NSTG (2019 - Q2)

Good day, ladies and gentlemen, and welcome to the NanoString 2019 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Doug Farrell. You may begin, sir. Doug Far

Thank you, operator, good afternoon everyone. On the call with me today is Brad Gray, our President and CEO; and Tom Bailey, our CFO. Earlier today, we released our financial results for the second quarter of fiscal year 2019. During this call, we will make 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 our addressable markets, our strategic focus, and objectives, and the development status and anticipated success of recent and planned product offerings. Forward-looking statements are subject to 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 the today's call and we undertake no obligation to update these statement. As a reminder, we will be participating in the UBS Genomics 2.0 Conference in Utah, next week and we forward to seeing many of you there. With that, let me turn the call over to Brad.

Thanks, Doug. Good afternoon and thank you for joining us today. I’m looking forward to updating you on our progress. During Q2, we delivered our six straight quarter of double-digit growth in product and service revenue as sales of consumable into our expanding nCounter install base drive consistency in our base business. In parallel, we continue to build commercial momentum for our genomics Digital Spatial Profiler, following the late March launch with high profile publications, strong order flow and the imminent shipment of our first commercial instruments. This combination of consistency in the core nCounter business and strong demand for genomics GeoMx DSP is making 2019 a very excited period for NanoString. During the call today, I will provide an update on progress towards our strategic objectives for 2019 before turning the call over to Tom to review the details of our operating results for the quarter. As we outlined on our year-end call in March, our first strategic objectives for 2019 is to sustain double-digit growth in our core nCounter business. This growth continues to be fueled by our consumer business that leverages the pull-through of our expanding installed base. Our total consumer revenue for the second quarter was $14.4 million driven by 15% growth in life science consumables. The consumables sales channel continued to perform well and drove growth in both our Panel and our custom CodeSet business. Our oncology portfolio continued to account for majority of this growth, led by our PanCancer and 360 families of Panel. Our CAR-T Panel is also off to a strong start with 50 customers worldwide including a mix of leading academics with CAR-T manufacturing capabilities as well as biotech and biopharma customers. In addition, our product offerings outside of oncology are making important contributions to growth. Revenue from immunology and neuroscience panels increased by approximately 40% and 80% respectively over the prior year, and together accounted for about third of our panel revenue. In addition, we raised our profile among neurology customers via collaboration with the NIH funded MODEL-AD consortium to create human and mouse panels for Alzheimer's disease research. Historically, research in joint development for Alzheimer's has been limited by the lack of mouse models that can be used to accurately recapitulate the disease. As part of this collaboration, we are working closely with the Jackson Laboratory to develop a state-of-the-art mouse panel which can be applied to characterize five novel mouse models for Alzheimer's disease. We will continue to invest in new panel's content to drive top line growth and attract new customers outside the field of oncology. In Q2, we introduced metabolic pathways panels that allow researchers to study the underlying mechanisms behind alterations in metabolism, signaling pathways and self stress. These panels address large market opportunities with significant NIH funding including diabetes, endocrinology and hundreds of diseases that involve metabolic dysfunction. Meanwhile, R&D for diagnostic consumable revenue grew 4%, as Prosigna's continued growth in Europe was offset by moderating demand in North America where we've seen intense promotional efforts of our competitors. On the instrument side of our business, we continue to expand our installed base of nCounter systems, which reached approximately 790 systems by the end of Q2 and it's now about 18% larger than the prior year. Oncology application drove demand for about 70% of new instrument placements with the balance coming from immunology and neuroscience. Throughout the first half, we saw an instrument mix shift towards our high throughput MAX systems as customers are choosing to pay a premium for higher capacity in anticipation of future GeoMx DSP projects. Our second strategic objective is to position our GeoMx Digital Spatial Profiler for long-term commercial success. Our market development efforts for GeoMx continue to track ahead of our expectations both in terms of current demand and leading indicators. We’re pleased with the strong demand we continue to see for the GeoMx DSP instruments. Our cumulative GeoMx DSP orders increased to approximately 55 orders in total as we captured about a dozen new orders during the second quarter. Demand for GeoMx DSP cuts across customer segments and includes a mix that is roughly 60% academic and 40% biopharma and CRO. To-date about 75% of DSP orders have been placed by existing nCounter users while the other 25% of our GeoMx orders have been placed by new customers who uphold through new nCounter instruments. More importantly, we are tracking multiple leading indicators of future GeoMx demand that continued to strengthen. First, our DSP instrument funnel continued