T2 Biosystems Inc (TTOO) 2018 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the T2 Biosystems Fourth Quarter and Full Year 2018 Financial Results Conference Call. (Operator Instructions)

It is now my pleasure to turn the call over to Zack Kubow of the W2O Group. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Thanks for joining us for the T2 Biosystems Fourth Quarter and Full Year 2018 Financial Results Conference Call.

On the call to discuss the results and operational highlights for the quarter and year ended December 31, 2018, are President and CEO, John McDonough; and Chief Financial Officer, John Sprague. The executive team will open the call with prepared remarks, followed by a question-and-answer period.

I would like to remind everyone that comments made by management today and answers to questions 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 19, 2018, and other filings that the company makes with the SEC from time to time. 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 President and CEO, John McDonough. John?

Thank you, Zack. Good afternoon, everyone, and thank you for joining us as we discuss the progress, results and outlook following the fourth quarter and full year 2018.

2018 was a significant year for T2, headlined by the FDA clearance and market launch of the T2Bacteria Panel, the first and only FDA-cleared test to identify sepsis causing bacteria direct from whole blood. Combined with the T2Candida Panel, we now offer a tool to hospitals that we believe will enable earlier, more effective therapy for patients suspected of bloodstream infections that can lead to sepsis. The ability to identify deadly forms of bacterial and fungal infections directly from whole blood without waiting for the results of a blood culture has been a significant pursuit in medicine for the past century.

Additionally, we believe that while pharmaceutical companies have developed more effective means to fight these infections, the utilization has been hampered by the inability to rapidly identify the actual infection. We believe that the medical community and government agencies are now recognizing the difference that T2Direct Diagnostics can mean for preventing sepsis, which is the #1 cause of mortality in hospitals and the cause of over $27 billion of hospitalization costs, the most expensive health condition for U.S. hospitals. Before direct -- T2Direct Diagnostics, frontline treatment option for patients suspected of sepsis identify pathogens in 1 to 6 days' time, with a 50% to 65% sensitivity rate, which every single other company offering an FDA-cleared product for bloodstream infections is dependent upon. Due to the lengthy time to result and poor sensitivity of blood cultures, hospitals have used a probability-based system, based on the premise that if you can guess right quickly enough, mortality rates are reduced by 8% for every hour you speed up getting a patient suffering from sepsis on the right targeted drug.

With T2Direct Diagnostics, certain pathogens are identified in 3 to 5 hours directly from a patient's blood sample with greater than 90% accuracy, which we believe is a huge step forward and a win for patients in the health care system. As I will discuss in more detail, we believe that hospitals with strong antimicrobial stewardship efforts dedicated to the task and guided by our experience are becoming the vanguard of physicians and institutions that have found a better option with $150 T2Bacteria test panel. Results have shown that only 1 T2 test result can be as accurate as 3.8 blood culture sets, which are all required for all other diagnostics of bloodstream infection. We believe that the time has arrived for antibiotic treatment decisions early in the progression of disease can be based on identification of the actual pathogen infecting the patient, rather than on guesswork. And while systemic change is cautious in the hospital setting, we believe that the data is beginning to show that a willingness to adjust protocols provides measurable clinical and economic benefit. In addition, we believe there is an opportunity within our selling process and target institutions to identify and engage a customer segment that has shown the willingness to adopt and move fast, which we'll discuss on the call today.

During 2018, we also advanced our other new product initiative, which has the potential to further expand our market opportunity for our core T2Dx platform. Taken together, we believe that our progress in 2018 has positioned the company into a period of sustained and significant growth in the years to come. I will provide an overview of our key growth initiatives and milestones for 2019, but will begin with a high-level review of the financial results and commercial metrics for the quarter, which provides a foundation for our business outlook heading into the year. After my remarks, our CFO, John Sprague will provide a detailed review of our fourth quarter and full year financial results and outline our 2019 financial guidance.

In the fourth quarter, we remained focused on the execution of the T2Bacteria Panel launch and delivered results that were in line with our expectation. Total revenues were $1.8 million and product revenue was $1.3 million. Product revenue was flat year-over-year and up slightly compared to Q3 2018, reflecting growth in testing volume primarily related to the T2Candida panel. Capital sales were stable as more new customers selected the reagent rental model in the quarter, which has minimal upfront customer cost, and therefore, minimal revenue for T2, but stronger margins on recurring sales. As a reminder, new prices related to the T2Bacteria Panel in the second half of 2018 were in the implementation phase in Q4, and we expect these systems to begin to contribute recurring testing revenue this year and some have already began to do so in Q1 2019.

More specifically on T2Dx Instrument, we continue to build momentum with new contracts, securing 14 contracts with customers in Q4. This contract number puts us at the high end of guidance previously provided. In total, we estimate that this will provide over 80,000 new high-risk patients with access to a T2Dx Instrument, well ahead of previous guidance. On a full year basis, we secured 39 new T2Dx Instrument contracts, covering more than 250,000 high-risk patients, including 25 contracts in the second half of the year. To put this in context, as of December 31, 2018, we had 89 instruments placed or contracted to be placed with nearly all of the associated recurring revenue coming from T2Candida Panel utilization. As we enter 2019, we expect the new contracts from the second half of 2018 to complete the 3- to 6-month validation and startup phase and begin testing patients, which will begin to layer on meaningful T2Bacteria Panel sales.

Overall, we ended the year right where we expected to be with the launch of the T2Bacteria Panel. We have a strong sales pipeline of opportunities with the T2Bacteria Panel entering 2019, and we remain confident in the long-term opportunity for T2Direct Diagnostics. John will provide full detail on our guidance. But in short, we expect to approximately double our total revenue in 2019 and deliver 70 to 80 new instrument contracts consistent with prior guidance.

