T2 Biosystems Inc (TTOO) 2021 Q1 法說會逐字稿

Good day, and welcome to the T2 Biosystems First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Philip Taylor, Investor Relations. Please go ahead, sir.

Thank you, operator. 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 31, 2021, 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 would like to turn the call over to President and CEO, John Sperzel. John?

Thank you for joining our first quarter 2021 earnings conference call. Today, I will review the company's first quarter performance and provide updates on our progress across our 3 corporate priorities. I will then turn the call over to John Sprague, who will review our financial results for the first quarter before I make some closing remarks and we open the call for questions and answers.

During the first quarter, the T2 Biosystems team generated revenue of $7 million, an increase of 173% compared to the prior year period. Product revenue during the first quarter was $4.7 million, an increase of 345% compared to the prior year period. In addition to contributions from our COVID-19 diagnostic test, the T2SARS-CoV-2 Panel, which ended the first quarter with annualized test utilization of $214,000 per COVID-driven instrument, the annualized test utilization of our U.S. sepsis tests, T2Bacteria and T2Candida, was robust year-over-year and in sequential quarters. The annualized sepsis test utilization in the first quarter was $111,000 per instrument, up from $60,000 in the prior year period, a year-over-year increase of 85%; and up from $84,000 in the fourth quarter of 2020, a sequential quarterly increase of 32%.

We continue to advance our mission to fundamentally change the way medicine is practiced through transformative diagnostics that improve the lives of patients around the world. While COVID-19 presented a new and challenging opportunity to demonstrate the capabilities of our technology and our commitment to our mission, I want to reiterate that sepsis is our primary focus. Our novel sepsis test panels, T2Bacteria, T2Candida and T2Resistance offer potentially life-saving benefits for patients and cost-saving benefits for hospitals.

We believe that the clinical benefits of our sepsis products and the clear need to improve the standard of care for sepsis management will lead to greater adoption and increased utilization of our products. We are committed to establishing our T2Dx instrument and sepsis test panels as the standard of care.

The current standard of care for patients at risk of sepsis relies on broad empiric protocols to administer antimicrobial therapy despite the fact that such protocols are only optimal in approximately half of cases. To further complicate matters, the current standard of care for the detection of sepsis-causing pathogens continues to rely on positive blood culture for the detection of sepsis-causing pathogens in order to target therapy for patients that are suspected of sepsis. Blood cultures are diagnostic tests that are intended to identify the presence of a bloodstream infection. Due to their poor sensitivity, blood cultures often require multiple samples of blood from critically ill patients and take anywhere from 1 to 5 days to achieve the growth necessary for pathogen identification. Additional testing, such as traditional microbiology or post-culture molecular diagnostic tests may be required for determination of species ID and susceptibility.

The results achieved from this standard of care are both disheartening and alarming. Sepsis is the leading cause of death in U.S. hospitals, claiming the lives of nearly 270,000 Americans each year and the leading cost of U.S. hospitalization. In 2020, the U.S. Department of Health and Human Services estimated that the cost of sepsis care for patients in hospitals and skilled nursing facilities was more than $62 billion.

In addition, patients who survive sepsis may face hospital readmission due to the reoccurrence of sepsis, limb amputation due to complications of sepsis and long-term physical and psychological effects due to post-sepsis syndrome. As a sepsis survivor, I understand the impact of our technology can help our patients, hospitals and the broader health care system.

Several years ago, following a life-saving heart transplant, I acquired several multidrug-resistant bacterial infections while in the hospital, and I was diagnosed with sepsis. I was treated with broad spectrum antibiotics and after suffering severe nerve damage in both legs, spent nearly a month in a rehabilitation hospital where I had to learn how to walk again. I was discharged from the hospital and after spiking a temperature was immediately readmitted to finally receive the appropriate targeted antibiotic treatment.

