NanoString Technologies, Inc.
Q4 2015 Earnings Call Transcript

Published: 1 Mar 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the NanoString 2015 Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder to our audience, this conference is being recorded. Now I would like to hand the call over to Leigh Salvo from Westwicke Partners. Ma'am you have the floor.

[Leigh Salvo:]

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 fourth quarter and year ended December 31, 2015 and a copy of the press release can be found on the company's website 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 payers 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 publically update any forward-looking statements. With that, I would like to turn the call over to Brad.

[Brad Gray:]

Thanks, Lee. Good afternoon and thank you for joining us today. 2015 was a year of strong growth and substantial progress for NanoString. We closed 2015 having achieved virtually all of our strategic objectives with an expanded product line up, substantially larger addressable markets, increased momentum and diagnostic commercialization and multiple biopharma collaborations. We've positioned NanoString as a leader in the field of precision oncology with our nCounter platform offering a complete biomarker solution that has been adopted by academic researchers, leading biopharma companies and clinical labs worldwide. In 2015, our business model continued to deliver rapid and consistent growth. We grew our install in excess of 30% while maintaining robust consumable pull through, yielding $62.7 million in revenue or 32% year-over-year topline growth. For the fourth quarter, total revenue was $22.3 million, up 43% over the prior year. We expanded our install base to over 350 nCounter Systems worldwide while delivering annualized consumable pull-through of well over $100,000 per system. Overall, we're delighted by the strong finish to 2015 and believe we're well positioned for another great year. We've wasted no time in building on our momentum. During the first two months of the year we've signed two major biopharma collaborations. These partnerships with Medivation and Astellas in breast cancer and with Merck and immuno-oncology expand our diagnostic pipeline, provided infusion of non-dilutive capital and underscore the power and value of our technology. Over the next few minutes, I will outline our four strategic objectives for 2016 and provide some guidepost for how we expect to track progress. I'll then turn the call over Jim who will comment in more detail on our recent financial performance and financial outlook. Our first objective for 2016 is to penetrate our expanded market opportunity that building an install base of nCounter SPRINT Profiler. SPRINT delivers high performance with a footprint and pricepoint suited to the needs of the individual researcher. Since its launch last July, SPRINT has been off to strong start with 20 systems sold in 2015 and we expect the momentum to build throughout 2015. Based on our experience to date, SPRINT is clearly appealing to the previously uncapped segment of individual researchers who appear about twice as likely to buy a SPRINT as they were to buy a MAX or FLEX system. This is allowing us to broaden our customer base with 70% of SPRINT sold in 2015 going to new nCounter users. Our efforts to engage individual researchers have been successful and SPRINT now accounts for 40% to 50% of the interim opportunities in our sales funnel. In addition, the increase in the NAH budget is expected to provide an extra boost to SPRINT demand in the second half of this year as this more affordable system is marketed directly toward grant funded academic researchers. Our second priority for 2016 is to expand our suite of 3D Biology products. 3D Biology is a unique application of a barcoding technology that allows measurement of any combination of DNA or RNA and protein simultaneously on any nCounter system from a single tissue sample. We believe that 3D Biology will enable researchers to make entirely new observations about cancer biology while maximizing the data generated from their valuable samples. In September, we launched our first product in the 3D Biology family, the RNA

[Jim Johnson:]

