Accelerate Diagnostics Inc (AXDX) 2017 Q4 法說會逐字稿

Good day, and welcome to the Accelerate Diagnostics, Inc. 2017 Q4 Results Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Laura Pierson of Accelerate Diagnostics. Please go ahead.

Before we begin, I would like to advise you that information presented during this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Forward-looking statements include statements about our future and statements that are not historical facts. These statements may contain expectations regarding revenues, earnings, operations and other results, and may include statements of future performance, plans and objectives.

Forward-looking statements include statements pertaining to, among other things: the commercial launch and demand for the Accelerate Pheno system and the Accelerate PhenoTest BC kit for positive blood cultures; the potential benefits of the Accelerate Pheno system and Accelerate PhenoTest BC kit, including Accelerate identification and susceptibility results and estimates of time reduction to results; expectations on placement, sales and product profitability; the potential of our technology generally; our belief that our expanded manufacturing capability will allow us to meet demand; our expectation of our 2017 and 2018 performance; and our future development plans and growth strategy, including with respect to research and development as well as product expansion.

These statements represent only our belief regarding future events, many of which are inherently uncertain. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements because of various factors.

Information regarding important factors, including specific risk factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements are contained in reports we file with the SEC. You should read and interpret any forward-looking statement together with the reports we file with the SEC.

I will now turn the conference call over to Mr. Lawrence Mehren, President and CEO of Accelerate. Larry?

Thank you, Laura, and good afternoon, everyone. I'm glad you could join us for our Q4 2017 conference call. We will start with a review of our performance on our key 2017 goals. Next, Steve will review Q4 and full year preliminary 2017 financial results. I'll then lay out our goals and expectations for 2018 and wrap up with Q&A.

Our focus in 2017 was threefold: first, a great launch of the Pheno Instrument and Pheno test positive blood culture kit; second, maintain our product's superiority and expand the attractiveness of our current system and kit; and third, achieve CE marking for our respiratory kit.

Let's review our performance of each in order. First, our launch. By most measures, our launch has been a success. At the top of the funnel, we saw strong and increasing interest in the Accelerate Pheno system across the U.S. and the EU. This interest is tangible and translated into hundreds of accounts across the U.S. and Europe becoming qualified prospects, in essence, raising their hand and saying, "I want this system in my institution."

Further, we saw many of these qualified prospects turning into active customers. In 2017, we signed agreements for 337 instruments. Of these, 259 were evaluation contracts and 78 were placements. Pricing was solid for both instruments and reagents. For example, in both the U.S. and the EU, reagent pricing on average remains above $200 for all our clinical customers. Globally, mix was also favorable to our model, with more than 80% of deals closed this year for capital.

Annuity per customer also exceeded our expectations. This was driven by an increase in the number of instruments per customer to approximately 3, while reagent pull-through per instrument remained constant at around 1 kit per instrument per day. All strong results. However, as mentioned in our Q3 call, the acquisition process for a new diagnostic device has become extremely complicated and time-consuming. This resulted in an unexpected increase in our sales cycle to around 14 months, from the 6 to 9 months we had originally anticipated. This, in turn, delayed revenue. Needless to say, this miss was disappointing and we immediately began a critical examination of our sales processes.

In analyzing the challenge, we found 4 phases of the sales cycle right for significant streamlining. In each of these areas, we have now deployed different mitigations. And good news, we are already seeing excellent results from our efforts. For example, simply streamlining the language of our evaluation contracts had a positive impact in the fourth quarter, decreasing time to an evaluation contract by a number of months.

In addition to the sales cycle issues I just mentioned, a significant overhang in 2017 was that a large portion of qualified customers could not enter into any contract nor budget for a device that was not FDA approved. As we enter 2018, we are starting this year with FDA approval in hand and millions of dollars discreetly budgeted for the acquisition of the Pheno. Certainly, a better place to be.

Product superiority, our second goal, was an unqualified success. Instrument reliability was excellent with performance at year-end of approximately 1 repair visit per year, a measure that we believe is best-in-class. We added 3 new drugs to the panel in the EU, while lowering kit cost of goods sold over 20%.

Customer feedback has been excellent, with surveys of newly launched customers consistently saying they are, "satisfied with the device and the experience."

Analytical performance of the instrument was excellent with overall sensitivity and specificity in the high 90s, and EA and CA, measures of our AST performance, consistently above 90%. This, combined with an average improvement in time to result of approximately 40 hours, puts us in a class by ourselves. These data were confirmed by numerous studies and papers, documenting our ability to generate results up to 54 hours faster than the standard of care, while maintaining excellent performance.

