NanoString Technologies Inc (NSTG) 2016 Q4 法說會逐字稿

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

I will now like to introduce your host for today's conference, Mr. Doug Farrell, Vice President of Investor Relations. Sir you may begin.

Thank you operator and good afternoon, everyone. On the call with me today is Brad Gray, our President and CEO as well as Jim Johnson, our CFO. Earlier today, we released our financial results for the fourth quarter and fiscal year 2016. A copy of the press release can be found on our Website at Nanostring.com.

During this call, we way 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 new addressable markets, interactions with third-party payers, the timing and outcome of related reimbursement decisions, our strategic focus and objectives, and the development, status, and anticipated success of recent and planned product offerings.

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

As a reminder, we'll be participating in the Cowan Healthcare Conference next week. We look forward to seeing many of you there. With that I'd like to turn the call over to Brad.

Thanks Doug, good afternoon and thank you for joining us today. I'll begin my prepared remarks with an overview of our performance in 2016 followed by a summary of our Q4 results. Then I'll outline our strategic objectives for the year ahead before turning the call over to Jim to review our Q4 operating results and our guidance for 2017.

Overall 2016 was another year of strong growth and steady progress towards our strategic objectives. We grew our total revenue by 39%, increased our product and service revenue by 22% and expanded our install base to about 480 systems. In its first year of sales our nCounter SPRINT profile accounted for about 45% of units sold and drove a 40% increase in instrument unit sales all without slowing the sales of our MAX and FLEX systems. Throughout this install base growth we maintained total annualized consumable pull-through in line with our historical benchmark of $100,000 per system. We entered into two highly strategic companion diagnostic partnerships with Merck and Medivation Astellas which brought in roughly $45 million in non-dilutive capital helping us exit the year with a strong cash position of $74 million. We extend our leadership in the field of immuno-oncology as our platform became a workhorse for researchers in this field and our Tumor Inflammation Signature raised our profile among biopharma companies.

Our R&D efforts delivered innovative products such as 3D Biology panels and advanced the pipeline of two powerful new technology platforms, digital spatial profiling and Hyb & Seq. It generated significant commercial momentum and scientific mindshare as our peer review publications increased nearly 50% in a single year to total over 1500 papers and our technology was showcased in dozens of abstracts at leading scientific venues like AACR, ASCO, ASH and SITC. We're proud of these achievements and confident in our long-term growth prospects.

While our total revenue growth during 2016 was strong, our product and service revenue growth rates were inconsistent across quarters. Despite generating record revenue in the fourth quarter, we fell short of our expectations. The absence of a seasonal spike in year-end revenue was highly unusual and something we did not anticipate. To put this in perspective, our Q4 product and service revenue increased sequentially by 29% and 40% in 2014 and 2015 respectively while our sequential growth in Q4 of 2016 was only 6%. The experience of 2016 was a harsh reminder of the risks of relying on Q4 budget flush to drive substantial revenue growth and has influenced our approach to (inaudible) for 2017.

Our approach to improving the consistency and predictability of product and service revenue will be informed by our experience during Q4 so let me provide some details on the trends the we observed. Weak academic -- weak sales to academic customers which were approximately flat year-over-year drove the majority of our Q4 shortfall. Academic revenues were lower than expected for both instruments and consumables. During the second and third quarters of the year robust SPRINT sales had helped drive strength in our academic business but this did not happen in Q4. Our biopharma business was stronger in Q4 with double-digit revenue growth. This was driven by strong consumable demand with biopharma accounted for more than 50% of consumable revenue growing over 40% year-on-year.

Another area of strength was immuno-oncology or our PanCancer Immune Profiling Panel remains our number one selling product and accounted for approximately 25% of Q4 consumable revenue. Across both academic and biopharma customers we entered the fourth quarter with a reasonable funnel of instrument opportunities. This should have positioned us for a strong finish to the year, however, our closure rate on instrument sales fell off sharply in December when these instruments fell out of our Q4 sales funnel we did not have a sufficient number of backup opportunities to make up the gap.

The instruments that we were not able to close in Q4 were not lost to competitive alternatives nor did these customers lose interest in purchasing an nCounter. Approximately 85% of these instrument opportunities remain in our 2017 funnel and we expect to capture most of them over the next several quarters.

Our detailed analysis of Q4 trends suggests that the shortfall is due to a constellation of environmental and company-specific factors rather than a single root cause. On the environmental side, customers had indicated to us that many instrument purchases were delayed due to lack of funding especially among academic customers. This may have been influenced by funding uncertainties tied to the U.S. elections and Brexit.

