NanoString Technologies Inc (NSTG) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to NanoString's 2018 First Quarter Financial Results Conference. (Operator Instructions) As a reminder, this call is being recorded.

Now I'd like to turn the conference over to Vice President of Investor Relations, Doug Farrell. Sir, you may go ahead.

Thank you, operator. Joining me on the call today is Brad Gray, our President and CEO; and Tom Bailey, our CFO. Earlier today, NanoString released financial results for the first quarter of 2018. Copy of the press release can be found on our website at nanostring.com. During this call, we may make 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 our addressable markets, 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 which are beyond our control, including risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today's call, and we undertake no obligation to update this publicly.

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

Good afternoon, and thank you for joining us today. I'm going to provide an overview of our performance for the first quarter and an update on our strategic objectives for the year. And then I'll turn the call over to Tom to review the details of our Q1 operating results.

Our year is off to a good start, as we made solid progress against both our commercial and strategic objectives. I'm pleased with our recent commercial execution as we established momentum that puts us on track to meet our financial goals for the year. Our top priority is accelerating the growth of our core nCounter business. We achieved this goal during the first quarter as our products and service revenue increased by 14% to $18 million. Growth was strong across multiple segments of our business, particularly biopharmaceutical customers, clinical laboratories and in distributor territories.

We're particularly pleased with the growth -- the strong growth in our consumable business, which, inclusive of both life sciences and Prosigna, generated 15% growth during the first quarter. We believe that this is the result of actions taken over the last 12 months to strengthen our commercial channel. In 2017, we grew our installed base by about 25%, creating a natural tailwind for consumable revenue. To help leverage this expanded installed base, we added dedicated consumable sales reps, increasing our sales team by about 20%. These specialized consumable reps are having a tangible impact on our commercial productivity, as territories with field-based consumable reps are generating stronger growth than territories without these reps.

Our instrument sales grew by 5% in Q1, better than implied by our guidance and with nice linearity throughout the quarter. We had strong placements of our high throughput dual-use FLEX systems, as many customers paid a premium for the option to run diagnostic products. This was particularly true in Europe, where platforms that offer diagnostic utility are more likely to win tenders over dedicated research systems. SPRINT systems represented just under 40% of unit sales in the quarter. Overall, our Q1 performance increases my conviction that the enhancements to our commercial infrastructure have created durable improvements that are increasing the visibility and the predictability of the business. Congratulations to the new commercial leadership team on a great start to the year.

Now let me shift to our strategic objectives. Our first strategic objective is extending our leadership in oncology research and diagnostics. I'm pleased to report that we're making substantial progress on this objective. During the first quarter, oncology accounted for about 75% of our new instrument placements within direct markets. Oncology panel revenue grew 50% year-on-year, driven primarily by immuno-oncology, as the PanCancer Immune Profiling Panel remains our top-selling research panel. Our strategy for maintaining leadership in oncology research is to continue expanding our menu of panels.

The latest addition to our offering is our 360 series of cancer panels, which incorporate our diagnostic content and are designed for use in drug development. The IO 360 panel, launched late last year, remains our fastest-growing panel launch ever and is designed to characterize the tumor microenvironment and immune interactions to elucidate a tumor's mechanism of immune evasion. For example, at the AACR conference last month, researchers from CERTIM in Paris presented research using the IO 360 panel to study PD-1 blockade in solid tumors. Their research demonstrated the predictive value of the Tumor Inflammation Signature, which is included in IO 360 for the second-line treatment of non-small cell lung cancer with OPDIVO in a real-world clinical setting. In addition, we've introduced a mouse version of the IO 360 panel, so we now provide a suite of tools that span from animal models to clinical trials.

We recently launched the Breast Cancer 360 panel, which combines the power of the Tumor Inflammation Signature and the PAM50 signature that is the basis for Prosigna. And so far, customer interest is high. This panel was created to support translational researchers in their quest to understand how heterogeneity in breast cancer impacts drug development and patient management. We plan to introduce additional 360 panels later this year with offerings in lymphoma and lung cancer.

