NanoString Technologies Inc (NSTG) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NanoString 2016 Third Quarter Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions following at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Doug Farrell, Vice President, Investor Relations. You may begin.

Thank you, Operator. Good afternoon, everyone. On the call with me today is Brad Gray, our President and CEO, and Jim Johnson, our CFO. Earlier today, we released our financial results for the third quarter ended September 30, 2016, and a copy of the press release can be found on our website at NanoString.com.

During this call, we will make various statements about -- that are forward-looking statements, including 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, the timing and outcome of any related reimbursement decisions, our strategic focus and objectives, and the development, status, and anticipated success of recently planned product offerings.

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

With that, let me turn the call over to Brad.

Thanks, Doug. Good afternoon, everyone, and thank you for joining us today. In the third quarter we continued to extend our leadership in precision oncology, delivering strong growth through excellent commercial execution while advancing our product pipeline and our partnerships.

Our total revenue for the third quarter increased by more than 50% year on year driven by the unique value proposition offered by nCounter. We generated robust demand across all product categories and end markets with product and service revenue growing by 38%. Instrument placements for the third quarter were nearly double those for the same quarter last year, translating into 62% growth in instrument revenue and underscoring how effectively SPRINT has helped us reach new customers.

At the end of Q3 our install base had expanded to approximately 450 systems, up about 40% year on year. We believe we are still less than 5% penetrated in our target market, providing plenty of opportunity for our install base to continue to expand.

During Q3, our install base generated consumable pull through that exceeded $100,000 per system on an annualized basis. Our panel products continued to grow in popularity with panel revenue increasing by more than 45% year on year and accounting for approximately half of life science consumable sales. Demand was particularly strong from biopharma companies and our CROs, accounting for 45% of life science consumable revenue, growing 35% year on year and helping offset slower growth in consumable orders from academic customers.

Commercial execution remains a focus and a key element of our strategy is to continue strengthening our team. As part of this effort we recently added Kirk Malloy to our Board of Directors. Kirk is an industry veteran with more than 20 years of experience in life science tools, applied markets, and molecular diagnostics. Most recently, Kirk was Senior Vice President and General Manager of Life Sciences and Applied Markets at Illumina where for more than 13 years he guided commercial and operational teams through periods of tremendous growth. We welcome Kirk to the Board and are excited to have the benefit of his perspectives and insights as we scale our business.

In addition to our commercial success, the scientific momentum of our technology is building. Since our last call, our customers have published peer review papers based on our nCounter platform at a pace of about 10 per week, bringing the cumulative total to more than 1,350 papers. Recent publications are weighted heavily towards oncology and immunology, two fields where nCounter's high multiplexing and compatibility with small samples are distinct advantages.

Nowhere are these advantages more important than in immuno-oncology or IO where understanding how the immune center is responding to cancer is critical. Our central role in addressing the biomarker challenges in immuno-oncology will be highlighted later this week at the annual meeting of the Society for Immunotherapy of Cancer, or SITC, where we will present several scientific abstracts and we'll hold two workshops on the use of nCounter in IO.

Now I'd like to turn to our strategic objectives for the year. The first strategic objective is to better penetrate our commercial opportunities by building an install base of nCounter SPRINT systems. In Q3 we sold more than 20 sprint systems which led to a record number of instrument units sold in a single quarter. Consistent with our expectations, SPRINTs accounted for approximately half of the units sold in the quarter.

SPRINT's compelling combination of high performance and affordability is proving especially popular with academic customers worldwide who drove the vast majority of SPRINT purchases during Q3. SPRINT's appeal to academic researchers is helping power our continued growth in this segment despite the headwinds reported by some other companies.

Since the SPRINT launch in mid-2015, we have sold more 55 SPRINT instruments into a potential install base that we estimate is up to 10,000 systems. During Q3, over 80% of SPRINT systems sold were to new customers who had no previous access to the nCounter platform. We expect SPRINT systems to continue to play a key role in reaching our expanded addressable market.

