T2 Biosystems, Inc.
Q2 2020 Earnings Call Transcript

Published: 12 Aug 2020

[Operator:]

Greetings, and welcome to the T2 Biosystems Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Philip Taylor, Investor Relations. Please go ahead, sir.

[Philip Taylor:]

Thank you, operator. Thank you for joining us for the T2 Biosystems second quarter 2020 financial results conference call. I would like to remind everyone that comments made by management today and answers to questions will include forward-looking statements. Those include statements related to T2 Biosystems' future financial and operating results and plans for developing and marketing new products. Forward-looking statements are based on estimates and assumptions as of today and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these statements, including the risks and uncertainties described in T2 Biosystems' annual report on Form 10-K filed with the SEC, March 16, 2020, and other filings the company makes with the SEC from time to time. The company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. With that, I'd like to turn the call over to President and CEO, John Sperzel. John?

[John Sperzel:]

Thank you for joining our second quarter 2020 earnings call. I'll start by acknowledging the ongoing COVID-19 pandemic and its widespread impact on our communities. Our team at T2 Biosystems would like to thank all health care workers for their tireless service. I also want to thank my colleagues at T2 Biosystems, for their commitment to our mission while dealing with unprecedented challenges. On today's call, I'll start with a review of our performance during the second quarter and then discuss the progress made toward each of our corporate priorities, including the recent U.S. commercial launch of our COVID-19 molecular diagnostic test, the T2SARS-CoV-2 Panel and how it is well-aligned with our mission and our corporate priorities. John Sprague will provide the detailed second quarter financial results. I will make some closing remarks, and then we'll open the call for questions and answers. As we announced at the end of June, the T2 Biosystems generated total revenue of $2.6 million in the second quarter of 2020, an increase of 41%, compared to the prior year period. Growth was driven by increased revenue from the product development contract awarded by the U.S. government in late 2019. On June 30th, we commenced sales of our T2SARS-CoV-2 Panel in the U.S. market, and we significantly strengthened our balance sheet during and subsequent to the end of the second quarter. I want to take a moment to emphasize T2 Biosystems' mission. To fundamentally change the way medicine is practiced through transformative diagnostics that improve the lives of patients around the world. I also want to reiterate the three corporate priorities we set at the beginning of this year

[John Sprague:]

Thank you, John. Total revenue for the second quarter of 2020 was $2.6 million, an increase of 41% compared to the prior year period. Product revenue for the second quarter of 2020 was $1 million, an increase of 18% compared to the prior year period, driven by lower international instrument sales. Research and contribution revenue for the second quarter of 2020 was $1.5 million, an increase of 185% compared to the prior year period, driven by increased funding under our U.S. government contract. Cost and operating expenses for the second quarter of 2020 were $11.4 million, a decrease of $4.2 million compared to the prior year period, driven by lower cost of product revenue and lower selling, general and administrative expenses on lower international instrument sales. Net loss for the second quarter of 2020 was $10.7 million, $0.09 per share compared to a net loss of $15.6 million, $0.35 per share in the prior year period. We completed the ATM offering in July 2020, and there is no remaining availability. Cash, cash equivalents and marketable securities as of July 31, 2020, were $69.1 million. We remain compliant with the terms of our CRG debt facility. Thank you, and back to John Sperzel for closing remarks.

[John Sperzel:]

While the COVID-19 pandemic remains a significant global challenge, diagnostic testing continues to be center stage. We have an incredible opportunity created by the flexibility of our patented technology platform. Our ability to provide clinicians with critical diagnostic information in hours rather than days is unique and can help to save lives and improve outcomes for COVID-19 patients and those under intensive care, who are susceptible to bacterial or fungal infections that may lead to sepsis. We're excited to continue to drive the adoption of our technology while providing a powerful solution to clinicians in their efforts to combat this pandemic. With significant progress across all three of our corporate priorities, we have improved the position of the company, both financially and in the market. We believe customer demand created through the recent U.S. commercial launch of our T2SARS-CoV-2 Panel will have a significant positive impact on our business moving forward. We have a strong balance sheet, an improved cost structure, a potentially disruptive product pipeline and an experienced management team and Board of Directors. We look forward to providing updates on our progress toward these priorities throughout the year. We'll now open it up for questions. Operator?

[Operator:]

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] The first question is from Puneet Souda, SVB Leerink. Please go ahead, sir.

