T2 Biosystems Inc (TTOO) 2015 Q4 法說會逐字稿

Greetings and welcome to the T2 Biosystems fourth-quarter 2015 year-end financial results conference call.

(Operator Instructions)

Also as a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Matt Clawson of Pure Communications. Thank you. You may begin.

Thank you very much. Good afternoon everyone. Thanks for joining us for T2 Biosystems' fourth-quarter and year-end results conference call.

On the call this afternoon to discuss results and operational milestones for the period ended December 31, 2015 are President and CEO, John McDonough; Chief Financial Officer, Moe Castonguay; and Chief Commercial Officer, David Harding. John and Moe will lead off the call with some prepared remarks, followed by a question-and-answer period.

I would like to remind everyone that comments made by Management and responses to questions today will include forward-looking statements. Those include statements related to T2 Biosystems' future financial and operating results, and plans for marketing and developing new products. Forward-looking statements are based on estimates and assumptions as of today, and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by those statements. Including the risks and uncertainties described in T2 Biosystems' filings with the SEC, the risk factors section in the registration statements on Forms S-1 and 10-K as updated from time to time, as well as other risks and uncertainties detailed in subsequent SEC filings.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. With that, I would like to turn the call over to John McDonough for his opening comments. Good afternoon, John.

Thank you, Matt, and good afternoon, everyone. Thank you for taking the time to join us on the call today.

As Matt said, joining us today for the first time is David Harding, who joined the Company as Chief Commercial Officer in November, and is already making a significant impact. David is arriving at an exciting time, with international launch activities underway, and the second product of a pipeline that is closing in on commercial viability. With all of that going on, we are grateful for David's expertise and his ability to develop a truly global vision and integrated commercial strategy. I won't force him to play a speaking role in his first quarter here, but I will feel free to pass along the tough questions to him during the Q&A.

On another note related to the executive team, I'd also like to announce that Michael Gibbs, who has been our in-house attorney, and a valuable member of the team, has been named Vice President and General Counsel. Mike has played a key role across the organization from private and public financings to strategic partnerships and contract negotiations, and we welcome him to the executive team with this well-deserved appointment.

Now, onto the business at hand. We had a productive fourth quarter.

I'm pleased to say that we continued to make substantial progress, in that, in our opinion, the hospital community through its adoption of our platform seems to be demonstrating its belief that time and sensitivity are indeed the critical factors in impacting the census crisis in hospitals. We are pleased with our progress on important commercial metrics, engaging the hospitals on our target list, presenting our technology and its value proposition, signing new hospitals, and now seeing the utilization commence, following system initiations at our first adopters.

Commercially, we closed out 2015 strongly with 11 new hospitals, including two hospital systems, delivering commitments in the fourth quarter for the adoption of our T2Dx diagnostic instrument, and our T2Candida rapid diagnostic test. That gave us 30 hospitals and hospital systems in all for the year, which had been our goal since we first began to talk to investors during our IPO road show in the summer of 2014. As we projected, the rate of hospital commitments grew throughout the year, with 10 in the first half, 9 in the third quarter, and 11 in the fourth quarter, for a total of 20 in the second half of 2015. We believe that momentum will continue to grow in 2016.

In the fourth quarter, two of the account wins were with large hospital systems that plan to utilize T2Candida, and up to 22 hospitals in one case, and up to 14 hospitals in the second case. This means that in total, our 30 closed accounts as of December 31, 2015 could roll-out testing in over 60 hospitals in the United States, far exceeding our expectations. We are excited about the reception we are receiving in the hospital community and the commercial momentum we have established.

We are right where we hoped we'd be, and anticipate that 2016 will be a banner year for us, with continued adoption and use of the T2Candida diagnostic panel in a growing number of hospitals, which should set a strong foundation for our expected launch of T2Bacteria in 2017.

As of the end of the year, nine of the hospitals have completed the installation and verification process. They were up and running, implementing our T2Candida diagnostic panel to test patients at high risk of sepsis, and generating revenue. That number includes three that went live in the fourth quarter, but we expect the pace at which hospitals are going live to improve as we go forward.

On average, hospitals are implementing T2Candida in three to six months after contract signing, which is consistent with our initial expectation. Most of the account closings in 2015 occurred in the third month of each quarter however, which is why only 9 of the 19 accounts closed as of September 30 were online by year-end. As hospitals implement our systems, and testing with T2Candida becomes more routine, it's important to note that we are building a growing annuity business related to T2Candida cartridge sales.

In the future, instrument replacement should become a predictable driver of future revenue, as cartridge utilization and revenue grow, and new products such as T2Bacteria are launched, that leverage the install base of instrument replacements. We continue to receive encouraging feedback from physicians and hospital administrators who are using our product, and seeing first-hand the value of our T2MR technology.

