Somalogic Inc (SLGC) 2022 Q3 法說會逐字稿

Good morning, and welcome to SomaLogic’s Third Quarter 2022 Earnings Conference Call. (Operator Instructions). I would now like to turn the call over to Marissa Bych with Gilmartin Group, Investor Relations for introductory comments.

Thank you. Today, SomaLogic released financial results for the quarter ended September 30, 2022. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make forward-looking statements during this call within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements.

All forward-looking statements, including, without limitation, those relating to our market opportunity, gross margin and future financial performance, protein content and database growth, customer base, diagnostic pipeline, expectations for hiring and growth in our organization are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements.

Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent Form 10-Q filed with the Securities and Exchange Commission, and the section entitled Risk Factors in our most recent annual report on Form 10-K. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 14, 2022. The SomaLogic disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. With that, I will turn the call over to Royce Smythe, Chief Executive Officer.

Thank you, Marissa. Good morning, and welcome to our 2022 third quarter update call. I'd like to start by taking all of the invested and support SomaLogic as we continue to successfully translate 20 years of innovation into a more complete understanding of human biology, safer and more effective therapies and better patient care by leveraging the power of proteomics in ways that no other platform can. The commercial staff and structural reorganization we have previously discussed with our last since business as well as continued commercial growth are already bearing fruit.

We appointed a new leader for life science commercial efforts, moved from a centralized to a business unit structure to align all aspects of our life science commercial efforts, including sales, marketing and product under one vertical and are putting much more emphasis on training for the large number of new sales staff hired over the past year. I'm proud to share that we achieved $41.7 million in revenue for this quarter. Most important, we delivered on the imperative to stabilize the life science business and put that effort back on a growth track with $20.5 million in core revenue in addition to licensing royalties of $21.2 million. Shaun Blakeman, our Chief Financial Officer, will discuss his comments, the components of our top line revenue as well as our ongoing cash management initiatives.

Our go-forward plan has been thoughtfully focused the bulk of our efforts and internal investment on our life sciences commercial business and adjust expenditures on other parts of our business accordingly. We are executing a welcome new business unit structure, and we plan to continue to do so. Regarding our core business, the team has been acutely focused and is successful at achieving greater scale and customer diversity. Important events continue to smooth out quarterly variability and to drive sequential revenue growth. We are attracting new customers, retaining existing customers and turning smaller customers into larger ones. Pursuant we have added 54 new customers using our products and services over the past 12 months. Our biopharma customer revenue growth over the past 2 quarters -- I'm sorry, over the past 2 years is another important fundamental building block to assure progressive long-term growth.

Comparing current year-to-date and excluding long-term recurring contracts, average quarterly revenue from biopharma customers has increased more than 200% since during the 2020 fiscal year due both to the addition of new customers as well as the development of more project contracts with a large number of them. This trend of continuing customer diversification gives us a great deal of confidence in our ability to continue to substantially compound both financial and human value over the next several years.

Regarding the onetime royalty payment of our revenue for this quarter, I would like to remind everyone that developing a robust licensing component and associated revenue to our business has always been a part of our strategy. As we know, our thousands of proprietary reagents have potential application in a wide variety of life science use cases. We previously shared that we hired Ken Kaskoun our new Senior Vice President of Licensing and intellectual property strategy this past March from Qualcomm, where he held a similar position. And his team are now working on new licensing opportunities, and we are confident many of these will pay off over time.

The proteomics market has objectively grown. And solution psychosis are being used more frequently by biopharma and academic research customers for biologic discovery to facilitate clinical trials and to improve patient care. We are actively making it easier and more impactful for customers who work with us by growing our commercial team, expanding our current protein measurement identification product advantage in deploying, developing and launching subservice solutions. Commercial team build-out is a key area of focus, especially as we look to expand our international footprint in the NBA and APAC in order to capitalize on the substantial and largely other [tap] to revenue opportunities in these geographies. 60% of the top 50 biopharma companies in the world are located outside the United States as well as a number of important academic centers with specific interest in proteomics.