Turning to an update on the T2Bacteria Panel launch. We have recently reviewed our sales and marketing progress. And while we have hit the projected number of contracts, we believe there is growing interest and demand. Based on this analysis, we've altered our strategy from the first 6 months of the T2Bacteria Panel launch due to identifying several encouraging data points that we are integrating into our key initiatives to drive the T2Bacteria Panel launch in 2019. We are encouraged with the feedback from the market and are executing against the robust pipeline of interested hospitals and hospital targets. We delivered 24 new proposals in the fourth quarter, up from 15 in Q3 and continued the strong trend we saw leading into and following the FDA clearance of T2Bacteria. Moving into 2019, we will no longer provide the proposal number for each quarter as our focus and the results of our activity will shift to securing new contracts and driving utilization.

In terms of new contracts, when we analyze our new customer wins from the second half of 2019, we were encouraged by the data. Every new accounts in the United States that closed in the second half of the year had a 30- to 90-day sales cycle, which is much faster than our expected average of 6 to 12 months and also faster than anything we saw following the launch of the T2Candida panel. We believe that the accounts that closed quickly, typically have active stewardship efforts that are clearly focused on improving sepsis management patient care. Said differently, we believe that our more educated buyer is our best customer and the sales process moves fast with such buyers because they appear to see the potential of our product. These faster-closing accounts in the second half of 2019 (sic) [2018] were balanced with the number of potential T2Bacteria Panel customers that are trending towards the more traditional 6- to 12-month sales cycle range and that we will focus on in closing in 2019.

Given the potential of our rapid sales cycle, starting in Q1 2019, our sales reps are dedicating more time to broad outreach to hospitals in their territories in order to engage with additional accounts that could fall into this category while also advancing existing, more traditional opportunities. In January, the sales team secured first meetings with over 250 hospitals with whom we were not previously engaged that have expressed interest in one of our solutions. We believe this may accelerate the new account close rate of our sales force, which includes 16 representatives in the United States and ensure that we maintain a broad pipeline of opportunity.

In terms of utilization, we've received positive feedback on the service provided by our team of medical liaison. This team is led by Sandy Estrada, who implemented the T2Candida Panel at Lee Memorial Health System in Florida, one of our flagship accounts. They're working directly with the sales team in the sales process to ensure the value of testing patients is understood by new customers and to support the validation and startup process by sharing best practices and strategize to maximize the benefit of the T2Dx instruments for their patients. The first T2Bacteria Panel customers signed in 2018 are starting commercial activity in Q1 2019. And as more accounts go live over the course of the year, we believe our medical liaisons will increase customer satisfaction and support growth in T2Bacteria Panel utilization.

On the marketing front, we have several activities and campaigns planned for 2019 to support the momentum of the T2Bacteria Panel launch and expand awareness of the benefits of the T2Direct Diagnostics platform. Highlighting the T2Bacteria panel clinical data is one of the key components of our strategy as we have seen the importance of data in the adoption of the T2Candida panel. In the first half of this year, we expect the results of the T2Bacteria Panel pivotal FDA clinical trial to be published in a peer-reviewed medical journal. For many physicians and health care providers, the publication of this data in a peer-reviewed journal is an important validator of our technology. Over the course of the year, we expect to have a clinical evidence to continue to build with more clinical results to be added to many studies already reported using T2Bacteria Panel expected at the 29th European Congress of Clinical Microbiology and Infectious Diseases, or ECCMID, which will take place in Amsterdam from April 13 to April 16. In total, we have 5 scientific posters accepted for presentation at ECCMID, and we are sponsoring a major symposium with U.S. and European experts in direct -- T2Direct Diagnostics.

We will also have a strong presence at several U.S. and European customer meetings in February and March, leading into ECCMID, providing multiple opportunities to highlight T2Direct Diagnostics in our emerging T2Bacteria Panel data set. In the first 2 months of this year, we have received additional external validation of our technology. On January 30, our Chief Scientific Officer, Tom Lowery, participated in the Presidential Advisory Council on Combating Antibiotic-Resistant Bacteria, or PACCARB, in Washington, D.C. At the request of PACCARB, Tom provided information on T2Direct Diagnostics in support of their current task of identifying new priority areas for the next iteration of the U.S. government's 2020 to 2025 national action plan from combating antibiotic-resistant bacteria. If you did not have the opportunity to view the live webcast of the meeting, a replay is now available on YouTube and at the PACCARB website. And I encourage you to view Tom's participation which highlights our technology and the interest from PACCARB.

In February, T2 Biosystems was ranked in the top 10 of the world's most innovative biotech companies by Fast Company based on the FDA clearance and launch of T2Bacteria. We are honored to be listed with a mix of well-known and emerging companies that are transforming industries and shaping society.

Outside of the United States, we have a team of 6 direct sales and marketing professionals, managing our international distributors, covering parts of Europe and the Middle East. In 2019, this team will be focused on going deeper in these existing markets with both the T2Bacteria and T2Candida panels, while also supporting entry into new countries.

Turning to our new product pipeline, we have several opportunities to expand our market opportunity and leverage our core technology. The newest pipeline opportunity I'd like to highlight is expanding on our T2Carba Resistance+ Panel, which I've highlighted on previous calls, and for which we developed in partnership with Allergan and CARB-X and introduced at IDWeek in late 2018. The T2Carba Resistance+ Panel was the first direct from blood antimicrobial resistance panel and could be used to determine if a patient is resistant to the first-line therapy associated with certain deadly gram-negative bacterial infection. We have since expanded on the initial panel, which was focused on carbapenemase-resistant genes and are announcing a more comprehensive panel called the T2Resistance Panel. This panel includes detection and identification of 13 resistant genes from both gram-positive and gram-negative pathogen. These include detection of clinically important carbapenemase-resistant genes that are listed on the CDC urgent threat list for antibiotic resistance. All of these results are available within 3 to 5 hours, direct from blood and blood culture independent like our other T2Dx panels, which we believe will expedite accurate treatment for antibiotic-resistant bloodstream infection. The infections detected by the T2Resistance Panel are life-threatening, can lead to sepsis and result in high mortality rate. Under the current standard of care, diagnosing bloodstream infection caused by resistant pathogen requires a positive blood culture and subsequent analyses that can take 3 or more days to receive an actionable result. With T2Resistance, we believe that the time to receive an actionable result will be shortened to just a few hours.

