NanoString Technologies, Inc.
Q3 2015 Earnings Call Transcript

Published: 3 Nov 2015

[Operator:]

Good afternoon, and welcome to the NanoString’s Third Quarter 2015 Earnings Conference Call. My name is Trisha, and I will be your coordinator for the call today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I’ll now turn the call over to Leigh Salvo of Westwicke Partners.

[Leigh Salvo:]

Thank you, Trisha. 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, 2015 and a copy of the press release can be found on the Company's 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, prospects for expanding and penetrating addressable markets, interactions with third-party payors and the timing and outcome of any related reimbursement decisions, our strategic focus and objectives and the development status and anticipated success of recent and other planned 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 statements. With that I’d like to turn the call over to Brad.

[Brad Gray:]

Thanks, Leigh. Good afternoon and thank you for joining us today. The momentum we saw in the first half of the year continued into our third quarter. We delivered solid revenue growth and made substantial progress for our objectives for the year. In addition, during our Investor Day in September, we outlined our strategic roadmap highlighted with the markets we serve are rapidly expanding through an estimated $6 billion through the launch of our more affordable nCounter SPRINT profiler, our introduction of powerful 3D Biology applications, and the expansion of our diagnostic menu through the development of companion diagnostics. On our call today, I’d like to start with a brief review of our third quarter performance, followed by an update on our strategic objectives. Jim will comment in more detail on our financial performance and outlook. And I will then make some brief closing remarks before opening up the call for your questions. Total revenue for the third quarter was $15.7 million, up 27% over the prior year driven primarily by strong consumable sales. We expanded our installed base of nCounter systems to over 320 worldwide, while achieving annualized total consumable pull-through of over $100,000 per system. Instrument sales were $4.3 million in the third quarter, a slight year-over-year decline of SPRINT in North America and Europe, which offset by weakness in Asia Pacific, which we expect to recover during the fourth quarter. Consistent with our expectations, during the first 10 weeks of nCounter SPRINT availability we sold four systems. Life science consumable revenue, which excludes Prosigna, was $8.4 million for the quarter, up 40% year-on-year and 22% sequentially. Consumable growth was strong across all regions and customer segments. Prosigna sales were $662,000 in Q3, with the majority of sales driven by ex-US laboratories. Overall, we’re pleased with Q3 results and the outlook for the remainder of the year. Now I’d like to spend some time covering our progress on the four strategic objectives that we identified for 2015. Our first strategic objective this year has been to sharpen our focus on oncology by solidifying our leadership in tumor profiling and expanding into the field of immuno-oncology. We believe that we offer the most complete solution available for precision oncology, supporting both research and the ability to translate discoveries into diagnostics. This has provided us the opportunity to position the Company at the center of the Cancer Ecosystem and our customers today include the majority of NCI’s Comprehensive Cancer Care Centers, 17 of the top 20 biopharma companies, as well as over 50 clinical labs. Our oncology focus continues to drive nCounter system placements as approximately 70% of our instrument sales in Q3 through the labs focused on cancer. Our PanCancer Panels have become a workhorse of many cancer research labs, driving panels to approximately 40% of our consumable revenue and setting another sales record for us during Q3. Over the last year, we’ve rapidly increased our impact on the field of immuno-oncology or IO for short, which looks to harness the power of the body’s immune system to fight cancer. We introduced our first IO product the PanCancer Immune Profiling Panel a little more than a year-ago and quickly gain popularity among our customers. Over the same period, we’ve established several collaborations that have begun to bear