Had the T2Dx Instrument been present in my hospital, the pathogen that led to my sepsis diagnosis could have been identified in 3 to 5 hours. I recently published a book about my personal experience to help raise awareness about sepsis, which I am using to shed light on why we must change the standard of care for patients at risk of sepsis. The book is titled Courage: Powerful Lessons in Leadership, Strength, and the Will to Succeed, and I'm donating 100% of the sales to Sepsis Alliance and Donate Life America, the nation's leading organizations for sepsis and organ donation.

Our aim at T2 Biosystems is to change the standard of care by enabling targeted therapy faster, that is within 3 to 5 hours of the first blood draw. This is critical as each hour of delayed targeted treatment can increase patient mortality rates by up to 8%. Our T2Dx Instrument combined with our sepsis tests, the T2Bacteria and T2Candida panels offer the first and only FDA-cleared products able to detect sepsis-causing pathogens directly from whole blood in 3 to 5 hours, without the need to wait days for a positive blood culture.

To further T2 Biosystems' mission and create shareholder value, we've outlined 3 corporate priorities for 2021 that we believe position the company for long-term success: one, accelerating our sales; two, enhancing our operations; and three, advancing our pipeline.

We'll start off by addressing our first priority, accelerating our sales. On our last call, we identified 3 commercial priorities intended to accelerate our sales. First, to transition instruments sold in the U.S. during the second half of 2020 from COVID-19 testing to sepsis testing. Second, to increase sepsis test utilization in our legacy installed base; and third, to expand our T2Dx Instrument installed base.

To accomplish these objectives and expand our commercial reach, we have rebuilt our U.S. sales team. We understand that driving adoption of T2Dx Instrument and fully implementing the use of our test and integrating them into sepsis protocols within the U.S. hospitals requires a clinically focused sales team.

In late 2020, we created a geographic sales model with 10 regional account managers across the U.S., and we have filled all but one of those positions. Our U.S. regional account managers are sales professionals with broad experience selling capital equipment into the hospital market across multiple stakeholders and understand the system-wide sales process. They have completed a training program designed to articulate the clinical and economic value proposition to the whole hospital: clinicians, laboratorians, hospital administrators, antimicrobial stewardship committees and sepsis committees.

In combination with our field application specialists and medical repair specialists, we now feel that we have the right structure and team in place to accelerate adoption and continue to increase the utilization of our sepsis products. Our newly appointed Chief Medical Officer, Dr. Aparna Ahuja and the Medical Affairs Department are generating evidence to support the clinical and health economic value of our products, both internally and through collaborators with industry thought leaders. We expect to see data published and presented at key medical conferences throughout 2021, which is important as we seek to build greater awareness of our products in the medical and scientific community. Dr. Ahuja is also leading the creation of our scientific advisory board and building our clinical affairs team as we prepare to initiate multiple clinical studies.

The Expert Review of Medical Devices, a peer-reviewed medical journal recently published a meta-analysis, exemplifying the clinical and economic benefits of our products. We believe this data will be a powerful tool for our sales and marketing teams. This meta-analysis includes data from 14 clinical studies evaluating the use of our sepsis products in the United States and internationally. According to the meta analysis, as compared to blood culture, the use of T2 Biosystems' diagnostic products reduced the time to pathogen detection by 81 hours, reduced the time to species identification by 77 hours, accelerated the time to administration of targeted antimicrobial therapy by 42 hours, accelerated the time to deescalation of patients from empiric therapy by seven hours, decreased the length of patient ICU stay by 5 days and decreased the length of patients' hospital stay by 4.8 days.

Again, that's comparing T2 Biosystems' sepsis technology to traditional blood culture. The authors conclude that in addition to significant clinical improvements and efficiencies, this could theoretically reduce hospital costs by as much as $25,000 per patient tested. This independent third-party publication further demonstrates the potential impact that the T2Bacteria and T2Candida panels can have on improving clinical and health economic outcomes.

