NanoString Technologies, Inc.
Q1 2015 Earnings Call Transcript
Published:
- Operator:
- Good day ladies and gentlemen and welcome to the NanoString 2015 First 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 conference is being recorded. I would like to introduce your host for today's conference [indiscernible], you may begin.
- Unidentified Company Representative:
- Thank you. On the call today with me is Brad Gray, NanoString President and Chief Executive Officer, and Jim Johnson, Chief Financial Officer. Earlier today NanoString released financial results for the first quarter ended March 31st, 2015 and a copy of the press release can be found on our Web site at nanonstring.com. During this call we will make a number of statements that are forward looking including statements about financial projections, existing and future collaborations, future business growth, trends and related factors, interactions with with third party payers and the timing and outcome of any related reimbursement decisions, our strategic focus and objectives and the development status and anticipated success 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 publically update any forward-looking statements. With that I would like to turn the call over to Brad.
- Brad Gray:
- Thanks, Lee. Good afternoon. Thank you for joining us today. We are off to a promising start in 2015. Our nCounter technology continues to gain momentum as the leading platform for tumor profiling with broad and growing acceptance in both research and clinical markets. Our customers are now generated over 720 peer review publications, validating our platform intact. On the call today, I will provide our Q1 highlights and then review progress on our key strategic objectives. Jim will comment on our financial performance and outlook. And I'll then make some closing remarks and open up the call for your questions. Total revenue in Q1 was $11.6 million for the growth of 32% driven predominantly by strong instrument sales. We continue to substantially expand our install base of nCounter analysis systems adding both research and clinical lab customers. Instrument sales were 4.4 million in the first quarter representing growth of 27% and bringing our worldwide install base to over [287]. Consumable revenue excluding Prosigna was $5.5 million for the quarter reflecting 15% growth year-over-year. Fundamental consumable demand was strong. Orders from academic customers were above driving consumable revenue from each customer of 50% year-over-year. Our PanCancer panel products continue to grow in popularity driving panel revenue to more than double versus last year setting a new record in account more than 40% of all consumable sales. Despite the fundamental strength in demand, three factors constrained the consumable revenues realized during the first quarter, resulting in annualize consumable pull through below our historical and expected range. First, pharma customers we made extraordinarily large consumable purchases in Q4 work through those projects in Q1 before reordering. As a result while our pharma contributed less than 30% on consumable revenue compared to over to 40% in the first quarter of 2014 and over 50% in Q4 2014. Second, weather in the Northeast total ordering in the region counter install base, delaying something in the revenue to Q2. Finally, changes in foreign exchange rates reduce the amounts we realize for sale outside the U.S. We expect that the case of ordering from biopharma in customers located in North East will increase in Q2, returning to annualized consumable pull through of roughly $100,000 for system. Collaboration revenue with approximately $680,000 in Q1. The robust study of pivotal Phase 3 clinical trial using cell genes Revlimid to treat diffuse large b cell lymphoma or DLBCL opened during the quarter with numerous sites now screening patients based on their DLBCL sub-type as assessed by our investigational assay. We anticipate that the results of this study, this success will be used to support a PMA filing in the U.S. and other international registrations several years in the future. Turning our Prosigna breast cancer assay, sales were $381,000 again modest but trending upwards while the strong sequential growth is promising we continue to expect the uptake will remain limited until additional reimbursement to secure. Now, I’d like to spend some time covering the progress on the four strategic objects of 2015 which we highlighted in our last conference call. First, we remained leaser focused on oncology where we believe our technology plays an unique roll and provides us with the strategic advantage. Cancer was once again the primarily driver of new instruments replacements in Q1. At the recent AACR annual meeting at Philadelphia, our customer presented over 40 posters based on the use of our technology. As a result of this ever increasing profile on oncology, we enjoyed record boost traffic that represented at approximate 30% increase over the prior year. During the meeting, we showcased several important new products including our third PanCancer panel, this