T2 Biosystems Inc (TTOO) 2014 Q4 法說會逐字稿

Greetings and welcome to the T2 Biosystems 2014 fourth quarter and year-end financial results call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Matt Clawson, of Pure Communications. Thank you, Mr. Clawson. You may begin.

Thank you, Operator. Good afternoon, everyone, and thanks for joining us for the T2 Biosystems 2014 fourth quarter and year-end results call. On the call this afternoon to discuss results and operational milestones for the fourth quarter and full-year ended December 31, 2014, our President and CEO, John McDonough; Chief Financial Officer, Marc Jones; and Dr. Tom Lowery, Chief Scientific Officer. John and Marc will begin the call with some prepared remarks, followed by a question-and-answer period.

I'd like to remind everyone that comments made by management in response 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 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 factor section in the registration statement on Form S1, 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 unless it's required by law.

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

Thank you, Matt. Good afternoon, everyone. Thank you for taking the time to join us for our call today. 2014 was a transformative year at T2 Biosystems, and the fourth quarter activity indicated strong momentum as we enter 2015.

As a reminder, our first commercial products, the T2Dx instrument and the T2Candida diagnostic panel, were cleared by the FDA in September and commercial activities commenced shortly thereafter. While we expect the sales process and sales cycle to take 6 to 12 months to complete initially, our selling thesis to hospitals is straightforward. T2Candida identifies the clinically relevant species of Candida, a fungal pathogen known to cause sepsis. Candida infections has the highest mortality rate of all sepsis pathogens, averaging 40%. Published literature has demonstrated that the initiation of targeted therapy to infected patients within 12 hours can reduce the mortality rate to 11% and save approximately $30,000 per patient driven by a reduction of the length of stay in the hospital in the intensive care unit.

T2Candida runs on the T2Dx instrument, a fully automated instrument that processes a blood sample and provides results in three to five hours. We know of no other system either on the market or in clinical trials that can test for these pathogens in blood, and achieve clinically relevant results without culturing the sample; a process that can take days in most cases. We're also not aware of any technology available that could achieve the clinically relevant sensitivity that would be required to avoid the need for blood culture. Following the FDA clearance, which we understand occurred in record time, marketing activities ramped and our commercial team was activated. We grew the direct sales team to seven professionals in November, and we expect to add three or more additional sales representatives to the team over the next 60 to 90 days.

As word of the technology is spreading, we believe that we're attracting some of the best sales professionals in the industry. We plan to grow the sales force to approximately 15 by 2015. The sales team is targeting the top 450 hospitals in the United States in terms of volume of high-risk patients. The top 450 hospitals represent about one-third of the estimated $1.3 billion T2Candida market opportunity in the United States. As of today, we're engaged at some level with approximately 25% of the hospitals on the target list, and we've been encouraged with the response and progress coming from those initial interactions.

As we indicated during the IPO, our goal is to make placements in 30 or so of these high-volume hospitals by the end of this year. Our plan is to work very closely with our initial customers, providing comprehensive support and implementing the platform while we learn how to best streamline the adoption and integration process within each hospital. It is notable that our discussions with initial customer targets have been met with enthusiasm and a strong stated desire, among many accounts, to be among the first to implement T2Candida. There's a strong belief that our products can save lives and there's confirmation that the implementation of our products will drive significant cost savings within these hospitals.

To date, nine hospitals have completed an economic analysis based on that individual hospital and all of those analyses have confirmed that there'll be a strong return on investment when our product is adopted. As we gain knowledge through the initial implementations and the programs that result in the fastest and greatest outcomes, we plan to replicate that business model to accelerate the size and scale of our customer base to drive significant revenue and growth.

It is important to note that on January 13 the clinical investigators involved in our FDA clinical trial published the data from the study in Clinical Infectious Diseases, a tier 1 publication and probably the most read by the infectious disease community. In addition to restating the data from our clinical trial that demonstrated 91.1% overall sensitivity and 99.4% overall specificity, the publication cited several patient cases where T2Candida likely detected patients positive for a Candida infection that were missed by blood culture. In one case described in the paper, T2Candida detected a Candida infection that blood culture missed in 12 successive tests. Seven days after the T2Candida result was obtained, physicians performed an invasive procedure to obtain a tissue culture which proved that the T2Candida result accurately identified a case of intra-abdominal Candidiasis.

This paper demonstrates that the value of T2Candida goes beyond our ability to detect in three to five hours, what blood culture-based diagnostics take two to six or more days, that we can detect infections that can be completely missed by blood culture. The publication of this data has been extremely helpful and important to the hospitals we are speaking with regarding adoption.