This year's AACR conference was a tremendous success for the company and a positive leading indicator of our continued strength in oncology. Our technologies were showcased in a record number of abstracts, and our commercial presence generated about 600 customer leads. Our spotlight theater presentation drew more than 100 attendees, who came to learn about our 360 series of panels and our Digital Spatial Profiling platform. In addition, we hosted key opinion leader dinners for Digital Spatial Profiling and the Breast Cancer 360 panel that were attended by about 60 customers from academia and biopharma.

We also had a great quarter on the diagnostic side of our business. We achieved a major commercial milestone for Prosigna, breaking through $2 million in quarterly sales for the first time. We are seeing growth across all geographies, catalyzed by reimbursement wins and successful tenders. Prosigna continues to gain adoption in Canada, following positive coverage decisions in several provinces. In France, our success in a tender for the unit cancer network has provided ongoing access to several existing accounts as well as the opportunity to win new accounts. In the U.K., the National Institute for Health and Care Excellence, more commonly known as NICE, recently updated its recommendation of gene profiling test to include Prosigna. If this recommendation comes into effect as expected in September, we expect to begin establishing testing hubs and driving U.K. Prosigna sales, beginning in 2019.

Finally, we are continuing our efforts to expand our diagnostic menu. We are preparing to submit a PMA for our LymphMark DLBCL assay, pending results from the ongoing Phase III ROBUST study. In parallel, we've expanded our engagement with biopharma companies, increasing the number of pilot studies by about 15% over the last quarter to approximately 90 -- approximately 80 studies at the end of Q1.

Our second strategic objective for 2018 is to drive nCounter into new therapeutic areas and applications. As we described earlier this year, we're targeting well-funded research market outside of oncology where the experimental questions are well matched to our nCounter platform. We have prioritized 3 areas to date: immunology, neuroscience and quantitative PCR. Within immunology and neuroscience, we are borrowing from the playbook that has made us successful in oncology by developing well-designed and easy-to-use research panels relevant to the biological questions being asked in those fields. These panels are already driving new instrument placements, with immunology and neuroscience customers accounting for about 25% of instrument sales during Q1. Immunology is a field where gene expression profiling can be used to elucidate the mix and activation states of various types of immune cells and is already an important market for NanoString. During 2017, immunology papers accounted for about 25% of the nCounter-enabled publications from our customers. For the past several years, we've offered a menu of panels with broad coverage of immunology and inflammation, along with more targeted offerings, such as our myeloid panel.

In 2018, we introduced the new panels that are specifically developed for investigating mechanisms of autoimmune disease. Last week, at the American Association of Immunologists conference in Austin, Texas, we launched a panel for autoimmune profiling, which elucidates curated content to help identify biomarkers of clinical benefit in this rapidly growing therapeutic area, and the initial customer feedback was positive. The second new market that we've entered is neuroscience, which receives more than $10 billion in NIH funding annually. Much like immunology, neuroscience is characterized by disease processes dependent on the abundance and activation states of different cell types. Late last year, we launched 2 neuroscience panels: one focused on neuropathology and the other on neuroinflammation.

Though we are still in the early phases of adoption of these panels, the level of interest is high. For example, our recent neuroscience roadshow through Europe touched over 200 potential customers, and approximately 85 researchers submitted applications to a recent neurology grant program.

Another new application, helping drive wider nCounter adoption is PlexSet, which enables our entry into low-plex, high-throughput gene expression, offering a vastly simple workflow than qPCR, which is traditionally service market. During Q1, PlexSet helped motivate several new instrument placements.

Our third strategic objective is to launch our Digital Spatial Profiling platform under early access by year-end. Digital Spatial Profiling, or DSP, for short, is a novel and proprietary technology designed to enable the precise quantification of protein and gene expression spatially across the landscape of a tissue sample. Our DSP instrument is designed to automate the processing of slides, the selection of specific regions of interest within a biopsy and the preparation of samples capturing the gene or protein expansion within the selected region. Analysis of these samples can be performed either on our nCounter platform or a next-generation sequencer. The DSP instrument is on track to launch under early access in late 2018 followed by full commercial launch in the first half of 2019.

