T2 Biosystems Inc (TTOO) 2016 Q2 法說會逐字稿

Greetings, and welcome to the T2 Biosystems 2016 second-quarter six-month financial results conference call.

(Operator Instructions)

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

Thank you, [Shay]. Good afternoon, everyone.

Thanks for joining us for T2 Biosystems' 2016 second-quarter and six months results conference call. On the call this afternoon to discuss results and operational milestones for the period ended June 30, 2016, are President and CEO John McDonough; Chief Financial Officer Shawn Lynch; and Chief Commercial Officer David Harding. The Executive Team 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 developing and marketing 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' annual report on Form 10-K filed with the SEC on March 9, 2016. The Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law.

With that, I'd like to turn the call over to CEO John McDonough for his opening comments. Good afternoon, John.

Thanks, Matt, and good afternoon, everyone. Thank you for joining us on the call.

Recognizing that we spoke only a few weeks ago, you may not anticipate much in terms of new content today; but, in fact, we are very glad that you have joined us to get our update, which hopefully you will find both helpful and encouraging.

Today, as we look forward to the second half of 2016, we have never been more confident in the value of our unique T2MR technology and the investment technology it holds in a new paradigm for patient care. We believe this is a game-changing technology for the treatment of sepsis that already benefits many types of hospitals and health care systems in a modest but growing number of countries.

We've had a busy and eventful six months, filled with both successes and challenges that we believe are typical at an early-stage IDD Company in the first phases of a product launch. Selling into a challenging hospital environment, working to scale our Company at home and internationally, supporting a growing list of customers, pushing forward on important clinical development and trial programs, internally and with partners -- all significant tasks, but all necessary as we build the foundation for the growth that we feel lies ahead.

We entered the second half of this year with an active and robust sales pipeline of approximately 400 prospects, with approximately 5% of those in the late stages of the sales cycle. In the first half of 2016, we closed 11 new hospitals and hospital systems, which are or will be adopting T2Candida. Six of those accounts closed during the second quarter, four domestically and two internationally.

In the US, our new customers in the second quarter included a 17-hospital network, and another four hospital network, meaning that the six contracts closed represent 25 hospitals. The two international commitments are with large and prestigious medical centers.

As we have expanded our commercial footprint and are expanding our penetration beyond the initial contract win, we have discussed also expanding the metrics that we report to you regarding our sales progress. Starting today, we will be reporting on those additional metrics.

In total, we have now closed contracts with a total of 41 hospitals and hospital networks in the United States and Europe -- 36 in the United States and five in Europe. The 36 contracts in the United States include contracts with large hospital networks as we have reported each quarter. Including those hospitals in those hospital networks, T2Candida is or is expected to be used to test patients at high-risk of sepsis in approximately 111 US hospitals in total.

We estimate that those 111 hospitals each year see over 260,000 symptomatic high-risk patients, who could be tested with T2Candida, and in the future, over 335,000 patients who could be tested with T2Bacteria. These high-risk patients that we now have access to represent almost 4% of the total estimated market of 6.75 million high-risk patients with T2Candida.

Said differently, if our existing customer base of 111 US hospitals were to test all of their high-risk patients with T2Candida, we would expect to generate over $50 million in annual sales, and would estimate that the number could more than double with the introduction of T2Bacteria.

As we move forward and gain more experience in the coming quarters, we will be reporting on what percentage of that market universe we are penetrating, and how it grows over time. Remember, this is designed to be a recurring-revenue business model. I think we can all agree that the opportunity in our existing customer base is already quite substantial.

Hopefully you can understand our excitement with our commercial progress since the launch of T2Candida about 18 months ago, as we have developed a critical customer base that includes a robust number of institutions, with thousands of systematic patients at high risk for sepsis. As we gain critical mass, we recognize that tracking closed contracts alone does not provide the full and accurate picture of our current captive opportunity, and that these additional statistics can better allow our investors to understand the value of the customer base as it continues to grow.

We will continue to report on contracts closed each quarter. But we will also identify the number of hospitals associated with those contracts, and perhaps more importantly, the estimated number of symptomatic high-risk patients seen at those hospitals. That number is expected to drive future revenue growth more so than the number of contracts closed.