[Puneet Souda:]

Yes, thanks. And thanks, John and congrats on the strong results here. First question on trying to understand what does the pickup in sepsis means as a result of COVID? How sustainable is that trend? And correct me if I'm wrong, that this is a rule out test for sepsis. Can you elaborate the growth that you're seeing there? It appears to be coming from that during the quarter. How sustainable is that trend longer term? And what sort of contribution do you expect from that, specifically, not necessarily COVID testing? What do you expect from that sepsis in COVID patients in the second half because you have a significant ramp-up here in the sales in the second half?

[John Sperzel:]

The uptick that we've seen in test utilization for sepsis panels is largely driven by customers who have fully implemented the test into their sepsis protocols. And we saw that, in particular, in some of the hot spots in Florida and New York City. And in discussions with those customers, they're simply testing the COVID patients or those that are in critical care more frequently because of the risk of coinfections and secondary infections. So that part of it, we believe, is sustainable so long as the COVID pandemic is in front of us. In terms of the ramp in the second half of the year, the instrument sales that we have planned in the back half of the year, which is approximately 60 instruments, are largely both driven placements and they will be fully utilized by the T2SARS-CoV-2 Panel. The transition, obviously, is as the impact of COVID winds down some point in the future, we plan to transition those instruments that were installed during the COVID pandemic to our sepsis panels. And as I mentioned in the prepared remarks, we are pre-positioning that with every single customer that's adopting our T2Dx Instrument with the T2SARS-CoV-2 test.

[Puneet Souda:]

Okay. That's very helpful. And on the COVID assay, could you elaborate -- I think you gave a number of 60 tests per day. Is that a metric that can potentially increase? And how are you thinking about the next instrument? Is that a -- could you accelerate higher volume testing on that instrument, if you can provide any details on there

[John Sperzel:]

The next instrument is designed for greater throughput. I think it's important to say that we are focused on the products that we have today for the moment. And so, when we look at the T2Dx instrument, it has a theoretical throughput of just north of 80 tests per day, assuming that we can deliver a test in a little under two hours. However, when we look at practical throughput running three shifts, and some of our customers are running three shifts today, the practical throughput is about 60 tests per day. Now in terms of thinking about a model, we modeled that with customers running two shifts per day. So you could call that a little bit conservative, but that's the way we've done it.

[Puneet Souda:]

Okay. That's great. And then on the sales team, can you elaborate where do you stand currently? And what are the additions? What are expectations for additions into the second half? And overall, this is maybe a question for John Sprague, if you can provide your estimate on cash burn into the second half? Thank you.

[John Sperzel:]

So I'll take the sales piece. John can handle the up piece. I think it's important just to remember where we came from. In -- at the very end of Q1, we decided to eliminate the sales team that was in place. And in the midst of the COVID pandemic, I think we talked about this before, there was a period of time where hospital systems simply would not allow a sales rep to enter the building. And in many cases, that's -- that still occurs. So a lot of our selling efforts had been using other vehicles, remote vehicles, and we've been very, very successful with that. I can tell you that the inbound demand for our COVID test is significant. And we only need a few outsized sales reps in order to execute on that, which is what we have rehired. We've rehired three regional account managers so far, and we'll continue to scale that as the pandemic winds down and as appropriate. John, if you want to handle the cash question that would be great.

[John Sprague:]

Sure. So our cash burn was about $8.9 million in the second quarter. We see that as extending for the rest of the year, although we are adding manufacturing capacity as well as two commercial sales team. But it won't be a dramatic increase in burn. We are investing in inventory levels, as John mentioned, and that will utilize cash, but we see that starting to turn as we exit the year.

[Puneet Souda:]

Okay, great. Thank you.

[Operator:]

Next question is from Max Masucci, Canaccord Genuity. Please go ahead, sir.

[Max Masucci:]

Hi. Thanks for taking the question. So, it's nice to see the reinstated guidance for the year. Can you just speak to some of the key embedded assumptions and then the potential swing factors? The guidance calls for 60 instrument contracts for the year. What does the guidance assume for mix of capital sales versus reagent rental?

[John Sperzel:]

100% capital mix, that's one of the great things that have occurred in the shift, is we were able to sell instruments. We're able to put customers on standing orders. With the sale of an instrument comes the sale of a service contract. So, commercial model has been on 180 from reagent rentals to capital equipment. Now, I will say that we are making it attractive for customers to adopt our instrument technology, because there is both a short-term effort, which is to drive T2SARS-CoV-2 tests as well as to meet significant demand in the market. And there's a long-term play, which is to really revolutionize the sepsis market as COVID pans down.

