Accelerate Diagnostics Inc (AXDX) 2018 Q1 法說會逐字稿

Good day, and welcome to the Accelerate Diagnostics First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note today's event is being recorded.

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

Before we begin, it is important to share 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 those that are not historical facts. These statements may contain expectations regarding revenues, earnings, operations and other results, and may include statements of future performance, forward sales estimates, timing of clinical outcome data, time lines associated with severe bacterial pneumonia test kits for use on the Accelerate Pheno system, along with other plans and objectives.

Forward-looking statements include those pertaining to, among other things, the commercial launch and demand for the Accelerate Pheno system and 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 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 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 Diagnostics. Larry?

It is great to speak to you all. I have just finished doing a full review of our 2 focus areas for 2018: revenue and respiratory. What I found was encouraging, but also highlighted some timing risks that I want to share with you.

So let's begin with commercial progress in EU. Overall, we believe this geography is progressing quite well. We have just returned from ECCMID, the largest infectious disease congress in the EU. We showed quite well there, with significant booth traffic, quite a bit of funnel progression and hundreds of attendees in our symposia highlighting the benefits of rapid susceptibility in general and the Pheno system in particular.

At this congress alone, 12 posters were presented highlighting the speed, accuracy and clinical benefits of our system and test. This now takes us to over 60 posters and publications worldwide that continue to demonstrate the utility of the system and, more importantly, are now showcasing the clinical value of the system. In particular, they demonstrate the Pheno's unique ability to enable dramatic improvement to antibiotic prescribing, allowing for both rapid escalation and deescalation of antibiotics. And this is changing outcomes as evidenced by the data and presentations from La Princesa Hospital in Spain and Basingstoke and North Hampshire Hospital in the United Kingdom. In Basingstoke, for example, they have shown antibiotic treatment optimization, reduction in overall antibiotic use, narrowing of patient’s antibiotics and implementation of infectious control procedures, all a day-and-a-half faster on average than they were able to do before.

All of this is contributing to a bit of a tailwind in the EU, and while first quarter numbers were, as we guided earlier, very light, we did see meaningful progress. In Italy, for example, we now have 7 customers up and running clinically, with numerous customers deep in the funnel and expected to close over the coming quarters. We also are expecting a catalyst that we believe will continue to drive business in this country. In the fourth quarter, we expect AMCLI, the Italian Association for Microbiology's clinical care working group, to include our solution and guidelines for treatment of critically ill patients affected by bacterial infections. This is great for patients in Italy and, we hope, will be duplicated in other countries across the EU.

Other countries in the EU are also making progress, France, Germany, Spain and the U.K. among them. In each of these countries, we are implementing, specific market access programs that are having a positive impact. For example, in Germany, the biggest EU market, we have 2 active customers and expect many more. One sticking point in driving faster adoption was the lack of a German-specific health economic outcome model, with live data from German hospitals. This is something we have now remedied. With this in hand, we expect progressive commercial traction from Germany going forward as well as the rest of our EU business.

Lastly, our business in the Middle East has been doing quite well, and we expect good things from this region later this year.

Overall, good progress. And as expected, we should see a strong third and fourth quarter from this geography.

There is also progress in North America. To start with, our U.S. pipeline remains quite strong. We continued to add scores of accounts to our funnel and many accounts are in the latter stages of acquisition and implementation. Our conversion of evals continues to be nearly perfect, with very little attrition post evaluation and instrument performance that we believe has been excellent.

And while exciting, changing the practice of medicine is not easy. I had the opportunity to have dinner this past Saturday with a mentor of mine, Dr. Tom Grogan, the founder of Ventana Medical Systems, my former employer. Ventana eventually was a hugely successful company, but Tom reminded me that the first few years of Ventana's launch, like most diagnostic launches, was quite challenging, with first year sales of just 3 instruments. And I do also see risk in our commercial launch. A year into it, we have tremendous interest and good progress. However, I believe our funnel remains congested. Sales are still taking too long, and our efforts at speeding the process up have had mixed results. For example, while we are increasing the speed of evals and connections to the LIS, the contracting process remains challenging. In numerous institutions across the country, we have the support of clinicians, the lab and the C-suite. Yet final sign-off on our POs continues to extend. I believe this is all about urgency. Many of you have done the same work we have done, surveying hospitals to see if they know of the Pheno and plan to buy it. And we believe the results of these surveys remain encouraging. Usually, a resounding yes. Yet their urgency is different than ours. We don't want them to acquire tomorrow. We want them to acquire today. So we are redoubling our efforts to create the sense of urgency necessary to unstick these accounts. And most of these programs are already underway.