Our second strategic objective for 2016 is to expand our suite of 3D Biology products. 3D Biology is our initiative to enable the simultaneous measurement of DNA, RNA, and protein from a single biological sample on a single instrument. This enables customers to track as much biological information as possible from limited tissue samples which is especially important in cancer. Additionally, we expect 3D Biology to extend our competitive advantage over platforms that are constrained to a more limited set of applications.

At the annual meeting of the America Society of Human Genetics, or ASHG, held last month in Vancouver, we introduced two new Vantage 3D assays for profiling solid tumor FFPE samples. The 3D Biology workshop that we hosted as part of the launch was standing room only, another great indication of the customer interest we're generating.

The new Vantage DNA solid tumor panel is our first product to enable DNA mutation detection, targeting 104 mutations and 25 genes that drive growth across multiple solid tumors. As described during ASHG by our collaborators from the Fred Hutchinson Cancer Research Center, this panel can detect mutations from as little as 5 nanograms of DNA. The sensitivity to detect mutations that were missed by exome sequencing at 100 x depth.

These capabilities are complemented by our new Vantage protein solid tumor panel which profiles proteins and phospho-proteins in key oncogenic signaling pathways. Together, these panels allow researchers to more efficiently correlate genotypes and phenotypes in solid tumor samples which is critical for biomarker discovery and drug development.

While our Vantage assay revenue was not yet significant, the 3D Biology capability of nCounter is already increasing the appeal our technology and played a role in several customers purchasing instruments during Q3. We plan to continue to build out our portfolio of 3D Biology products and we expect that this product line will become a more important growth driver over time.

Our third strategic objective for 2016 is to extend our leadership in the development and commercialize of molecular diagnostics. This includes growing our Prosigna business and building a pipeline of companion diagnostic tests in collaboration with biopharma companies.

I'll start with Prosigna where during the quarter we achieved important US reimbursement milestones including positive coverage decisions from EmblemHealth and several independent Blue Cross Blue Shield plans. We currently estimate US coverage in more than 80% of indicated patients and our market access team continues to focus on winning over the remaining major private payers.

In addition, our collaborators continue to generate data to support reimbursement and adoption of Prosigna and we expect at least 8 PAM50 studies to be presented at the San Antonio Breast Cancer Symposium or the SABCS in December. Meanwhile, we have expanded our Prosigna install base which has grown to approximately 55 clinical labs worldwide, paving the way for increased adoption in 2017 and beyond.

Turning now to our companion diagnostic efforts, during the past several months the healthcare industry has experienced some extraordinary events that elevate the strategic value of biomarkers and companion diagnostics in the minds of biopharma executives and investors alike. Merck's successful use of a biomarker driven strategy to expand the use of KEYTRUDA in non-small cell lung cancer combined with the unexpected failure of Bristol-Myer Squibb's CHECKMATE-026 study have highlighted the importance of having the right biomarker strategy, particularly in the highly competitive field of immuno-oncology.

These events have already heightened biopharma company interest in using our nCounter platform to help manage risks in clinical trials. We believe that we are well-positioned to benefit from the increased focus on IO biomarkers, both through sales of instruments and consumables to biopharma companies and through companion diagnostic partnerships like the one established with Merck earlier this year.

Recall that in June our colleagues at Merck presented data showing that

nCounter base gene expression assays had strong analytical and clinical performance across multiple tumor types and out performs conventional PD-L1 IHC techniques in predicting response to KEYTRUDA in a head to head comparison. Our collaboration with Merck continues to proceed according to plan and Merck is currently enrolling three registration studies that incorporate the nCounter based tumor inflation signature.

Importantly, the terms of our collaboration with Merck provides the flexibility for us to partner with other biopharma companies and these business dialogues have accelerated in recent months.

Meanwhile, our collaboration with Medivation and Astellas continues to progress well with no disruption in progress expected from Pfizer's acquisition of Medivation. As described on ClinicalTrials.gov, the Phase 3 ENDEAR study of enzalutamide in patients with triple-negative breast cancer is currently recruiting study participants who will be enrolled based on the resulted of our modified PAM50 assay. The rapid and successful transfer of this gene signature algorithm from RNA-Seq to the nCounter system will be described in an abstract at the upcoming FABCS in December.

