Nanosphere's Management Presents at Lazard Capital Markets Healthcare Conference (Transcript)

| About: Nanosphere, Inc. (NSPH)

Nanosphere, Inc. (NASDAQ:NSPH)

Lazard Capital Markets Healthcare Conference

November 13, 2012 08:00 AM ET

Executives

William P. Moffitt III - President and CEO

J. Roger Moody Jr., - PAO and CFO

Analysts

Stephen Unger - Lazard Capital Markets

Stephen Unger - Lazard Capital Markets

Hi. Good morning. Thanks very much for coming to the – I guess, this is our 9th annual Investor Conference here at Lazard. This is my third. I’m Steve Unger, I’m Life Science Tools and Diagnostics Analyst here.

So we have a very strong two days plan for you guys. We have 23 companies here, 14 public, 9 are private in Life Science Tools and Diagnostics. Most of them are diagnostics, that’s in my opinion where the action is at least at the moment.

So planning new advance technologies into the clinical study. Our first presentation, I’m very happy to introduce is Nanosphere and today we have with us CEO, Will Moffitt and CFO, Roger Moody. And those are going to handle the presentation, maybe we will have a little bit of time for Q&A.

I do want to highlight one thing before we get started, we do have a [lunch] speaker today, I’m only introduced once, the keynote speaker Dr. Martin Kohn, who is the Chief Medical Officer – Medical Scientist, excuse me, for IBM Research and he just have let us walk in through super computing stuff and data crunching and all that and I think there is going to be a lot there to think about.

With that, I’m going to hand it over to Bill and again if we do have some time, we will do a little bit of Q&A. Thank you.

William P. Moffitt III

Thanks, Steve and thanks to everyone at Lazard for including us in the conference this year. It’s my pleasure to be here and review with you the story of Nanosphere. The regulatory forward-looking statements – statement we figured how to get 2,000 words on a single slide. Essentially I will translate this as anything I say is not based on fact or history is likely to come out different than what I might say.

The highlights of this Company are very intriguing and in fact to me personally and I think to all those who are invested in the Company, we have a very break through molecular diagnostics platform, the Verigene system is designed to enable much earlier detection of disease and guidance of therapies. We have the ability to do both nucleic acid or genetic tests in the system as well as ultra-sensitive protein and we demonstrated the possibility to do both on the same sample at the same time.

So it’s a very flexible system with a flexible format and designed to show a significant need in today’s marketplace. One of the leading edges of that significant need is the conversion of century old methods in microbiology to molecular methods, rather than growing bugs out on plated media over the course of a few days together result back to a physician on a critically old patient. Molecular methods, those are we’re bringing to the market in fact cut those days into hours and we will walk through an example of that here in just a few minutes.

There are significant upside in this Company beyond just display in microbiology or be at the microbiology play along to drive this Company to and through profitability with good strong healthy growth. But we will spend a couple of minutes at the end of the presentation talking about that upside opportunity in cardiovascular diagnostics.

We have been investing in parallel, if you will, over the last few years in both system functionality and development, as well as investing at a very broad menu to address the infectious disease market as well as the cardiovascular market. The assays that we have in infectious disease include respiratory virus, notably a blood stream infection, maybe the short cut term for that would be sepsis assay. It is the first ever cleared by the FDA; it was cleared at the end of June of this year. We have just commenced the marketing effort for that product. And we have others in the pipeline of C. difficile assay and enteric package and panel and the other half, if you will, the blood stream infection, which is a gram-negative half.

On the cardiovascular side, we’ve had in the market for sometime now, a Warfarin Metabolism assay for determining the appropriate induction dose for patients going on Coumadin. We’ve also had a thrombophilia panel, it’s an assay designed to determine whether or not the individual is predisposed for blood clots. Someone who is genetically wired have a stroke or heart attack much sooner in the life then otherwise they would have.

We have a Troponin assay that is in the stage of transferring from one platform to another, so we can get a high throughput model here on this assay and we have had in the FDA an assay for 2C19, it is an assay designed to assess drug therapy for drugs in a metabolize through the 2C19 genetic pathway, the most notable those probably will the number one in the thrombolytic and that’s Plavix. That assay was cleared by the FDA just a few days ago, press release went out here about 20 minutes ago on the clearance about assay. So we’re very pleased to have that in our portfolio now as well.