The first program is evidence, something that we are actively driving. In addition to the 61 publications and posters on the Pheno, we expect an additional 7 to be presented at the upcoming ASM.

Included in the publications, we now have clinical outcome results to further attest the value Pheno is providing. We are also initiating a registry for both our blood and respiratory kit that we expect, will show the significant improvements to patient outcomes driven by Pheno results.

Most importantly, evidence is also coming that, we expect, will be a major driver later this year. In late 2017, 2 institutions, the Mayo Clinic, Rochester and UCLA, secured IRB approval to conduct a randomized clinical trial investigating the efficacy and associated health economic outcomes of Pheno. The trial randomizes patients with gram-negative infections into 2 cohorts: one group receives therapy based on standard of care; the other care informed by Pheno. Needless to say, this was a difficult study for which to secure approval, given the potential challenges of clinically impactful information and earlier optimized therapy. Regardless, the study is nearing completion, and we expect enrollment to finish in Q3, with early data soon after.

If the study concludes as we hope, it will demonstrate the improved outcomes for these critically ill patients, with positive impacts on mortality, morbidity, length of stay, stewardship and cost. We can't wait.

The second program is securing contracts with group purchasing organizations, many of which are compliant. And I'm happy to report that we are also making steady progress here. These contracts represent access to over 3,000 institutions and unlock a huge part of the market currently closed to us. This past week, final revisions were completed for the first of these contracts, and we expect their countersigning in the next days. We expect the others to be concluded in the coming quarters. And while there is no guarantee of broad adoption in these institutions, this should be a significant catalyst for our sales efforts and speed up the contracting process.

Thirdly, our KOL strategy is also working. We now have, arguably, the 2 most prestigious children's hospital in the country as paying customers. We also have a number of the most prestigious cancer centers and tertiary hospitals using our device clinically. Also notable are the number of community hospitals that are finding the Pheno useful, even indispensable. We continue to be humbled by the stories of lives saved and overall improvements in hospital outcomes, including to the bottom line. It is also helpful that a number of these customers have become real evangelists of the technology and not hired guns. These folks are just so darn excited by what they are doing, in changing sepsis outcomes using the Pheno, that they are encouraging others to consider our system. This is how it should work.

Finally, we have also reorganized the sales team to take advantage of the momentum created by these efforts. We have substantially increased our sales organization and recently completed extensive training of the new team we have brought to the effort. And while some ramp time for the new team is expected, we are already seeing benefits that will accrue in the coming quarters.

So all in all, we believe much to be encouraged about: solid data, great KOL support, good anecdotal evidence of clinical outcomes, with definitive clinical data to come.

For me, I now believe that we are no longer managing if we will become standard of care in much of the world, but when. That is a good feeling and has the team very pumped up.

So as we guided previously, we had the very light Q1 we expected and still expect to have a light Q2. We do expect to see a heavy Q3 and an even heavier Q4. The funnel right now looks to get us to the bottom end of our guidance range, albeit with some risk. And how we end Q2 will, obviously, have a material impact.

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

Thank you, Larry, and good afternoon, everyone. Revenue for the first quarter was $801,000 compared with $530,000 from the same quarter in the prior year. This increase was the result of sales of the Accelerate Pheno system and Accelerate PhenoTest BC kit across the U.S., Europe and Middle East. Cost of goods sold for the first quarter were $492,000, resulting in a gross margin of 39%. This gross margin includes onetime charges and the effects of excess capacity, which negatively impacted our quarterly margin. We believe these items will not have an impact on our outlook for a strong full year gross margin.

Selling, general and administrative expenses for Q1 was $14.4 million compared with $10.5 million, for the same period from 2017. This year-over-year increase was driven by higher selling personnel-related costs in the U.S.

Research and development costs for the quarter were $6.8 million and $4.3 million from the same period in the prior year. This year-over-year increase was due to investments made for the preparation of our U.S. respiratory clinical trial and expanded clinical affairs activities.

Our net loss for the first quarter was $20.8 million, resulting in a net loss per share of $0.37 on weighted average basic shares outstanding of 55.6 million. This net loss contains $5.6 million in noncash based stock (sic) [noncash stock-based] compensation expense. Net cash used for the quarter was $16.2 million. The company ended the quarter with cash and investments of $193.6 million, which includes net proceeds of approximately $100 million from the convertible offering, but excludes the additional approximately $21 million of net proceeds from the Green Shoe exercise in April.