In addition, as we analyze Q4, we received numerous reports of unprecedented discounting by other companies selling genomic research products. Even though these offerings were not directly substituting for nCounter, they represented competition for year-end spending. Our analysis suggests that we may have lost some Q4 budget flush dollars to other genomic companies that offered deep year-end discounts. In terms of company-specific factors at play, we believe that our commercial effectiveness dropped during the fourth quarter as our commercial resources and processes have become stretched following years of revenue growth that outpaced the expansion and evolution of our commercial channel.

For instance, to-date, our field base sales reps have been primarily responsible for both instrument and consumable revenue even as our install base of instruments within each territory has grown substantially and the number of instrument opportunities they are cultivating and delivering each year has grown. In addition, our marketing processes have remained geared towards the higher end of the research market while nCounter SPRINT has opened up the larger more diffuse bench top market. Therefore, our number one strategic objective in 2017 is to optimize our commercial channel both in terms of the reach and mix of resources in order to efficiently penetrate our expanded addressable market. This will start at the top of the commercial organization.

Barney Saunders our current Senior Vice President of Sales & Marketing has led us through the past six years growing our annual revenue from approximately $10 million to where we are today. During this time Barney built a commercial organization that has delivered impressive growth and its success has increased the scale and complexity of our business. However, the approaches that have made us successful over the past six years will not necessarily sustain our growth in the years ahead. We've concluded that the company would benefit from a new senior commercial leader who brings experience in growing businesses of our current scale and beyond as well as a fresh set of eyes to help us spot opportunities and to evolve and strengthen our commercial approach.

We have recently initiated a search for a new senior vice president of sales and marketing. Barney will continue to lead our commercial efforts through the search and will remain in the company through a transition period following the appointment of his successor before transitioning to his next professional opportunity.

In parallel, we're making investments across our commercial channel designed to increase both our reach and our productivity. We will be adding consumable focused staff who can efficiently serve the needs of our existing install base to both our inside and our field-based sales teams. We expect this to free up our incumbent sales reps to invest more time on instrument sales.

We are also upgrading our marketing efforts that generate, qualify and handoff leads. We recently recruited a new vice president of marketing, Anna Berdine, who has 20 years of experience working for the industry leaders with billions of annual revenue. She has already implemented a number of initiatives to increase our brand awareness and customer mind share such as an expanded presence at trade shows and scientific symposiums and a more sophisticated Website that will go live in the second quarter to support new digital marketing initiatives.

We will also increase resources for demand generation and lead automation to accelerate the lead handoff to our sales team and strengthen our overall funnel of opportunities. We believe that our efforts to optimize the commercial channel will result in more robust and predictable growth in the years to come. That being said, these changes will take time to yield measurable impact. We remain cautious on our growth outlook over the next several quarters as our team focuses on making these improvements to support long-term performance rather than simply maximizing near-term growth.

Our second strategic objective is to launch new products that are expected to generate both near-term revenue and increase our competitive differentiation and build new and existing markets. Within the oncology market we planned several new product launches at the AACR meeting in April as well as additions to our 3D Biology offerings later in the year.

3D Biology has had an early impact influencing approximately 20% of instrument sales during 2016 and raising the profile of our platform by garnering awards from the scientists and a preliminary presentation at the recent AGBT Meeting. During 2017 we'll introduce a series of 3D Biology assays for research in hematological cancers well as an updated version of our nSolver Analysis Software to help researchers realize the full potential of 3D Biology.

Later in the year we plan to expand our disease focus beyond oncology introducing highly curated gene expression panels in areas like autoimmune, infectious disease and neurobiology applications that we believe will broaden the appeal of nCounter.

In addition, we plan to expand into the low-Plex gene expression market traditionally dominated by quantitative PCR. With the launch of a new consumable format called PlexSet. This launch will expand our market from mid-Plex gene expression where researchers profile many genes over a small number of samples to the low-Plex segment where researchers look at a smaller number of genes over a much larger number of samples.

Our third strategic objective is to lay the groundwork for an expanding menu of companion diagnostic assays. Prosigna remains the foundation of our diagnostic business and we will continue to build on it in 2017 by capitalizing on the many accomplishments our team achieved over the past year such as inclusion in the ASCO Clinical Practice Guidelines and expanded reimbursement that brings our overall U.S. coverage to nearly 90% of indicated lives.