one focused on cancer progression. With this third addition to our line of our PanCancer panel, researchers now have the power to explore nearly any question in cancer biology. Today, the most excited area of it, which gives the honest the power of the immune system to fight cancer. Because the immune response to tumor growth involves large changes in both RNA in protein expressing levels, we believe our nCounter technology is ideally suited for biopharma profiling in this area. Our first IO product of PanCancer immune profiling panel introduced in September 2014 quickly gained the following and has now been used by our approximately 50 different customers including researchers and about 20 different biopharma companies. Today, our customers have used nCounter technology to publish over 20 papers in the IOPO. We’ve made IO our major theme of our new products collaborations and strategy and as a result we’re substantially increasing our impact in this area. At AACR, we introduced two significant additions to our IO focused product portfolio. First, in response to demand from biopharama customers we introduced a mouth version of our PanCancer immune profiling panels, which is designed for use with the analog model most commonly used in preclinical product developments. Second, we made IO the target of our first RNA protein profiling panel a powerful new category of assays that enable simultaneous deduction of genes and protein expression. This new immuno-oncology RNA protein profiling panel can simultaneously measure the expression of 770 genes and 30 proteins especially important for understanding cancer immunology including PD1 and PDL1 CTLA-4. We’re focused on demonstrating the power of our IO panels to identify biomarker signatures that predict or mildly response to cancer immunotherapies and help identify which combinations of therapies maybe best for individual patients. As part of this effort and in response to interest we’ve received, we’re deepening our relationships with leading academic groups in the field. On April 1st, we announced a multi-year collaboration with the MD Anderson Cancer Centre to accelerate the development and adoption of our new RNA Proteinassay in the field of immune-oncology and targeted therapies. The collaboration will involve the development of RNA Protein assay and incorporation in the select clinical studies being learned in the Anderson. Just yesterday, we announced the collaboration with the Cancer Immunotherapy Trials Network or CITN to identify biomarker assayfor novel cancer immunotherapies. Under this collaboration we will work with CITN to utilize our immuno-oncology panels and clinical studies of single agents in combination therapies. Together, our recent technology development and collaborations with MD Anderson and CITN have an important role into the center of a dynamic field of immune-oncology. Importantly, both of these collaborations are structured to generate data, validating the use of our panels and to grant NanoString lights to resulting research and diagnostic content, potentially generating even more powerful IO products in the future. With immuno-oncology becoming a major focus for the company, we’ve recently added Dr. Robert Hershberg to our Board of Directors to help guide our strategy. Dr. Hershberg is an oncologist and Ph.D. by training and brings extensive experience in IO in translational medicine. He currently leads Celgene’s research research and early development efforts across its IO portfolio and overseas a newly formed Celgeneimmuno-oncology Center of Excellence here in Seattle. He’ll be true asset to NanoStringand we welcome him to the team. Our second strategic objective this year is try deepen our relationships with biopharmaceutical companies including building a pipeline of continuing diagnostics. During Q1, we continued to rapidly expand our biopharmainstall-baseas instrument sales to biopharma set a new record and sales to biopharma’s and the CROs to serve them accounted for about 25% of new instrument placements. In addition, biopharma responds to our new RNA
- Jim Johnson:
- Thanks, Brad. The company had a solid quarter with total revenue of $11.6 million, up 32% versus the first quarter of 2014. Instrument revenue for the quarter was $4.4 million up 27% over first quarter of 2014. System sales were particularly strong U.S. and Europe, and in both academic and biopharma customers. Consumable revenue was $5.5 million, 15% higher than a year ago. As we described in our last quarterly call Q4 2014 reflected more than the typical volume of large orders from biopharma customers and represented more than 50% of our consumables business in the quarter. This resulted in reduced order flow from these customers in Q1 as they digested these Q4 purchases. Aside from this one dynamic all other customer segments showed strength. The purchases from academic customers, up 50% year-over-year and significant momentum in sales of panels and Elementry agent both of which more than doubled year-over-year. As Brad mentioned, our consumable revenues for the quarter were also negatively impacted