NanoString Technologies Inc (NSTG) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NanoString 2016 first-quarter financial-results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mark Klausner. You may begin.

Thank you. On the call with me today is Brad Gray, who is President and CEO; and Jim Johnson, CFO.

Earlier today, NanoString released financial results for the first quarter ended March 31, 2016, and a copy of the press release can be found on the Company's website at nanostring.com.

During this call, we will make a number of statements that are forward-looking, including statements about financial projections; existing and future collaborations; future business growth, trends, and related factors; prospects for expanding and penetrating addressable markets; interactions with third-party payers and the timing and outcome of any related reimbursement decisions; our strategic focus and objectives; and the development status and anticipated success of recent and other planned product offerings.

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today's call. We undertake no obligation to update publically any forward-looking statement.

With that, I would like to turn the call over to Brad.

Thanks, Mark, and good afternoon, and thank you for joining us today.

Over the past several months, we have continued to strengthen our leadership in [precision] oncology, with significant progress towards our strategic goals, and have achieved a string of critical milestones across many dimensions of our business. Let me start with a few highlights.

Our customers recently published their 1,000th peer-reviewed paper using nCounter technology. On the life science side of our business, we unveiled an expanded portfolio of 3D Biology assays that allow researchers to simultaneously analyze DNA, RNA, and proteins. In parallel, we presented proof-of-concept data for our Hyb & Seq and Digital IHC programs, demonstrating the untapped potential of our platform. On the diagnostic side of our business, we recently achieved Medicare coverage for Prosigna in all 50 states.

Finally, we executed two major biopharma collaborations, which provided a substantial cash infusion, making Q1 the first quarter of positive operating cash flow in the Company's history. We are proud of these achievements and optimistic about our continued growth.

Total revenue for the first quarter was $14.7 million, an increase of 27% from the prior year. Our total revenue was above the midpoint of our guidance range of $14 million to $15.2 million in revenue for the quarter, so the mix was different from what we had anticipated, as strong collaboration revenue offset lower-than-expected product and service revenue. Product and service revenue was $12.1 million for the quarter, below of guidance of $13 million to $14 million.

The shortfall in product and service revenue was driven by lower-than-expected instrument revenue. While the mix of MAX, FLEX, and SPRINT instruments was in line with our expectations, the total number of units sold was down year-on-year.

Although we entered the quarter with a strong sales funnel, a number of Q1 instrument opportunities required more time than anticipated to close; and the orders slipped beyond the end of the quarter. Our commercial team has been working tirelessly to close instrument opportunities that slipped past the end of the Q1, to validate the quality and status of the Q2 sales funnel, and to improve our funnel-management processes for the future.

Total demand for our instruments remains strong, and we have seen significant improvement in the pace of instrument orders in April, making it the strongest first month of any quarter in Company history.

We expect instrument-revenue growth to normalize over the balance of the year, and we reiterate our guidance for total revenue of $86 million to $90 million, and product and service revenue of $[70] million to $75 million in 2016.

During the quarter, we expanded the install base to over 370 nCounter systems worldwide, while achieving annualized total consumable pull-through of just under $100,000 per system.

The life sciences consumable revenue grew 31% year of on-year and was strong across all regions and customer segments. Demand for [panel] products remained high, accounting for 45% of our consumable revenue. Biopharma customers and their CROs contributed approximately 40% of consumable revenue, growing about 80% year-on-year.

Meanwhile, Prosigna revenue doubled year-on-year, while our new diagnostic partnerships with Merck and Medivation and Astellas drove our collaboration revenue to more than triple.

Before I provide an update on our strategic objectives, I'd like to share some details from what was a very exciting AACR meeting, held in New Orleans during early April.

Because of our focus on cancer, this is an important meeting for the Company, and each year its significance grows. This year, our customers presented at least 35 different studies powered by nCounter technology, up 35% from a year ago.

Our focus on immuno-oncology, combined with our unique 3D Biology platform, drove customer interest in [nCounter] technology to record levels. The amount of booth traffic was unprecedented, with a number of customer leads captured increasing over 50% compared to 2015.

In addition, we held dozens of private meetings with biopharmaceutical companies interested in accessing our 3D Biology, Digital IHC, and companion diagnostic capabilities. Overall, this was the most successful scientific meeting in Company history and was a strong indicator about our future growth potential and impact in the field of oncology.

Now I'd like to spend some time covering the progress we made on the four strategic objectives we identified for 2016.

Our first strategic objective is to penetrate our expanded market opportunities by building an install base of nCounter SPRINT profilers. The SPRINT system delivers high performance with a footprint and price point suited to the needs of individual researchers.

In the quarter, we sold 8 SPRINT units, accounting for just under half of our instrument placements. SPRINT is successfully expanding our reach, with over 70% of SPRINT buyers to date representing new customers.

In line with our product positioning and launch strategy, a majority of SPRINT customers to date are individual academic researchers who focus on oncology. SPRINT is also appealing to smaller, newly public and privately funded biopharma companies who find it an affordable way to access nCounter for biomarker research.

In addition, the price point for SPRINT is opening new markets, evidenced by a disproportionate number of SPRINTs going to Asia, where SPRINT sales helped drive our year-on-year revenue growth in that region to above 50% during Q1.

