T2 Biosystems Inc (TTOO) 2019 Q3 法說會逐字稿

Welcome to T2 Biosystems 2019 Third Quarter Financial Results Conference Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to Zack Kubow of the W2O Group. You may begin.

Thank you, operator, and good morning, everyone. Thanks for joining us for the T2 Biosystems' Third Quarter 2019 Financial Results Conference Call. On the call to discuss the results and operational highlights for the quarter ended September 30, 2019, are Chairman and CEO, John McDonough; and Chief Financial Officer, John Sprague. We are also joined by Tom Lowery, Chief Scientific Officer.

The executive team will open the call with some 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 these statements, including the risks and uncertainties described in T2 Biosystems' annual report on Form 10-K filed with the SEC on March 14, 2019, and other filings 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 Chairman and CEO, John McDonough. John?

Thank you, Zack. Good morning, everyone, and thank you for joining us as we discuss the progress, results and outlook following the third quarter of 2019.

During the third quarter, we announced a series of major milestones that provide economic drivers and external validation, increasing the momentum and support for T2 Biosystems' near-term and long-term growth potential. These milestones were headlined by being the first and only in-vitro diagnostic company to receive a New Technology Add-on Payment, or NTAP, from CMS that covers approximately 2/3 of the price of the T2Bacteria Panel.

We expect this new reimbursement code to also be picked up by private payers in time. The decision summary from CMS also included a strong statement of endorsement by stating this extra reimbursement is being put in place because the T2Bacteria Panel represents a substantial clinical improvement over existing technologies because it reduces the number of patients on inappropriate therapy, thus reducing other interventions as well as reducing length of stay and mortality rates for patients with sepsis-causing bacterial infections.

An equally significant milestone was the announcement that we were awarded a new multiyear milestone-based government contract with an initial milestone value of $6 million. In addition, we announced a breakthrough technology contract with Premier, launched the research-use-only version of the T2Resistance Panel and further expanded our international distribution network and market opportunities.

We also improved our financial position and eased the need for capital with the restructuring of our CRG term loan; made progress towards a reduction in our cash burn by 30% to $8 million per quarter by the fourth quarter of 2019; and put in place 2 financing agreements that provide us with the possibility to access up to $60 million of capital at market levels.

We'll provide an update on each of these items and the related operational progress on today's call. But first, I'll provide an overview of our financial results for the third quarter. We achieved third quarter product revenue of $1.4 million and secured contracts for 12 T2Dx Instruments: 5 in the United States and 7 outside of the United States, which was in line with our expectations based on the changes we made during the third quarter to our U.S.-based commercial approach and changes to the sales team, as reported on our Q2 call.

This included 5 placements associated with fulfillment of the company's new government contract that initiated in September. Importantly, T2Candida growth remained steady and more new T2Bacteria customers went live in testing patients. We believe we're on the right track with changes we have made to our commercial strategy and are encouraged by several factors.

Our sales force is making good progress, engaging with pharmacy and infectious disease specialists on the stewardship committees of potential customers. This is complemented by our national accounts team, which is focused on large integrated delivery networks and group purchasing organizations such as Premier. Securing contracts with these organizations provides improved access to their hospitals and health systems.

Our team continues to have positive interactions with IDNs and GPOs, and we are hopeful that we'll be able to announce additional partnerships similar to Premier in the near future.

Outside of the United States, our international business is performing well. And during the third quarter, we entered 10 new markets outside of the United States. We are now in 35 countries and have plans to continue expanding this year.

Overall, there continues to be strong interest in both the T2Bacteria and T2Candida Panels in the market, and we have a dynamic sales funnel that gives us confidence in the long-term market opportunity for T2Bacteria.

In addition, beginning October 1, the NTAP for T2Bacteria went into effect. T2Bacteria is the first and only in-vitro diagnostic test to receive approval for NTAP, which is granted to new technologies that demonstrate substantial clinical outcomes for patients.

