Nanosphere's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Nanosphere, Inc. (NSPH)

Start Time: 17:00

End Time: 17:43

Nanosphere, Inc. (NASDAQ:NSPH)

Q2 2013 Earnings Conference Call

August 06, 2013, 17:00 PM ET

Executives

Michael McGarrity - President and CEO

Roger Moody - VP-Finance, Treasurer and CFO

Analysts

Bill Bonello - Craig-Hallum

William Quirk - Piper Jaffray

Jeff Frelick - Canaccord

Shaun Rodriguez - Cowen & Company

Operator

Good afternoon. Thank you for attending the Nanosphere Conference Call. Before we begin, I'd like to remind everyone that various remarks about future expectations, plans and prospects constitute forward-looking statements for purposes of Safe Harbor provisions under the Private Security Litigation Reform Act of 1995. None of these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated.

Among the factors that could cause our actual results to differ materially include but not limited to Nanosphere's ability to develop commercially viable products, Nanosphere's ability to achieve profitability, Nanosphere's ability to produce and market its products, Nanosphere's ability to obtain regularly approval of its products, Nanosphere's ability to protect its intellectual property, competition and alternative technologies and Nanosphere's ability to obtain additional financing to support its operations and all the risk factors identified from time to time in our report filed with the Securities and Exchange Commission.

Any forward-looking statements made on this conference call speak only of today's date, Tuesday, August 6, 2013, and Nanosphere does not intend to update any of these forward-looking statements to reflect events or circumstances that occur after today's date. This conference call is being recorded for audio rebroadcast on Nanosphere's website, www.nanosphere.us. All participants on this call will be on listen-only mode. The call will be followed by a brief Q&A session.

I will now turn the conference over to Mr. Michael McGarrity, President and Chief Executive Officer of Nanosphere, Incorporated. Thank you.

Michael McGarrity

Thanks, Joanne, and thank you all for joining us for our Q2 2013 results call. With me today is Roger Moody, Chief Financial Officer of the company. We continue to make progress in building our leadership position in the molecular microbiology market enabled by our Verigene system. The establishment of our customer footprint driven by our gram-positive blood culture assay will serve as a foundation for additional menu currently in the regulatory process to build a sustainable revenue ramp.

We achieved revenues of $1.9 million and 35 new customer placements in Q2. Roger will provide a detail of our operating results, but first let me update on our focus and progress in the second quarter. As we have discussed in the past, the focus of our organization is in two key areas that we are confident will put us in a leadership position in the U.S. and globally. First, our field commercial organization is singularly focused on building our installed base and moving customers through the implementation process in July of utilization.

Second, our development and clinical groups are driving our menu expansion efforts forward with both our gram negative and enteric panels. On the first front, I would emphasize a number of key initiatives we are driving and investment we are making as follows. One, establishment of a record base, experiential blueprint of implementation taken from actual customer experience, designed to aid new customers in the implementation process. Two, key opinion leader validation physicians represented by pharmacy and infectious disease that serve as a guide for new customers.

Three, disseminating a growing body of evidence from our publications validating performance and value proposition associated with targeted therapy, improved outcomes and impact on health care economics for what is the most costly in-patient diagnosis in the U.S. today. Four, expansion of our U.S. direct sales organization to 19 and the addition of medical science liaison physicians to drive our clinical value proposition to key stakeholders.

Additionally, I would like to note that we will be sponsoring a webinar on August 14th at 1 o'clock Eastern Time highlighting the value proposition of our blood culture assay related to patient outcomes, health care costs and antimicrobial stewardship. This webinar will feature key opinion leaders from Johns Hopkins, Medical College of Wisconsin and the Ohio State University Medical Center. These speakers represent the perspective of key stakeholders of microbiology, infectious disease and pharmacy, all of whom stand to benefit from implementation of our tests for diagnosis and treatment of bloodstream infection patients.

Our expectation is that these initiatives and investments will serve to contract the extended time to utilization that we have experienced from our original assumptions. Our internal performance metrics are directly tied to contracting this time utilization process and we expect to provide evidence of our progress as we go forward. We also expect these efforts to catalyze meaningful revenue acceleration in the coming quarters. However, our experience with our initial customer base has clearly taken considerably longer than anticipated which will necessitate a reset of our 2013 revenue guidance from $13 million to $15 million to a range of $10 million to $11 million and 150 to 200 placements from 200 to 250 placements.

We have evidence that our assumptions related to performance, average utilization and pricing are all intact. This recast reflects the extended timeline from three months of time to implementation to approximately eight months. We are confident that our efforts to drive these timelines down will be recognized in the coming quarters, but will not allow us to catch up in the back half of 2013. We would expect gram negative and enteric panels to follow more traditional laboratory validation timelines of 90 days.

