NanoString Technologies, Inc.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the NanoString Technologies’ 2014 Third Quarter Financial Results Conference 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] I would now like to remind everyone that the call is being recorded. I would now like to turn the call over to your host, Ms. Lynn Pieper with Westwicke Partners. Ms. Pieper you may begin

[Lynn Pieper:]

Thank you. On the call with me today is Brad Gray, NanoString President and CEO and Jim Johnson, CFO. Earlier today, NanoString released financial results for the third quarter ended September 30, 2014, and a copy of the press release can be found on our website at nanostring.com. During this call, we will make a number of statements that are forward-looking, including statements about financial projections, existing and future collaboration, future business growth and related factors, interactions with regulators and third-party payers and any related decisions and the development and status of additional product offerings. Forward-looking statements are subject to numerous 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. We undertake no obligation to publicly update any forward-looking statement. With that, I’d like to turn the call over to Brad. Brad?

[Brad Gray:]

Thanks Lynn. Good afternoon and thank you for joining us on our Q3 call. We are pleased to report strong third quarter results with important progress across all three dimensions of our business; Life Sciences, Companion Diagnostics, and Prosigna. During the third quarter, we sustained our momentum delivering record revenue of $12.3 million, a 47% increase over last year, primarily driven by strengthened instrument placements and solid consumable pull through. In addition, we delivered substantial and accelerating progress in our companion diagnostic collaboration with Celgene. Finally, we continue to advance the launch of our Prosigna Breast Cancer Assay, achieving our first U.S. reimbursement milestone. On the call today, I’ll review progress in our three core areas of focus. Jim Johnson will summarize our financial performance and guidance, and then we will invite your questions. I’ll start with our base business, Instruments and Consumables, which continues to be the largest source of revenue growth. During the third quarter, we added both research and clinical lab customers and as of the end of the quarter, we had a worldwide installed base of well over 230 nCounter Analysis Systems. Our customers have now used nCounter technology to generate over 560 peer-reviewed publications and have averaged one new publication every week day over the past six months. Instrument revenue during the third quarter was $4.5 million, up 27% compared to the prior year. Oncology was once again the most common motivation for new instrument placement, accounting for nearly 70% of nCounter system sold in the quarter. The popularity of the dual use FLEX configuration also continued in Q3, accounting for approximately half of our new instrument placements and dominating our strategy of combined cancer research and diagnostics on a single platform. This just launched about a year ago, the FLEX system is popular with cancer centers, commercial clinical labs and CROs alike. In addition, we’ll continue to penetrate international markets with approximately two-thirds of the new system sold in Q3, going outside North America. Consumable revenues were again strong in the third quarter with annualized pull-through well above $100,000 per system, resulting in a record consumable revenue of $6 million, an increase of 37% over the prior year. Continuing the trend we saw last quarter, demand from academic customers was high, which we believe is a result of growing recognition of nCounter as a critical platform for cancer research. Our biopharma customers once again account for disproportionate fraction of our Consumable sales contributing approximately 30% of Consumable from roughly 20% of installed base. Our Consumable growth was also driven in part by the success of two recent PanCancer Panel launches, which together illustrate our distinctive capabilities in the field of cancer biology. As described during our last call, our new PanCancer Pathways Panel was the most successful new gene expression panel launched in our history. This panel offers researchers a simple and robust assay to investigate biology across 770 genes in all major cancer pathways. During the third quarter, interest in the panel continue to grow as academic researchers and biopharma companies incorporated it into their biomarker discovery efforts. In September, we launched our PanCancer Immune Profiling Panel, a unique offering targeted towards the dynamic field of immuno-oncology. The Immune Profiling Panel complements our Pathways Panel and brings a new dimension of gene expression information to a field that has historically been focused on protein based and analytical methods, such as immunohistochemistry. It promotes a better understanding of cancer by allowing researchers to bridge the gap between the biology that drives tumor growth and the immune response that attempts to control it. This new panel can be applied to all cancer types, potentially accelerating the discovery and development of new therapies and predictive biomarker signatures. From weeks since its launch the new panel has proven popular with researchers and biopharma companies and we are optimistic about the commercial opportunity. Also contributing to our consumable growth is the increasing interest in our Elements Reagents which offer transitional research labs a clear path from moving their discoveries into a clinical setting. Interest in our Elements Reagents is growing rapidly with Elements revenue up 85% sequentially during the third quarter. Elements Reagents along with our Prosigna Breast Cancer Assay are also important to the business pace for clinical labs looking to acquire and nCounter System. So far this year, interest in Elements Reagents has been a significant factor in the sale of 12 systems including 5 systems during the third quarter. In support of Elements commercialization, we recently announced the collaboration with Brigham and Women's Hospital in Boston to accelerate translation of genomic discoveries in the clinical cancer diagnostics. Usually Elements Reagents, clinical assay will be developed to detect gene expression, copy number variation and fusions from a diverse range of tumor samples. We are excited to partner with Brigham to accelerate the process of taking innovative assays that last mile