to expand as we process the leads generated around our launch earlier this year. During the first half of the year, we accumulated more than 2500 unique customer leads for GeoMx about half of which have now been qualified that are triaged by our sales organization. We anticipate that the GeoMx sales cycle will be about six months. So, we would expect to the majority of the benefit of these lead degeneration activities will improve in 2020. Another strong leading indicator is demand for our DSP Technology Access Program or TAP, which is a service that provides customers an opportunity to run experiments on our prototype DSP instruments. Our TAP service provides an important mechanism for potential customers to evaluate the DSP technology before ordering a GeoMx instrument, as evidenced by the increasing percentage of new GeoMx instrument orders that resulted from our TAP interactions. During the second quarter, we completed more than 25 TAP projects resulting in more than $1 million in TAP service revenue. We received orders for more than 30 new projects including orders for several large projects proposed by biopharma companies in academic medical centers. We now carry a backlog of more than 50 projects valued at more than $2 million that we have recently expanded our TAP service staffing and added weekend shifts to keep pace with this growing demand. A secondary benefit of our Technology Access Program is that accelerates growth in the body of peer review literature that demonstrates the scientific utilities of the GeoMx DSP. Our collective path experience now includes approximately 125 projects that have been completed for about 85 unique customers. These efforts have contributed the seven peer review publications so far, and we're tracking another dozen papers that have been submitted. This growing body of high-impact papers continued to create awareness underscore unique capabilities of GeoMx and represent a critical form of advertising that you simply cannot buy. The initial wave of DSP publications focuses on the search to biomarkers in immuno-oncology, a few with more than a thousand active clinical trials ongoing and a significant need to accurately identify patients to benefit from immune therapy. Two recent and particularly high impact GeoMx DSP publications nicely illustrate the utilities of spatial profiling in immuno-oncology. In June, David Rimm and his team of researchers from the Yale University Medical School published a study in a journal of Clinical Cancer Research that use the GeoMx to identify biomarkers that were predictive for objective response, progression free survival and overall survival for patients receiving immunotherapy for metastatic melanoma. Last week, the prestigious journal of Nature Medicine published a study that highlighted the use of GeoMx to identify unique biomarkers for unanticipated adverse events in a cohort of metastatic melanoma patients being treated with immunotherapy. By using Digital Spatial Profiling and to understand the mechanism of this neurotoxicity, clinicians may be able to develop a test to help and form patient selection. There is worth noting that this was the third GeoMx-related paper to appear in Nature Medicine in just the last nine months. We had another leading indicator of demand for DSP over the long-term as interests coming from the clinical diagnostics community. Earlier this week, we announced that we have entered a joint development agreement with Mayo clinical laboratories who will perform across site study using GeoMx DSP to investigate the immune architecture of breast tumor samples. While the path of developing clinical test for GeoMx will take time, our department with Mayo clinical labs which is a world renowned for developing such state-of-the-art tests. As we entered the third quarter, we're excited to embark upon a new phase as GeoMx instrument delivery began to delight our customers and impact our revenue growth. We're on track to begin shipping the first commercial GeoMx systems in August recognizing our first DSP instrument revenue later in the quarter. Through the second half of 2019, we expect to recognize revenue on between 25 and 30 of our previously received GeoMx orders. This will start with the delivery of a small number of systems in Q3 followed by a bolus of deliveries in Q4, as we work to get most of our GeoMx priority site systems to customers before year-end. Even with the push to deliver systems during the second half, we currently expect to carry a healthy backlog of GeoMx DSP instrument orders into 2020. I'll close my prepared remarks with an update on our third strategic objective, which is to advance our Hyb & Seq platform toward the commercial launch in 2021. We continue to make steady progress on the Hyb & Seq program and are becoming increasingly focused on the application of Hyb & Seq to infectious disease. This is an area of high unmet need where a simple fast workflow confers tremendous medical value and competitive advantage. Infectious disease testing also provides a first application for more general mid-plex integrated molecular diagnostic platform opening the potential for diagnostic commercial partnerships in the future. We expect to provide a next major technical update at the Association of Molecular Pathology or AMP conference in November. We've planned a highlights update to our sequencing chemistry that accelerate turnaround time and increase accuracy. In addition, we plan to highlight cultural independent pathogen identification and rapid phenotypic antibiotic susceptibility testing studies performed in collaboration with the Broad Institute. We look forward to seeing many of you there. Now, I would like to turn the call over to Tom to review the details of our second quarter results.

