NanoString Technologies, Inc.
Q3 2018 Earnings Call Transcript

Published: 10 Nov 2018

[Operator:]

Good day ladies and gentlemen and welcome to the NanoString 2018 Third Quarter Financial Results call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder this call is being recorded. I would now like to introduce your host for today's conference Mr. Doug Farrell, Vice President Investor Relations. Sir you may begin.

[Doug Farrell:]

Thank you operator. Good afternoon everyone. On the call with me today is Brad Gray, our President and CEO; and Tom Bailey, our CFO. Earlier today we released our financial results for the third quarter of 2018. A copy of the press release can be found on our website at nanostring.com. During this call, we make statements that are forward-looking, including statements about financial projections, existing and future collaborations, future business growth, trends and related factors, prospects for expanding and penetrating addressable markets, our strategic focus and objectives, and the development status, timing and anticipated success of recent and planned product offerings. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today’s call, and we undertake no obligation to update those forward-looking statements. We're looking forward to catching up with many of you next week. We'll be on the road in Boston for a DSP KOL dinner as well as in New York at the Canaccord Conference. With that let me turn the call over to Brad.

[Brad Gray:]

Thanks Doug. Good afternoon and thank you for joining us today. I'm going to provide a brief overview of our performance for the third quarter and an update on our strategic objectives. Then I'll turn the call over to Tom to review the details of our Q3 operating results and to update our guidance for the year. We've executed well over the last four quarters and returned our core nCounter business to solid growth. For three quarters in a row our products and service revenues have exceeded the top end of our guidance, demonstrating that the steps that we've taken to strengthen our commercial team and infrastructure have been successful. In addition, we've generated tremendous interest in our GeoMx Digital Spatial Profiler setting the stage for a successful 2019 launch that we believe will accelerate our growth rate next year. In the third quarter, we recorded $21.5 million in product and service revenue generating 27% year-over-year growth. These results were strong across the board with instruments, consumables, and service, each growing by greater than 20% compared to the prior year Our instrument revenue have benefited from solid demand from bio-pharma customers who drove about half of our instrument revenue in direct markets. SPRINT accounted for approximately 45% of instrument placements. Our installed base has increased by more than 20% over the last 12 months, laying the foundation for continued growth in our core nCounter business in 2019 and beyond. I'm particularly pleased with the trajectory of our consumable business. Total consumables which includes both life science reagents and Prosigna grew more than 28% during the third quarter. The bifurcation of our sales force into separate teams focused on instruments or consumables has provided visibility and linearity resulting an annualized consumer will pull through at the high end of our guidance range. Within life sciences consumables we delivered more than 35% growth in panels, while custom code sets were approximately flat year-on-year. Meanwhile, Prosigna delivered its strongest quarter yet. Now, I'd like to provide an update on our strategic objectives for the year. Our first strategic objective is extending our leadership in oncology research and diagnostics. During the third quarter oncology continued to be the primary growth engine for our business accounting for about 60% of new instrument placements in our direct markets. Our PanCancer panels remain the largest portion of our consumable revenue and grew approximately 25% year-on-year. Much of this growth is driven by immuno-oncology where our PanCancer immune profiling panel remains our top-selling research product and our newer IO 360 panel remains our fastest-growing panel launch to date. These products are being systematically incorporated into the biomarker discovery paradigms of biopharma companies. For example, last week we announced a translational research collaboration with MacroGenics who use IO 360 to identify predictive biomarkers signatures for their MGD013 program. We will be evaluating the Tumor Inflammation Signature and other Novel Gene Expression signatures that may enhance or accelerate the clinical development of MDG013 potentially yielding a companion diagnostic in the future. We expect our momentum in immuno-oncology to continue. The annual meeting of the society of immunotherapy for cancer or SITC is currently underway and features more than 25 studies with data generated using our platforms. This morning we announced the launch of a new CAR-T Characterization Panel for use in development and manufacturing of cell therapies. This panel was created in collaboration with eight leading research centers and biopharma companies and it is designed for use across the entirety of the CAR-T workflow including leukapheresis manufacturing and post infusion monitoring. We believe that this product can help address a major unmet need in a field where there are currently over 100 active CAR-T programs and more than 600 active studies underway. We're also making steady progress on the diagnostic side of our business. During Q3 we generated record Prosigna revenue of $2.6 million driven by growth across all geographies. We now expect to exceed $9 million in Prosigna revenue for 2018 putting us above the top end of our previously provided Prosigna revenue guidance range. In addition, we expect the Prosigna’s growth will continue to benefit from positive health technology assessments. For instance the UK's [Night] has published on its website draft guidance that includes Prosigna and which is scheduled to be finalized in December of this year setting the stage for Prosigna to become widely available to UK patients beginning in 2019. Our second