As a result, hospitals in the United States treating Medicare inpatients with sepsis are now eligible to receive incremental reimbursement through NTAP of up to $97.50 for the T2Bacteria Panel, in addition to the diagnostic-related group, or DRG-based reimbursement. This is compared to all blood culture-based products, which are only covered by the DRG code and are not eligible for this NTAP reimbursement. This covers approximately 2/3 of the cost of the test for these patients and effectively lowers the cost of the T2Bacteria Panel from $150 to around $50 per test.

In addition, we anticipate that most private payers will provide the same coverage in time, aligned with historical precedent, further expanding the benefits of the NTAP beyond Medicare patients.

The early feedback from our promotion of the NTAP in August and September and since it has gone into effect has been positive, both with existing and potential customers. We believe this has the potential to be a major economic driver towards adoption and clearly demonstrates the substantial difference between the clinical and economic value of our product versus any product that is based on positive blood culture results.

Turning to our government contract we announced in early September, we are very excited to have extended our funding from the U.S. government beyond that of CARB-X. At a recent conference in Washington, D.C., Dr. Rick Bright, Head of the Government Agency that awarded us this contract, highlighted T2 Biosystems as the first company to graduate from CARB-X and transition to this extended government program.

We're excited that through this work, our product portfolio will potentially allow for a significant improvement in the management of patients suspected of sepsis and other bloodstream infections. This can potentially result in better clinical outcomes, savings to the hospitals and a decline in the prescribing of unnecessary antibiotics that add further costs and drive the development of emerging superbugs that are resistant to current treatment options.

We initiated activity under the agreement and are on track with the program time lines. We expect improved research revenue commencing in Q4 as activity picks up.

I will now turn the call over to Tom Lowery, our Chief Scientific Officer, for a pipeline and technology update. Tom?

Thank you, John. I'll start with a quick update on our pipeline initiatives. First is the T2Resistance Panel, which is designed to detect 13 antibiotic resistance genes from both gram-positive and gram-negative pathogens, direct-from whole blood and will complement the T2Bacteria Panel. T2Resistance Panel is now available as a research-use-only test.

As a reminder, data from our recent industry presentations demonstrated that the T2Resistance Panel provides at least a 2-day time advantage compared to conventional methods that require a positive blood culture for a result.

Due to this unique ability, the T2Resistance Panel was granted breakthrough designation by the FDA in February of this year. We are pleased to have launched it as a research-use-only product in the United States at the end of September and are encouraged by the early feedback from interested customers.

The panel is also available outside the United States, and we received our first customer orders in October. Additional studies are underway and others will start shortly at multiple sites within the United States, Europe, the Middle East and South Africa. We have submitted for CE Mark approval, and we expect to receive it during the fourth quarter of 2019, as planned, which would enable a product launch for clinical use of T2Resistance outside of the United States by year-end.

Second is a comprehensive panel, which is expected to cover 99% of all bloodborne bacterial infections by means of greater than 36 reported results. This panel is comparable to all of the products in the market that identify infections from positive blood cultures, but detects these pathogens directly from the patient sample. This panel includes pan-Gram positive and pan-Gram-negative results for greater than 250 species, in addition to all bloodborne antibiotic resistance threats identified by the Centers for Disease Control and Prevention, or CDC.

In layman's terms, when available, we believe this panel has the potential to completely change the industry, providing a pan-pathogen detection paired with resistance testing directly from blood, further improving time to effective therapy and reducing the reliance on blood cultures and the post culture testing for species identification and susceptibility results. This panel will run on a next-generation instrument that we believe will lower the cost of goods for our disposable test panels, while being able to deliver a high number of results per day. We began product development on this new platform, building on prior work we've performed to adapt our technology to create this panel.

Outside of sepsis, we're developing a first-of-its-kind biothreat panel under our government contract. This is expected to be the first ever ultra-high sensitivity, direct-from-blood panel for detection of multiple biothreat pathogens and toxin genes. We believe this biothreat panel addresses a large new market opportunity and is another example of how our platform can address market needs that cannot be addressed by other platforms.

Turning to our other development programs, we continue to work on our T2Lyme diagnostic panel with our ongoing pivotal study and expanded the clinical trial protocol to patients starting EM rash, which is the bulls-eye rash associated with Lyme.