Feedback from potential customers indicate that real-world use could include both running on certain positive T2Bacteria Panel results in certain patients and expand into screening certain patients before they are empirically treated with drugs for gram-negative and gram-positive infection. We're encouraged by this feedback and plan to rollout the T2Resistance Panel as a research use only product in the United States and to receive a CE Mark enabling a market launch in Europe before the end of this year.

From an FDA perspective, we are delighted that the FDA has granted breakthrough device designation for the T2Resistance Panel. The FDA's breakthrough device program is intended to expedite patients access to breakthrough technologies that will provide effective treatment or diagnosis of life-threatening or irreversibly debilitating conditions or diseases by expediting their [development], assessment and review. We are honored to receive this breakthrough designation from the FDA and appreciate the productive partnerships with CARB-X and their funding agencies, BARDA and the Wellcome Trust. We look forward to working towards bringing the first-ever culture independent direct from blood test for resistance markers to market.

The second pipeline opportunity is the T2Lyme Panel, in which we began enrolling patients in the pivotal FDA study in 2018. We will continue collecting data for our pivotal study in 2019 and are already encouraged by the preclinical data on this panel. If these results carry through to our FDA trial and we can secure regulatory approval, we'll be positioned to offer a new tool to diagnose lyme disease in an approximately $700 million market.

In addition to these opportunities, our R&D team continues to work on expanding our testing menu for existing and future applications, and we look forward to sharing additional updates on our pipeline as appropriate.

With that, let me turn the call over to John Sprague, who will review our fourth quarter and full year 2018 financial results in greater detail. John?

Thank you, John. Fourth quarter 2018 total revenues were $1.8 million, a 6% increase over last year's fourth quarter revenues of $1.7 million and within the range of guidance Product revenues, primarily T2Candida Panel and T2Dx Instrument sales, were $1.3 million, level of last year's fourth quarter product revenues and were driven by growing T2Candida Panel sales and the timing of T2Dx Instrument sales. T2Bacteria Panel sales are just commencing to ramp up after our July 2018 launch due to hospital new diagnostics validation protocols of 3 to 6 months. Research revenues were $0.5 million compared to $0.3 million in last year's fourth quarter.

Cost and expenses, excluding cost of product revenue, were $9.8 million compared to $9.7 million in last year's fourth quarter and were $1 million below the low range of guidance and includes depreciation and noncash stock option compensation and restricted stock unit, or RSU, grants of $3 million in the fourth quarter compared to $1.8 million in last year's fourth quarter and increased primarily due to the vesting of performance-based RSUs.

Operating margins were a loss of $13.6 million compared to a loss of $14.4 million in last year's fourth quarter. Net interest expense and other income was $1.6 million compared to $3.8 million in last year's fourth quarter and decreased due to the absence of a derivative charge in 2018.

Our net loss was $15.1 million, $0.34 per share compared to a net loss in last year's fourth quarter of $18.2 million, $0.51 per share. Weighted average shares outstanding were $44.1 million compared to $35.7 million in last year's fourth quarter.

Our cash and cash equivalents were $50.8 million at December 31, 2018. We believe our cash and financing sources are sufficient through the first half of 2020.

2018 financial results. We delivered 14 new system contracts in the fourth quarter of 2018 and 25 in the second half of 2018, which was at the high end of our guidance. On our last call, we estimated these instruments were expected to provide access to at least 75,000 patients suspected of sepsis in the second half of the year, and the fourth quarter achievement alone of more than 80,000 exceeded that goal. The number of high-risk patients is important as it represents the current existing market opportunity for the T2Candida and T2Bacteria panels, if every patient at hospitals under contract were tested at the time they showed symptoms of infection. However, this metric is becoming increasingly difficult to accurately track and report and ultimately will become less meaningful as we expand our installed base and provide the option to this high-risk population, which will be reflected in our utilization and recurring T2Bacteria and T2Candida panel sales. Therefore, we'll discontinue this metric in 2019.

Revenues for 2018 were $10.5 million, an increase of 123% over revenues of $4.7 million for 2017 and were driven by growing T2Candida Panel sales and T2Dx Instrument sales. Product revenues, primarily T2Candida Panel and T2Dx Instrument sales, were $4.8 million, a 41% increase over last year's product revenues of $3.4 million. Research revenues of $5.7 million compared to research revenues last year of $1.2 million. Cost expenses, including cost of product -- excluding cost of product revenue, were $40.2 million compared to $46.5 million last year and include noncash depreciation and stock option compensation in RSUs of $12.3 million compared to $7.8 million last year and increased primarily due to the vesting of performance-based RSUs.

Operating margins were a loss of $45.1 million compared to a loss of $53.9 million last year. Net interest expense and other income was $6.1 million compared to $8.5 million last year.

Our net loss was $51.2 million, $1.26 per share compared to a net loss of $52.4 million or $1.94 per share last year. Weighted average shares outstanding were $40.6 million compared to $32.1 million last year.

2019 outlook. The following forward-looking statements reflect estimates based on information as of March 7 and are subject to uncertainty. We reaffirm our guidance as outlined on our third quarter 2018 conference call. Overall, we expect revenue to double in 2019 and 2020 as our customer base grows and accounts go live testing the T2Bacteria. In 2019, we expect product revenue to grow over 100% and for research revenue to grow by 40%. For the first quarter of 2019, we expect revenue in the range of $1.3 million to $1.5 million, with revenue ramping over the course of the year. In 2019, we expect to close contracts with placement of 70 to 80 instruments, roughly double the number in 2018. This includes 8 to 10 contracts expected in the first quarter, which aligns with hospital purchasing seasonality and historically has been our lowest T2Dx Instrument quarter, especially outside United States.

