NanoString Technologies Inc (NSTG) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NanoString 2018 Third Quarter Financial Results Call. (Operator Instructions) As a reminder, this call is being recorded.

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

Thank you, operator. Good afternoon, everyone. On the call with me today is Brad Gray, our President and CEO; and Tom Bailey, our CFO.

Earlier today, we released our financial results for the third quarter of 2018. The copy of the press release can be found on our website at nanostring.com.

During this call, we 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 addressable markets; our strategic focus and objectives; and the development status, timing 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 those forward-looking statements.

We're looking forward to catching up with many of you next week. We'll be on the road in Boston for a DSP KOL dinner as well as in New York at the Canaccord conference.

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

Thanks, Doug. Good afternoon, and thank you for joining us today. I'm going to provide a brief overview of the our performance for the third quarter and an update on our strategic objectives. And then I'll turn the call over to Tom to review the details of our Q3 operating results and to update our guidance for the year.

We've executed well over the last 4 quarters, and returned our core nCounter business to solid growth. For 3 quarters in a row, our product and service revenue has exceeded the top end of our guidance, demonstrating that the steps that we've taken to strengthen our commercial team and infrastructure have been successful. In addition, we've generated tremendous interest in our GeoMx Digital Spatial Profiler, setting the stage for a successful 2019 launch that we believe will accelerate our growth rate next year.

In the third quarter, we reported $21.5 million in products and service revenue, generating 27% year-over-year growth. These results were strong across the board with instruments, consumables and service each growing by greater than 20% compared to the prior year.

Our instrument revenue benefited from solid demand from biopharma customers who drove about half of our instrument revenue in direct markets. SPRINT accounted for approximately 45% of instrument placements. Our installed base has increased by more than 20% over the last 12 months, laying the foundation for continued growth in our core nCounter business in 2019 and beyond.

I'm particularly pleased with the trajectory of our consumable business. Total consumables, which include both life science reagents and Prosigna, grew more than 28% during the third quarter. The bifurcation of our sales force and the separate teams focused on instruments or consumables has provided visibility and linearity, resulting in annualized consumable pull-through at the high end of our guidance range.

Within life sciences consumables, we delivered more than 35% growth in panels, while Custom CodeSets were approximately flat year-on-year. Meanwhile, Prosigna delivered its strongest quarter yet.

Now I'd like to provide an update on our strategic objectives for the year. Our first strategic objective is extending our leadership in oncology research and diagnostics. During the third quarter, oncology continued to be the primary growth engine for our business, accounting for about 60% of new instrument placements in our direct markets. Our PanCancer panels remained the largest portion of our consumable revenue and grew approximately 25% year-on-year.

Much of this growth is driven by immuno-oncology where our PanCancer Immune Profiling Panel remains our top-selling research product, and our newer IO 360 panel remains our fastest-growing panel launched to date. These products are being systematically incorporated into the biomarker discovery paradigms of biopharma companies. For example, last week, we announced a translational research collaboration with MacroGenics who use IO 360 to identify predictive biomarker signatures for their MGD013 program. We will be evaluating the Tumor Inflammation Signature and other novelty gene expression signatures that may enhance or accelerate the clinical development of MDG013 (sic) [MGD013] potentially yielding a companion diagnostic in the future.

We expect our momentum immuno-oncology to continue. The annual meeting of the Society of Immunotherapy for Cancer, or SITC, is currently underway and features more than 25 studies with data generated using our platforms.

This morning, we announced the launch of a new Car T characterization panel for use in development and manufacturing of cell therapies. This panel was created in collaboration with 8 leading research centers and biopharma companies, and it's designed for use across the entirety of the Car T workflow, including leukapheresis, manufacturing and post-infusion monitoring. We believe that this product can help address a major unmet need in a field where there are currently over 100 active Car T programs and more than 600 active studies underway.

We're also making steady progress on the diagnostic side of our business. During Q3, we generated record Prosigna revenue of $2.6 million driven by growth across all geographies. We're now -- we now expect to exceed $9 million in Prosigna revenue for 2018, putting us above the top end of our previously provided Prosigna revenue guidance range. In addition, we expect that Prosigna's growth will continue to benefit from positive health technology assessments.

For instance, the U.K.'s NICE has published on its website draft items that includes Prosigna and which is scheduled to be finalized in December of this year, setting the stage for Prosigna to become widely available to U.K. patients beginning in 2019.

Our second strategic objective for 2018 is to drive nCounter into new therapeutic areas and applications. Over the past several quarters, we've used new product launches and marketing campaigns to substantially increase awareness of nCounter outside oncology. These efforts are paying off. And during the third quarter, approximately 40% of instrument sales came from areas outside of oncology, the most meaningful contribution to growth since we began tracking this metric.