In parallel, our collaboration with Celgene in the field of lymphoma is progressing nicely as the Phase 3 ROBUST study continues to enroll. Look for data on the impressive site to site reproducibly of our lymphoma sub-typing assay to be presented at the American Society of Hematology meeting next month.

Finally, in addition to the steady progress that we've been making in our existing biopharma partnerships, we continue to expand our pipeline of collaborative opportunities through pilot studies. And that now includes 37 projects with 17 different biopharma companies.

Our fourth strategic objective of the year is to expand our addressable market through new applications that leverage our optical bar-coding technology. This includes our Hyb & Seq single molecule sequencing program as well as our digital spatial profiling platform which we previously referred to as Digital IHC.

At the ASHG conference in Vancouver last month, we presented an update on the development of our Hyb & Seq chemistry which is designed to enable library-free, amplification-free single molecule sequencing. We were able to demonstrate a workflow that goes from FFPE tissue to initiation of a sequencing run in less than 60 minutes with only 15 minutes of hands-on time. Hyb & Seq's simple workflow creates the potential for a sequencing instrument with rapid sample to answer capabilities that are well suited for clinical applications where ease of use and speed are critical.

Our next step is to demonstrate the sequencing of a cancer focus panel by coupling the same sample prep methodology outlined at ASHG with an expanded barcode set on a prototype instrument. We're very excited with the progress that we've made and we look forward to providing our next update at the annual Advances in Genome Biology and Technology, or AGBT, meeting held next February.

Meanwhile, we've continued to generate compelling proof of concept data for our digital spatial profiling platform. Our goal with this program is to enable our customers to extract the maximum amount of biomarker information from their tumor tissue, including insights on how the biology differs across the geography of the tumor. Earlier this year we demonstrated the ability to spatially profile 30 or more proteins at once from a single slice of FFPE tissue using highly multiplexed labeled IHC antibodies.

Next week at the meetings of SITC and the Association for Molecular Pathology, or AMP, we will highlight a powerful new capability, the spatial profiling of proteins and RNA expression on the same system. This capability gives researchers the flexibility needed to interrogate RNA when suitable antibodies do not exist. In recognition of the capability, we are now referred to this technology as digital spatial profiling.

In addition, we're in the process of introducing our digital spatial profiling capability through a technology access program in which biopharma companies and leading academics will send us tumor samples for spatial profiling of proteins.

We plan to incorporate insights gained through these experiments into our development of a new digital spatial instrument that will sit upstream from the nCounter system. We have recently begun to engage a limited number of customers ahead of the official launch of our technology access program and interest among biopharma companies is strong. Three biopharmas have already signed on and we expect the numbers to grow in the quarters ahead.

Overall, we were pleased with the important progress towards our strategic objectives in the third quarter and are confident that we've laid the groundwork for continued growth.

Now I'll turn the call over to Jim who will review our third quarter financials and guidance.

Thanks, Brad. Total revenue for the quarter was $23.9 million, up 53% versus the third quarter of 2015. Total product and service revenue was $19.2 million, 38% higher year over year. Foreign exchange rate fluctuations primarily related to the British pound reduced growth of product and service revenue by approximately 100 basis points. Instrument revenue was $6.9 million, 62% higher than in the third quarter of 2015. Instrument demand was strong across all geographic regions and was particularly strong in Europe.

Total consumable pull through for the quarter was $11.5 million, up 27% year over year and keeps us on track to meet our historical run rate of over $100,000 per system for the year. Life sciences consumable revenue, the largest component of consumable pull through was $10.3 million, up 23% as compared to the third quarter of 2015.

Prosigna kit revenue, the other component of pull through was $1.1 million for the quarter, up 73% year over year and roughly constant sequentially. Ex-US markets continue to generate the majority of sales as recent US reimbursement wins have yet to impact Prosigna revenue.

We record $4.8 million of collaboration revenue for the quarter compared to $1.8 million in the third quarter of 2015. The increase resulted from our new collaborations with Merck and with Medivation and Astellas.