One physician who spoke at our recent sales meeting total us about the impact our products are already having on the healthcare of patients in the hospital itself. She indicated that they are saving roughly $500 per tested patient, due to the reduction in anti-fungal drug use alone. This means they are realizing a 2X return on their T2MR investment, purely from drug savings, not including any other savings such as those associated with reduced length of stay in the hospital for patients. This institution is currently compiling that data, and hopes to present at a major conference later this year.

We are of course compiling economic savings results of our own, and we'll also be encouraging others to present the fiscal benefits of adoption of T2Candida at conferences and industry forums whenever possible, as we move through 2016. Our goal is to create a steady stream of new evidence that demonstrates the extraordinary value of this technology. These savings are all accomplished while we help doctors and hospitals deliver improved health outcomes to patients.

In terms of the volumes and testing at the hospitals online, we are actively tracking to the use of our products. And while it's too early to identify consistent patterns, these initial volume ramps are obviously an important metric and revenue driver for us. The initial volumes are consistent with what we expected.

Our plan is to track these test volume numbers as they grow, and at some point as the year progresses, report what we see, in order to provide more clarity on how institutions come online, and how testing volumes ramp at hospitals. For now, everything is on track. Needless to say, the two contracts closed in Q4, with 22 and 14 hospitals associated with their network, could provide volumes significantly greater than a typical single hospital contract, so we'll provide a high level of support in all regards.

As of December 31, we had 15 direct sales reps on board in the United States. Our plan this year is to grow the sales team to 20 reps by the middle of 2016, and then to assess the potential scaling of the organization further, as we prepare for the launch of T2Bacteria, which I will discuss in just a moment.

Additionally, we plan to bring onboard two distributors to focus on certain European market opportunities in Q1, and plan to enter at least two additional European markets later this year. We're evaluating our go-to-market approach and expansion into other European regions, as we progress through the year.

The opportunity for T2Candida is significant in Europe, as the cost of anti-fungal drugs is up to 3 times greater than it is in the United States. There is also tremendous opportunity for T2Bacteria in our hemostasis products in Europe. We are expecting to close our first hospital accounts through distributors in the second half of this year.

I am very pleased to also report that we began patient enrollment in the T2Bacteria FDA pivotal trial in December, as planned. We expect to complete the trial in Q3, which would keep us on track with our goal of filing with the FDA this year, and receiving FDA clearance early next year, assuming a similar timeline is followed by the FDA as T2Candida.

We are building a powerful recurring revenue business model with T2Candida now, and we anticipate the hospitals that are implementing T2Candida to become a highly-attractive customer base for the adoption of each of our T2MR products, starting with T2Bacteria. Remember that the addition of T2Bacteria more than doubles our market opportunity and will run on the same T2Dx platform as T2Candida. With an expanded product set, we also will plan to expand our target market beyond the top 450 hospitals of the United States, which is our primary focus today with T2Candida.

T2HemoStat, our initial hemostasis product, is also on track to commence its FDA clinical trial in Q3, and it continues to draw a growing interest among trauma surgeons and other specialists facing the dual patient problems of bleeding and clotting in the aging baby boomer population, that is prone to blood thinning treatment regimens. As a reminder, T2MR is capable of detecting all of the key hemostasis parameters needed to measure platelet activity, fibrinogen, clotting time, fibrinolysis, and other key parameters, from a single blood sample in about five to 45 minutes.

This year, 41 million trauma patients are estimated to arrive in emergency rooms in the United States, and over 10 million of them to have symptoms of impaired hemostasis. Today, the diagnostics needed to assess the risk of these patients for clotting or bleeding are typically run on separate instrument platforms, and can take hours to produce a result. To save precious time, clinicians often have to make treatment decisions based only on what they see and on their experience, rather than using actual diagnostic data.

In other words, they are in a similar position to infectious disease doctors, who today are waiting for blood culture results, and have to make educated guesses on how to treat patients. Published data supports that mortality rates could be reduced by 50%, transfusions could be reduced by 50%, and significant costs could be saved if accurate and rapid diagnostics were available. We believe the initial market opportunity for screening trauma patients alone is about $500 million in the United States.

Finally, the T2Lyme project through a partnership with Canon US Life Sciences is also on track, and progressing towards an FDA clinical trial. We're jointly developing a diagnostic test panel that can rapidly detect Lyme disease, a potentially deadly bacterial infection caused by ticks. By applying T2MR to Lyme Disease similarly to what we are doing with sepsis, we believe we can have a significant impact on patient care, while saving the healthcare system substantial time and money.

The current testing standards have low clinical sensitivity, with data that suggests that 90% of patients never get diagnosed. More than 360,000 people are affected by Lyme Disease each year according to the CDC, and 3.4 million tests are run annually.