Since signing our first European distributors in the first quarter, we've been pleased with the speed of commercial progress and hospital adoption. I'm going to have David Harding, our Chief Commercial Officer, talk in more detail about that market in a few moments. It's an interesting and very positive story for us.

At home, we're getting more skilled at selling into the hospital market place. It's a market that in many ways is resistant to change and disruption, which is what we are selling. Our success requires the collaboration of several constituents within each organization, who need to come together in order to sign a commitment and launch successfully.

We knew what we were getting into, and it helps that we have a growing body of data that demonstrates that we offer better science, better technology, and better patient outcome at a lower cost. Our T2MR technology can detect the pathogens that cause sepsis in a matter of hours rather than days, saving thousands of dollars in the process.

We believe we are marching towards a tipping point in the market when adoption will accelerate and sales cycles will be shorter. Customer success stories will likely drive this next wave of growth, and the introduction of T2Bacteria will be a major driver, as well.

Our enthusiasm is buoyed almost daily by the stories we hear first-hand from hospitals as they test patients. We are continuing to hear stories of decreased patient mortality, and cost savings even greater than we've discussed with you. We saw a wave of customer testimonials at the ASM conference in June, and understand more customers will be presenting data at ID Week in October. We look forward to sharing that data with you on our next call.

We talked in July about issues we encountered in the ramp of our manufacturing processes, which we now believe are largely behind us. I am proud of the fact that we responded quickly to a higher than normal invalid test result rate that some customers were experiencing with T2Candida.

We worked quickly and very closely with our customers, and alleviated the problem, getting products back on customer shelves just a few business days after our call in July. The early data we are getting back from the field indicates we have resolved the invalid response issue of our actions, and in certain cases it has even become a positive, helping us build closer bonds with our pioneering customers, who appreciated our transparency and proactive approach in facing and solving the issue.

While the temporary halt in shipments did impact deliveries in June and July, and therefore short-term revenue, I can quite honestly say I don't believe we lost any business, or sustained any serious long-term negative commercial impact from this. Product was replaced as fast as it was pulled back, and all customers replenished with the inventory they needed in about two weeks.

On the clinical front, we have no further update on the progress of the T2Bacteria clinical trial. We remain on track to file with the FDA by mid-2017, and we are working hard to see if we can shorten this time line. We are excited about this very important product, and are pleased with the product performance to date.

We're increasing our focus more actively on partnership for new product development activities, such as our work with Canada and US life sciences related to our lyme disease diagnostic channel in development, and our recently announced collaboration with Bayer related to our hemostasis platform.

To that end, and with an additional goal of closely monitoring expenses, we plan to focus our hemostasis efforts on partnering with companies such as Bayer, and perhaps even more broadly with other companies that are currently in the hemostasis diagnostic market. We are seeing a lot of interest and activity among potential collaborators. Rather than move forward alone, we will hold off on entering an FDA clinical trial for hemostasis this year, as these partnering efforts continue to develop.

These partnerships, along with others on the drawing board, validate our technology. They open up new applications for T2MR, and may even serve as a great secondary source of capital.

We continue to expand our sales force, which now totals 23 in the United States. We will likely keep the size of the sales force in the current state for the end of this year, and then we'll consider expansion in 2017. We will continue to emphasize customer success stories in all of our marketing and sales tactics, and continue to evolve our sales strategies for approaching new accounts.

Speaking of success stories, I'd like to now bring in David Harding to tell you about our very exciting international effort. We have constructed a very savvy distribution network, and have already reached our full-year commitment target only halfway through the year. David?

Thanks very much, John, and good afternoon, everyone.

As John indicated, we are very encouraged about our early progress in Europe. Through the first half of the year, we have secured contracts with four important European institutions in France, Italy, Spain, and also in Denmark, that are led by some of the top leaders in infectious diseases and microbiology. This pace of contracts and installations is going faster than we had originally anticipated.

In part, this is driven by clinical leaders who are anxious to use T2's pioneering technology to improve patient care. But there is an economic underpinning to the up-take, which is the disproportionately high cost of certain anti-fungal drugs in Europe. In fact, this popular class of anti-fungal drugs can be up to three to four times more expensive than in the United States. European hospitals are very cost conscious, and many of them see great potential value in being able to use the T2Candida panel to rapidly remove patients from unnecessary and very expensive empiric anti-fungal therapy.