from late state translation research to clinical validation end use. Finally, we remain on-track for the launch of our Next Generation, nCounter System in the first half of 2015. As a remainder, this product will be a single instrument with a similar – with a smaller footprint than our current system and will be targeted at the new price sensitive research market. This system will run the same chemistry with our current system than a lower throughput. We are excited about the market opportunity for this product and force its introduction next year. Moving now to our second core area of focus, our companion diagnostics program, made substantial progress during the third quarter. To-date the similar piece of our companion diagnostics strategy is our collaboration with Celgene, under which we are supporting the development of Revlimid for the treatment of diffuse large B-cell lymphoma or DLBCL. Our Celgene collaboration is progressing even more smoothly than we had expected and I am extremely pleased with the great partnership with Celgene and proud of the performance of our diagnostic development team. Since initiating the collaboration in March, we have focused on walking down assay procedures, sub-typing algorithms and GMP manufacturing processes, as well as agreeing on a regulatory path with the FDA. So far the technical work is tracking according to schedule. Our interactions with the FDA have gone even better than initially planned, leaving the acceleration of several milestones. In total, we achieved $5 million in milestones which contributed to $1.1 million in collaboration revenues during the quarter. Looking ahead, we expect the Revlimid Phase III study to begin enrollment by the first quarter of 2015. Patients will be enrolled based on their DLBCL subtype as assessed by our in vitro diagnostic assay and the result of the study when successful will be used to support a PNA filing in the U.S. several years in the future. In parallel, we are engaging with many other biopharma companies regarding how we might collaborate and support their drug development initiatives. Fee discussions cover areas including other DLBCL therapies. They are targeting the breast cancer therapies using molecular subtypes provided by Prosigna and the development of companion diagnostics based on new discoveries made by our biopharma and academic customer using nCounter technology. We are increasingly confident that overtime companion diagnostic partnerships will become a significant driver of growth and cash flow for our business. Turning now to our third core area of focus. During the third quarter we made considerable progress in the launch of the Prosigna Breast Cancer Assay, our first in-vitro diagnostic product. Prosigna sales in Q3 were $272,000, up from 181,000 in the second quarter. During the third quarter seven additional labs took steps to become future Prosigna sites bringing the worldwide total to 30 planned laboratory sites across 12 countries. Most of the Prosigna revenue growth in Q3 was from the U.S. market, where we currently have six labs actively offering Prosigna testing services and then another seven preparing for launch. We are particularly pleased with the enthusiasm for Prosigna expressed by cancer centers and large hospitals. Since our last call, two additional NCI-designated comprehensive cancer care centers have acquired nCounter systems with the intent of launching Prosigna testing; City of Hope in Los Angeles and the University of Arizona Cancer Center. Gaining reimbursement remains the top priority with a dedicated market access team focused on generating positive coverage decisions. This team made important steps forward in Q3. In August, UnitedHealthcare the nation’s largest private insurer entered into a contract with LabCorp to provide coverage for Prosigna. In September, we had another important win as California’s Medicaid group Medi-Cal informed us that they will be covering Prosigna representing close to six million covered lives. And just last week Providence Health plan indicated that they will be covering Prosigna as well. Total U.S. coverage for Prosigna as a result of this initial wave of positive coverage decision is more than 45 million lives or approximately 20% of the U.S. patients indicated for Prosigna. While we’re pleased with this initial wave of cover decision, we still have a long way to go until every eligible U.S. breast cancer patient has access to Prosigna. With 2014 NCCN guideline of stage 2 forthcoming, we do not at this point expect a Medicare coverage decision under Palmetto MolDx program before the first half of 2015. We expect Prosigna growth to remain modest until Medicare and additional reimbursement is secured. Outside the United States, we continue to lay the foundation for broad long-term adoption of Prosigna. During the quarter, we met regulatory requirements to market Prosigna in Australia, New Zealand and Hong Kong. Two additional centers outside the U.S. now plan to begin offering Prosigna testing services, including two labs in Australia. This brings the number of labs outside the U.S. ready to provide Prosigna testing to a total of 17 of which seven are currently providing testing. Also on the international front, we completed enrollment in our German decision impact study and expect that result will be presented sometime next year. During the current quarter, we’re initiating a decision impact study in France involving eight institutions. In December, the result of our Spanish decision impact study will be presented at San Antonio Breast Cancer Symposium along with several other studies on Prosigna and PAM50. Finally, we continue to strengthen our already compelling body of clinical evidence for Prosigna. In October, the Journal of Clinical Oncology published an analysis of data from over 2,100 patients showing that the risk-of-recurrence score generated by the Prosigna predicts the risk of late distant recurrence, after five years of endocrine therapy. The results show that Prosigna can identify a patient population where the risk of late distant recurrence is so low they maybe despaired the prolonged endocrine therapy. These results, in combination with previously published clinical studies, demonstrate the potential for Prosigna to inform both the use of chemotherapy and the use of extended endocrine therapy based on a single risk score. Overall, we are pleased with our momentum on multiple fronts and optimistic about our continued growth. I would now like to turn the call over to James Johnson, for a review of our financial results and financial guidance.