Across all of our product pipeline applications, I think it's important to reiterate that time to diagnosis is not our only key differentiator. Three to five hours for a sepsis test is a significant advantage over competitors that all need blood cultures, which take days. But we're not just about early detection. We also offer distinct advantages in terms of sensitivity and accuracy.

As we announced at the Leerink conference last week, recent head-to-head studies of the detection of Candida demonstrated that the T2Candida panel has a sensitivity of 96.4%, up from the 91.1% in our FDA clinical trial. This compares to 60% for blood culture, which means that 40% of patients with candidemia and candidiasis are missed by blood culture. All of the products that we are aware of that are in the market or are in development are entirely based on using a positive blood culture, which means they do not address at all the 40% of patients who are deemed negative by blood culture.

The head-to-head studies are significant, in that they have allowed us to change our labeling and market the T2Candida panel with a claim of superior sensitivity as compared to blood culture for the detection of candidemia and invasive candidiasis. This is a very big deal.

As we continue to demonstrate the widening gap between our technology and those blood culture-based technologies currently in use, we expect that our tests will grow in usage, and become a standard of care in each of the diagnostic categories that we are pursuing.

Now, I'd like to turn the call over to our CFO, Moe Castonguay, who will give you the financial details of the quarter, and our outlook for the coming period. Moe?

Thanks, John. As John indicated, we hit our goal of 30 hospital commitments for the adoption of T2Candida by the end of 2015. It is notable that more than 18 months ago, when we were in our IPO process, months before we had FDA approval, we had a reasonably accurate vision of how this first year would roll out commercially. At the end of the year, nine hospitals were up and running, and generating revenue to us.

Total revenue for the fourth quarter was $1.01 million, which consisted of $343,000 of product revenue, and $668,000 of research revenue. Product revenue for the quarter was primarily derived from the sale of consumable diagnostic tests. Total revenue for the full year was $2.8 million, made up of $599,000 of product revenue, and $2.2 million of research revenue. Product revenue included sales of T2Dx instruments and consumable diagnostic tests to the various hospitals.

Total operating expenses for the fourth quarter increased to $11.6 million, as we continued to increase our investment in our sales force, and increased the R&D cost on new applications that featured T2MR. The quarter's operating expenses were lower than anticipated, primarily due to lower personnel-related costs. For the year, operating expenses were $44.4 million.

The net loss applicable to common shareholders for the fourth quarter was $12 million, or $0.56 per share, compared to $9.1 million or $0.45 per share in the fourth quarter of 2014. The increase was primarily due to increased operating expenses, and was also impacted by the weighted average increase in common shares outstanding, due to the December secondary public offering of our common stock.

For the full year 2015, the net loss applicable to common shareholders was $45.3 million, or $2.21 per share, compared to $36 million or $4.15 per share. After adjustment for accretion of redeemable convertible preferred stock prior to our August 2014 initial public offering.

The Company's balance sheet as of December 31, 2015 showed total cash and cash equivalents of $73.7 million. That balance was bolstered by the December -- in December by a secondary public offering of common stock, raising net proceeds of $33.26 million. We also drew down the remaining $10 million from our line of credit in December.

Now looking forward, in order to best project our performance in the coming year, it's helpful to look at 2015 and understand how we fared against our base modeling assumption. The answer is, right on track. Let's look at data to provide some general modeling guidance, and then we will provide more specific guidance for both Q1 and for the full year of 2016.

We set a goal to secure commitments from 30 hospitals, and we came in right on target. The 30 hospitals include two hospital systems that could roll out testing to 22 hospitals in one system, and 14 in the other.

We stated that we expected the average test price for T2Candida would be between $200 and $250 per test. We are right in the range, as expected.

We expected that 60% or more of the initial 30 contracts would likely occur in the second half of 2015. Again, about two-thirds came in after June 30.

We assumed it could take from three to six months for each facility to get up and running from contract signing through validation and to first patient testing. And thus far, the average is within our expected range.

We anticipated that after systems got up and running it could then take an additional six months to 12 months for a customer to ramp to testing all of their high-risk patients, as they most likely will start by testing a segment of their high-risk patient population. On that statistic, all the hospitals that went live did so in the last four months of 2015, and it is too early to tell with any certainty how we are measuring up. But we certainly don't see anything indicating that it isn't a reasonable assumption.

Once a hospital goes live, there a number of factors that affect the amount and timing of testing, and product revenue. A couple of these factors are worth noting as we head into 2016 for modeling purposes. While our quarterly contract totals remained on pace throughout the year, a majority of contracts were signed in the latter half of the quarter. In fact, about two-thirds of contracts were signed in the last month of the quarter, in 2015. While we have put a focus on trying to smooth out that pattern, we may continue to see that dynamic.