[Max Masucci:]

Great. And then just any initiatives to reduce the time line to get the instruments up and running once they are placed? Just would be helpful to understand, what sort of assumptions are baked in there?

[John Sperzel:]

It's about three weeks, right now. So, it's been massively...

[Max Masucci:]

Three weeks. Great. And then what sort of runway do you have to expand your manufacturing capacity organically? Are you still exploring manufacturing partners to help you extend the capacity? And then does your 2020 guidance assume -- what does the 2020 guidance assume for manufacturing capacity? Is it a constraining factor? Or is there any sort of dependency there?

[John Sperzel:]

So, we plan to sell key instruments into U.S. customers in the second half of 2020, which I mentioned in the prepared remarks, is a sevenfold increase compared to last year. So, we're ramping our instrument manufacturing to stay ahead of that anticipated demand. We have littered a lot of materials. John sort of highlighted that, that's going to show up in increased inventory in the second half of the year. We're ramping our test manufacturing as well to meet what we believe is significant customer demand. The beauty about having the installed base that we have, knowing exactly where it is and what we plan to place in terms of COVID-driven placements is we can very accurately forecast the number of tests that our installed base actually can consume. So, the maximum number of that installed base it can consume. Now, some customers are going to want to order more than that because they're experiencing allocations, delayed shipments or back orders with other manufacturers. So, while we're making promises to customers on delivery because we know that we can stay ahead of our installed base in terms of the scalability of our test, some customers don't believe that and they're going to order more than what the instrument can actually consume on a day, a week or a monthly basis. So, we feel very good about our ability to scale manufacturing of instruments. We feel very good about our ability to scale manufacturing on the test. And our model is a go-at-a-loan model. We are still pursuing opportunities for government funding, scale up procurement that we hope would be non-dilutive. Of course, we can't make any guarantees that, that will occur.

[Max Masucci:]

Great. That's it for me and congrats on the new opportunity ahead.

[John Sperzel:]

Thanks Max.

[Operator:]

We have a question from Ben Haynor, Alliance Global. Please go ahead sir.

[Ben Haynor:]

Good afternoon gentlemen. Thanks for taking the questions and congrats on being able to offer guidance when a lot of firms have pulled back and have not been able to reinstate it. So just thinking about the 60-system number, are those kind of -- what's kind of the mix in terms of new accounts, existing accounts that might need additional systems? And then how that incoming demand -- how many orders or indications do you have in hand at the moment?

[John Sperzel:]

I would say that it's about 80% new customers, 20% existing so far. We're still six weeks into the launch. So, that's an early number. And we're confident enough in that 60 instrument number to give guidance. I think you started with that as a comment, Dan. So, thanks for acknowledging that and we're pretty confident in these figures enough to give that guidance.

[Ben Haynor:]

And maybe -- and then maybe you're not seeing this being that you've got incoming interest, but do you get a sense of what other solutions on the COVID testing front that these hospitals might be evaluating?

[John Sperzel:]

Well, obviously, there are a lot of players in the COVID diagnostics space. As I mentioned in some of my prepared remarks that supply -- molecular tests that supply antigen test, antibody tests -- there are lots of different testing locations, that frankly, leads to a lot of confusion and misunderstanding. So, I want to be very clear about where we're going to compete and how we're going to win. We're going to compete in the hospital market. We're going to be focused on supplying them with a number of tests that meets their expectations about our platform, and we're going to make commitments to that. What we're seeing from other -- from many of our customers is that they buy a system from a competitive company and within one week, they're on allocation. And so the discussions that are taking place about turnaround time on instrument. Somebody might say, well, two hours. There are out there that can give results in less time than that. That's great if you can get those tests. I mean what we're hearing if you watch the news every day is turnaround time is measured in days, not hours. We're going to stay very focused on the hospital market. I think we've all heard the adage that what you say no to is often as important as what we say yes to. That rule applies for us. We're not going to chase other market segments that are outside of our long-term objective to revolutionize the sepsis place. This is a catalyst for us to go out and significantly increase our installed base, generate revenue, product gross margin and then to lift that down the road to building a really strong sepsis business.

[Ben Haynor:]

Okay. That's very helpful. Thanks for the color there. And then maybe following up a little bit on my first question, on the 60 units, do you expect a lot of these accounts just given the throughput to need multiple units or is it kind of 1.2, 1.5 systems per account on average?

[John Sperzel:]

We are in discussions with many customers that want multiple systems, and that's great.

[Ben Haynor:]

Okay. Thanks a lot gentlemen. That’s all I had.

