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Nanosphere, Inc. (NASDAQ:NSPH)

2013 UBS Global Healthcare Services Conference Call

May 21, 2013 8:30 am ET

Executives

Michael McGarrity – President and Chief Executive Officer

Analysts

Natalia Medina – UBS Investment Bank

Natalia Medina – UBS Investment Bank

Good morning and thank you for coming to the 2013 UBS Global Healthcare Conference. My name is Natalia Medina, I’m happy to be your host for this session. Our first presenter will be Michael McGarrity from Nanosphere. Thank you.

Michael McGarrity

You fit much better on the stage than I do – a little claustrophobic. Good morning. With me this morning is Roger Moody, our Chief Financial Officer. And we have some forward-looking statements I’d like to draw your attention to from a guidance standpoint and I’ll leave that up to you.

Roger and I would like to, on behalf of all of our employees, represent to you this morning how excited we are to be leading the conversion of traditional microbiology culture methods to molecular methods. We have established a clear and compelling focus in this area. In addition, we have an expanding menu that will provide a significant revenue stream for us. And we focused an execution across all of our geographies, U.S., Europe and Asia Pacific and I’ll talk to you more about that.

The reason for this focus is because the Verigene provides significant and compelling catalyst advantages to provide for this conversion. We are first to marketing critical disease states such as sepsis, which I’ll talk about, and there is a growing body of clinical evidence to support our leadership position. Finally, we have a growing customer base and revenue that will provide significant traction in the market.

I want to comment on, our technology also has a number of capabilities outside of the microbiology space, which we’ve developed in the area of oncology, cardiovascular disease, genetics, pharmacogenetics. But we have defined a clear focus in the microbiology space. We will look to monetize these opportunistically and strategically, however, our execution based focus within the organization and in the field is in the microbiology space. And with that focus, we have clear path to profitability and cost reduction.

These are the key drivers in this decentralization. On the left, you are familiar with because this has been happening over the last dozen years. The decentralization of test from central reference laboratories in the virology space to rapid on-demand testing in the hospital based laboratory. That’s been driven by sample-to-result automation, but only for tests such as HCV, HIC, HBV, Chlamydia, Gonorrhea, single and dual target tests. The reason the microbiology lab is not converted is because of the complex requirements of high count multiplexing needed to treat, diagnose and treat the complex disease states that we’ll talk about this morning.

Our microarray capabilities allow us to provide both identification and resistance in a highly multiplexed format that allows for that conversion. And this is what it looks like if we decentralize from the central labs into the hospital based laboratories, 4000 of them in the U.S alone. And interestingly, we have seen in our current customer base the full spectrum of those customers. So these are just not academic medical centers that are leading the conversion. We have 200 bed hospitals that have adopted our technology, regional medical centers, integrated delivery networks and academic medical centers.

Our menu, as I mentioned, is the key. Adoption is driven by menu into these hospitals and we have an expanded and compelling menu in this area. All multiplex test, our respiratory virus, our blood stream gram-positive infection and our C. difficile assay are all both FDA cleared and CE Marked on the market here and in Europe.

So we’ve demonstrated our ability to run on-demand sample-to-result multiplexed assays from respiratory sample, stool sample, and positive blood culture, all on a sample-to-result automated fashion.

Our gram-negative assay for blood culture is in FDA clinical studies now. We have already received CE Mark, which points to the fact that we have already demonstrated accuracy, which is key, I’ll talk about to these tests from a sensitivity and specificity standpoint. And our enteric panel as well as in clinical trials for CE Mark and FDA clearance, we would expect that in the second half of 2013.

So all of this provides not only clinically compelling menu, but a revenue opportunity for each of the customers. Now, while we would not expect every customer to run every menu item we have, if you build up the average customer in the U.S. as I mentioned, not the biggest hospitals, not the smallest, and take our average cell price, you can provide a compelling average market opportunity form a revenue standpoint for each of these tests.

So let me focus on the clinical application of our sepsis blood stream infection test. Blood stream infections are sepsis or bacteremia or Septicemia or what it’s often referred to is the single most costly reason for U.S. inpatient hospitalization, accounted for greater than $15 billion in annual healthcare spent in the U.S. alone.

The challenge of delayed diagnosis and intervention related to this disease state and diagnosis as each hour passes without diagnosis and intervention, it causes an increase in mortality of 8% per hour. And this is on top of a mortality rate that was already greater – 8 times greater than any other diagnosis in the U.S., at 16.5%.

The reason this is such a challenge is because the requirements to address it are significant. The first and most important is the ability to multiplex, as I‘ve commented on. Our gram-positive blood culture assay has 12 targets for both identification and just as importantly for drug resistance from methicillin and vancomycin.

