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Nanosphere, Inc. (NASDAQ:NSPH)

Q3 2008 Earnings Call

November 10, 2008 5:00 pm ET

Executives

Bill Moffitt - CEO

Roger Moody - CFO

Mike McGarrity - Chief Marketing Officer

Analysts

Scott Gleason - Stephens

Bruce Cranna - Leerink Swann

Bill Quirk - Piper Jaffray

Katherine Xu - Credit Suisse

Operator

Good day, ladies and gentlemen and welcome to the third quarter Nanosphere Inc. conference call. My name is Crysta Clarke and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. (Operator Instructions)

Before the call begins, Nanosphere would like to state that certain statements made during this conference call which are not based on historical facts, maybe deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements.

Such factors include those described from time-to-time in the Nanosphere's filings with the United States Securities and Exchange Commission, including without limitations the risks described in Nanosphere's most recent quarterly report on Form 10-Q on file with the SEC. Please note that Nanosphere undertakes no duty to update this information.

I would now like to turn the presentation over to your host for today's call Mr. Bill Moffitt, Chief Executive Officer. Please proceed sir.

Bill Moffitt

Thank you, Crysta. Good afternoon everyone and thank you for joining us for Nanosphere's investor conference call, covering the third quarter. In a few moments I will turn the call over to Roger Moody, Chief Financial Officer of the company, who will review the results we released this afternoon; and to Mike McGarrity, Chief Marketing Officer of the company, who will provide an update on our customer activities and sales and marketing programs.

Before turning the call over to Roger and Mike, I would like to discuss with you the progress that we are making in product development and building our business. As we discussed last quarter, our business growth is driven by test menu expansion.

Our currently clearly assays for hyper-coagulation and warfarin metabolism continue to generate customer interest, but we do not expect to see accelerated growth until we expand our test menu. In that regard, we continue to make notable progress on a broad number of fronts.

Let me take you through some of those and how we expect our pipeline of products to enable us to accelerate market penetration. Our nucleic acid product development programs encompass additional human genetic assays and infectious disease tests, while our protein test menu is driven first by cardiac troponin with additional assays in feasibility.

In the Human Genetics market segment, we have filed a 510(k) submission with the FDA for our cystic fibrosis assay comprising the panel of mutations recommended by the American College of Medical Genetics and the American College of Obstetrician Gynecology.

The market for this assay is approximately 1.8 million tests per year and we anticipate an average sell price target of about $65. This assay demonstrates the unique high count multiplex capability of our nanotechnology based Verigene System and offers our customers the ease of use associated with our random access cartridge format.

We have also filed a 510(k) with the FDA for our first infectious disease assay, a panel of respiratory viruses for the detection of influenza and RSV. In clinical trials to support the FDA submission, we believe our data demonstrate this assay to be superior to others on the market today. This first generation assay requires external sample preparation by the customer before proceeding to the Verigene System.

A second generation assay that will run on the Verigene II System will provide complete sample-to-result automation. In a few moments, Mike McGarrity will give our review of the market opportunity for this test.

Other product development programs continue on track. We are completing the validation and verification studies for our HFE assay in preparation for clinical trials later this quarter. Mutations in the HFE gene are the leading cause of hemochromatosis, the excess absorption of iron by the body, which leads to diseases such as cirrhosis to the liver, liver cancer, thyroid cancer, diabetes, pancreatic cancer, renal failure and heart attack.

When we receive FDA clearance to market this test, we will be the only FDA cleared assay on the market. While today this is not a huge market, the potential is significant. Since one in 250 has this disease and one in eight is a carrier of one or more of the mutations. Although more prevalent than cystic fibrosis, HFE is not that well known, but awareness is on the rise. A number of customers in our pipeline are awaiting this test.

Looking at how our instrument platform continues to develop, the Verigene II incorporating complete sample to resolve automation remains on track with the targeted release in the back half of 2009. Our regulatory plan is to submit first for human DNA extraction in support of our previously cleared genomic assays and then develop all future genomic and infectious disease assays on this platform.