As John mentioned, it typically takes new instrument in average of 3 to 6 months to go live and patient testing centers as hospitals are required to validate any new diagnostic testing instruments. During this period, the company typically receives nominal revenue, unless the instrument has been purchased by the hospital, which in the United States occurs about 15% of the time. International distributors typically purchase instruments at a 30% discount off of list price of $100,000 per instrument. We expect the continuation of average sales prices of $150 per test for the T2Bacteria panel and $200 per test for the T2Candida Panel. International distributors typically receive about a 30% discount per test panel.

We estimate that a single T2Dx Instrument is capable of running about 3,000 tests per year, but expect our utilization to be in the 1,000 or 2,000 test range as the customers ramp up over time. Therefore, we expect each T2Dx Instrument to generate an average of about $300,000 annual revenue from a combination of T2Bacteria and T2Candida Panel testing.

We expect quarterly operating expenses to be $10.5 million to $11.5 million in 2019 and during the first quarter, including noncash depreciation and stock option and RSU compensation of approximately $3 million per quarter. Noncash stock compensation expenses maybe impacted by the timing of performance-based RSU divesting. We estimate that we will achieve cash flow breakeven between $65 million and $75 million in annual revenue. We expect our gross margins to be approximately 45% to 50% at these revenue levels. Our weighted average shares outstanding of $44.1 million may be impacted by stock option exercises.

Thank you. And back to John McDonough for closing remarks.

Thank you, John. In summary, we believe 2018 was a landmark year for the company and are pleased that we delivered on our operational and financial goals for the year. The T2Bacteria Panel launch is progressing as planned, and we have a comprehensive strategy in place to continue building momentum, secure new T2Dx instrument contracts and drive utilization. We believe change is happening and will accelerate in the hospital environment, as will the subsequent impact on our financial.

In 2019, we also anticipate important milestones for our new product pipeline, providing incremental growth opportunities for the company. Taking all together, we expect that this should allow us to double our revenue in each of the next 2 to 3 full years.

Thank you for your participation in today's call and for your continued interest in T2 Biosystems. That concludes our prepared remarks for this evening.

Operator, we'll now open the call for questions.

(Operator Instructions) And our first question is coming from the line of Steve Brozak with WBB Securities.

Like every analyst, I'm preparing notes for tomorrow's summary of what you've just been talking about, but one thing comes out that's a little bit different. A few days ago, a blogger came out with some statements that were pretty much replete with factual errors, mistakes in science and just basic sloppiness, but obviously it's had a bearing on a stock price. And the question that I'd like to ask right off the bat is, what did this blogger ignore, got wrong and what do you think the important takeaway was? And I'd like to have some follow-up questions about -- then afterwards, please.

Okay. Thanks, Steve. Thanks for being on the call. I know the report that you refer to, and I guess I'd have a couple of comments on that. It definitely had an -- appears to have had a pretty significant impact on the stock price. The first point I'd say is everyone should look at the disclaimer at the end of the report, for anyone who reads it, as that basically says that both the blogger and their clients are in a short position of the T2 stock. And it certainly is curious timing that, that report would come out shortly after some pretty darn good news on the T2Resistance Panel, the breakthrough status that had caused a run up in the share price, which probably isn't good for people in a short position. It is definitely hard to see that someone's trying to make money, which of course that's what it's all about, but doing it in a way that basically is impeding a product that can save patients' lives. One in 5 people in their lifetime will have sepsis and that would mean that the author of that report has a 20% shot of being one of those people, and I can assure you that they would want our product in any institution they show up in if them or anybody close to them should have one of these deadly diseases. As is common, generally speaking, I'd say, as it's common with these types of short report, the report itself combines some factual statement in data with some subtle omission of key facts, there's inaccuracies, and that's all mixed up with a whole lot of opinion. I don't want to spend a lot of time on it, but I guess I'll just make a few points. It is certainly odd that what's not mentioned in the report is that T2 is the first and only product that can detect infections directly from blood, that can do it without a blood culture, that can provide results in 3 to 5 hours versus 1 to 6 days. So we detect over 90% of infections versus 50% to 65% for blood culture, the one T2 result is equivalent to 3.8 blood culture result. And somehow the product is compared and probably for a reader that doesn't understand the market, is compared to a product that's a post-blood culture product, that perhaps didn't do too well, but although it seems to be succeeding in the market. And then as compared to products from Roche and Abbott that failed. They never got a FDA approval because they couldn't detect between 1 and 10 CFU/mL. In fact, the comparisons to Roche and Abbott, again, never FDA-cleared products, never offered in the United States, hold from the market in one case for sure because they tried to get FDA clearance and were denied. But I think we can say for sure that companies of that size do nothing but reconfirm the size of this market opportunity, the fact that they would go after in the first place. It's really difficult to say that those technologies flopped and therefore, we will. I think we're in a very different position with FDA clearance. Additionally, just couple of other points. The report tries to say species identification doesn't matter. I guess our response to that would be that's just wrong. That's just completely wrong. 85% of clinical decisions are made based on species identification. There was a recent JAMA publication, a Tier 1 journal, most probably everybody has heard about, that confirms that. And I think the strength of JAMA would be very different than maybe the strength of the author of the report. And of course, we had a recent presentation by Tom Lowery, at the Presidential Advisory Council was involved because of the difference that we can make in changing clinical decisions. So it's -- the FDA granted us breakthrough status because of the impact we can have on patients' lives. And of course, the last proof point on clinical validation is our customers. Lives are being saved. We have examples at Henry Ford Health System, Lee Memorial Health System, the recent case that we are aware of where a physician is convinced because of the use of our T2Bacteria Panel, who identified an infection that the blood culture would have missed and from a type of infection that has a 70% to 80% mortality rate, and this physician will use T2 forever because he believes we saved his patient's life. There is also a comment about breakthrough designation not being a big deal. It's very rare for a diagnostic company to receive breakthrough designation. And I just point out that if you read the guidelines, the FDA provides breakthrough designation when you offer significant advantages and where availability of a product is in the best interest of patients. And so I would say the FDA probably thinks our technology can make a big difference in the lives of patients. But then lastly, I'll just say the report also downplays research revenue and that's not recurring. I believe John Sprague just provided guidance that says we believe our research revenue is going to grow 40% in 2019, so seems like we're doing okay on that front. So I don't know where these reports comes from. I don't know what their motivations are. I just noticed a bunch of inaccuracies in there and always disappointed to say that, but those things happen. What we're going to do at T2, our objective here is to keep bringing products to the market. We're going to drive this technology into the marketplace. We're going to impact patients' lives. And we believe our share price is going to reflect that as we continue to do that moving forward. That's what we control, we don't control the rest of it.