While U.S. COVID-19 cases have decreased since the peak in January, our T2SARS-CoV-2 Panel continues to be a valuable tool for our U.S. hospital customers. We believe U.S. hospitals will continue their COVID-19 efforts during 2021, especially as new COVID-19 variants emerge, like the B.1.617 variant currently spreading in India. We previously announced that the T2SARS-CoV-2 Panel is capable of detecting the Brazil, U.K. and South Africa variants based on sequence and in silico analysis. And I'm pleased to confirm that the T2SARS-CoV-2 Panel is also capable of detecting the India B.1.617 variant based on the same analysis.

While the COVID-19 pandemic has limited access to hospitals, we anticipate increased access to hospital personnel as the year progresses and to a greater extent, during the second half of the year. We believe this provides greater opportunity to sell new T2Dx Instruments for sepsis testing, add sepsis test panels to customers that are currently utilizing only the T2SARS-CoV-2 Panel and to drive broader adoption of sepsis test panels in legacy sepsis accounts. This is why we expect 70% of 2021 T2Dx Instrument sales to occur in the second half of the year and to be used primarily for sepsis testing. This has been our strategy since the onset of the pandemic and the reason why we have only been selling our instruments to prequalified U.S. hospital microbiology lab customers with a stated interest in evaluating the use of T2Bacteria and T2Candida panels for integration into their sepsis treatment protocols.

As previously stated, our commercial focus in 2021 remains on driving adoption and utilization of our sepsis products. We remain on track to close at least 30 T2Dx Instrument contracts during 2021. Our new U.S. sales force is actively calling on targeted customers, both virtually and in person, and we are advancing toward our 2021 sales objectives. I'm pleased to report that during April, we sold T2Dx Instruments to 2 of the leading U.S. hospitals, which will be used for routine sepsis testing.

Moving on to our second priority, enhancing our operations. In 2021, we will continue to prioritize enhancing operations across our business, including improvement in product gross margins and operating cost structure. Over the last 12 months, we have significantly scaled our manufacturing capabilities and strengthened our supply chain relationships. We believe this is important for the future success of the company as we advance our product pipeline and continue to enhance our operations.

While the increased volume has had a favorable impact on overhead absorption, we are continuing to pursue a number of cost improvement initiatives aimed at improving product gross margins and increasing the company's overall efficiency.

Finally, I would now like to address our third strategic priority, advancing our pipeline. We intend to extend our technology lead by broadening our capabilities for the detection of sepsis causing pathogens from whole blood samples. Our ongoing focus has been on advancing the programs outlined in our product development contract awarded in 2019 by the Biomedical Advanced Research and Development Authority, or BARDA. The total value of the contract is up to $69 million paid upon the achievement of certain milestones and defined contract phases. We completed the base phase of the contract during the third quarter of 2020, and we are currently working toward fulfilling the milestones under option 1 of the contract.

As I previously stated, our new product development programs have been running ahead of schedule and under budget, which provided an opportunity to revisit the terms of the BARDA team, including the schedule. Today, we announce that we have modified the terms of our existing BARDA contract that will allow us to accelerate our project milestones in option 1 for our comprehensive sepsis panel, the next-generation instrument and the biothreat panel. We have recently hired a number of employees to accelerate these programs under the terms of the BARDA contract, including the schedule and funding.

The comprehensive sepsis panel is a direct from blood test panel designed to detect approximately 99% of all bloodstream infections caused by bacterial and Candida species and antibiotic-resistant markers identified as threats by the CDC in a single test with a timely result of approximately three hours. We believe this comprehensive sepsis panel has the potential to totally disrupt the traditional blood culture workflow and become the new standard of care. The next-generation instrument is designed to be fully automated and random access, like our current T2Dx Instrument. The instrument is being designed in parallel with the comprehensive sepsis panel to detect an increased number of pathogens and resistance genes from a single whole blood sample independent of blood culture. The biothreat panel is a direct from blood panel designed to detect 6 biothreat pathogens from a single patient sample and run on the FDA-cleared T2Dx Instrument.