The first infectious disease assay we plan to bring to market on the Verigene II will be the second generation respiratory panel. Although all versions of the Verigene System will run protein assays, many of the subsystems in the Verigene I and the Verigene II are not required for protein test.

Therefore we will shortly commence our reengineering program to remove those unnecessary subsystems from the Verigene system for those customers who will want to play a unit in an emergency department or STAT lab dedicated solely to running the cardiac troponin assay.

Dubbed the Verigene POC, we expect this to reduce production cost to the system and enable us to offer a less expensive, dedicated platform for protein assays. The development program for our ultrasensitive cardiac troponin assay remains on schedule.

We have had very productive conversations and meetings with the FDA regarding our pre-IDE submission for this test and believe that we now have a very clear understanding of the requirements for this submission. Moreover the FDA continues to affirm the 510(k) regulatory path.

Our plan is to first seek clearance for this test with an intended use for diagnosis of myocardial infarct and risk stratification of acute coronary syndrome patients. Based on early clinical data, we believe our assay will allow physicians to disposition chest pain patients significantly earlier than assays on the market today.

In addition to regulatory clinical trials to support an FDA 510(k) submission, we are also in the early stages of initiating an international pivotal trial for this assay to demonstrate how it can further change the practice of medicine.

Principal investigators have been selected, primary and secondary end points and the study protocol are nearing completion and we are in contract negotiations with several sites with more continuing to come on board. Ultimately, we would expect to involve 12 to 15 sites in the US and Europe.

In the coming weeks, we will provide more details regarding this study and our expectations for timing. We are very excited about the prospectus for this and other ultrasensitive protein assays as well as our continued development programs in genomic and infectious diseases.

Now let me turn the call over to Mike McGarrity, Nanosphere's Chief Marketing Officer to expand upon our commercial progress and market opportunities. Mike?

Mike McGarrity

Thanks Bill. The commercial organization remains focused on our current customer validations and utilization as well as building the pipeline for menu expansion. The respiratory assay recently submitted to the FDA will provide our entry since the infectious disease market running out our offerings in the key areas of genetics, pharmacogenetics and infectious disease.

The recent Association for Molecular Pathology meeting provided additional evidence that molecular testing can significantly improve diagnosis and treatment of infectious diseases. Each year approximately 50 million people in the US suffer from respiratory virus, leading to over 20 million diagnostic tests.

The methods available today are traditional culture, rapid strip test, direct fluorescent antibody detection and newly emerging molecular diagnostic assays. Of these molecular methodologies provide the highest sensitivity and specificity. However, as recently noted in the Wall Street Journal article, current molecular methods are expensive and complex.

We believe our use of use multiplex capability and random access approach prove to be the most compelling. While we cannot be certain of the timing of clearance relative to this respiratory season, we are confident that this test will open our market opportunity and advance Nanosphere's position in the decentralized laboratory.

As we develop and commercialize our next generation assay to be run on Verigene II System, we will optimize even further the workflow with complete sample to result automation.

The AMP Meeting also focused on the many factors of affecting the development of the warfarin market. Nanosphere was featured prominently in a poster exhibit from the VA Connecticut and keynote speakers continue to point the need to implement this testing on a broader basis. While the market awaits the decision on reimbursement from CMS, many customers continue to develop their own data to support testing programs.

We believe we have a critical advantage to capitalize on this developing market opportunity based on our FDA cleared status in light of the recent guidelines associated with the ASR assays. While early uptick of this test has been below our expectations, we believe the value proposition is compelling and the testing will expand as payors, clinicians and laboratorians align with improved patient care associated with use of this test.

Finally, we continued our education and awareness campaign outlining the value proposition for an ultrasensitive cardiac troponin assay at the recent American College of Emergency Physicians meeting, where we exhibited and held symposium focused on rapid disposition of chest pain patients.