We enter 2017 in the strongest competitive position we have had since we launched the product. The new year is off to a good start with Humana issuing a positive coverage decision and the BlueCross BlueShield Evidence Street issuing a positive technology assessment which has already resulted in multiple Blue's plans offering, covering, for Cigna. Meanwhile we are beginning to prepare for the launch of companion diagnostic tests coming out of our collaborations with Celgene, Medivation, Astellas and Merck.

Based on the pace of ongoing clinical studies, our work with Merck will potentially be the first of our biopharma collaborations to yield a diagnostic product launch. Merck currently has three active registrational studies that are incorporating our Tumor Inflammation Signature and two of those trials are expected to reach their primary completion dates this fall.

One of our priorities is to prepare to file PMA modules for the Tumor Inflammation Signature later this year setting the stage for the commercial launch of this breakthrough diagnostic product as early as next year and reinforcing our position as a leader in the field of immuno-oncology.

We believe that we remain uniquely positioned to be a partner of choice for companion diagnostic assays based on gene expression signatures. We have a strong pipeline of ongoing biopharma partnering discussions and suspect that these dialogues will continue to mature yielding new collaborations that expand our markets and fund our growth.

Over the last year we more than doubled the number of diagnostic pilot studies from 2017 at the end of 2015 to 41 pilot studies with 18 companies at the close of 2016. We have also recently doubled the size of our business development team and believe that we are well positioned to add multiple new biopharma collaborations in 2017. Our fourth strategic objective is to advance our portfolio of breakthrough technologies that include digital spatial profiling in Hyb & Seq. Both of these concepts were announced just over a year ago and the progress that we've made has exceeded our expectations.

As we highlighted at the recent AGBT Meeting we believe that our product roadmap is unparalleled in our industry and illustrates how we are working to harness the full potential of our optical bar-coding technology. Digital spatial profiling or DSP is a powerful new research tool that enables the precise quantification of protein and gene expression spatially for regions of interest across the landscape of a heterogeneous FFPE tumor slice.

In November we announced that in response to the tremendous customer demand we were initiating a technology access program for which we would allow customers to experience this disruptive technology in advance of the commercial launch of a DSP instrument. These interactions with customers and real-world samples will help us better understand their customer needs so that we can optimize our DSP platform.

At the ASCO SITC Conference last week, researchers from the Novartis Institute for BioMedical Research presented the first data to emerge from our technology access program. In this collaboration we demonstrated that our DSP platform was capable of generating highly multiplex protein and RNA data from FFP tissue samples with robust and consistent performance that was well correlated to Novartis' immunohistochemistry data we were able to characterize the tumor micro environment allowing us to better understand the function of the immune system and the status of T-cells and checkpoint markers.

The poster received steady interest from academic and biopharma researchers alike and continued to raise our profile in the field of immuno-oncology. Encouraged by customer response, we've accelerated our investment into the development of DSP and are targeting a DSP instrument launch in late 2018. Until then we expect to continue our DSP service as a means of keeping customers engaged generating supported reference publications and seeding the market for future instruments.

At the recent AGBT Conference we unveiled the substantial progress that we've made with our Hyb & Seq platform over the last 12 months. We performed a live demonstration in which a first time user was able to go from a slice of FFP tissue to the initiation of a sequencing run in less than 60 minutes with only 15 minutes of hands on time. This showcased the unprecedented simplicity and rapid sample to answer capability that could make the platform exceptionally well suited for clinical applications.

Simple, fast, clinical sequencing is an unmet need that represents a substantial market opportunity and our competitive advantage here could be considerable. We consider the Hyb & Seq chemistry to be now largely derisked. Our goal over the next 12 months will be to scale up the chemistry and to further demonstrate its capabilities working in collaboration with academic groups. In parallel we will begin to engage with potential corporate partners about the possibility of collaborating to advance the development and launch of the Hyb & Seq instrument.

Assuming that the program is appropriately resourced, we believe that we could begin shipping beta instruments by 2019. Overall we're in a period of unprecedented innovation at NanoString which is yielding an instrument pipeline with substantial commercial potential and strategic significance.

We're excited to realize this potential and seed our growth for the years to come. Now I'll turn the call over to Jim to review our financial results for Q4 and outline our guidance for 2017.

Thanks Brad. Total revenue for the quarter was $25.2 million, up 13% versus the fourth quarter of the prior year. Total product and service revenue was $20.3 million, up 5% compared to 2015. Foreign exchange rate fluctuations reduced the growth in total product and service revenue by approximately 180 basis points. Instrument revenue for the quarter was $7.5 million down slightly compared to the fourth quarter of 2015. Sales of SPRINT systems were below our expectations consistent with the overall academic softness.