Thanks Brad. Total revenue for the quarter was $22.3 million up 43% versus a strong comp in the fourth quarter of the prior year. Total product and service revenue was $19.4 million up 36% year-over-year. Foreign exchange rate fluctuations reduced the growth in total product and service revenue by approximately four percentage points. Instrument revenue for the quarter was $7.9 million, 25% higher than in the fourth quarter of 2014. The growth was driven sales of SPRINT and geographically instrument sales in the Asia-Pacific region, recovered in Q4 from the slowness experienced in Q3. Life sciences consumable revenue was $9.9 million up 38% year-over-year. The key growth driver of the substantial increase in the sale of panel products especially our PanCancer Immune Profiling Panel, which has now become our biggest seller. Prosigna IVD kit revenue was $822,000 for the quarter, growing 24% sequentially with ex-U.S, markets continuing to generate the majority of sales. In total we had record consumable revenue for the quarter with pull-through of $10.7 million up 46% versus fourth quarter of 2014 and significantly above $100,000 per system on an annualized basis. We recorded $2.9 million of collaboration revenue for the quarter. The surge in revenue resulted from substantial progress in our original collaboration with Merck and an amendment to our agreement with Celgene, which brought in $1.6 million of cash during the fourth quarter. Gross margin on product and service revenue for the quarter were 56% up from 53% reported for the fourth quarter of 2014. The increase resulted largely from a shift in product mix toward consumables and other factors including improved margins on consumable revenue and service revenue. R&D expense was $7.1 million for the quarter up 30% over the fourth quarter of the prior year. The increase reflects increased investment in product under development for the life science research market such as 3D Biology panels and Hyb & Seq chemistry as well as higher cost related to diagnostic development including our original Merck collaboration. SG&A expense was down slightly year-over-year, the $14.2 million for the quarter and this reduction reflects cost efficiencies resulting from the reorganization of sales and marketing that occurred in the first quarter of 2015. Stock-based compensation expense was $1.5 million compared to $1.3 million for the fourth quarter of 2014. Our GAAP net loss decreased to $8.8 million or $0.44 per share, compared to $12.4 million or $0.68 per share for the fourth quarter of 2014. We ended the quarter with approximately $49 million of cash investments. So now I will turn to financial guidance for 2016. We’re currently projecting total revenue of $86 million to $90 million for the year assuming constant currency which is an increase of 37% to 44% over 2015. It includes collaboration revenue of approximately $15 million from our agreements with Celgene, Medivation and Astellas and Merck but does not include any additional collaborations, which represent upside to our guidance. Following the announcement of new collaboration, we will update our guidance to reflect the impact of revenue and expense. Total products and service revenue is projected to be $71 million to $75 million for the year reflecting growth of 25% to 32% over 2015. In 2016, we expect MAX and FLEX instrument placements to be down modestly from 2015 with instrument revenue growth driven by SPRINT placements. We have included $5 million of Prosigna IVD kit revenue in our guidance, reflecting an assumption that Prosigna will continue to grow steadily based on the guideline inclusions and reimbursement wins achieved over the past year. In total, we believe that consumable pull-through per system can continue to approximate 100,000 per system in 2016 with the increased contribution from Prosigna compensating for the lower than expected pull-through on SPRINT systems. Before moving to costs and expenses, let me take a moment to talk about our quarterly revenue trends in 2016. Consistent with our experience over the past three years, we expect consumable pull-through in the first quarter of the year to be lower on a per system basis than in the other three quarters. We also expect to see typical seasonality on instrument sales. As a result we expect first quarter product and service revenue to be in the range of $13 million to $14 million. For the remainder of the year, we expect product and service revenue to breakdown by quarter similarly to 2015. For collaboration revenue, we expect substantial growth from quarter-to-quarter in 2016 starting at approximately $1 million to $1.2 million in Q1 growing modestly in Q2 and then more substantially in Q3 and Q4 based on expected milestone payments under the new Medivation, Astellas and Merck collaborations. Our gross margin on products and service revenue is expected to be in the range of 54% to 55% for the year with collaboration revenue excluded from the calculation. Gross margin on product and service revenue will likely fluctuate from quarter-to-quarter based on the mix between consumables and instruments. However ignoring this revenue mix impact, we expect it to continue to trend upward as the scale of our consumables manufacturing operation grows. We're expecting total operating expenses of $94 million to $99 million in 2016, which represents an increase of 21% to 27% over 2015. The increase in operating expense would be largely driven by increasing R&D expense including the incremental cost related to our diagnostic collaborations. Also the increase stems from our decision to make incremental strategic investments in projects like 3D Biology, Hyb & Seq chemistry and our immune-risk chemistry alternative. We expect operating expenses to include approximately $8 million to $9 million of stock-based compensation expense for the year. Our GAAP operating loss for the year is expected to be in the range of $40 million of $43 million. Interest and other expense is expected to be between $5 million and $5.5 million for the year and we expect GAAP net loss for the year in the range of $45 million to $48 million or $2.30 to $2.45 per share. Total capital expenditures are expected to be between $4 million and $5 million for the year, net of resold improvement funding from our landlord. Finally, turning to cash outlook, as noted earlier we finished the year with approximately $49 million in cash and investments. We expect the collaborations with Medivation, Astellas and Merck together will bring in $40 million to $45 million of cash in 2016. This should put us very close to net cash flow breakeven for the year and with one additional collaboration, we could be cash flow positive. Furthermore with our cash on hand, our two recently announced collaborations in untapped borrowing capacity, we believe that we have sufficient capital available take us beyond 2017. We expect to find additional collaborations during this time and these should provide us with an even longer financial runway. So with that, I’ll turn it back over to Brad to wrap up.