Finally, despite the compelling price and performance of SPRINT, we have not seen a [major] pattern of customers scaling down nCounter MAX orders in favor of SPRINT.

As expected, the fraction of instrument revenue driven by SPRINT continued to increase during Q1, and SPRINT now represents over 40% of the units in our instrument sales model. We are aggressively building the funnel of SPRINT opportunity, focusing on individual researchers through awareness campaigns and seminars. As a result, we continue to expect that SPRINT [fills] will account for approximately half of the systems sold this year.

Our second strategic objective for 2016 is to expand our suite of 3D Biology products. Our 3D Biology technology is a unique application that allows measurement of DNA, RNA, and proteins simultaneously on any nCounter system from a single sample.

We believe these 3D Biology products will enable researchers to make novel observations about cancer biology, while maximizing the data generated from the valuable samples.

In September of last year, we launched our first product in the 3D Biology family, the RNA protein PanCancer Immune Profiling Panel. This panel is now being used by over 20 different customers, 70% of whom are researchers at biopharma companies. And even with this limited product offering, 3D Biology has helped expand our customer base, motivating a meaningful number of instrument purchases.

At AACR in April, we introduced nCounter Vantage, a broader portfolio of 3D Biology assays that can be mixed and matched, creating many new ways for cancer researchers to apply our 3D Biology technology to gain a deeper view of cancer and immune biology.

As part of the introduction, we launched two new assays that enable highly multiplex analysis of RNA transcripts from key disease-driving gene fusions. The nCounter Vantage lung gene fusion panel and leukemia gene fusion panel are both designed to be combined with other Vantage protein and DNA panels.

For protein analysis, we showcased two new panels, which are initially being made available under product-evaluation programs. The first panel is focused on immuno-oncology research, targeting 30 proteins involved in immune cell signaling; and it's designed be combined with our 770-gene PanCancer Immune Profiling Panel.

The second panel focuses on proteins that drive solid tumor growth. It includes the capabilities of detecting protein phosphorylation that indicates pathway activation and is designed be combined with our 770-gene PanCancer Pathway Panel.

Finally, for the first time ever, nCounter technology can be used for the analysis of single-nucleotide variations in DNA. We recently introduced the first of three new nCounter Vantage DNA panels, which are being developed to profile up to 192 single-nucleotide variations, from as little as 5 nanograms of DNA.

The first panel focuses on mutations [that are in] a variety of solid tumors and will be made available under a product-evaluation program beginning in Q3. We believe that these powerful new Vantage assays and our affordable nCounter SPRINT profilers together form a potent combination, which appeals to many new customers, expanding our reach and impact.

Our third strategic objective for 2016 is to extend our leadership in the development and commercialization of molecular diagnostics. We expect to deliver this objective, both by continuing to grow the market for our Prosigna breast-cancer assay, and by building a pipeline of companion diagnostic assays in collaboration with biopharma companies.

We've had a number of wins for Prosigna during the last several months. In February, the ASCO Clinical Practice Guidelines were updated to recommend use of Prosigna for guiding treatment decisions in early-stage breast-cancer patients.

Importantly, Prosigna and Oncotype DX were the only two tests to receive a strong recommendation, together with a high rating of evidence quality. We believe that this will help drive further reimbursement wins with US insurers.

In March, Prosigna received a favorable final local coverage determination by Noridian, providing Medicare coverage in 13 states, effective as of May 3. In April, Prosigna received a favorable final local coverage decision from Novitas, which covers Medicare patients in Texas and ten other states.

As a result, Prosigna now has Medicare coverage in all 50 states across the country, representing a great success for our reimbursement team, and an exciting milestone for the Company.

We are also making progress on reimbursement outside the US. In April, we learned that Prosigna will be covered by the French national healthcare system. This government reimbursement is incremental to the previously announced win of a tender by a major French hospital system.

Shifting gears to our pipeline of companion diagnostic assays, the two major collaborations we announced earlier this year are off to a great start.

In our collaboration with Medivation and Astellas, we are working to translate a novel gene-expression algorithm into a potential Prosigna-based companion diagnostic, to identify patients with triple-negative breast cancer who will respond to the drug enzalutamide.

The new algorithm, which was initially developed by Medivation using RNA [seek], has now been successfully transferred to the nCounter platform. In addition, the FDA has determined that this modified Prosigna test can be used for enrolling the phase-III study, meeting a major milestone earlier than we had anticipated and qualifying us to receive a $5-million milestone payment during the second quarter.

Under our expanded collaboration with Merck, we're working to develop the regulatory approval for, and subsequently commercialize, a diagnostic assay to identify patients with multiple types of solid tumors who will respond to the drug Keytruda.

In recent months, we have successfully locked down the algorithm for the test and have been shipping the assay kits to clinical labs, in preparation for processing tissue samples collected during clinical trials.

Separately, we have [accessed] more immuno-oncology content to our recently announced collaboration with HalioDx, under which we will jointly develop gene-expression assays through assessing the response to immune therapies. These assays originate from the pioneering work of Dr. Jerome Galon, a leading researcher in cancer immunology, and expand our leadership position in immuno-oncology.