And again, I very much appreciate the succinct answer on that. Going back to what you can say in terms of your internal, the specifics of your contracts, your placement. Can you go through that path and explain how critical that is and how you approach that? Because frankly, it's one of the things that we monitor more than anything else. And I'd like to follow-up with that -- with the hospitals after that, please.

Yes, you bet. So as we pointed out over the course of 2018 and going back to the beginning of the year, the most important metric for us this year is the instrument placement. Because that shows that a hospital is adopting and it gets to an institution where the technology can be adopted, and we know there is a 3- to 6-month process before accounts can go live. And so we got FDA cleared in the middle of the year, and we're going to see revenue growth in T2Bacteria, as John mentioned, as we go through 2019. But it's all about placements. And we are delighted with the result of the placement number of 14 in the quarter, 25 in the back half of the year. We basically took the instrument placement rate and almost doubled it in the second half of the year versus the rate that we've been running at. I think that's a real indication of hospital interest, hospital adoption of our technology, and we were really pleasantly surprised, if not almost shocked that the 30- to 90-day sales cycles we're seeing seen, nobody would have predicted that. This is a big game-changing technology that's a big decision for a hospital to make. And for them to move that quickly, it just shows that there are a lot of people out there and the most educated ones I might point out, that see the value of rapid species identification and the impact that can have on their patients and the economics of their hospital.

And let's -- if you don't mind indulging me for a second, on the hospital system. What can you tell us about that because that's obviously something that's critical to your growth?

We are seeing use at some of the larger systems. We are in multiple sales cycles with all of the major ones that you'd want to see us involved with. And we think that will play a significant role in achieving our goals for 2019.

Okay. So in analyzing that, you would look at versus going out there and hitting singles or doubles, you could have multiples of that based on hospital system growth?

Absolutely. That's going to happen, Steve, in our opinion. The tipping point is coming and getting these accounts live and getting more and more stories about the patients' lives being saved and the impact of the institutions are going to drive to that point. And you can definitely see it in the interest building and the momentum in the market.

So if I were to go out there and use your words, in this particular case, what you're pushing for is the tipping point, where the standard of care will now be challenged by your actual designation and your ability to go out there and discover these pathogens. Is that a good way of looking at it?

I think that's a great way of looking at it. And I think the presentation and being invited to the President's advisory council certainly is a big indication of that, as is the breakthrough device indication from the FDA, the leaders, the biggest experts that out there are seeing the differentiator and the impact that we can have.

And just on that one note and then I'd like to actually go over PACCARB. But on the research use only designation, I mean, a lot of diagnostics that we cover will always use that if they're with companies that are specific like Quest or anything else, they'll just have research use only. There is a financial model for that. But in your particular case, you've got the different metric and approach to that. What -- can you tell us anything about that? Or what can you share?

Well, what we can share about that is that having that research-use only product available can really help feed the market. Ultimately, our objective with the T2Resistance Panel, of course, will be to get FDA clearance, that's where the breakthrough designation will help us and should accelerate that process and hopefully provide a clear and smoother path. But the research use only product can the used by pharmaceutical companies, it can be used in research, it can be used for creating and generating studies and publications that can be available at the time of the release of that product in the U.S. And of course, getting the CE mark will give full authorization for clinical use outside the U.S. and we're excited to be on track to be able to achieve that milestone before the end of this calendar year.

Okay. Last question. Going to PACCARB and listening to the statements that were made by the Chair, he came out and said pretty much something along the lines in his estimation, 90% of true sepsis could be picked up by a T2. And that was book ended by the VP of bioMérieux basically saying that she thought that this was an investigative novel approach in diagnostics from -- for direct sepsis. What were your thoughts about the entire panel of the discussion that took place from PACCARB? And what you look forward into the future? And I'll hop back in the queue.

Well, we're excited to be part of the dialogue at the national level for driving resistance out of the market. The big problem is because of superbugs, 10% to 15% of the time antibiotics won't work. And the reason why resistance is in play primarily is because of the overuse of antibiotics. One of those things that I think I've appreciated about the T2 story is we provide rapid results. I think people understand that, they can get patients on the right drug, but we also provide rapid negative test results, that can allow, in many cases, for de-escalation of drugs. And that de-escalation of drugs is good for the patients, it's good for cost, but it's also good for eliminating and reducing resistance in the first place. Yes, basically what T2 is detecting with our species identification, we're detecting the pathogens that lead to sepsis. Sometimes people get confused. We're not detecting sepsis, we are preventing sepsis by getting patients on the right drug and identifying these infections much faster. So we're delighted with the presentation. We thought there was a lot of support. Dr. Tom Lowery did a great job. And we look forward to continuing to pursue these opportunities that put the opportunity of using our products front and center in the national conversation.

Our next question is from the line of Mark Massaro with Canaccord Genuity.

This is Max on for Mark. So what percentage of the 14 contracts in Q4 were capital versus rental agreement? And can you just help me better understand why Q1 revenues will decline sequentially, just given the more bacteria customers are expected to be live?