More importantly, numerous studies and now actual customer results are confirming that these rapid interventions are having a dramatic impact on a hospital's ability to manage the challenge of sepsis. For example, perhaps the most exciting development of 2017 was the data coming out of our first customer, University Hospital of Augusta. As part of their implementation, they have been keeping detailed records of the clinical impact of the Pheno. And what they found is extremely encouraging. Using the Pheno, they were able to reduce overall deaths from sepsis from approximately 12% to less than 4%, a 75% reduction. The lab director told us recently that this equates to 3 lives saved each month at their institution since implementing Pheno.

And not only is the Pheno saving lives, it is also saving money. Antibiotic savings alone have tallied $90,000 since implementation. In addition, savings from lower readmission rates, fewer C. diff. infections and decreased morbidity are expected to deliver many times the savings, yielding a very high ROI.

And while we are eager to duplicate this data across other customer sites, what we have already seen suggests, we believe, that the Pheno could be the most powerful sepsis intervention ever launched. We will be working with the site to publish these results and believe we will see these in a high-impact journal in 2018.

We will also be launching a registry to collect similar outcome results across our customer base.

The great performance of our sepsis solution is a solid foundation on which to deliver our severe pneumonia solution, our third key initiative of 2017. Severe pneumonia is a deadly disease with high mortality and significant health care costs. We believe our kit, which is direct from sample, reduces time to result by approximately 60 hours, a game changer for these critically ill patients. It is also a large market with over 2.8 million possible tests and will increase our overall time by over 50%. Needless to say, we are eager for the global launch.

Interestingly, we believe this flu season also demonstrated the importance of this test as some, who begin with viral flu, contract bacterial pneumonia, often with devastating results. We believe our kit will help.

For all these reasons, we worked diligently in 2017 to move this towards a global launch. Throughout the year, our development team made steady progress on the kit, culminating in our CE mark study. This multisite study demonstrated the strong performance of the device. Sensitivity and specificity were 97.3% and 99%, respectively, while AST performance across 15 drugs was also quite good with EA and CA at 93.8% and 96.9%, respectively. Most importantly, time to result was 57 hours faster than the standard of care, which we believe will translate into significant clinical value.

In summary, 2017 was a solid year for Accelerate. Commercially, we met or exceeded our expectations on most of our key parameters, including the number of qualified prospects, the number of evaluation contracts, pricing per tests and modules, capital mix and annuity per customer. However, we underestimated the length of the sales cycle, something which we believe we have now mitigated.

Our product superiority goal was achieved with new drugs, improved performance and consistent reliability.

Finally, our third goal, the CE marking of our respiratory kit was also achieved with excellent performance rounding out the year.

All in all, as I said, a solid performance and a good base on which to build a great 2018.

And with that, I will turn it over to Steve to review our preliminary financial performance. Steve?

Thank you, Larry, and good afternoon. Revenue for the fourth quarter was $2.1 million and $4.2 million for the year compared with $39,000 and $246,000 for the same periods in the prior year. These increases were driven by sales of the Accelerate Pheno system and Accelerate PhenoTest BC kit across the U.S., Europe and the Middle East.

Cost of goods sold for the fourth quarter were $649,000 and $1 million for the year, resulting in gross margins of 69% and 76%, respectively. These gross margins are inflated due to instrument inventory sold in the past few quarters that were previously recorded to research and development expense.

Selling, general and administrative expenses for the fourth quarter were $11.5 million and $45 million for 2017 compared with $10.5 million and $37.2 million for the same periods of 2016. These year-over-year increases were driven by higher personnel and evaluation-related costs in the U.S. and Europe.

Research and development costs for the quarter were $6.1 million and $22.3 million for the year. This compares to $5.6 million and $29.5 million from the same periods in the prior year. This year-over-year decrease was due to clinical trial and prelaunch inventory costs incurred in 2016 that did not repeat in the current year.

Our net loss for the fourth quarter was $15.1 million and $62.9 million for the year, resulting in a net loss per share of $0.27 and $1.16 on weighted average basic shares outstanding of 55.4 million and 54 million, respectively. These net losses contained $2.9 million and $13.9 million in noncash stock-based compensation expense. Net cash used for the quarter was $12.1 million and $51.8 million for the year. The company ended the year with cash and investments of $109.1 million.

We anticipate filing the 10-K for the year on February 28.

I will now hand the call back to Larry to review our 2018 goals and outlook.