Additionally, to date, we have signed agreements for 345 instruments. Of these, 256 are under evaluation contracts and 89 are placements. We anticipate filing the 10-Q for this quarter later this evening. And I will now hand it back to Larry to review our progress on research and development.

Thank you, Steve. In Q1, we made considerable progress on our second focus area for 2018, the completion and trial of our severe bacterial pneumonia test kit for use on the Pheno system.

First, as we have previously mentioned, we remain in active discussions with FDA, and these continue to go well. The dialogue continues to center around trial design and necessary analytical studies. We have, however, received surprising and encouraging news from the agency on the regulatory classification. They notified us recently that the product will be a 510(k), a declassification from the sepsis kit, which was reviewed as a de novo device. The net result of this is a shorter path to approval and a less complex review process. And while we are hopeful that these discussions will conclude soon, we are taking this opportunity to introduce a recently developed automated sample preparation instrument into the trial. We believe this device (technical difficulty) improve upon current microbiology sample preparation workflows, enabling the use of Pheno on numerous sample types and applications, including respiratory. One of the immediate benefits of applying this is improved reportability from complex samples, particularly those with interfering substances, such as antimicrobials. Lastly, we believe the output of this device is suitable for diverse microbiology applications, enabling it to feed other workflows we are currently developing.

Needless to say, we are excited about this device and believe securing its approval as part of our respiratory trial while adding some schedule risk is well worth it.

In Q1, we also completed adding 3 additional drugs and 2 ID targets to the pneumonia panel to make the product even more appealing, allowing it to assist in guiding treatment for some severe community-acquired pneumonias, potentially increasing the product's overall TAM. Given this progress, we continue to expect to initiate the U.S. regulatory trial in Q2 or Q3. Further, given our 510 classification, we expect a launch relatively soon thereafter. We will let you know more as soon as we conclude with the FDA.

Lastly, we are nearing initiation of a multicenter clinical outcome study in support of our severe pneumonia product. The study is targeted to begin in Q2 and includes a number of leading academic hospitals. The first phase of the study will establish a baseline for the time to current culture-based antibiotic susceptibility results in serious pneumonia, along with outcomes and management practices. The second phase will be a prospective, randomized clinical trial that will evaluate both analytical and clinical performance. This outcome study is powered to demonstrate impact on length of stay, mortality and serious complications associated with hospital onset and ventilator-acquired pneumonia. We expect to have data available from the study right around the time we launch and believe this evidence will significantly shorten time to adoption. And with that, I will open it up to questions.

(Operator Instructions) Today's first question comes from Tycho Peterson of JP Morgan.

I guess, Larry, given the magnitude of the myths relative to The Street, I think there's a lot of focus here on what is going to take to unstick these accounts. You talked about a little bit of it, but you've had the posters and publications out there for a little while, your placements did get cut in half sequentially. I guess, can help us get some comfort that these initiatives are actually going to pay off here? Can you also address the fact that you didn't preannounce given the magnitude of the myths? And then it sounds like you've got about $25 million worth of systems that have been in the field for about a year, 100 or so. Why haven't these converted at this point?

Okay. So, Tycho, I appreciate the questions. You will have to help me if I forget one of them. There is a lot of them there. So I think in the first case, as it relates to The Street's guidance, we didn't provide guidance on a quarterly basis and, accordingly, we didn't feel it was necessary to preannounce. At the end of the day, we did guide that our first quarter would be quite light, our second quarter would also be quite light, the third quarter would be heavy, and the fourth quarter would be heavier. So I think we're on track to achieve just that. And further, we reiterated our guidance for the year on this call. Secondly, I would say that in the first quarter, we had a number of new pieces of evidence presented, including that which was recently presented at ECCMID. I think that will help and I think the rest of what we're doing as articulated in the conference call, will also be quite helpful. You had another question, which -- I missed that third question.

You've had a decent number of systems sitting in the field for over a year. I think it's around $25 million worth. Why haven't these converted? Some of the earlier evals, why are they still under evals and haven't converted at this point?