I say the key take-aways from our first quarter commercial activity are: strong receptivity in the market, probably better than we've anticipated; excellent progress within our target hospital group; a deliberate and thoughtful process of adoption, as we anticipated; and a great deal of enthusiasm among those hospitals that are currently in the contracting process.

I'll turn the call over to Marc Jones, for a quick rundown of the financial results and a summary of our outlook for the key metrics. I will wrap up our remarks with some color on our recent strategic announcement and how we view additional opportunities outside of our core business. Marc?

Thanks, John. As John indicated, we made excellent progress in our fourth quarter in terms of our milestones and infrastructure build. The fourth quarter and full-year results reflected investment of resources commensurate with those efforts, but those costs were well in line with anticipated levels and we are confident that we have established a disciplined cost conscious culture and will continue to manage to spend well.

Through the fourth quarter we generated revenue primarily from research and development agreements and government grants and have not generated any revenue from the sale of products. In the 2014 fourth quarter and full year we recorded $119,000 of research revenue for both periods which primarily consisted of revenue-related to feasibility studies and collaboration efforts with third parties. Total operating expenses for the 2014 fourth quarter and full year were $9 million and $30.8 million respectively compared to $5.7 million and $20 million for the 2013 periods. The increases in operating expense were mainly associated with the Direct 2 pivotal clinical trial and other regulatory support and activity. Research and development activities for additional applications of T2MR, expansion of marketing programs, build out of the US commercial infrastructure, and increases in share base compensation charges and expenses related to being a public company.

The net loss for the 2014 fourth quarter $9.1 million or $0.45 loss per share, compared to $8.3 million after adjustments for accretion of redeemable convertible preferred stock, or a $5.89 loss per share for the 2013 fourth quarter. The increased loss was principally due to the increased operating expenses which I just covered.

For 2014, the net loss after adjustments for accretion of redeemable convertible preferred stock was $36 million or $4.15 loss per share, compared to a net loss of $27.5 million or $19.72 loss per share for 2013. Loss per share calculations for each of the periods reported were impacted by the overall increase in common shares outstanding, resulting from our August 7, 2014, initial public offering. Specifically, for the fourth quarter of 2014 which was the first full quarter that included the conversion of the preferred shares and issuance of the net common shares and the IPO, we had 20 million weighted shares outstanding. For the 2014 full year we had 8.7 million weighted average shares outstanding.

The Company's balance sheet as of December 31, 2014, had total cash and cash equivalents of $73.8 million, which included $19.7 million in proceeds; net of deferred financing costs; and two draws on the July 11, 2014, debt facility; and approximately $58.1 million in net proceeds from the August 6, 2014, initial public offering. In addition to the cash on the balance sheet, we are able to draw an additional $10 million from our debt facilities through June 30, 2015.

Before I turn the call back to John for his final comments, I'd like to reiterate the outlook John laid out in our Q3 call. We anticipate the ramp of placements this year will be weighted to the second half of the year as our sales force is small and our selling efforts couldn't commence until we received FDA clearance. We expect that 60% or more of the initial 30 contracts will likely occur in the second half of 2014. When we close the contract with the hospital, we anticipate it will take three to six months to install and verify the performance of the T2DX instrument. This is completely consistent with the timeframe realized by other diagnostic platforms when they are initially installed. We anticipate that it could take an additional 6 to 12 months for a customer to ramp the testing of their high-risk patients, as they most likely will start by testing a segment of the high risk patient population. And we estimate that the average annual revenue per hospital could be as much as $1 million among the top 450 hospital accounts if they were to test all of their high-risk patients.

As you model our expenses going forward we anticipate total Q1 operating expenses to grow in the range of 30% over Q4, largely resulting from the ongoing impact of commercialization investments we made in the fourth quarter of 2014; the calendar timing of certain R&D and marketing program expenses in Q1 of 2015; and incremental expenses related to the development collaboration with Canon. We anticipate approximately $850,000 in non-cash expenses, primarily depreciation in stock compensation, during that period, and we expect only marginal growth in expenses from Q2 to Q4 of 2015. Additionally, through our partnership with Canon and other research development projects, we expect to book over $200,000 in partner revenue in Q1.