Another reason for our early traction in Europe is that we have been able to partner with a set of distributors that have deep experience and relationship in the microbiology and infectious diseases space. We are in the process of securing additional distributor relationships over the second half of the year, and anticipate having coverage across most of western Europe by the end of the year. We believe the market opportunity in Europe represents approximately 3 million symptomatic, high-risk patients. We look forward to updating you on our progress in these important regions as we continue to add distribution capacity, and learn more about the drivers of adoption, and ultimately utilization in these institutions.

Now I'll hand it back over to John.

Thanks, David.

As you've heard me say several times, it is very difficult to predict the timing of closing dates for hospital contracts, particularly when we're introducing a truly novel and disruptive technology. Based on our analysis of our sales funnel activity, and the number of institutions that are in the later stages of the sales cycle, we believe we can achieve the goal of closing 45 commitments and contracts this year, although we fully understand the uncertainty in that number given the difficulty in predicting the timing of when contracts will close.

We are targeting both hospitals and hospital systems, which can provide more access to high-risk patients than the contract numbers alone would suggest. To that end, more importantly, we will also target increasing the number of patients that's high-risk of sepsis in our customer base from an estimated 260,000 as of June 30 to 360,000 or more by year end, an overall increase of the available patient population of over 35%.

Before I turn the call over to Shawn to discuss our second-quarter results, I'd like to remind investors of the importance of this install base as it relates to our razor/razor blade business model. As we build the customer base, customers first go through the installation and verification process that averages three to six months. Once they begin testing patients, the initial volumes are typically small, but we expect volumes to grow over time, causing revenues to ramp in a more significant way. When that occurs, it can drive steady recurring revenue with growing margins.

We believe it will grow exponentially with the introduction of new products for our T2DX diagnostic instruments. We are confident the introduction of T2Bacteria targeted for late next year will help drive both utilization and adoption rates. The need for rapid detection of bacterial sepsis is similar to Candida sepsis, but there does appear to be an even broader market appreciation for bacterial sepsis.

Now I'd like to turn the call over to our CFO Shawn Lynch to discuss our second-quarter financial results. Shawn?

Thanks, John. Total revenue for the second quarter was approximately $990,000, which consisted of $151,000 in product revenue, primarily from consumable diagnostic tests, and $839,000 in research revenue. The impact of product revenue from the temporary hold in shipments in June from confirmed order placements was approximately $200,000.

Total operating expenses for the second quarter were $12.5 million, reflecting increased investment in our sales force, and commercialization of our products. The expense impact from the field action related to T2Candida invalid results was approximately $60,000. The net loss applicable to common shareholders for the second quarter was $14.1 million, or a $0.58 loss per share, compared to $11 million, or a $0.54 loss per share, in the second quarter of 2015.

Our balance sheet as of June 30, 2016, remains strong, reflecting total cash and cash equivalents of $50.2 million, with an additional $5.5 million available under our equipment credit lease facility.

Now for the outlook for the remainder of 2016. We believe we can hit 45 new customer commitments and contracts globally for the year given our current pipeline, although we recognize the difficulties in predicting the timing of when contracts close create some risk. Anticipated placements in the second half are targeted to add approximately 100,000 new symptomatic patients at high risk for sepsis annually.

We believe that the more relevant target for us is increasing the patient population that we have access to, to testing with T2Candida now and T2Bacteria in the future, as that population is likely to be a more accurate future predictor of testing volumes and future revenue. To date, roughly 90% of instrument placements were under a reagent rental model, and that number remains a good estimate of the expected pattern going forward.

Research revenue in Q3 and Q4 of 2016 is expected to be comparable to what was realized in the second quarter of 2016. We anticipate total third-quarter operating expenses to be between $12.3 million and $12.8 million, including approximately 2 million in non-cash expenses that consist primarily of depreciation and stock compensation expense.

We expect net interest and expense to be approximately $900,000 in the third quarter. We anticipate the total number of common shares outstanding will be approximately 24.5 million in the third quarter, and for the full year we're forecasting weighted average shares outstanding of 24.4 million.

With that, I would like to turn the call back over to John for some closing remarks.

