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Executives

Michael McGarrity – President and CEO

Roger Moody – VP-Finance, Treasurer and CFO

Analysts

Chris Lewis – ROTH Capital Partners

Bill Quirk – Piper Jaffray

Bill Bonello – Craig-Hallum

Jeff Frelick – Canaccord

Brandon Couillard – Jefferies

Shaun Rodriguez – Cowen & Company

Nanosphere, Inc. (NSPH) Q1 2013 Earnings Call May 8, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Quarter One 2013 Nanosphere Incorporated Earnings Conference Call. My name is Angela, and I’ll be your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

Before we get started I would like to remind everyone that this conference call may contain forward-looking statements. All forward-looking statements involve risks and uncertainties, including without limitations, the risks detailed in the company’s filings and reports within the Securities and Exchange Commission. Such statements are only predictions and actual results may differ materially from those projected.

I will now turn the call over to Mr. Michael McGarrity, President and Chief Executive Officer. Please go ahead, sir.

Michael McGarrity

Thanks, Angela, and thank you all of joining us for our Q1 2013 results call. With me today is Roger Moody, Chief Financial Officer of the company. And we are pleased to report a number of significant results, as we continue to build our leadership position in converting traditional microbiology methods to rapid molecular methods enabled by our Verigene System.

We achieved record revenues of $2.4 million and 46 new customer placements in Q1. Additionally, we strengthened our balance sheet with the financing totaling $27 million comprised of a combination of debt and a $5 million shelf offering sale of primary shares to William Blair Small Cap Growth Fund.

Finally, we strengthened our leadership team with the addition of Dr. Ken Bahk as Chief Strategy Officer. Roger will provide detail of our operating results and financing activity. But first I would like to articulate key aspects of the progress we have made in the first quarter.

Our commercial organization continues to build out our customer base and advance them through the validation and implementation process for our gram positive blood culture assay. We have seen traditional seasonality in our respiratory business in Q1 and in parallel, our blood culture customers are beginning to provide consistent ordering patterns after validation and implementation.

The amount of time for this initial customer base to move through the process to implementation and utilization has clearly taken longer than initially anticipated. As we have gathered more experience with our installed base, we have identified a number of key drivers and will continue to invest in accelerating timelines going forward.

While we have used the term validation to characterize the timeline and effort associated with converting customers from installation to live, it is probably better characterized as an implementation process.

Our feedback from customers have universally found performance of our test in the validation process as exceptional. Our test has oftentimes, when compared to gold standard methods, proven to be more accurate. This data is compelling and will service the basis for our success based on the critical nature of bloodstream infection diagnosis and associated therapeutic direction.

So, while the validation process is becoming more straightforward as we generate reference data for new customers, there is some considerable variability in the post-validation implementation process.

This process often includes the presentation of data from validation to pharmacy, infectious disease, critical care and administration; as well as the integration of results reporting into information technology systems allowing for associated therapeutic change; and finally, post-implementation communication to affiliated sites in some integrated delivery networks.

We now have experienced working customers through this entire process in a variety of hospital settings from academic centers to community-based hospitals. Based on that experience, we have made investments to support and accelerate this implementation process.

While it is clear that our initial customers have taken, in some cases, greater than six months to reach full implementation, our regular analysis of every customer placement and its progress indicates we are now turning the corner to consistent revenue ramp. Providing a technical and clinical implementation blueprint for customers, based on reference data and experience will continue to drive this progress.

In evidence is the fact that we are leading the change of diagnosing and treating the most costly and deadly critical care disease state in the United States healthcare system today. The performance of our test, coupled with the critical value of the clinically-actionable information it provides, is giving us the first-mover advantage that will build a sustainable and loyal customer base. This installed base will service the footprint to drive additional revenue as we expand our menu with our gram negative and enteric assays in development.

We continue to make progress in our clinical study work for our gram negative blood culture assay with our goal of mid-year FDA submission on track. We did experience a technical issue with our enteric assay, which has been resolved and our study sites are coming back on line. Resolution of this issue will likely move our FDA submission to back half of the year. However, we are exploring every opportunity to accelerate that timeline.

Finally, I would like to comment on the recent appointment of Ken Bahk in the role of Chief Strategy Officer. I have known Ken for eight years now and personally recruited him to return to Nanosphere to join our leadership team.