We believe our assay will enable emergency physicians to more quickly diagnose heart attacks and more appropriately risk stratify acute coronary syndrome patients. A paramount concerned for the emergency physician is timely and accurate disposition of these potentially critically patients. We are encouraged by the understanding and appetite exhibited by this key constituency in the adoption of our assay.

I will now turn the call back over to Roger Moody, Chief Financial Officer and will welcome your questions and the follow-up.

Roger Moody

Thank you, Mike. This afternoon, I will review Nanosphere's third quarter 2008 financial results, which are accompanied by today's press release and 10-Q filing with the SEC, both of which are posted on our website, which is www.nanosphere.us.

Third quarter 2008 product revenue was $210,000 as compared with $6,000 in the third quarter of 2007, and $195,000 in the second quarter of 2008. Third quarter revenue consisted primarily of cartridge sales and reagent rental fees.

We continue to expect approximately 75% of our systems placements to be reagent rentals. In the third quarter, we recognized $75,000 in revenue from government grants and contract as compared with $193,000 in the same period last year. As a reminder we do not expect to grant any contracts to be a significant revenue moving forward.

Cost and operating expenses in the third quarter were $9.3 million as compared with $10.2 million in the prior year. The year-over-year decrease is due to a non-recurring compensation expense of $1.7 million in the third quarter of last year. This decrease is partially offset by investments in product development as well as general and administrative expenses related to operating as a public company.

Cost of product sales was $246,000 in the third quarter of 2008 resulting in a slightly negative gross margin. Our cost reduction programs continue to proceed on schedule. Throughout 2008, we have made significant progress in our cost reduction programs. These programs include initiatives to reduce both cost of materials and labor.

Our plans to reduce to material cost include process automation, additional multi-cavity moulds and volume absorption of overhead. Labor cost will be further reduced through addition cartridge assembly automation, increased production lot sizes and greater volume.

Through the course of 2009, we expect these efficiencies to allow us to meet customer and internal demand for cartridges without increasing either manufacturing labor or capital expenditures.

Sales, general and administrative expenses in the third quarter of 2008 were $3.4 million versus $4.4 million in the same period last year. This decrease was driven by the previously noted $1.7 million non-recurring compensation expense in the prior year, which was partially offset by approximately $300,000 and expenses resulting from increased field activity in support of our customers and pipeline developments, and approximately $300,000 in legal, accounting and consulting expenses necessary to operate at a public company.

Investment in research and development in the third quarter of 2008 was $5.7 million, which was slightly lower than the $5.8 million in the third quarter of 2007 as a result of completion, of certain development program associated with system design.

Our net loss was $9 million with the third quarter of 2008 as compared with $27.1 million for the same period in 2007. Third quarter 2007 net loss included non-cash expense for the derivative liability associated with our preferred stock which converted into common upon our initial public offering.

On a more comparable basis, third quarter 2008 operating loss was $9 million, which was down from $10 million in the same period of 2007 and $9.8 million in the second quarter of this year. Our cash balance as of September 30th, 2008 was $84 million. Cash used in operations was $24.1 million during the nine months ended September 30th, 2008.

We are laser focused on ensuring every dollar we spent as directly attributable to key initiatives, which have clear return on investment. We have also taken a conservative approach with our cash invested. Keeping it in a money market fund, which is backed the US Department of Treasury's Temporary Guarantee Program.

On a technical note, we have changed our accounting policy related to patent cost to be more in line with industry standards. As a result we now expense patent prosecution costs and the period in which they are incurred rather than capitalizing and amortization these costs over their useful life.

As a result, our intangible assets have been reduced from $4.7 million to $1.5 million as of September 30th, 2008. The impact on 2008 earnings is de minimus. A further description of this change is included in our 10-Q filed with the SEC today.

Summing up, our product revenue in the third quarter was essentially flat, our spending and cash position are both in line with our plans and expectations.

Now let me turn this call back over to Bill.