In the future, we plan to make the research-use only versions of these assays available to biopharma companies for use in pilot studies, which we believe could open doors for new companion diagnostic collaboration. Meanwhile, we have continued to leverage our lymphoma and breast-cancer assays into additional pilot studies with potential biopharma partners. And the total to date has grown to 26 studies with 13 companies.

As a result of all of these successes and progress, we believe that our credibility as a companion diagnostic partner continues to grow, setting the stage for additional biopharma collaborations in the future.

Our fourth strategic objective for the year is to expand our markets, with new applications using our optical barcoding technology, specifically through single-molecule sequencing and multiplex digital immunohistochemistry, or Digital IHC.

We recently presented proof-of-concept data from Digital IHC at AACR. Using the prototype slide-processing instrument, together with our existing nCounter system, we were able to demonstrate simultaneous profiling of 30 different protein targets, in a spatial context, across a single slide of FFPE tissue. The technology demonstrated the dynamic range exceeding five logs and neared single-cell resolution.

Customer interest in Digital IHC has been even stronger than expected. During the AACR meeting, dozens of interested research customers visited our poster; and we had approximately 130 attendees at our standing-room-only seminar. In addition, we held numerous private meetings with biopharma companies eager to expand the number of proteins that can be profiled in [precious] tissue samples.

We believe that there's a substantial latent demand for technology that can profile multiple proteins on a single FFPE slide. We intend to commercialize Digital IHC as an instrument and assay kit that could be used for slide preparation, ahead of processing by one of our existing nCounter systems. While a commercial Digital IHC instrument is still several years away, look for more proof-of-concept data at a scientific meeting later this year.

During the first quarter, we also presented [first] proof-of-concept data for Hyb & Seq, at the February AGBT meeting. Hyb & Seq is a novel, massively parallel, single-molecule sequencing chemistry with the potential to enable a workflow much simpler and faster than currently available sequencing methods. We see the greatest opportunity in clinical applications, where we believe it may have critical advantages for running targeted running targeted cancer panels.

Over the past several months, Hyb & Seq program has continued to advance. This effort has focused on increasing the number of sequence cycles performed and achieving uniform hybridization across the target. We look forward to presenting our progress publicly at a scientific meeting later in the year.

Overall, we have grown incrementally positive about the commercial opportunities for both Digital IHC and Hyb & Seq and believe that they have the potential to fuel growth in our business for many years to come.

Now I'd like to turn the call over to Jim to review our first-quarter financial results and guidance.

Thanks, Brad.

Total revenue for the quarter was $14.7 million, up 27% versus the first quarter of 2015. Total product and service revenue was $12.1 million, 12% higher year-over-year. Foreign-exchange rate fluctuations reduced the growth in total product and service revenue by less than 1 percentage point.

Instrument revenue for the quarter was $3.4 million, 22% lower than in the first quarter of 2015. The decline was driven by both volume and mix, as we sold fewer systems in total, and the addition of nCounter SPRINT lowered overall average selling price. SPRINT represented just under half the systems sold during the quarter.

Total consumable pull-through for the quarter was $8 million, up 35% year-over-year. The pull-through was slightly below $100,000 per system on an annualized basis, which reflects seasonality similar to the first quarter of last year, and is consistent with our quarterly guidance.

Life sciences consumable revenue, excluding Prosigna, was $7.2 million, up 31% year-over-year, and was driven by particularly strong demand from our biopharma customers. Prosigna IVD kit revenue was $754,000 for the quarter, 98% higher year-over-year, with ex-US markets continuing to generate the majority of sales.

We recorded $2.6 million of collaboration revenue for the quarter, compared to $761,000 in the first quarter of 2015. The increase in revenue resulted from our new collaborations with Merck and with Medivation and Astellas. The first-quarter collaboration revenue was above our expectations, due to a higher-than-anticipated percentage of completion for these new collaborations.

Gross margin on product and service revenue for the quarter was 52%, up from 51% reported for the first quarter of last year, largely due to product mix. R&D expense was $7.2 million for the quarter, up 22% over the first quarter of the prior year.

The increase was largely driven by increased investment in new-product development, included 3D Biology applications, our Hyb & Seq sequencing chemistry and Digital IHC, as well as work performed under our new companion diagnostic collaborations.

SG&A expense was up 6% year-over-year to $14.9 million for the quarter, and this increase reflects costs associated with added staffing and professional fees. Stock-based compensation expense was up $1.9 million compared to $1.2 million for the first quarter of 2015. Our GAAP net loss decreased to $14.6 million, or $0.74 per share, from $14.9 million, or $0.81 per share for the first quarter of last year.

We strengthened our balance sheet during the quarter, exiting Q1 with approximately $57 million of cash and investments, up from $49 million at the end of 2015. This positive operating cash flow was driven by the receipt of $18 million in technology-access fees from our new collaborations, offset by other operating cash usage.

So now I'll turn to our 2016 financial guidance. We reiterate our guidance for total revenue of $86 million to $90 million for the year, assuming constant currency, which is an increase of 37% to 44% over 2015. This includes expected collaboration revenue of $15 million. We continue to expect total product and service revenue of $71 million to $75 million, including Prosigna revenue of approximately $5 million.