You bet. I will let John answer that question.

Yes. So 6 capital sales in the fourth quarter.

And a decline -- potential decline sequentially would be because of an expectation of fewer capital sales in Q1 relative to Q4. We expect reagent revenues to be increasing from Q4 to Q1.

Okay, that's helpful. And I appreciate the color and the full year guide segment breakdown. How should we think about the split of product and research revenues in Q1? And I'm just -- can you just help us understand your assumptions around the quarter-over-quarter acceleration in product revenues throughout the year?

So if you look at the first quarter, we're guiding to $1.8 million to $3.3 million, with product revenues being between $1.5 million and $2.4 million. So that would leave research at $300,000 to $900,000 in first quarter.

Okay, that's helpful. And could you just help us better understand the next steps with the FDA and timings regarding the T2Resistance Panel? And I guess when can we expect just roughly an FDA-approved version to hopefully hit the market?

Yes. I don't have a clear answer to that question, Max. We're in discussions with the FDA around trial design. Once we have all of that and understand what the path is to clearance, we can be more definitive. We certainly wouldn't expect it based on what we know today before 2020. We don't expect that, that would happen in 2019. And we don't know enough even to be able to say would happened in 2020. But we're in discussions. The breakthrough status is going to definitely help in terms of accelerating that and we'll report back later once we have a more clear path on timing.

Great. And then just one more, if I can. Regarding T2Lyme, how is enrollment going? And do you still -- do you have to wait for the spring/summer to find more lyme patients? And should we expect an FDA submission by the end of 2019? Or is it looking more like an early 2020 event?

Yes. We have no update on enrollment. It does require kind of the spring/summer season to be here in order to pick that up. And it's unclear whether we'll be able to do everything we need to do, can complete enrollment as to get a filing by the end of 2019. So it's possible but we just don't know until the enrollments sort of recommence.

Next question comes from the line of Patrick Donnelly with Goldman Sachs.

Maybe just on the new go-to-market strategy for T2Bacteria. Can you just help us think what the key changes are there? What drove the decision to alter the approach? And then on the back end, have your expectation for the market change at all with the new approach to that?

Yes. Great question, Patrick. So in terms of the new approach, the biggest change to the whole approach is what we have discussed in the last call, building a medical affairs and a medical science liaison team. That team is now up to 6 people in the U.S., 1 person in Europe, and they're making a big difference in the sales cycle when you get to the point in the sales cycle when customers are identifying patients that they're going to roll this product out to when they go live in testing patients, and as they think that through during the sales process. The other area that we made a difference is getting it through more accounts. We put a much bigger push on getting into institutions that we haven't been speaking to. In fact, in January alone, we got introduced to more accounts than we have been introduced in the entire second half of 2018. And a lot of that is driven by the understanding that these sales cycles can be really quick. So we want to be in front of and getting sales -- the sales team in front, the decision-makers, people who are on stewardship committees and sepsis committees as fast as possible to identify whether they are potential for moving quickly. Those are the 2 key points, I think, and what we expect out of that is reflected into our guidance. And as we implement these changes and start to see the effect of these changes, perhaps we'll come back and readdress guidance at a later date, but far too early to do anything like that today.

Okay, that's helpful. And then -- certainly, appreciate new customers take time to quality validate and ramp the product. But can you just talk about early trends on pull-through utilization for T2Bacteria? And then also just what's baked into guidance for 2019 on that front?

Yes. So the first accounts that purchased in the second half of the year are just going live now. The early utilization is as expected, but boy, the data's too early because we expect more ramp in the first quarter and then a build as you go through the year. So we're on track. We expect that in the first half of the year, T2Candida will likely still be utilized more than T2Bacteria, but that'll all change in the second half of the year as these customers are ramped up and the testing volumes are growing. And ultimately, we would expect somewhere between 75% and 85% of our reagent revenue to be driven by T2Bacteria as compared to T2Candida.

Okay. And then maybe just a last one. Obviously, customer testimonials, word of mouth are big keys to driving adoption along with data you guys have already shown. So can you just talk about what you're hearing in the market on that front? How long you think it'll take to really cause an inflection for new product like this to really gain traction in the eyes of customers, anything you guys can do to kind of help that along outside of again, just getting customer testimonials out there?

Yes. We believe it's kind of a 2-pronged approach. It's all about making sure customers can see that this product really works and it's working in the hands of institution. So customer testimonials are a big part of it. Our next significant conference will be at ECCMID in Europe, which I mentioned on the call. We'll be at the ASM conference in June, which is here in the United States. And then the other part of it is clinical studies and publication. We are hopeful and expect to see the publication from the clinical investigators from the FDA pivotal trial that was going back to 2017 into 2018. That will be a very, very important publication, because it will be a large 11-center study covering a large number of infections and being able to go even deeper than what's on the label in terms of what the investigators can speak to on our FDA label. And then what you should expect to see is we've worked with a number of institutions to help them and guide them in studies that they're running, and we expect to see a steady repetition and rollout of some one-off studies that will be going on at different institutions as we go through 2019. But those are really important. Those will be really important for the next several years.

The next question is from the line of Paul Knight with Janney Montgomery.

John, can you review the time of placement to panel sales on bacteria? And is that changing in terms of turnaround time, in your view, based on now that you've got 6 months' experience?

Yes. I think this is one of the areas that we do a really good job. Most diagnostic companies that were having calls like this, when they talk about 6- to 12-month validation period before they go live and testing patients. And we have done a really good job in being able to shorten that to 3 to 6 months. So it still is 3 to 6 months. Labs are required to validate and test. And some will do kind of little -- mini studies because they all validate it using whatever approach they deem appropriate. We help by providing clinical samples and talking to them and sharing experiences and sharing other customer experiences, which is why I think we've done a really good job of getting that into the 3- to 6-month range. But because it is still in the 3- to 6-month range, our first close in 2018 really happened towards the tail end of the third quarter following the FDA clearance, which has happened at the end of the second quarter, which is why we still have truly nominal T2Bacteria sales in our fourth quarter numbers and the counts are just now starting to come on and test patients.