Gross margin on product and service revenue for the quarter was 58%, up from 55% reported for the third quarter of last year. The improvement was driven by higher gross margin on consumable revenue which resulted from efficiencies of scale and a favorable mix of consumable products sold during the quarter. In addition, gross margin across all products benefited from the achievement of a revenue milestone that permanently reduced the loyalty rate on our license of the foundational nCounter patents.

R&D expense was $8.7 million for the quarter, up 50% over the third quarter of the prior year. The increase was driven by costs supporting the advancement of our biopharma diagnostic collaborations as well as increased investment in new technology and product development programs, including 3D Biology, Hyb & Seq, and digital spatial profiling.

SG&A expense was up 30% year over year to $15.6 million for the quarter and the increase largely reflects costs associated with adding staffing to support the company's growth, increased legal and other professional fees, and higher state and local taxes related to amounts received under collaboration agreements.

Stock-based compensation expense was $2.2 million compared to $1.8 million for the third quarter of 2015. Our net loss was $10.1 million or $0.51 per share compared to $9.5 million or $0.49 per share for the third quarter of last year. We ended the quarter with approximately $54 million of cash and investments and year to date we've had positive operating cash flow.

Our biopharma collaborations are having a substantial positive impact on cash flows and revenue. We continue to expect that the collaborations with Medivation and Astellas and Merck together will bring in $40 million to $45 million of cash for the full year 2016. As of September 30, we'd accumulated approximately $40 million of deferred revenue from collaborations on our balance sheet and we forecast that approximately $14 million of this deferred revenue will be recognized on our P&L as revenue over the next 12 months before considering the incremental benefit of ongoing R&D funding and potential future milestones.

Additionally in October we strengthened our balance sheet by selling two blocks of common stock to our after market facility for aggregate net proceeds of approximately $20 million. So, we expect to end the year with more than $60 million of cash and investment on hand.

Turning to 2016 financial guidance we are reiterating our guidance for the year. Total revenue is expected to be in the range of $89 million to $93 million for the year including approximately $18 million of collaboration revenue. Total product and service revenue is expected to be in the range of $71 million to $75 million, including approximately $5 million of Prosigna revenue. Gross margin on product and service revenue is anticipated in the range of 54% to 55% and is trending towards the high end of the range. As a reminder, collaboration revenue is excluded from this calculation.

Operating expenses are expected to be in the range of $94 million to $99 million, including approximately $8 million to $9 million of stock based compensation expense. Operating loss is expected to be in the range of $37 million to $40 million. Interest and other expense is expected to be between $5 million and $5.5 million for the year and net loss is anticipated to be $42 million to $45 million or $2.15 to $2.30 per share.

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

Thanks, Jim.

In summary, solid execution continues to build our momentum across the multiple dimensions of our business. Our diverse revenue streams and new product cycles are producing strong results that are uncorrelated with any one particular end market. The nCounter SPRINT system is accelerating our pace of instrument sales, demonstrating our ability to reach a large underpenetrated market. We believe that our pipeline products are potentially transformative, promising to provide even more insights than our current offerings.

Finally, we have positioned the company in the center of the immuno-oncology revolution with products and partnerships designed to help solve the relevant biomarker challenges and maximize the potential of these new lifesaving therapies.

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

(Operator Instructions) Doug Schenkel, Cowen & Co.

Thank you for taking the question. This is Adam on for Doug. I don't know if you mentioned it in the call but I was wondering how much of the catch-up from Q1 was there in Q3? It sounds like there was about $750,000 remaining to be caught up from Q1, so I was wondering how much of that was reflected in Q3 revenue. Thank you.

Sure. As a reminder, during the first quarter we experienced poorer than expected commercial execution that cost about $1.5 million in instrument business to slip beyond the first quarter. During the second quarter we estimate that we captured about half of that, or about $750,000, leaving another $750,000 to potentially capture during the remainder of the year.

During the third quarter, we expect that we captured another 20% or so of that slip, suggesting that maybe a $300,000 benefit from that slip accrued to our instrument revenue during the third quarter. I think what that shows you is instrument revenue growth was very robust, even excluding the catch-up that we continue to make for the Q1 slip.

Okay. And maybe just to follow up on that, do you expect to catch the remaining amount of that slip in Q4?