For the second quarter of 2016, we expect total revenue of $18.5 million to $20.5 million, including product and service revenue of $15.5 million to $17 million, and collaboration revenue in the range of $3 million to $3.5 million. Collaboration revenue is higher than our previous expectations, due to the accelerated achievement of a $5-million milestone payment in April, under our collaboration with Medivation and Astellas.

For gross margin on product and service revenue for the full year, we expect to be in the range of 54% to 55%, with collaboration revenue excluded from the calculations. For operating expenses, we continue to expect a total of $94 million to $99 million for the year, including approximately $8 million to $9 million of stock-based composition expense.

Our GAAP operating loss for the year is expected to be in the range of $40 million to $43 million, and we continue to expect interest and other expense to be between $5 million and $5.5 million for the year. Our expected GAAP net loss for the year is unchanged at $45 million to $48 million, or $2.30 to $2.45 per share.

We expect total capital expenditures between $4 million and $5 million for the year, net of leasehold improvement funding from our landlord. And from a balance-sheet perspective, we continue to expect the collaborations with Medivation and Astellas and Merck together will bring in $40 million to $45 million of cash for the full year 2016, which should put us very close to net cash flow break-even for the year.

So with that, I'll turn it back over to Brad to wrap up.

Thanks, Jim.

In summary, we are building a diversified business with multiple growth drivers and an attractive mix of near- and long-term opportunities. In Q1, we delivered strong revenue growth, despite a shortfall in instrument sales. We are confident that we can quickly return to our high standards of sales execution and deliver expected growth along all dimensions of our business over the balance of the year.

We are well positioned to capture near-term growth opportunities created by SPRINT, 3D Biology, and our leadership in immuno-oncology, as well as longer-term opportunities, such as growing our diagnostic business through additional biopharma collaborations and expanding our powerful barcoding chemistry in new markets. With so many growth drivers and catalysts, we are extremely optimistic about the future.

I would now like to open the line for your questions.

(Operator Instructions) Doug Schenkel, Cowen and Company.

Good afternoon. Thanks for taking the questions. Brad, I appreciate all the detail on the strength of instrument demand in April. But with that said, by our math, it seems like you came up light of instrument revenue by -- something in the ballpark of $1.5 million. Was that all timing? And if so, could you at least help us a little bit more than you already have by telling us something like the majority of that [miss] has already been recaptured in Q2? We just want to make sure we can isolate this purely to a timing issue versus something else.

Yes. Thanks for the question, Doug.

We obviously are extremely disappointed in the instrument performance in Q1. We've spent a lot of the last five weeks studying it and looking to rectify it. At the risk of going into too much detail, let me share with you kind of what our understanding of root cause for that -- that instrument trend and shortfall was.

Our confidence is high, both because we've had a good April, and because we think we understand the issue. We've isolated two root causes to what happened in Q1.

First, really during Q4, our sales reps did a poor job of balancing their allocation of time between closing business and cultivating new opportunities that were early in the sales cycle. And then second, at the same time, they were overly optimistic about how quickly Q1 opportunities would close -- or said differently, they underestimated the hurdles in the purchasing process that they still needed to get through.

And so what's happened over the course of the quarter is that while we were constantly monitoring the sales funnel on our CRM system -- things looked good all the way through mid-March, at which point in time, instrument opportunities started to be reclassified as Q2 instrument opportunities.

And there's a whole variety of reasons why that happened, but generally speaking, these were decision -- things like decision-makers being unreachable due to vacation or rescheduled final-approval meetings, or other curve balls in the purchasing process.

And so if we had a more mature instrument funnel, we would have had more time to rectify those situations. But instead, they slipped. And we have worked really hard over the last five weeks to close a number of those, and we've been successful in closing a number of those.

That being said, we don't expect the entire shortfall to be made up in Q2. We expect that it will take several quarters before the full shortfall experienced in Q1 is made up in our instrument numbers.

Okay. Thanks helpful. And maybe to push a little further on that -- recognizing -- there's really no question that NanoString has been making a ton of progress. If you look at the new publications, expanded reimbursement coverage instances, new-product launches, new features -- clearly the Company is doing a good job in innovating and moving your product offerings forward.

I think -- again, not to pile on, but that's why it's so surprising that you could have an instrument miss, even if it is timing-related. Our model suggests you shipped about 17 instruments in the quarter. There's some error [bars] around that, but we think we're in the right neighborhood, based on the data that's out there in your prepared remarks.

When you think about that number of placements, and really the ratio of placements to the size of your sales infrastructure, really just dividing placements into salespeople, it just doesn't seem on the surface like an awe-inspiring level of productivity for a sales force that has grown, is getting more mature, and seemingly should have more arrows in the quiver to use in selling encounters.

Recognizing what you talked about in terms of your disappointment about Q1, in general are you happy with how the efficiency of the sales force is evolving? And if not, what steps are you taking more specifically to improve the productivity -- not just (inaudible) but to really improve upon that ratio I'm referring to over the coming quarters.