While we are still definitely in growth mode, we have seen good progress with tenant talented new and experienced additions to our sales team in the third quarter, 6 of whom will be working in EMEA and APAC. Our unique ability to synthesize our reagents rather than having to work in biologic systems to create them enables much faster development of new protein identification and measurement content than other approaches. Our development proprietary optimizations for our new 10-K project will be completed over the next few months, and we anticipate launch of this new product in late 2023. When it will widen even more our already substantial current global lead in platform content. Shifting to our distributed solutions. We expect full access launch for our site of service 7k SomaScan [Assay Kit] into more Semiscan-certified sites by the end of this year. We believe there is substantial upside potential for our business as we make existing kit products mobilely available and develop and deploy additional distributed products.

These solutions not only provide augmented top-line revenue and meet more customer needs, but also reduce service business variability by limiting reliance on customer project completion, sample batching and delivery to us. In addition to our own kits, our work with Illumina to develop a co-branded distributed NGS protein measurement and identification kit product continues to go very well. We value our close relationship with Illumina as well as our unwavering commitment to create market and sell an NGS application of SomaScan that will change the commercial landscape for aptamer-based assays and changed the landscape for proteomics in general. Consistent with [Luminis] reporting, we anticipate these co-branded products to launch in 2024. Both we and our partners at Illumina look forward to updating you with further details in coming quarters.

In addition to these new products, sales of modular distributed sample prep solutions that we now have in development for both Array and NGS SomaScan formats is targeted in the 2024 time frame. In addition to new rate base and NGS product and solution development and commercialization, we are committed to the development of novel chip-based approaches as evidenced by our recent acquisition of Telemetrics. -- the San Diego-based global leader in DNA nanotechnology. We are incredibly excited about the intermediate and longer-term opportunities for this work and have such a talented development group now on the team to accelerate it.

Beyond executing on core customer growth and diversification as well as the provision of new products and solutions. We have also been working tirelessly to eliminate pressures experienced over the summer, notably supply chain dynamics and customer spending behavior. Despite the continued unpredictable nature of international trade, the impact of supply chain issues on our business are less pronounced at this time. We've been proactively dealing with this fluid environment by taking matters into our own hands, anticipating issues before they occur and offering sample shipping suppliers or other assistance where needed. Like many others, we continue to see stress on biopharma budgets in this market.

While we are very optimistic about our fourth quarter performance due to continued customer growth, our conservative assessment when shared by others as well is that we could generally see a more modest cadence than is typical for customers who usually work to spin down remaining buckets, and therefore, less sequential growth in the fourth quarter being (inaudible) a typical year.

As we have discussed, we will adjust our spending eventuality as needed. Regarding our [progenic] diagnostics, we have previously shared that we have created 16 laboratory-developed tests or LDTs on our platform. Related, we will be now (inaudible) in the results of a very positive trial for one example of these products. Our secondary cardiovascular risk test, which is superior, predicting the risk of heart attack, stroke or death and individuals affected by diabetes and other cardiovascular risk factors. This clinical study was performed in conjunction with Cure Healthcare. These virtual trial platform has been leveraged by others to facilitate third-party coverage for new healthcare products. We continue to pursue licensing and partnership opportunities with these novel assets.

Quick note on 2 recent manuscripts published by teams at the NIH and FDA. 2 organizations respected for unbiased scientific integrity and rig. NIH manuscript published in Nature Scientific Reports represents the largest technical evaluation of our [7 case] SomaScan platform today, demonstrating its extensive coverage of the human [proteome], remarkable sensitivity and consistent low variability. The offers point out that these characteristics are unique in comparison to other proteome approaches. The FDA manuscript bolusing clinical pharmacology reports demonstrates denote of some scan to characterize biosimilar drugs. And according to FDA investigators, SomaScan represented a sensitive dynamic and highly reproducible method. We are encouraged and confident in our recent progress and the improvements we have made in execution over a short period of time. We have reset and stabilized our core service business, supported by a growing list of biopharma and academic research customers, and we have a proven technology and platform with tremendous runway ahead.