Today, we also announce that BARDA has agreed to include milestones for the T2Resistance Panel that will enable T2 Biosystems to commercialize this product in the United States market. While we're currently selling the T2Resistance Panel in Europe under CE Mark, we need to conduct additional verification and validation studies as outlined by the FDA through the presubmission process to initiate the clinical trial needed to pursue FDA 510(k) clearance.

To frame this opportunity, more than 2.8 million antibiotic-resistant infections occur in the U.S. each year and more than 35,000 people die as a result. Unfortunately, these patients are typically on empiric therapy or therapies that do not adequately treat the resistant infection in a timely manner as the current standard of care for identifying these resistant markers also relies on blood culture workflow. We believe the T2Resistance panel can be a game changer for many of these patients, providing results in hours instead of days, enabling clinicians to target therapy for patients with resistant infections faster than ever before.

In 2017, CARB-X, which is funded by both BARDA and the Wellcome Trust awarded T2 Biosystems $2 million to support the development of the T2Resistance Panel, designed to detect 13 resistant genes from both gram-positive and gram-negative pathogens directly from a whole blood specimen without the need for blood culture.

In 2019, the FDA granted breakthrough device designation for the T2Resistance Panel, reflecting the purpose of the test panel to rapidly identify resistant infections. We believe this test will enable more patients to get on the right targeted therapy faster, potentially reducing mortality and hospitalization costs, and we're excited to continue our partnership with BARDA on this critical project.

With that, I'll now turn the call over to John Sprague to go over the details of our first quarter financial results.

Thank you, John. Total revenue for the first quarter of 2021 was $7 million, an increase of 173% compared to the prior year period. Product revenue was $4.7 million, an increase of 345% compared to the prior year period, driven primarily by increased sepsis and COVID-19 test sales. Research contribution revenue was $2.3 million, an increase of 54% compared to the prior year period, driven by increased BARDA contract activities. Product costs for the first quarter of 2021 were $5.8 million, an increase of $1.1 million compared to the prior year period, driven by increased sales. Research and development expenses were $4.7 million, an increase of $400,000, driven by increased BARDA contract activities.

Selling, general and administrative expenses were $6.2 million, a decrease of $1 million driven by lower headcount. Net loss for the first quarter of 2021 was $10.7 million, $0.07 per share compared to a net loss of $14.9 million, $0.22 per share for the prior year period. Total cash was $43.9 million as of March 31, 2021, including marketable securities and restricted cash.

We filed a new Form S3 registration statement and established an ATM facility in March to allow the company to sell common stock. To date, we have not sold any stock under the facility.

Reiterating guidance, we continue to expect total revenue for the full year 2021 of $24 million to $26 million, including product revenues of $16 million to $18 million and research contribution revenues of $8 million, and we expect to close at least 30 T2Dx Instrument contracts.

Thank you, and back to John Sperzel for closing remarks.

Entering 2021, we set 3 corporate priorities: accelerating our sales, improving our operations and advancing our pipeline. We're very pleased with our progress during the first quarter, which included total revenue growth of 173% and product revenue growth of 345% compared to the prior year period. Most importantly, our sepsis test sales continue to increase with an 85% increase compared to the prior year period, a 32% sequential increase compared to the prior quarter.

We have rebuilt a clinically focused U.S. sales team to drive greater adoption of our novel sepsis products, and we are strengthening our medical and clinical affairs teams to generate additional clinical and economic data and to support our customers. We continue to enhance our internal operations, which have resulted in a more favorable cost structure. And we remain excited about our product pipeline, including the T2Resistance Panel and our opportunity to lead the change in the standard of care for the management of patients suspected of sepsis.

We will now open the call to questions. Operator?

(Operator Instructions) And we take our first question from Mark Massaro of BTIG.