Over the past several months, we have substantially increased our level of engagement with potential DSP customers, laying the groundwork for a successful 2019 launch. One avenue for engagement is our technology access program, or TAP, which is a fee-for-service program, allowing researchers to run their samples on our prototype instruments. During the first quarter, we initiated 9 new TAP projects, bringing the total number of such projects to 40. We've also expanded our menu of DSP panels to cover mouse models used in immuno-oncology and introduced the first DSP panel for neuroscience appeal for the strong spatial orientation.

Last week, we announced that we have partnered with leading contract research organizations to expand access to DSP services, particularly among biopharma customers. We have signed agreement with 5 select CROs, including Kovacs, Q2 Solutions, Cancer Genetics, Core Diagnostics and Propath UK. These groups, which already offer spatial analysis using conventional IFC and FISH technologies will now be able market DSP services to their existing biopharma customers. Initially, the services will be performed within NanoString laboratories under our TAP program. But we expect that these labs will acquire DSP instruments when they become available.

In addition, we're using our commercial presence at major scientific conferences to introduce DSP to prospective customers. Earlier this year, DSP generated substantial buzz among genome researchers during the annual AGBT meeting. Customer interest and momentum increased last month when DSP was strongly featured during the AACR conference.

At AACR, NanoString and its collaborators presented 4 abstracts highlighting the capabilities and applications of DSP. First, Professor David Rimm from Yale University used a 44-Plex protein panel on DSP to characterize pretreatment melanoma samples from patients receiving anti-PD-1 therapy and identified 5 novel biomarkers that predicted clinical response. Each biomarker is tied to a particular cell type, an insight that was enabled by spatial profiling, which would not have been observed using traditional nonspatial grind-and-bind assays. Second, researchers from Genentech, who ran DSP through our technology access program, demonstrated highly reproducible RNA profiling from non-small cell lung cancer and strong concordance with both flow cytometry and immunohistochemistry. Third, the NanoString team demonstrated significant advances in the DSP RNA profiling capability with proof-of-concept studies that characterize 1000 RNAs simultaneously using NGS readout, allowing them to reconstruct entire signaling networks with spatial resolution.

Finally, a study from the NanoString team demonstrated the first DSP panel built for use on mouse samples, extending the utility of the platform into preclinical research.

In our booth at AACR, we unveiled an alpha version of our DSP instrument, demonstrated the software used to explore and analyze DSP data and provided a virtual reality experience that demonstrated the simplicity of the workflow. AACR generated about 300 DSP customer leads, of which 50 were highly qualified through private meetings in our DSP suite or, through their submission, offer DSP TAP projects under our grant program. Customer interest and feedback was fantastic. And we've been quoting the DSP instruments at a list price of $295,000, with really no customer pushback on cost. We are now more confident than ever that DSP will be an important platform in 2019 growth catalyst.

Our fourth strategic objective for the year is to advance our Hyb & Seq platform toward a commercial launch in 2020. We continue to make steady progress on the development of our Hyb & Seq platform. We're currently discussing new opportunities for Hyb & Seq customer collaborations and demonstration projects, including several that came out of the AGBT conference in February. In addition, we've expanded our market research efforts, and results suggest that the 24-hour turnaround time and simultaneous sequencing of both DNA and RNA are compelling features for Hyb & Seq.

Meanwhile, there have been important developments on the regulatory and reimbursement fronts. First, the U.S. Food and Drug Administration recently finalized guidance on NGF-based companion diagnostic assays, establishing a framework for design, development and validation of NGF-based tests. Second, the Centers for Medicare & Medicaid Services issued a national coverage determination on sequencing-based companion diagnostic panels for advanced cancer. Together, these developments make us more positive on the long-term commercial opportunity for Hyb & Seq. I look forward to updating you on our continued progress on the Hyb & Seq program in future quarters.

Now I'll turn the call over to Tom to review our financial results for the first quarter and provide our guidance for Q2.

Thank you, Brad. I'm pleased to have the opportunity to discuss our results for the first quarter of 2018. Our team's delivered a strong first step toward achieving the financial goals we outlined in March, and we've established good momentum heading into the second quarter.