We do expect to continue to make up ground in Q4, capturing -- what we probably estimate today is about 90% of the slip. There probably one instrument that slipped that will not be captured this year. But we do expect to continue to make up ground in the fourth quarter.

Okay. And maybe if I could just get in one more. You noted that academic customers drove strong SPRINT ordering in the quarter. I just want to make sure I heard it right. Were orders strong from both US and OUS academic customers or was it more concentrated to a particular geography? Thank you.

Yeah. Academic revenue for NanoString was strong across the board geographically. So, both US and ex-US customers. I think Jim noted that instrument demand particularly in Europe was strong. So, total academic revenue for Q3 was up about 30% for us. Instruments drove most of that.

Instrument revenue in academic in markets was up about 50% year on year. We really do attribute that to SPRINT where I think the combination of power and affordability is resonating strongly. That's great because that's exactly the strategy for the development and launch of that product was to target the individual researcher in the academic context.

Consumables were a slightly different story. We had a good consumable quarter overall but that was driven primarily by biopharma which grew about 35% which offset slower growth in the academic which we estimate is about 15% year on year growth. So, that's the story with the academic context.

Steve Beuchaw, Morgan Stanley.

Good afternoon, guys. Thanks for taking the question. It's Liza on for Steve. I just was hoping that maybe when you were discussing the roll off of the patent, if you could maybe provide some sizing around that and also clarify whether it applies to both consumables and instrument revenue?

Sure. Hello, Liza. Basically the contract that we have with inventors of our base nCounter technology had a provision that when we reached a certain threshold of revenues that the royalty rate would decline. We've never disclosed the actually royalty rates from that agreement, but suffice to say it does have a meaningful impact on our cost of goods. And that's cost of goods basically for any products that are made for nCounter. So, it's instruments, consumables, even Prosigna.

And just one point of clarification to build on that, I want to make it clear to everyone, these patents have not expired. We have not lost exclusivity or patent protection related to our core IP. This is just a pre-negotiated reduction in royalty rate that was achieved based on our cumulative revenue to date.

Sorry about that, probably not the sharpest wording. If I could just ask one more, I guess just moving to Prosigna now that you have over 80% coverage in the US, have you guys thought about the sales strategy to move doctors to your test and how you're going to tackle that?

Thanks for the question, Liza. We're always thinking about how to drive adoption of Prosigna and our technology in the US and beyond. I'll say Prosigna is tracking about where we expected it for the year. Our guidance was $5 million for 2016, doubling over the $2.5 million we did last year. Year to date, Prosigna's grown 92%. So, we're tracking pretty nicely towards our expectations.

I think what we have found is the first right step is getting reimbursement. And we've made a lot of progress there. We still have a few major payers to go. But we feel really good about the trajectory that we're on. Once you've gotten reimbursement, the challenge becomes shifting market share and the fact is most physicians in the US have been using a competitive product for nearly a decade and they're largely satisfied with that product.

And so where we're focused today is on finding the customers who truly value the localized testing option that Prosigna provides. And where we're really finding adoption here in the US so far is in places like integrated delivery networks who value the fact that they're both doing localized testing and internalizing the cost of testing. And the community oncology networks who also value the ability to internalize testing, control the sample, and also the economics that comes with the products.

And that's where we're seeing most of our market share gains here in the US. Over time we hope that the larger commercial labs will embrace the opportunity to enter this market using Prosigna and competing in winning market share. But we've learned not to expect miracles from their commercial capabilities.

And for that reason we continue to really think about a steady linear growth in Prosigna over time. That's not to say Prosigna isn't already contributing and paying dividends well beyond its revenue in terms of the strategic impact of it. Prosigna has driven a clinical install base of 65 system worldwide.

That was a meaningful contribution to our revenue and sets the stage for new menus to be launched on those instruments and of course it's increased our credibility and our capability as a companion diagnostic partner to biopharmaceutical companies and in many ways that menu of forthcoming tests through that partnerships that are likely to drive our true diagnostic revenue growth in the long-term.

Great. Thanks so much.

Dane Leone, BTIG.