With this expanded target patient population, the T2Lyme Panel may potentially have a much broader indication for use when brought to market. Based on the continued feedback from the FDA and the dynamics of the Lyme disease testing market, we believe that the most expeditious path for commercializing Lyme may be offering a test with a single partner as a lab-developed test.

This doesn't preclude our ongoing work or pursuing an FDA cleared panel, but provides a more near-term revenue opportunity. The majority of Lyme disease testing is currently carried out by reference labs, and we've had several discussions with leading reference laboratories to partner for the commercialization of T2Lyme and potentially for the development of additional panels for Lyme and other tick-borne pathogens.

Although at this time, we are not providing a date for when we expect to enter into a partnership agreement, our goal is to potentially have T2Lyme validated in our partners' lab and ready for launch in time for next year's tick season in the Northeast.

Lastly, there continues to be interest in the T2Candida auris panel, RUO from hospitals around the world that are dealing with the emerging superbug, Candida auris. The panel can help these hospitals in addressing the containment and elimination of this superbug. We've received orders for the T2Candida auris panel RUO from customers in the Middle East and South Africa, in addition to Europe, underscoring the growing global awareness and interest in this panel.

These customers are using a panel for 3 separate use cases. First, routine testing in patients where prevalence is very high, such as in South Africa and some locations in the Middle East. Second, in Europe and Australia, to test patients from countries with Candida auris is prevalent. And third, to validate the panel for use in advance of an outbreak. Due to the high mortality rates associated with Candida auris and the difficulty in addressing an effective health care facility, we're seeing some customers maintaining a reserve of T2Candida auris panel RUO tests just in case of an outbreak.

Outside of our development programs, I want to close by highlighting that we are pleased to see support from the CDC's National Healthcare Safety Network, or NHSN, for nonblood-culture-based testing, like T2Bacteria and T2Candida. Effective January 1, 2020, the CDC's new guidance for the use of nonculture-based testing methodologies will go into effect.

Under this guidance, nonculture-based tests like T2Candida and T2Bacteria will not increase the hospital central line-associated bloodstream infection or, CLABSI rates. Ultimately, this is a positive endorsement of the unique characteristics of nonculture-based tests. We believe it will encourage hospitals to use nonculture-based tests like ours to identify infected patients more rapidly and sensitively when it's possible, culture-based tests. Let me give you a personal example from one hospital, with whom I've met. After explaining that a single T2 test can catch infections missed by a single set of blood cultures, the [read] of infection controls have been very resolutely, "I don't want to catch infections that I'm missing." Now that may sound bizarre. It certainly did when I heard it.

However, under the old CLABSI surveillance rule, a significant percentage of a hospital's annual CMS reimbursement could be reduced due to hospital having a high CLABSI rate as compared to its peer group. As one KOL in the field recently published, this created a perverse unintended incentive for hospitals to limit testing in order to avoid an increase in CLABSI rates and thereby jeopardizing such a large amount of their annual reimbursement.

Fortunately, due to the advocacy of our customers and the insight of those at the CDC, the CDC made this change to accommodate new technology and avoid this unintended consequence. We expect use of our test to be boosted by this important change.

I'll now turn the call over to John Sprague, our Chief Financial Officer, for an update on our financial results.

Thank you, Tom. As noted in our press release, due to a recent ransom cyberattack on our information technology systems, we've determined that additional time is needed to finalize the company's Form 10-Q for the third quarter of 2019.

We will be filing the 10-Q on a delayed basis as soon as it can be finalized, which we expect will be in the next 5 days. We will file the appropriate form with the SEC to secure an extension. Accordingly, the expense and earnings results we're reporting today are preliminary. The interruption caused by attack did not materially affect the company's operations. Importantly, the company did not pay a ransom and worked with an external firm experienced in cyberattacks, who also determined that no customer or company data was exfiltrated.

Third quarter 2019 financial results. Third quarter 2019 total revenues were $1.6 million compared to last year's third quarter revenues of $2.5 million. Product revenues, including $200,000 for instruments placed related to our new government contract, were $1.4 million, 17% higher than last year's third quarter product revenues of $1.2 million and were driven by growing T2Bacteria Panel, T2Candida panel and T2Dx Instrument sales.