This is [Janine] on for Mark. So I just have a quick one on how you anticipate balancing placing new instruments along with instrument conversion over from COVID to sepsis for 2021.

Sure. So first of all, we're super excited to have the new sales team in place, and we're able to attract really talented people. If we look at those 10 sales territories, there is a mix of installed base for sepsis, which we would call our legacy installed base, new instruments that we sold in the second half of 2020, which are primarily used for COVID testing. So not every territory looks the same. Some territories, in fact, of those 10 have very few instruments in their installed base. So depending on what that particular territory looks like, a sales rep may have a heavy emphasis on converting COVID-driven instrument sales to sepsis testing, may have a mix of that plus sepsis testing or may have a very heavy load of selling new instruments.

But as John said, when we look across the whole business for 2021, we feel confident in the 30 instruments that we plan to sell for this year, the 30 contracts. And I will say that in April, we already closed 2 major accounts, one of them is Mayo Clinic and the other is Baylor in Texas. So we feel really great about the quality of those 2 closes that we already have in April.

Okay. Awesome. And just one follow-up for me. On the modification of the BARDA contract, it seems like you may have some updates on the product pipeline. So you said that -- just touch on the update you have for T2Lyme and T2Resistance as well as the next-gen instrument.

Sure. So the way the BARDA contract is structured, as I mentioned in the call, there's a base phase which we completed late last year, and then there are 6 options. We're working on option 1 right now. And we obviously have to earn our way into option 2 and 3 and 4 and so on. The best way we can do that is to deliver on the milestones within the option that we're currently working.

And our team has done a terrific job. We delivered all the milestones on the base phase, which led to option 1. And we did that ahead of schedule, underbudget. We were in the same place with option 1. So we had the opportunity to meet with BARDA and revisit the schedule, the structure, the timing, the funding to a very favorable position.

Remember, our goal is to get these products finished, get the regulatory approvals and get them into the market so that we can save patient lives. And we're ahead of schedule on that. We were able to pull milestones from option 2 for the comprehensive sepsis panel, the next-gen instrument and the biothreat panel into option 1. So the hope would be that when we get to option 2, we're able to pull milestones from option 3 into 2 and continue along that base. So when we get to the goal line, we're faster on all of these projects.

The most important thing that we were able to accomplish is to get T2Resistance pulled into the overall BARDA program. It was listed as an additional service originally, and we were able to bring milestones for T2Resistance into option 1, which is going to allow us to accelerate that program, and we're super excited about that. We view it as a key product in our portfolio in the U.S.

as far as T2Lyme, just your last question, our strategy has always been to initially sell T2Lyme as a LDT, or a lab-developed test, through a partner. That obviously got put on hold because of COVID, but that remains our strategy going forward, and we're hopeful to make some progress in the back half of 2021.

Our next question comes from Stephanie Yan of Canaccord Genuity.

I'm on for Max Masucci today. So first off, could you give us an inside view of the sales interaction that you all have been experiencing lately? In terms of the customer types you're targeting, are you seeing any strength -- areas of strength or certain regions or customers of a specific size, whether that's a larger integrated health care system or a smaller hospital lab?

So we're obviously targeting hospitals only. That's the only place that we're selling our products because, of course, we're focused on critically ill patients, whether it's for COVID testing or for sepsis testing. We are targeting a mix of integrated systems as well as stand-alone hospitals. I mentioned 2 that we just closed, Baylor and Mayo. And of course, those are systems as well. So it's a combination. If we target all systems, sometimes they have a longer sales cycle, and we want to just have a good balance there.

We just hired and expanded the sales team. For most of the first quarter, they were in very extensive training. They have a lot of experience selling diagnostic products, selling capital equipment. Many of them have sold into microbiology labs. So the training was very focused on the clinical value proposition and the economic value proposition and, of course, the technical aspects of our products.