Life Sciences consumable revenue was $11 million, up 11% year-over-year. Sales to biopharma were a key growth driver and we continued to see strong demand for our panel products which represented more than 50% of total consumable revenue for the quarter. For Cigna IVD Kit revenue as $1 million for the quarter, down slightly versus Q3 but growing 25% year-over-year with ex-U.S. markets continuing to generate a majority of the sales.

In total, we had record consumable revenue for the quarter with pull-through of $12 million up 12% versus the fourth quarter of 2015 and above $100,000 per system on an annualized basis. We recorded $4.9 million of collaboration revenue for the quarter compared to $2.9 million in the fourth quarter of 2015. The increase was driven by the added revenue from the Medivation Astellas collaboration and the expansion of our collaboration with Merck. Gross margin on product and service revenue for the quarter was 59%, up from 56% reported for the fourth quarter of 2015.

The increase resulted largely from a shift in product mix to consumables, increased economies of scale in our consumables manufacturing operations and a lower royalty rate on our license of the foundational nCounter patents. Due to the achievement of accumulative revenue milestone that took effect in Q3 of last year.

R&D expense was $10 million for the quarter, up 41% over the fourth quarter of the prior year. The increase was driven by diagnostic development costs related to our three biopharma collaborations as well as increased investment in key products under development for the Life Science research market including 3D Biology, digital spatial profiling and Hyb & Seq.

SG&A expense increased by 17% year-over-year to $16.7 million for the quarter and the increase predominantly reflects increased product marketing activities and investment in our sales channel that we believe will drive revenue growth in the coming year. Stock-based compensation expanse was $2.5 million compared to $1.5 million for the fourth quarter of 2015.

Our GAAP net loss for the fourth quarter of 2016 was $11.6 million or $0.55 per share compared to $8.8 million or $0.44 per share for the fourth quarter of 2015. We ended the quarter with approximately $74 million of cash investments. During the quarter we sold approximately 1.3 million shares of common stock under our ATM facility bringing in net proceeds of approximately $26 million. This represents the remainder of the shares that were available under the ATM program.

Now I'll turn to financial guidance for 2017. Total product and service revenue is projected to be $81 million to $85 million for the year reflecting growth of 17% to 23% over 2016. This includes approximately $6 million of Prosigna IVD Kit revenue, reflecting and assumption and for the near-turn Prosigna revenue will continue to grow in a linear fashion.

Considerable pull-through for system including both Life Science consumables and Prosigna is expected to be in line with our historical benchmark of $100,000 per system in 2017. For guidance purposes, we continue to assume that SPRINT pull-through will be approximately half of our historical rate from MAX and FLEX.

Revenue from our existing biopharma collaborations is expected to be approximately $19 million to $20 million in 2017. Note that this only includes revenue from our existing collaborations primarily with Celgene, Medivation and Astellas and Merck. It does not include any new collaborations which would represent up-side to our guidance. Following the announcement of new collaborations we intend to update our guidance to reflect the impact on both revenue and expense. Our total revenue guidance for the year is $100 million to $105 million assuming constant currency which is an increase of 16% to 21% over 2016.

Before moving to costs and expenses, let me take a moment to talk about quarterly revenue trends in 2017. Given our experience in the fourth quarter, we're taking a more conservative approach to guidance in 2017 and not assuming a signficiant step-up in year-end customer spending as in past years. So for that reason we're guiding for product and service revenues to be distributed across the four quarters on a percentage basis that will be similar to 2016 with first quarter product and service revenue in the range of $14 million to $15 million. For collaboration revenue, although we expect growth for the full year, the first quarter amount is expected to be roughly flat year-over-year at approximately $2.5 million. A timing of revenue recognition is being impacted by additional assay validation work planned later in 2017 and 2018 which reduces the percentage of completion in the first quarter.

For gross margin on product and service revenue, we've made good progress and we expect margin expansion to continue in 2017. Specifically we expect to be in the range of 57% to 58% for the year and collaboration revenue excluded from the calculation. Gross margin on product and service revenue will likely fluctuate from quarter to quarter based on the mix between consumables and instruments. However, independent of product mix we expect gross margin to continue to trend upward as the scale of our consumables manufacturing operation grows.