Thanks Brad. For the second quarter of 2019 product and service revenues 22.4 million which was near the high end of our guidance range. Product and service revenues grew approximately 10% year-over-year and included 4.9 million of instrument sales, 11.8 million of life science consumable sales, 2.6 million of Prosigna sales and 3 million of service revenue. Our second quarter revenue growth was driven by a 14% increase in demand for nCounter panels and a 45% increase in service revenue that continue to benefit from strong customer interest in our GeoMx Technology Access Program. Considerable pull-through was within our guided range and approximately $76,000. Revenue recognized from collaborations was 8 million. Collaboration revenue was impacted in Q3 by the inclusion of our Celgene partnership, which resulted in accelerated recognition of all remaining deferred revenue from Celgene. We received cash from collaborators during the quarter of 5.5 million. Gross margin of product and service revenue in line at 57% compared 58% in the prior year. Our gross margin was impacted positively by strong consumable sales, offset by investments we are making to expand our manufacturing capacity and our installation and service resources for GeoMx DSP. R&D expense was 17 million, an increase of 17% over the prior year period. The increase was driven in part by continued investments in GeoMx DSP and an nCounter panels as well as our Hyb & Seq program with the Hyb & Seq spending offset by funds received from Lam Research. SG&A expense was 22.5 million, an increase of approximately 9% as compared to prior year. The growth in SG&A expenses was in part due to investment in commercial launch activities related to GeoMx DSP and offset by lower professional fees, which in last year's second quarter were impacted by Sarbanes-Oxley compliance and other audit related activities. Both R&D and SG&A expenses were also impacted by higher stock based compensation expenses recorded during Q2. For the second quarter, stock-based compensation expense was 5.1 million, up from 2.9 million in the prior year. Depreciation and amortization expenses were 1.2 million. We ended the quarter with over 145 million of cash, cash equivalents and short-term investments. This amount includes an additional $20 million of borrowings incurred during the quarter under our term loan facility with CRG. Turning to guidance, in today's press release, we reiterated our full year guidance for revenue and gross margin, and we provided an updated full year outlook for operating expenses and GAAP net loss with changes being primarily due to higher expected stock-based compensation expense. For the third quarter, we expect our total product and service revenue to be in the range of 24 million to 26 million, which includes approximately $2 million of GeoMx DSP revenue. This revenue range will deliver approximately 13% to 22% growth as compared to the prior year period. We expect approximately $3 million of collaboration revenue in the third quarter, so we guided total Q3 revenue to be in the range of $27 million to $29 million. Now, I'll turn the call over to Brad for closing comments.

Thank Tom. In summary, half way through 2019, the business is performing just as we had expected. Our commercial team is executing well and consistently generating healthy growth in our core nCounter business. Both current and leading indicators of demand for GeoMx DSP are strong and we are on track to recognize our first commercial revenue for GeoMx DSP systems this quarter. I'm delighted with our recent progress and proud to be a part of the NanoString team who generated such solid results. With that, I'll open up the lines for your questions.

[Operator instructions] Our first question comes from Doug Schenkel with Cowen.

This is Adam Wieschhaus on for Doug. Thanks for taking my questions. You've increased your cumulative GeoMx by I believe 12 instruments in Q2, which was a slight increase in orders compared to the 10 that you added in Q1. So do you think this 12 instruments order increase per quarter is a right cadence? Or could it go higher based on the number of leads you've generated so far?

Thanks, Adam. Yes, we're really pleased with the order flow. You know being in the 10 to 15 per order range is right that we expect to be at this stage and really to maintain that about a dozen orders per instrument pace through the second half of the year. Clearly, in the longer term as the lead generation activity that we started really in the April timeframe around our launch being it's -- to work its way through the long sales cycle for capital equipment. We will expect that number to increase in 2020, but we're delighted with the run rate that we're on right now right now. And if you kind of just play it forward ending where we are at about 55 systems, adding another about 25 in the second half if that’s where it ends up, delivering and then actually installing between 25 and 30. You can see a way to a situation where we will be entering 2020 with a 50 instrument backlog, which takes us a really good way towards where screen expectations are for instrument revenue one DSP as it currently stands for 2020. So, we think that we're on a really good cadence. I look for the run rate to remain approximately the same to the second half of but to accelerate in 2020.

Okay that’s helpful. And you've noted that the TAP program and the customer base increased again this quarter. Is there a lot of overlap between the customers that participate in that program and those that are in the GeoMx instrument backlog? I’m just trying to understand, how enrolling that program could potential feed into driving GeoMx placement and awareness? Thanks.