Well, I think the good news, Tycho is they're all in play. So we haven't lost a single one. I think it's taking quite a long time to contract. I mean, we do not have the benefit of being a reimbursed device. So unlike other folks out there that can rely on reimbursement, we actually have to rely on demonstrating health economic outcomes, and sometimes that's challenging. I think we've done a really good job of that and are in the process of converting most of those instruments. And we expect, frankly, majority of those to convert this year. And that's what's really driving our optimism that we'll have the year that we projected.

All right. And just one last one, I guess. If you think about the efforts to unstick the accounts, is there any one in particular that stands out as potentially being more meaningful? I mean, if I think about the sales reps you're hiring, are you hiring at a more senior level? Or there are other factors here that -- initiatives you listed that could be more impactful?

Yes. I'd say 2 things. First of all, the ARLG study, which includes Mayo Clinic, Rochester and UCLA, if that comes out as we expect it will, demonstrating what all of our customers have so far experienced, which is a significant improvement in patient outcomes, and that's done in a prospective way, it's very difficult for a hospital then to not adopt. I think we will have created a situation where, I don't want to be hyperbolic, but it's almost malpractice not to have this. And I think that could be a significant catalyst. Secondly, it's important to note that we increased our sales force by almost 50% and a number of those folks, I'd say, over half our sales force has less than 3 months in the seat. So those folks are coming up to speed right now. Frankly, they've just been trained, and we're already seeing great things. So I remain quite optimistic.

And our next question today comes from Bill Quirk of Piper Jaffray.

So, Larry, just going back to your comments about the lower respiratory pricing and specifically thinking about the front-end piece to that, you've mentioned that -- or kind of implied, I think, in your comments that, that could create some additional time or turnaround time, rather, with respect to the clinical trial. Is the device itself, is it finished at this point? Any remaining technical risk or anything like that associated with it? Or are we ready to go here from a clinical trial standpoint?

Yes. Bill, thanks for asking. Yes, I'd say there is still technical risk, and we will be optimizing and integrating right up until the day that we enter clinical trials. We're always searching for perfect performance. And as we are continuing to optimize, I'd say, if we run into a challenge, it's not going to present binary risk because the test works great, but it creates a time line one. So with all that being said, based on what we're seeing, we still expect to start our clinical trial in Q2 and Q3.

Okay. And given the preliminary data that's affiliated with that, which, obviously, was quite strong, so, Larry, it's just a question of -- do you have some optionality here where you can take this into the clinic without the sample prep device if, to your point, you're optimizing up until the last second? If you don't get there, can you still move forward on this and incorporate this later? I mean, how should we think about that being a potential bottleneck to getting the clinical trial started?

Yes. It's a good question, Bill. I think, yes, we do have optionality. At the end of the day, what we're trying to do is have just a home run here on both the technical perspective, overall performance outcomes, and we really want to drive as perfect a product as we possibly can. And we're going to be, as I said, optimizing until the very last moment. But we already have something that works really, really well and is better than anything else out there.

Okay. Got it. And then just 2 more quick ones for me. On the Italian guidelines, can you talk about whether or not you're getting close with any other country, I assume, perhaps Europe, just given the Pheno has been there a little longer? And then secondly, given the economic study that came out of University Hospital -- or the mortality study, excuse me, that came out of the University Hospital, is that something that you guys are using with respect to trying to get these systems closed faster? I'm just thinking about a scenario where you could end up going to the hospital C-suite and then trying to do it kind of a top-down push to try to get these things up and running. Curious to your thoughts there.

Yes. So as it relates to University Hospital, yes, we are excited about the white paper that came out. It's been helpful to us. And for sure, it's assisting our sales people moving stuff forward. I would say though that because it's a pre-post observational study, it's not nearly as powerful as a study that is fully randomized like the Mayo Clinic study. So I think the Mayo Clinic study will be much more powerful and creates much more of a tailwind than does the Augusta work, but the Augusta work as well as our other customers who have put forward a number of papers and publications about clinical data, those are all helpful to us. So we're excited about that. But I really do think prospective, randomized trial is the gold standard and more powerful. As it relates to Europe, I think the answer is no, I don't think we're close to guidelines in any other country. But we are making a significant progress in Germany as well as in France with reimbursement. So those would be significant catalysts for us. And we expect by the third quarter to hear about whether we achieve the first step of reimbursement in both of those countries. So I think good news, overall.

And our next question today comes from Brian Weinstein of William Blair.

Larry and Steve, it looks like the funnel isn't really growing that much right now, 259, now 253. Can you talk about what's causing the front-end of that funnel to maybe not have any kind of acceleration there. Is that anything due to the competitive environment you're seeing today relative to competition versus like molecular ID and resistance products or [molB]? And do you think that your product actually can live side-by-side with those other products in the lab? Or do you think you really have to do one or the other?