by adverse weather in the Boston area, which represents our largest regional install base, and strengthening of the U.S. dollar versus foreign currencies Prosigna test kit revenue grew to $381,000, a significant step up from the previous quarter. We are seeing increasing momentum in the demand for Prosigna kits, but there may be some variability from quarter-to-quarter. As you know we calculate pull through in each quarter based on total research in Prosigna consumable revenue in relation to our total install base system as of the beginning of the quarter. In the first quarter, we felt below our $100,000 persistent annualized benchmark for the first time. However, we believe that other than the foreign exchange impact, factors responsible are temporary. We recorded $761,000 of collaboration revenue for the quarter and most of this relates to our cell gene collaboration with a modest contribution from a small exploratory research collaboration was initiated in the fourth quarter. Gross margin on product and service revenues for the quarter was comparable to the first quarter of 2014 at 51% and gross margin during first quarter was impacted by the same factors that caused reduced consumable pull through for system. R&D expense was $5.9 million compared to 4.7 million in the first quarter of last year. The increase reflects cost related to diagnostic development including the Celgene collaboration and investment in the development of more nCounter products and technology. SG&A expense was $14.1 million for the first quarter up from 10.7 million a year ago. The increase reflects the impact of personnel hired in 2014 to support Prosigna commercialization as well as incremental G&A cost to address the company’s growth. Stock based compensation expense was $1.3 million for the first quarter of this year compared to 1 million a year earlier. Our GAAP net loss for the quarter was $14.9 million or $0.81 per share compared to 11.4 million or $0.68 per share in the fourth quarter of last year – sorry, first quarter of last year. In prior quarters, we provided a schedule of non-GAAP financial information to adjust for the impact of preferred stock with outstanding prior to our IPO and certain other items. Because our historical comparisons are no longer impacted by this preferred stock, we discontinued the non-GAAP presentation. We ended the quarter with approximately $56 million of cash investments. I’d also like to highlight that we’ve extended the period for borrowing the remaining $15 million available under our term loan agreement by six months. We now have until November 30, 2015 to access this funding solely at the company’s option. Now I’ll turn to financial guidance. We’re now making any revisions to our full year 2015 guidance at this point in time. We continue to expect total revenue of $58 million to $61 million for the year which includes $2 million of Prosigna revenue and $2.5 million of collaboration revenue. Based on our visibility year-to-date, we’d like to provide some thoughts on quarterly revenue trends. Regarding instrument revenue, we just recorded a relatively strong first quarter and as a result we expect Q2 instrument revenue to be roughly flat versus Q1. In Q3, consistent with our previous comments, we expect our initial revenues from the new Gen 3 system and we expect instrument revenue growth versus the prior year to moderate while the funnel for the new system builds. With respect to consumable pull through which includes both research consumables and Prosigna [indiscernible] kits, we expect to be at roughly $100,000 per system annualized in the second quarter. This implies a step-up of $1 million to $1.5 million in Q2 as compared to Q1. For the full year, we expect to be at or above the $100,000 per system we generated historically. Collaboration revenue in Q1 was higher than the $625,000 per quarter run-rate suggested by our annual guidance. In the current we expect an offsetting reduction in Q2 that will put us with approximately half of our annual guidance as of mid-year. And as a reminder, any potential new companion diagnostic collaborations represent upside to this guidance. For the full year, gross margin on product and service revenue are still expected to be in the range of 53% to 55%. And ignoring the impact of revenue mix, we expect gross margin to trend upward over the course of the year consistent with the expected growth in scale of our consumables manufacturing operation. And as a reminder, collaboration revenue is excluded from our calculation of gross margin. For operating expenses, we continue to expect a total of $77 million to $81 million for the year including approximately $5 million to $6 million of stock-based compensation expense. Our operating loss for the year is still expected to be in the range of $42 million to $49 million. We continue to expect interest expense of approximately $4 million for the year and capital expenditures of $4 million to $5 million approximately half of which will be funded by our landlord as leasehold improvements. So with that, I’ll turn it back over to Brad to wrap up.