Immunology has been an area of particular strength. During the third quarter, immunology accounted for approximately 1/3 of new instrument placements, while our portfolio of immunology panels accounted for about 1/4 of all panel sales and grew more than 50% year-on-year.

Neuroscience is another area of focus where we introduced new panels earlier this year. While these panels remain early in their product life cycle, repeat purchasing behavior is encouraging with reorders from about half of the customers who tried these panels to date.

Our third strategic objective is to initiate the early access launch of our GeoMx Digital Spatial Profiling platform by year-end. We remain on track to achieve this objective and expect to ship our first beta units to external sites later this quarter. The progress that we've made on DSP in the past few months has been fantastic, and we are seeing multiple leading indicators of a strong 2019 launch.

Our DSP Technology Access Program, or TAP, which allows customers to experience DSP by sending their samples to NanoString for processing, has expanded at an impressive pace. During Q3, we received orders for more than 20 new TAP projects, and demand currently exceeds our internal capacity. Biopharma companies have begun to submit studies that total hundreds of patient samples, and we are carrying a substantial backlog of TAP orders.

In addition, the TAP program is yielding a steady stream of DSP data and presentations at Nature meetings. Just this week, at the SITC meeting, there are 6 studies that include DSP data, each covering a different cancer type and authored by a different set of scientists. The TAP program recently yielded 2 independent peer-reviewed papers published simultaneously in the high-impact journal, Nature Medicine, one of which was co-authored by Jim Allison of MD Anderson, who recently won the Nobel Prize for his work in immuno-oncology. We're tracking a large number of additional manuscripts that we expect will publish over the next year, highlighting the power of DSP and supporting its adoption.

In August, we opened an early access program to place 5 data instruments at leading research centers. The program was substantially oversubscribed, allowing us to select the sites from among the top research institutions, medical centers, biopharma companies and contract research organizations.

To begin capturing demand from researchers who were not selected as Early Access sites, we created our GeoMx Priority Site or GPS program. Participating in the GPS program provides researchers with an opportunity to preorder a GeoMx system for delivery in 2019 while beginning to generate data on their samples to the Technology Access Program ahead of instrument delivery. For a price of $295,000, customers will receive a package including their GeoMx instrument, startup reagents and TAP service on 12 samples. GPS status will be limited to the first 20 participants who purchased the commercial system.

Outside of the GPS program, we've been working to build a funnel of potential customers interested in ordering GeoMx systems after the full commercial launch, a plan for the first half of 2019.

During Q3, we ran a GeoMx DSP grant program that received more than 100 applications from academic researchers from around the world. While the University of Oxford was selected as the winning recipient, the other applicants form a substantial funnel of potential GeoMx customers. In fact, some applicants responded to the news that they had not won the grant by immediately requesting a quote for the purchase of a system.

In summary, across TAP, Early Access, the GPS program and our grant contest, we are seeing many signals of strong demand that increase our confidence in a successful 2019 GeoMx launch.

Our fourth strategic objective is to advance our Hyb & Seq platform towards a commercial launch. As we highlighted at the Association of Molecular Pathology, or AMP, meeting last week, both the technical development and new applications are progressing nicely.

On the technical front, we provided the first public disclosure of sequencing data from the fully scaled Hyb & Seq reagent set, which included a 4,096 bar code set, covering every possible 6-base combination in any genome. This reagent set provides the fully generalizable sequencing chemistry and achieved a major milestone in our development program.

We also highlighted the ability to seamlessly visualize and analyze Hyb & Seq data using a standard genome browser. And we presented an approach for ultrafast digital counting of DNA and RNA, allowing Hyb & Seq to be used like a supercharged nCounter system to rapidly detect pathogens or measure gene expression profiles.

In parallel, our collaborator showcased work in the field of infectious disease, demonstrating how the simple workflow and rapid turnaround time of Hyb & Seq could open up new clinical applications for next-generation sequencing. This is an area where existing sequencing technologies fall short of customer needs, creating a significant opportunity that we believe could be one of the killer applications for Hyb & Seq. Researchers from Massachusetts General Hospital were selected for an oral presentation of their work on rapid pathogen identification and antibiotics susceptibility testing using Hyb & Seq. The second study from researchers at Weill Cornell Medical Center used Hyb & Seq to rapidly and accurately identify pathogens across kingdoms, including bacteria, viruses and fungi.

Our next major update on Hyb & Seq will be at the Advances in Genome Biology and Technology, or AGBT, conference in Q1 of next year.