And as you -- as your sales force makes commentary in the field, what do you think it is? Is it the clinics, the hospitals, administrators still needing convinced on clinical utility? Or is it doc practice? What do you think the one, two, threes are that are giving you or you view as resistance?

I would say that the number one is, oftentimes, convincing the lab director in the hospital about the impact our products can have. It's rare that it's the clinicians. They know what they'll do with the test results and they know they're going to change the clinical decision. But sometimes the lab directors are a little bit less informed in that regard. And that's why you have the longer sales cycle because you need to bring those group together. I could share one experience where that was not the case, one that I was personally involved in, where I spoke to the microbiology lab director and I was the first person to actually introduce T2 to that person. That lab director is actively involved in their Antimicrobial Stewardship Committee. What that means is every day, he is on the phone, managing the 300 patients they see a month who are suspected of sepsis. And in each case, this group that gets on the phone and goes into a meeting every day, they're trying to decide and guess what drugs to give each patient next if the drugs aren't working, because again, it's all based on empiric therapy. When I had this discussion with him, he completely got it totally. His question shifted to, well, what's your sensitivity and what's your specificity? And of course when you heard 95% sensitivity, 98% specificity, the discussion changed really quickly. And less than 30 days later, they're adopting and they're in the middle of installation and hopefully will be going live and testing patients in Q2, all of that unfolded in the month of December. So when you hit that lab director who is involved at that level, it moves quickly. When they're not, they need to be convinced. Because ultimately, they are the ones who run the tests and ultimately the cost of this test comes out of their budget. But I would say that's the #1 area is typically where it can sometimes take a little bit longer to convince people.

Next question comes from the line of Jordan Abrams with Cantor Fitzgerald.

Appreciate the color on the new sales strategy. Are you planning to add any reps in '19? And if so, what sort of ramp in reps are you considering? And how steep is the learning curve for adding new reps to meaningfully contribute to adding customer accounts?

Yes, so we don't have any plans to go beyond the 16 in the first half of 2019. And we'll kind of pause it there and reassess midyear whether or not we go beyond that. We typically can get a rep out making calls just after 30 days after they come onboard. We have a pretty rigorous training schedule, and we have them go make calls with other more experienced reps. It's a deep educational process, though. And I would say in terms of realistic time frame for when they might close their first piece of business, that's probably more in the 6- to 9-month range before you'd actually see them close an account after you hire them. We've had examples where that goes quicker, but more likely fix the time up because you've got a sales cycle on top of the learning curve that -- of the sales rep that when you put them all together, you typically estimate a 6- to 9-month range.

Great. And then second, I mean can you speak to the nature of how you're winning certain accounts or hospitals placing T2Dx Instrument in the emergency department first? Or are you getting traction outside the emergency department? And is it possible to provide a mix of customers that are emergency department-only versus emergency department plus outside ED?

Yes. So in virtually all cases, the instrument itself is in the hospital microbiology lab. But the testing is going on in the emergency department. 70% to 80% of the accounts are going live in the emergency department first. But yes, now there are other areas of hospitals were being used as well, the intensive care unit and others. And we talked about the benefits in the emergency department over 50% of sepsis cases begin there and there's a strong reimbursement system in place. And the objective is virtually every hospital has something that will be called a sepsis alert or a sep 1 package or a sep 1 bundle. They all call it something different. And what that -- I'll call it a sepsis package for the purpose of this discussion, if a patient meets certain criteria in terms of how they're presenting in the emergency department, they automatically will go and put them on broad-spectrum antibiotics and do all sorts of tests. And the objective is for T2Bacteria to be a part of that sepsis package. And as the hospitals go live, some are going straight to doing that, others are taking a segment of that patient population and will grow it, I think because they want to test it first and see the impact and try it on certain patients. And that's more typically the case, and that's consistent with what we expected and certainly consistent with the revenue ramp and guidance that John provided earlier.

The next question is from the line of Soumit Roy with JonesTrading.

Just wanted to get a little color on the data that's coming out in April. What are you going to see there? And are we going to see post-approval, any better controls real-world setting test data versus blood culture showing economic or clinical benefit?

Yes. So there will be a number of poster presentations at the ECCMID conference, most of them on T2Bacteria. There'll also be a symposium of clinical experts who will speak to their use of the T2Bacteria product. And then absolutely you should expect to see a series of other presentations and clinical publications coming out of different institutions, some were users of the T2Bacteria research use-only product. We expect to see more of those as we go through 2019.

Do you think that to be the key that's holding back the Wall Street more believing in the product or in its adoption, where they really want to see the -- rather than revenue growth, they really want to see a real-world post-approval economic or clinical benefit? That what's holding investors back?

I'm going to kind of punt on that question, because I don't know exactly what's holding investors back. I think we have to do a better job of making it clear what our differentiators are. I think sometimes people get confused and they don't understand. Maybe they were direct from blood, and that may be part of it. I think sometimes there's market factors in play. And yes, I think some of it is show more revenue growth and drive towards profitability. And we have -- that is our #1 objective, is driving market adoption first through instrument placement and where it all begins and then drive use of testing so that we can drive top line and ultimately bottom line improvement. And I think as we do that, investors are going to come onboard and see the benefits. And hopefully, we'll see a tipping point with investors too, as they understand these very clear differentiators and the impact that we can and are having in the marketplace for patients and for hospital economics.

Just to get a little color as you talk with physicians. Right now, I suppose they are using both T2 and the blood culture to test. And at what point do you think that they would feel more and more comfortable using T2 Panel as the only testing panel? And the second and my last question is when can we get a better clarity on the T2Lyme when the filing of the data we can see for '19?