Bill Moffitt

Thanks Mike and Roger. Before moving on to take your questions, in concluding this afternoon's call I want to reemphasize one key point. Clearly, we are disappointed with the delays we have experienced in getting certain new products to market and the impact that has had on our business, but we remain committed to delivering upon a broad test menu, which we believe will drive significant customer and shareholder value.

As we continue to add tests to our product offering, the market value of our platform rises significantly. The tests that we anticipate delivering to the market over the next few quarters represents a total market opportunity in excess of $1 billion. Moreover, we anticipate bringing to the market even greater simplicity in the form of the Verigene II System fully incorporating sample to result automation.

We believe this expanded menu and the value proposition of each assay will drive accelerated market penetration. Now, we will be pleased to take any questions you may have and Crysta, we will turn the call back over to you.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Scott Gleason with Stephens. Please proceed.

Scott Gleason - Stephens

Hi, thanks for taking my questions.

Bill Moffitt

Hi, Scott.

Scott Gleason - Stephens

First question: as a system sale number for the quarter, can you give that out and give us a breakdown of the regional rental versus outright sales?

Bill Moffitt

Mike?

Mike McGarrity

Scott, we placed six systems in Q3 and Roger did you comment on the regional...

Roger Moody

One of them was an outright sale.

Scott Gleason - Stephens

Okay, great. Bill can you talk more about the respiratory viral panel, the second- generation product? Are there going to be additional pathogen targets on the second- generation product and does that mean that you going to encounter any of it at all from property issues as you expand out the menu?

Bill Moffitt

First of all, I think there will be additional targets on that second generation assay. And we've gone through trying to weigh exactly which targets we should add. We currently test individually for influenza A, influenza B and RSV A and separately for RSV B. Some of the assays that are out there actually combine the two RSVs, because they are difficult to handle.

Our platform, the uniqueness of our nanotechnology probe, makes it a little bit easier for us to handle that differentiation. The para-influenza assays need to be added here. We also look at meta-pneumovirus. Beyond that I don't know if you have any feedback from or were in attendance of the most recent AMP meeting.

But beyond that, things like the adenovirus, the rhinoviruses, these are interesting targets but I think they are still in the academic setting if you will. There was quite a sentiment voiced at the meeting that those types of targets should not be on an assay, simply because there's not a real clear clinical differentiation as to what or distinction as to what you would do with the patient. And in some cases it was felt that those types of targets just confuse people.

There was an interesting conversation there. I think the answer is, yes there will be additional targets and this will run a sample to resolve. Mike you want to add to this?

Mike McGarrity

One more comment: as we develop the next generation assay, we have the flexibility based on our cartridge. To add additional targets and/or provide cartridges with the flexibility to select your targets, whether they be seasonally based, or patient target based - which we feel is the key to the all or nothing proposition that people have a choice of today.

Bill Moffitt

Thanks, Mike. That is an important point; that it won't be an all are nothing. There will be a variety of different cartridges and configurations on different cartridges.

Scott Gleason - Stephens

Bill, can you update us on the pivotal study timeline for starting that. How many patients are you are thinking about including?

Bill Moffitt

These are things that are still I'd say are in the works. I'm speculating; this is educated speculation if there is such a thing, because the folks that are doing the powering of the study for us are checking some last minute, new answers of the study that we want to be sure are included in some of the secondary endpoint.

So I'm going to say this is going to be somewhere plus or minus 1,500 patients enrolled; from that we would expect to see anywhere in the 15% to maybe 18% of these patients - these are chest pain patients - who would ultimately have cardiovascular disease. So that's about the right kind of powering number if you will be able to get out the endpoints we are looking at.

The timing is less clear. We are already in negotiations with some of the sites over the specific contracts we've actually contracted an external CRO who are very experienced in this specific field, and they are helping guide us in this endeavor. They will help manage the sites as well.

So we are well on the path toward what I would say is getting started. We don't have a patient enrolled yet, it is a bit early for that. But, we have principal investigators selected, we have some sites already selected, we have a few more that we are working with, qualifying, so we are moving along pretty good with this project.