Based on industry averages, we had estimated that 20% of the contracts would be instrument purchases with the remaining coming in as reagent rentals, in year one, 90% of placements were reagent rentals. A bit higher than we anticipated, so that fact did have a small impact on initial customer revenue totals, but the lower initial revenue is of course recaptured over time as the utilization of the reagent rental model is more lucrative to us, due to the higher revenue per test.

Now for specific values for the coming year and quarter. In the coming year, we anticipate doubling the placement rate, and ending the year with 90 commitments, translating to 60 additional hospitals and hospital systems in 2016. Due to seasonal contracting cycles, we expect commitments in the first quarter of 2016 to be relatively flat with our closed commitment volume in Q4 of 2015.

Moving to revenue, the Company anticipates research revenue remaining relatively unchanged from the fourth quarter of 2015 to the first quarter of 2016. We also anticipate higher product revenue in our first quarter of 2016 than was realized in the fourth quarter of 2015, primarily as a result of more hospitals going live, and other hospitals starting to ramp the number of patients tested. We expect six to seven accounts to go live in the first quarter, and begin testing patients.

The Company anticipates total first-quarter operating expenses to be between $13 million and $13.4 million, including approximately $1.9 million in non-cash expenses that consist primarily of depreciation and stock compensation expenses. Virtually all increases in operating expenses are associated with investments in building our sales and commercial capabilities, both in and outside the United States, new product development, the clinical trials associated with new products, and building the infrastructure required to support the scale of business we expect to realize in 2017 and beyond.

We expect weighted average shares for the first quarter of 2016 to be 24.2 million, and for the full-year we are forecasting 24.7 million. This reflects the shares issued in the secondary stock offering in December 2015, as well as projected stock option exercises and shares sold to employees through the Employee Stock Purchase Plan.

With that, I'll turn the call back over to John.

Thank you, Moe.

First of all regarding our guidance, I want to reiterate that our focus for 2016 has always been primarily two-fold. First, broadening the adoption of our T2MR and T2Candida technologies across the most active institutions in the United States. And second, successfully completing the clinical trials necessary to get T2Bacteria onto the market.

Nothing has changed regarding our guidance. While our revenue ramp is right on track, and is expected to grow nicely during the year, staying on plan, it is the growing foundation of installed and active users, combined with the ability to leverage it with a second powerful product, T2Bacteria, that we expect will generate the more significant revenue trajectory.

Now let me summarize the key takeaways for the quarter and the year. We achieved our goal of 30 hospitals committing to our technology in 2015. These 30 hospital commitments represent over 60 hospitals in the United States. Our products are being implemented in the time frames we expected, and our customers are seeing the impact in patient care and economic savings as they come online. We are very excited to be right on track commercially and financially, and to hear of the proof of concept, and the positive changes our T2MR technology is already having in hospitals.

We believe we are contributing to saving lives, and already demonstrating a strong ROI right now. We know about the positives, because we are hearing from the hospitals who are using our technology. We believe 2016 will be an important year for sharing the great benefits our technology is having in the hospital market, and is offering the people who are actually being tested with our technology.

We see our commercial ramp of hospitals increasing in 2016, especially as our sales force has expanded to 15, and each new rep is getting up to full speed more rapidly as they benefit from our collective experience in the marketplace. We plan to continue to grow the sales force to 20 people by the middle of 2016, and we have two international distributors coming on board that should further expand our footprint.

We expect to see a continued flow of publications related to T2Candida, T2Bacteria, and T2HemoStat, with a focus on customer economic savings from the utilization of T2Candida. It is through recent publications that we've been able to expand our FDA label in Q4 to say that T2Candida provides superior sensitivity as compared to blood culture for the detection of candidemia and invasive candidiasis.

We are enrolling patients for the T2Bacteria FDA pivotal trial, and we are on track for a potential commercial launch early next year. The customer base we are building today with T2Candida will be fully leveraged, as T2Bacteria comes online.

As I said earlier, we believe today more than ever that our T2MR technology will prove to be the next big breakthrough in medical diagnostics. It can detect single cells 25 to 30 times faster than any other diagnostic, and with greater accuracy. That enables the very rapid treatment of patients, meaning we help a hospital get the right patient on the right drug as quickly as possible. This is what the market refers to as precision medicine, often thought of as the future of medicine, but something we at T2 Biosystems are delivering today.

With that, I'd like to turn the call over to the operator for questions. Operator?

(Operator Instructions)

Bryan Brokmeier from Cantor Fitzgerald.

Could you provide some color on your hospital pipeline, and in doing so, could you provide some details on how you derive at the 60 new contracted hospitals in 2016?