The market opportunity for us, we break it into pieces, if you will, and take a look at assays that we think are immediate and very, very near-term. Market opportunities where the value propositions of the assays are known, the markets are extremely well defined and customers are in essence are looking for products to serve these needs. And things that fall into that category are these microbiology assays. There is about a $760 million market there in the U.S. alone, which is going to about double that for the rest of the world. Then we put into an intermediate term, this cardiovascular business, we will come back to that at the very end of the presentation, but the reason here is this requires some market education. The Troponin assay, which is ultra-sensitive changes the way patients were treated and diagnosed and monitored and ultimately treated.

All of these pharmacogenetic assays change the way the doctor practices medicine today. These things don’t happen overnight, they take some time. So, I’d say we look to get significant strong growth out of those assays, but they’re in the two, three, four or five year window time, not be immediate, next month or quarter or two as we see in the microbiology space. In the long-term, this platform has more flexibility and breadth of capability than other molecular platforms out there.

What’s driving this industry today is simplicity. The ability to move very complicated assays into the average community hospital or clinic or wherever the patient is seen. There are – then capabilities to do these kinds of assays, it’s been around for about 15, 20 years now, but those methods were so complicated that will reserve for the largest academic teaching centers and those hospitals they could afford the resources to do a lot of manual hands on preparation manual assays.

What the market needed was simplicity. The ability to put a sample into a system and get a result out the other end with minimal, a minute or two of hands on tech-time. At the same time, the market also needs the ability to do complicated assays, big broad panels. Not single point questions, whether or not the patient has a specific tray or specific infectious agent, but answering the broad question, does the patient have an infectious agent, a blood stream infection, leading to sepsis? If so, what drug will kill it? That’s a very broad panel of targets. And so, the industry basically needs two things, simplicity and the ability to get out these very complicated assays.

About five, six years ago, Cepheid came along and do a tremendous job, improving out one of these points and that were simplicity. They were the first sample to result system in the marketplace and they built a huge market opportunity for themselves around the MRSA assay, Methicillin-resistant Staphylococcus aureus. But moving on to the next requirement – set of requirements, if you will, is the fact that we need something more than just a single target assay.

If you look about these market needs and do a lot of market research and process to define that, what we realize asking for about four categories of things. One is just easy use, make those things simple. There is a tremendous shortage of medical technologist in this country, there is not a lot of opportunity in the laboratory, with a lot of hands on labor, hands on tech-time on these kinds of assays. A lot of these assays are very complicated, but we’re also dealing with critically ill patients.

So we need to be able to run these tests 24 hours a day, seven days a week. That means whoever had 2 AM on Sunday morning needs to be able to run this system and run one assay at a time without having the batch things up. So on demand random access, big broad menu I can get at any single test whenever I want to and then the idea were this is as close to the patient as you can possibly get. So, that the cycle of time from demand for a test to resolve back to a clinical action on the patient is as short as possible.

In order to achieve all that, the performance of the device must be unquestionable. It’s got to be extremely high quality, extreme high sensitivity, clinically accurate, high specificity, you may have thoughts negative answers and quality must be assured and a [unit] use device the only way to assure quality is have quality controls on the system in the cartridge, if you will, at the time the assay is being run.

Move to the right side of the slide, people looking for versatility. The capability to test a variety of things, no one wants to build a huge capability, buy capital equipment, install and training people etcetera around one assay. They’re looking for platforms that have very broad applicability and at the end of the day everything they’re worried about rose into one equation and that’s cost. What is this going to cost me? Both in terms of ease of use, labor and tech-time, but also what’s the absolute cost to pay for a test? And the answer is they’re looking for pennies per result. So that requires a very powerful technology and I believe the Verigene system fulfils that need.

Let me walk you through an example here. This is the sepsis assay, the gram-positive assay; we had cleared back in June. Sepsis is the number one driver of cost in hospitals today. It’s also the number one killer. One out of two patients in the ICU who go septic die, one out of six in the general population who wind up with sepsis die. So it’s a significant issue in the clinical community, it’s a significant cost driver, [as I said] being the largest in the hospital, if you will. Mortality rates are high and importantly there is another little element, it is called Antibiotics Stewardship. We’ve been feeding all these bacteria all of our antibiotics for the last five or six decades now and many of them are becoming resistant to that, which makes it all the more difficult to treat the patient. And that’s becoming a tremendous concern at marketplace.