We're expecting total operating expenses of $117 million to $120 million in 2017 which represents an increase of 20% to 23% versus 2016. We expect approximately half of the increase in R&D and the other half in SG&A. The increase reflects several key investments over and above what we would consider a normal operating expense growth rate.

The R&D growth will be largely driven by investment in new product and technology development including the DSP instrument. Note that our guidance includes continued development of Hyb & Seq chemistry but does not include the Hyb & Seq instrument development which is dependent on partnering the project. The SG&A expense growth is driven by increased investment in our commercial channel consistent with Brad's commentary.

We expect operating expenses to include approximately $10 million to $11 million of stock-based compensation expense for the year. Our GAAP operating loss for the year is expected to be in the range of $49 million to $53 million; this reflects a modest increase versus our 2016 operating loss but we believe it's justified by the important investments we will be making in new products and commercial capabilities. It's also important to note that the new collaborations would have the potential to reduce the loss. Interest and other expense is expected to be approximately $6 million for the year and we expect GAAP net loss for the year in the range of $55 million to $59 million or $2.51 to $2.69 per share. Total capital expenditures are expected to be approximately $4 million to $5 million for the year net of leasehold improvement funding from our landlord.

Finally turning to our cash outlook, as noted earlier, we enter the year with a strong cash position. Given the level of ongoing business development activity, we're optimistic about the prospects for entering into more biopharma collaborations, having the potential to bring in substantial amounts of near-term cash and fund a substantial portion of our operating cash needs with non-dilutive capital.

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

Thanks Jim. In closing, we entered 2017 in a position of strength. We have compelling products that addressed large and underpenetrated markets, an active pipeline of companion diagnostic collaborations and an enviable portfolio of new technologies that are moving steadily through development.

This year we're making investments in our commercial infrastructure to ensure that we have the reach and channel mix to deliver consistent revenue growth. We're balanced in this investment in near-term growth with funding a compelling technology roadmap that secures our long-term potential and builds strategic value.

We enter 2017 in the strongest cash position in years that we believe we are well positioned to achieve our strategic and financial objectives. Now we'd like to open the call for questions.

(Operator Instructions). Our first question comes from Doug Schenkel with Cowen & Company, your line is now open.

Okay, good afternoon guys, thank you for taking my questions. So first on guidance, the low end of your revenue guidance would represent 16% growth year-over-year; robust but well below trend and materially below the expectations that were out there before the Q4 pre-announcement. In dollar terms, to get to the low end of the range you'd have to grow, I think it's $13.5 million year-over-year. Two and a half million of that is expected to come from collaborations. It seems like consumable revenue should grow at least $10 million including Prosigna based on your installed base where it was at the end of the year in recent trends and accounting for SPRINT mix.

So I guess what I'm building to is does the low end of your range assume basically no instrument revenue growth and if so, why would that be a plausible assumption at this stage of the SPRINT rollout?

Thanks for the question Doug, as you know we don't normally break out our guidance assumptions at any finer detail then we have in the -- with the top-line product and service versus collaboration revenue. But I think you're correct that at the low end of the range instrument revenue growth is modest at best and I think what you heard in the commentary of the investigation of our Q4 sure fall is that we feel that at this moment we have stretched our commercial team to beyond where their ability to increase productivity is measured by instrument per rep, you know, is supported.

And so we're going to be making structural changes over the course of this year that we know will position them to both service the needs of our, now, much larger install base and continue to drive instrument placement and we're going to do that through things that take time; a new commercial leader that could take time for us to recruit these searches, it's not unusual for them to take up to six months in time. New roles that we're defining that include new consumable specialists, sort of farmers in the field who have serviced the needs of our install base, investments in inside sales professionals who will have to build partnership with our field based assets to begin to drive an increase in productivity. And so these things take time and so as I said in my prepared remarks we're cautious about the near-term impact of those much harder to implement kind of changes.

In addition -- and so that impacts the first half of the year. On the second half of the year as Jim said quite explicitly, you know, in 2017 based on the harsh lessons of 2016 we are not assuming that we benefit from the Q4 budget flush to the extent that we have in the year's past, in 2014 and 2015. And so, you know, you can look historically -- and then that accounts for several million dollars in revenue, a lot of it instrument revenue, that would normally have been in our guidance that deliberate in the change and approach we're not including this year.

So, I mean, I think that's -- you know, maybe that helps contextualize the reasons that at the bottom in the range you might imagine modest instrument revenue growth.