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

Great. Thanks, Marc. Before we turn it over for Q&A, I'd like to spend a few moments discussing our recently announced strategic news. As you may have seen, earlier this month we announced we entered in to a multi-year strategic agreement with Canon US Life Sciences. We will be jointly developing a diagnostic test panel that can rapidly detect Lyme disease. If you're not aware, Lyme disease is a bacterial infection that is spread by ticks and typically caused by three different bacteria species. If left untreated, Lyme disease can cause chronic joint inflammation, neurological disorders, and cognitive defects. The CDC estimates that more than 350,000 people are affected by Lyme disease each year, but the number of diagnosed cases is less than a tenth of that due to underreporting and poor diagnostic protocol and test.

Importantly, about 3.4 million tests are run for Lyme disease each year. Those tests include serology, PCR, and blood culture, which have low sensitivity and take approximately two to three weeks to derive results. Canon and T2 Biosystems see significant opportunity to apply T2MR in much the same way we are with our sepsis product. By detecting the specific bacterial species directly in whole blood in three to five hours and limit detection as low as one colony form of unit per mL, there is the potential to significantly impact the health and well-being of patients by enabling targeted species-specific therapy earlier which may also take significant costs out of the healthcare system.

Reimbursement structures are already in place, so we estimate that the market opportunity at roughly $700 million of the United States. The deal with Canon provided $2 million up front in additional milestone payments that could total $8.5 million. We will retain exclusive worldwide commercialization rights of any products developed out of the collaboration and, if commercialized, we will pay Canon royalty payments. We expect to commence this project shortly and are hopeful that we can enter an FDA clinical trial in less than three years. Canon is a world-class company and is very keen on additional life science programs, so we'll continue to explore ways to work together on other programs.

In addition to Canon, we continue to see a growing level of interest from third parties who are interested in working with us to develop new applications based on the T2MR platform. We'll continue to be highly selective in this process but see collaborations as one way to pursue the many application opportunities for T2MR without having to do it all ourself. We'll continue to report on these opportunities as they move from feasibility and research to full scale development projects when appropriate.

Shifting to our internal pipeline, we continue to make progress on the development of our next two products. T2Bacteria focuses on detecting bacterial targets associated with sepsis and T2HemoStat, an instrument and diagnostic panel, that will develop rapid critical hemostasis measurement initially targeting the screening of trauma patients. These development efforts are on track with the timelines we discussed during the IPO with T2Bacteria on track to enter an FDA pivotal trial in the second half of this year, and T2HemoStat on track to enter an FDA pivotal trial in the first half of 2016. We estimate that our total addressable market, including T2Candida, T2Bacteria, T2HemoStat, and now T2Lyme is over $3.7 billion.

That concludes our update on the period, but I want to leave you with this thought. There's a clear and urgent need for fast and accurate sepsis diagnostic panels, that was demonstrated by the FDA's efficient clearance process. The new data, included in the publication in Clinical Infectious Diseases, and is now finding out what the positive reaction and interest we are receiving in the marketplace. We are pleased with the results from the early stages of our commercial launch of T2DX and T2Candida, and are working diligently with the medical community to deliver our diagnostic panel to hospitals, physicians, and patients. And we are very encouraged with their initial response.

With that, I'll turn the call over to the operator for questions. Operator.

Thank you.

We will now be conducting a question and answer session.

(Operator instructions)

Isaac Ro with Goldman Sachs.

Good afternoon. Thank you.

I want to start off with a question regarding the selling cycle for the technology. Just curious if you have an update for us in terms of what you learned regarding the time it takes to close; the types of decision makers that you're meeting with; and just in general if you had any surprises regarding where the early interest is showing up, whether it be the high-end hospitals that you referenced or some of the small to mid sized. Any big surprises along any of those metrics?

Hello, Isaac. How are you doing?

No, we really have not had any surprises on the selling cycle. The initial accounts are all within the top 450 hospitals, as anticipated. As I mentioned, we're now actively engaged surprisingly with about one-quarter of all of those accounts who are actively engaged in the sales pipeline. All indications are supporting the thesis that we're looking at 6- to 12-month sales cycles.

The decision makers in the processes are following what we expected. We start our discussions typically with thorough infectious disease, sometimes through critical care or transplant, but almost always infectious disease. We then go to the microbiology lab director. Sometimes that order gets reversed, but it's not typical. And virtually every time we get actively engaged in these accounts, they're moving forward -- some faster than others of course.

We've gone through a number of the economic analyses that are needed to support proposals and closes. We're most excited about that because it's confirmed based on the real data coming out of those hospitals that there's a very, very strong return on investment based on their own data and beliefs through the adoption of our technology. And so we feel as good as you can at this stage in the process for where we're at.

And, again, I'd just confirm the cycle is moving as we've expected' but the number of accounts in the pipeline is greater than we expected.