fruit. Demonstrating our leadership in IO, we plan a significant scientific and commercial presence at the annual meeting of the Society for Immunotherapy of Cancer, or SITC later this week in National Harbor Maryland. On the commercial front, we plan to introduce several new assays that we believe will make our platform an even more valuable tool in immuno-oncology research. On a scientific front our collaborators from the cancer immuno therapy networks are expected to present a late breaking abstract demonstrating the power of our platform to profile the immune system during clinical trials using both FFPE and blood samples. We will also be hosting a seminar on bringing the next generation of IO biomarkers to the clinic that will include a panel of experts from our biopharma collaborators, Celgene and Merck. These collaborations represent an important part of meeting our second strategy objective for the year, which has to deepen our relationships with biopharmaceutical companies, including building a pipeline of companion diagnostics. Today over 70 nCounter systems are dedicated to biomarker discovery in over 50 different biopharma companies and CROs. During Q3, demand from these customers were strong contributing over 40% of consumable revenue in the quarter, and increasing over 60% year-on-year. We expect that biopharma used with our technology will yield new assays that may help select patients for specific therapies. We intend to partner with biopharma companies to develop and commercialize companion diagnostics which over time will build a menu of tests with compelling clinical utilities. As we highlighted during our Investor Day, we believe that the diagnostic opportunity represents a market value of $2.5 billion. Our first major biopharma collaboration is with Celgene, and it’s focused on developing the Gold Standard of clinical assay for subtype in Diffuse Large B-cell Lymphoma or DLBCL. Today our assay has been used to enroll patients with ABC type DLBCL in the Phase 3 robust study. During 2014, we received the platform of $12 million in payments from Celgene, demonstrating the ability of companion diagnostic collaborations to contribute non-dilutive capital. In early October, at Celgene’s request we expanded our collaboration and improved clinical trial enrollment in additional countries such as China and Russia, which is expected to grant an additional payment of approximately $1.6 million in the fourth quarter. Our second major biopharma collaboration is with Merck and it’s focused on developing clinical assays in the field of immuno-oncology. Since initiating the collaboration in May, we’ve made significant progress improving the technical feasibility of an immune related gene expression assay with the potential to predict which patients may benefit from the treatment with KEYTRUDA. Wherever possible, we keep to create Gold Standard clinical assays that can be used to predict response of the multiple therapies. This aspiration extends across breast cancer using PAM50, DLBCL using our lymphoma subtyping test and broadly with an immuno-oncology. Today we’ve entered undisclosed agreements to conduct exploratory biomarker study using these assays with a total of nine different biopharma companies, including three agreements entered during the third quarter, given the breadth and intensity of partnering discussions going underway, we’re optimistic regarding the outlook for completing additional partnership agreements that will expand our opportunity in the biopharma markets even further. Meanwhile Prosigna has been driving us toward our third strategic objective, which is to further penetrate the clinical laboratory market. Clinical labs are continuing to adopt Prosigna and today the number of Prosigna sites has increased to 49 clinical labs, across 13 countries with a total of 34 labs worldwide offering -- actively offering Prosigna testing services. Just as importantly, we continue to achieve major milestones with Prosigna to demonstrate a growing capability of diagnostic commercialization that we believe will be leveraged across an entire menu of tests over time. Within Europe, Prosigna has now been included with several influential breast cancer diagnostics. In September, Prosigna was added to the European Society of Medical Oncology or ESMO clinical practice guideline, recognizing Prosigna’s value for determining the potential benefit of chemotherapy. The