You bet, Bryan. Thanks very much for the question. So in terms of the pipeline, it remains strong and robust. We've grown our sales force now to 15 reps, generally speaking, each of them are targeting 20 to 30 accounts in their territory, and we're in discussion with most of them. As we have built our target in terms of account closes for 2016, we really rolled over the metrics that we actually realized in 2015, in terms of how long it takes for us to come on board and when they start closing accounts, and what they ramp up to.

And as we have reiterated in the past and we can reiterate on this call, our goal has been to see our reps grow and be able to close on average six accounts per year, once they are up and through the initial learning curve, which is typically six to nine months. By hitting those 30 commitments by the end of 2015, which of course translates into over 60 hospitals, because of the 22 hospital system and 14 hospital system that we closed in Q4, but when you focus on the 30 commitments, indeed we have proved that we were averaging that six target accounts per effective sales rep, which is what we've typically seen in fast-growing and successful diagnostic companies.

So, are those -- the other hospitals in that 22 and 14 hospital systems, are those hospitals definitely going to be adopting, or are they still -- do they each individually have to make a decision?

That's a great question, and there are two different answers for both of those questions. In the 22 hospital system, in fact it's in a large city situation where the hospital is spread out. They do all of their testing for all of the hospitals in a single lab, and indeed, their plan is to roll it out to virtually all, and I believe all of the 22 hospitals in that particular system. And they use a courier service as they do with blood culture and other diagnostics to bring the blood samples to that central location. So we do believe that they will roll out in the 22.

In the 14 hospital system, they typically deploy the technology at the hospitals themselves. And we believe we will at least get into most of those systems, but that is still a little bit to be determined, in terms of how they would exactly roll that out.

Okay. And last quarter you had indicated that you had touched the majority of the 450 hospitals. Just simple math, 15 reps at 20 to 30 hospitals at the high end, gets you to the total of 450. So where do you stand now, in terms of the number of 450 hospitals? Have you touched them all or are you at the 25 times 15 range?

There is no doubt that we've quote touched them all, but in terms of how many, we try to track it how many have we visited, and there, we have probably at this point, visited in the order of 75% of those accounts.

Okay, thanks a lot.

Isaac Ro from Goldman Sachs.

I wanted to think a little bit about 2016, with regards to the path from getting from your current contracts to the year-end goal, and was curious if you could maybe, just piecing together some of the stuff you gave us, and maybe deconstruct it on a couple of items. I'm curious if, how much of it is tied to upselling existing customers, such as that large hospital you mentioned, versus just benefiting from the broader sales force, versus the demand that would be associated with sepsis. Just wondering if you took those three items, and feel free to add others that I might be missing, but rank order them, or give us a sense of how much those items will drive the adoption curve this year.

That's a really hard question so I'm going to let David Harding take that one.

Thank you, John, this is David. So I would say that the vast majority of the new hospitals that we plan on closing would come from the 450 list originally. That is, they would be brand-new accounts. There are certainly some hospitals that we have contracted with, that have more nationalized networks that we would be planning to introduce once the flagship site goes live, and shows really good results. But I would say the vast majority would be brand-new accounts that we would be penetrating over the course of the year.

Okay and then for sepsis, can you give us a qualitative sense of how important that is to catalyzing the next wave of customers, either in terms of if you were to tranche out that top 450, is the 25% that you haven't touched yet, is it because those are customers that you just haven't been able to reach, or maybe is it customers you think would need to see sepsis, the full bacterial panel rather, in order to be engaged? I'm just curious how important a swing factor you think that will be?

Yes, so in terms of the other 25%, and here I'm a little bit of giving you an opinion instead of having all the data, but I think if I were to parse it, probably 10% of the 25% are just in remote locations that we haven't gotten to yet with the sales reps. And when you get to the other 15%, for the most part, it's being driven by reps who just came on board in December, and we just haven't gotten out to them all yet. I would think that in the territories where we have reps, we will get a visit at virtually every account.

Now, to get to your answer though, or what I think you're trying to get at, which is how big a deal was the bacteria panel, it's a big deal. There's no doubt about it, right? Statistically as we see it, about 15% of the accounts we visit have told us, hey, we are really interested, wildly interested in your technology, but why don't you come back what you have the bacteria panel, there's a higher incident rate when you combine candida and bacteria, and/or they really want to roll the testing out in one wave instead of one wave with Candida, and then a second wave with the bacteria panel.

The other thing that I'd point out though, in terms of the impact of the bacteria panel, it will help us with the top 450, but perhaps more profoundly, it will allow us to go way beyond the top 450. We'd expect to be targeting somewhere in the order of the top 1,500 and top 2,000 hospitals, when the bacteria program goes online. Now we can go beyond the top 450 with candida, and in fact we have.