For the first quarter of 2018, our total revenue was $23.1 million, that includes product and service revenue of $18 million, representing year-over-year growth of 14%. Product and service revenue includes $4.7 million from instrument sales, representing 5% growth as compared to the first quarter of 2017, and $11.5 million in total consumable revenue for the first quarter, representing 15% year-over-year growth. Overall, consumable pull-through was approximately $76,000 per system on an annualized basis. Life science consumables revenues, excluding Prosigna, was $9.4 million, reflecting 9% year-over-year growth.

Life science consumables benefited from growth of more than 30% in panel revenue, which more than offset the anticipated decline in our Custom CodeSets. Panels now account for more than 70% of life science consumable revenue, a good indicator of our successful transition to panel-driven consumables.

Consumable revenue includes $2.2 million of Prosigna sales, a record quarterly result and an increase of 51% year-over-year. As in previous periods, Prosigna revenue was split about 1/3 recorded in North America and 2/3 in the rest of the world. Service revenue was $1.8 million in the first quarter, with the growth driven by our technology access program for DSP. We reported $5 million in collaboration revenue for the first quarter, with the majority derived from our partnership with Lam Research. We expect collaboration revenue to ramp over the course of the year. Gross margin on product and service revenue for the quarter was 57% as compared to 55% for the first quarter of 2017, with the improvement primarily driven by product mix shift toward consumables.

R&D expense was $13.8 million, an increase of 28% over the prior year. Investment in our Hyb & Seq program accounted for the bulk of the increase and was offset by approximately $3.5 million in program support payments that we received from Lam Research during the quarter. Excluding Hyb & Seq development expenses funded by Lam Research, our R&D expense would have been modestly lower in the first quarter of 2018 as compared to the prior year. In addition, a significant portion of our remaining R&D expenses relate to our investment in DSP, a new platform that is approximately a year away from a full commercial launch.

Our SG&A expense was $19.4 million for the quarter, an increase of 11% as compared to the first quarter of 2017. This increase is primarily the result of investments made to expand and specialize our commercial channel in 2017. Stock-based compensation expense for the quarter was $2.9 million, and we ended the quarter with $60.5 million of cash and short-term investments.

Now turning to our financial outlook. We exceeded our product and service revenue guidance in the first quarter and we feel confident about the trajectory of the business. We are reiterating the full year 2018 guidance for revenue and operating expenses that we provided during our March call. This is consistent with our philosophy on guidance that we shared back in March of providing guidance we feel confident that we can meet and sometimes exceed.

So in summary, for the second quarter of 2018, we expect product and service revenue of $18.5 million to $19.5 million, collaboration revenue of approximately $6 million and, therefore, total revenue of approximately $24.5 million to $25.5 million.

Turning to our balance sheet, we continue to believe that our current resources and the additional business development and financial opportunities available to us will enable us to support our current business and product development initiatives.

In addition to the financial support we expect to receive through our collaboration with Lam Research, we've established and maintained a $40 million aftermarket facility that would enable us to consider raising additional equity capital should conditions and terms be favorable to do so. We are also actively evaluating potential alternative financing vehicles and various business development options that could provide capital for the company and that may be available to us based on our improving core business performance and our robust product pipeline.

Thank you for your time today and your interest in NanoString. And I'll now turn it back to Brad to conclude the discussion.

Thanks, Tom. We are increasingly confident that enhancements to our commercial team made over the past year have increased our effectiveness and set the stage for a stronger growth profile during 2018. Our recent product launches and the scientific successes of our customers are extending our leadership in the field of oncology while our entry into new therapeutic areas is expanding our serviceable markets. Meanwhile, customer excitement about Digital Spatial Profiling provides conviction that the growth will further accelerate upon DSP launch during 2019. Overall, we are positive on the company's outlook for the balance of 2018 and beyond.

We'd now like to open the call for your questions.

(Operator Instructions) Our first question comes from Doug Schenkel with Cowen.