conclusion on the guidelines panel placed Prosigna at parity with other established gene expression assays. This is the third European guideline to include Prosigna, following additions to the St. Gallant and German AGO guidelines earlier this year. Within the United States, we’ve continued to make substantial progress towards reimbursement for Prosigna. On October 1, Medicare began reimbursing for Prosigna testing in three jurisdictions managed by Palmetto, CGF, and Cahaba, which collectively cover nine states. Noridian which administers Medicare in California and 12 other States published a favorable low -- draft local coverage determination. Noridian’s draft coverage policy is open for comment until December 7, and we expect that it will become effective during the first half of 2016. Meanwhile Medicare has issued a draft clinical lab fee schedule that sets Prosigna reimbursement of $3,416 consistent with our expectations of parity pricing to other leading drug cancer tests. While the competitive and reimbursement environment for Prosigna is improving, it will take time for these improvements to translate into substantially increased Prosigna sales. For example, we expect it will take several quarters before the recent Palmetto Medicare decision yields a meaningful increase in Prosigna kit sales. Specifically, we expect very little impact in Q4 followed by gradual growth in 2016. Finally our fourth strategic objective for the year has been to expand our addressable markets by launching products with broad affordability and appeal. During the third quarter, we made two exciting product introductions that we believe together expand our serviceable market by $2 billion. First, in mid July, we launched the nCounter SPRINT Profiler which offered the individual researcher the same highly précised nCounter chemistry and data as our previous systems, but with a smaller footprint and lower price. Reaction of the system has been extremely positive and the week since the launch SPRINT has accounted for approximately half of the new instrument opportunities that have entered our sales funnel. It has been rewarding to previous sales funnel began to build with many individual researchers and institutions that has not had access to nCounter technology in the past. Importantly, these systems are largely incremental to our previous existing funnel and we’re not seeing customers who are already in the funnel for a MAX or FLEX system, downsize their order to a SPRINT. While the funnel is building nicely, the sales cycle for SPRINT is expected to be approximately six months similar to our other systems. As a result, we don’t expect many of these new opportunities to convert to sales until 2016. We currently expect SPRINT system sales to number approximately ten units during the fourth quarter. Our second major product announced in Q3 was the unveiling of 3D Biology. This unique application of our bar coding technology allows measurement of any combination of DNA, RNA, and protein, simultaneously on a single system from a single tissue sample. Importantly, 3D Biology applications run on all of our nCounter systems and enabled researchers to make entirely new observations about cancer biology, while maximizing the data generated from valuable samples. We believe that our new 3D Biology applications will broadly appeal of our technology through researchers who are traditionally focused more in proteomics and provide another distinctive capability not generally available from other competing technology platforms. In addition, by including proteomics in DNA analysis and the gene expression experiments already being run on nCounter, we believe that over the next several years we can increase our consumable revenue per sample. In September we launched the first product in the 3D Biology family, the RNA Protein PanCancer Immune Profiling Panel. This product builds on the success of our existing gene expression panel and enables researchers to simultaneously measure important proteins that are therapeutic targets such as CTLA-4, PD-1 and PDL-1. Over the next few years, we expect the launch of family of 3D Biology consumables that we believe in combination with the nCounter SPRINT Profiler will provide a product suite that is powerful and affordable to the cancer research community. Now I’d like the call to -- turn the call over to Jim to review our financial results and provide financial guidance.