Sepsis is one of the leading causes of death in the United States, and the most expensive hospital-treated condition, costing the US health care system alone an estimated over $20 billion a year and growing. We have a technology platform that can detect these dangerous pathogens faster than anything else on the market.

While not pleased with the rate of contracts closed in the first half, we are pleased with the quality of the accounts closed, the potential scale of these opportunities, and the status of our sales pipeline, especially at the late stages of the sales cycle.

We are confident that our new Executive Team members, which include Joanne Spadoro, who brings years of operational experience from her time at Roche Diagnostics and other leading diagnostic companies, and Shawn Lynch, who brings extensive financial experience to the team from his time at GE and PerkinElmer. We believe we have a strong team in place, and we're making significant operational and commercial progress.

Finally, we're increasing our focus more actively on partnerships for new product development activities, such as our work with Canada and US life sciences, and our recently announced collaboration with Bayer, which may have a multiplying effect on what is already an enormous opportunity. These partnerships, along with others on the drawing board, validate our technology. They could open up new applications for T2MR, and may even serve as a great secondary source of capital. We have an immense opportunity right in front of us that we're reminded of it every day by the impact our products can have on the lives of patients at over 100 hospitals around the world.

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

(Operator Instructions)

Our first question comes from Bryan Brokmeier from Cantor Fitzgerald.

Hi. Good afternoon. John, were any of the six completed installations instant purchases, or were they all reagent rentals?

All of the six accounts -- the four accounts in the US that we closed in Q2 were all reagent rentals. The two European accounts, when those instruments are installed, they are purchases because we sell the instruments directly to the distributor who, in turn, we believe is placing them under reagent rental with account. But that's financially supported by the distributor.

But that's the six completed installations you're talking about?

No. Those would be the six accounts that we closed during the second quarter. Of the six that got in -- that went live in Q2, we believe they were all reagent rentals.

Okay. And you said that you talked about the target of 45 contracts of the full year, but there is some risk around hitting that. Can you provide any range or what sort of variance could there be in hitting that 45, or maybe even exceeding 45?

Well, we're not going to try to provide a range around that because we'd rather just stick with our goal being to get to the 45 number. But likely it will probably be some number that's a little more or hopefully no more than a little less, right, although last year we targeted 30 and hit 30. I do think, and I would suggest, that the more important goal is getting access to the number of patients. Not all contracts are the same.

As we've stated in the past and going back to when we initially became a public company, we anticipated that a typical hospital among the top 450 would provide access to about 5,000 systematic high-risk patients per year. And if you do the math on the 260 million high-risk patients that are a part of the current 36 US contracts, that actually shows the importance of the hospital networks we're closing.

Because each contract, on average, has actually been providing us with access to about 7,200, actually over 7,200 high-risk patients. So once you look at that, if you really try to look at future revenue modeling and the like, the number of patients that ultimately we have access to testing is more important than the contract.

Having said that, we still believe that we can get to the 45 number. But more importantly, we feel very good about adding another 100,000 high-risk patients to the overall patient population that will be available to us by the end of the year.

Okay. Thanks a lot.

You bet.

Thank you. Our next question comes from Isaac Ro from Goldman Sachs.

The first question is on the nature of your pipeline. I was curious on how you were defining potential customers that you said are in late stages. Curious if you have a methodology you can share with us in terms of what constitutes late-stage versus early stage?

Yes. Hi, Isaac. When we're in the late-stage, there are very -- there's very different factors that go into that. But it's almost -- it always would mean that there's a champion for support. Typically, you would have both infectious disease and the lab support in all likelihood. They have a proposal on hand. They probably have brought off on economics. And, David, I don't know if there is anything else you would add to that. They probably even have contracts --

They have a contract in hand, yes.

It doesn't mean it's in legal yet, but it might be in legal. Some of it would be probably working, some of it probably would not.

Okay. That's helpful. And then on the pipeline, you guys talked a lot about the time line for the bacterial panel. But I don't think we spent a lot of time talking about from -- what exactly will go into it. I know you guys probably thought carefully about how to make that commercially compelling. But curious if you could give us a little color on the type of content you want to put into the bacterial panel so that it accelerates the demand for your technology?