strategic objective for 2018 is to drive nCounter into new therapeutic areas and applications. Over the past several quarters we've used new product launches and marketing campaigns to substantially increase the awareness of nCounter outside oncology. These efforts are paying off and during the third quarter approximately 40% of instrument sales came from areas outside of oncology, the most meaningful contribution to growth since we began tracking this metric. Immunology has been an area of particular strength. During the third quarter immunology accounted for approximately one third of new instrument placements while our portfolio of immunology panels accounted for about one quarter of all panel sales and grew more than 50% year-on-year. Neuroscience is another area focus where we introduced new panels earlier this year. While these panels remain early in their product life cycle, repeat purchasing behavior is encouraging with reorders from about half of the customers who try these panels to date. Our third strategic objective is to initiate the early access launch of our GeoMx Digital Spatial Profiling platform by year-end. We remain on track to achieve this objective and expect to ship our first beta units to external sites later this quarter. The progress that we've made on DSP in the past few months has been fantastic and we are seeing multiple leading indicators of a strong 2019 launch. Our DSP technology access program or TAP which allows customers to experience DSP by sending their samples to NanoString for processing has expanded at an impressive pace. During Q3 we’ve received orders from more than 20 new TAP projects and demand currently exceeds our internal capacity. Biopharma companies have begun to submit studies that total 100s of patient samples and we are carrying a substantial backlog of TAP orders. In addition, the TAP program is yielding a steady stream of DSP data and presentations at major meetings. Just this week at the SITC meeting there are six studies that include DSP data each covering a different cancer type and authored by a different set of scientists. The TAP program recently yielded two independent peer-reviewed papers published simultaneously in the high-impact journal Nature Medicine. One of which was co-authored by Jim Allison of MD Anderson who recently won the Nobel Prize for his work in immune-oncology. We're tracking a large number of additional manuscripts that we expect we'll publish over the next year highlighting the power of DSP and supporting its adoption. In August, we open an early access program to place five data instruments at leading research centers. The program was substantially oversubscribed allowing us to select the sites from among the top research institutions, medical centers, biopharma companies and contract research organizations. To begin capturing demand from researchers who are not selected as early access sites we created our GeoMx priority site or GPS program. Participating in the GPS program provides researchers with an opportunity to preorder a GeoMx system for delivery in 2019 while beginning to generate data on their samples through the technology access program ahead of instrument delivery For a price of $295,000 customers will receive a package including their GeoMx instrument, startup reagents, and TAP service on 12 samples. GPS status will be limited to the first 20 participants who purchase the commercial system. Outside of the GPS program we've been working to build a funnel of potential customers interested in ordering GioMx systems after the whole commercial launch planned for the first half of 2019. During Q3. we ran a GeoMx DSP grant program that received more than 100 applications from academic researchers from around the world. While the University of Oxford was selected as the winning recipient the other applicants form a substantial funnel of potential GeoMx customers. In fact, some applicants responded to the news that they had not won the grant by immediately requesting a quote for the purchase of a system. In summary, across TAP, early access, the GPS program, and our grant contest we are seeing many signals of strong demand that increase our confidence and a successful 2019 GeoMx launch. Our fourth strategic objective is to advance our Hyb & Seq platform towards a commercial launch. As we highlighted at the association of molecular pathology or AMP meeting last week, the technical developments in new applications are progressing nicely. On the technical front, we provided the first public disclosure of sequencing data from the fully scaled Hyb & Seq reagent set which included a 4,096 barcode set covering every possible six base combination in any [genome]. This reagent set provides a fully generalizable sequencing chemistry and achieved a major milestone in our development program. We also highlighted the ability to seamlessly visualize and analyze Hyb & Seq data using a standard genome browser and we presented an approach for ultra-fast digital counting of DNA and RNA allowing Hyb & Seq to be used like a supercharged nCounter system to rapidly detect pathogens or measure gene expression profiles. In parallel, our collaborators showcased work in the field of infectious disease demonstrating how the simple workflow and rapid turnaround time of Hyb & Seq could open up new clinical applications for next-generation sequencing. This is an area where existing sequencing technologies fall short of customer needs, creating a significant opportunity that we believe could be one of the killer applications for Hyb & Seq. Researchers from Massachusetts general hospital were selected for an oral presentation of their work on rapid pathogen identification and antibiotic susceptibility testing using Hyb & Seq. The second study from researchers at Weill Cornell Medical Center use Hyb & Seq to rapidly and accurately identify pathogens across kingdoms including bacteria, viruses, and fungi. Our next major update on Hyb & Seq will be at the Advances in Genome Biology and Technology or AGBT Conference in Q1 of next year. Now I'll turn the call over to Tom to review our financial results for the third quarter and update our guidance for the balance of the year.