Ken will provide key strategic and tactical leadership, focused on driving our current execution as well as providing the strategic vision for menu, platform and application of our capabilities over the coming years. He is also leading the Enterprise Value initiative of our bloodstream infection test to key opinion leaders in critical care, infectious disease, pharmacy and hospital administration.

I would now like to turn the call over to Roger Moody to review our operational results for Q1.

Roger Moody

Thanks Mike. This morning, I will summarize Nanosphere’s first quarter 2013 financial results and financing. For additional information on these topics, please refer to the related news release as well as our 10-Q and 8-K filings, all of which are available on our website www.nanosphere.us.

As Mike described, we continue to build our U.S. microbiology customer base. These customers are beginning to realize value from our blood culture gram positive test. While the time to implementation has extended beyond our expectations, we are confident that both the conversion and utilization rates will drive meaningful top-line growth.

I will start by reviewing the first quarter 2013 results. First quarter revenue was $2.4 million as compared with $1.3 million in the first quarter of 2012 and $1.6 million in the fourth quarter of 2012. Revenue growth in the first quarter was driven predominantly by respiratory virus and blood culture gram positive test sales.

Cost of product sales increased in the first quarter to $1.5 million due to increased volume. Gross margins increased to 35% in the first quarter of 2013 from 30% in the first quarter of 2012, driven by lower unit cartridge manufacturing costs.

Selling, general and administrative expenses in the first quarter of 2012 – 2013 were $5.3 million compared with $4 million in the first quarter of last year. The increase in SG&A was due to field sales and customer support team expansion, accrued severance and expenses associated with running both gram negative and enteric clinical trials.

Research and development expenses were $4.1 million in the first quarter of 2013 as compared to $4.4 million in the same period last year. This decrease was due to reduced spending on assay development materials and equipment depreciation.

Total operating expenses in the first quarter were $9.4 million as compared to $8.5 million in the first quarter of 2012. Net loss for the first quarter of 2013 was $8.5 million compared with $8.1 million in the first quarter of 2012.

Net cash decreased in the first quarter by $8.8 million due to our net loss and working capital increases. We finished the quarter with $24.3 million in cash. Pro forma cash at the end of the first quarter would have included $11.8 million in net proceeds from the first tranche of the debt financing and $4.7 million in net proceeds from the sale of common stock totaling $40.8 million.

This morning, we announced that we have secured $27 million in new financing that should provide more than enough capital necessary to surpass positive cash flow. $22 million of this financing was sourced through a debt facility with Oxford Finance and Silicon Valley Bank. We have closed on the $12 million first tranche and will be able to draw on the second $10 million tranche between December of this year and April of next year, if certain financial conditions are met.

Also, I’m pleased that we are able to bring William Blair Small Cap Growth Fund in as a shareholder through a $5 million underwritten registered offering.

Now, I will turn to guidance for 2013. We reaffirm our 2013 revenue guidance of between $13 million and $15 million and our guidance of 200 to 250 new customer placements. While we are not providing quarterly guidance, I would like to reiterate that most of our first quarter revenue was driven by respiratory virus and blood culture gram positive test sales.

During the first quarter, we experienced the traditional decline in respiratory virus sales, as the flu season ended. We expect that blood culture gram positive test sales will increase in the second quarter. However, not at the rate that will fully offset the reduction in respiratory virus test sales.

We expect that our 2013 revenue will reflect this seasonality, larger first and fourth quarters driven by respiratory virus assay sales and consistent sequential growth driven by customer implementations of our gram-positive blood culture test.

Therefore, second quarter revenues are likely to be lower than first quarter revenues. But again, let me reiterate that we are reaffirming our full year guidance. There is a growing body of evidence supporting the value of our bloodstream infection test. This, coupled with early customer response, will drive sustained revenue growth.

Now, let me turn the call back over to Mike for concluding remarks.

Michael McGarrity

Thanks, Roger. In conclusion, I would like to highlight our participation in a number of key industry meetings where our leadership position is evident. First, we recently participated in the European Congress on Clinical Microbiology and Infectious Disease, where we exhibited and presented data from our European investigator sites.

Second, we also exhibited and held a standing room only workshop at the Clearwater Virology Seminar. This workshop included customer presentations, highlighting adoption and implementation of our blood culture assay, as well as performance and cost benefit data related to our enteric panel in development.

And lastly, we will be attending the American Society of Microbiology meeting, where we will have 10 customer-generated abstracts, attesting to the performance and value of our infectious disease menu and specifically, our gram positive blood culture test.