[James Johnson:]

Thanks, Brad. Financially our performance for the quarter was once again strong. Total revenue $12.3 million, up 47% over the $8.4 million reported for the third quarter of last year. Instrument revenue for the quarter was up by 27% compared to Q3 2013 and Consumable revenue came in at the record $6 million up 37% from $4.4 million from the third quarter of last year. The growth in consumables is broad based across all major geographies and we’re particularly strong in our academic customers. Prosigna test kit revenue was modestly higher as anticipated at $270,000 for the quarter. We recorded $1.1 million of revenue from the cell gene collaboration in the quarter. And recall that with our accounting methods we only recognized a fraction of the cash that was received or contractually being from Celgene. Contractually we achieved $5 million of milestones in the third quarter, which was shown in accounts receivable September 30, and have subsequently been received in October. This brings the total cash received under the collaboration to-date to nearly $11 million with 1.7 million recorded as revenue since inception, the remaining $9 million that is shown in deferred on our balance sheet as of September 30, which we will bring to our P&L's revenue as we complete our work on the collaborative project over the next several years. Gross margin for the quarter was 53% compared to 55% in the third quarter of last year. As a reminder we calculate gross margin based on product and service revenues only and exclude collaboration revenue from the calculation. There are several reasons for the decrease in gross margin. Last year our gross margin benefited from several very large sales to buy a Pharma customer. We had unusually per unit cost as well as certain favorable overhead cost variances during the period. This year we had a much higher proportion of our sales through distributors, for which our margins are lower. R&D expense is $6 million compared to $3.8 million in the third quarter of 2013. The increase reflects, increase investment in the advancement of nCounter technology including the engineering and testing of our next generation system as well as cost related to diagnostic development including Celgene collaboration. SG&A expense was $12.5 million for the quarter up from 8 million a year ago, that's flat sequentially. The Increase versus the prior year reflects Prosigna launch costs including the establishment of our oncology sales force, investments to build our lab-based sales channel and increased administrative costs to adapt the company’s rapid growth. Stock-based compensation expense contributed significantly to the overall growth in operating expenses. It totaled $1.3 million for the third quarter of 2014, compared with 280,000 a year earlier. Our press release includes the schedule non-GAAP financial information, which shows our operating results as if all pre-IPO preferred stock had been converted to common stock. On a non-GAAP basis, our net loss for the quarter was $9.8 million or $0.54 per share, compared to 6.4 million or $0.44 per share in the third quarter of 2013. Please refer to that schedule for a detailed reconciliation of GAAP and non-GAAP results. We ended the third quarter with $68 million of cash and investments. So now turning to our updated financial guidance for 2014. We’re now expecting total revenue for the year of $46 million to $48 million, which represents growth of 46% to 53% over 2013. In modeling for the fourth quarter of the year, there are several factors that should be considered. With Instruments and Consumables, we expect to see our normal seasonal pattern with relatively stronger performance in the fourth quarter compared to the third quarter, driven primarily by increased instrument demand. Proposed segments, the longer than anticipated timeline to achieve medical reimbursement, means that Prosigna revenue in the fourth quarter is again likely to be modest. We don’t expect to see a significant in fraction from these terms and until such time we begin to see a positive impact from Medicare coverage. Regarding with Celgene collaboration we saw those according plan, we expect to achieve additional $1 million milestone in the fourth quarter after which the remaining milestone would try to regulatory approvals several years in the future. With the faster than anticipate projects this year, we now expect collaboration revenue for the year to be $3 million to $3.5 million. We also narrowed our expected range of gross margin on product and service revenues to 52% to 54%. For operating expenses, we narrowed the range to $71 million to $73 million for the year including approximately $5 million in stock-based compensation expenses. Our operating loss for the year is now expected to be in range of $45 million to $49 million. We continue to expect interest expense to be approximately $4 million and capital expenditure are now expected to be between $4 million and $5 million for the year. With the $5 million the fleet which are gained and $10 million is of additional borrowing under our term loan agreement both of which occurred in October. We expect end of year with approximately $70 million of cash investments. So with that, I'll turn it back over to Brad to wrap up.