- Brad Gray:
- Thanks, Jim. So far 2015, we are successfully executing our strategy to place our company and technology at the center of cancer research and diagnosis. We made solid progress on our four strategic initiatives in a particularly our a poise play an important role in a dynamic field of immune-oncology. We believe that successful execution of our strategy will drive growth and value creation not just in 2015 but over the long term. We look forward to updating you on our progress during future calls. I would now like to open up the line for questions.
- Operator:
- [Operator Instructions]. Our first question comes from Tycho Peterson of JPMorgan. Your line is now open.
- Unidentified Analyst:
- This is Tejas on for Tycho. Can you help us quantify the impact of timing versus FX versus weather in terms of your consumable pull-through number and what exactly was that number in the quarter?
- Brad Gray:
- The actual pull-through number in the quarter including Prosigna were $85,000 and $90,000 for system per year. So slightly below the $100,000 per your benchmark that we've talked about often in the past. Forcing that the three factors that I described, it is difficult, probably the easiest part to understand is the biopharma revenue. So in the first quarter of 2014, biopharma revenue accounted for over 40% of our consumable revenue and in the first quarter of 2015, it was less than 30%. So that 10% swing and quite the consumable sales would have been, over half a million dollars higher if biopharma had consistently showed up for 40% of our Consumable sales. It’s worth remembering that in the fourth quarter of last year we had an extraordinary biopharma quarter where they accounted for over 50% of our consumable sales. The impact of weather on FX, I'd say we're less overall than the impact of biopharma. But about equal in magnitude.
- Unidentified Analyst:
- Got it. And then just a quick follow up on NCCN guidelines. I thought I heard you say Brad that you were now optimistic about coverage independent of that decision. Can you just share some of your thoughts on what's driven this shift because earlier you'd spoken about coverage being contingent on those guidelines.
- Brad Gray:
- Yes. So we have the opportunity over the last year since we first put out in front of the NCCN to generate substantial additional clinical evidence. And so in anyways, the NCCN guidelines were they not fully updated will be lagging by about a year on the NanoString's clinical data. We had an opportunity to remain engaged with payers especially the MolDx team regarding our new clinical data that includes things like decision impact study results that demonstrate clinical utility and five other abstracts that will be presented at ASCO . So some of that has been shared confidentially with payer and the reaction has been positive. And that's been encouraging to us that some of these groups will be able to move forward with the decision that may be independent of the NCCN guidelines.
- Operator:
- Thank you and our next question comes from Jeff Elliott of Robert W. Baird. Your line is now open.
- Jeff Elliott:
- Good afternoon, guys. Thanks for the questions. First one is really just a follow up to the last question that is on the pharma consumer spending their -- or purchasing. What are you seeing in the second quarter so far in terms of pace in there?
- Brad Gray:
- Jeff, we're not going to provide specifics key reserves at the time but I will say that we're seeing a recovery in ordering patterns from some of those customers that has seen it slow down in the first quarter. So we're encouraged overall that we'll see the recovery of biopharma ordering in this. In this quarter that will drive our consumable pull-through back and aggregate to roughly a $100,000 per system.
- Jeff Elliott:
- Got it. And then can you give us an update on where you are at in terms of posting that coverage, either in terms of covered lives or percent of market covered?
- Brad Gray:
- Sure. So, in the U.S. today we believe we have about 50 million covered lives, which refers in just over 20% the relative infinite use the relevant infinite use population. Encouragingly, through our Prosigna patient support program does benefit investigations for patients who enroll in our program. We had an opportunity to understand the benefit that are being provided by private payers who don't have formal written policies yet about Prosigna. And in the majority of those cases where we have done benefit investigations, private payers are providing coverage for Prosigna. So your effective coverage maybe slightly higher than the 20% or so that have verified progress coverage decisions.