[John Sperzel:]

Thank you, Ben.

[Operator:]

We have a question from Steve Brozak, WBB Securities. Please go ahead, sir.

[Steve Brozak:]

Hey, thank you for taking question. I've just got one follow-up. I know it’s too early for you to tell us in terms of what you're seeing with the COVID testing. But can you tell us anything anecdotally about what your -- what the different hospitals, the different clinicians are giving you as far as feedback? Any light you can do would be terrific?

[John Sperzel:]

I think one thing that I'd like to point to, Steve, is the fact that we already have a handful of customers that are using our Sepsis Panels as well as our T2SARS-CoV-2 Panel. Those are customers that already existed. They were ones that asked us early once we announced that we were going to develop a COVID-19 test to be early adopter for that because they saw the connection clinically between critically-ill COVID patients and the risk of sepsis. So that was a thesis that we had when we licensed this technology from Hackensack Meridian Health. And it's really exciting to see it play out that way, that we're meeting customer needs and we're helping patients have better outcomes.

[Steve Brozak:]

Actually, thank you John -- that actually leads me to the next question in terms of the COVID sepsis correlation because that's something that, obviously, we're reading about in the newspapers all the time. Can you give us any insight as to what you're seeing as far as how clinicians are practicing and how they understand this? And anything you can give us on that front, that would be terrific, and I'll hop back in the queue? Thank you.

[John Sperzel:]

So I might ask Tom Lowery to just comment about the clinical application between the sepsis panels and the COVID test. Tom, do you mind responding to that?

[Tom Lowery:]

Sure, happy to. So we've seen data and more data are emerging about the presence of super infections and co-infections and a lot of our customers where utilization is up are customers that have been in epicenters of the outbreak, such as New York City and other places. And so, we're seeing that as these patients who are suffering from COVID or in the ICU, they really discrete them rapidly and quickly for the presence of bloodstream infections and persistent fungal infections and they turn to our panels T2Candida and T2Bacteria to do that.

[Steve Brozak:]

Great. Well, thank you again John and Tom. And congrats on, obviously, on this progress.

[John Sperzel:]

Thank you, Steve.

[Operator:]

[Operator Instructions] We have a question from Mark Massaro, BTIG. Please go ahead, sir.

[Mark Massaro:]

Hey guys, congrats on a good quarter. Thanks for taking my questions. I guess, before I start, for Tom Lowery, I just want to congratulate you for your long tenure of the company and all the successful development milestones you had to take T2 to this level.

[Tom Lowery:]

Thank you, appreciate it.

[Mark Massaro:]

And okay, so my first question, guys, if you could just help me with the guidance. So obviously, 60 placements in the back half of the year is something that I don't think anyone on this line was expecting. John Sperzel, you talked about receiving some orders in the quarter. Just doing the math relative to the initial guide that you provided earlier in the year, that would assume an incremental step-up of, I think, its $4.5 million of product revenue relative to the initial guide. So can you just give us a sense for -- have you received somewhere near 20 or 30 orders for the T2Dx system? Just some sense on the traction you have on the order side?

[John Sperzel:]

Sure, Mark. First of all, it's an even bigger step-up than that, because by this time, in our initial guidance, we would have expected to be further along in product sales than we were through the end of Q2, because of the headwinds related to COVID, mostly in the international market and mostly moving from evaluations to closes. So we expect a significant step-up from the first half of the year to Q3 and then an even bigger step-up to Q4. Now what drives that is instrument placements. The number of instruments that we have installed at the end of a given quarter, it's really what's going to drive revenue in the following quarter. So if you look at the 60 units, we already have a significant pipeline of customers in our sales funnel that are in the contracting process. And we already have a number of customers that have gone live with our T2SARS-CoV-2 test, and new customers as well as existing customers. So we didn't plan to get into the specific number on this call. But just in terms of the way we think about Q3 and Q4, we expect Q4 to be 2x above Q3, in terms of the way we think about that guidance for the full year.

[Mark Massaro:]

That's super helpful. And then, on the successful increase in annuity per system, I think you said 51% sequentially. How sustainable do you think that is? And can you give us any commentary about what July look like?