Without the identification and the resistance, we won’t provide the clinically actionable result needed to impact these disease states. You need accuracy and sensitivity and specificity. This test cannot be 90% sensitive or right most of the time, you need to have a result, the clinician can act on confidently, and we provided that across all of our assays from a sensitivity and specificity standpoint; I’ll talk about the importance of that.

And then obviously it needs to be fast, it needs to be on-demand, it’s easy to use on a Saturday night or on a Tuesday morning those patients are just as sick and we have moderate complexity designation for all of our assays that are cleared through the FDA, which allows for that 24-hour, seven days a week operation of our system.

So this is the slide that I referred to as (inaudible) if you’ve never been to heaven. This is a look at the current workflow associated with identification of these infections. Blood culture is incubated after 8 to 12 hours. There’s a Gram Stain done to subset the identification of the bug. Is then grown on a plate for another 24 to 36 hours and then susceptibility is defined over 48 to 72 hour timeline. Implementation of the Verigene System allows for 2.5 hour result after positive blood culture and Gram Stain for both identification and resistance.

So what is the impact? We know that data publications have shown a number of key factors from the standpoint of economic antibiotic and outcome based results. Rapid reporting leads to a 6.2 day reduction in hospital stay, accounted for greater than $21,000 in cost savings per patient, and interestingly, and significant number of positive blood cultures are actually contaminants. Our ability to rule out these contaminants can lead to a cost savings of almost $9,000 per patient.

Rapid resistance reporting leads to a 25 hour reduction in time to optimal antibiotic therapy. It used to be that we would be see two years ago, antibiotics stewardship programs in the top academic medical centers. I can tell you that the range of hospitals that referred to earlier from 200 bed hospitals to academic medical centers, virtually all of them are adapting antibiotics stewardship programs with the importance of preserving these last-line therapies as well as providing this type of patient care and improvement in treating these patients.

And finally, it saves lives and 80% reduction in the critical care unit alone, from 47.8% to 9.5%. In addition to this data, we have additional data on our assay from a number of key centers around the U.S. from Cedar Sinai to Cleveland Clinic, Froedtert, Johns Hopkins, Wexner and University of North Carolina. They have all validated the sensitivity and specificity of our assay and the value of implementation.

This week as we speak, we have 11 abstracts being presented at the American Society for Microbiology Meeting, and I would call your attention to one of them, from Banner Health in Phoenix, which showed that the blood culture gram positive deduction of methasone-susceptible Staph aureus was 40.3 hours faster than conventional culture methods.

And just as importantly and more impressively, that the therapeutic chain for impaired vancomycin by clinicians increased by 55%, from 35% to 90%, post implementation of our test. It’s important to note that vancomycin is not the best therapy for Staph aureus. It’s more toxic to the patients and it’s just not as effective. So the ability to deescalate in a timely manner, where you can actually impact the patient is what’s compelling about these results. We expect to see that and are seeing that in all of our validated customer centers.

I would call your attention to one additional anecdote we received that points to the other aspect of the clinically actionable result and this was shared with us by one of our customers with a patient who had, our tests had identified enterococcus faecium, a really bad opportunistic infection and it also called out vancomycin resistance. In this case, escalation of therapy is critical at that point, but the escalated therapies, linezolid, are restricted by the pharmacy. They will not be released by the pharmacy without definitive diagnostic proof of that volume in that resistance marker. three days later, that patient would be dead.

our ability to provide that information led to what the clinician and the lab director felt was the saving of that patient’s life, if not, an eight day reduction in hospital stay, again, the power of escalation or de-escalation based on our clinically actionable results.

From an execution and commercial strategy standpoint, we have the three geographies represented here with our strategy. In the U.S, we have a direct sales force with a supporting, engineering, clinical applications and technical support group. We also are initiating a number of key strategic initiatives based on the data that you’ve seen this morning and heard about this morning for implementation and strategic applications of the technology through an enterprise initiative.

In addition, we have European distribution, our key European markets of UK and Germany led by Grifols and Thermo Fisher. In last week, we are excited to announce our marketing distribution and collaboration agreement with Hitachi High-Technologies in Japan as we expand our Asia-Pacific reach.

I refer to our growing customer base and revenues, as you can see here, historically our 2013 projected guidance is 200 to 250 placements and $13 million to $15 million in revenue, and we are across our organization, all of our operational disciplines and our sales organization committed to delivering on these results.