Okay. So thanks, Brian. Look, as we mentioned, we have a substantial funnel. I think it's grown significantly. I think we now have more than 750 prospective customers in North America alone. Again, this is a congestion problem, not a demand problem. And we actually didn't lose evals in Q1. We added 10 new customers and converted several more. So -- and in addition, we had a number of -- a couple of customers purchase directly. It's important to note that total evaluation instruments, that number is rolling number and will decrease as customers convert. And frankly, in Q1, finally, our sales team was really being reorganized. And that was the first priority. I'd say, we should see significant progression in Q2, Q3 and Q4. So I do not see this as a stoppage or anything. I think this was -- we took a pause to put in place the things that we needed to put in place. And my expectation is that Q2, Q3 and Q4 should be quite good. I'd also say that the competitive situation is not what's holding us back at all. We're not in a situation where we are going head to head against a molecular device and finding ourselves wanting. And I think in many cases, we coexist. So we have many coexists with a molecular placement, and you'd see them running a respiratory viral panel, while we're running those blood samples. So I would expect that to continue and a number of accounts. And frankly, in some accounts, we are going head-to-head against molecular devices and, typically, we're winning.

All right. Last quarter, you mentioned the China feasibility study that you had commissioned. Obviously, it's a huge market. You said you might have an update for us on that in a couple of months. Where is that now? And what were the results of that study if you can share that?

Yes, sure. China looks very good for us. Reimbursement looks quite good for us, and the market looks appealing. We're heading over -- our team is heading over to China in 2 weeks to deepen the investigation, meet with KOLs and commission a number of studies. So we're enthusiastic about progression there.

And then at the end of the prepared remarks on the Q4 call, you did mention some pharma partnerships at that point. Are you able to expand on what their comment was referring to and the timing to hear more about this?

Yes. Look, I think, in this case, I -- we are working with a number of pharma groups on a number of different deals. And that's all I'd like to say about it right now.

And our next question today comes from Sean Lavin of BTIG.

I guess, my first one is just kind of given the number of systems you have there for a while, as Tycho brought up, or has it come to a point or you're at the point where you start taking some back to kind of encourage hospitals to start buying them?

No, Sean. I mean, we wouldn't take them back unless the hospital has said that they're not interested or not going to buy them. And so far, we have not had that happen. So we're not finding a situation where we've got hospitals that are saying we don't want to buy. Quite the opposite, we're seeing. Most of our situations are that we have hospitals that are working very, very hard to purchase those instruments. And it's an internal struggle for them.

But if a hospital couldn't keep using a system and doesn't have any threat of losing a system, what makes them wake up on a certain day and say, here is payment. What incentivizes that?

Well, I mean, first of all, it doesn't make sense for us to deinstall when that hospital is in the process of moving things through their various committees. I would -- I'll give you an example, like, we have a number of hospitals where they have 5, 6 or 7 committees, each one meeting in a month or 2 times. So while that hospital is moving through that process of acquisition and securing budget, and most of the time, given where we are, that's not something that had been budgeted for in 2017. So it's off-cycle budget, which takes a longer time. So, Sean, we don't think it makes sense to deinstall that when they already are highly motivated to get this approved.

Okay. And then as you think about your guidance and certainly the confidence in the back half, is there anything you can kind of point to that gives you the confidence that there are certain hospitals that say, we'd rather pay in the third or fourth quarter or you've gone through a number of hospitals and you've looked at kind of where they are in the different committees? I mean, is there something you can kind of point to that says this should really pick up later this year [instead of it being hope but] more kind of material things you can point at?

Yes, sure. We have many customers that are in the bottom-end of the funnel that are past evaluation. Those evaluations have been exceptional. They've said they are going to purchase, and they are going through committee right now. And we have enough of those that, even with attrition, we believe that we'll be in good shape.

Ladies and gentlemen, this concludes today's question-and-answer session. I'd like to turn the conference back over to Larry Mehren for any closing remarks.

All right. Thanks for the questions. And I would say, as usual, a special thanks to our great team. They're doing a fantastic job. Another great thanks to our dedicated customers and our really committed shareholders. You are all making it happen and, as I said earlier, I think it's just now about when. And I think we're on our way. We're absolutely on our way. Cheers. And I'll speak to you soon.

Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.