The Verigene system very simply takes what has historically been a three day plus time to turnaround specific results to identify what the organism is that’s in the blood stream of the patient, and then tell the physician whether or not that particular strain of the organism is resistant to any of the drugs that are being used. The Verigene turns three days in the two hours and it’s that straightforward.

So a very definitive diagnosis of exactly what the infectious agent is, along with what drugs it might be resistant to. Saves time, saves money, saves lives, papers are out there that have shown this will take as much as six days or more of the hospital stay, take that patient out of the ICU two, three, four days earlier, saving over $20,000 per patient, simply by identifying, diagnosing and treating properly earlier. 80% reduction in loss of life, that’s just huge and for Antibiotics Stewardship we get the patient on the right antibiotic within a matter of hours as opposed to a matter of days thereby saving exposure to other antibiotics and continuing the resistance of process.

There are a number of clinical publications that are already, have been presented on this assay as well as some others in our portfolio. You can see the list of the institutions that we’re working with, it’s quite prestigious group of investigators and authors here. Essentially what they are all proving is, not only does the assay work, it works exceptionally well, it beats out other methods of doing these kinds of assays that would be available and in terms of our Respiratory Virus assay it’s been found competitively to be the best against the number of other competing systems. Our focus here is on hospital-based laboratories. We have some regional reference labs that are customers. We have some outpatient facilities that are customers. But our primary target here is hospitals; everything from the smallest community hospital to the largest academic teaching center.

Our sales strategy in the U.S. is the direct sales organization. We are still building that organization. We have 12 sales reps on board. We have three more in the queue. We will be probably north of 20 by sometime in the second quarter of this next year. We also have another field organization; customer support people, these are people who are specialist in the assays, the way the system works, helping the customer through validations, evaluations of the system, this sort of thing, and an internal customer service organization ready to respond to technical problems and obviously that’s a 24 hour a day, seven day a week team there.

In Europe we go through distributors, country specific distributors. In Spain and the U.K, we use Grifols, Germany and France, we use Thermo Fisher, and we have a number of other country specific distributors there as well. In Asia pacific, in South Korea, a well established medical technology company there Handock, they’ve been particularly interested in selling the assay, the 2C19 assay that we announced the clearance at this morning, because in the general population the European descent, about 30% of us have these mutations that cause us not to metabolize among other drugs, this drug Plavix and therefore the drug is not effective, in fact there a black-box warning on the drug. But in the – certain of the Asian descent populations the problems of those mutations is over 65%. So, obviously a great concern to them. In Japan and China we’re talking to distributors there, folks who could help us move into those markets in a very strong way.

I said earlier, our microbiology pipeline would drive this Company to and through with strong growth, to and through the profitability phase if you will. This is a slide that shows the assays that we have. It also has some numbers associated with those assays out to the right. That’s the revenue stream we would expect to get from an average typical customer on an annual basis for that test alone.

So you can see the Respiratory Virus assay which is cleared and on the market here in the FDA – cleared by the FDA and on the market here in the U.S. As well as it’s on the market in Europe and throughout the world. We would expect to get about $100,000 a year in disposable test cartridge volume from an average customer in an average flu season.

Now we haven’t seen an average flu season since the last pandemic, there had been smaller. But we have seen about $50,000 per customer, per year during these small flu seasons which ups or validate this number for us.

We have the Bloodstream Inflection Sepsis assay, the gram-positive piece of that if you will in the market, in Europe now cleared here in the U.S. That’s about $50,000 a year product for us. A C. difficile assay, this is an intestinal bug that causes blood problems. That assay is in the FDA now. It was submitted right at the beginning of this quarter. It’s worth about $40,000 per customer. And then we expect to get into the market in 2013 a gram-negative assay particularly attractive in Europe and our intent is to CE mark that right after the first of the year and get it on the market, in Europe in the first quarter.