Yes. So kind of a 2-part answer. We don't believe in the short term or midterm, the blood culture will be stopped at all based on the current panels that we have in the market. That's not needed. That's not needed economically and not in the best interest of patients. However, most typically, there are 4 blood culture sets we run for patients, and it's because of that poor sensitivity of blood culture, and they may do the first 2 sets right away, but then the third one comes 12 hours later, the fourth one might come another 12 hours later. And of course, all of that's just further delaying time to result. One T2 test results, as I mentioned, is the equivalent of almost 4 blood culture sets, which is pretty remarkable in its own right, never mind the time advantage that we have in the first place. So the 2 run side by side and the number of blood culture sets when T2 is positive are likely to decline. If you get a T2 positive, you may not run that third and fourth blood culture set. You may still run the first 2 sets at the beginning, but you may not run the third and the fourth because you've identified the infection through the T2Bacteria or the T2Candida Panel. Over time, as through our work with CARB-X and expansion of that, it's our intention to bring to market a product that will detect 20, 30 or more pathogens and resistance markers that probably will have a much, much bigger impact on how much blood culture is being run as that product is developed and coming to market. Now we're couple years away from that for sure. But ultimately that one will be broader in scope and they have a bigger impact on blood culture. But in a short run, that's not the case nor is it required to be the case, and we never actually ever talk to a hospital about that, almost ever talk to a hospital about that. In terms of T2Lyme, we just have to see where that clinical study progresses. And hopefully later this year, for sure, we'll be able to provide a further update on what that time line might look like. But really difficult to do so today, and we're not even in lyme season to be able to report much progress.

Next question is from the line of Yi Chen with H.C. Wainwright.

This is Raghuram for Yi. Just a few questions about T2Resistance and then a follow up. What would the T2Resistance price be compared to the T2Bacteria and the T2Candida? And then in terms of the guidance that you provided, does this include any potential revenue from the T2Resistance in Europe that you're anticipating CE Mark before the end of 2019?

So we have not established a price for the T2Resistance Panel. I think if you were trying to build a model, if you assumed pricing similar to T2Bacteria that's in the $150 price range, that's probably a good place to start, but we have not officially priced that product and we have work to do before we do that and we have time to do it. And no, our guidance does not include any revenue from T2Resistance in 2019.

Okay. And then just looking at the space, in general, I was wondering if you anticipate any competition or just see anything on the horizon, really that could provide that sort of gene detection and produce results in that similar time frame compared to T2Resistance?

We do not. We have not seen any clinical data that would suggest others can get into this 1 to 10 CFU/mL range. We're not aware of a FDA trial going on. We know a couple little companies that have talked about working on these things. There always has been. We think if they're successful, they got to be at least a couple or 3 years away, and that's assuming they're successful. We know how difficult it is and we know the challenges of getting here. So something we watch really closely, but we don't see anything coming anytime soon, that's for sure.

Excellent. And then just the final question on the T2Dx. Just wondering if the guidance that you provided for 2019 is going to be primarily driven around the T2Bacteria Panel? Or if you could provide a little more clarity on where the number is coming from?

John, do you want to take that one?

Sure. So it's about 50% is T2Dx sales and 50% is cartridge sales and they're really 50-50 Bacteria and Candida. Although towards the latter part of the year, Bacteria will start to increase and exceed Candida and be more in the range of 70-30 exiting the year.

Our final question is from Puneet Souda with Leerink.

Wanted to get a sense of, and apologies if I missed this. Do you have to be -- how are you thinking about guidelines overall? And what guidelines are still that you need to be in rather than attempting to convince each customer into the product or product purchase? Help us just understand, what can you do broadly to just drive adoption of the product?

In the field of sepsis, we have a lot of work going on in the field of guidelines and working with the CDC and others. Guidelines in this space have a less impact than they do in other cases like cancer diagnostics, which is something I had experienced with my last company. And the reason for that is that the infections and the types of infections are different by hospital. And so a one-size-fits-all doesn't quite work. But the key to getting into those guidelines and they can and will be helpful is to do the clinical studies and have the data that shows the validation to get into those guidelines. And we certainly have that in mind in our clinical studies that we have in progress and have planned for 2019 and beyond.

Okay. And then on menu, what's been the feedback from customers on the overall menu on T2Bacteria?

It's been very positive. Again, I would say it can be slightly different by hospital. Again, infection rates are different. Generally speaking, the 5 species on our panel will cover 70% to 80% of the infections in the emergency department over 50% of infections within a hospital. Sometimes you'll go into a hospital though that has a different infection rates and those numbers might be lower, and then they might not see the same value in the panel. But oftentimes, statistically 50% of the time, you'll see infection rates that are higher as well. So generally speaking, it's been a positive reception to the panel. We cover 90% of the ESKAPE pathogens which are the most problematic ones, and that's generally recognized when you go into an institution. So we don't see that as a limitation, but sometimes it can be a part of a discussion.

Okay. And then just last one on, what's your expectation for overall growth in EU versus U.S., and now with Bacteria and Resistance Panel coming up? And just wanted to get a sense of what's the split you expect there? Sorry if you've covered that already.

No, we didn't. So we expect to see comparable growth in both of those businesses as we go through 2019. The dynamics is a little bit different. The U.S. market is dominated with reagent revenues because most of those contracts are reagent rentals where the instruments are being placed, where in Europe, we're most often selling an instrument through a distributor, so there's some revenue associated with that. So you see more instrument sales coming from Europe, slightly lower reagent and the reverse of the U.S. But we expect to see comparable growth rates for both areas in the year.

We have reached the end of the question-and-answer session. I'll now turn the call over to John McDonough for closing remarks.

Well, thank you all very much for listening to the call. We are excited about the developments in 2018. We're excited about the adoption rate, very excited about the accounts that are going live and the impact, the early impact we're seeing with T2Bacteria and T2Candida. We look forward to reporting back on the next quarterly call with more results and more clinical data. And we thank you all for listening in this afternoon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.