Many of the 30 commitments we have in place are with hospitals that are in the top 450, but [were better to show] and they're highly interested or they have a big candida program, and then we close those accounts, but there is many accounts you get shut out on. They may only be seeing 10 or 20 candida cases year, and they just don't want to bring in a whole new platform for that purpose. That is again the accounts that are outside of the top 450. But with the bacteria panel, that game changes significantly, in terms of the number of patients who are positive, and hence our ability to target a much bigger hospital-base, other than what we are targeting today.

Super helpful. Maybe one last one if I could, which had to do with your comments on Europe. I don't think we got an update on your plans for distributor partnerships in the first half. I'm wondering where you guys in that process, and Moe, if you could help us with how to think about the margin impact of distribution, distributor relationships, as those ramp up? Thank you.

So in terms of Europe, our initial approach is through distributors, in most of the cases, the first two cases, we are getting exclusive rights to a defined territory, and it's a territory with firms that, for the most part, have been already in the sepsis space and already have the relationships with the accounts. And we treat them as an extension, and in fact they are an extension of our US sales force.

We bring them in, we train them, and they ultimately will be the ones doing the sale, they will close the sale, they will install and service that account, and will really serve as a level three technical resource behind the scenes. And of course, support them as much as we can in their sales efforts and marketing efforts. Moe?

With respect to the normal margin relationship, it would be like any other international customer. You would expect them to have sufficient funds to be able to provide a discount to their customers, and make a good margin, as well. That said, we will be investing heavily with them initially, to make sure they are launched properly.

Generally speaking, distributors are getting somewhere on the order of a 30% discount off of the US price, so that there is margin for them. I will point out, because this is a question we have been asked a few times, and I know Moe covered this. In the United States, we have been holding super strong on pricing between $200 and $250 a test. We expect to see at least that in the first markets that we are entering in Europe.

Got it, thanks for all the color. Appreciate it.

Dan Leonard from Leerink Partners.

This is Kevin Chen in for Dan. You mentioned that you are expecting about 90% reagent rentals. Could you give more color on that trend, and are you seeing a difference in the verification periods in the capital placements in the reagent rentals?

I will take the first part. No, we're not seeing any difference at all in terms of verification and validation of a reagent rental versus capital. They're averaging right in the three to six month window that we expected, and we're hopeful that trends down over time, but we will see results, and we are learning how to help customers to do that quicker, but then there's these new things, regulations being followed at labs, that probably keeps it right in that three to six month range despite our efforts to do better.

And in terms of the 90/10, we just see more interest in reagent rental. The 80/ 20 was our best estimate coming out of the gate. The only thing that I will point out is when you've got 30 commitments, and you are at 90/10, the end there is still small. There could be fluctuations, it doesn't take but one or two instrument sales and all of a sudden you are back at 80/20, right? But I think 90/10 is the right expectation going forward.

Sure, that makes sense. Last quarter you highlighted an acute care hospital that had a very quick sales cycle, less than 90 days I think. I was hoping you could give us an update on this account, and are you seeing a faster pace in the verification process, as well?

No, they are in the verification process. We expect that particular account to be right in that three to six month range. Everything is proceeding well, but we don't see that as being faster, just because it is an acute care hospital.

But to follow-up on your question, there are definitely accounts that go faster. We've had accounts go less than three months. We have one that might actually be on a six-week cycle, as we speak. But then you find other accounts that are closer to that six-month range because they want to do more verification, or they have got to get their IT department involved in order to get everything logged into the system, and they don't want to do that until they complete verification, so you are going to see variances. The average of three to six months, I think seems to be holding up really well.

Great, thank you.

Paul Knight from Janney Montgomery Scott.

This is Bill March on for Paul. Maybe just piggybacking off of that, could you give us any update on accounts that have come online post Q4 close, in terms of utilizing, if you've seen some of those from Q3 and Q4 adopting?

Yes I think we will keep our comments to Q4, and we will comment on Q1 when we get to that call, but nothing surprising going on. Everything is proceeding on course, I will say that.

Got you. Maybe just talking a little bit more about bacteria, could you remind us again, maybe some of the timelines we should be thinking about, as we head into 2016, with the clinical trial getting underway?

Yes. So with the patient collection underway, we are quite hopeful, obviously it's always dependent upon the clinical trial sites following an enrollment cadence consistent with what you expect. But assuming that goes as expected, we believe we can complete that clinical trial in Q3. And depending on when we complete the clinical trial in Q3, probably takes in the order of six weeks to close everything up and get to an FDA submission, probably more likely that happens in Q4, based on the cadence we are seeing out of the gate.

Great, and then maybe just one last one on the sales force now up to 15, and working with some distributors in Europe. Do you think that sales stay flat for a little bit, or do you think you need to continue to add to the team?