And then in development, in fact head it into clinical trials over the course of the last few weeks here has been an enteric panel, this is a full panel of gastrointestinal infectious agents, and that’s worth about $50,000 or so per year. So, when you add all this up, you can see that when we get these assays cleared, an average customer could do over a $250,000 a year whereas in disposable test volume, if they bought every test from us. Now I don’t expect every customer to buy everything from us.

We said on our most recent earnings call of the 100 systems that we placed in the U.S. in the last year, 90% of them are using validating or about to start validating that bloodstream infection assay and about half of them are using or going to validate this flu season, our flu assay. So right there, that gives you a bit of a metric, its not everybody is going to use everything.

We think the C. difficile assay will be very strong for us. It will be one of only two assays in the market that identify the hypervirulent 027 strain of C. difficile, which is extremely important for the very young and the very old. In the enteric panel there’s this much excitement around that product as there is and was around our Bloodstream Infection assay. So, with about 400 customers up, validated and running some blend of this menu here will get to about $75 million run rate which is breakeven for the Company.

And so we have up sided beyond that and we do in the cardiovascular space. The hyper-coagulation panel which has been out there for a while, you can see what its value is to us about $30,000 per year and more from metabolism. This is an interesting one. This is to set the induction dose for new patients going on Coumadin. The FDA put a block-box warning on this in April 2007, but this market never really took off. And I think it’s in part because the payers had a tendency to push back on that, because the economics if you will, for them back then probably didn’t make a lot of sense. Probably that’s more [sold] today and I think this will continue to gain traction.

The assay you see labeled here is Plavix Metabolism is that 2C19 assay that was – we announced the clearance at this morning. Again, this is most pertinent to percutaneous intervention patients, stent patients. Patients that are going to have a stent put-in are going to go on any Platelet Aggregation assay or drug and Plavix was the one of choice. It is metabolized through this 2C19 pathway and this determines whether or not the patient is in fact going to convert the drug.

Plavix itself is not the drug. It’s a pro-drug. When the body metabolizes the drug it converts it to an active form. So, if you can't metabolize the drug, you can't convert it to an active form. And so, there’s some strong recognition of awareness in the marketplace and a need for this.

And I spoke to a Troponin assay. We have an assay for Cardiac Troponin; it is the gold standard marker for cardiovascular disease. It’s been in the market, I’d say 30, 35 years as a marker. It’s well established. It’s only found in the cells of heart muscle tissue. Therefore the only reason you should find it in the bloodstream is if you got a problem with heart cells and something is dying there, ischemic stress, cardiac arrest, chronic heart failure et cetera. So, the difference here is, this assay is far more sensitive than the assays that are in the market today and it’s because of our underlying core technology. We have the ability to catch disease earlier.

We’ve shown in the course of the last year and half or so the ability to actually monitor and do a very good prognostic workup if you will on patients who have chronic heart failure to anticipate acute events and so forth, and set odds ratios of people having acute events and determine where they are in the progression through the disease. These are all tremendous opportunities for us. As you can see they add significant upside to us on a revenue basis, but at the end of the day these things are going to take a little bit more market education. So we tend to think of them in the coming years, but not necessarily in the coming months.

Remember the bottom right hand box on what this market needs; penny’s per result, low cost. We believe that we are going to be – proven to be ultimately in an extremely competitive advantage here due to our cost structure. This technology sounds complicated, if you walk through it on a technical basis, it really sounds complicated, but when you get down to it, it is a simple cheap microarray. Don’t think of us as Affy or Ilumina, we're a dumb, down, simple, cheap version of what they do. This is about 400 spots printed on a three by one glass microscope slide, that’s the capture sequences. We take gold nanoparticles attached to them; additional label sequences and run an assay. Everything that’s needed to run an assay sits in this little disposable test cartridge, the unit use device.

That cartridge today costs us a little over $20 to make, but half of the cost is a hydrogel substance we must put on the slide before we can attach the microarray to it. You can take the microarray material, nuclear gas, its proteins if you want, try to stick them down on bare glass and they won't stay there. They’ve got to have some structure to stick to, and so use a hydrogel. We’ve been buying this on the outside. We’ve been paying an average of $9 to $10 per slide for that coating to be put on it.