We delivered contracts for 12 new systems, including 5 placements associated with the new government contract in the third quarter of 2019 and 35 year-to-date. Research and contribution revenues, which does not include T2Dx Instrument placements associated with the new government contract, were $200,000 compared with $1.2 million in last year's third quarter.

We anticipate costs and expenses excluding cost of product and research contribution revenue of $10.5 million to $11.5 million, including system respiration costs of $500,000 related to the cyberattack compared to $8.6 million from last year's third quarter.

Total cost and expenses include depreciation and noncash stock compensation of $1.8 million, estimated, in the third quarter compared to $2.9 million in last year's third quarter, a decrease primarily due to last year's vesting of performance-based RSUs.

We anticipate an operating margin loss of $13.7 million to $14.7 million, compared to a loss of $9.2 million in last year's third quarter. We anticipate net interest expense and other income of $1.7 million compared to $1.6 million in last year's third quarter.

We anticipate a net loss of 15.4 -- $16.4 million, $0.33- to $0.36-per share compared to a net loss in last year's third quarter of $10.8 million, $0.25 per share. Weighted average shares outstanding were 46.1 million compared to 43.8 million in last year's third quarter.

2019 outlook. The following forward-looking statements reflect estimates based on information as of November 12, 2019, and are subject to uncertainty. We expect full year 2019 revenues of $8.7 million to $9.6 million and expect product revenues in the range of $5.7 million to $6.1 million.

We expect product -- we expect research and grant contribution revenues for the full year in a range of $3 million to $3.5 million. We expect fourth quarter product revenues of $1.7 million to $2.0 million. We expect 45 to 50 T2Dx Instrument-placement contracts in 2019 and 10 to 15 in the fourth quarter of 2019.

As you consider product revenue growth, please keep in mind, following the guidelines we have outlined on prior calls. Historically, it took new instruments an average of 3 to 6 months to go live and begin patient testing. As John outlined today for T2Bacteria, this time extended beyond 6 months for many customers and is averaging closer to 9 months. During this period, the customer typically receives normal revenue unless the hospital purchases the instrument, which in the United States occurs about 15% of the time.

International distributors typically purchase instruments at a 30% discount off a list price of $100,000 per instrument. We expect a continuation of average sales of $150 per test for the T2Bacteria Panel and $200 per test for the T2Candida panel. International distributors typically receive a 30% discount per panel. We estimate that a single T2Dx Instrument is capable of running about 3,000 tests per year, but expect average utilization to be in the range of 1,000 to 2,000 tests per year after testing ramps up. Therefore, we expect T2Dx Instrument to generate an average of about $300,000 annual revenue with a combination of T2Bacteria and T2Candida Panel testing.

We have taken actions to reduce our cash burn rate to under $8 million per quarter in the fourth quarter of this year, which will allow us to continue executing on our growth strategy while reducing expenses to be in line with our updated revenue expectations.

Operating expenses, excluding cost of product revenue to be $10.5 million to $11.5 million, including the research collaboration in the fourth quarter of 2019. Total cost expenses include noncash depreciation and stock compensation of approximately $1.5 million per quarter.

The timing of performance-based RSU vesting may affect noncash stock compensation expense. Our cash and cash equivalents were $16.2 million at the end of September 2019, which we expect will take us for the first half of 2020 without accessing any additional capital from our ATM and equity credit lines. We sold 1.7 million shares, $2.1 million of net proceeds through the ATM in the third quarter and 0 shares under the equity credit line. We are currently compliant with the terms of our CRG debt facility and we expect we'll continue to be compliant in future periods.

Stock option exercises and shares sold under the ATM and equity credit line may affect weighted average shares outstanding of 46.1 million. Thank you, and back to John McDonough for closing remarks.

Thank you, John and Tom. In conclusion, the third quarter of 2019 was filled with watershed milestones, each providing a significant benefit to the economics, commercial ramp and exposure for the company. The potential of our technology has been recognized by CMS, the U.S. government, the CDC, Premier, the FDA and customers that have adopted our technology and track the results.