- Jeff Elliott:
- Okay, and then one last one here. Any idea when at this end will update the guidelines?
- Brad Gray:
- We really don't have a lot of visibility year-to-date, we would like to provide some thought. As you know from the last call, expecting that April issue of the Journal of the NCCN would include article prescribing the full guideline including the discussion section, even that article did appear focused only on local regional testing, things like surgery and radiation, and didn't speak to the question of genomic testing at all. So we haven't yet seen the full update to the guidelines including the discussion section. We are sure that eventually it will appear, but we are not in a position to provide you any guidance about when to expect to see that. And actually for that reason that we have been moving for, with dialogues with payers, independent of the NCCN timeline.
- Operator:
- Our next question comes from the line of Luis Garcia of Morgan Stanely. Your line is now opened.
- Luis Garcia:
- I am on Steve today. I was just wondering if you could maybe discuss the protein expression testing functionality and give us a little clarity of how you should think about financial impact on the consumables and products side, and timing for that?
- Brad Gray:
- Yes, we'll be happy to. So we believe that the RNA protein application is potentially transformative. What it allows the researcher to do is out of a single, effectively a single slice from a tumor biopsy get up to 770 gene expression data and 30 protein expression markers. So it allows researchers in the field of cancer to get just one parallel value from their refracted tumor biopsy samples. We know that cancer researchers want this. 80% of the cancer researchers whom we have spoken to look both at nucleic acid like RNA and protein, but they typically do so in two different experiments on two different pieces of equipment, and what we offered them is a chance to do, is take just one sample of that tumor and get all the information at once, get increase in their productivity and importantly the information out of the tissue. The way we are bringing RNA protein assays to market is by first building of protein capable portion of our very popular Pancancer gene expression panels, and we will be releasing those through product access programs over the course of 2015. We are starting with the immune oncology motion that we released at ACR and then with a pathway version to follow later this year. We will expect this new capability to be under our product access program for most of 2015 with commercial versions beginning to appear late this year. We will be charging mostly biopharmaceutical companies and to a lesser extent researchers -- access to that program, so there is some modest contribution to revenue in 2015 that takes into our guidance, but we really expect that the substantial growth driven by this product to come in 2016 and beyond.
- Luis Garcia:
- Okay, and you're seeing probably more of what I understand and increasing share of consumable rather than product sales? For example, could you see additional product sales traction maybe on the Gen3 instrument with the protein testing functionality?
- Brad Gray:
- We absolutely think that the protein functionality that we are offering increases the appeal of our instrument and will help drive instrument uptake. Of course the participants on our product access program will be working with the new assays, first are our current owners of the nCounter system by and large. But over time, we do expect to increase the appeal of our technology and further differentiate it from alternative offerings, and therefore drive more instruments there.
- Luis Garcia:
- And just shifting focus to the companion diagnostics platform. If we assume no incremental collaborations, how should we be thinking about cash burn in the balance sheet in the next two years?
- Jim Johnson:
- Well, you make a good point Luis is that companion diagnostics activities are important to our financing strategy. Consistent with our net loss guidance for the year we believe we got sufficient cash and investments to take us well into the next year. And we also have $15 million of additional borrowing capacity that's available to us, so it would add to that. But clearly our strategy is to augment these forms of cash flow from additional companion diagnostics collaborations and by successful executing on that we think that that will reduce the need for us to raise funding through other means, like equity.
- Operator:
- Thank you and our next question comes from Dane Leone of BTIG. Your line is now open.
- Dane Leone:
- So as this kind of quarter played out and you're thinking about the rest of the year, in regards to the NextGen system, within the scope of guidance what's kind of contemplated in revenue contribution once you hit the market with the NextGen system, I guess around midyear?