Thank you, Steve. Now onto 2018. With instrument performance where we want it to be, we now can be laser-focused on 2 initiatives for 2018. The first of these will be the achievement of our revenue guidance for 2018. Specifically, we expect to generate revenue of between $21 million and $30 million for the year, with a very light first half and a very steep ramp into Q3 and Q4. We expect price will remain above $200 a kit, supporting strong gross margins.

Our confidence here is high. The learnings from 2017 with the resulting improvements to our sales process, which we recently rolled out at our national sales meeting, have fired up our sales team. The addition of our new top sales representatives from BioFire, Cepheid, bioMérieux and Beckman is also contributing.

Our second focus will be on respiratory, where we expect to initiate U.S. trials in late Q2, early Q3, with completion and submission shortly thereafter. Our trial on this direct-from-specimen test will be groundbreaking and it is difficult to predict FDA's ultimate requirements for size, follow up and sample type, among others.

Further, we expect to include an arm demonstrating clinical outcomes associated with using the device, something that we believe is also unique.

Accordingly, while we can predict when we will start the trial, the completion and approval timing will require us to advance our discussions with FDA. Given that we have already sent our presubmission package to the FDA, a significant milestone, we anticipate that this conversation will occur over the next 90 days and expect to provide an update on this in our first quarter conference call.

In addition to these principal objectives for 2018, we are continuing research and development on additional sample types, the next-generation Pheno instrument and other complementary instrumentations. This, combined with Pharma partnerships and China expansion, will definitely keep us busy and we couldn't be more excited to see the results of these efforts.

And with that, I will open it up to questions.

(Operator Instructions) And our first question comes from Bill Quirk with Piper Jaffray.

I guess, the first question is, Larry, thanks very much for the CE mark data on the respiratory test. If memory serves, I believe all of those thresholds, assuming that they could be replicated in the U.S. data, would be sufficient for FDA approval, correct?

That's correct, Bill. And hey, before I get to your questions, I just wanted to mention one thing. So I'm glad to know that our employees are listening. I understand from our head of customer service that customer feedback with the surveys of newly launched customers consistently say they are not just satisfied but very satisfied with the device and the experience. And this is the highest rating possible. So I want to make sure I get that in for our customer service folks. So -- excuse me, Bill. And now I'll answer your question. The answer is, yes, absolutely. Based on that data, we would receive FDA approval. That's correct.

Okay. That's excellent news. And certainly very glad to hear that your customers are rating you in the highest category possible in terms of the service and support. Additional question is, just thinking a little bit about the lower respiratory product and specifically the clinical trial to design, to include clinical outcomes measures there. Presumably, that being designed in, one, to help no doubt speed eventual adoption. And secondly, I'm assuming this is being asked by some of the customers, certainly we've heard it in some of the survey work we've done.

Yes. Bill, look, I'd say that the kind of results that we are seeing from the sepsis product are quite heartening. And we, in hindsight, would've preferred for that to be part of the clinical trial. If we could have seen that type of reduction in sepsis right out of the gate, I think we would have had more of a tailwind for sure. So we want to make sure that we do that in this trial. I think that there is a potential actually to show even a greater impact on severe pneumonias. And so we decided to take a bit of time and build in a clinical arm to the trial. Now this is unusual. It's typically not done in a diagnostic trial. But we're confident that we're going to see something that could be quite spectacular.

That's great. Certainly looking forward to it. One question for Steve, and then I'll let somebody else jump on here. Steve, expected cash usage in 2018?

Yes. Coming out of 2017, we were pretty consistent with our expectations in the range of $10 million to, call it, $13 million per quarter. We expect this to ramp a little bit as we get into our clinical trial for respiratory and ramping up the sales team a bit. But nothing dramatic. I think we'll still be in the range of $13 million to $15 million on a net basis per quarter.

Our next question comes from Brian Weinstein with William Blair.

Can you talk a little bit about where in the evolution process -- I think you said you have 259 as of 12/31. Can you just talk a little bit more about kind of what stage of that evaluation process these are in? Are they weighted a little bit more towards the later stage of that? Or are they more in the early stage of evaluations?

It's a great question, Bill. I would say that they are in various stages across the board. We have some evals that are complete and are moving towards acquisition. And we have some that are just at the very beginning of the process. The good news is, is that some of those that are at the very beginning of the process were using our new "accelerated evaluation process" and so those should go faster than they have in the past, and we'll allow those to move through the sales cycle more quickly than what we've experienced. I think, in general, as we've said, based on what we've seen in the past, we'll see light Q1, Q2 with lots of conversions in Q3 and Q4.