We are leveraging these endorsements and the growing body of clinical and economic evidence to drive adoption of T2Bacteria, shorten sales cycles, and make our tests available to more patients as soon as possible. We are also focused on expanding our national accounts programs and working closely with customers to highlight the impact our products are having on their patients.

The external endorsements and the impact we are seeing in hospitals leave us both excited and convinced that our products need to be and ultimately will become standard of care. Thanks to the internal T2 Biosystems' team for their commitment and tireless efforts in pursuing our mission and to our investors for your belief and support.

With that, we will now open the call for questions. Operator?

(Operator Instructions) Our first question is from Puneet Souda with SVB Leerink Partners.

John, my first question is, you held a call 2 months back, highlighting BARDA contracts and the New Technology Add-on Payment and a couple of other drivers, which you reiterated today. So could you remind us when did you hear about the cyberattacks and sort of how long -- what's the duration of these attacks? And how far it dates back? And if it would have any impact on the fourth quarter sales here?

Yes. So no, the cyberattack didn't have an impact on Q3 and won't have an impact on Q4. We're back and running. All systems are back. The team worked tirelessly to make that happen. It didn't affect customers and it was just a massive, massive inconvenience that took several weeks. And the biggest challenge just in terms of how it affected the timing of filing the 10-Q is just getting all the data back into the ERP system, which the team has virtually now completed. Now we just need the auditors to review and sign off on the numbers, which is why we've got the extension for the next 5 days. But yes, the cyberattack, it should not be of anyone's concern.

Okay. And then I assume that it has no impact on the BARDA contract as well, given that Biomedical Research from the U.S. government. And would that delay -- and would that impact or delay timing of the projects for BARDA or any stringent security requirement they have?

Yes. Great question. So absolutely not. Has had no impact on BARDA. The project started exactly when we thought it would, and it really hasn't impacted. And then importantly, what -- we were hit with one of these ransomware attacks and we brought in experts who have helped companies like us many, many times. Unfortunately, this is a massive business now bigger than, I hear bigger than gambling. And what they do is they lock you out of your own system. So nothing was taken from the company based on everyone's review of everything. So there was absolutely no records that were removed or anything like that, but just certain codes that were put in place that locked you out of things like your ERP system.

So, massive inconvenience: the effort to restore means you just bring your ERP system back online and you go to your backups, use your backups and then you start, get your backup date and put all the data back in again. So massive, massive inconvenience on the team at T2, who have been incredibly working around the clock in one of the most impressive efforts I've seen ever, frankly, but it has no impact on BARDA, no impact on customers. It didn't -- no assets of T2 were taken from the company and again, nobody should be worried about this at this point in time.

Okay. Thanks on that. And on the systems placement in the quarter, can you remind us out of those 12 contracts, how many of those were in ER? And I assume that the government ones weren't placed in the ER? If you could remind us on that. And on the sales force, could you update us whether the sales force is now talking to customers about the NTAP, and sort of is that helping you in the sort of immediate term, given that the economics of the testing are much more better? And are you seeing any benefit from that? Or should we expect any benefit from that in the fourth quarter?

Yes. So historically, and I believe this was the case in the third quarter but I don't know for sure, about 70% of these placements are all, of course, going into a hospital lab, but the patient population being tested is traditionally about 70% of the ER. And you're right, the government units aren't being used in the ER. In terms of NTAP, yes, our sales force has been talking to everybody about NTAP. And those discussions started as soon as we received or about a week after we received NTAP, once we were able to educate them and have them go out there and start talking about it.

And we do think that it will have an impact in the fourth quarter, especially on instrument placements. Now the 2 areas that it's going to make a big difference is, we believe it'll drive further adoption of the technologies because it improves the overall -- significantly improves the return on investment for bringing the system in place. And secondly, and we're seeing this, we believe we'll see a broader set of patients being tested with T2Bacteria because of the lower price point as well.

So we think it'll have a big -- it will have an impact in Q4, and the impact will be growing as we go into the first half of next year, for sure, because we're talking about it now, but these things all have cycles, if you will, call it a sales cycle between when you start talking and when it actually turns into real business, but some impact in the fourth quarter is expected.

And my last one is on the transition that's in works right now. Could you update us where do you stand in your transition to the Chairman role? And where does the search stand currently for the CEO? I appreciate it.