Against this backdrop and based on the current trends in our business as well as onetime licensing royalties, we are raising revenue guidance for the full year 2022. Shaun will provide more detail on that guidance shortly. In closing, it's important to note that we continue to maintain an enviable balance sheet and all the optionality that comes through that resource. However, in this market environment, it's absolutely prudent to preserve as much capital as possible while still aggressively capitalizing and executing effectively on top-line revenue opportunities. While some of our recent uptick in spending has been necessary to put information technology structure in place to support life science commercial growth as well as public company operating structures in place. We have previously announced our intent to make significant operational expense reductions moving forward.

By focusing on life sciences, commercial needs and opportunities and continuing to invest in them, we will do this while still growing the scale and success of that business. Shaun will discuss how we are executing and are on track for the initial stages of that plan. Before I turn it over to Shaun, I'd like to reemphasize what we're building in some logic. -- insights garnered from the ease of our platform have already improved the landscape for customers and their important work in discovery, clinical trials in patient care. It's no longer debatable that proteomics is a rapidly expanding market and our unique technology is the right one to capture a significant increasing share of its value. While we are still building our commercial capabilities, we are confident the tremendous opportunity objectively in front of us will unlock growth, deepen relationships with existing and new customers and create significant financial returns and human benefits. As I've shared, there is a great deal more to come in the near term and beyond.

I'd now like to turn it over to Shaun for a review of our financial results. Shaun?

Thanks, Roy. Revenue for the third quarter of 2022 was $41.7 million compared to $20 million in the same period of the prior year. We are pleased with the improvement in our assay services business, and we are excited about the work our commercial team is doing, all of the ingredients to grow our platform are intact. And in Q3, we saw the results of improved commercial execution. And though the amount the licensing revenue we recognized this quarter was unexpected. To Roy's point, this is just one example of licensing opportunities we hope to pursue in the future. Given the amount of licensing revenue this quarter, I would like to provide additional clarity on our revenue breakdown to help you understand our underlying business performance Breaking down $41.7 million. We recognized $17.6 million from our core assay services business. A 0.4% increase from our third quarter 2021 assay services revenue of $17.5 million and a 60.8% increase from the $10.9 million of assay services revenue we recognized last quarter. We also recognized $2.9 million of revenue for our other core businesses, including kits, life and [finance] collaboration revenue.

And then we recognized the $21.2 million in one-time livening revenue that Roy mentioned. This $21.2 million was comprised of an $8 million upfront payment, which we received from [EP] as part of the terms of our devising agreement and $13.2 million recognized under GAAP of future guaranteed minimums of $5 million that we paid for SomaLogic over the next 3 years from 2023 to 2025 for a total of $15 million. Due to that, we account for this arrangement as a financing type arrangement with $1.8 million allocated to interest income that will be recognized over the next 3 years.

So this means that each year, we will be receiving $5 million that will not be recognized in those future years other than the small interest component I just described. Gross margin for the third quarter of 2022 was 72% compared to 56.1% in the third quarter of the prior year. Gross margins were primarily driven by the large amount of licensing royalty revenue at 100% margins. If you back that out, our margins ex royalties would be 39.7%, which is due lower margin bio [examples], as I discussed, we will be running in Q2. We will continue to process those samples in Q4. I would reiterate that at our current volumes, our core SomaScan margins without (inaudible) and large customer mix remain in the low to mid-50% range.