[Jim Johnson:]

Thanks Brad. Total revenue for the quarter was $15.7 million up 27% versus the third quarter of last year. Total product and service revenue was $13.9 million up 23% year-over-year. Foreign exchange rate fluctuations reduced the growth in total product and service revenues by approximately 4.5 percentage points. Instrument revenue for the quarter was $4.3 million, 6% lower during the third quarter of last year. System sales were in line with our expectations in North America and Europe. However, they were less than expected in the Asia Pacific region, reflecting lumpiness and a shift of a relatively low number of systems between quarters. Accordingly we have a robust funnel for Q4 in APAC. Consumable revenues for the quarter was strong with total flow through including Prosigna was $9 million, 44% versus third quarter of last year and well above $100,000 per system on an annualized basis. Life Sciences consumables were $8.4 million of this total, up 40% year-over-year. This strength can be attributed to a larger than normal volume of biopharma business, which represented approximately 40% of the total. Also we continue to see strong demand for our panel, which represented approximately 40% of total life sciences consumables revenue for the quarter and grew by more than 50% year-over-year. Prosigna test kit revenue for the quarter was $662,000 growing 12% sequentially. We recorded $1.8 million of collaboration revenue for the quarter. Most of this relates to our collaboration with Merck and to a lesser extent our Celgene collaboration. Gross margin and product and service revenue for the quarter was 55% up from 53% during the third quarter of last year. The increase largely resulted from a shift in product mix toward consumables versus instruments. R&D expense was $5.8 million for the quarter relatively flat compared to $6 million in the third quarter of last year. While we’ve increased our investment in the development of new nCounter products and technology, for example 3D Biology, this increase has been offset by a reduced engineering cost relating to the development of nCounter SPRINT. SG&A expense was down slightly year-over-year to $12 million for the quarter. This reduction reflects cost efficiencies resulting from the reorganization of sales and marketing that occurred in the first quarter of this year. Stock-based compensation expense was $1.8 million compared to $1.3 million in the third quarter of 2014. Our GAAP net loss decreased to $9.5 million or $0.49 per share compared to $12.1 million or $0.67 per share for the third quarter of last year. We ended the quarter with $45 million of cash in investments. We are continuing to pursue a three-pronged financing strategy based on the generation of non-dilutive cash from companion diagnostic collaborations, opportunistic equity issuance through the at the market arrangement we’ve in place with Cowen and Company and term debt. To that end, we recently amended our existing term loan agreement to increase the total available funding from $45 million to $60 million to extend the draw period through the end of 2016 and to extend the interest only period to 2021. We did not utilize the ATM in the third quarter. So now I’ll turn to financial guidance for 2015. We’re maintaining our total revenue guidance for the year at $60 million to $63 million. With the continued strong performance in our companion diagnostic programs, including the amendment to our Celgene collaboration, we expect Q4 revenue mix to shift toward collaboration. We now expect collaboration revenue to be $5 million to $6 million for the year, up from $4.5 million previously. Our product and service revenue for the year is now expected to be $55 million to $57 million compared to $55.5 million to $58.5 million previously. Our current expectations for fourth quarter consumables revenue growth have been modestly reduced based on our current funnel visibility. The fourth quarter of last year included some very large biopharma consumable orders that are not expected to be repeated this year. Regardless, we continue to expect consumable pull-through to be at or above $100,000 per system for the year. With respect to Prosigna, we do not foresee substantial growth in Q4 versus Q3 and although we expect to finish the year ahead of our original guidance to $2 million, total Prosigna revenue for the year is expected to be less than $2.5 million. We expect fourth quarter product revenue mix to shift toward instruments. As a result, we expect gross margin on product consumables revenue for the full-year 2015 to be at or near the low end of the range of 53% to 55% that we guided to previously. As a reminder, collaboration revenue is excluded from our calculation in gross margin. For operating expenses, we’re lowering our range of guidance for the year to $76 million to $78 million from $77 million to $81 million previously. This includes approximately $7 million of stock-based compensation expense. Our operating expenses have declined in the past two quarters; we do not expect this trend to continue. In 2016, we expect operating expenses to increase as we continue to invest in advancing our nCounter technology, developing new products based on 3D Biology and continuing to build our sales channel as a means of driving robust top line growth over the long-term. However, we’re focused on continuing to drive operating leverage in our business and we expect to continue closing the gap between revenue and operating expenses. Our anticipated gap operating loss for 2015 is now expected to be in the range of $40 million to $44 million. Previously we guided to a range of $41 million to $47 million. We continue to expect interest expense of approximately $4 million for the year, bringing our revised GAAP net loss guidance to $44 million to $48 million. We still expect capital expenditures of $4 million to $5 million, approximately half of which has been funded by our landlord and leasehold improvements. So, with that I'll turn it back over to Brad to wrap up.

[Brad Gray:]

Thanks, Jim. In Summary, we continue to build our stature in the field of precision oncology and believe that we’ve established a roadmap that positions us for continued growth. Our commitment to oncology cuts across all aspects of our business as we seek to provide best-in-class products for unlocking tumor biology, yielding insights that can lead to better therapies. We plan to continue to raise our profile among academic researchers, biopharma companies, and clinical labs focused on oncology by adding powerful 3D biology applications, broadening our assets, and with our new and affordable nCounter SPRINT profiler and expanding our diagnostic menu to include tests, enabling key decisions in cancer treatment. I’d now like to open the lines for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Tycho Peterson with J.P. Morgan. Your line is now open.