Great.

And just a followup on pricing for Candida. You have offered a range in the past and talked a little bit about the difference between range of rental versus outright sale. And so just curious, given all those things, an update on how you're thinking about ASPs for Candida.

No change there; and in my mind, that's really good news. We're seeing strong confirmation that that pricing -- again our unit one price is north of [$250]. With volume commitments, we go lower than that. We have not seen any surprises on pricing, and the economic models are supporting the pricing that we put forward.

Okay, great. Thanks so much. Stay warm up there.

We're trying.

Bryan Kipp, Janney Capital Markets.

Thanks for taking the questions.

John, I guess to start here, you've cited all the positives, 25% of the top 450 you're having ongoing conversations. Where are the pushbacks, if any? I think you cited microbiologists sometimes (audio difficulties). I know there's a lot of (technical difficulty). Are you seeing any other areas that potentially were hurdles that you didn't expect initially?

No, Bryan, we really haven't seen any hurdles that are different than what we expected. I would say confirming what we expected, sometimes going through the economic model can take time. In fact, if you look at the 6- to 12-month sales cycle, probably if the accounts are on the shorter end of that, it's going to be because they get through that element of the process in a few weeks as opposed to a few months. And the issue there is simply one of getting access to the data within the hospital for how many positive patients they're seeing a year and what antifungal drugs they're using on what percentage of their patients.

Not surprisingly, many hospitals just don't have ready access to that information. So it's a bit of a Where's Waldo trying to find that information. Every time we've gone through, we've been able to get through that; get the data; and demonstrate a really strong ROI.

All right.

I guess a followup. You continue to cite or state that you think you'll penetrate about 30 accounts or 30 instrument placements by year end. But I'm thinking in context. If you're having ongoing conversations, typical 6- to 12-month conversion cycle, with 25% of the top 450, that in conjunction with nine hospitals have already performed economic analyses that have been positive. Why aren't you kicking that up, or why are you still in that same range despite the better-than-expected start?

Yes, I think until we get on a couple of calls and talk about the number of contracts we've closed, it would be a little premature to increase the target. Number one, we're pretty data-driven here at T2. And the ultimate data is in closed contracts, and we can confirm the 6- to 12-month sales cycles with enough data points so we can extrapolate what that would mean for the future. So that would be number one.

And then number two, we'd be really excited at 30; 30 is a great number. That would mean we're penetrating 8% of the top 450 hospitals within the first year. That would be a really strong number for us to deliver on. We remain very confident in that number. When we have data to take it up, we'll do that; but it's way too premature to do that.

Okay. Fair.

And last one for me is on the Canon announcement. Were those extended talks? Was that a month, two-month conversion cycle? I'm just thinking in context. Just the unique nature of the deal where it seems like if there were risks to you ala upfront milestone pays for the R&D and from there you get commercialization rates. So any color there, as well as are there ongoing talks with Canon amongst others? I think you did discuss that earlier, but any additional color would be helpful. Thanks again.

Yes, sure. We've been in discussions with Canon for some time. I don't exactly know when it started; but it's probably in the 9- to 12-month range, certainly not 2 to 6 months even. The discussions are like any relationship that you build over time.

I know from their standpoint they're really excited about the T2MR detection technology and the impact that it can have on the marketplace. And they have an interest in being a player in the diagnostics business. And it certainly took some time for us to be able to identify the right application to get started with. And we think this is a terrific first step, hopefully, in what will be an ongoing, and maybe in the future expanded, relationship with Canon.

Appreciate it again. Have a great day.

You bet.

David Lewis with Morgan Stanley.

This is actually Scott Lang in for David. Just a couple quick ones from me.

You mentioned targeting 30 or so of those high-volume hospitals by the end of the year. Can you give us a bit more flavor for how you see the ramp going? Will it be more reagent rental or sales in the beginning? And in your early discussions with these hospitals, can you speak to whether there's any interest for multiple box placements at the same institution?

Great question, Scott.

We expect, and I stated this at the outset, that there will be about an 80%/20% reagent rental to capital equipment purchase split. The only indications would suggest that that's still a good number. If anything, maybe it's slight ticking towards capital being a little bit more than 20%. But I would stick with the 80%/20% assumption for the time being, again, until we have some closed accounts that might suggest it goes in a different direction.

Absolutely we're seeing interest in multiple instruments. It's really going to come down to the volume of tests being run in a hospital site, their interest in having some redundancy and interest in being able to handle surge capacity. But I think when we were on the road show, we had given some guidance on that.