[Brad Gray:]

Thanks Jim. To wrap up, we’re proud of our 2015 performance and believe that we are well positioned for 2016 and beyond. We've attractive near term growth opportunities created by nCounter SPRINT, new 3D biology assays and our leadership and immuno-oncology. We have compelling longer term opportunities such as growing our diagnostics business and expanding our powerful barcoding chemistries into new markets such as sequencing and pathology. Finally, our recent biopharma collaborations have validated our platform, strengthened our leadership in precision oncology and will provide substantial near-term cash flow. With so many drivers and catalysts, we're extremely optimistic about the future. We will now open up the call for Q&A. I look forward to taking your questions.

[Operator:]

Thank you [Operator Instructions] Our first question comes from the line of Doug Schenkel with Cowen & Company. Your line is now open. Please go ahead.

[Doug Schenkel:]

Hey guys good afternoon and thank you for taking my questions. So on the Merck collaboration, of course before I get into that congratulations on that development.

[Brad Gray:]

Thank you.

[Doug Schenkel:]

Given what you provided in terms of guidance on total amount of cash you're going to be bringing in across all of your agreements it does seem like there is probably a decent upfront component to the agreement or certainly something that gives you some amount of confidence that there is going to be a decent amount of cash coming in 2016 via that agreement. Can you give us anything more specific there in terms of what is guaranteed in very near term or upfront funding associated with that deal?

[Brad Gray:]

Sure, thanks for the question Doug. So overall the Merck collaboration is expected to provide about double the overall economic value and cash of the previously announced Medivation and Astellas collaboration. The reason is, the Merck collaboration has -- is a multi-indication collaboration. So as I said in the prepared remarks, Merck include a $12 million technology access fee that at the very beginning of the collaboration, which is not contingent on performance, up to $12 million in near term financial milestones that are preclinical in nature meaning many or all them could be achieved in the current calendar year. And then in addition Merck provides R&D funding and while the exact resource allocation for that collaboration will be determined by joint steering committee, we’d expect it to be about double what we're putting into the Medivation and Astellas collaboration.

[Doug Schenkel:]

Okay. That is very helpful and then I’m just looking through my notes and hopefully this is undated, but I think last time we asked, you indicated that there were at different stages and some of them were just an evaluation, but I think you said you had ongoing programs with nine different biopharmaceutical companies. Where is -- has that number changed at all now as we sit here in early 2016?

[Brad Gray:]

Yes, I think that was an update that maybe we provided in late 2015. As of today Doug, we have executed 17 different pilot studies with 11 different biopharma companies. As a remainder these pilot studies are designed to provide access to our lymphoma assay or our breast cancer assay so that biopharma companies can test sample base collected in clinical studies and determine whether or not they believe that our test might predict response to their therapy. The idea is that those -- if it does, there may be a potential for a much larger companion diagnostic collaboration in alliance with Merck and Medivation and Astellas that would follow.

[Doug Schenkel:]

Okay. And one last one Brad and then I'll get back in the queue, along the same lines, you're thinking about your operating expense guidance for the year. You've guided us to expect the operating spend to increase just under $20 million year-over-year, I believe if I have the math right. It sounds like some of that is associated with the new agreements you've entered into. Separate from that, it does sound like most of the increase in spend is going towards R&D. Is any of the spend being taken on in advance of additional agreements being entered into essentially making sure you have the staffing in place to support additional deals? Thank you.

[Brad Gray:]

Yes, I think R&D increase does represent a large fraction of the increase and largely it's driven by our companion diagnostic deals and it's in response to the signing of the Medivation, Astellas and the Merck agreements. We're of course making sure that we have a good set of bench strength to continue to be able to scale this business, but in general we don't hire capacity far in advance of assigning those collaboration. Anything you want to add to that Jim.