Yes. Isaac, the key to the content of that panel is if you -- but we look at this and the way to look at it is think about symptomatic high-risk patients. So if you're a high-risk patient, let's just say a patient who's in the intensive care unit despite the fever, what typically happens is that, that patient is immediately put on broad spectrum antibiotic drug.

They, in typical institutions, the broad spectrum antibiotic drugs, which are cheap, they're probably about $20 a day, they will cover about 60% of the bacterial infections that a patient might have. It doesn't cover 40% and it, of course, doesn't cover Candida, the five fungal infections. So the panel for T2Bacteria includes things such as staph aureus, Klebsiella pneumonia and E. coli and a number of others that are typically not covered by broad spectrum antibiotic drug because the real impact that we can have on our septic station is to change the therapeutic decision within that first, let's call it, six-hour window to get them on the right drug.

Because we know mortality rates can be cut in half or more and the cost savings are tremendous with the reductions in the length of stay in the ICU, as well as reduction in the length of stay in the hospital when you can treat patients with the right targeted drug more quickly. So the good news here is that our T2Bacteria will cover almost 95% of the bacterial infections a patient might have that are not covered by broad spectrum antibiotic drugs.

And what that means is that a combination of T2Candida and T2Bacteria, along with the use of broad spectrum antibiotics, should mean that 95% of sepsis patients are put on the right drugs within the first six hours. And that is totally game-changing and could have just a tremendous impact in terms of the very high mortality rate, 30% in total for sepsis, and the really high cost to treat.

That's very helpful. Thanks so much.

You bet.

Thank you. Our next question comes from Steve Brozak from WBB Securities.

Hey, good afternoon, gents.

One tactical question. Are you -- because I know that you talked about getting product or cartridges back out. Are you complete in terms of your cartridge swap out to the field? And I'm sure you would have told us if there were any clients that basically had any questions. But I'm sure that you've handled it. So do you want to give us any color on that, and I've a question about your technology?

You bet, Steve. It is complete. It was completed extraordinarily fast. Virtually, all customers were back with the product they needed the week after we spoke on the phone. Virtually everyone was testing patients a week later. Virtually everybody was restocked within two weeks and then one holder over after that fact. And sure, yes, a lot of customers had questions, but they had questions before we took the field action. And to our knowledge, virtually all of those questions have been answered to the satisfaction of the hospital and the people who ask those question.

Okay. And obviously, that's -- no one likes to see a recall, but candidly, I guess you guys handed it -- handled it as well as you could ask for. But looking at that, because obviously, these hospitals are your first line of consumers. I remember watching and looking at something that you had presented about layering where you were looking at layering. So, for instance, all of these adopters for the T2Candida products are going to be the same adopters for the bacterial products and for the hemostat products.

So are you looking at that kind of etysis where each of these people that are the adopters would be the quick adopters for the next product line, and how does that play as far as the Europeans are concerned? Because obviously, you had mentioned the differential in terms of fungal products and how much they -- anti-fungal products and how much they cost? So are you looking at it in a similar way there as well? And one follow-up after that.

Yes. So this is David. On the European piece, for sure, we are looking at it in a very similar way. I don't think there will be the same cost differential in anti-bacterial drugs as there are with the anti-fungals. But nevertheless, the need still remains for a rapid bacterial diagnostic. So we believe that the same institutions that are adopting T2Candida now will be the early adopters for T2Bacteria as well.

And in the US, I think it's safe to say it will be very rare account that CHLOE that would not be highly interested in what we're doing with T2Bacteria. That would be a very rare event.

Okay. So thanks for making sure that was clear. Looking at -- you had mentioned something on the sepsis side. In looking at the quarter million sepsis cases that take place in the United States, what, by the corresponding -- because I -- we did some research and basically came out and said that for every hour of delay, there was about an 8% mortality -- increase in mortality rate for patient treatment.

So in looking at how this -- are you seeing any kind of anecdotal feedback from the clinician saying, you know what? This is different. Or we're seeing something that is different in terms of how we're going to change the practice of medicine? What are your thoughts there, and I'll hop back in the queue after that?

Yes. So I would say a couple things, Steve. So, yes, I mean, virtually, every time a customer is adopting our product, you hear things such as break-through, game-changing, words of that ilk. In terms of the impact, direct protection from blood, eliminating the need for blood culture, which doesn't just have a multi-day delay in diagnosis, but this is 40%, 50% of the infections entirely, where our sensitivity has been consistently been necessarily 90% or better.