[Tom Bailey:]

Thanks Brad. I'm pleased to have the opportunity to review our operating results for the third quarter of 2018 and our updated outlook for the year. For the third quarter of 2018 product and service revenue was $21.5 million representing a year-over-year growth of 27%. Our third quarter performance brings total product and service revenue for the first nine months of 2018 to $59.9 million. This result represents 17% growth as compared to the first nine months of last year. It was driven primarily by strong consumable sales and demand for our GeoMX DSP technology access program. Product and service revenue for the third quarter included $5.4 million at instrument sales and $13.7 million in total consumable sales. Our instrument installed base grew over 20% compared to this time last year and annualized consumable pull-through at over $81,000 for Q3 were above the high end of our guidance. Life science consumables revenue excluding Prosigna was $11.1 million reflecting 24% year-over-year growth. Life science consumables benefited from growth of more than 35% at panel sales. Consumable revenue also includes $2.5 million Prosigna sales, an increase of more than 50% over the prior year. Service revenue is $2.3 million with growth driven by continued demand for GeoMx, DSP, TAP as well as our increasing installed base of systems. Revenue from collaborations was $7.2 million for the third quarter bringing total collaboration revenue recognized year-to-date to $16.8 million. For the third quarter we received cash from collaborators of $7.3 million bringing our year-to-date cash received from collaborators to $19.5 million. The majority of cash received and collaboration revenue recognized was derived from our partnership with Lam Research. Gross margin on product and service revenue for the quarter was 57% which was consistent with the third quarter of 2017. R&D expense was $16.7 million, an increase of 46% over the prior year. Investment in our Hyb & Seq program accounted for the bulk of the increase and was supported by approximately $7 million in program payments received from Lam Research during the quarter. Excluding Hyb & Seq development expenses funded by Lam, our R&D expense would have been lower in Q3 ‘18 as compared to the prior year and a significant portion of our remaining R&D expenses relate to our investment in GeoMx DSP a new platform that is now less than a year away from its commercial launch. Our SG&A expense was $17.8 million for the quarter, a decrease of 3% as compared to the third quarter of 2017. The lower expenses in the current quarter are primarily related to lower than planned accounting and legal fees. The timing of certain expenses related to trade shows, and marketing activity and modestly lower personnel costs. Stock based compensation expense for the quarter was $2.8 million and we ended the quarter with $95 million of cash, cash equivalents and short-term investments. Turning to our financial outlook, we exceeded our product and service revenue guidance for the third quarter by approximately $1 million as a result we are again raising our product and service revenue outlook for the full year. For the full year 2018 we now expect product and service revenue of $82 million to $83 million representing an annual growth rate range of 14% to 15% as compared to our revised range offered this past August of 10% to 13%. This increase in our annual product and service revenue outlook is a result of our strong consumables pull through driven by customer demand for nCounter panel products and by our dedicated consumable sales team. Our raised outlook is also supported by growth and our service revenue driven primarily by GeoMx, DSP, TAP. We continue to expect gross margin to be in the range of 57% to 59% consistent with our prior