This proof of value, coupled with our focus and investment in moving our customer base and revenue ramp forward, provide a continued confidence in delivering on our guidance of 200 to 250 customers and $13 million to $15 million in revenue in 2013.

Our comments today are intended to provide clear and transparent visibility to our plan and progress. And we expect to deliver value to our customers, patients and shareholders.

Again, I would like to thank all of you for your interest in and support of Nanosphere. We look forward to reporting on our continued progress in 2013. And now, I will turn the call back over to Angela for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question we have comes from Matt Dolan from ROTH Capital Partners. Please go ahead.

Chris Lewis – ROTH Capital Partners

Hi, guys. This is Chris Lewis, on the line for Matt. Thanks for taking the questions.

Michael McGarrity

Hey, Chris.

Chris Lewis – ROTH Capital Partners

I was hoping you could speak a bit more on the validation and implementation process, particularly what key drivers in that process have you identified and then invested in to accelerate that? And where do you think that timetable tracks as those investments become integral part of the process going forward?

Michael McGarrity

Yeah, Chris. I think that we are working with our commercial organization to provide support on a couple of fronts. The first is advancing the communication to the key facilitators of the tests, such as pharmacy, infectious disease and critical care and we now have parallel efforts going, in addition to the validation process, to move those groups forward as much as we can in the process.

I think second aspect is providing – now that we have experience with our number of customers going through the processes to be able to provide assistance to customers to accelerate their both validation and implementation process. This is in the form of a blueprint that provides them with technical support information from a validation standpoint as well as implementation results reporting for the clinicians to take action from a therapeutic basis.

And some of those situations on the delays are, as I mentioned, more mechanical from a hospital side and we’re just trying to get a hold – get ahead of each of those. So, I think we’re confident that we will see these cycles probably come to a stop and then begin to contract back as we get more and more experience, more and more data and are able to implement these processes within the customer base.

Chris Lewis – ROTH Capital Partners

Okay. Thanks. That’s helpful. And then, turning to the utilization per system, there is a nice increase in the consumables per system during the quarter. So, can you talk about what contributed to that increase? And I know you kind of mentioned that you expect utilization to decrease in the second quarter. So, can you kind of talk about that and how should we expect utilization to trend throughout the remainder of 2013? Thanks.

Roger Moody

Sure. The utilization increased in the first quarter, driven both by respiratory virus assay test sales as well as blood culture gram positive test sales. We expect that the respiratory virus utilization doesn’t go to zero, but it falls off pretty dramatically with the flu season, as it does each year. We expect to see a continual increase in the utilization of the gram positive test as we go into the second quarter and then third and fourth quarters.

Chris Lewis – ROTH Capital Partners

Okay. And then, if I could just sneak one more in. You mentioned the expansion of the field sales and customer support. Can you provide some more color on just the extent of that expansion experienced during the quarter and what are your plans for that for the remainder of the year? Thanks, guys.

Michael McGarrity

Yeah. We’ve expanded our sales force to 15 going to 17 here in Q1, crossing over into Q2, and we’ve also expanded in two – three other areas; our field service engineering team is our installed base expense, our customer support group that works through the training and assists in the validation process, and then our clinical support team that’s working this Enterprise Value initiative, which is advancing the sales process through implementation and accelerating that effort.

So, we feel good not only that we have the right people coming on board, but we’re providing that full Enterprise Value sale. And I would just note as well that my comment on working with every individual customer on a regular basis with our sales management, our sales team, our technical support and our clinical support on a one-by-one basis is giving us this visibility and confidence in the process.

Chris Lewis – ROTH Capital Partners

Thank you.

Operator

Thank you. Next question comes from Bill Quirk from Piper Jaffray. Please go ahead.

Bill Quirk – Piper Jaffray

Thank you. A couple of questions for me. Mike, glad to hear that the enteric clinical trial is back on track, would you mind just elaborating on, I guess, what’s slowed it down here for about a quarter?

Michael McGarrity

Sure, Bill. From a technical aspect, an essay like that, it’s never like one thing. I think we have a – our plan for sensitivity and specificity on that assay is so high that we really set a standard for performance going in our clinical site. We brought a number of clinical sites up and we saw an issue, as we’re running our initial studies we immediately stopped to address it, really looking to get ahead of any aspect of sensitivity or specificity that would show are compromised.