[Brad Gray:]

Thanks, Jim. In summary, we sustain our momentum during third quarter, demonstrating progress in all three dimensions of our business. Our fundamentals are strong with growing installed based around the globe and solid consumable pull-through driven by our compelling offerings in the field of oncology. With our first major reimbursement wins under our belt the commercial success of Prosigna is question of when not if. Finally, our first companion diagnostic collaboration is off to a great start showcasing our capabilities to the biopharma community then setting the stage for more such partnerships in the future. We look forward to updating you on our progress during future calls and now we'd like to open the line for questions.

[Operator:]

(Operator Instructions). Our first question is from Tycho Peterson with JPMorgan. Your line is open.

[Unidentified Analyst:]

Hi guys, this is [indiscernible] for Tycho. Just to kick things off here, I mean in terms of nCounter placements in the quarter did you see a sequential step down? I mean, it looks like you had about 14 to 15 as a quarterly run rate over the previous three quarters and this quarter were slightly lower in the nine to 10 unit range is that right?

[Jim Johnson:]

Hi. This is Jim. There is I think a little bit of confusion, perhaps. We don't really provide precise installed base numbers, so you can't really do the math looking at one quarter -- posting for our August conference call we've said we had approximately 220 and at September 30 we've said we had well over 230. So you can't conclude from our disclosure the number of systems that go down in the quarter. But if you look at our instrument revenues that we recorded you can see the sales of systems were much higher. Great.

[Unidentified Analyst:]

Right. Any comments on throughput, is that sort of climbing up as well on the sequential basis?

[Brad Gray:]

Consumer performance has been strong and each of the last two quarter in particular we've seen nice resurgences in academic interest in consumables. And so that strong performance driven by that customer set. And then our tailored products extremely popular as we described during the call.

[Unidentified Analyst:]

Okay. Yes, go on.

[Brad Gray:]

One other thing to add is that customer activity in the summer months during the third quarter is generally little bit slower as well. So that has a little bit of seasonal impact.

[Unidentified Analyst:]

Got it. Now turning to Prosigna I mean how should we think about inclusion in the preliminary CMS, CLFS as scheduled that was out in October. Does that have any impact on NCCN guideline inclusions or financial coverage?

[Brad Gray:]

No these are independent events. The – see last quarter you referenced does not impact inclusion NCCN guidelines and we don’t expect to impact. The MolDX decision the NCCN guidelines are typically updated in the fourth quarter of every year, so we would expect that those guideline updates are forthcoming and we expect there has to be important factors in the MolDX discussion. But we expect that that conversation in the digestion of any new guidelines will take some time. So we would mix that MolDX decision until the first half of next year. But we don’t expect it to be impacted by some of the CMS activity.

[Unidentified Analyst:]

I see. And then the two max which were the indicated on the last call have they begun to cover the test now?

[Brad Gray:]

Yes. I believe we have had our customers have had process claims processed in those regions.

[Unidentified Analyst:]

Okay great. Thank you.

[Operator:]

Thank you. And our next question is from Dan Leonard with Leerink your line is open.

[Unidentified Analyst:]

Hi, good afternoon guys this is Justin on for Dan. Congrats on some of the commercial progress with Prosigna just curious on the OUS offering what are the payment kind of the peer dynamics with the labs that are offering the test now? And then with the four new plans are going to add as well? Sure -- I am sorry.