We have a clear path to profitability, as I mentioned, driven largely by our consumable, our test cartridge, where we have the three-fold approach to cost reduction is led by our substrate, where we’ve licensed in-house technology to reduce cost in the near and longer-term.

In addition, our plastic component reduction plans are in place to allow for scale and volume to reflect our cost of goods as well as labor and overhead leading to what we will see as a razor/razor blade business. And it’s important to note that based on the competitive pricing dynamics in the marketplace, we’re actually providing our multiplex tests with pennies or cents per target.

All this leads to a business that really, as I said, begins to look like a razor/razor blade business as we approach breakeven with the consumable portion running into the 60s, 70s and approaching 80% at scale based on our projections.

So the key is, we believe, to not only our leadership position today and long-term market leadership are exactly what we deliver with our technology is embedded in the Verigene System. Ease of use, 24x7 availability, on-demand, random access and near patient testing for these critical disease states, performance from a sensitivity and specificity standpoint, the versatility of a broad testing capability of nucleic acid and in protein capabilities.

We have demonstrated ultra-sensitive protein detection in a number of applications that I referred to earlier. we also have demonstrated the ability to put down a nucleic acid and a protein on our microarray, which we feel can deliver significant clinical value as we go about our menu, high count multiplex and the ability to be qualitative and quantitative.

And finally, the economic value associated with not only our product from a cost of goods and profitability standpoint, both from the value that we provide both the hospital and the healthcare system. So I thank you for your attendance, interest and I refer back to our, Roger and I representing our employees that we are all committed to delivering significant value to our customers, our patients, and our shareholders.

So we have few minutes here for questions for Roger and I.

Question-and-Answer Session

Unidentified Analyst

(Inaudible)

Michael McGarrity

So we haven’t given projections from the standpoint specific timelines. but I would tell you that the process that they’ll take us through and they identify their strategy for us to go through kind of a three-step process. first, research use only availability of our products in their targeted market. Second is into IVD approval, and the third is IVD with reimbursement. So each of those provide additional market opportunity within the Japanese market, and they’ve defined their strategy to work through that process. As I mentioned, sales and marketing distribution as part of the arrangement as well as we commented the potential for collaboration and as their platform development there, a significant prolific developer of the platform from an OEM standpoint. So we see an opportunity to work with them on a number of plants. Yeah.

Unidentified Analyst

Can you talk about the competitive landscape (inaudible)?

Michael McGarrity

We are in the blood stream infection. so we are the only product on the market right now with FDA plan and we believe that our menu round out of gram-positive and gram-negative will provide fleet coverage for the blood stream infection, as I commented on our plan there to submit the gram-negative assay to the FDA in midyear. And the key aspect to our work with our initial customer base is going through this validation and implementation process as well as the sensitivity and specificity that we think is a pretty significant barrier to entry from the standpoint of not only the multiplex, but being able to have those really clinically, actual sensitivity both of the three numbers that we think would give us good position.

Unidentified Analyst

(Inaudible)

Michael McGarrity

No, we have a respiratory virus assay that’s cleared on our platform, the blood culture and a C. difficile assay, and then in our immediate 2013 pipeline is our gram-negative blood culture assay and our expanded enteric panel for gastrointestinal applications. We’ll continue to develop menu from there, because our total projection is built into our near-term. those test alone from our market opportunity standpoint and some that we’re seeing in adoption standpoint that will take us through breakeven. Any other question?

Unidentified Analyst

Can you describe your detection technology (inaudible)?

Michael McGarrity

Yeah, absolutely. so the proprietary technology is our gold nanoparticles. and I think the key aspects are two-fold, number one, how we functionalized the gold nanoparticles with the complementary that our oligomer antibody to nucleic acid or protein, and then our sensitivity and specificity that’s driven by that. We actually – it’s important to note that, we have the capability to amplify or use our direct detection capability. So our respiratory assay, we do have an amplification step and our stool based assays will have an amplification step. Our blood culture assay, we do not require it. There is natural amplification built into the blood culture.

And our sensitivity and selectivity based on some proprietary aspects of our detection allows to, not need them amplified. We think that’s really important. We think it’s a competitive aspect from a standpoint of limitations of TCR technologies because of the risk of amplifying contaminants in these patients from a blood culture standpoint. So we put down captures on a microarray, our gold nanoparticles are capturing the target of interest. And we form basically (inaudible) on the slide on the user optics to pick up the signal, light signal.

Unidentified Analyst

(Inaudible)

Michael McGarrity

Roger?

Roger Moody

Yeah, I’ll take this. There is a huge opportunity for (inaudible)

Unidentified Analyst

(Inaudible)

Michael McGarrity

Thank you very much.

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