Brad, product and service revenue of $18 million was, I believe, $1 million ahead of the high-end of first quarter guidance. You talked about a lot of things that seem to be moving in the right direction. With that in mind, I'm just curious if there were maybe 1 or 2 things you might want to call out that were key drivers to the beat relative to your internal expectations for products and services.

Yes, I think the beat that -- the primary drivers of the beat that I would point to are: one, consumable revenue on the life sciences side; and two, Prosigna revenue. On the life sciences side, our pull-through came in probably a little ahead of where we had visibility to at the time of our guide. I would point to the great effectiveness of our new commercial team, especially our new consumables leader and field-based consumables reps, in continuing to drive panel sales, which increased substantially over the course of the quarter. On the Prosigna side, we guided to about $8 million to $9 million for the year. Q1 came in nice and strong at $2.2 million with a lot of momentum there. So I think between those 2 things is really where the source of the upside relative to our initial Q1 guide came from.

Okay. That's great and very helpful. So I think you placed around 35 instruments in the quarter, recognizing you gave us an installed base that was approximately 640, so there's some error bars around that 35 placement number. That being said, if we use that, that also was stronger than at least what we expected. That said, I would have expected instrument revenue to be stronger than what you reported on that type of placement number. That is unless SPRINT placements accounted for a greater proportion of placements, which, I believe, was not the case based on what you described in your prepared remarks. Could you just provide any additional color on why ASPs weren't a bit higher, if my math is right, in the quarter? And what are you expecting from here?

Yes. Doug, I think your math -- your estimate of 35 units is a little high, and I know that you're working to infer unit volume from some of our installed base commentary, which we always round. So I think your 35 number is a little high and, therefore, the ASPs on the instruments are -- that your estimates are a little low. I think our ASPs are in line with historicals during the first quarter. As I mentioned in my prepared remarks, SPRINT accounted for about 40% of unit placements, which was right at the lower end of what we'd previously guided as the target of, I think, 40% to 45%. So I think the mix was about in line, the ASPs were about in line, and instrument revenue was 5% up against the guide of flat for the year. So we feel pretty good overall about instrument revenue for Q1. And in terms of the outlook, I think we're maintaining the flat guidance for the year. But we're, obviously, happy with the momentum during the first quarter.

The only other comment that I would add to Brad's, is that at times, the inferred ASP in a particular quarter might reflect exactly where system has gone, whether it's into a distributor or through a direct channel. So there might be some modest flux as a result of that, that could impact that when you're trying to do the math relative to looking at the installed base that we reported in addition to the other factors that Brad mentioned. But overall, everything is very much in line with what we've experienced in previous quarters. On an ASP basis, we're looking at the various conduits of instrument placements.

Okay. That's really helpful. And yes, sorry for making some mathematical leaps there and that those answers are helpful. Maybe one last one on DSP, where you're clearly making tremendous progress. What's the average revenue opportunity associated with each of the 40 TAPs you have in place? And ultimately, we hope that many of these will lead to placements when you move into launch mode of the instrument. And I guess, finally, is there any notable change in interest in DSPs, since you announced that you could use DSP with NextGen sequencing on the back end?

Yes. So I think to answer your first question, of the 40 TAPs we've done, I think the average is -- value of the order, so to speak, is somewhere between $50,000 and $100,000. The typical scale for a biopharma company under the program is 20 samples at about $5,000 each, or $100,000 in the price for an academic is half that at about 20 samples at $2,500. So somewhere between those 2 is the average.

Now it'll take time to realize that revenue and, in fact, our revenue recognition is in time lagging bookings for our technology access program because we're capacity limited to the small number of prototypes that we have available, and we're since oversubscribed.

To answer your second question, Doug, yes, we do hope that many of these participants will like what they see under the technology access program and will convert into instrument customers over time. And that's really why the reason that we're both continuing our existing efforts on the TAP program and enlisting the help of 5 leading CROs to go out and market the TAP service even more broadly to biopharmaceutical companies that we think could represent great early adopters for the platform.