We probably could have continued, but we really want to make sure we get everything right on the front end, because we believe that making a clean and thorough submission of the FDA is what we’ve done with our last couple of submissions. And we know that you get time back on the back end as opposed to trying to push through, if you feel like you might have an issue.

So, we feel very confident in the performance of the assay. We feel confident that it’s back on track and that we’re going to work to accelerate each and every site that we can and try to work through that process.

Bill Quirk – Piper Jaffray

That’s understood. And then, forgive me if I missed it in your prepared comments, but did you mention the number, specifically, of microbiology accounts, and for that matter what percentage is either running or validating the gram positive panel? I think you provided that in the fourth quarter call.

Michael McGarrity

Yeah. So, the majority of our microbiology customers are running the blood culture, not all of them. Some of them are respiratory-only. But we’re getting close to 200 total – about 175 total microbiology placements in the U.S. and, obviously, greater than 300 placements worldwide, including our Verigene 1 and our international customers.

Bill Quirk – Piper Jaffray

Okay. Got it. And then, Mike, lastly just on competition, can you talk a little bit about the success that you’ve had with gram positive has most certainly attracted some attention here, as have some of your pipeline assays. Can you just walk us through a little bit about how you’re thinking about the environment today versus, say, in the year or two from now and there’s going to be a couple of other folks in the market? Thanks.

Michael McGarrity

Sure, Bill. We feel – our bloodstream infection assay, we feel the gram positive, the gram negative and our use panel that we have in development will provide the best offering in the marketplace for a couple of reasons.

Number one, the way we’ve designed our panels from a standpoint of following a gold standard gram stain process to direct appropriate test and indicated test, the appropriate pricing models that we’re providing our customers, and then essentially the performance, I referred to on our – the standard we have set for our enteric assay, it’s really driven by the fact that we have put out, if you look at our repository assay, our gram positive blood culture assay, the most sensitive and specific test on the market.

And when you look at the blood culture application in particular, you need both. You have to make sure that you get it right from a sensitivity standpoint, no false negatives, and from a specificity standpoint, no false positives.

And we believe that standard will carry us competitively through the next year. If you look at our customer base now and our pipeline, we have pipeline customers that are waiting our gram negative to bring up both the gram positive and the gram negative for one validation implementation process.

We have a number of customers that are running gram positive, that are waiting to bring up the gram negative based on availability. And the majority of those customers are all waiting as well for the enteric. So, when we look at our customer base, that’s my comment on the footprint, we feel like, are first-mover advantaged.

While we arguably having to do a lot of the initial lifting and bringing up the standard-changing tests like this, we feel like it’s going to pay off, from a standpoint of this footprint and a loyal customer base to both – allow for the continued development of our menu.

Bill Quirk – Piper Jaffray

Very good. Thanks, guys.

Operator

Thank you. Next question comes from Bill Bonello from Craig-Hallum. Please go ahead.

Bill Bonello – Craig-Hallum

Hi. Good morning. Just a couple of follow-ups. Is there any way you can give us a little bit of detail on the revenue breakout between respiratory and blood culture in the quarter, in particular, just so as we think about modeling the quarterly progression? And it’s helpful that you said look for revenue to be down, which is not surprising, but so that we can do that with some better accuracy.

Roger Moody

Yeah, Bill. This is Roger. We just aren’t breaking it out by assay at this point. I would tell you that, to give you a little more color on it, we saw a distinct climb in respiratory virus assay sales starting in the fourth week of November into December through January, and it fell off sometime in February fairly sharply.

So, that’s kind of the dynamic of what we’ve seen on the respiratory virus test. What we’ve seen with gram positive is a steady build that really started, really, in its infancy in the fourth quarter. The first quarter, we saw a good growth over the fourth quarter. I would expect to see that growth continue as we move throughout 2013.

Bill Bonello – Craig-Hallum

Okay. And then, just to follow-up on Bill’s question a little bit, and maybe you’re not going to give this data point anymore. But I do think last quarter you specifically said that there were 50 customers that had completed validation of the gram positive. Any chance we can get an updated number there?

Michael McGarrity

Yeah, Bill. We feel like about a half of our customers have completed the validation process, so approximately 75. I think what we’re really delineating now is the differentiating between getting through that validation process and full life implementation utilization. And we feel like half of those are in that mode and the other half are converting here on a pretty regular monthly-by-monthly, quarterly-by-quarterly basis.