Now I'll turn the call over to Tom to review our financial results for the third quarter and update our guidance for the balance of the year.

Thanks, Brad. I'm pleased to have the opportunity to review our operating results for the third quarter of 2018 and our updated outlook for the year.

For the third quarter of 2018, product and service revenue was $21.5 million, representing year-over-year growth of 27%. Our third quarter performance brings total product and service revenue for the first 9 months of 2018 to $59.9 million. This result represents 17% growth as compared to the first 9 months of last year. It was driven primarily by strong consumable sales and demand for our GeoMx DSP Technology Access Program.

Product and service revenue for the third quarter included $5.4 million in instrument sales and $13.7 million in total consumable sales. Our instrument installed base grew over 20% compared to this time last year, and annualized consumable pull-through at over $81,000 for Q3 was above the high end of our guidance.

Life science consumables revenue, excluding Prosigna, was $11.1 million, reflecting 24% year-over-year growth. Life science consumables benefited from growth of more than 35% of panel sales.

Consumable revenue also includes $2.5 million of Prosigna sales, an increase of more than 50% over the prior year. Service revenue was $2.3 million, with growth driven by continued demand for GeoMx DSP TAP as well as our increasing installed base of systems.

Revenue from collaborations was $7.2 million for the third quarter, bringing total collaboration revenue recognized year-to-date to $16.8 million. For the third quarter, we received cash from collaborators of $7.3 million, bringing our year-to-date cash received from collaborators to $19.5 million. The majority of cash received and collaboration revenue recognized was derived from our partnership with Lam Research.

Gross margin on product and service revenue for the quarter was 57%, which was consistent with the third quarter of 2017.

R&D expense was $16.7 million, an increase of 46% over the prior year. Investment in our Hyb & Seq program accounted for the bulk of the increase and was supported by approximately $7 million in program payments received from Lam Research during the quarter. Excluding Hyb & Seq development expenses funded by Lam, our R&D expense would have been lower in Q3 '18 as compared to the prior year and a significant portion of our remaining R&D expenses relate to our investment in GeoMx DSP, a new platform that is now less than a year away from its commercial launch.

Our SG&A expense was $17.8 million for the quarter, a decrease of 3% as compared to the third quarter of 2017. The lower expenses in the current quarter are primarily related to lower-than-planned accounting and legal fees, the timing of certain expenses related to trade shows and marketing activity and modestly lower personnel costs.

Stock-based compensation expense for the quarter was $2.8 million, and we ended the quarter with $95 million of cash, cash equivalents and short-term investments.

Turning to our financial outlook. We've exceeded our product and service revenue guidance for the third quarter by proximally $1 million. As a result, we are, again, raising our product and service revenue outlook for the full year.

For the full year 2018, we now expect product and service revenue of $82 million to $83 million, representing an annual growth rate range of 14% to 15% as compared to our revised range offered this past August of 10% to 13%. This increase in our annual product and service revenue outlook is a result of our strong consumables pull-through driven by customer demand for nCounter panel products and by our dedicated consumables sales team. Our raised outlook is also supported by growth in our service revenue driven primarily by GeoMx DSP TAP.

We continue to expect gross margin to be in the range of 57% to 59%, consistent with our prior guidance.

We expect collaboration cash received and revenue recognized to be approximately $23 million. This update relative to our previous guidance of approximately $25 million is the result of a sequential reduction in the expected Hyb & Seq-related R&D spending in Q4 of '18, following significant efforts in Q3 to fully scale the Hyb & Seq reagent set and chemistry.

We expect total revenue, which includes our estimate of revenue from collaborations, of $104 million to $106 million, consistent with our previous guidance.

As detailed in our press release, we are narrowing our prior guidance range for operating expenses. We are also updating our guidance for GAAP net loss and net loss per share for the year, reflecting modest changes pursuant to the updates just provided. Our GAAP net loss per share of guidance also reflects the expected impact of additional shares issued in the equity offering completed in July.

For the fourth quarter, we expect product and service revenue of $22 million to $23 million, which would represent growth of 5% to 9% over the prior year.

Q4 instrument revenue is expected to be approximately consistent with the last couple of quarters, sequentially, in line with our guidance of steady instrument revenue for the entirety of 2018 as compared to 2017.

Annualized consumables pull-through was expected to continue at near -- at or near the top end of our guidance range of $75,000 to 85 -- to $80,000 per system. We expect service revenue will continue to show consistent year-over-year growth in Q4, benefiting from strong demand for GeoMx DSP Technology Access Program.