Finally, on your third question, we have seen a meaningful increase in the interest level in Digital Spatial Profiling from having -- based on having opened up the platform for an NGS readout. If you think about the market opportunity, in a closed system -- if we had moved forward with a closed system that only read out on nCounter, we would be able to market into the 600-plus nCounter customers that we have out there today, or we would have had to convince a customer to acquire both a Digital Spatial Profiling system at something like $295,000 plus $100,000 to $150,000 for another nCounter system. That would've been a much higher hurdle for adoption. But today, having opened it up, we can market into the 15,000 next-generation sequencing platforms out there, and the barrier to entry is much lower for a customer to begin doing spatial genomics.

In addition, we're finding that a lot of the same researchers, who have enjoyed single-cell science in a nonspatial format using droplet-based approaches to single-cell gene expression from other vendors, are thinking about DSP as a secondary step to take interesting samples and interesting situations and see how the single-cell science is actually interacting in space. And that is a more basic science research customer than we have traditionally addressed, but one who is very well funded and very enthusiastic about early technology adoption. So I would say that the decision to open up DSP to NGS, so far, looks like it's going to pay off nicely.

Our next question comes from Catherine Schulte with Baird.

First, I was just wondering how much incremental TAP revenue do you expect these new CRO partnerships will generate in 2018. And is that already contemplated in your prior guidance?

We did -- we won't be, actually, recognizing any revenue into the income statement out of the TAP programs. So that is not contemplated as part of the guidance that we've given. It's all based on our traditional product and service revenue. And there are reasons why there are differences between cash that we received for these programs under DSP and revenues that we booked that we won't -- we can get into offline, Catherine, if you'd like, but it's -- there's some complexities associated with what we can book for revenue. But we have to wait to book for revenue until we either provide the service under the TAP or into next year when we deliver an instrument under the launch of DSP later.

Yes. Let me build on what Tom said. I think there's really 2 things, and let me parse your question. Two ways to interpret it. One is, for signing the 5 collaboration -- the 5 CRO collaboration agreement, that was a nonrevenue event for us, the signing of those collaborations themselves. That being said, if they deliver TAP services -- they drive TAP services under the agreement, we would have an opportunity to recognize revenue for those services over time over the balance of the year. This was contemplated in our guidance. We've been working on some of these agreements for quite some time, Catherine, knowing that we were going to make this announcement around the AACR time frame. So it is baked into guidance.

Okay. That's very helpful. And then on DSP, any update on commercialization plans in terms of your interest of potentially using a partner there? And if you were to use a partner, is that something you would set up prior to launch? Or would the plan be to launch it on your own and then add a partner as needed?

So DSP is a very exciting program, and it has captured the interest and imagination of channel partners. We are receiving inbound interest from groups who are interested in servicing the traditional pathology market, servicing kind of the next-generation sequencing and single-cell markets and groups who are interested in building companion diagnostics on the platform. That being -- and we were entertaining those discussions and looking to see if there are win-win types of arrangements that we could put in place. That being said, I don't think we need a channel partnership to have a successful product launch. The core market of translational researchers and genomic researchers that, we believe, will be the early adopters is one that we feel our sales force is well positioned to launch the product into, with the opportunity to expand later -- expand the channel later post launch. So we're going to continue to evaluate these opportunities. But I don't think we can be specific about whether we will or won't enter one of these channel collaborations or the timing of it at this time, Catherine.

Okay. And then last one for me. I appreciate your commentary on neurology and other applications drawing interest. And I saw yesterday CDC posted a presolicitation for a MAX to do some HPV genotyping. So just curious to get your thoughts on how much nononcology applications will drive instrument demand going forward.

Yes. So last year, you may recall oncology drove about 85% of our instrument placements in 2017. So for me, that's a great testament to our leadership in that field, but it shows that we have yet to tap into the much broader area of science that we could be contributing to. For me, if we were able to increase the percentage of nononcology instrument sales from 15% to 30% this year, that would be about in line with my expectations, and that would be a nice boost to grow.