[Brad Gray:]

Yes outside the United States in general government or the payers – or the primary payers who cover there the needs of the breast cancer patient. And to a lesser extent there are private pay patients. So in most of the countries where we place instruments outside the United States, our strategy is to place instruments in leading academic centers where the physician, scientist there can advocate for reimbursement with our government while beginning to test private pay patients. We have had some early reimbursement wins from government payers in particularly in Spain where both the region around Madrid and region around the Barcelona have agreed to cover Prosigna. In addition, we are running a series of decision impact studies in European countries that are designed to really demonstrate to the government that use of Prosigna has the potential to improve decision making in breast cancer ultimately saving them money in the long run. So that's our current strategy in ex-U.S.

[Unidentified Analyst:]

Got it, thanks. And then you mentioned the Spanish study you are going to present in December at San Antonio and I think you mentioned one or two more could you just remind us of those and timing?

[Brad Gray:]

Sure we have three -- according the decision impact studies we really talked about three decision impacts studies. The first was executed in Spain and that complete in enrollment earlier this year, now be presented in December of the San Antonio Breast Cancer Symposium. Second in Germany has just completed enrollment and we would expect that to present data – presented in 2015 and finally we’re just initiating a decision impact study in France and we haven’t specified the timelines for that study.

[Unidentified Analyst:]

Thank you. And just one more quick one on the NexGen encounter, where are you guys in that process?

[Brad Gray:]

Sure. Well we remain on track for a launch in the first half of 2015. Development is ongoing. We have continued to work on the manufacturing prototypes that we received over the summer and we’re focused on – the team is focused on optimizing the software and putting those instruments through their faces. Then once the software is optimized, they’ll move into the verification or validation phases.

[Unidentified Analyst:]

And any target for – initiating early access or not that far ahead yet?

[Brad Gray:]

I’ll restate the data that we expected – it will be commercially launched in the first half of next year.

[Unidentified Analyst:]

Okay. Thanks a lot.

[Operator:]

Thank you. [Operator Instructions] Our next question is from Jeff Elliott with Robert W. Baird. Your line is open.

[Jeff Elliott:]

Hi guys, thanks for the questions. First one is on the insurance coverage you mentioned in the press release. I guess, can you walk us through how you get to that, that total number you mentioned in the total number of percent of lives covered?

[Brad Gray:]

So there are two different numbers mentioned there, Jeff and one of each will walk you through than the other. The 45 million lives covered is simply the sum of the lives covered under the private insurance plan and the government insurance plan that we’ve announced today. So 30 something million lives from UnitedHealthcare, 8 million lives from two Medicare carriers that we announced in the last call. 6 million lives from the Medi-Cal and then smattering of these smaller plans bring us to over – approximately 45 million in total covered lives. But it’s also remembering that the indicated population for Prosigna is post menopausal breast cancer patients and those patients aren’t distributed evenly across all health plans. So we have a separate model that estimates based on the age of various populations and plans, the coverage of that indicated these populations, and with just 45 million lives we have achieved approximately 20% of coverage.

[Jeff Elliott:]

Got it. Okay. That’s helpful. And sticking with Prosigna here, I guess you look at some of the investments you’ve made so far and than obviously in light of that the ramp has been a little bit lower than at least the cell sign had previously assumed. How do you think about continued investment in Prosigna near term kind of given some of the uncertainties around uptick in ultimate reimbursement? I guess specifically I am thinking of this sales push you planned out early this year. How do you think about those sort of investments in light of the ramp kind of where we are at?

[Brad Gray:]

We know we have higher days, it’s a reminder for everyday, a market access team is about five individuals in the U.S. and 15 sales reps to begin the process of educating physicians around the country. And that is for us the right scale today, obviously, reimbursement is the primary gating factor for any physician prescribing Prosigna and so the market access team is very hard at working and very focused on that. With 15 sales reps around the country what we’re able to do is begin educating physicians about Prosigna, driving trial usage in those – in that fraction of the market that is covered today, especially the UnitedHealthcare covered patients, who could have testing preformed at LabCorp. And then partnering between our oncology sales force and our Instrument sales reps to poised instruments in these leading cancer centers in large hospitals around the country to build an installed base in anticipation of future reimbursement.

[Jeff Elliott:]

Okay. Thank you.

[Operator:]

Thank you. I am not showing any further questions at this time.

[Robert Gray:]

Well, thank you, all, for your interest in NanoString Technologies and for joining our Q3 call. We look forward to continuing to update you in some of our future Investor meetings. Thank you.

[Operator:]

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