So we hear that game changing story with high frequency. And most excitingly, we're seeing it start to play itself out. And we're hearing stories, anecdotal stories at this point, about the impact certainly we're having on cops. But more importantly, the impact we're having on patient care, mortality and the like. And we think those stories as they come into the market more and more, and they are.

And we believe that will continue at an ideal rate where it will be a game changer in terms of getting this adoption rate to an inflection point. The other thing that I think is worth pointing out, which is not generally understood, of course, the most Important thing that the technology enables is the reduction in morality rate.

But the other thing that was demonstrated in our IMS publication, IMS Healthcare publication about 18 months ago is that the cost is death very high for sepsis patients, but the hospitalization cost where patients can die is about 2.7 times greater than those who survive. That's important in terms of adoption. It really is. I mean, I'd like to say that exclusively reductions in mortality will drive adoption.

They will. But you need a couple of the cost savings certainly in the environment we're in. The reason why there's a cost of death for sepsis patients is quite high is the patients who don't survive. They spend a lot of time in the hospital, a lot of time in the ICU. Unfortunately, this isn't suffering that is dealt with eally quickly in terms of the patient.

Well, look, obviously, I look forward to what happens in the next quarter in terms of adoption, but obviously, the technology is going to keep growing. I look forward to the updates in the future. Thank you.

Thank you.

Thank you. Our next question comes from Steve Beuchaw from Morgan Stanley.

Good afternoon, guys. This is [Liza] on for Steve. Just a quick question on better understanding the partnership in hemostasis. So as we think about that partnership, I'm guessing it would be -- we would be expecting kind of more companion diagnostic clinical trials in the -- beyond this year. And then should we think about that moderating development expenditures for the hemostasis products in your R&D?

Yes. Hi Liza. So I think the way you should think about that is that, first of all, we have a world-class pharmaceutical company that worked with this products about six to 12 months and how doing some collaboration would work for us. And they saw information vis-a-vis, us being able to measure the impact, hemostasis impact on patient samples and perhaps even be able to measure their drug effects that they bring, the technology and health and they're using it more extensively.

Yes, we think there is a real opportunity for this to move towards companion diagnostics. And ultimately, if those clinical trials were to include that, that would probably be done by Bayer and (inaudible) because that would be relative to their drug. But if we get to that point, it would certainly represent a very extensive opportunity for us for Bayer and, of course, there are many other pharmaceutical companies that might be quite interested in what's going on here, too.

Great. And then just one follow-up. I noticed a little bump this quarter in the research revenue and expectations for that to continue. I don't know if you could provide any kind of color on that or maybe through the balance of the year what you're thinking about?

Well, we're expecting the second half to be pretty flat with the first half. And I don't think there was anything special going on there in terms of the bump. Shawn, anything to add to that?

No, I think that's correct.

Great. Thanks so much.

Thank you. Our next question comes from Paul Knight from Janney Montgomery.

Hi, John. Can you talk to -- about the consumable stream a little bit? It looks like your sales, your consumable sales per instrument was down a lot. Was it -- did the recall impact half of the quarter or was it two weeks? It just seems like your sales per instrument was down. Can you talk to that?

Yes. Hi, Paul. This is Shawn. So why don't I start first with kind of the data. So we had -- our revenue impact was about $200,000. And that was from confirmed orders that we did not recognize revenue on as a result of the recall. I think there were -- so those are the facts. I think are there any other situations related to the recall? I'll let John comment.

Yes. Certainly, we stopped taking orders and shipping the last week in June. And so there likely would have been other orders we would have shipped on that would have increased that number further given that we didn't think the orders was really tough to quantify what that might be.

And then back to bacteria, the number of published papers that -- we haven't seen a lot of flow there. Is there -- why is that?

Well, we have published data on limited protection for many of the species that are a part of the panel. Generally speaking, the next significant publication you're going to see is the FDA trial. It's generally not wise to be doing preclinical studies and publications and the like when you're in a FDA clinical trial. So I think that's normal course of activity.

But certainly, clinical data will be important as we launch the product. You can expect to see a posted presentation at ID Week coming up in October. But generally speaking, we're --

Were you were expecting commercialization of bacteria from a month ago, John?