In general, with the exception of the first quarter, I have been very pleased with the performance of our sales organization. They delivered, since we became a public company, I think ten consecutive quarters of meeting expectation. That being said, there are some hard lessons that we learned in the first quarter, and nobody here is pleased with the productivity that we saw during that quarter.

I'd say, as an organization, we have become extremely skilled at closing instrument sales that are late in the sales process. But we have not yet mastered the art of balancing that closing effort with the lead generation and the early-stage cultivation effort. And that was, really, I think, the key lesson of the first quarter.

In addition, I think -- obviously, at a leadership level here, our diligence on the funnel needs to be stronger. And we've spent a lot of time in the last few weeks more carefully [diligencing] the status of instruments in the funnel so that they are not overly optimistically classified.

So those are the near-term things that we're doing to improve productivity. But there's also some long-term things that we're doing, and we're getting help from the outside on some of these.

First, we need to be better at defining the process of how we cultivate early-stage instrument opportunities. We have so many more of them now with nCounter SPRINT that the old processes we used when we were a smaller company, more focused on the niche, aren't going to scale.

And so to kick-start this, we've created a task force that includes people from sales and marketing to focus on moving these early-stage opportunities, many of them SPRINT, and people whom we are just beginning to know, and making sure that they are being managed all the way through the sales cycle, even from the beginning, to the close.

And then second, we're making some changes to the way we use our CRM system and our other forecasting procedures to make sure that we are very carefully categorizing even the earliest-stage opportunities in the funnel.

So I'm with you, Doug. I'm disappointed in the productivity that we saw in the first quarter. We are going to have to focus on getting ourselves better, but I feel confident that we can.

No, that's all really helpful. And one last one, Brad and Jim, and a more positive one -- the collaboration revenue in the quarter was clearly a big positive, and better than we expected. I apologize if I missed this in the prepared remarks, but is that really more timing-related, or is there a chance that there actually could be an upward bias, absent other announcements, to your guidance for collaboration for the year -- collaboration revenue for the year?

Doug, this is Jim. I'll take that one. At this point, we believe that it's mainly just [timing], in that more of the revenue is being sort of front-end-loaded than we'd originally anticipated.

We still believe that $15 million is the right number for the year, based on what we can see today. But obviously, things can change, but we believe that that's the right place to be, based on what we know right now. So it's really just a case of recognizing revenue more quickly than we anticipated.

Okay. All right, thanks, guys. Really appreciate it.

Steve Beuchaw, Morgan Stanley.

Hi, guys. This is [Liza] on for Steve. Congrats on the Prosigna coverage. I was hoping maybe you could walk us through some of the puts and takes built into the 2016 guidance, maybe provide an update on the conversation with payers going forward?

Sure. I'll take the conversations with payers going forward. So Prosigna -- it's really gained tremendous momentum from the perspective of guidelines and reimbursement.

The addition of the ASCO guidelines earlier this year really is the [fifth] local guideline in a row, I believe, that had included Prosigna at very high levels of evidence -- really have helped those last Medicare carriers who were holding out get across the line.

In addition, it's resonating, we think, with the private payers, though those conversations take longer, and they're harder to predict exactly when they're going to convert to positive medical policies on Prosigna. But overall, we're really feeling good about our ability to continue to drive private-payer coverage.

On your second question on guidance, I don't know that I quite understood the question. Maybe you can restate that for us.

Sure. Just kind of wondering if there are puts and takes to the $5 million and what could drive it above or below, as we think about this.

Our $5 million in Prosigna guidance had assumed that we would continue to be successful in getting coverage. So I would -- I do not think that -- although we're tremendously excited about getting to the milestone of full coverage geographically across (inaudible) Medicare, and it's a huge win for our team -- it's the one that we had seen coming and planned for.

So I do not think -- and that's why we're not increasing Prosigna guidance. I'd be reluctant, as I've said many times in the past, to have people think about Prosigna growth as being driven by an inflection. It's going to be steady growth here in the United States, and that's what's implicit in the guidance.

Great. And just thinking through -- if you could provide some additional color on the HalioDx joint development, and anything on potential time lines and how we should think about this collaboration relative to the other collaborations that you have with the biopharma companies.

Sure. The HalioDx collaboration is fundamentally different than the ones we have with biopharma companies like Merck and Medivation and Astellas.

In those instances, the developer of a drug is paying us to jointly develop a diagnostic with their drug. In this instance, a small company that has identified content with the help of, really, a leading immuno-oncology researcher, has been looking for a platform on which to port that content. And nCounter has emerged as the leading platform, not just for gene-expression signatures, but especially in the field of immuno-oncology. So it's a really natural fit.

And so what we're doing there is -- we're going to take the gene signatures that they have discovered, and which, you know, some biopharmaceutical companies have already expressed some interest in learning more about, and we're going to develop [kits].

And our hope, obviously, is that this biology is powerful, that we find that it is useful in making decisions about who gets what drugs, and that coming out of this, with this content, we'll be in a position -- an even stronger position than we had been in the past to win new companion diagnostic collaborations.