Yes, yes. We're right in the middle of that search. There are definitely a couple of exciting candidates in the pipeline. I can't predict when that will all close itself out, but we're ready to move forward as soon as we have the right candidate in place, and I'm looking forward to the transition. So hopefully, this will all happen before the end of this year, but it's difficult to predict those things.

Our next question is from Mark Massaro with Canaccord Genuity.

John, I guess, my first one is on the 5 placements in the U.S. I believe those were all associated with the BARDA contract. Can you just give us a sense for your expectations of placements going forward related to BARDA? And then can you also talk about sort of your funnel unrelated to BARDA?

Yes. So there may be some more instrument placements related to BARDA, but if they are, it'll be not in a significant number, we don't believe. And in terms of our expectations for placements in the U.S., we remain very confident that we can continue to hit our 10 to 15 placements per quarter target. And that is where we would expect to be in the fourth quarter as well.

Very good. When we think about that BARDA contract, obviously, it's comprehensive, $6 million up front, an additional $63 million in funding over 7 option periods over 5 years. Can you just give us a sense for any more granularity around how much has been recognized up front and maybe the cadence of potentially recognizing that additional $63 million over time?

Yes. So I'll let John Sprague answer this. I think, John, am I correct, there was about $200,000 to $300,000 in the third quarter recognized with BARDA?

Yes, we took in $300,000 in September.

Yes. And maybe, John, you could talk to our expectations in Q4 and Q1.

Q4, the research revenue guidance is primarily all BARDA, and we haven't guided for 2020 yet, but this initial $6 million award runs through beginning of May of 2020.

Now what we'd expect to have happen, Mark, is you've got these 7 options, and it's not all going to be sequential. So we think it's likely in -- sometime in the first quarter another option will be picked up. And when that option's picked up, you now have 2 -- if you think about it as projects going on at the same time, so the revenue goes up. So assuming all these options are put in place, we're probably going to be averaging somewhere between $1.5 million and $3 million a quarter for several years if all the options were exercised.

Yes. That makes sense. And then as we think about our model for 2020, it looks like consensus has research revenue increasing in 2020 from the 2019 levels. To the extent that you can comment, do you think that that's fair? Or do you see the research revenue line potentially variable depending on the timing of announcing new initiatives?

I think it has 2 trigger points. New initiatives could impact it. But the other piece of it is the timing of BARDA exercising their options. If BARDA were to exercise their options the way we think they will, then I think some of the numbers that are out there -- and I don't have them in front of me -- are right, research revenue should definitely ramp up maybe even have the potential to double on the backs of BARDA alone in 2020, but that's assuming these options are all picked up in a timely manner.

Okay. And then can you comment on the breakthrough contract you signed with Premier to the extent that they're a significant GPO with really strong traction in U.S. hospitals? Can you just give us a sense for the funnel you think you might have with Premier and any early access points that your sales force has had through that contract?

Yes. We're having great access points that help them identifying hospitals and putting some programs together. There are many hospital accounts that we're already in that are a part of Premier. So that has accelerated discussions of those accounts. So it's also a very favorable and positive start.

Our next question is from Paul Knight with Janney Montgomery.

John, could you -- when you talk about $40 million needed to do -- achieve cash flow breakeven, does that include -- should we deduct, rather, the potential $6 million upfront payment from BARDA? And then lastly, could you kind of outline where you stand with Lincoln and your equity draw as well?

Yes. So that $6 million would not be a part of the $40 million. I would not think about it that way. I think about it as $40 million on top of the $6 million. And both Lincoln Park -- we have an ATM in place. And our plan there is to be opportunistic in terms of using it based on the share price.

Obviously, we saw some good rebounding on the share price. We're still not crazy about where it is relative to the value of the company for sure. But we'll continue to monitor it and utilize those vehicles very carefully because we don't want to over dilute the company, but on the other hand, we could potentially -- we'll use it to raise capital if we think the terms are reasonable.

And then the Lyme test, what would you expect pricing on the Lyme if it went LDT? And how confident are you on a spring or summer launch?