Yes, Adam, one of the most important functions that the Technology Access Program is playing for us is to provide a test drive opportunity for people who are interested in GeoMx instrument that sort of drive before you buy a program. In the last quarter about half of our new DSP instrument orders were from customers who had been part of TAP program. So that sort of illustrates the Importance of path and its validity as a leading indicator for our future instruments orders. I think in total perhaps 40% about overall orders was now total about 55 orders have come to the TAP program, but we see that being an important mechanism going forward. So, we will continue to track and report TAP volumes to you.

Our next question comes from Dan Brennan with UBS.

So first one is just on the pacing in the back half of the year for GeoMx placements. I guess you said two in Q3, obviously Brad, you've been pretty clearly you want to delight customers go real slow make sure, it's right too. Let say, you have a pretty big install in Q4, so just walk us through a little bit about only doing two in Q3 and the ability to kind of ramp us much in Q4?

Sure, as you point out and I'll iterate Dan. The most important thing for us in 2019 is to generate interest and a large sales funnel for the GeoMx DSP and delight the customers who taken the risk of being early adaptor for the technology. As part of delighting that customers, we will start with a very small of instrument placements in the third quarter, and we're broadly focused on sites that have had some exposure to GeoMx DSP through the beta instrument program that we had beginning late last year or who are intensely urgent situations from either a fiscal perspective in terms of meeting to spend the money now or in from a scientific prospective. And that will allow us to work any kinks out in those first rounds of installations. We have already scaled up our installation and support team to be able to deliver the balance of our revenue expectations through Q4. I don't believe that high risk, but we want to make sure that those as smoothly as possible. So, we will start by doing to approximate 2 million in revenue in Q3 leading between 4 million and 6 million of revenue to do in the fourth quarter.

And then Brad just related to order pipeline on GeoMx. Just walk us through little bit the early experience you've gotten now another 12 orders this quarter and you talked about like the longer cycle, but there is obviously tremendous excitement over this space. So just walk us through a little about like what are you hearing from customers those that as you convert them over? How much of it is like funding kind of an issue for them to get like? What are they most excited about? Just give us a little flavor for the type of comment or any feedback you are getting from customers as you go through the order process.

Yes, I think what we've learned throughout the entire period in last few years as we engage with customers on, Digital Spatial Profiling and maybe Spatial GeoMx more broadly is that there is enormous latent need in demand scientifically for technologies that can do spatial profiling. And we've been delighted by how eager customers are to gain access to this technology even in situations where they have little or no exposure to it. Most of our demand -date is coming from the immuno-oncology community who have long-standing relationships with industry in our through our core nCounter business and really great used cases for identifying biomarkers in terms of immune cell physical infiltration of the tumor. We've had tremendous success rate with early grant applications anecdotally in the second quarter. We're aware three Howard Hughes Medical Institute researchers submitted grants to Howard Hughes and all three were funded in the first application. That's a really great dull whether for this kind of technology and this need being consider with a leading-edge of science where this funding agencies are happy to see their research dollars go to work. So, this is everything we see and both in terms of current demand and leading indicators continues to build our excited and confident about the future of this pipeline.

And maybe one more John, on kind of GeoMx, you talked about these leads 50% have been qualified. What you're doing from a standpoint of, how much of the conversion to orders as a function of just educating customers having the right team in place to go out and do the necessary kind of demonstrations things like that? And if that the case, like, just walk us through little bit how many salespeople? How many technicians you have kind doing this? Thanks.

Yes. So, the currents orders are largely for people who have been evaluating the potential for GeoMx instrument purchase for some period of months. Generally speaking, Even though decision cycles take pride of months, and so we haven't yet begun to see the impact of all of the lead generation activity that took around, took place in February of the AGBT meeting or in March and April at the AACR meeting. I would expect that as those leads are qualified, meaning, we validate that the customer is the kind of people who are serious and who are not just browsing our booth, we determine that they actually have funding and we begin to truly engage them in sales and include them in our sales funnel. That process will begin to impact us really in 2020. When I think about the past between interest at a booth or participation or webinar and a natural instrument purchase order, I think the important processes like having our instrument reps go and visit and explain the technology in a face-to-face meeting, so using our existing properly sized instrument fuel force. I think the possibility of bringing in deep technical specialists which we have about a half of dozen worldwide now, we do nothing, but go into the intricacies of spatial profiling. I think about maybe performing a small DSP TAP study to show that on the sample types with the type of sciences people are doing this instrument works. And then I think about hopefully an instrument purchase order thereafter. That’s a cycle that I think we have all the resources in place to execute on. As I mentioned, we're scaling up that Technology Access Program capacity because we're understanding how important it is, and I think that cycle should take about six months time. So, but we're modeling it closely Dan, and obviously, the DSP demand could justify an incremental investments, targeted in our channel, if we need to make it, and we really evaluate those things every single quarter and will adjust as needed.