[Jim Johnson:]

No, I think that's -- you guided it. It's slightly more of the dollar amount that would be attributable to R&D growth, but obviously on a percentage basis, that's on a much smaller base. So the increase in R&D will be on a percentage basis, much higher that SG&A.

[Doug Schenkel:]

Okay. Thanks guys and congrats again.

[Brad Gray:]

Thank you.

[Jim Johnson:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Tycho Peterson with JPMorgan. Your line is now open. Please go ahead.

[Tycho Peterson:]

Hey thanks. Maybe just following up on those questions earlier about bandwidth around companion diagnostic collaborations, I guess first of all some of the incremental cost, can you talk us how much of this is going down the regulatory pathway on your end? And are you going to be spending on I guess in the Merck deal and the extent of Merck deal you talked about retaining the flexibility to develop the broader assays that's something you're going to be spending on in 2016?

[Brad Gray:]

So most of the incremental R&D expense that goes to supporting our existing -- our new Medivation and Astellas and Merck collaboration and during the current calendar year, that's mostly assay development work. So our obligation of our partner, our focus is to develop those assays to deliver them, in the second half of the year to our partner so that they can begin applying them in their studies and so that does not entail too much regulatory expense in the current year. Most of it is R&D is R&D focused. The regulatory expense would come several years down the road in the wake of having executed the studies as we're preparing filings. So that's the focus of the growth. In terms of the amount of investment we'll be making in 2016 on the sort of universal assay concept, I would say that's very modest. First and foremost, we want to do well by our partner at Merck and deliver that assay to them. In parallel, I am sure we'll begin some partnership discussions with other companies who may be interested in that and we'll begin thinking about universal assay, but I would not expect that to be a major driver of R&D expense in the current year.

[Tycho Peterson:]

Okay. And then a question on the service and product guide of $71 million to $75 million, that includes or doesn’t for pro service there?

[Brad Gray:]

That includes Prosigna.

[Tycho Peterson:]

Okay. And then I guess just lastly on 3D Biology, can you maybe just talk on either reimbursement landscape, what you're hearing from customers especially as you expend the assay menu? Are you having to help facilitate some of the reimbursement discussions just try to kind of make sure your customers are getting paid.

[Brad Gray:]

So 3D Biology is initially a researches-only application. None of the customers, the 20 customers who accessed it in 2015 were doing so in the effort of developing a clinical assay. They were using it for their classic biomarker discovery -- biomarker discovery, biomarker research efforts. Most of these were in fact drug companies. So 3D Biology is I think for the next several years are researches-only product line for us and therefore the challenges of reimbursement are not expected to have any impact whatsoever on the trajectory of 3D Biology.

[Tycho Peterson:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Steve Beuchaw with Morgan Stanley. Your line is now open. Please go ahead.

[Lisa:]

Afternoon guys, this is Lisa on for Steve. I just have a couple of quick housekeeping questions. I was hoping you could maybe provide an update on the biopharma consumable spending in the quarter and how we should be thinking about that in '16?

[Brad Gray:]

Sure. The biopharma demand for consumables was strong in the fourth quarter. They represented about 40% of our consumable revenue and they were a primary driver of that increase in panel spending that Jim characterized in particular our PanCancer Immune Profiling Panel, which is now our number one selling research panel has proven popular with our biopharma customers.

[Lisa:]

Great. And then while I’m thinking about the ramp to Prosigna adoption after the Meridian decision and Medicare comes on Board, how should we think about that logistically in terms of the timeline in the funnel and also if you could just help with international contribution and maybe how we should think about pricing ex U.S. for Prosigna?

[Brad Gray:]

So we expect demand for Prosigna to grow across the course of 2016 and the way I would describe is linear and not just because we've learned that it takes time for new guidelines and new reimbursement decisions to translate into increased kit sales. The Meridian decision will of course be really a great milestone for us as we have several important promotional customers in California who benefit from having Medicare coverage. But I would not look for a major inflection in the wake of that decision. In terms of international contribution, as I think we've noted in the past, ex-U.S. Prosigna in our revenue has so far accounted for the majority of our Prosigna revenue. In 2016, I would expect the U.S. to catch up with both regions contributing materially to growth. Pricing for Prosigna, it does vary by region. Pricing is not an important dynamic in our company of competition in the U.S. but it is ex-U.S. and so we're doing rational discounting when competing for government tenders overseas. That being said, it's still an extremely profitable product and still probably the most highly priced in vitro diagnostic kit in the world.