Yes, I would say we don't know what the pricing would be, but we would expect it to likely be at least north of $100 a test. And I think we're confident that we could see a launch during the tick season. Could it all happen by spring? Potentially. I think everybody that we're talking to is motivated to make that happen. So we have some confidence. It could be at the beginning of the tick season, but it's still too early to be overly confident about that, but there's still a lot of work to do.

And you mentioned in your comments earlier on the call that the Bacteria Panel expansion would be next-gen based. Is that next-gen sequencing-based, did you mean?

No. We mean next generation of our own T2Dx Instrument.

Our next question is from Steve Brozak with WBB Securities.

John, since a lot has been asked and answered, I'd like to go into one thing that had been talked about. Specifically, Candida auris. Now, obviously, you've got a exceptional relationship with BARDA and CMS, and I'll come back to the CMS part. But with Candida auris, can you flesh out or give any details in terms of the relationship that you had developed with CDC? Because I know that, that's been ongoing for a while, and I'd just like to get a reminder and any details you can provide on that, please?

Yes. You bet. Tom, do you want to take that one?

Sure. So we developed the Candida auris test for, at request of CDC and they did the validation. They published in Mycoses where they were able to use our test to get identification of Candida auris from a swab sample that's -- from patient skin swab sample within 3 hours as opposed to waiting for a culture positive, which, for Candida auris, takes 3 weeks. So the entire sort of value for Candida auris in use of patient surveillance is to provide a real-time result, and we're the only test out there that's demonstrated this real-time result within a few hours to [apt] sensitivities equivalent or better than culture to be able to inform and movement of the patient. And that's where the interest is coming from in terms of the test, and it was great to sort of work with CDC on that and see the data they published that demonstrated a clinical validation of it.

Tom, if you might just answer 1 follow-up on that. Compared to the regular pathology and how labs work, how effective have they been in terms of isolating and culturing and identifying Candida auris in the past? And I don't mean to plug you, but how -- what's the comparison as far as -- and I'm not talking about the top labs in the country or the world, but the average lab. Can you give us any details on that, please?

Ineffective, completely ineffective. That's why it's spreading even within our country right now. Currently, there's a bit of a denial going on by hospitals, hoping to just not test it and not see it, but it's spreading across hospitals and within the long-term acute care facilities, [you have it in] nursing homes and the standard method right now is they send these swab samples off to the state lab or the CDC, and then they get results back weeks later and the patient's already moved around. And so this is a serious problem and it's spreading. Fortunately, there are institutions that are starting to realize they need to be proactive. Outside the U.S. is a bit ahead of the -- within the U.S. in terms of doing that, and we're excited to be able to help those institutions.

Great. And my last question, and I'll hop back in the queue. On the CMS side that recognized T2, there was a part to that that I wanted to get greater detail and explanation, if possible. Obviously, there's a lot of new antibiotics that are out there that are not being used or that are very expensive in several cases. How does T2 and the use of T2 play into the availability or the use of those drugs and what the hospital decision making process is? Because I'm kind of curious because it's not just using T2, but it's the access to other drugs as well, that T2 can enable. What are your thoughts there? And thanks again. I'll hop back in the queue.

So John, [want me to] take that one, John?

Sure.

So -- today, physicians are prescribing antibiotics based on what they think a patient is infected with. They actually don't know if the patient's infected until days later because of the time it takes to get a positive culture and results from the laboratory. Because of that, they're relying on empiric therapies and they have a very strong bias to very cheap antibiotic therapies. And so the more expensive, specialized antibiotics are kept locked away. And so tests like T2 are critical to justifying the use of those antibiotics because then they will actually know the patient's infected, particularly with our T2Resistance Panel; and you know the patient's infected with the resistance, a pathogen that harbors a resistance marker and that will provide justification to use these more precious and more expensive antibiotics far earlier in the progression of disease.

And that's been one of the big challenges with these antibiotics. There's just not enough justification for the hospital to implement them because they're incurring costs, and they're not confident that they're using the drugs on the patients who're actually infected because they're just guessing. And so the T2 system, because we're a nonculture-based test, we can provide that result directly from the patient within just a few hours is, I think, essential to resolving the problem that we face with our new antibiotics.