Okay, that is helpful and I guess a related follow-up, and I apologize if I missed it in your prepared remarks, did you talk about the exact number of salespeople you plan to hire what the cadence of those hires is expected to be and how quickly on average we should expect those folks to be adequately tenured to actually contribute to instrument and consumables growth?

No, I didn't get specific in the prepared remarks but I'm happy to provide a little color now Doug. So --

Okay, that's great.

What's -- the number of people that we intend to hire is to increase our commercial headcount by on the order of 20% to 25%. That will be focused in our sales, predominantly in our sales organization, and that -- the nature of the hires, which will be about 30 people in our sales organization, will be about 25% classic quota carrying reps that you'd think of at the sales force expansion, but then 75% will be new roles that are designed, you know, new or an expansion of existing roles of people who are really trying to service the needs of our install base. If you think about how much our business has transformed over the last 12 to 18 months, it's substantial. The launch of SPRINT both drove an increase in our install base of about 33% over the last year and basically demanded that each rep sell 40% more instruments, units, than they had in the past. Meanwhile their install base, in any given territory, has gotten quite material, 15 to 20 instruments per territory that need to be services with respect to driving that $100,000 per system per year consumable pull-through.

And what we really found in the fourth quarter was we had not sufficiently supported the field base reps with these ancillary roles that allow them to achieve that productivity and so in 2017 we're really looking for the first time to begin to sort of dichotomize the hunter and the farmer, the instrument -- the effort that goes to growing the install base that's more of a hunting type of activity from the effort that services the needs of the install base that's more of a farmer activity.

So that gives you a little bit more color about the nature of the role. In terms of the effectiveness and I think the good news is these are not people who have to come -- the nature of the hire, 75% of them at least, is that they're going to come in and begin to service our existing install base and so that doesn't require building a whole new funnel of instrument opportunities that requires getting to know our current customers which takes less time.

But, yes, I think that's balanced against the fact that in many ways these are new roles and that the way that these salespeople will be working together in collaboration is going to be a new habit that we're going to be forming, it's going to be a new set of processes that we're going to be forming and that will take time. And that's part of our -- that's implicit in our commentary about caution in the first half as we make these fundamental changes.

Okay, thank you for all of that detail and maybe just one last one before I get in the queue. I just want to dig in a little bit more on the balance of environmental versus company specific issues that were in play in the fourth quarter. You know, so on the environmental side you attributed your challenges in the academic end market to at least in part aggressive genomic instrument discounting I think is how you put it. You know, we didn't see anything in Illumina or Qiagen for that matter's P&L's that would suggest there were any aggressive pricing dynamics in play and we've talked to those companies about that and we didn't hear anything. We also haven't picked up anything in our checks in the channels. That doesn't mean that it didn't happen but it's not obvious that it did. And given how late you report in the quarter, at this point I think it's fair to characterize your performance in the academic end market as a bit of an outlier. So, you know, with all of that in mind, I'm wondering how much of this do you think was, at this point as we sit here on March 1, company specific versus environmental? And I ask this because I think it's important not just to get a better handle on what happened in Q4 but to make sure as we sit here two months into the year, two months in the year, to make sure that you have a solid handle on what happened so that we can make sure that you are properly moving forward with the steps that need to be taken to essentially address the issues properly and avoid these mistakes moving forward.

Yeah, I think it's -- let me be really clear. We think that the company specific issues were the majority of the root cause of the shortfall. They were exacerbated by this constellation of environmental issues but I think our actions speak loudly here in terms of what our Number 1 strategic objective for 2017 is. It's about addressing commercial effectiveness through these changes on our channel starting at the leadership level and then moving through the details that I've described.

We're ready for the next question operator. Doug, you there?

Our next question comes from Tycho Peterson with JP Morgan. Your line is now open.

Thanks and maybe just starting with companion diagnostics, you know, I guess it's been over a year since you expanded the Merck deal, it sounds like the pipeline is fairly full but can you maybe just talk a little bit more, I mean just why things have slowed a little bit on that front and your confidence that you can get some additional deals across the line and then you know, are you handicapping the probability of clinical trial success in guidance around any of your existing companion deals?

You know, let me address the second question first Tycho. I think -- you know, we don't handicap clinical trial success. The way that our contracts are structured where these collaborators are that because our investment in things like preparation of a PMA and all of our development efforts are covered from an R&D reimbursement perspective; we're full steam ahead being ready, planning for success on these studies. You know, not all clinical studies will succeed but, you know, our efforts are moving full steam ahead.

