you look at our year-over-year -- our financial ratios from September 30 to June 30 -- last year to June 30 this year, we went from 3.7 on the current ratio of 7.8. We went from 0.55 debt to equity to improve to 0.35. We're moving in the right direction. The company's getting better and stronger while the share price is going down. That can't last forever. So whether that's an improvement in market tone, whether we make it to a market cap that appeals to a broader audience at some point, the lines intersect and we'll see a dramatic revaluation. I joke; we can't control when the Jack in the Box jumps out of the box. We can just keep cranking the handle. And that's what we're doing in running the business and building the value for our shareholders. And we are shareholders, so this is -- everybody on the call here and everybody in the management team own stock and have capital at risk as well as options. So we're -- we watch the downside along with shareholders, and we drive the upside for shareholders.
I agree. You have to manage the business; not the stock. But that being said, we are looking for new initiatives and trying to market to new audiences. If anyone has suggestions, please feel free to reach out. I'm all ears.
Yes. And we now have 2 analysts covering us. Of course, Industrial Alliance and Bloom Burton. Chelsea Stellick and Paul Stewardson at Industrial Alliance and Antonia Borovina at Bloom Burton. And certainly we'll welcome others and hope to get other investment banks covering us as a healthy and well-run growing business.
And don't forget Bruce.
Yes, and Bruce, absolutely. And Bruce Krugel working for, of course commissioned by Microbix, but very well respected and not subornable in terms of his own opinions.
Yes. And just as a reminder, there is a new presentation that went up on the website today. So everyone, feel free to check that out. And if you have any feedback on it, again, feel free to reach out. If any of your questions were not answered today, please feel free to e-mail me, and I'll get you a response from Cameron. And yes, thanks everyone for participating. Thanks for your questions. I think there were some interesting new ones covered today, so that's exciting. Cameron, was there anything you wanted to discuss today that we didn't get to?
No. I would just reiterate that we have clear goals to continue growing our revenues and our earnings intelligently and continue to work towards executing this. So thank -- and just thank everybody for their interest and support. We really do appreciate it. And we couldn't be doing this without everybody's help and support. So thank you.
Great. Well, thank you, Cameron. Thanks, Jim. Thanks, Ken, for taking a break from your vacation to be with us today.
No worries.
And congratulations. Definitely exciting times for Microbix.
Well, thank you, everybody. And if any questions occur to anybody coming out of this call, please don't hesitate to reach out to any one of us and we'll endeavor to address them.
Okay. Thanks. Have a good afternoon.
Thanks, everybody.
Thanks, everyone.
Thanks, everybody. Take care. Bye.