[Lisa:]

Great. Thank you so much. I'll jump back in.

[Operator:]

Thank you. Our next question comes from the line of Dane Leone with BTIG. Your line is now open. Please go ahead.

[Dane Leone:]

Hi thanks for taking the questions. So Brad as you go forward here in 2016 and you’ve always had good momentum in terms of the partnership side of things. Where -- how do you think about your capacity to handle these additional partnerships whether it's early on assays you have or the partner wants to develop new assays. How do we think about your capacity or utilization of the team to really go after these new deals?

[Brad Gray:]

Well I think with three partnerships now, the utilization of the team, perhaps utilization is very high. We will have to make some incremental hiring to support our new partnerships. But these partnerships are -- with the work is up on a rolling basis once again the portfolio and we've demonstrated with Celgene it really took nine months of work between the time that we signed that collaboration and we delivered the assay to Celgene for the enrollment of their Phase 3 robust study. And then after we delivered that assay, while the work that has stopped completely it changes in nature and so the assay development team who delivered the assay to roll on to a different study while the clinical team comes in and supports the trial. And so I think now we scale only -- by the time we scale up early this year in the wake of these two new agreements, I think we will have a nicely sized team that can manage the portfolio of these efforts on a go forward basis. In addition, we're certainly hoping that in the future, some of our new diagnostic efforts will be to re-partner some of the existing assays with additional companies. So for instance with Medivation and Astellas as you can imagine, the assay development work is substantially less than it was for our Celgene collaboration because we're largely repurposing with Prosigna reagents with a new algorithm of paired close to developing the whole new assay. So as we move into re-partnering existing assays, I think the demand on the team for each incremental deal will be less and less.

[Dane Leone:]

Thank you very much.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Catherine Ramsay with Robert W. Baird. Your line is now open. Please go ahead.

[Catherine Ramsay:]

Hey guys. Congrats on a new collaboration and great quarter. A quick question for us as far as 2016 guidance. Could you talk about what impact you're baking in for the NIH funding increase? And then a little more color on what you're expecting from 3D Biology this year?

[Brad Gray:]

Sure. I think NIH funding increase is baked into our -- base of our instrument revenue in the back half of the year in a very modest way. I think it's a good tailwind for Sprint, the Sprint launch in particular because Sprint is really targeted towards the academic market. But yes, I wouldn't say, our guidance hinges materially on NIH funding. I am sorry, the other question Catherine was.

[Catherine Ramsay:]

What your expectations are for 3D Biology this year that are baked in the guidance?

[Brad Gray:]

Yes, so 2015 is a building year for 3D Biology. We're trying to go from having really only one propionic assay to having a suite of DNA, RNA, and protein assays that can be used in combination. It's going to take us most of the year to get full commercial launch of those assays and so we do not factor a tremendous amount of really biology product revenue into our consumable guidance. However, our experience has been that 3D Biology is a motivated factor for instrument place and then in fact several of the instruments we sold in the fourth quarter were partly motivated by the excitement of specific customers about 3D Biology. So I would expect 3D Biology to show up in our instrument line in 2016 and then more our consumable line in 2017 and beyond.

[Catherine Ramsay:]

Okay. Great. And you talked about the trend towards panels. Could you remind us what percent of revenue those are now and what their margin profile is relative to other consumables?

[Brad Gray:]

Sure. So panels have increased as a percentage of our consumable revenue substantially over the last 12 months. In the fourth quarter, the growth year-on-year was about 100%, so I think double year-on-year to about 50% of our consumable revenue, our life sciences consumable revenue. So that's been a really nice win for us. We aren’t specific in terms of breaking out the margins panel products versus our custom made products, but I think you're right to infer that they're more profitable because we build them at scale and we inventory them. So it's a very good trend in our business.

[Catherine Ramsay:]

All right. Great. Thanks guys.

[Operator:]

Thank you. There are no further questions. I would now like to turn the call back to Brad Gray, CEO of NanoString for closing comments.

[Brad Gray:]

Well, thank you all for taking the time to dial in and hear our updates. We hope you all have a great night.

[Operator:]

Ladies and gentlemen, this does conclude today's program and you may all disconnect. Everybody have a wonderful day.