We don't need to handicap the trial success in terms of the way we've guided revenue if that's really what your question is because we are not guiding to include in 2017 guidance. Any revenue that would result from a new companion diagnostic product or any revenue associated with a milestone that we might receive based on the success of a clinical trial or a regulatory filing. So, there's no need for us to handicap those things in our 2017 guidance.

On the question of the cadence of companion diagnostic partnerships, I think we're obviously pleased with how the funnel is developing. We've, I think, made clear we expect to repeat the successes of 2016 and 2017 in terms of getting a couple of deals done. And these things are the size of companion diagnostic partnership that we do based on gene expression signatures. You know, these deals are few and far between, it's not as if there's a lot of them happening out there away from NanoString right now. We're, you know, I think in every dialogue and we feel that those dialogues are maturing nicely. So, you know, we can't probably be any more specific in terms of handicapping timing than that but we feel really good about the dialogues we're having.

And then on the spending front, I want to make sure that I understand the dynamics around Hyb & Seq. I know you're not baking in instrument development into your guidance this year. When do you expect to kind of move forward with a decision on that front? I mean, the messaging at AGBT was you derisked the chemistry, you planned to have beta instruments in 2019 so should we expect at some point this year you come out and communicate, you know, a spending plan around instrument development?

Yeah, I think that most of 2017 is going to focus on chemistry development. So, I don't know that we'll be coming back necessarily in the months ahead with any kind of update on changing our guidance to include instrument spend, I don't think that's necessary to keep the product moving forward during 2017.

By the end of this year, you know, my hope is that we do have more clarity, you know, a partner. The partner on the outside could be a whole range of different types of entities, you know, we've had groups that are technology developers who are excited to be a part of a clinical sequence or that could be transformative. There are companies out there who obviously have commercial aspirations with respect to diagnostic sequencing, you know, we -- there could be a whole range of different arrangements but -- and I think we have time over the course of this year to figure out what's best for this product and what's best for our shareholders in terms of how we move forward.

Okay, and then lastly on digital spatial, I know you've got -- you mentioned eight partners in three months down at AGBT, can you maybe talk about bandwidth for additional partnerships and then are any of the additional resources you're adding this year around that into the launch next year? And then how should we think about your view of the ramp in the market opportunity in terms of sizing it?

Yeah, so the digital spatial profiling, there is embedded in our guidance an increase in R&D spending that would support the development of that instrument. So unlike Hyb & Seq it is funded, it is in our guidance and that team is moving full steam ahead. In terms of bandwidth for additional technology access, we have -- we run those technology access programs on a series of prototype, prototype instruments internally so the work itself is highly synergistic with the instrument development, so we're motivated to continue that. You know, we have only a couple of, or a few prototype instruments today but that capacity is expandable. And then I'll say, doing a whole lot of these technology access partnerships is not really the objective, they're not really inclined to be revenue drivers, they're meant to be ways to engage with thought leaders like Novartis on their toughest challenges so that we understand we're building the right instruments and so that, you know, when we come to market with an instrument in late 2018 there's demand and there's a set of customers who are anticipating it and ready.

So, I just think we have capacity to do more technology access partnerships but I wouldn't say maximizing the number of those is an objective for the company this year.

Okay, and market sizing and how you think about the ramp?

Yeah, so the -- it's probably too early to talk about the ramp but the market sizing is substantial. We see initially a biomarker market of, you know, substantial scale without being too quantitative about it that overlaps very maturely with the market we address today. The biopharma companies in particular, as our technology access program shows, willing and able to spend generously on getting this kind of biomarker information out of samples.

So to recap what our technology access program economics are like, for $99,000 biopharma companies are buying the right to process 20 samples so that's basically $5,000 a sample in processing and that compares to what on average for NanoString is about a $200.00 per sample typical reagent stream that would come off an nCounter today. So, I mean that gives you a sense that you know, there's a number of instrument replacements out there that probably are in many of the same labs that we address with nCounter already and the reagent stream that these instruments could generation could be very material.

Okay, thanks. And then just one last clarification. You talked about 85% of the nCounter orders you think are still in the funnel. Have you seen any of them come through in the first couple months of this year?

Yeah, we have though -- I mean, I'll caution that unlike our experience in the first quarter of last year where the cause of delay was primarily administrative in nature where purchasing processes just were taking a few extra weeks and we therefore recaptured a very large fraction of those slipped instruments very quickly. The nature of what happened here is different and so we don't expect the same rebound dynamic that we experienced in the second quarter of 2016. We think it will take more time to recapture these instruments in the funnel but they're there and I'd say about half of them are timed for the first quarter with the balance over the course of the year.