So, I think essentially the timeline extension from that first group of customers we installed from the 50 to 100 has taken the longest and that’s why we see a visibility to that; A, turning the corner; and B, that process accelerating, not only based on our investments, but also based on the data and the historical roadmap. Essentially, this blueprint that we’re providing customers that will – we expect – haven’t seen visibility to that yet, but we expect that to contract those timelines.

Bill Bonello – Craig-Hallum

Sure. Okay. And so, just to be – make sure I’m understanding that. Then the 50 that we got last quarter were 50 that have completed validation, but that doesn’t mean they were necessarily fully implemented then, I assume?

Michael McGarrity

Correct.

Bill Bonello – Craig-Hallum

Okay. And then, you commented a little bit on sort of the pull-through you’re seeing. Just curious for the customers that are fully implemented and I know you don’t have a lot of time under your belt. But does it seem like the consumable pull-through is on the blood stream is kind of consistent, and for that matter, with the respiratory, is kind of consistent with what you had expected?

Michael McGarrity

Yeah, Bill. Actually, we have customers that have ordered cartridges through the validation process or post validation. We’re just being conservative from the standpoint of when we call them fully live in utilization, because those are the ones that we’re driving to our models that we’re building out and that we’re viewing with the sales force and our technical support group.

I will just make one additional comment related to that as I want to provide this clear visibility to the technical mechanics of getting these customers through the process. I would step back, well, and say that, from a subjective standpoint, we are really, really excited about what we’re seeing in the field, from the customers that have gone through the process, that are reporting results.

We are getting feedback from not only microbiology lab directors, but clinicians regarding patients that were impacted, specific situations and examples.

And I think an example of that was our presentation at the Clearwater Virology Seminar from Shands hospital in Florida, where they basically attested to not only the clinical value, but the economic value of brining the test.

And so, we have – we want to provide clarity and examples on the technical support basis, but very, very positive feedback across the board, not only the assay performance, but the value of the assay. And we know and we see visibility to that reference base expanding our customer opportunity and are being able to refer new customers into our pipeline, as well as share data and getting through this process.

Bill Bonello – Craig-Hallum

Excellent. And at the transition and I’ll just – I promise this will be my last question. But any thought on when we might actually then see some gram positive outcomes data presented or published by any of your customers?

Michael McGarrity

Yeah. We – short of the FDA, sometimes the publication timelines can be difficult to predict, but we know that that will be coming out and we have some chart review data that individual customer accounts are running. So, Bill, we would expect that we would be – that would be coming to the market here in the near future. I’ll leave it at that.

Bill Bonello – Craig-Hallum

Okay. That’s awesome. Thank you very much.

Operator

Thank you. Next question comes from Jeff Frelick from Canaccord. Please go ahead.

Jeff Frelick – Canaccord

Yeah. Great. Thanks. Hey, Mike, just on maybe when should we start seeing some of the actions in the blueprints that you’ve started to implement? When should this become more visible? I guess if the timeline’s in that three to six months range, what does it go to? What’s kind of the bogey there? Thanks.

Michael McGarrity

I want to make sure I understand your question, Jeff. If you’re asking how do we see the timelines trending, I would say that we’ve probably hit our high side from the standpoint of some of these customers taking greater than six months. We will want to report that to you when we see visibility to that.

But that’s our expectation based on the resources that we’re putting out there and our individual account-by-account reviews. What that pulls back to or tracks back to if we get back to a 90 day process, we’ll just keep reporting on where we are there. But I think we’ve probably hit the high end.

And this first group of customers that are going live, I think our crossover quarter is Q2 and then you start to see that, and that gives us our confidence in our guidance, because we have built it up from an account-by-account basis, customer by customer, rep by rep, to be able to confirm our guidance.

Jeff Frelick – Canaccord

Okay. So, the greater than six months now you’re saying that should start coming doing in 2Q, correct?

Michael McGarrity

We will report when it starts to come down…

Jeff Frelick – Canaccord

All right.

Michael McGarrity

But everything or all the investment we’re making and the focus we’re putting on is designed to drive that down. Yes.

Jeff Frelick – Canaccord

Okay. And then, can you give us an update on Europe?

Michael McGarrity

Yeah. So, I would say that this quarter we continue to find our market up there – opportunity there, particularly in our key markets of UK and Germany, we believe those will be the key aspects of driving a definable market opportunity that we can begin to predict and project.

And I would say those efforts are moving forward. I think we’ve made significant progress in Q1. And I would think that as we get toward midyear and Q3, we’ll be able to give you some indications as to what that turns into as we haven’t built a significant amount of European revenues, as you know, into our 2013 guidance. But we’ll be getting a better picture of that and report that as well.