We think last quarter in our Q2 earnings call that due to the impact of those low-margin samples, our second-half margins would be overall fairly flat compared to the first half of 2022. Given the additional royalty revenue this quarter, we anticipate gross margin for the second half of the year to improve the low 60% range. Total operating expenses for the third quarter of 2022 were $70.7 million compared to $36.2 million in the third quarter of 2021. R&D expenses for the third quarter of 2022 were $19.4 million compared to $15.6 million in the third quarter of 2021. Sales, general and administrative expenses for the third quarter of 2022 was $51.2 million compared to $20.6 million in the third quarter of 2021. G&A included onetime charges this quarter for stock-based compensation and lease termination, adding approximately $15 million.

Adjusted EBITDA for the third quarter of 2022 was a loss of $31.9 million compared to a loss of $18 million in the third quarter of 2021. Please see our press release on file with the SEC as of this afternoon for a reconciliation between GAAP net loss and non-GAAP adjusted EBITDA. We ended the quarter with $566.3 million of cash, cash equivalents and short-term investments. Our strong capital position is an important differentiator for our business in the current market environment and allows us increased flexibility to evaluate and act upon both organic and inorganic opportunities accretive to our current growth prospects.

And as part of our focus on reducing cash burn, we are successfully implementing our plan to reduce operational expenses by $75 million from last quarter's operating expense consensus through 2023, which we announced last quarter. We have implemented over $10 million of seeding this year, net of one-time items in Q3 and Q4 related to business optimization, and we are finalizing our plans with over 85% of the operating expense improvements through 2023 now identified. We are appropriately pointing resources toward our highest revenue-generating activities, focused on life sciences and fully supported the commercial growth of that business.

As Roy mentioned in his comments, while we do not anticipate seeing larger year-end volume influx from our biopharma customers, we nevertheless expect and look forward to continuing to build our commercial execution at the end of the year and going into 2023. So turning to guidance. Based on our year-to-date progress and including this third quarter's line revenue, the current trends in our business, we now expect 2022 revenue to end in the range of $93 million to $98 million.

At this point, I would like to turn the call back to Roy.

Thank you, Shaun. Again, thanks to everyone for joining us for this third quarter 2022 report. As a result of continuing to put the fundamental building blocks in place, our business is gaining momentum. There is ongoing and more commercial infrastructure growth and differentiation to come as well as the development diversification and launch of new products, leveraging our unique core technology, one that partners and collaborators and customers both want and need to deliver on our shared goals of the prevention of human suffering and the prolongation of meaningful life. We look forward to sharing more with you in the coming months.

And with that, I'll turn it back over to the operator for Q&A. Operator?

(Operator Instructions). Our first question will come from Brandon Couillard from Jefferies.

This is Matt on for Brandon. Shaun, a quick one for you. On the prior $80 million to $90 million guide, was there any of the various pieces of the New England Biolabs royalty baked into that number?

We did anticipate -- we knew that we were in negotiations so we did anticipate getting some elements of that. Certainly, the exact amount was unknown at that time. And some of the recognition around the minimums was unexpected going into the quarter. So the answer is yes. But I would also point out that our core business is also performing as we had anticipated going into the second half. So we're trying to put out a reasonable guide based on all of that as we're seeing things right now.

Okay. And then for the fourth quarter, you guys noted a more modest cadence to spend at customers, as you sit here halfway through the quarter now. Is that actually what you're seeing show up in order trends? Or is it more anecdotal and taking a more conservative approach into maybe a more traditional year-end budget flush?

Yes. This is Roy. I think we're on target compared to where we would hope to be for the fourth quarter. We're just anticipating again based on states and we're hearing and others are hearing as well, at this rush in the fourth quarter for -- especially for biopharma customers to spend down their budgets in this market may be less pronounced. But we do feel good about the coming quarter.

I would also point out this as a if you think about the guide that if you recall what I said regarding the NEB licensing revenue, that's not going to be recognized now in future quarters the same way. So as you typically might see $1 million or $2 million historically come in. We're not going to see that next quarter for the reasons I explained.

Thank you. One moment for our next question, please. Our next question will come from Kyle Mikson from Canaccord Genuity.