Entering new therapeutic areas like neurology and immunology takes some time. We have to go build our reputation in those fields as we did in oncology. We think we've armed our sales team with great panel products that are well designed and useful. We have to get the word out and get written in the grant cycles, et cetera. So in this first quarter, with nononcology applications driving 25% of instrument placements, I feel that's a good start to the year. I'd like to see that increase over the balance of the year if we can, and if it's reached 30%, I'd be quite pleased.

(Operator Instructions) Our next question comes from Tycho Peterson with JPMorgan.

This is Tejas on for Tycho. Just wanted to get a sense of the guidance in light of the relatively strong start to the year. And what you're assuming here in terms of a budget flush in 2018 in light of the upside in the NIH budget? And then I have a couple of follow-ups.

Tejas, I'll start and then maybe hand it over to Tom to add on top. We're very pleased with the start we had to the year. That being said, Tom, when he came onboard, outlined a guidance philosophy that was perhaps more disciplined that we've had in the past, one that's focused on providing guidance that we're confident we can meet and from time to time beat. And so just one quarter into the year, it's a little early, in our view, to increase guidance.

To your second question about the degree to which we have assumed a budget flush at the end of the year, you'll recall that when we provided guidance, both in 2017 and in 2018, we described that we were not assuming a substantial Q4 budget flush. That is a pattern that sometimes materializes, but can't be counted on to help make guidance. So we don't have implicit any kind of extraordinary Q4 budget flush. That being said, even in years where there's not a budget flush, it tends to be our strongest quarter of the year, but I don't think we're seeing anything extraordinary.

Got it. And then in terms of your biopharma collaborations, has there been any change in the tenor of your conversations after the Merck PD-L1-agnostic data at AACR, et al.? Every once in a while, we hear about this sort of commercial disincentive to have narrow labels from big pharma. So have those conversations changed at all? Or are people still very enthusiastic about the Tumor Inflammation Signature and other biomarkers?

We're remaining very strongly engaged with potential companion diagnostic partners on the Tumor Inflammation Signature. And in addition, the IO 360 panel, which contains the Tumor Inflammation Signature, has become our fastest-growing panel launch in the history of the company. And I think that shows that there's still a lot of interest in understanding the mechanisms of immune resistance and what predicts response to these therapies.

I will say the success of some of the drug developers in getting broad labels for anti-PD-1 therapies has been noticed by everyone in the field and maybe providing less of a focus on that particular indication. But that's been offset by the emergence of second-generation IO therapies that are focused on other mechanisms of action or targets besides PD-1 and PD-L1. Increasingly, our customers are thinking about what combinations of immuno-oncology therapies to use. And we think that, that is a critical question that can only be addressed with the kind of multiplexed assay that can look at distinct areas of biology much like the nCounter platform enables and the IO 360 panel enables. And so that's where a lot of the discussion is for us today.

Got it. And then one final one here for me, Brad. In terms of DSP commercialization, how are you thinking about avoiding this risk of disruption to the core franchise, given that on the last call you said you're only going to invest in few application specialists so it's largely going to be the same sort of sales reps? Because they now have the option to sell a more expensive box with a potentially higher pull-through versus your existing lineup, and there's an incentive there for them to overprioritize that perhaps.

Yes. I think that's a good question, Tejas. It's one we haven't really grappled with just yet, as the launch is still approximately a year away. I mean, I think those types of incentives can be compensated through sales force commission planning and the way the commissions are adjusted to address those. So I think we'll look at the tools we have available to make sure that our sales reps are spending the right balance of energy across the instrument portfolio at the time of launch. But we handle that today, right? We have a SPRINT system that lists for $149,000. We have a FLEX system that lists for $265,000. And so to add another instrument that might list at $295,000 I don't think substantially upsets the apple cart or stretches our sales force. They already deal with instruments at substantially different price points.

I show no further questions in queue, so I'd like to turn the conference back over to Mr. Farrell for closing remarks.

Thanks, everybody, for joining us today. The transcript should be up in about 90 minutes or so. If you did miss any portion of the call, domestic callers please use the number (888) 793-9492, international callers please dial (734) 385-2643. The conference ID for the same is both (sic) [for both is the same], that is 6188428. With that, thank you, again, for joining us, and have a greater.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.