I would expect that by next quarter's call, which will occur sometime after the first through the year, we'll be in a position to not only speak in much more detail about timing but also be able then to speak specifically to the end points that we are driving towards as well.

Scott Gleason - Stephens

Great. Can you give us a little bit of an idea about the international study? How is, the kind of size that you are thinking about, and timing on that as well?

Bill Moffitt

I am sorry I may have been confused here. That was Roger commenting on that pivotal study.

Scott Gleason - Stephens

Okay.

Bill Moffitt

Were you asking the original question about the FDA study?

Scott Gleason - Stephens

Yes.

Bill Moffitt

I am sorry, I apologize for that. That earlier comment was on the pivotal trial. The FDA timing and the starting of those studies, that we've not really commented on publicly other than to say that we are still targeting mid '09 for this product in the market.

The size of that study is somewhere right around 900 to 1,000 patients collected prospectively run retrospectively. And that takes account of samples that you use to develop the training, algorithms for how you make the determination about where your cut points are and then it also takes into account the patients required then to ultimately test out the system.

So, but the right way to think about this is all of these samples are already collected or we are nearing the end of the collection timeframe. So once we have the assay validated and verified internally, we'd prepared to move quickly toward testing those patients out. So don't think of the FDA regulatory trials as requiring substantial patient enrollment. This is virtually all done.

Scott Gleason - Stephens

One last question: looking at the point of care product that you mentioned briefly for the Verigene, the only protein assays, what kind of cost reduction could you guys potentially look at, just going to a protein only product?

Bill Moffitt

We are doing the work on that now, there are some elements in the system. For example, there is Sonic horn in there that's used to fragment the DNA and prepare it for testing, that's not necessary on the protein assay. There are some elements such as the power supply come down in size, there are some heat block transfer components in there. There are number of internal components that are not necessary when we get to the protein assay. We haven't finished yet coming up with a sort of comprehensive look, how much cost we think that takes out of the system. Because at that same time, we are going to take a look at how we could reengineer it a bit to down size it as well.

Scott Gleason - Stephens

Bill, Roger thanks for taking my questions.

Bill Moffitt

Thank you.

Operator

Your next question comes from the line of Bruce Cranna with Leerink Swann. Please proceed.

Bruce Cranna - Leerink Swann

Hi, good afternoon.

Bill Moffitt

Hi, Bruce, how are you?

Bruce Cranna - Leerink Swann

Good, thanks Bill. The first question is for Mike. The six instruments in the quarter; are they actually validated or they just in the field at this point?

Mike McGarrity

They are placed under the process of validation. We report systems that we have shipped to customers in the quarter and they are usually ready to go or at least we are ready to get started with validations and our validation times we continue to drive down as we better process based our sample preparation methodologies from customer-to-customer. So those are shipped in customer sites and in the process of validation.

Bruce Cranna - Leerink Swann

Okay. You used to talk previously about the funnel, or pipeline. Are you in a position to comment a little bit on that in terms of potential accounts you may have on deck?

Mike McGarrity

I think that we have customers in our pipeline that we're working through from a shipment standpoint. We have additional customers that are in the queue for additional menu delivery. So if you look at our current menu coupled with CF and respiratory, I won't give you a firm number, but we feel good about the ability to continue to ship, validate and grow the utilization with these customers.

As well as we have worked and continue to work on warfarin utilization, that's why I pointed to a couple of other developments coming out of AMP that I think are helpful on a comp-by-comp basis, the broader market approaches with warfarin are continuing, but we're encouraged by some of the data coming out of individual sites, the first one I mentioned via Connecticut was very positive.

Bruce Cranna - Leerink Swann

Thanks. Now I have to ask you a difficult question; I am curious about the sales force. Have you been able to keep the sale force intact? Have you had any add-ons or drops there? I guess, what I am wondering is if you've got them all kind of cranked up too early or if there has been any update there?