We are already active with a lot of customers. And as the first questions came in around the mix of customers that we have out in the market, we're speaking with customers that bought our instrument for COVID testing about transitioning to sepsis. We're talking to our sepsis customers about more broadly utilizing our products in their facilities, and we saw that in the increases in utilization in the first quarter. And we're very early in the process of talking to customers that we've never spoken with before.

We're still seeing hospitals, to some extent, limiting sales rep access, but we're doing everything that we can, whether it's via Zoom or telephone calls or, in fact, in-person meetings to get as much access as we can. We do see that evolving in a favorable way as the year progresses.

Okay. Great. And also, could you give us a little bit more detail around the demand and utilization trends you've been seeing with T2Bacteria versus T2Candida?

So the majority of our sales in the U.S. are focused on T2Candida, and that is really just a consequence of when those products gained FDA clearance. T2Candida came out well ahead of T2Bacteria, and T2Bacteria evaluations in the United States were more impacted by COVID than T2Candida, which was already integrated in many of our customer sites. So we see that mix changing over time. The opportunity is obviously much greater with T2Bacteria, and that's obviously a priority for our sales team as well.

(Operator Instructions) Our next question comes from Benjamin Haynor of Alliance Global Partners.

First off for me, just you mentioned on the improvement for the utilization on the sepsis instruments. Is that kind of a figure that you see being able to build upon as time -- as we go through 2021 and beyond here? At least as in the existing accounts, I know there will be some impact as some of these COVID accounts move over to sepsis testing as well. But at the existing accounts, do you expect that, that will continue to build?

We expect to continue to increase the test utilization on our sepsis platform. We target, I would say, as an average, $200,000 per instrument per year on an annualized utilization basis. If you remember, Ben, a year ago when I joined, it was at about $50,000. I think a year ago, this quarter, it was at $60,000. It grew throughout the year. We ended 2020 at $86,000. We came out of Q1 at $111,000. So we're obviously moving towards $200,000, but we had hoped to get there sooner. Again, we set a target at end of 2020 to get to $100,000. We're a little bit short of that, but there were some COVID headwinds. And that part of it is still a little bit unpredictable, but we still consider $200,000 as the right threshold or baseline for a sepsis utilizing customer. We have many that are doing well beyond that, by the way.

Sure. Okay. Got it. And then on the gross margin improvement, I think it's the best you put up in the past few years anyway in terms of gross margin. I mean is that largely due to the -- a better mix of sepsis panels versus COVID panels? Or is that a function of grants/research revenue coming in at higher margin? What's the right way to think about that?

John Sprague, would you like to take that?

Yes. So I think it's all of the above, Ben. But think about it in pieces. The product margins are improving. We've been able to make bulk buys against our forecast and get better product materials pricing for components. We put in operational efficiencies on the plant floor, which is driving better throughput and better yields. And then, of course, the BARDA volume absolutely drops right to margin, it helps. But the product trends will continue improving and will also benefit from improved sales volumes.

Okay. That's helpful. And then just thinking about kind of the clinical side of things, obviously, the meta-analysis that you had published or that was published seems awfully compelling. If you're getting folks out of the ICU 5 days earlier, and I know it's theoretically -- theoretical of the $25,000 per patient tested. That would seem, like I said, awfully compelling. I guess, what additional evidence do you think hospitals need to see to get on board? And anything that you can discuss in terms of what your clinical efforts might look like this year that you mentioned earlier in the prepared remarks?

I would completely agree, it's very compelling data. And of course, that is up to $25,000 per patient tested. That's based on a cost -- average cost in an ICU days. So that can fluctuate across the country depending on where the patient is. We're going to continue to develop both clinical and economic data to support the products. That's why we hired Dr. Ahuja as Chief Medical Officer. And I would say the bar is being raised every single day in that area, and we're excited about it.

This concludes today's Q&A session. At this time, I would like to turn the call over to our host for any additional or closing remarks.

Thank you very much for joining our first quarter earnings conference call. We look forward to updating you next quarter.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.