No, not at all. We're very excited about it. We expect it to be filing with the FDA in the middle of 2017. Hopefully, that puts us in a position. Obviously we can't say when the FDA will clear or something, but it would suggest sometime in the second half of the year we could get FDA clearance and the market. And we're excited to get out there and do that, and we're doing everything we can do to see if there's we anything can do to pull that figure in a little bit.

Okay. Thanks.

You bet. Thanks, Paul.

(Operator Instructions)

Our next question comes from Mark Massaro from Canaccord Genuity.

Hey, guys. Thanks for taking the question. John, can you comment on how many customers are in the final stages at this time, and have you seen any variation?

So what we have said, we've got about 400 customers in the pipeline, 5% in the late stages, about 5% in the late stages. So that's the math about that points to some 20%-ish kind of number. And the only variation we typically see is the number goes up, not down, unless an account closes and it's not in the late stages anymore.

But it's pretty rare for us to get into the late stages and have an account go away. It definitely can happen that it stays in the late stages longer than you want. Because we've seen that happens, which gets to the predictability of timing when these contracts close.

Okay. Great. So that's pretty stable. Obviously, we just passed the month of July. Can you comment on hospital activity in the month of July given vacations and whether or not it's a little harder to do business in the summer months relative to maybe the Fall or the Winter?

Typically, we generally saw July to be just fine. Our experience would suggest August is the month that is slower and then September goes like gangbusters. But I think August is usually -- it seems like the industry has more sense to August being August, and that's a bigger challenge than the month of July.

Great. And can you also comment on where the invalid rates are trending now? Obviously, they spiked quite a bit and you resumed shipping. I'd just be curious to know how those rates have come down.

From what we can tell -- and, of course, we don't get to see what's going on every day with a (inaudible) only within a couple of weeks. But by all accounts, the invalid rates are back to where they were before all of this started. And I don't think we're aware of any customer raising a question about invalid rates since we back to the old manufacturing process.

Okay. Great. And then another follow-up. In the one to two weeks that you were not shipping, was there any change in behavior at some of your customer sites? Maybe, in other words, what were they doing not running your Candida test?

Well, it's interesting. We were able to resolve it quick enough that I think there's only like one or two accounts that may have gone a day or two without having products available. But keep in mind, we stopped shipping on, I think it was around June 27. We resumed -- we announced that we were pulling product back from the field on July 8, and we had product back in both customer's hands where they needed it by July 13 and we had a weekend in between.

So we skated through that one. There were definitely some customers who got down to no inventory that we had cartridges arriving the day they were running out of inventory. So that was a fairly seamless process. And I will say because the question got asked earlier. By all accounts, we didn't have much of a customer reaction to this. We really didn't. We definitely had a couple calling up and, what am I going to do? I was in the middle of verification.

So we had a couple of questions like that. But this was somewhat of the normal course activity for customers. This is not super unusual. We hope this is super unusual for us. You don't want to be doing this. But we were cautious. We were quick. And the customers responded generally speaking as this being a non-event.

Okay. Great. And just my final question, obviously, the Bayer collaboration is super early days. But what are some of the next items that we can monitor that would be significant in the development of the panel?

Of the hemostasis panel, specifically?

Yes. Yes.

I think to keep an eye out for over the common quarters would be more partnerships, because we're really focusing on additional Bayer partnerships or perhaps even a more extensive partnership with somebody that can take that product forward from a commercial standpoint. So we've had a lot of discussion going on from that standpoint.

There's a tremendous amount of value in this technology as it relates to the hemostasis market, and we think we have the product at the stage where these partnerships can be quite attractive for us in terms of bringing the product forward and driving towards commercialization.

Great. Thank you.

You bet. Thanks.

Thank you. At this time, we have no further questions. I will turn the call back over to John McDonough for closing comments.

Well, thank you all for dialing in today. We look forward to reporting back on third quarter results after the conclusion of the third quarter. And if people have additional questions, we'll certainly be around. While the commercial markets may be slow in August, we'll be working in August and working hard to build additional shareholder value and drive towards the introduction of T2Bacteria and the further commercialization of T2Candida. Thank you all for dialing in.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.