[Tycho Peterson:]

Hey, thanks. Brad, maybe can you just add a little bit more color on APAC? It sounds like that you expect it to recover in 4Q and maybe some of those orders have already come through. But where did you see the softness, and maybe what gives you conviction in a 4Q recovery?

[Brad Gray:]

Sure. So in the first half APAC was a strong contributor to growth and it was up 30% year-on-year on total revenue. In the third quarter, we basically saw a reversal and revenue dropped 30% year-on-year. As we dug in, we really saw this was due to the slippage of several instrument orders in our distributors funnel from Q3 likely into Q4. And as we look into the sales funnel now, we see its tremendously strong instrument funnel in APAC. So we believe that it was a temporary blip that is likely to recover in the fourth quarter.

[Tycho Peterson:]

Okay. And then can you talk a little bit about on 3D Biology, obviously interesting opportunity and going after a number of different technologies in proteomics, DNA, and RNA. Can you maybe just talk a little bit about how you think about getting written into grant cycles and how you see that business ramping?

[Brad Gray:]

Sure. So 3D Biology is a very novel concept. And we -- but we believe it’s a new way of doing in some cases, science that has been done for a while. So if you read many of the papers published by long time nCounter users, about 30% of the time, they will already include proteomics data right alongside the genomics. So from an academic perspective, we’re not necessarily taking a view that these have to get written into grant funding because it’s just a different way of executing the science that was already planned, but to do so in a much more efficient way. I’d say in totally, however, 3D Biology is likely to appeal most strongly to the biopharma customer segment, as evidenced by our early access program for our RNA protein immune profiling panel which had six biopharma companies and three academic centers, the biopharma company hunger for getting a maximum amount of data from the minimum amount of tissue is very high. And of course grant funding cycles are not the dynamic at play in the biopharma customer set.

[Tycho Peterson:]

Okay. And then maybe last one for Jim, just on spending. You talked about expanding the term agreement. Can you maybe just give us a sense as to how you’re thinking about OpEx for ’16? And are you pulling forward some spending into ’16 from the out years?

[Jim Johnson:]

Sure, Tycho. Well, generally speaking, we’ve -- as part of our financing strategy we expanded the term loan and that’s an important part of our three-pronged strategy. When we think about OpEx going forward, for us it’s really about growing the top line. We are not specifically planning on pulling anything forward. But generally speaking, we see a lot of opportunities to build both the nCounter technology and the products, the 3D Biology products and that’s -- investing in that is really going to grow our top line. So that combined with an investments in -- continuing to build our sales channel which we’ve been doing over the last few years, we think is a great investment that’s going to generate growth for the long-term and the near-term.

[Tycho Peterson:]

Okay. I will leave it at that. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Steve Beuchaw with Morgan Stanley. Your line is now open.

[Steve Beuchaw:]

Hi. Good afternoon, guys. Thanks for taking the questions. First, I will start on I guess I would call it the core business, so FLEX and MAX. Brad, now that you’ve seen SPRINT out there in the field -- first off, thanks for the color on how you see that evolving. But I wonder if you could spend just a minute on FLEX and MAX and how you see the funnel evolving for FLEX and MAX now that we have got SPRINT out there in the field. Is that still growing and have you seen any changes to the pattern?

[Brad Gray:]

Yes, thanks for the question. I think we will continue to see strong demand for FLEX and MAX. As we outlined in the Investor Day, although we’ve been focused on core labs and clinical labs, with those two systems in the past, we’re still very early in penetrating that segment of the market. So I think there is a lot of growth left at the MAX and FLEX into the spectrum and in some conversations that start with centers, really around SPRINT may actually transition to a MAX and FLEX sale, ultimately as we get into a deeper dialogue with those customers about their throughput needs and their aspirations to have a clinical testing offering. So I’d say a lot of our new lead generation activity has been based around SPRINT in the last several months and of course an affordable system is a very good way to start a dialogue with the customer that we haven’t engaged within the past. But we do expect to continue to move FLEX and MAX systems.