Jeff Frelick – Canaccord

Okay. And then, just last question, how is the C. diff rollout going?

Michael McGarrity

We’re starting to see customers – our installed customers begin to look at bringing up – we have had a number of customers validate the C. diff assay. I think that one of the aspects of the flu season was to get through the flu season and then bring up the C. diff assay and/or turn our attention to the blood culture assay.

But we would – our C. diff customer – percentage of our customer base is right around our expectations, where we don’t expect it to drive – to be a catalyst for new placements, but we expect to be competitive where we want to be, where the price makes sense and where the opportunity exists within our installed base.

Jeff Frelick – Canaccord

Okay. Thanks, Mike.

Operator

Thank you. Next question comes from Brandon Couillard from Jefferies. Please go ahead.

Brandon Couillard – Jefferies

Hey. Good morning. Thanks for taking the question. Roger, can you give us a sense of the mix between consumables and equipment revenue? And then maybe, which or what percentage of the placements were cash?

Roger Moody

Yeah. Brandon, we do not break it out. But as I’ve said in past calls, a majority of the revenues are test versus systems revenue and that percentage has been growing and it grew into the second quarter. And in terms of the breakout of customers that are either purchasing or renting system, we have seen in the past that it’s a fairly mixed blend.

And as I think I’ve talked about in the past, we project a greater amount of reagent rental, just to ensure that our cash projections are conservative, and if we’re surprised, we’re surprised on the positive end of that.

We are driving some additional initiatives in the area of leases that wind up looking like purchase deals for us and they move forward cash and revenue. But we’re just implementing those new lease programs. And so, we’ll report more on that in subsequent quarters.

Brandon Couillard – Jefferies

Okay. Can you give us a sense of the cash burn expectations for the year, and then possibly to the degree you’re willing, some update on the gross margin outlook saw a nice sequential uptick, but where you expect to be, perhaps, exiting the year and the second half?

Roger Moody

Sure. First, on the cash burn, the last two quarters have included significant amount of inventory buildup, as we have built the inventory and placed it out in the field to get through these implementation processes. Once we start converting from implementation of live use, the systems are either sold or put under a reagent rental.

And so, I would expect that that investment that we’ve been making in inventory falls in the future quarters as we convert these customers into live usage and under an equipment contract. That and gross profit contribution, as the revenues rise, are what will drive the cash burn rate down on a quarterly basis over the next, let’s call it, several quarters.

In terms of margins, we have a number of cost reduction programs in place and we have made very good progress on many of them, most of which we have not yet seen the benefit of. We’ve seen some of the benefit of converting to our in-house substrate. Although we still have not converted all of our assays over, we’re making continued progress on that.

I would expect to have them converted over by the end of the year. And so, we feel good that there are a number of additional cost reduction opportunities that we will see implementing, coming into effect over the next several quarters. I’m not going to put out a specific margin amount by the end of the year, but I will say I would expect to see a continued steady progress.

And I would also say that none of these things just are implemented at once, because we have to validate test by test and change by change in order to ensure that we don’t have any change in performance of our assay. So, I would expect it to be a smooth increase as opposed to some major shift.

Brandon Couillard – Jefferies

Thanks. And then, just an update on the gram negative submission to the FDA in terms of timing, you still expect the midyear submission there?

Michael McGarrity

Yeah, Brandon, we are on track for gram negative. The clinical studies are going well. As you know, we had our CE Mark of our gram negative assay, which really shows that we’re pretty well down the road there, from a data performance standpoint. And from a clinical study standpoint, we’re seeing that same performance. So, that is moving along and we expect to see the same from our enteric. We’re just – we need to get a little further down the process there.

Brandon Couillard – Jefferies

All right. Thanks so much.

Operator

Thank you. Next question comes from Shaun Rodriguez from Cowen & Company. Please go ahead.

Shaun Rodriguez – Cowen & Company

Hi, guys. Thanks for taking the question. So, back on the implementation timeline issue, you noted several times that the timelines for implementation are extending beyond your expectation. You’ve been talking about this for a few quarters now.

So, I just want to make sure I’m interpreting your commentary clearly. Are these stretching even longer than they were, say, relative to your Q4 call? Or when you say they’re extending beyond expectations, are you still referring to your initial expectations at the very early stages of the launch?