And then a final one for me, just kind of on nCounter pull-through is a little bit below kind of our expectation, but obviously within your range, just kind of walkthrough kind of any trends in the quarter on that front or just kind of the normal variability quarter-to-quarter? Thanks.

Yes, I think I will take that and let Tom add, if he wants. I think when you look at our pull-through, it was around 76,000 for system per year, really if you crosswalk that and say which component if anything was lower than it has been in the previous quarter. I think you want to look at Prosigna in North America. Prosigna in North America was off by 0.5 million below where we expected it to be in a period prior period prior to the intense dynamic we're seeing now. And that accounts for the vast majority of a difference between pull-through rates calls at the middle of our range and in the lower half what we saw. We think the trends in our life science consumables business continue to remain healthy across both panel and custom, both oncology and non-oncology. So, we think overall in the long run, our consumable revenue will continue to grow and lockstep with our installed base, which has been 18% to 20% in recent quarters.

The only comment I would add to that Dan is I think you pursuant to the latter that you mentioned. There is -- it’s a bit of timing issue as well our growth and panels were really strong in first quarter. It wasn't quite as strong in the second quarter and I think that has much to do with just quarterly timing than anything else. So, it's really Prosigna is really the only sort of part of that off, the rest of it we feel solid about.

Our next question comes from Tycho Peterson with JP Morgan.

This is Lennie on for Tycho. Thanks for taking our questions. First, can you talk about any evolution in the GeoMx order book since you've started accepting order with which customers segment you have seen the most traction with? And can you give us an early read on utilization? Is it tracking in line or above your initial estimates?

Sure, so just to reiterate the order book is continuing to grow. We grew in the last quarter to 55 cumulative orders, as of June 30th that was about a dozen new orders in the second quarter. In totality about 60% of our orders have come from academic researchers and 40% from the biopharma and CRO community. That's pretty close to what are nCounter install base mix is. So that as expected. It's too early to talk to utilization. We haven't yet placed in any of our commercial instruments and it will take some time after we begin to place those instruments into the second half before we have really a good bid on utilization. But as mentioned in the past, we would encourage people to model at a pull-through persistent that similar to what we see on nCounter, which is a net $75,000 to $80,000 annualized rate.

[Operator instructions] Our next question comes from Catherine Schulte with Baird.

This is actually Tom Peterson on for Catherine. Thanks for the question. Just curious on the Mayo collaboration, what kind of timelines on the two studies are we looking at? And is the angle here to offer these kids similar to Prosigna? Thanks.

So, Mayo collaboration is really a long-term exploration of how our Digital Spatial Profiling technology could be applied in the clinic. The first study that we described which is profiling breast cancer tissues for their immune profile is expletory in nature and designed to identify biomarkers that may one day become clinical tests. So, it really speculative for us to imagine when that particular test could possibly come to market, but I think we're still several years away from that. That being said, I mean Mayo clinical lab is one of the absolute world leaders and amongst specialized laboratories. Their willingness to take to be a very early adopter and to begin to think about how to use in the clinic is a great indication of the long-term interest and potential in that market. And when we think about the size of clinical market today, immunohistochemistry in the clinical is a $2 billion market and in R&D expression through in situ hybridization is probably another $1 billion. It's a total market, the size of which is at least as large as we characterize the research markets. Now, it'll take some time before we can get to the clinic, but in terms of long-term lifecycle of the GeoMx platform and spatial profiling in general, we think the clinic is really exciting in our collaboration with Mayo can only help us come up that curve faster.

Thank you. I’m showing on additional questions at this time. I'd like to turn the call back over to our host.

Excellent, Brad. Thank you very much for joining us today. If you did miss any portion of the call, we expect to replay to be available in about 2 hours. For any callers that want to access that. Domestic callers please dial 855-859-2604. International callers, please dial 404-537-3406. The conference ID number is the same for both 5182286. And with that, thank you very much for joining us today.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.