I want to emphasize that none of these developments affects our commitment and belief that we are in a position to expand our customer base with consistent revenue acceleration.

Finally, we continue to make progress in our clinical study work for a gram-negative blood culture assay with expected Q3 FDA submission. Our enteric clinical study efforts are underway with an expected FDA submission of Q4. It is important to note that there is considerable interest and identified demand in the market from our existing blood culture customers and pipeline customers to validate this assay upon receipt of regulatory clearance.

I would now like to turn the call over to Roger Moody to review our operational results and further comment on our guidance.

Roger Moody

Thanks, Mike. This afternoon, I will summarize Nanosphere's second quarter 2013 financial results. 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.

Our customer base and test utilization continue to grow, albeit at a slower pace than we would like. Gram-positive customer implementation and instrument sales timelines have extended beyond our initial expectations. Test utilization for customers who have gone live with our gram-positive test is in line with our expectations. Customers utilizing our gram-positive tests are reporting positive analytical and clinical results and our new customer pipeline is expanding.

Now I will review second quarter 2013 results. Second quarter revenue was $1.9 million as compared with $1.3 million in the second quarter of 2012 and $2.4 million in the first quarter of 2013. The sequential revenue drop was driven by the rapid decline of the flu season at the end of the first quarter.

Year-over-year revenue growth in the second quarter was driven by blood culture gram-positive test sales. Blood culture gram-positive test revenue grew 44% sequentially in the second quarter. Cost of product sales increased in the second quarter to $1.3 million due to increased volume.

Selling, general and administrative expenses in the second quarter of 2013 were $5.1 million compared to $4.2 million in the second quarter last year. The increase in SG&A was due to field sales and customer support team expansion and expenses associated with running in both gram-negative and enteric clinical trials.

Research and development expenses were $3.1 million in the first quarter of 2013 as compared to $4.7 million in the same period last year. This decrease was primarily due to reduced spending on goods and materials associated with new assay development and a one-time capitalization of certain raw materials to inventory that were previously expensed.

Total operating expenses in the second quarter were $9.6 million as compared to $9.8 million in the second quarter of 2012. Net loss for the second quarter of 2013 was $7.8 million compared to $8.4 million in the second quarter of 2012. Net cash increased in the second quarter by $7.6 million resulting from a $16.5 million cash increase in financing activities, partially offset by an $8.8 million cash decreased from operating activities.

The financing activities included the $12 million first tranche of a $22 million debt facility and a $5 million sale of stock less transaction expenses. We finished the quarter with $32 million in cash.

Now I will turn to guidance for the remainder of 2013. As Mike noted, we are adjusting our 2013 guidance to $10 million to $11 million in revenue and 150 to 200 new customer placements. The revised revenue guidance reflects the additional five months it is taking our customers to begin clinical utilization of our gram-positive test and an extended time to secure purchase orders for the equipment.

It should be noted that the customers that are live in utilization support our customer assumptions of $50,000 in gram-positive test revenue per year. There is no doubt that our revenue ramp is behind where we expected and would like. As Mike noted, we are taking decisive actions to address these time lags.

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

Michael McGarrity

Thanks, Roger. I would like to conclude with an example of the basis for our conviction and our progress and opportunity to build a sustainable revenue ramp and continue to deliver menu of solutions for complex disease states.

Our compelling abstract from the American Society of Microbiology meeting cited data from one of our clinical sites in which they concluded Nanosphere's gram-positive blood culture assay's detection of methicillin susceptible Staph. aureus was 40.3 hours faster than conventional culture techniques and drove a 55 percentage point increase in therapeutic change from empiric vancomycin to methicillin from 35% pre to 90% post implementation from our targeted and efficacious treatment.

We believe this is a clear indication of a number of critical solutions that our test can provide. One, a meaningful reduction in time to accurate definitive result for both identification and associated drug resistance. Two, clearly physicians will not act on a result that is provided outside of clinically actionable window of two to three days. However, if that result is provided earlier 90% of clinicians will act and deescalate to last line therapies to more appropriate targeted therapy.

Three, the end result of this use of our test suggest benefits from cost savings to outcomes to practical impact and antibiotic stewardship efforts. And four, if the benefits by test reach a majority of stakeholders in the treatment paradigm of blood stream infections.

In conclusion, our guidance changed notwithstanding. We have visibility to test initial adoption in the broad utilization of our customer base and associated revenue acceleration. Our comments today are intended to provide clear and transparent visibility to our plans and progress. And despite our early challenges noted today, our team is energized and committed and we expect to deliver value to our customers, patients and shareholders.

Again, I would like to thank you for your interest in and support of Nanosphere. We look forward to reporting on our continued progress.

I will turn the call back over to Joanne for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question comes from Bill Bonello from Craig-Hallum. Please go ahead. Your line is now open.