[John Sperzel:]

Sure. So I don't have July in front of me, quite frankly. But where we were in Q2 versus Q1, just important to go back. At the beginning of the year, we said that the utilization in terms of number of tests per year measured in dollars was approximately $50,000. That's about what it was at the end of Q1. I think it had inched north of $51,000, $52,000, and its north of $70,000 in the second quarter. So we obviously saw an uptick. And as I mentioned before, we saw it in hotspots. We saw it in New York. We saw in Florida. We saw it with some of our international customers, in Italy as well, although we don't count that in our utilization for the U.S. So we think that, that part is sustainable. We set a target to get to $100,000 by the end of this year in utilization. Now, that's pre-COVID, but I think our prospects just got substantially better to even outdo that number, because we're now adding a COVID test to our platform.

[Mark Massaro:]

Got it. Yes. No, that's remarkable. And then your two large GPOs, Premier and Vizient, can you talk about the traction you've had within their large networks? Presumably, some of the COVID contracts or orders you've received likely might be stemming from those GPOs?

[John Sperzel:]

We have not added the T2SARS-CoV-2 Panel to the Vizient or Premier contracts yet. That's something that we're going to look at in the back half of the year. Quite frankly, we have so much inbound demand right now. I don't think that, that's something that we need to address at the moment for a number of reasons. And in terms of our sepsis business, obviously, COVID impacted the implementation with Vizient and Premier to start the year, but we expect that to be strong as we go forward.

[Mark Massaro:]

Okay. And you said you now have a reviewer at the FDA on the COVID test. Do you think this is four, eight, 12 weeks away? I mean, do you have a sense on roughly when we can expect to see an EUA approval?

[John Sperzel:]

It's really hard to predict that, Mark. I can tell you that we are in an interactive review process, where exchange goes back and forth. What we can do is control our response time, and I'd tell you that we are going to be very prompt.

[Mark Massaro:]

Yes. And I think...

[John Sperzel:]

That said, it's not slowing down our commercialization of the test. I mean, we are still able to market, sell, ship for commercial use, and we are.

[Mark Massaro:]

Yes. Understood. Your -- you now have, I think you guys said $69 million of cash at the end of July. It's the highest cash balance you've had in a long time. How does that change how you think about -- John, you haven't been at the company for that long. You announced restructuring. I know not all of your sales people have been in place in their seats a long time. But you do have a lot of tailwinds, you have a lot of new products, I think you have a relatively small sales force. Is there any chance we could get you to quantify how many reps you have now? And then how many you think you might have a year from now?

[John Sperzel:]

So having a strong balance sheet, obviously, is a blessing. We thank our shareholders for supporting that. It doesn't change the fact that we have to be good stewards of capital and we intend to be. On the other hand, we did that for a reason so that we could lean into commercial opportunities. And we have a great one standing in front of us for sepsis as well as for COVID and we intend to do that. We have rehired three new regional account managers. These are expert people from very successful diagnostic companies. And I don't have a number yet for end of the year, Mark, we'll scale that as it makes sense. Quite frankly, if we had 50 salespeople today, they'd be sitting at home and that's not the best use of our capital. So we're going to be slow in rebuilding that, but we won't let it get ahead of us.

[Mark Massaro:]

Got it. On the T2Resistance Panel, I think you have CE-Mark. It's commercial as an RUO in the U.S. Can you give us a sense of timing with the FDA understanding -- I believe you have breakthrough device designation. Just where are you in conversations with the agents?

[John Sperzel:]

Tom, you comment on that?

[Tom Lowery:]

Yes. So the agency, they have these weekly town hall meetings and they communicated that everything not COVID-related is on the back burner. So unfortunately, that affects a lot of private programs. So we really aren't in a position to be able to say sort of ETA as to our discussions with them and the kick-off of our pivotal study.

[Mark Massaro:]

Yes. That makes sense. Understood. And then sorry, for all the questions. Last one for me. You guys have a lot on your plate. My suspicion is that maybe the Lyme disease test might be on hold, given focusing on the task at hand with COVID and everything else going on. Is that right or do you continue to pursue maybe an LDT launch with the lab part?

[John Sperzel:]

So the LDT launch with the lab partner is still our strategy. And you're absolutely right in characterizing that as we're keeping that in our back pot given the other opportunities that we have in front of us at the moment. So it's a little bit on a backburner, if you will.

[Mark Massaro:]

Great. Thanks, guys.

[John Sperzel:]

Thank you, Mark.

[Operator:]

The next question is from Louis Samra [ph]. Please go ahead, sir. I’m sorry, he’s unregistered. Gentlemen, that begins that -- we've reached the end of the question-and-answer session. I'd like to turn the call back over to John Sperzel, CEO. Please go ahead, sir.

[John Sperzel:]

Thank you very much for your participation in today's call and your support of T2. Look forward to updating you next quarter. Have a great day, everyone.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.