- Brad Gray:
- Thanks for the question, Dane. We haven't broken out our instrument revenue guidance for the year into Gen3system versus our current Gen2 and PLEX systems. We have said that the first revenue from Gen3 will come in the third quarter and then of course that we would expect it to grow into the fourth quarter and that was the largest quarter of the year for capital purchases and our field team will have more time to build a Gen3 focus funnel. So we do expect it to be an important contributor to instrument revenue growth in the second half of the year, although we haven't quantified that specifically.
- Dane Leone:
- So when you think about the launch of the NextGen system, I think you guys have kind of skipped the beta testing period. Does that mean Q3 is kind of a close eye beta testing for some initial adopters before you are really able to go out to the broader target customer. And then when you think about 4Q, expanding the commercial offer, you know the target accounts that you planned ahead, are these accounts that you currently have a relationship that don't really think that current gen systems are appropriate for them, and are looking for this NextGen system to kind of be optimized to their needs or is this -- or lot of these accounts can be new relationships that you're after going after to establish?
- Brad Gray:
- The first clarification on the launch in Q3. We are going with the full commercial launch right out of the gate. And Dane, that's the way we've actually launched the last two instrument systems launch, about the Gen2 instructions launched both the systems and then the PLEX system were extensively validated and put through extensive reliability testing internally so that an early access or beta launch period was not required. Our field force will be trained to sell the technology and will be selling it at the full commercial launch, around the mid year timeframe. The customers we will be targeting, with the people who are very similar, and similar even the same institutions at many of our current nCounter users. The difference will be that these will be individual researchers rather than just the core lab. We collected, our time, a long list of potential customers who are intrigued by the capabilities that nCounter chemistry provides but who could not afford the $235,000 to $285,000 systems that we sell today are looked for. And so we will be going back further first to customers who have previously expressed interest been encountered but haven’t been able to on the system. In addition, we began a substantial lead generation program, and focused individual cancer researchers who do the type of biomarker discovery and development that our technology is most popular for. We begun to engage them once again about the capabilities that are chemistry provides and we look forward unavailing to them, a more affordable option that suited to their needs. So I think, some of that will be coming with the full commercial line in the mid-year and we do expect to running start based on customer that we have been engaged with in the past and institutions that are already familiar to us.
- Dane Leone:
- Great. And one last one from me, when you think about the launch of the multiomic [ph] assay, this course seems like a bit of abnormality in terms of pull through per instrument but with the launch of the multiomic assay, what’s kind of the thinking you go through when you say okay this is something new and interesting and different versus what anyone has been able to do before, where kind of this kind of pole utilization rates of the current and nCounter systems on the market, I guess we are trying to think is it cannibalistic to experiments that are currently going on with their kind of machines and just getting a better utility function of them or do you think this raises, is more additive and raises actually utilization levels of the machines.
- Jim Johnson:
- I think it’s little early for us to know for sure since we are just entering a product access program, what the IMA protein capability will do for go though. But we expect that it will for distant customers, it drives down to get more information per sample and therefore potentially spend more on the multiomic [ph] assay to that sample and they would have gene expression measurement alone and that could provide increased pull through at the margin. We will be watching that carefully as we move towards the full commercial launch of beyond the protein assay. I think just as importantly, it makes our technology appeal to more cancer researchers and it effectively can increase on stall base by driving people to adopt our technology where they adopted a less capable technology otherwise. I think it is graced that the RNA protein capabilities coming alone at the same time approximately at our lower cost system because it can increase the appeal and at the same time that we are increasing the affordability of that system and so I look forward to see what can be a different stall base program.
- Operator:
- Thank you and at this time, I am showing no further questions in the queue. I would like to turn the call over to Brad Gray, CEO for any closing remarks.
- Brad Gray:
- Thank you all for joining us on the call today and your interest in the NanoString and we look forward to seeing you at upcoming investor conferences [indiscernible].
- Operator:
- Ladies and gentlemen, thank you for your participant on today's conference. This concludes the program. You may now disconnect. Everyone have a great day.
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