[Steve Beuchaw:]

Got it. And then Jim, a question on gross margins and how they trend from here. Consumables, really strong in the quarter, drove a nice gross margin quarter. SPRINT has a bit of a different gross margin profile relative to FLEX and MAX. And now we’ve a little bit more visibility on Prosigna, and how that is likely to trend here over the next few quarters. Can you give us a bit of a refresher on what the puts and takes are in terms of product mix relative to gross margins, excluding companion diagnostics’ collaboration revenues, and just to help us think about how it evolves into next year? Thanks.

[Jim Johnson:]

Sure. So I think that our consumables -- the most important concept I think is that our consumable revenues have much higher gross margin than instruments. But there are some finer points within each of those. Obviously, Prosigna is a high value assay that we make at large scale and it’s probably the most profitable of any of our assays. And then the panels that we produced which are growing significantly are also high margin within the world of consumables. And so as we displace custom assays with panels that should help to drive higher margins as well within the consumable area. As far as instruments are concerned, we don’t really have the opportunity to gain leverage there like we do on consumables, because we’re outsourcing the manufacturing of all our systems. And so, but with the launch of SPRINT, we do believe that over time as we get to normalized production volumes, that will slightly improve our margins with respect to instruments. So putting that all together, we feel we’ve conviction that over the next several years as we continue to grow our business, particularly with scale and the consumable side that our gross margins will continue to increase and long-term we can set overall gross margins in the 60% to 70% range are likely.

[Steve Beuchaw:]

Got it. Thanks so much, guys.

[Operator:]

Thank you. And our next question comes from the line of Doug Schenkel with Cowen and Company. Your line is now open.

[Doug Schenkel:]

Okay. Thank you and good afternoon guys. My first question -- actually, probably the first couple are just clarifying questions on guidance. So full-year revenue guidance is unchanged. Collaboration revenue, I believe, has gone up by $1 million at the midpoint. Prosigna, I believe you increased by about $0.5 million, so the offset clearly appears to be the balance of product and services revenue. It sounds like Q3 instrument revenue was a bit weaker than you expected. But you said this was largely a timing dynamic, so in terms of just trying to kind of pull this all together, relative to your original expectations, have you lowered consumable revenue for the year?

[Brad Gray:]

Yes, this is Brad. I will take it Doug. I think as we set guidance for the beginning of the year, we had hoped that some of the dynamics that we observed around consumable revenue in the second half and specifically in the fourth quarter that we experienced in 2014 would repeat themselves. You may -- people who were following us at that time may recall we had an extraordinary Q4 consumable quarter in 2014 and we attributed that to several large biopharma orders that totaled over a $1 million in orders from a single customer and as we approach the end of the year where we actually have visibility into the sales funnel, we can see now that that is not going to repeat itself. That Q4 budget flush associated with consumable is not likely to repeat in 2015 and so I think guidance -- the primary difference between our earlier outlook and our current one.

[Doug Schenkel:]

Okay. That’s helpful. So with that in mind, we should, and I guess, accordingly expect the same type of drop off we saw from Q4 to Q1? You would expect something that’s a little smoother than that?

[Brad Gray:]

You mean as we began to look through Q1 2016?

[Doug Schenkel:]

Yes. Well, what you talked about was really -- you had a budget flush in Q4 and that made Q1 a little bit tougher. So, really what you’re saying is you would expect a more normalized Q4 to Q1 sequence?

[Brad Gray:]

Yes. I think that’s right, Doug, because I don’t think we’re going to see the spike in Q4 2015 that we saw in Q4 2014.