And I, just last week, was at World Antimicrobial Resistance Conference in Washington, D.C., where this was a part of the discussion. And I think it's an important piece of the solution for antimicrobials.

(Operator Instructions) Our next question is from Ram Selvaraju with H.C. Wainwright.

This is [Savon] on for Ram Selvaraju. Just come back to your reducing your cash burn. I wanted to see if you had any comments on how this has progressed in terms of whether the reduction in operating expenses has negatively impacted market penetration of the company's products?

Yes. We believe that the way we've been able to reduce the cost, we have for the most part, not made substantial reductions on the commercial side of the business. It's been in other areas of the company, although we have held the size of the sales force back a little bit. So we feel very comfortable that we are rightsized for the moment, and we are prepared to expend further on the commercial side, once we see further progress and growth where we believe more people can really drive more business.

Okay. And then importantly, with your Q3 revenue, whether the company could meet the new minimum revenue requirement in term loan agreement with CRG?

Yes, we believe we will meet that minimal revenue requirement.

Okay. And one last one from me. Can you provide more color on the hospital validation time lines for the system? Do you expect the time lines to improve going forward? And in addition, how have your discussions been with any potential partnership?

Yes. So the typical time line after an account is closed, it's been averaging closer to 9 months to go live in testing patients. We do expect to see that decline over time, probably not in the short run, but we expect that to pull back into the 6-month range. And then on the partnership side, we have a lot of active dialogue, and I would even call it a strong pipeline of partner opportunities. And we're always hopeful on that front, that things will come together. But as we talked about, we have some partnering opportunities around the Lyme tests. We have other partnering opportunities that would affect some of our sepsis-diagnostic products as well. So strong pipeline, difficult to predict if and when things like that will come together. But we're hopeful we'll have more good news to report in the coming months.

Operator, are there any other questions?

Yes. Our next question is from Ben Haynor with Alliance Global Partners.

Just thinking about the Lyme LDT test, can you kind of give us a sense of the testing that goes on now for Lyme and the pricing and the cost to the patient on serology and other things that are traditionally done?

Yes. There's usually a combination of tests that are run, multiple serology tests, even PCR is used and if -- you could almost think of it as a triage approach. And when you add it all up, some of the labs that run these tests will charge in the order of $500 to get a battery of tests, multiple serology tests, TCR all in the hope of trying to detect an infection because these are, as we know, very, very difficult to detect.

So we, obviously, fit in really well with that existing paradigm. Whether we would replace all of those tests or be a part of those battery of tests would be determined over time. But we certainly fit in there as a novel approach and more sensitive approach than what's being used today. And we do believe that our own pricing, at least north of $100, maybe higher than that, maybe a lot higher than that would be warranted.

Okay. I was just -- that's definitely helpful. And then I was just trying to get at how you think about the pricing. I mean, is it something that you want to, of course, drive as much volume as possible or maximize the profitability on it? Or how -- what's a good way to think about it? Or is it still evolving, being that you're not quite sure whether it'll be a standalone -- offer kind of a standalone test or kind of be part of the mix of the battery of tests that are done?

Yes. I think in the short run, a combination of objectives of really trying to drive market share and get out there, but also drive profitability. And our cost of goods are such that we can go to lower prices in the $100 range and still get a reasonable profit margin. But we would like to drive volume, for sure, in the early days to try to drive to a more standard of care.

Okay. That's helpful. And then you mentioned in the prepared remarks about T2Candida growth remains steady. Can you kind of give us a ballpark of that growth rate? I mean, is it teens? Is it single digits? Where does that kind of fall these days?

We've been generally growing, Ben, 5% to 10% quarter-over-quarter.

Okay. Great. And then just lastly for me, kind of, I guess, a housekeeping question. Were any systems sold during the quarter?

Yes. The international units were almost all sold to distributors.

Okay. None in the U.S., though?

None in the U.S.

We have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Well, thank you all for dialing in this morning. We're very excited about the progress that was made in the third quarter on so many fronts and look forward to seeing continued growth in the business and an accelerated growth in the business and look forward to reporting back to you next quarter. Thank you.

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