But that's going to take time, and the process is going to look a lot like it does today with our lymphoma assay and our breast-cancer assay, where we put those tests in the hands of pharma companies through what we call a pilot-study program; we wait for them to get positive results; and then based on the conviction that we all have that that's a predictive test, we move forward.

So it'll take some time to play out, but we're optimistic about it, and we think it's just another way that NanoString is becoming positioned as the leading platform in immuno-oncology.

Great. Thanks so much. I'll jump back in.

Jeff Elliott, Baird.

Thanks for the question. Brad, first question on these collaborations -- I think the answer is no, but the question is, are you seeing any change in demand, either from the rumors that Medivation could be acquired or that when you look at -- there's been several press reports about Merck perhaps trailing Bayer, given that Bayer went mass-market, whereas Merck has gone more the precision-medicine route, and it doesn't seem to be working quite as well -- have you seen any change in demand from these partners, or more broadly in your conversations, in terms of precision medicine?

Thanks for the question, Jeff. So, I would -- no, we're not seeing a reduction in demand, by any stretch, from either of our partners. In fact, I think these collaborations are off to such a rapid and positive start that those relationships have never been stronger.

With respect to Medivation, our collaboration agreement, of course, contemplates changes in control for Medivation. And regardless of who ends up owning Medivation, we'll still have a partner.

We would expect that XTANDI, enzalutamide, is really the core asset of Medivation and that -- regardless of who acquires that company, if anyone does, that they would continue the development programs. And so we don't feel at risk at all related to a change in control of Medivation. And by the way, most of the companies who are rumored to be potential acquirers are already customers who know our technology well, and with whom we have awesome relationships. So that's on the Medivation front.

With respect to Merck -- and I know there has been kind of press coverage and commentary about the differentiated approach that Merck has taken -- differentiated from what Bristol-Myers Squibb has -- I think increasingly, people in the field believe that we're going to have to select which patient gets these powerful new therapies. And that's going to be important, both from an efficacy standpoint, because we want to, of course, see if people (technical difficulty) response (technical difficulty). But it's also going to be absolutely necessary from a health-economics standpoint, where -- because these drugs (technical difficulty) combination, the costs can skyrocket out of control very quickly if we are not thoughtful about who gets them.

So I believe that's a vision that Merck shares, and I think that our collaboration with Merck around Keytruda is a great start to what's happening in the immuno-oncology field. But I think there's going to be more demand over time, not less.

Okay. Yes, I would agree with that. And then two on Prosigna -- I think, just in light of all the progress you've had with the MAX and getting traction with the guidelines, could you revisit how we should think about [ASP]? Is it still kind of the $1,500 to $2,000 range? And then in light of getting the 50-state coverage and the guidelines, and it really seems like you've got some momentum -- but then when you look at the mix of revenue in the first quarter, it's still largely international. Is there anything that you're waiting for specifically? Is it more, like you said before, just kind of a gradual build and getting awareness and adoption built over time? Is there something specifically we should be thinking about for you to get some milestone to hit before that revenue would start to ramp?

First on the question of ASP, our ASPs for Prosigna kits have maintained nicely, in that $1,500 to $2,000 a kit range. And I don't have any reason to believe that it's going to move outside that range at this stage.

As a reminder, the clinical lab fee schedule for Medicare -- and I believe this is the case for all of the different carriers now -- we're listed really at parity with Oncotype DX, at $3,420 per test. And that's between the $1,500 and $2,000 kit price. That leaves plenty of margin for the lab to cover their costs, and then some. And so we don't feel pricing pressure here in the US. And when you look at the global [blended] average, we're still in that range.

So from a geographic-mix perspective, things have been growing in both our markets; 60%, or so, of Prosigna kit sales have come from international. That was true before. That was also true in the first quarter.

We think that will start to shift and that the US is going to start to grow even faster with some of these Medicare coverage decisions. But as a reminder, as you look at the first quarter, those decisions I described were not effective during the first quarter. Noridian did not become effective until May 3. The Novitas decision came in the April time frame.

So remember, demand is going to lag reimbursement decisions by one, if not more, quarters. And so continue to look for a steady ramp of Prosigna, not something that's a huge inflection point.

Great. That's helpful, thank you.

Tycho Peterson, J.P. Morgan.

Thanks. A lot of my questions have been answered. But I want to go back to the instrument softness. Brad, I guess for starters, any geographic color, just given that Europe has been a pressure point for some of your competitors? And secondly, in terms of leading indicators, can you talk a little bit about -- do you have a sense of to what degree SPRINT is being written into NIH grants? I'm just trying to understand, with the budget being up a little bit, if you're going to see a bit of a tailwind here on the academic side, and (multiple speakers)?

Sure. Thanks for the questions, Tycho. There was a geographic difference with respect to the shortfall. As I mentioned in my prepared remarks, a highlight for us during the quarter on growth overall was Asia-Pacific. We really saw SPRINT really come in at the right price and performance for that market. And that helped us drive a good bit of growth. So instruments were strong in Asia-Pacific.

I'd say they were moderate in the US, where we had mixed performance. The slippage -- and some slipping in the US -- the slippage was most in Europe. And I don't attribute that necessarily to sort of a market-demand phenomenon, but I would attribute it to what I'll call the differences of the sales process in Europe.