Just want to go back to the fourth quarter. I know Roy, you talked about the -- some of the puts and takes I just want to dive into it a bit more. It's pretty important. So this updated the guidance, I think it implies like $15 million in services revenue, a 15% quarter-to-quarter decline. Maybe you could just talk about what that assumes for the macro headwinds, maybe specifically maybe each factor and then elaborate on these biopharma trends. specifically wondering if that's applicable to both small biotechs and large pharma. And is there any catch-up from prior quarters in the fourth quarter guidance as well? I'm just trying to figure out the conservatives and baked in there.

Okay. This is Shaun. I'll actually just clarify something I think, and then I'll let Roy talk about some of the trends in further details. Because if you think about the guide, again, that just told Brandon that we're not going to see that typical maybe $1.5 million to $2 million of NAV revenue. So if you actually back that out, you're seeing at the midpoint, our assay services remaining relatively flat, which is, again, as we described a reflection of our anticipation that the biopharma volumes are going to be somewhat subdued compared to previous fourth quarters. And also just trying to account for typical risks that might happen around the holidays and things like that with getting again to be [samples] in. But we don't see really -- or as a payer calling out any deterioration in that business quarter-to-quarter. Do you have [anything to add more Roy]?

No, not really anything to add, again, just that in this market, we're not anticipating a huge spin down in previous fourth quarters. In the last month of the quarter, we've often seen large drop-in projects so that our biopharma customers can spend down their budgets. And we're just not hearing that that's going to be the philosophy this year. But again, we feel really good about the guide as it sits.

Okay. But just like in pharma physically, is that going to be the small companies and the big company? Just wondering the dynamic there. And then also the catch-up, like we've talked about this in the past, is there any of that in the fourth quarter as well? Could that be upside maybe?

Sure. There's a possibility that some of the business that got pushed in the second quarter, we'll be able to close that out in the fourth quarter. There was a knock-on effect with our larger biopharma customers in that they usually are doing projects sequentially. So some of that takes longer to catch up than 2 quarters because they had to finish the project. It wasn't finished in the second quarter. In the third quarter, when you look at that data and then over a quarter or so and then up the next project on our docket.

So -- but there should be some of that coming into the fourth quarter. In regards to the difference between large biopharma and small biopharma, it's fairly [syncratic] -- it really depends mainly on not only the market context, but how well those companies are faring in this market context. We've ordered that some are doing well and some are having a massive layoffs. So -- but there's no real pattern there. It really varies from customer to customer. And again, we're not talking about something dramatic here. We're just saying, as we mentioned, that we do believe there'll be a modest decrease in that rush to spin down budgets at the end of the year just based -- and we're not the only one seeing this or predicting this for the fourth quarter.

It's been common. Currently, what we're hearing from companies. So that was helpful. I appreciate that. And then, Shaun, on gross margins, I appreciate the commentary that product and service gross margin declined to like high 30s compared to the normalized low to mid-50s. I just wanted to know if you can break down what you think services and product margins like have been or could be. Services looks like it's been high 30s, products have been like 29% to 61% looks like the past 3 quarters. What do you think that gets to normalize? Just you talked to the 50s. I'm just curious when you break it up for services and kits. Just curious about that.

Well, I would not -- I think what we're seeing early on in the kits margin, I wouldn't use that as the yardstick because there's a lot of means in terms of equipment placement, et cetera, that -- and then quite frankly, also in that product category, it's not just kits, although certainly, that's the bulk of it this quarter. So again, I would anticipate that to -- as we progress and really expand our kit franchise that would be over 50% margin business. Looking at the core assay services. Again, I've always said that the baseline we started that, if you really take out some of the noise at the mid-50s -- sorry, mid- to high 50s type business. Right now, with volumes just in the core assay services being a little below [20%], that keeps it in the low to mid-50s, but if we continue to expand. As we continue to expand volume there, and again, normalized margins just on our current cost structure would go back to the high 50s with volume leverage. But again, it's really just the biobank samples that are really driving that down this quarter.