Bill Bonello - Craig-Hallum

Thanks. Good afternoon, guys. So I completely understand what's going on with the sort of pace of the revenue ramp and the longer time that it's taking customers to get fully implemented in the complex process involving a number of constituents. I guess the piece that I'm struggling to understand is sort of the dismal pace of placements in the whopping reduction in guidance there. And I guess I'm trying to understand, I mean you made reference several times to taking a longer to secure purchase agreements, but I guess what I'm really trying to get a feel for is, is the competitive environment having more of an impact than you might have thought it was? BioFire now is out there with both gram-negative and gram-positive and recently came back under the market with their tests, you've got Bruker out there with the Biotyper. I'm just wondering if customers are basically considering more alternatives than maybe what you had expected and that's driving a longer decision time and maybe fewer positive decisions? And then I have a follow-up if I can.

Michael McGarrity

Bill, I understand the question. I would characterize our pipeline in a couple different ways. We see a build of our rep-by-rep pipeline for blood culture gram-positive, gram-negative and enteric. We probably expect to see some quarter-to-quarter variance and we've increased the number of sales reps to continue to drive the urgency on placements. I would say at this point we don't have visibility impact to our pipeline or placement rate specifically from BioFire's blood culture panel. And we continue to foresee the feedback that validates our initial approach related to the way we structured our panels and our price points. So, at this point we have visibility to the pipeline developing as we've projected and I think that it's building on the top and the increase in the reps is designed to do two things, while the increase in the reps and the increase in the support for the clinical support people is designed to have the reps focus obviously both on building the pipeline, executing it through the process and getting customers live.

Bill Bonello - Craig-Hallum

I hear what you're saying but I guess – maybe I'm not understanding that. I mean it was just three months ago that you had a significantly higher placement target and so I guess I don't understand on that piece, on the placements, what it is that's changed between a few months ago and now in terms of how many systems you think you can place?

Michael McGarrity

Yeah, I think we're taking the data that we have in our pipeline, Bill, and making a conservative estimate of what we definitely believe we can attain within the current pipeline we have as well as our menu additions of gram negative – that are paced by gram negative as well as those that are awaiting the enteric.

Bill Bonello - Craig-Hallum

Okay, I guess that makes sense. So basically you're just saying the pipeline isn't quite what you had expected it to be at this point in time. I guess the other question I wanted to ask is just on the financing situation, the cash on hand, you still believe that's enough to get you to breakeven in light of these volumes?

Michael McGarrity

Bill, just one more clarification. Our pipeline is actually building – our pipeline is actually accelerating in the quarter. I think it's the focus on the time to moving them through the process, getting them moving as well as people that maybe paced by the additional of our gram negative or enteric panels as we move them to second half of the year, we expect those submissions for Q3 and Q4.

Bill Bonello - Craig-Hallum

Okay. I just want to make sure I understand what you're saying there. It's taking longer to convert the customers that you expected, not just to get them up and implemented, but it's taking longer to actually complete the system placement/sale?

Michael McGarrity

Yeah, we had customers that we expected in Q2 move forward.

Bill Bonello - Craig-Hallum

Okay.

Michael McGarrity

Roger, do you want to comment on the cash?

Roger Moody

Yeah, with regard to the cash, Bill, we continue to believe that we have sufficient cash on hand to get this company to positive cash flow and even with revised guidance.

Bill Bonello - Craig-Hallum

Okay, thanks.

Operator

Thank you. The next question comes from William Quirk from Piper Jaffray. Please go ahead.

William Quirk - Piper Jaffray

Great, thanks. Good afternoon, everybody. First question is, if I think about the 35 placements during the quarter, Mike, can you just talk to – you mentioned the respiratory season obviously slowing down pretty dramatically, but can you just talk to of those 35, were all of them related to gram-positive, was it half? Help us think little bit about what these are maybe primarily used for, were there any respiratory systems out there? Thanks.

Michael McGarrity

Bill, virtually all of the placements if not all are bringing up the blood culture assay. We'd expect some of those to follow-on with our respiratory assay pending next season, but they're all blood culture customers.

William Quirk - Piper Jaffray

And so then basically if I look at the 150 to 200 system placement guidance, and if I guess the base (inaudible) placement assumption would suggest a little -- slow down here in 3Q, just the summer seasonality that ramps back up a little bit in the fourth quarter. Is that the right way to think about it? And the 200 on the other hand would assume that you see some fourth quarter ramp in respiratory and/or some additional ramps on some of the other blood culture products? Is that the right way to think about the pacing?

Michael McGarrity

Yeah, I think that's exactly right, Bill. And the pipeline could sustain that high end but we're allowing for timing as you suggested through third quarter and the fourth.