guidance. We expect collaboration cash received and revenue recognized to be approximately $23 million. This update relative to our previous guidance of approximately $25 million is the result of a sequential reduction in the expected Hyb & Seq related R&D spending in Q4 of ‘18 following significant efforts in Q3 to fully scale the Hyb & Seq reagent set and chemistry. We expect total revenue which includes our estimate and revenue from collaborations of $104 million to $106 million consistent with our previous guidance. As detailed in our press release we are narrowing our prior guidance range for operating expenses. We are also updating our guidance for GAAP net loss and net loss per share for the year reflecting modest changes pursuant to the updates just provided. Our GAAP net loss per share guidance also reflects the expected impact of additional shares issued in the equity offering completed in July. For the fourth quarter we expect product and service revenue of $22 million to $23 million which would represent growth of 5% to 9% over the prior year. Q4 instrument revenue is expected to be approximately consistent with the last couple of quarters sequentially in line with our guidance of steady instrument revenue for the entirety of 2018 as compared to 2017. Annualized consumables pull-through is expected to continue at or near the top end of our guidance range of $75,000 to $80,000 per system. We expect service revenue will continue to show consistent year-over-year growth in Q4 benefiting from strong demand for a GeoMx DSP technology access program. We expect approximately $6 million in revenue recognized from collaborations reflecting updates to the planned pacing of Hyb & Seq R&D spend during Q4 as described earlier. Finally, we expect tour new of approximately $28 million to $29 million. Turning to the balance sheet, we exited the third quarter with approximately $95 million in cash on hand. In addition, we recently announced the new $100 million term loan facility with our existing lender CRG which replaces our old $50 million dollar facility and offers us significantly better terms and more potential capital to fund the business. Gross proceeds of our initial draw totaled $60 million and we dented approximately $8 million of additional cash at close after repaying the old loan and related transaction fees which ultimately puts our pro forma cash balance at over $100 million. We believe this transaction together with our recently completed equity financing and funding we expect to receive from Lam Research provide the resources necessary to fund our business plans in 2019 and beyond including the GeoMx DSP launch. Thank you for your time today and your interest in NanoString and I'll now turn it back to Brad to conclude the call.

[Brad Gray:]

Thanks Tom. In summary, our core business is on strong footing and our growth outlook is positive. Our leadership and oncology remains strong and we successfully are expanding into new therapeutic areas. As we look ahead for 2019 we see continued adoption of nCounter supplemented by a GeoMx DSP launch that we expect to raise the company's growth profile. We're optimistic about our markets and products and confident in our ability to execute. We now like to open the call for your questions.

[Operator:]

Thank you. [Operator Instructions] And your first question comes from at Dan Brennan with UBS. Your line is open.

[Dan Brennan:]

Great. Thank you. Thanks for the question the guys. Congrats on the good quarter. So I wanted to start with the consumable business obviously a strong quarter there. Maybe can you just elaborate a little bit on what you're seeing on the oncology side particularly with your existing panels and then maybe can you define a little bit more what this CAR-T panel opportunity looks like?