Yes. This is Roy. I would add that as we've discussed in past quarters, these large population-based studies are important for our business based on the potential creation of 1 or 2 measurement standards in the market, and we obviously want to be one of those 1 or 2, if not the one. So these lag population-based studies are important. The one Shaun referred to that we're running now is the human Technical Institute from Italy. And these biobank projects are usually public-private partnerships, where governments apply some of their resources to running the biobanks, and we have to apply some of our own resources as well. There is top-line revenue coming from most of these. It's just that we have to accept lower margins in exchange for the ability to run these large population-based biobank studies and to participate in the development of measurement standard.

Okay. That was great. One more for me. Just like as we prepare for the co-branded kits rollout, just wanted to get an update on the NGS market, how you're viewing it or interacting with that. How are you seeing that market today, Roy to ensure that you've been your partner hit the ground running for the launch in '24, saw you guys at ASHG, -- are you going to be attending AGBT, things like that?

Yes, Kyle, the partnership with Alumina has gone exceedingly well. So far, the development of the kit product is on track from a timeline perspective. The Illumina's already out talking to putative customers. And as they have discussed in the past, there's a big opportunity to convert potentially [Lars] throughput genomic centers that they're very familiar with they have great relationships with to proteomics customers as well. We also feel like over the next year, as we increase our kits business in a knock-on effect for the co-branded kits from alumina as well.

(Operator Instructions). And again, to -- our next question will come from Evan Stampler from Stifel.

Evan here on for Dan. I just want to go back to this question about the fourth quarter and just doing quick math, it looks like expectations came down by about $5 million, and I know you referenced of $1.5 million to $2 million of, I guess, royalty revenue that you are not going to see in the quarter. So that leaves another $3 million or so. Is that the way to think about it? And is that all because of lack of budget flush that maybe you were contemplating previously? Or are there other things that we should be thinking about that caused you guys to bring down the number?

This is Shaun. You mean relative to fourth quarter consensus coming out of the last quarter's call?

Yeah.

So yes, I would say it's really more of a reflection of just right. I think the consensus models logically assumes a ramp-up. And we really are -- as we've always said, we really look at this as a full-year type game. And typically, historically, we have seen Q4 exhibit some seasonality around biopharma budgets that talked about several times today that's been more subdued this year. And that's really all you're seeing there. If you look at the core services business as we shown (inaudible), as would be implied in our guide, at the midpoint, you're really not seeing a degradation. We expect it to be fairly consistent with what we're doing this quarter. And we're continuing to build out that pipeline from our Q2 and to call back out of that. And that's really a simple as that. There's not really any anticipated degradation again there, like I said previously. It's just -- we're trying to put out a guide as we can rely on taking all the factors into account. And we look forward to being able to continue to improve upon that in the future.

Yes, I would add -- this is Roy. -- this quarter's core business is a 45% sequential increase compared to the second quarter. And we certainly have no reason to believe that we're going to have any divarication from our current execution progress in the fourth quarter. We feel pretty good about the fourth quarter.

Got you. And so I guess, maybe there's no degradation, but it sounds like 4Q year-on-year, I think it's going to be about flat. And I guess, year-over-year, you have a big investment in your commercial team. It's grown a lot since last year. Are these -- is the commercial team just getting up to speed? Like where are you in that process relative to expectations?

Well, first thing I would say is, yes, we've -- 74% of our sales staff have been hired in the last year. It takes about 9 months to get people fully productive in a new territory, and we're making good progress on bringing more people to that group and getting those people trained up and productive. Fourth quarter last year was an unusual quarter. We had a large drop in deal in the fourth quarter. In addition to the fourth quarter spend down that you normally see.