[Doug Schenkel:]

Okay. So then turning to instruments, in 2013, 41% of full-year instrument sales occurred in Q4. In 2014, this dropped to a still robust 35% of the total. So given what you said about SPRINT not impacting demand for MAX and FLEX, your guidance for SPRINT, the timing dynamic you talked about in Asia Pac, and then just normal seasonality, are you comfortable that in Q4 you can do 35% to 40% of total instrument sales for the year?

[Brad Gray:]

Yes. I believe we’re, Doug. And I think there is a few different things contributing to that. One is, of course, 10 SPRINT systems which is our approximate estimation for what the contribution is there. That’s a new product cycle that’s being layered in. Two is, of course, the normal seasonality that we’ve experienced in each of those years and three is a series of sales reps and expansion of the field force that was layered in late last year and early this year and those sales reps are now becoming effective. We usually find that sales reps take 6 to 9 months in the field before they come effective. So when we put all those pieces together we look at the overall funnel, it's the strongest we’ve ever had with respect to instruments.

[Doug Schenkel:]

Okay and one last one. One area of focus for some of us in the past has been on your visibility on instrument placements through distributors in Asia Pac. In the past, it has been pretty rare where you have got surprised, it seems like you were surprised in the quarter. Can you just describe what steps you took to make sure that there is no other surprise in Q4? Presumably, you dug in here a little bit more than normal. So anything you could share there would be helpful. Thank you.

[Brad Gray:]

Sure. So maybe just a little bit of how we manage Asia overall. We manage our Asian region out of Singapore, where we have a small staff there who manage some direct markets and then also coordinate very closely with our distributors. Our sales leadership also visits Asia quarterly and they visited Asia near the very end of the third quarter of -- just a few months ago and had a chance to meet face-to-face with many of our distributors in that region and get a very clear sense of what was and wasn’t in the funnel. So I’d say that’s how we’ve gotten the visibility that we are communicating here. Just in terms of the trends -- Asia is a big place, so the trends that we’re seeing within Asia so far this year really maybe isolating the weakness a little bit more that we experienced in Q3. The sales were weakest in Japan and the Australia New Zealand area and were relatively stable in China. And I think it gets to be law of small numbers as you slice the region up. But that’s what our due diligence has unearthed so far.

[Doug Schenkel:]

Okay. Thanks, Brad. I appreciate it.

[Operator:]

Thank you. And our next question comes from the line of Catherine Ramsey with Robert W. Baird. Your line is now open.

[Catherine Ramsey:]

Thanks, guys, for taking the questions. Can you provide any more color on what the mix was for Prosigna in terms of U.S versus international in the third quarter? And then, if you have seen any change in the U.S since Palmetto and some of the other MAX came on board?

[Brad Gray:]

Sure. So the revenue split Prosigna was about 60% North America -- I’m sorry, I got that backwards. Jim is correcting me. It was about 60% ex-North America, 40% North America. We saw growth in both regions sequentially and year-on-year. I wouldn’t attribute any of that growth though to the Palmetto decision. As we’ve said in the prepared remarks the Palmetto reimbursement became effective on October 1, and of course that was beyond the end of the quarter. And then in addition, we expect that Medicare reimbursement to take time to play through first -- for physicians to become aware of it and for physicians to begin to make trial usage of Prosigna and then finally for labs to respond to that demand by ordering kits. So we did not experience an increase associated with Palmetto during the third quarter. I would say I do not think we should expect this to see it in the fourth quarter either. I think it will take time to gradually impact Prosigna kit sales in the quarters ahead.

[Catherine Ramsey:]

Okay. That’s helpful. And then for the overall pull-through number you talk about exceeding $100,000 per system per year, does that average include SPRINT systems or is that only for MAX and FLEX?