In Europe, with the bureaucracies that often exist in the academic customers, and often the requirements for government tenders, for things that really have [to go out to] tender so multiple parties can bid on them as part of a process -- I would say that the sales processes have a larger tendency to drag on in Europe than they would in North America. It's a slower sales cycle, with more potential for late-breaking curve balls. And so as a result, we did see more slippage in the [NEA] -- in Europe, than we had in North America.

Tycho, remind you of your second -- oh.

Just on (multiple speakers) on the NIH dynamics, and are you (multiple speakers) written into grants? Is there a good leading indicator?

Yes. So -- that's right. So SPRINT became -- the research world came to know about SPRINT really for the first time in mid-July of last year. And so if you look at the NIH granting cycles, really the first wave of NIH grants into which SPRINT could have been written will be coming out in the July time frame. So we do think that that will be helpful for continuing to grow SPRINT, as that product is geared toward the academic market.

Okay. And then just lastly -- any milestones we can be thinking about, in terms of some of the pipeline stuff? You touched on HalioDx earlier, but I'm thinking about Hyb & Seq, for starters. Is there anything -- and then also the IHC technology -- is there anything we should be tracking over the next year?

With both of those technologies, the pipeline program -- we hope to show more data and more progress at academic meetings, or scientific meetings, rather late in the year. I think the major ones where we had exhibited and shown data in the past are American Society of Human Genetics meetings in October; the [amp] meeting in November; and then the SITC meeting, which is the Society of Immunotherapy of Cancer, meeting, also in November. So look for more proof-of-concept data -- the next stage of data out of both of those programs to come forward at those meetings.

With Hyb & Seq, we're continuing to focus on the [chemistry], running more cycles of sequencing; demonstrating that these novel probes that are the heart of our kind of universal sequencing reagent behave nicely across all different types of DNA sequence; and that, of course, that we have a very simple sample-prep capability that's designed to be really as close as possible to the very low-hands-on-time experience of a traditional nCounter.

So those are the areas of focus for us, and probably what you'll see next. And then on Digital IHC -- you know, we've shown so far, basically, 30-plex IHC. We've shown some of the dynamics of that. Look for us to more carefully characterize the sensitivity, the limits of detection, and so forth, for that platform. And that's where we're going next.

Okay. And actually one last one on the partnership front, with the biopharma partners. Is there momentum building here? I'm just trying to understand what -- does success beget success here? Are you getting a lot of interest in additional partnerships based on what you've done with Celgene and Merck and Medivation? And what's your (multiple speakers)?

Yes, Tycho, we are. And I would say that success does beget success. Every time that we've done another partnership with -- these are very well-respected companies. They're very -- I think they're all three projected to be -- three of the drugs that we're associated with are projected to be three of the top-ten cancer drugs over the next few years. So they're very high-profile programs.

And every time we do that, for the next biopharma company that's considering working on our platform, they feel all the better about it, because they know we went through a very rigorous due-diligence process with these pharma companies.

And then furthermore, when we execute in the way we have -- which I'm very proud of -- just a matter of months after instituting some of these programs, we're delivering assays, we're getting through FDA nonsignificant risk determinations -- we're getting very quickly to the start of the phase-III studies, which is kind of the key rate-limiting step for the drug companies.

As we do that and demonstrate our capabilities, I think our credibility grows. And that stimulates demand, too. So I've really never been more optimistic about our ability to continue to expand this line of business.

That being said, as always, it's hard to predict exactly when these things happen. And so we will continue for now to exclude incremental partnerships from any kind of guidance.

Understood. Thanks.

Dane Leone, BTIG.

Hi, thank you. Can you -- maybe I heard this wrong, but I thought you said you had a $5-million payment triggered from Medivation in the second quarter?

That's correct.

But you're guiding for $3 million, $3.5 million? Was some of that pre-recognized or something like that?

That's -- Jim, as a reminder, I'll give a non-accountant's view, and then I'll hand it over. As a reminder, the revenue recognition always lags the receipt of cash in the way that we account for our deals. And the $3 million to $3.5 million in revenue guidance does include the assumed receipt of the Medivation milestone.

Maybe just to add to that -- essentially, everything that we're receiving, either up front or as milestones or as R&D funding, gets pooled, and part of it gets deferred, and part of it gets recognized as revenue, based on the percentage of completion of the projects. So essentially, a good part of that $5 million is going to end up sitting on our balance sheet for a while as deferred revenue.

Okay. I think people are still trying to figure out the guidance in relation to the instrument revenue number in the first quarter. So is there any way you could break out what your expectation is for instrument revenue specifically in the second quarter?

You know, Dane, we don't provide guidance at any further level of granularity than we have. I think -- what I may have said already, but I'll say it, probably more clearly now -- we expect to make up some of the lost ground in the second quarter, but not all of it. And if you just look at the difference between the $12.1 million that we delivered and the $13 million to $14 million we had in our product and service revenue guidance, you come to basically $900,000 -- almost a couple million in shortfall.

We do attribute that shortfall to instruments. We will make up some of that ground in the current quarter, but we will not make it all up. And as a result, look for us to, what I'd say, normalize our instrument revenue growth over the balance of the year.