Mike McGarrity

If there is anything we can really celebrate and feel great about, we think brought on great people in the sales force and we have kept all of them, which I think is an indication of a couple of things. Number one: our customers believe in what we are providing and in our reps, whatever challenges we have worked through from a sample preparation, validation.

There are two things; our reps have been there for our customers and our customers are staying with us because they believe in the approach and that we will execute and deliver menu, so we feel good about the quality of the people. We've kept them, they are engaged and I think they believe in the direction we had it both from a strategic and that our execution is coming as well.

Bruce Cranna - Leerink Swann

Okay. Bill, for you, how should we be thinking about timing for HIV at this point?

Bill Moffitt

We are working internally right now, finishing off the internal validation verification stage. They have to be done before you can commence the FDA external clinical trials. It's our expectation, our plan to get the clinical trials for this assay started before the end of the quarter. That's a target to get that done daily. I'd like to be able complete them before the end of the quarter, but that's going to be determined in part by how these current validation studies go. I think you can expect to see us get those studies started in this quarter if not even conclude them in this quarter.

Bruce Cranna - Leerink Swann

That would mean a filing sometime in Q1 '09?

Bill Moffitt

Right about at the end of this year or the early part of '09, yes.

Bruce Cranna - Leerink Swann

Okay: on the point of care instrument. I guess we are calling Verigene, POC and thinking about that being protein specific. So I'm thinking about troponin and how that rolls out. What are your thoughts at this point in time about that assay and the trial work you are doing with that assay? I assume it's going forward on Verigene and that tests on Verigene POC would be beyond whatever delivery time we're talking about for the first assay.

Bill Moffitt

Well, first, the assay will be the same. We literally will sell a cartridge that you could run on any three of those systems; the original Verigene I, the Verigene II or the Verigene POC. The purpose of the Verigene POC is just in response to customers who say, look, we are going to stick this thing right in our STAT lab in the emergency department. So and we don't need to run anything except that assay.

So, there is no need for us to incur the cost of one of these, I'll say it this way, more sophisticated or more complicated pieces of equipment. And then try to pass that along to the customers. So, for us, it represents an opportunity to take some cost out of the system, take the price down a bit and bluntly make it easier for the customer to acquire the system. But by no means does that imply that you would have to wait on another configuration of the assay.

Bruce Cranna - Leerink Swann

It wouldn't be a separate filing for that instrument?

Bill Moffitt

No. Actually, what we ultimately do is file the assays after the instrument is completed.. This instrument would probably be filed on a special 30-day or we haven't really even planned out that regulatory path, since all we are doing is taking components out, it might even just be a letter to file.

Bruce Cranna - Leerink Swann

Great, thank you.

Bill Moffitt

Thank you.

Operator

Your next question comes from the line of Bill Quirk with Piper Jaffray. Please proceed.

Bill Quirk - Piper Jaffray

Hi, thanks. The 1,500 patients that's for the pivotal trial in the states, did I hear correctly?

Bill Moffitt

Pivotal trial USA and international.

Bill Quirk - Piper Jaffray

USA, international, okay, right.

Bill Moffitt

The powering of that study is 1,500 patients total.

Bill Quirk - Piper Jaffray

And then 900 to 800, I'm sorry....

Bill Moffitt

The 900 to 1,000 is the FDA trial.

Bill Quirk - Piper Jaffray

Okay, got it. Thank you for clarification there. How many sales people do have on board right now?

Mike McGarrity

We have seven US sales reps.

Bill Quirk - Piper Jaffray

Seven US reps. And given that obviously, frankly the business is foreseeing slower than expected, are we in a freeze any hires until we get closer to troponin or are we going to continue to execute on the hiring plan, I guess I was trying to get a little clarification there.