So I wouldn't put much weight on this year's fourth quarter performance compared to last year's fourth quarter performance. As we stated repeatedly at this stage of our business and the fact that we're mainly a service business still, but we're obviously moving away from that rapidly with a very strong plan for distributed products that there's a fair bit of variability and unpredictability quarter-to-quarter. In fourth quarter last year with a large drop in deal is an example of that. So I certainly wouldn't say that comparing fourth quarter last year to fourth quarter this year implies anything of significance.

And just one last question, if I can. Are there any additional like licensing deals that are maybe in the pipeline? Maybe you can't talk specifics, but are these things that we should anticipate down the road?

Yes, as I said, we believe this will be an important part of our business moving forward as New Inland Biolab is one legacy deal. We have not had the talent or the focus that we need to put on this on the ground here until recently, and we are in discussions with a number of other potential licensees. It may not be next quarter or the quarter after that. But depending on how things go, but we feel very confident that the use cases for [seminars], of which we now have thousands and thousands that we've created and are capable of distributing to others. The use cases for these in-life sciences contacts are fairly similar to the use cases for antibodies with some added use cases as well as the New England Bio deal exemplify. So yes, we are in discussions with some other licensees. I do believe over the next year that we will add some additional deals.

One moment for our next question, please. Our next question will come from Dan Brennan from Cowen.

Maybe just a few more on the fourth quarter and then we can go bigger picture. Just Shaun, I think you mentioned the guide reflects flat quarter-to-quarter on a raise. If you take the 93% to 98%, it implies $14.2 to $19.2 million for the fourth quarter, so that $16.7 million at the mid, and you just did $17.6 million in the raise. I just wanted to square the circle on the comment that the guide implies flattery. Is you just saying like within the range, although the midpoint is below? Maybe just give me some color on that first.

Yes. Hi Dan. Well, let me be clear. I wasn't trying to put out the exact number for Q4 because that's obviously why we're giving a range. But I just was trying to clarify exactly the question, put it at the low end. I just trying to clarify if you really look at the core assay service business component of that, that is relatively flattish. It could be a little bit more or less than that given the range, you're right. But I'm not specifically implying a number with that comment other than just that if you go to the low end, I think trying to point more towards the mid-range and that being relatively flattish as all I meant by that.

Got it. And then does the guidance assuming product business in the fourth quarter, I would assume, you've been getting $1 million or so roughly a quarter the kit business while in the full launches. Maybe you can clarify when the full launch is going to a (inaudible). I heard in the prepared remarks, but just give us some sense of what's expected in the fourth quarter for that.

Well, we're not specifically breaking out the product categories in the guide, but again, the guide is all-inclusive. So that's -- all of the core components with the exception of, again, that's the typical licensing revenue, which is primarily NEB that previously would have been recognized each quarter and historically, it's been $1 million to $2 million in the last year each quarter. That's not going to be recognized due to the new arrangement.

Dan, this is Roy. We had a successful beta program for kits. We do plan to add some more certified sites in the fourth quarter to that beta program and for full access to really kick off right at the end of the year. We do have a number of sites in the pipeline for that full access as well.

Got it. Okay. So you had basically Shaun – Thanks for that Roy. So basically, in the fourth quarter, you would have anticipated in the prior guide to have basically gotten $1 million or [$2] from this royalty in the fourth quarter and then you wind up getting a much, much bigger amount, obviously, with the upteal. But part of the fourth quarter, the prior way we thought about the fourth quarter, was that $1 million or $2 coming and now it's not going to come. Is that fair?

Yes. Certainly, at the last quarter before we signed the agreement, unless we all the proper accounting on it, yes, I would have anticipated the quarterly revenues from that to be analogous to what we've seen previously. So that is a change going forward for us, certainly from our previous expectations.

This is Roy. We're -- again, we're trying to be mindful of all of the context in the fourth quarter. The NEB revenues being obviously paid into this quarter instead of next quarter, the likelihood that some of our large biopharma customers are not going to rush to spin down their budgets in the fourth quarter. But I want to be clear that the reset and stabilization of our core SomaScan business, we believe, will continue into the fourth quarter.