[Brad Gray:]

Sure. Thanks Dan. So oncology remains a core area of strength for us. The majority of our PanCancer panel revenue which grew over 25% year-on-year is accounted for by our two immune-oncology panelists the PanCancer immune profiling panel which for some time it's been our number one selling product and our newer IO 360 panel both have grown quite robustly over the last year with demand coming both from academic researchers and from biopharma companies. In particular the IO 360 panel has appealed the biopharma companies because it includes the tumor inflammation signature as developed by Merck and has demonstrated to be a helpful predictor of response in checkpoint inhibitor therapy. So we continue to expect that that line of consumer products will grow as our installed base in cancer continues to grow. The CAR-T therapy panel was built really with a coalition of leading centers and academic research and biopharma companies who are all grappling with the same challenge which is how do you extract living material from a person, put it through a manufacturing process and then re-infuse it as a therapeutic. That's obviously a very complex process to control when to make reproducible over time. What we hope we can do is use the high flex gene expression profiling that nCounter offers to identify markers that can help characterize the samples before they go into manufacturing process, monitor the manufacturing process and then test the quality of the final manufacture material that goes back into the patient. The CAR-T panel will begin shipping in the fourth quarter of this year though we don't expect it to make a [material] contribution right out of the outset. What we really hope will happen is that some of this 100 odd organizations that are developing CAR-T therapy will incorporate it systematically into their manufacturing processes in the long run which could make it an important product in much the same way we've seen with other bio processing type applications from other companies.

[Dan Brennan:]

When you think about CAR-T, and you think about immunology, and you think about neurology, is the impact of this proliferation of panels is it to eventually drive an upward trend towards your pull through NOI such that you can exceed that 75 to 80 consistently or is it simultaneously likely going to drive an inflection rate in your instrument growth rate? So pull forward from customers, I mean, so I guess, there's a long way of asking is flat instruments the right way to think about kind of as we look beyond ‘18 with it 75 to 80 or do we expect kind of those to inflect higher given the increasing panel breadth that you have?

[Brad Gray:]

Dan, I expected the right way to think about our business is continued flat nCounter instrument placement just as we guided this year with consumable pull through in a 75 to 80 range that we guided and have now demonstrated this year. The introduction of new panels will primarily benefit us in terms of motivating new instrument purchase both in oncology maybe in areas like CAR-T and outside oncology and areas like autoimmune disease and neurology and that will help sustain that instrument placement rate, it will not we expect drive consumable pull-through meaningfully above the current pace that we're seeing.

[Dan Brennan:]

Okay, and then let me just one on DSP. So when will you share some initial thoughts about 2019? You give a lot of color about the extensive amount of trial and that's ongoing. So when will we get the first look on how we should be thinking about these before ‘19 and just running related to that what's left in terms of the scale up for commercial like how much work needs to be done for your product to be ready to ship out is I mean is it fully manufacturing no in-house and it's bass you've got a lot of you sitting in inventory to go out or is there still a lot of kind of inherent transition up to that scale up process still ahead of you. Thanks.

[Dan Brennan:]

Yes. So I think we'll obviously be guiding formally about our revenue expectations for 2019 as we always have in the first quarter when we do our full-year wrap-up call typically in February. What we have said that we can provide for initial kind of modeling on DSP is that we expect the launch to look a lot like the SPRINT launch did, as you may recall the SPRINT launched around mid-year and sold about 20 units in the first couple of quarters. So if next year with having sold 20 DSP systems the recognized revenue for 20 DSP systems that would be a bottom line with our current expectations and we'll know a lot more as time goes on and we'll be willing and able to provide more clear guidance when we get to the February call. In terms of what remains for us to complete before the launch I think we're in really good shape. The instruments, the beta instruments have been in house since August. They're being put through their paces then we don't feel that there's going to be any material instrumentation design changes before full commercial launch. The rate of limiting step really for us is the software which is a very important part of the user experience in DSP because the visualization of the images coming off the system in combination with a high flex proteomic and gene expression data there's a big part of the power of the platform and right now that's the focus of our ongoing development and debugging efforts. In addition, it'll be very important for us to make sure that the first set of user experiences from DSP are positive. This is a new platform unlike anything that customers have used before, so we'll want to throttle the placement rate of new instruments in the early quarters in order to ensure that we can provide tremendous levels of support and great experiences to our customers and we are working now and we'll be working in Q4 to install those beta systems to train customers for the first time and to smoke out anything that could go wrong in that process so that when we get to the full commercial launch it's as smooth as possible. But there is not any major scale up activity or engineering to complete at this stage. It's really about software reagents and making sure the customer experience can be an excellent one.