Okay. I mean, is there -- the way it's just kind of flowing through people's models, it still seems like without the change in guidance and (inaudible) some of the other factors on 2Q, it still seems like that you're expecting kind of pretty low levels of year-on-year growth in the instrument category. Is that a function of you're still waiting for that funnel to build and, like, have a much heavier, I guess, second half? Is that the way you're kind of thinking about things?

I don't think that I would describe the growth that we're anticipating in instrument revenue in the second quarter as light or minimal. I would describe it as normalizing, for growth rates that were implicit in our annual guidance.

Okay. And the second question that people seem to still be picking on, here -- this is the first quarter where Prosigna revenue did not grow sequentially. Are there any -- I know you guys unlocked some additional markets during the first weeks of the second quarter [in the second quarter here] they'll kick in the back half. But just in terms of what had been unlocked in the back half of 2015, I think there was an expectation to continue to see that sequential growth. Is there any commentary you can provide in terms of what you saw in the first quarter? And I guess some people are also extrapolating a strong quarter for Genomic Health, that maybe they've refocused competitive efforts. I guess, any insight you can provide would definitely be helpful right now.

I guess I'd say, Prosigna is a pretty small number [than reasonably lumpy]. So I don't think people should extrapolate too much from the trend sequentially from Q4 to Q1. I mean, it was a doubling year-on-year, which is exactly what our guidance is, which is -- from $2.5 million last year to $5 million. So it's consistent with our overall guided growth rate.

It is a sequential drop from Q4 to Q1, but we regularly have seen that in years past in almost every aspect of our business. So I would call that standard seasonality.

Okay. Thanks, guys.

Paul Knight, Janney Montgomery.

Hi, guys. The question -- regarding this instrument uptake, how much of this do you think is from the lower ASP units you're rolling out? Is it customers delaying on that? Is it your salespeople spending time on the lower-ASP unit? Can you -- what's your color on that?

Thanks for the question, Paul. We obviously look closely at that. We wanted to make sure that the SPRINT launch wasn't in some way cannibalizing our overall instruments and causing instrument units not to grow as a result.

We do not believe that's what it is. And I think the thing that's given us confidence in that is, one, I think the instrument mix in Q1 was consistent with what we expected it to be, which was just under 50% SPRINT, which is what we expect it to be for the year; and SPRINT was up sequentially in terms of the percentage of instruments that represent it, which you would expect at this stage of a launch.

So I'd say that's growing all in the way that we expected. I'll also say the nature of the instruments that slipped from Q1 to Q2 is also representative of the mix that we would expect. So there was sort of no mix phenomenon, either in what we closed or what we deemed to have slipped from Q1 to Q2. So I'll say that we don't think that that's an issue.

Back to the earlier execution point -- you know, Jim and the team and I, we take tremendous pride in our ability to execute. And so we're focused on getting it back on track.

One of the things we are thinking about is how to arm our sales organization, not -- you know, to be able to capture the SPRINT opportunity, both in terms of the mix of people we have, inside sales versus field-based, and the processes they use about who does what to generate leads early in the process versus close them late.

And so that's something that we're studying carefully. And we will continue to, of course, improve the process. And we may evolve the mix over time to fully capture the opportunity created by SPRINT.

As an example, other companies who've introduced bench-top systems have successfully used inside sales forces, who are based in a home office -- a headquarters, rather than in the field, to carry a lot of the water with respect to cultivating bench-top instrument leads most of the way through the sales cycle. We have begun that process here. But you know, we're learning how to work most effectively together across the different parts of our sales organization. So that's one of the things that we look to improve, as well.

So in summary, I'd say SPRINT is not a cause of the shortfall in instrument revenue we had, either from a cannibalization perspective, or because our sales reps don't know how to sell it. But, getting really great at selling SPRINT is obviously something we're focusing on and is going to help ensure that we don't have the kind of shortfall we had in the first quarter in the future.

What stage are you at, Brad, in the 3D Biology rollout? Obviously, customers seem pretty excited, but what's the impact of the 3D Biology point in the consumable (multiple speakers) growth?

We've just gone from the first inning to the second inning. And until April at AACR, we had really only one product that did what we'd probably call 3D Biology, which is look at proteins. And on the basis of that one product alone, we know we closed instrument sales with customers who were motivated to adopt nCounter based, in part, on 3D Biology.

So I'm saying -- I guess I'd say it's very early days, but even with a very small portfolio of products, we think it's motivating the growth of the install base. That's a very positive sign.

It's going to take a while for us to build out this portfolio to where we want it. By the end of 2016, we hope to have critical mass of a portfolio. [Beginning of] AACR, we have a few new things to talk about that's going to make it incrementally helpful to drive more instrument sales.

I would say in terms of when 3D Biology reagents become a meaningful contributor on the consumable revenue line, we're probably looking at 2017. Mostly, this year is going to help us motivate new instrument customers.

Okay, thanks.

At this time, I would like to turn the call back over to Brad Gray for closing remarks.

Well, thank you all for your interest in NanoString this afternoon. We'll look forward to seeing many of you at upcoming investor conferences or scientific meetings. Thank you for your time.