Okay, thanks.

(Operator Instructions). And our next question comes from Catherine Schulte with Robert Baird, your line is now open.

Hey guys, thanks for the questions. I was wondering if you could talk a little bit more about the entrance into the low-Plex testing market, you know, how much you think that expands the market and a potential revenue opportunity there?

Yeah that's -- it's a good question Catherine. That's a market that we think about being a classic core lab market. So, you know, many different core labs in the academic research space run on behalf of the investigators in their department; large studies in terms of number of samples on quantitative PCR systems that are automated and what we've done in developed in Plex is actually a way of doing that that has advantages from a workflow perspective, obviously a precision perspective, the ability to dial up and down the PlexSet more flexibly than you could on quantitative PCR.

Actually one of our customers, one of our early access customers for this presented it at the AGBT Meeting, it was a poster by a fellow at Dartmouth that really showed how compelling this was for him and so we'll actually launch PlexSet at the upcoming ABRF Meeting which is the meeting that's geared towards the core lab, the core lab administrators, and we think that -- we think there's a lot of demand based on the few groups who had access to this as we've developed it.

And, you know, it's a -- it will be an opportunity to drive more pull-through on the existing systems and then in some cases it's at these core labs we haven't penetrated with an nCounter yet, it could drive incremental MAX sales.

Okay, and then it sounds like you guys are pretty confident about hopefully adding multiple collaborations this year. Can you remind us what kind of headcount additions you would have to make if you did sign an additional deal?

Yeah, we usually do have to add a few incremental headcount in our R&D organization and then to a lesser extent our clinical and regulatory organizations. You know, I'd say maybe five to ten individuals per partnership depending on the nature of it whether we're re-partnering one of our existing assays which would obviously be lower while we're building a new assay from scratch which would be higher.

The good news is, of course, that these -- the economics of these partnerships are structured certainly from a cash flow perspective but also from a revenue recognition perspective to more than cover the cost of the incremental people both on a cash flow basis and on a profit loss accounting basis. So we would expect that they would be accretive to revenue and to bottom line and to cash flow when they're announced.

Okay, and then last one for me. As you guys are bulking up, you know, sales and marketing investments, has that changed at all, your R&D pipeline prioritization or capital allocation priorities?

Well, I think balance is a very important word that we use a lot around here Catherine so we are thinking a lot about the balance of investment between sales and marketing and R&D and, you know, part -- when you hear us talk about funding the digital spatial profiling program but potentially seeking a partner for Hyb & Seq, you know, that is part of a deliberate decision we've made that we need to be investing in a balanced way across sales and marketing and R&D and that may mean that for some programs we seek partnership outside to fund actual technology development.

Great, perfect. Thank you.

And our next question comes from Paul Knight with Janney Montgomery, your line is now open.

One second okay. Hi, can you guys hear me?

Hey Paul. Yep.

When you were talking about, you know, the continuing softness and academic, can you talk to the color, any change in the tone of the market here in the first quarter and then specifically also geographically what's happening in Europe we know as others have been reporting it's been soft but any color there on academic U.S. and Europe geographically?

Yeah, I mean I think -- I mean I guess we don't believe that there's a systemic weakness in the U.S. academic markets. We had in the fourth quarter, you know, a set of instrument dialogues that were subject to funding delays, you know, it's a law of small numbers when you're a company that's at our scale and based on how our other peers have reported, there doesn't seem to be to us a systemic weakness. But there's the kind of weakness that if you don't have coverage in your funnel you don't have enough backup opportunities when some -- when a few go sideways because funding is lost on sort of account specific basis then you end up with a mess. And so I want to be clear about that. From the geographic perspective you know, our weakness in the fourth quarter was PAM geographic and it wasn't isolated to the U.S., I wouldn't say Europe was exacerbated any more than any other geography, you know, it impacted academic customers and all our three major geographies of the America's, Europe and Asia.

And then you know, we did hear of price cutting in the genomics market as well for Q4 and even a little bit in Q1, what are you seeing on pricing here in Q1?

You know, the noise that we were hearing in the fourth quarter I think has dissipated so I don't know that we hear about the deep year-end discounting since the new year has come over.

Okay, thank you.

At this time I'm showing no further questions. I would like to turn the call back over to Mr. Brad Gray for closing remarks.

Thank you all for your interest today. As Doug mentioned earlier we'll be at the Cowen Conference next week and we look forward to seeing many of you there.

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