Marc, maybe you want to add to that in terms of what to expect in terms of number of instruments per account.

Yes, we would expect certainly one instrument at the average hospital would be fine. We expect to place more than one instrument in each of these sites. We've assumed around two instruments per site. And that will ensure in an area where there's a surge that hospitals have the capacity to run those tests so they can get those critical results back as soon as possible.

Got it.

And then just a quick followup. You mentioned that you were looking to pretty much almost double your existing sales force this year from 7 to 15 reps. Can you give us some idea of how long that on-boarding process takes -- when you expect a new rep to start kind of contributing?

Yes, the way we'd modeled that one, Scott, is there's usually a three-month period just to get up-to-speed. We have a very detailed and aggressive sales school that lasts almost two weeks, so we do some crash course training. Usually we're able to go out to a conference shortly thereafter training and take the new team out there and expand on the education process. Usually three months is what you should expect to kind of get up-to-speed. And you start seeing a little bit of productivity between month three and six, and then you're going full guns after six months.

I am very pleased with what we're seeing in terms of the early size of that. The growth in the pipeline, literally from when we probably were last on this phone call, has grown well over 3X in terms of the number of hospitals that are actively engaged in the sales pipeline. And that's largely driven by the fact that we added five people in November. And so those new folks, along with the folks that had come on board in August and had been there for about three weeks when we got FDA clearance, are definitely getting engaged in building pipeline a little faster than we would have expected. Now, again, we need more data in terms of conversion rates and all that sort of stuff to know what this all means. But it certainly is very encouraging in all regards.

That's great. Thanks for taking questions.

You bet.

(Operator instructions)

Dan Leonard with Leerink Partners.

Hi, everyone. This is [Carmen] in for Dan.

I just have one question. Has the JAMA article spurred any additional conversations with potential partners? And how do you plan to prioritize partnership opportunities going forward?

Yes, that's a great question. Absolutely, between the JAMA publication and the Clinical Infectious Diseases publication, we're seeing a lot of interest coming from other players interested in developing applications on our platform. And even among many of the therapeutic companies, which is a very interesting area where our diagnostics can be a real valuable aid even in running clinical trials. We're going to be really selective. Now, working with the therapeutic companies around products that we have, we're excited about that. We've got a number of opportunities developing, and that's just a natural extension of the base business that we're involved with.

In terms of new applications with the technology, we're going to be really selective. We don't want to create channel conflict. We don't want to have application conflict. So we've said, no, many times; but we'll say, yes, in the right situation. Certainly a Canon-like opportunity is perfect.

Lyme disease is on our radar screen, but it would have taken a while for us to get to that one. It's a big opportunity though, and one we're able to structure a relationship in a way where we're able to retain all of the commercialization rights so that you avoid any distribution of conflicts that can arise with these relationships down the road.

Great. Thank you so much.

You bet.

Bryan Kipp with Janney Capital Markets.

Hello, quick followup. IMS, I know we've talked about it in the past -- the data that's supposed to come out potentially published. Do you have any color on when that's going to occur, and is it going to be next quarter or two? Just thinking in conjunction with adoption.

We are quite hopeful that we will see a publication of some of the independent economic data that's been pulled together regarding T2Candida specifically this year. It's really hard to predict that. We're hopeful we'll see it here in the first half of the year, but you're dealing with publications.

This is an independent group that's submitting it, and we now have publications that have to accept it on their timeline. It would be just foolish for us to try to predict when that might occur; but we're hopeful for 2015, hopefully here in the first half.

And, Marc, quick one for you in light of the Lyme disease announcement. How do you expect to incur the R&D costs? Is it going to be a year or two-year kind of turnover from the $2 million up front? I think in the past, you said it usually costs $1 million to $2 million to create another asset. So just thinking in terms of how we should flow that through our models.

Great question, Bryan.

We anticipate in 2015 to kick off the project here pretty shortly, ramping up R&D activities. And I would expect we'll see somewhere in the order of $1 million, $1.5 million or so in revenue. And I'd expect expenses to offset that revenue in 2015. This project, as John mentioned, we anticipate to enter a clinical trial in the next several years. So it will be a project that extends beyond 2015, but that's kind of how I see the expenses layering in 2015.

Okay. Appreciate it.

Thank you.

Ladies and gentlemen, that is all the time we have for questions for today. I would now like to turn the floor back over to management for closing remarks.

Well, thank you all for listening today. We look forward to reporting back on our progress next quarter. We will sign off here from the North Pole, also known as Lexington, Massachusetts. Thank you.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.