Got it. And back at 3Q, when you were providing guidance and I think the way you articulated at the low end was very conservative. So basically, what you were seeing from pharma back then and you thought there was a conservative element to it, I guess, things just have gotten worse on the overall end markets? Or is there just a much bigger degree of conservatism that you're baking in, just trying to think through what transpired because I know in Q2, you guys had seen, obviously, this pause in pharma spending and I thought that you guys have tried to incorporate that pause persisting into the fourth quarter.

Yes, Dan, the second-quarter slowdown in contracting was fairly idiosyncratic. We're certainly not seeing a slowdown in contracting now. Things are moving along. I think we, like everybody else at the beginning of the year to this market would already be much better. It's just not. And so again, we're just trying to be, if not conservative pragmatic about the spinning behavior in this market in the fourth quarter. But we're not -- the supply chain issues that we saw earlier in the year have mostly aggregated in large part due to our proactive activities and contracts are moving along at the usual pace now. We're just again trying to be pragmatic about the prolongation of this tough market and the impact that it could have on our biopharma customers in the fourth quarter. It's really nothing more than that.

And what's happening on the academic front, is spending pretty consistent there? Or is there any choppiness just from the global macro?

Spending has been pretty consistent on the academic side and not surprising because most academic spending is driven by grants and the impact of the economy on grant funding usually is a couple of years in arrears. So based on what the federal government outlays for federal grant support program. So we really haven't seen much of a change there. And a significant percentage of our growth over the last year or 1.5 years has been adding more academic sites in addition to hormone customers as well.

Got it. Okay. Trying to think if there was one more I could go to here. And in terms of the ongoing licensing strategy. So obviously, this is a -- this royalty deal is certainly a notable one. I know Roy, you wanted to exit '22 with the view that you've got multiple drivers of your business. Obviously, this notable royalty deal is a big one. What's the pipeline look on that front in terms of additional licensing deals, whether before year-end or over the course of the next, say, 12 months.

Yes. We don't anticipate any large licensing deals before the end of the year, although we certainly aren't going to turn down if we get one over the finish line before the end of this fiscal year. We just hired our head of licensing this past March. He's really, I would say, just now coming fully up to speed as a small team working with them and has a number of conversations ongoing. While I don't see any large licensing deals before the end of this quarter, there could be some licensing deals signed in the next year. We have a lot of opportunities. Again, the use cases for some of the reagents in the life sciences context are large. And the conversations we're having now, span the spectrum of those use cases.

And maybe last one. I know we're not going to talk about '23 today, but the consensus models have revenues up 35% year-on-year. Obviously, you're talking about still pharma spending environment, having some pauses in it right now, any lead indicators about that lifting and as we exit '22 without giving numbers, how do you feel about the trajectory of the business going into '23?

We feel good about executing the business. Obviously, we can only control what we can control. We feel good about expanding into EMEA and APAC. I mentioned that we put 6 individuals into those regions this last quarter. Probably more important to note is that we hired the market leaders for both of those regions, which should accelerate our success in creating a full contingent of folks on the ground there. We're looking at some partnerships ex-U.S. as well.

And obviously, the large new customer growth that we've experienced over the last year will begin to bear fruit as those customers complete their first projects, and we bought the second and third larger projects, and we get more projects under each of those umbrellas. We certainly can't control the market context in 2023. It'd be great if we could. We can only control what we can control, the things that we can control, pitching out the growth of the commercial team, expanding our geographic reach putting our distributed solutions more effectively and more heavily into the market for all things we anticipate happening in 2023 in addition to beginning to hopefully capitalize or on the significant customer growth we've had over the past 18 months.

Got it. Okay. We'll [start again] (inaudible). Roy, thank you very much.

And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Roy Smythe for any closing remarks.

Great. Thank you, operator.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.