Michael McGarrity

Yeah. I think that they’re extending from our original…

Shaun Rodriguez – Cowen & Company

Okay.

Michael McGarrity

Original projections of 90 days. I think that what we see is that there is a distribution of the timelines for particular customers. We have customers that go through the process in that 90-day projection. We have others that take out, as I commented, greater than six months.

So, I think what we’re trying to provide, Shaun, is visibility to that distribution and how we work with each and every customer through the pipeline. So, it’s probably what you’re looking for is an average, which is probably most indicative of the way you can project. And I would say that we probably, we’re pushing from 90 days to that six-month range and we’re working to pull that back.

Shaun Rodriguez – Cowen & Company

Okay. That’s very helpful. Thank you. And to be more – a little more specific on an earlier question on initial utilization trends on the blood culture assay, are you still comfortable with the ramp that I think you assumed in your guidance, that was about a third of full utilization in the first quarter post-validation and two-thirds the second quarter out, and then, the large would be getting to full utilization by the third quarter post validation? Is that still the expected sort of pacing, or do you think it might be a little bit more gradual than that?

Michael McGarrity

Yeah. That’s a good question. I think we’re probably being conservative there. We see customers that are going into full utilization from the beginning. Others, that are beginning to order, but I would call them still in that implementation process, because they’re not in that full utilization. So, we’re really trying to cut this as many ways as possible.

And part of that is this investment in our resources in the field are really tasked with not only this enterprise sales initiative to make we sell to all the key stakeholders initially in the process, but also to make sure that we drive that implementation process to full utilization.

And we feel very confident that the customers that have gone through are buying consistently, implementing, reporting results and using the test in a clinically actionable way. So, that’s the cut we’re taking and we’re doing that on a territory-by-territory, customer-by-customer basis.

Shaun Rodriguez – Cowen & Company

Okay. And last one from me, again, just want to confirm, and I apologize if you already answered this, but you didn’t bake in expectations for enteric to be a meaningful revenue contributor this year in terms of your guidance, correct?

Roger Moody

No, we did not.

Shaun Rodriguez – Cowen & Company

Okay. Great. Thanks, guys.

Operator

Thank you. We have a question from Bill Quirk from Piper Jaffray. Please go ahead.

Bill Quirk – Piper Jaffray

Yeah. Thanks. Just two quick follow-ups from me guys and just thinking, I guess, a little further out in the pipeline, can you just remind us, Mike, where you guys are sitting these day, both on troponin as well on a fully sample-in, answer-out system? Thanks.

Roger Moody

Hey, Bill. This is Roger. Let me take the troponin question. We actually have a very high-sensitively troponin that is performing well at both – at limited detection all the way, which get way down into the low digits of picograms per milliliter. And we have this assay working both on our Verigene System as well as on an open robot. We are considering ways that we might commercialize it without distracting our core focus on the infectious disease business.

And in fact, there are different companies out there that have expressed some interests. And so, we would look to partner in that area to move forward that commercial opportunity rather than distract the core focus of this business on the infectious disease opportunity.

Michael McGarrity

Yeah. I would just add, Bill, our expectation there is any investment we make here, from a resource standpoint, will be based on a clear monetization opportunity that we have with a specific partner.

Bill Quirk – Piper Jaffray

Very good. And then, on the, I guess, fully integrated, if you will, Verigene System, or maybe different way of phrasing is, perhaps, the third-generation of the Verigene.

Michael McGarrity

Yeah. I think we’ll probably a little more clarity for that aspect to you in the next couple of conversations here as we look at the best ways to accelerate that. I think Ken Bahk has some initiatives that he is advancing there, from a standpoint of potential opportunities to accelerate that. So, let me come back to you with some more information as we get better visibility to be able to predict or project the timeline there.

Bill Quirk – Piper Jaffray

Understood. Thanks, guys.

Operator

Thank you. I’d now like to hand the call back to Michael McGarrity for closing remarks.

Michael McGarrity

Okay. Thanks, Angela. I would just like to thank all of you, again, for your interest, your questions and participation here. And again, I would just reiterate stepping back from all the technical aspects of our efforts here, we are really changing – we believe, we’re changing the way these patients with sepsis and blood stream infections are treated.

And we believe our customers are recognizing the value of that. And we believe we have a clear lead in that space and that that will pay dividends with this assay with additional assays as we build our customer base. And we look forward to reporting our next round of results. Thanks again.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Thank you.

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