[Brad Gray:]

Today it includes SPRINT systems that -- in the long run we’d expect a differential pull-through on SPRINTs versus the MAX and FLEX. But for now with only six SPRINTs sold to date, SPRINT overall is not affecting our pull-through for the fourth quarter and the third quarter.

[Catherine Ramsey:]

All right. Great. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Dane Leone with BTIG. Your line is now open.

[Dane Leone:]

Hi. Thanks, guys. Hopefully you can hear me? I apologize; I’m in an airport right now. Going on Prosigna again, how much do you see in terms of new accounts starting to test versus increased volumes at existing accounts as you have seen higher revenues or higher utilization post some of these guideline inclusions?

[Brad Gray:]

Sure. So I think the question is being what -- how much of the sequential growth came from new account versus account just growing their book of business? Its very small numbers [technical difficulty] SPRINT is out there, but reasonably modest between the second and third quarter. I’d say most of our revenue in the third quarter came from accounts who were already active at the beginning of the quarter. And again, just to reiterate, I do not attribute any of the sequential growth from Q2 to Q3, through the improving reimbursement situation with respect to Medicare, because that reimbursement was not effective during the quarter.

[Dane Leone:]

Okay, great. And then on the three unnamed partnerships that you announced you had signed during the third quarter, can you give us any color in terms of the nature of those relationships compared to what you’ve with Merck and Celgene existing?

[Brad Gray:]

Sure. So these are very different types of relationships compared with Celgene and Merck’s relationships. These are very small exploratory pilot or feasibility studies where we make available our assay such as Prosigna with a subtyping feature enabled or the DLBCL subtyping test. We make those available to a drug company to view to -- to determine whether or not that the test predicts response to their therapy and development. Usually on a small number of samples from a trial that they’ve already conducted and this is really exploratory and the idea would be that in most cases where it turns out that one of the subtypes or test outputs is predictive that we can then get into a more serious conversation with that biopharma company about a companion diagnostic partnership. So I think that these as nominal incomes of the economics, but hopefully setting the stage for much more substantial companion diagnostics partnerships in the future.

[Dane Leone:]

Great, thank you.

[Operator:]

Thank you. And our next question comes from the line of Dan Leonard with Leerink Partners. Your line is now open.

[Michael Sarcone:]

This is Mike Sarcone filling in for Dan. Just one question from me. You had mentioned, in terms of investment spending for next year, one of the prongs is a continued build out of the sales channel. Could you just give us any color or frame that in terms of head count and timing through the course of the year?

[Brad Gray:]

Hi. This is Brad. I will take it. Yes, I think we’re in the midst of our -- the one area that it’s very clear we’re watching closely and evaluating is the SPRINT launch. And SPRINT has substantially increased our ability to reach individual researchers and institutions who would not have been able to afford Prosigna -- I’m sorry, the nCounter system in the past. And so we’re looking at that and we’re watching that funnel build and we are looking at the leadership team to make sure that we're making the right investments to maximize that opportunity. And that's not going to necessarily mean a very substantial increase in our field force than the sales reps who are actually out in their territories. But what it will more likely mean is an investment and a new inside sales capability at NanoString that would help to relieve the field based resources of some of the burdens of consumable sales. And that's something that we piloted here over the last year and we have shown it can be very effective, having really Seattle headquarters based staff who are helping support consumable sales keeping our instrument reps focused on moving the new instrument sales. So that will -- we will require some additional headcount. We'd probably execute that expansion relatively early in the year once we have gotten a handle on what the right mix of field based and inside sales resources are.

[Mike Sarcone:]

Okay. Thank you.

[Operator:]

Thank you. And I’m showing no further questions at this time. I’d now like to turn the call back to Brad Gray for any closing remarks.

[Brad Gray:]

Thank you. We appreciate you taking an interest in our call -- joining our call today. We look forward to seeing you at some of the upcoming meetings. We will be at the AMP meeting in Austin later this week as well as the CISI meeting near the end of the week in Maryland. Hope to see some of you there. Thank you.

[Operator:]

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