[Dan Brennan:]

Great. Thank you.

[Operator:]

Thank you. Your next question comes from Catherine Schulte from Baird. Your line is open.

[Catherine Schulte:]

Hey guys thanks for the questions and congrats on a nice quarter. First on DSP what are your initial capacity limitations they're from a manufacturing perspective and how quickly should we expect that to ramp up?

[Brad Gray:]

Yes I think we have sufficient manufacturing capacity to provide the number of instrument units that I just described it's sort of analogous to the SPRINT launch. As I alluded to an answer to Dan's question I think our capacity constraint is going to be more on the installation and service side. We want to be absolutely certain that we're supporting our customers and their first experiences on the platform and we'll want to be sure that they get the white glove service that they need on a new technology and so we're thinking hard about how we organize ourselves for that, how many people we need, how many different teams, how many instruments a month we can reasonably install and still provide that service we want and in the beta program, the early access program that initiates later this quarter is going to be the first trial run on that process and we'll have a lot more to say about what we think we can reasonably accomplish when we get to the time of guidance at the February next year.

[Catherine Schulte:]

Okay and then can you talk a bit more about the MacroGenics collaboration. How should we think about this unfolding and any timelines for a potential move into phase three?

[Brad Gray:]

Sure, the MacroGenics collaboration is unlike our other biopharma collaborations in the sense that we are not moving initially towards the development of a companion diagnostic product. We're instead focused on really retrospectively analyzing some of the early studies for MGD013 using our IO 360 panel and our [biopharama] expertise with the hope of finding a gene expression patterns that can help accelerate the development of that either by selecting patients or otherwise. So for the next 12 months, we'll really be focusing on testing samples from those dose escalation and dose expansion cohorts and really it will require at least 12 months before we be in a position to determine that we have companion diagnostic content that could be used in further development.

[Catherine Schulte:]

Great and then last one from me just can you give some qualitative comments on feedback you got on DSP at the ANP conference? How did the interest level compared to what you're expecting?

[Brad Gray:]

Yes. The interest level from in DSP has exceeded our expectations and almost every opportunity. At AMP we had a number of people stopped by the booth take a look at the system we had on display there, a number of people were attended on corporate workshop to hear about the experience coming out of Bernie Fox from Providence Healthcare who's again presenting this week at the Society of Immunotherapy and cancer meeting really as we speak, yesterday at SITC the team sent me some photographs of an absolutely packed theater of people listening to Dr. David Rimm present his experience with DSP which was one of the six studies on DSP that's being presented there and we have another key opinion leaders dinner at SITC this week that I expect to have a good turnout for. So I think the interest level and the category of imaging based spatial proteomic and genomic technologies is going up a lot, I think DSP is one of the most exciting products in that category, category that has as of yet no clear leader and we have a real opportunity to establish a leadership position here.

[Catherine Schulte:]

Great. Thank you.

[Operator:]

Thank you and I'm showing no further questions at this time. I'd like to turn the call back over to Doug Farrell for closing remarks.

[Doug Farrell:]

Thank you all for joining us today. If you did miss any portion of the call there will be a replay available in the next hour and a half or so we request the caller's dial 888-793-9492 and please use access code 6767978. If you're an international caller please dial 404-537-3406 and again the conference code 6767978 thanks again for joining us today.

[Operator:]

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you all may disconnect. Everyone have a wonderful day.