Okay. And then, you had talked about the progress you made by changing the contracting and the language on the front-end to get people into evals. One of the other issues that you guys had mentioned in the past were kind of getting the IT systems up and going. So can you give us an update on the IT incentives that you guys were using to work on the software during the evaluation and contracting? And if that's also shaving off some months of the process as well?

So, Bill, in that case, we have not had a situation or many situations yet where we've been able to exercise that. We are doing a lot of other things. For example, we now have contractual relationships with all of the significant LIS providers. I think we have finished or are soon to finish all of the interfaces between our instrument and those LISes. Accordingly, we'll see that part accelerate for sure just by those interfaces being prebuilt. And over the course of the next 2 quarters, we'll start to see some of the incentivized sites, who are going to do this concurrently, also happen. As a matter of fact, I think on Monday we reviewed a site that is actually doing the LIS before they are doing the evaluation. But that's just kicking off right now. So I can't tell you what the overall savings yet will be, Brian.

Got it. Okay. And then, can you just describe a little bit the types of the accounts you're winning? Are you taking share away or -- winning head-to-head accounts from guys that were considering going with (inaudible) molecular idea to resistance products or are you winning accounts that are more, kind of, old school culture or something else? Just any kind of an update on what you are typically seeing there?

Yes. Brian, great question. And we're excited that we are mostly in head-to-heads against molecular products. We see a number of different companies out there, often Luminex with their Nanosphere product line. And we are winning those head-to-heads. As far as I know, we're batting a thousand there. So it looks really, really good. And some of the closes that you're going to see early in the year are direct takeaways from folks that are running molecular right now.

(Operator Instructions) And our next question comes from Tycho Peterson with JP Morgan.

This is actually Julia on for Tycho. My first one is, the 78 instruments that you installed as of today, could you just break out the specifics between the U.S. and Europe?

It's about 70% U.S., 30% Europe right now, roughly. Actually -- excuse me, that's the revenues split. The revenue split's about 70% U.S., 30% Europe, while commercial contracts were roughly 50-50.

Okay. Got it. And then next, you mentioned the capital sales mix is currently above 80%, already strong there. What is the specific break out between U.S. and Europe in expectation?

Yes. We saw -- sure. So we saw coming out of 2017 that nearly all of the contracts that we closed in North America were for capital. And we saw roughly 60% of contracts closed in Europe were for capital. 40% were reagent rentals, which is a very typical model for the European market. Our expectations are that we will still see a majority of overall global contracts that we close in 2018 for capital.

Got it. And then, in terms of the order conversion, I know you talked about a number of measures that you're taking to improve the situation. Does any of those involve changing your system pricing?

No.

How does the system pricing look like in the capital placement contracts?

Yes. I mean, generally what we've seen is that pricing has not been an issue. It's been somewhat binary for the hospital, once we convince them that they have a need and this is the right solution, then we move through pretty quickly. So not an issue there. So we don't anticipate having to change either our kit pricing nor our instrument pricing dramatically heading into '18. On the instrument side, generally, we target about $200,000 for an average customer, call it 2-module system. And of course, there's discounts for customers taking on additional instruments at initial acquisition.

Got it. And then lastly for me, what kind of revenue scale do you think is required for you to, sort of, reach your long-term target of 70% plus gross margin? And just longer term, what kind of operating margin are you targeting at scale?

We think that certainly -- the foundation for good operating margins is a strong gross margin. And the track to getting into the 70s, I think, is right in front of us. We've built manufacturing capacity for thousands of instruments a year and hundreds of thousands of consumables. And we have over the past year implemented a lot of changes to fundamentally decrease the cost of the kit. So I think that sets us up very well for scale. Now we just have to run volume through the system that we built to achieve those targets in the 70s.

Okay. Just to clarify, because you've previously talked about next year expectation of gross margin more about low 60s. So like -- is that still your latest expectation for this year?

Well, I don't think we particularly guided gross margins for this upcoming year and the picture there is pretty complex. I think we will be somewhere around that mark, but there's a lot of factors at play.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Lawrence Mehren for any closing remarks.

Thanks. So in closing, I want to thank all of our employees, our investors and our customers for the great support through 2017. Your hard work and strong belief in our company and our technology has put us in a great position to have a banner 2018. We couldn't be more enthusiastic. Thanks to you all, and I'll speak to you soon. Bye-bye.

The conference is now concluded. Ladies and gentlemen, thank you for attending today's presentation. You may now disconnect.