Yes, so we plan to get up to 20 reps by the middle of the year. And then we will reevaluate, and we might even reevaluate quicker than that, and a lot of it will be analyzing the productivity trends, and also just trying to prepare ourselves for the T2Bacteria launch, and really assessing what the size of the sales organization should be, as we launch into what will be a bigger targeted customer base, in terms of the number of hospitals that they will call on.

In terms of revenue, revenue as we have been saying, it can be up, and it can be down you, you sell one instrument, you don't sell one instrument in a quarter with these numbers. Accounts come online, at the beginning of the quarter, at the end of the quarter, the numbers are just really low, so it's tough to show that cadence. We do think Q1 revenue will be higher than Q4. I think as we get to perhaps Q3, maybe Q2, but probably more likely Q3, we should start to see some trends in revenue that makes it a little bit, ultimately becomes a somewhat predictable revenue model. But as you get into getting picked off, and the numbers are low, it can be up and down a little bit, but I think we start to see some interesting trends in predictability starting to emerge in the Q3 timeframe.

Great, thanks for your help.

Mark Massaro from Canaccord Genuity.

Thanks for taking the question. John, I wanted to ask you, with the guidance for 90 hospitals for 2016, I wanted to pick your brain to see if, at some point in the future, you might start guiding to number of units, as opposed to number of hospital contracts? The question is, especially -- I'm asking especially given the two large hospital systems that you added in Q4, I just want to get a sense for how many systems per hospital you think are likely, as you look out one to two years?

Yes, Mark, that's a great question, and yes, I do anticipate that we will make that shift probably when revenue predictability becomes part of what is going on. Perhaps as early as the second half of this year. Of course, what you really want to see is what is the average revenue per instrument today, the numbers vary enough that probably if you are doing any analysis like that, and looking at committed hospitals and people adopting the technology and what is the opportunity, we think it's just a better way of looking at it in the short run. But I think when you get to the midterm, certainly 2017, maybe even the second half of 2016, you want to start looking at how many instruments are placed where and what kind of productivity are you getting per box.

Okay, great. And would love to hear your thoughts on what percentage of your 30 contracts today are in systems that are using both your candida test as well as a post-blood culture solution, and as you look out a year, do you think this mix, or the percentage mix of folks who are using both will trend roughly flat, or do you think there is an opportunity for folks that are using post-blood culture to cease using post-blood culture and migrate to your platform totally?

Yes, so of course, every account that is doing blood culture is doing post-blood culture, right? I think what you are talking about is the PPR, and mass-spec and more of those rapid post blood culture analysis, and because we are targeting the big accounts, most of them are doing mass spec, really, and that's, in the big accounts, that's what you really see. Sometimes, you'll see some other boxes for some others but at almost all of them, they are using mass spec in some way, shape, or form.

I think as you get to mid and smaller hospitals, you might see some differences, because the capital costs of mass spec might cost that particular solution out. I think that over time, and as we build out more and more panels, we are definitely going to have an impact on blood culture volume. We are aware of one account in Q4 that actually, they were deciding whether to expand what they're doing in blood culture or bring in T2Candida, and it wasn't because they were really competing for one versus the other, but there was a budget question of how many things can we do, we are only going to do one, and which one is going to have a bigger impact, and they brought in T2Candida.

That's the only situation I'm aware of where there was that head to head concern, and to be honest with you, we found out about that after the fact, not in the middle of it. So I think blood culture is going to continue to be around, for a long time probably. And I think the post-blood culture products are going to continue to bring value, because they do speed up speciation, and we know every hour of delayed therapy makes a huge difference. That's driven the adoption of mass spec for that purpose. And those products will be used for a long time, I think.

Okay, great. And just last question for me, you mentioned that the research revenue is likely to be comparable in Q1 versus Q4. Is that a reasonable expectation beyond Q1? In other words, roughly flat, or how do you see research revenue trending?

I think that's a reasonable assumption, Mark, and if it became something different than that, we would probably give an update on one of these calls.

Okay, great. Thanks very much.

Steve Brozak from WBB.

Most of the questions have been asked and answered, but there is one thing I would like to come back to. The labs that you are dealing with right now, since you are looking at changing by orders of magnitude how diagnostics work, turnaround times, and accuracy, what is the feedback that you are getting from them directly, as they have come on board, and as they are currently coming on board? Are there any positives? Obviously that would be the first thing I would be looking for, but are there also any other comments they have, we would like to see this or this. And if you can answer that, I've got one follow-up, please.

Yes, I'll be honest with you, that the real highlight of 2015, it's the accounts that are coming online, and it's the impact that we are having. And the excitement of the users who are rolling the tests out, and most importantly, we are seeing patients being detected that are missed. There was this story I heard just this morning of one account that's live and they're testing patients, and the patient was on an anti-fungal and they thought the infection had cleared because the blood culture came back negative, and T2Candida came back positive because blood cultures missed it, because the presence of anti-fungals prevents growth, so that patient is going to stay on the anti-fungal drug, that may have been pulled from that drug.