Mike McGarrity

Well, I think Bill, we don't have any absolute yeses, or no's there. I think our plan is to build on the nucleic acid side to build as our menu expands based on coverage and customers and our utilization ramp. There are a number of factors that will effect that, I think respiratory potential additional, warfarin utilization. So, we're not setting any, there is no initiatives that says we're not going to hire any more sales reps. I think we're going to make sure we support the customers to advantage of the market opportunity as we deliver additional assays.

As far as troponin goes, that's part of the market conditioning that we're doing at this time to really make sure we understand the sales process, the approach, the constituents involved and the positioning and based on that information which we feel very good about our intelligence at this point, we'll start to look at the troponin strategy in the first half of '09 from the people standpoint. And I think Roger is building that into our cash and budget plans for '09 going forward.

Bill Quirk - Piper Jaffray

Okay. And then speaking about the respiratory virus stuff, what's the expected turnaround time for both first gen and then the second gen assays there? I'm trying turnaround time, I am thinking from sample acquisition to results?

Bill Moffitt

I think the first generation assay runs on external sample prep. The customer is going to do an amplification step and then come to the Verigene System. And the total time from sample acquisition to result out is right about 4.5 hours.

Mike McGarrity

This is to clarify the majority of that is the processing of the samples from specimen to reverse transcriptase PCR amplified product that goes into our system. We actually see opportunities tick down our hybridization time on the current Verigene System for nucleic acids based on that front end preparation.

Bill Moffitt

The other way you think about it, Bill is the sample prep methods that are out there, sample prep alone is about an hour. The reverse transcriptase amplification process is about two hours long and then you come to our assay for about an hour and change in the slide reading and we are optimizing that later part. It compares to those that are in the market today range from about that same time zone on upwards of six hours or more.

Bill Quirk - Piper Jaffray

I know you are right, Bill.

Bill Moffitt

Yes.

Bill Quirk - Piper Jaffray

Market leaders actually closer to eight so…

Bill Moffitt

That may be case. So, we would expect this obviously to be much faster for the customer, much easier to use. But again it is just the first generation. The second generation our ideal target is that, of course it's on the Verigene II. So, it's going to be sample in result out.

And our target here is to get this assay to run in about three hours from beginning to end and that would incorporate all these steps. I mean we'd like to think we could get it into the 2, 2.5 hour range, but I'm not comfortable saying. We yet have a clear path to get there, so I think we are more thinking that it's going to be in a three hour kind of range.

Bill Quirk - Piper Jaffray

And so it sounds like Bill if I'm hearing you correctly given the yes to an off pour or offline our TPCR step that do we basically need to figure out the chemistry within Verigene to make sure that we can amplify RNA or maybe I misheard something there but it sounded like you're are an offline step to amplify RNA and then you are detecting with Verigene?

Bill Moffitt

Let me be sure, I'm clear here. The first generation assay, generation one, the one that's in the FDA today runs on the Verigene I System. The current Verigene System it's in the market. So, the customer has to do sample prep with somebody's system out there whether it's [former you] or something that process about an hour.

Then you got to convert, these are RNA viruses, so we have to convert RNA to DNA and that's the reverse transcriptase piece and then amplify up to be sure you don't miss any of the extremely low abundance targets.

One of the things that and I apologize if you're getting bit technical here but one of the things that's been observed by a number of infectious disease people in the academic and research world or even the clinical research world, as they have used their own sort of home-brew PCR based assays is that the efficiency of amplification or detection even of an extremely low abundance target in the presence of a second infectious agent is quite poor. So, said different.

If you have a high abundance influenza A patient, you may totally miss a lower abundance RSV A infection because of the inefficiency of the amplification process. So in our case, while we believe we could do a reverse transcriptase and bluntly from that point probably not have to do an amplification, we're concerned about missing the double infections.

So, we in fact have the customer do a reverse transcriptase sample amplification step and that's that two-hour second step followed by now you go to the Verigene System. And the Verigene System runs in about an hour and a half alto, although like I said we are working to optimize that. This is at the first pass through of this assay.