Hi. Thank you, guys. Just for historical context, before you started receiving coverage decisions or had big coverage to push over the last year for Prosigna, just how many institutions were you actually in? I feel like you had said 45 in the past. I just wanted to make that was right regarding the number of clinical labs with Prosigna capabilities.

Yes. The number of clinical labs offering Prosigna has increased steadily over time. So, it really depends at what point in time you'd be looking at. I think 65 is up maybe about 5 systems from where we were last quarter, if I remember correctly and about 50 of our 65 instruments are active and I think that's also up about 5 systems over the 45 who were active a quarter ago. It's hard for me to remember back to another point in time, Dane. But I think the point is with reimbursement and with guidelines continuing to become more well understood and more well known by our customers, we have continued to expand the install base. And I would expect to continue to do so, both in the US and abroad.

Okay. I guess looking at the collaboration landscape, how do you think about expansion? You touched on it a little bit. How do you think about expansion and maybe deeper penetration with some of the institutions you're currently working with? And I guess that's specifically to bring up the efforts over at Celgene to look at similar products to REVLIMID, CC-122 specifically was called out as having a classifier in development for DLBCL. Is that something you're working with them on? And if not would that be something to contemplate in the future?

Yes. Obviously, Dane, we couldn't speak about any kind of confidential ongoing discussions or collaborative work that hasn't been announced yet. But suffice it to say we think that nCounter is really the gold standard for companion diagnostic development based on gene expression signatures. Really I think of our expansion of our collaborations overall is really moving on two axes.

One is taking the existing diagnostic content that we already have, meaning the Prosigna, the lymphoma assay that we've developed with Celgene and now our tumor inflammation signature that we've developed with Merck and looking for new diagnostic partnerships built around that content and I really think that being able to bring content to the table puts NanoString in a unique position compared to other platform companies who generally speaking only bring technology to the table and I'm very optimistic about us continuing to form partnerships around those products.

Of course the other dimension is to take diagnostic content as it emerges from biopharma companies and put it onto the nCounter platform. A lot of that work is already taking place. So, on nCounter and a very large number of biopharma companies, 18 of the top 25 pharma companies who are doing their biomarker work on our system. Others is being ported over from RNA sequencing as we demonstrated in the Medivation instance. So, we think really regardless of how diagnostic content is being discovered, if it's a gene expression signature, people are going to want to port it on to nCounter. We look for the opportunity to work with Celgene or anybody else who has new gene expression content.

Thank you very much.

(Operator Instructions) Catherine Ramsey, Robert W. Baird.

Hey, guys. I appreciate the question. Can you talk a little bit about the dynamics behind the strength in Europe and if you're hearing any concerns from researchers in the UK about future funding?

Yeah. Thanks for the question. We obviously think the European trend looks strong, especially from an instrument perspective during the third quarter. So, overall, if there is a funding challenge that exists there, I think the affordability and appeal of SPRINT is helping us power through is just as we mentioned it is overall in the academic markets. I have not yet heard any specific feedback from European customers about their fears. But I've read news reports of others expressing those.

I think our overall exposure to the UK is actually very small as a company. So, I would not expect a material impact on our growth rate from that. Jim did mention that from a FX standpoint there's about 100 basis point impact in Q3 just from the move in currencies. But I don't think that we've seen yet or expect any substantial change in demand from a unit perspective.

Great. That's helpful. And could you talk a little bit about what you saw from China in the quarter?

Asia-Pacific trends were robust and in line regionally with other parts of the world. Instrument demand was strong and as we've mentioned in the past the SPRINT actually appeals very strong in the Asia-Pacific region because it is a more affordable platform that probably has the capacity to meet the needs of many of the researchers there. So, I wouldn't say there was a notable trend in either direction with respect to China other than maybe as a reminder, China is an important market for us. It's the second largest install base of nCounter systems outside the US.

Great. Thank you.

There are no further questions. I would like to turn the call back over to Brad Gray for closing remarks.

Thank you for your interest today. We look forward to seeing many of you at the upcoming AMP and SITC meeting next week and at our investor conferences later in the quarter. Thanks for your time.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.