We expect approximately $6 million in revenue recognized from collaborations, reflecting updates to the planned pacing of Hyb & Seq R&D spend during Q4 as described earlier.

Finally, we expect total revenue of approximately $28 million to $29 million.

Turning to the balance sheet. We exited the third quarter with approximately $95 million in cash on hand.

In addition, we recently announced a new $100 million term loan facility, with our existing lender, CRG, which replaces our old $50 million facility and offers us significantly better terms and more potential capital to fund the business. Gross proceeds of our initial draw totaled $60 million, and we netted approximately $8 million of additional cash at close after repaying the old loan and related transaction fees, which ultimately puts our pro forma cash balance at over $100 million.

We believe this transaction, together with our recently completed equity financing and funding we expect to receive from Lam Research, provide the resources necessary to fund our business plans in 2019 and beyond, including the GeoMx DSP launch.

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

Thanks, Tom. In summary, our core business is on strong footing, and our growth outlook is positive. Our leadership in oncology remains strong, and we successfully are expanding into new therapeutic areas. As we look ahead toward 2019, we see continued adoption of nCounter, supplemented by a GeoMx DSP launch, that we expect to raise the company's growth profile.

We're optimistic about our markets and products and confident in our ability to execute.

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

(Operator Instructions) And your first question comes from Dan Brennan with UBS.

So I wanted to start with the consumable business. Obviously, a strong quarter there. Maybe can you just elaborate a little bit on what you're seeing on the oncology side, particularly with your existing panels? And then maybe can you define a little bit more what this Car T panel opportunity looks like?

Sure. Thanks, Dan. So oncology remains a core area of strength for us. The majority of our PanCancer panel revenue, which grew over 25% year-on-year, is accounted for by our 2 immuno-oncology panels: the PanCancer Immune Profiling Panel, which, for some time, it's been our #1 selling product; and our newer IO 360 panel. Both have grown quite robustly over the last year with demand coming both from academic researchers and from biopharma companies. In particular, the IO 360 panel has appealed to biopharma companies because it includes the Tumor Inflammation Signature as developed by Merck and as demonstrated to be a helpful predictor of response in checkpoint inhibitor therapy. So we continue to expect that, that line of consumable products will grow as our installed base in cancer continues to grow. The Car T therapy panel is -- was built really with a coalition of leading centers and academic research and biopharma companies who were all grappling with the same challenge, which is how do you extract living material from a person, put it through a manufacturing process and then reinfuse it as a therapeutic. That's, obviously, a very complex process to control and to make reproducible over time. What we hope we can do is use the Hi-Plex gene expression profiling that nCounter offers to identify markers that can help characterize the samples before they go into manufacturing process, monitor the manufacturing process and then test the quality of the final manufacturing material that goes back into the patient. The Car T panel will begin shipping in the fourth quarter of this year, though we don't expect it to make a material contribution right out of the outset. What we really hope will happen is that some of the 100-odd organizations that are developing Car T therapy will incorporate it systematically into their manufacturing processes in the long run, which could make it an important product in much the same way we've seen with other bio-processing-type applications from other companies.

When you think about Car T and you think about immunology and you think about neurology, is the impact of this proliferation of panels, is it to eventually drive an upward trend towards your pull-through annualized such that you can exceed that $75,000 to $80,000 consistently? Or is it simultaneously likely going to drive an inflection rate in your instrument growth rate, so a pull-forward from customers? I mean, so I guess, the long way of asking, is flat instruments the right way to think about kind of as we look beyond '18 with that $75,000 to $80,000? Or do we expect kind of those to [in front] higher given the increasing panel breadth that you have?

Dan, I expect that the right way to think about our business is continued last nCounter instrument placements, just as we guided this year with consumable pull-through in the $75,000 to $80,000 range that we guided and have now demonstrated this year. The introduction of new panels will primarily benefit us in terms of motivating new instrument purchase, both in oncology, maybe in areas like Car T, and outside oncology in areas like autoimmune disease and neurology. And that will help sustain that instrument placement rate. It will not, we expect, drive consumable pull-through meaningfully above the current pace that we're seeing.

Okay. And then maybe just one on DSP. So when will you share some initial thoughts about 2019? You gave a lot of color about the extent of the amount of trialing that's ongoing. So when will we get the first look on how we should be thinking about DSP for '19? And just wondering, related to that, what's left in terms of the scale-up for commercial? Like how much work needs to be done for your product to be ready to ship out? Is -- I mean, is it fully manufacturing now in-house? And its pace, you've got a lot of these sitting in inventory to go out? Or is there still a lot of kind of inherent transition up to that scale-up process still ahead of you?