Now generation two, first of all we'll have more targets, multiple types of cartridges for different panels of those targets and all three components, sample prep, [RT AMP], and the Verigene hybridization will all run inside the Verigene II System. Did I help get those two different generations clear enough?

Bill Quirk - Piper Jaffray

Yes, you did though. So, essentially we are going to putting in basically a [Thermoflacher] and two Verigene II?

Bill Moffitt

We are going to put in the capability to do some amplification in Verigene II, yes.

Bill Quirk - Piper Jaffray

Okay, understood. And then last question for me, I am sorry, I asked so many, but obviously a couple of your competitors have exited the warfarin market or have announced they are going to exit warfarin market here. One is recently as AMP I think the was to go, and so to that extent presumably you were been in touch with those customers, I have to think that this would be a good thing for you guys in terms of being able to increase the utilization of assay.

Bill Moffitt

I would say there is, first let me comment and then I'll turn it over to Mike. I think first of all, Bill the reason that some of these have been exited in the market if you will is they were ASRs.

Bill Quirk - Piper Jaffray

Yeah, absolutely, that's correct.

Bill Moffitt

That falls under the increased scrutiny from the FDA on these coke packaged ASRs. So it does put us in a good position to pick up some additional customers. And I know there was interest expressed by some customers already at the AMP meeting. So, Mike, I'll you maybe expand a little further.

Mike McGarrity

I think Bill, we're focused on obviously, providing solution for those customers that are running under ASRs and we'll be targeting those here. We are targeting them right now. That's ongoing. So, we would hope that that coupled with the work we are doing on an individual side-by-side basis to build datasets as well as the larger industry wide work we'll continue to move that forward.

Bill Quirk - Piper Jaffray

Thank you very much.

Bill Moffitt

Thanks Bill.

Operator

(Operator Instructions). Your next question comes from the line of Kristen Stewart with Credit Suisse. Please proceed.

Katherine Xu - Credit Suisse

Hi. This is actually Katherine for Kristen. Can you hear me?

Bill Moffitt

Yes, fine, thank you.

Katherine Xu - Credit Suisse

First, how shall we think about the break out of lease versus outright sales going forward? And then secondly in terms of cash burn, what do you anticipate for the next few quarters and can you just talk about where your cash balances are held in what securities?

Roger Moody

Sure, first of all, on the mix between lease and outright sale, we have since the first customers we set up seen about 25% purchased outright and 75% lease and we expect that to continue moving forward. The second question you had on burn rate, we continue to fund all the programs that we've discussed today.

We do not see any anticipated increases in tour cash burn. In fact, we see some opportunities to reduce them. As I've mentioned earlier, manufacturing next year we feel that we can produce not only our internal needs but also our customer needs given the current staff that we have on board from a manufacturing perspective. So while there are some investments that we were going to be making in ramping up sales force for troponin, we do not believe that, that will be done at the cost of an increased burn rate.

Katherine Xu - Credit Suisse

Okay. So you're pretty comfortable with your cash balance I guess for the next year or two.

Roger Moody

Correct.

Katherine Xu - Credit Suisse

Okay. Alright. That was it. Thank you very much.

Roger Moody

You had one another question which was where is the cash being held. We have cash in our money market account and that money market account is a mix of different things predominantly treasuries, although there is some commercial paper in there as well, only on the highest quality commercial paper.

This is a money market fund which elected to participate in the government's guarantee program that was set back in September and so they've completed the process of board approval as well as the application process. So, that money is actually backed by the US government at this point.

Katherine Xu - Credit Suisse

Okay, great. Thank you very much.

Operator

At this time there are no further questions. I would like to turn this presentation back over to Mr. Bill Moffitt.

Bill Moffitt

Thank you, Christa. Thanks everyone for joining us for the third quarter call. Nanosphere, we appreciate your continued support and look forward to chatting with you in the future. Thanks and everyone have a good evening.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Nanosphere, Inc. Q3 2008 Earnings Call Transcript
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