We've had several cases where patients are on PICC lines, and the blood culture comes positive, because often times they will draw the blood culture from the line, and they will draw the T2Candida from a different source, and in that particular case, both of these -- several of those cases, there's actually been several at this point, under normal circumstances, the culture comes back positive, they pull the line on the patient, which is really bad for the patient. The patient's on a line because they need help, they need assistance, nutrition, et cetera. But they do it because oftentimes the line is the source of the infection. It's called source control in the hospitals, and in all of these cases the T2Candida came back negative, where the blood culture was positive, saving the patient from pulling the line.

We've had many cases of just positive detections, which of course is the most important thing that we are doing, but there's one hospital account that approached us, and they said we are reducing anti-fungal use, my biggest challenge is that all my physicians aren't aware that we are offering the test in our hospital. Can you help us? Yes we can help you. We've got marketing materials, some of the sales people we are hiring, their job is just that, to go down and educate physicians and hospitals that are closed accounts.

We know that is challenge number two. You get the account closed, they're all dressed up, they send out their e-mail, here's this test, here's some data. People are pretty busy, not all the clinicians that should be ordering tests are going to order a test. That's why we have always believed there is a ramp in a testing. Because even when you roll it out and say we are going to test everyone in the ICU, you're probably not going to test everyone in the ICU unless all the clinicians, all the critical care docs are aware of it.

It's been an awesome reception frankly, as the accounts come online. And the most heartening thing for us, I joke, but it really is true, it's not a joke, this technology really works. We really do detect patients that are being missed. We really can have an impact.

You actually started to hit on the follow-up. Given the prevalence of nosocomial infections, and everything that is taking place, are you starting to get feedback that you are going to start to see a change in the standard of care, or in the treatment protocols that you start to see with these patients? Or with the way physicians practice medicine?

I shouldn't say that, because the patients are obviously going to be the ones that the physicians decide on. Are you looking at that? Are you thinking about that, and what color can you provide on that? And I will hop off. Thank you.

We really should change the standard of care. The standard of care is terrible. It takes too long and you're missing 40% or more of the patients that are positive.

I think it's way too early. I wish I could be on this call saying we are becoming the standard of care. I don't think that would be an accurate assessment, although we are changing the way patients are being treated in the hospitals, for the segment of patients that are being treated.

So at some level, there is a standard that is starting to shift in a small way in the accounts where we have gone live. We have even heard on two occasions, wow, we have to test patients with this product. It would be malpractice if we didn't, right? And that's when you really get to standard of care.

But it is about the risk of not testing, but it's really more of a statement about the impact that this product can have if you do test patients. Yes, we watch that one really closely. Yes, we believe that will happen, but it's really too early to make that kind of declaration. Hopefully in the future we can, and we will.

Great, look forward to that declaration. I will hop off. Thank you.

Bryan Brokmeier from Cantor Fitzgerald.

How do hospitals that choose to purchase the instrument most differ from those that choose the reagent rental model?

That's a great question, Bryan. I get asked that a lot. Among just the two of us here on the line, I wish I could tell you that there is this deep economic analysis that is run at hospitals. Some do that, but that is pretty rare. You would think if you or I were doing this, you would think what's cost of the instrument, how many tests am I going to run, which one is economically the driver? That's really not what happens.

Some institutions have rules that say we will only buy equipment, and we won't do reagent rentals. Then they just buy equipment. They don't even want to talk about a reagent rental. That is rare, but that does happen. There are other hospitals where the lab director will say just give me a reagent rental contract because the capital process is too difficult in this institution. So we just want a reagent rental, it's easier for us to bring it in, and if that changes in the future, maybe we'll purchase the instrument in the future. That is the typical situation. It's really more about the internal process of a hospital that typically is driving the reagent rental.

Of the 15 that you installed in 2015, were any of those instrument sales, or were they all reagent rentals?

Great question. I know there was at least one instrument sale in there, maybe two. David is saying two.

Okay, thanks a lot.

If there are no further questions, I would turn it back over to management for any closing remarks.

You bet. Hopefully, you got a good sense from this call today that we are really excited about the developments in the business on all fronts. Most importantly, hospitals going online with T2Candida, continued adoption from the hospital base. And really exciting, to the end of the T2Bacteria clinical trial, which we know is going to take us to a completely different level from a commercial standpoint, hopefully in early 2017. And as I have said to many of you, keep your eye on hemostasis, because we have a blockbuster we believe, that is going to change the care of trauma patients, in just the same way we are doing with T2Bacteria and T2Candida. In summary, we just have an awesome detection technology, and we are just getting started, and look forward to reporting back in the future. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines. Have a nice evening.