Yes. I think we'll, obviously, be guiding formally about our revenue expectations for 2019, as we always have, in the first quarter when we do our full year wrap-up call, typically in February. What we have said that we can provide for initial kind of modeling on DSP is that we expect the launch to look a lot like the Sprint launch did. As you may recall, the Sprint launched around midyear and sold about 20 units in the first couple of quarters. So if we exit next year with having sold 20 DSP systems, recognize revenue for 20 DSP systems, that would be about in line with our current expectations. And we'll know a lot more as time goes on, and we'll be willing and able to provide more clear guidance when we get to the February call. In terms of what remains for us to complete the formal launch, I think we're in really good shape. The instruments -- the beta instruments have been in-house since August. They're being put through their paces. And we don't feel that there's going to be any material instrumentation design changes before full commercial launch. The rate-limiting step really for us is the software, which is a very important part of the user experience in DSP because the visualization of the images coming off the system, in combination with the Hi-Plex proteomic and gene expression data, is a big part of the power of the platform. And right now, that's the focus of our ongoing development and debugging efforts. In addition, it'll be very important for us to make sure that the first set of user experiences from DSP are positive. This is a new platform, unlike anything that customers have used before, so we'll want to throttle the placement rate of new instruments in the early quarters in order to ensure that we can provide tremendous levels of support and great experiences to our customers. And we are working now, and we'll be working in Q4 to install those data systems to train customers for the first time and to smoke out anything that could go wrong in that process. So that when we get to the full commercial launch, it's as smooth as possible. But there is not any major scale-up activity or engineering to complete at this stage. It's really about software reagents and making sure the customer experience can be an excellent one.

Your next question comes from Catherine Schulte from Baird.

First on DSP. What are your initial capacity limitations there from a manufacturing perspective? And how quickly should we expect that to ramp up?

Yes. I think we have sufficient manufacturing capacity to provide the number of instrument units that I just described that's sort of analogous to the SPRINT launch. As I alluded to in answer to Dan's question, I think our capacity constraint is going to be more on the installation and service side. We want to be absolutely certain that we're supporting our customers and their first experiences on the platform. And we'll want to be sure that they get the white glove service that they need on a new technology. And so we're thinking hard about how we organize ourselves for that, how many people we need, how many different teams, how many instruments a month we can reasonably install and still provide the service we want. And the beta program, the Early Access program that initiates later this quarter, is going to be the first trial run on that process. And we'll have a lot more to say about what we think we can reasonably accomplish when we get to the time of guidance on February next year.

Okay. And then, can you talk a bit more about the MacroGenics collaboration? How should we think about this unfolding? And any time lines for a potential move into Phase III?

Sure. So the MacroGenics collaboration is unlike our other biopharma collaborations in the sense that we are not moving initially towards the development of a companion diagnostic product. We're instead focused on really retrospectively analyzing some of the early studies for MGD013 using our IO 360 panel and our bio-informatics expertise, with the hope of finding some gene expression patterns that can help accelerate the development of that, either by selecting patients or otherwise. So for the next 12 months, we'll really be focusing on testing samples from those dose escalation and dose expansion cohorts. And really, it'll require at least 12 months before we'd be in a position to determine that we have companion diagnostic content that could be used in further development.

Great. And then last one for me. Just can you give some qualitative comments on feedback you got on DSP at the AMP conference? How does the interest level compare to what you were expecting?

Yes. Interest level from -- in DSP has exceeded our expectations at almost every opportunity. At AMP, we had a number of people stop by the booth, take a look at the system we had on display there. A number of people attended our corporate workshop to hear about the experience coming out of Bernie Fox from Providence Health Care who's, again, presenting this week at the Society of Immunotherapy and Cancer meeting, really, as we speak. Yesterday, its -- the team sent me some photographs of an absolutely packed theater of people listening to Dr. David Rimm present his experience with DSP, which was 1 of the 6 studies on DSP that's being presented there. So -- and we have another key opinion leader dinner at SITC this week that I expect to have a good turnout for. So I think the interest level in this category of imaging-based spatial proteomic and genomic technologies is going up a lot. I think DSP is one of the most exciting products in that category with -- category that has, as of yet, no clear leader. And we have a real opportunity to establish a leadership position here.

And I'm showing no further questions at this time. I'd like to turn the call back over to Doug Farrell for closing remarks.

Thank you all for joining us today. If you did miss any portion of the call, there will be a replay available in the next hour or half -- 1.5 hours or so. We request callers dial (888) 793-9492, and please use access code 6767978. If you're an international caller, please dial (404) 537-3406, and again, the conference code 6767978. Thanks again for joining us today.

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