We took our license to a proprietary technology about a year and half, two years ago; brought that in-house. We're now converting all of our products over. The day we convert a product over from a purchase slide to an in-house manufactured slide the cost drops from $9 to about $3 or so. As volume grows, that $3 will come down below $1. So, right there half the cost of the cartridge has a program in place to already take it out and get down to an extremely low cost.

The single greatest component of cost beyond that is plastic. And plastic everyone I think understands how that works. The more volume you have, the more cavity counts you put on your moulds and the cost come down in a ratio basis. So, we are today sitting around $6, $6.5 for the cartridge components, we’re getting down well below $2 as volumes grow. And that scale column over there, you could ask what's the number there? It’s only about 2.5 million, 3 million cartridges per year. And I saw a price of $45, $50 or so, I think by the time we're a little more up to a $100 million in revenue, we have a cost structure here for the cartridge in total that’s well below $5. On a per NOI target basis considering a lot of our assays are doing 10, 15, 20, 25 different targets, we’re down to penny’s per result for the customer right where we need to be to have a very strong competitive position.

You can see here what this does, the gross margin for the Company. As the disposable becomes the largest component of sales, as its cost drops and the gross margin rises significantly the Company’s profitability improves dramatically over a reasonably short window of time.

So, in summary a strong breakthrough platform and technology that gives us some capabilities to create competitive advantages in the marketplace, but most importantly to solve some significant problems for customer which makes this technology and our Company quite attractive to our customer base.

We are leading the conversion of microbiology over to molecular methods. We believe this will provide very robust, strong near-term growth for the Company, and that we will move through profitability on the shoulders of this strategy alone. We have significant upside beyond that in the cardio vascular space and then long, long term success for the platforms is very flexible and a good position on a competitive basis.

We have a very strong balance sheet. We have a well defined path to profitability. Right now, it’s all about execution. And with that Steve, we’ll turn it back to you and we’ve only left ourselves a minute or two for questions.

Question-and-Answer Session

Stephen Unger - Lazard Capital Markets

We have roughly two minutes for questions, if there is a question from the audience. Anyone? No. I have a question.

William P. Moffitt III

Okay.

Stephen Unger - Lazard Capital Markets

As far as – did you talk about the significance of the gram-negative test for either sales in the U.S. or Europe [as you’re in], and what that means for the Company in 2013?

William P. Moffitt III

So the gram-negative, we talked about sepsis. The way a sepsis patient is diagnosed today, a blood culture bottle is drawn typically out of the arm if they’re an outpatient or from the line somewhere if they’re an inpatient. That blood culture bottle has media in it that will cause things to grow. It’s the way to determine whether or not DNA that’s going to be measured downstream is coming from a viable living organism that’s causing a problem in the body or it’s just dead DNA circulating in the bloodstream because you already killed it with an antibiotic. So step one is, prove that something is growing and you do that in the blood culture bottle and that bottle turns positive the lab runs a quick inexpensive test called Gram stain, it tell them whether or not they’re dealing with gram-positive, or gram-negative bacteria.

If it’s a gram-positive you run our gram-positive assay. If it’s a gram-negative, we don’t have drugs in this country that treat gram-negatives, you just keep doing the best you can do for the patient, but you know what you need to know, so to speak. In Europe there are drugs on the market, that are believed to be effective against gram-negatives, but they’re extremely expensive.

So, what the market in Europe wants to know is, am I dealing with a gram-negative. If I am, which one is it, and what drug resistance might it carry. Because if it’s killing the resistance of the drug and quit spending the money, because the drug isn’t doing any good. We don’t have that scenario here in the U.S. yet.

So, the importance of this assay is first – this gram-negative assay is first in Europe. So we will see market right in the first of the year and we would expect it to increase our placements, in our penetration in Europe or be it like most companies doing business in Europe today in this sector, we’re all flying into the headwinds of the economy in Europe. But nonetheless I would expect to see this to give a shot in the arm and improve our market penetration there.

Stephen Unger - Lazard Capital Markets

That improves the value proposition?

William P. Moffitt III

Yes, absolutely.

Stephen Unger - Lazard Capital Markets

Okay. All right. Thank you. Thank you for (indiscernible) schedule. Thank you.

William P. Moffitt III

Thanks, Steve. I appreciate it.

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