William Quirk - Piper Jaffray

Okay. And then having said that, Mike, and I guess this builds off of Bill's question is nobody wins 100% of deals, right, and if I'm a hospital and I'm looking at bringing up a product like this, I'm going to take a look at everything else out there. So, to what extent are you guys factoring in competition into your placement assumptions as you think about your deal pipeline? And again I've never run across a company that's closed 100% of the deals they've been looking at. So help us think a little bit about that. Thanks.

Michael McGarrity

Yeah, it's a fair question. We're not anticipating closing 100% of them. We recognize the competitive position that we have in the marketplace particularly with BioFire. I don't think there's anybody else that would be able to provide what we provide from a diagnostic information standpoint. I would say there's two things that we believe. We believe that they will get customers probably in situations where they may have their respiratory assay although we're in alongside them in certain situations. I think there's also and that's a (inaudible) competitor as a positive, but we see and potentially could benefit from additional spreading of their awareness in the value proposition because we do believe that based on a significant market development and the acceleration of that market development that we do compete favorably. So if we have an additional competitor out there building the interest and the awareness or making the pie larger, so to speak, that we can compete from a standpoint of the performance of our assay which we believe we'll be able to demonstrate significant or even – we have the best performance on the market and potentially a better performance in competitive situations as well as the way we've designed the panels and pricing.

William Quirk - Piper Jaffray

Okay, got it. And then just last one from me and I'll jump back in the queue. Your comment regarding speeding up or reducing the time to adoption for gram negative and enteric, Mike, is that simply a function of going into existing gram positive accounts and just doing that to adopt the additional assays but that should take a lot less time than obviously going and trying to open up a new account where you obviously sign off on a lot more things including initial validations, et cetera?

Michael McGarrity

Yeah, I think the gram negative – the majority of our gram positive customers are awaiting the gram negative which now that they've brought in validated utilized and go in lives. The gram negative we anticipate to be strictly an accuracy method comparison. In the enteric our pipeline customers that we're working closely with in anticipation of our clearance that is viewed more as a laboratory validation process and not the full hospital-wide implementation process. So the third leg of that is that it's working to contract our timeline, so we think we have three ways that we should move toward attracting those timelines.

William Quirk - Piper Jaffray

Okay, got it. Thanks for the color.

Operator

Thank you. The next question comes from Brandon Couillard from Jefferies. Please go ahead. Your line is now open.

Unidentified Analyst

Hi. This is [Kate] actually in for Brandon. I was wondering if you can give me an update on the number of customers actually running the gram-positive test or validating as you have in past quarters?

Michael McGarrity

Yeah, so we have between 150 and 175 customers in microbiology in the U.S., 175 of those the majority are running the blood culture. So if you think approximately 150 customers in the U.S. in the process are anticipating validating the blood culture and we've got approximately a third of those coming through the validation and implementation process.

Unidentified Analyst

Okay, thanks. And is there any way you can quantify the customers in the pipeline that may have moved to, I think you mentioned flipped from Q2 to 3Q?

Michael McGarrity

No, I think that's reflected in our guidance under the previous question that we have a customer pipeline that supports the high end of our revised range and we're allowing for – to the question that just came up related to – going through Q3 with the normal acceleration into Q4. So we allow for that in that range of 150 to 200.

Unidentified Analyst

Okay, thanks.

Operator

Thank you. The next question comes from Jeff Frelick. Please go ahead. Your line is now open.

Jeff Frelick - Canaccord

Thanks Mike and Roger. Mike, could you maybe breakout for us just what happens across the eight-month timeline?

Michael McGarrity

Yeah, Jeff, I think that we would break it up into four buckets; the validation, the installation, training and validation process which is fairly straightforward and based on the performance of our assay. We do not run into performance or issues with discordant results. In fact we compare favorably to both the Gold Standard when adjudicated by sequencing. The challenges in the other three areas through implementation process probably range in three areas from taking that data which – the validation processes range a little bit whether customers are electing to run all prospective actual samples, clinical samples as opposed to using potentially spiked samples for the more rare combinations of identification or resistance. So the validation timeline can be expended. There are using strictly prospective or if they are using it to generate data to look at prospective value proposition within the hospital. So the data, for instance, that I cited in my comments related to antibiotic de-escalation, that was a customer that actually took a significant time probably greater than eight months to go through the full validation and implementation to live process which they are now and they're one of our top revenue producing customers. However, they did that so they could generate prospective data to present to the other constituents. So there's a value in that that I've commented on before. And then the other area is sometimes logistics related to IT implementation, results reporting and presentation of the data to the other areas of pharmacy, infectious disease, critical care. And then finally our – some of them are waiting for their contract purchase to be approved before going live. So, we have a good handle and we have data – and we were managing and studying to [utilize] in each of those areas and that review on a regular basis is allowing us to understand where to apply resources. I think what we've accelerated is our parallel pass to all of those activities that take customer through the blueprint to utilization whereas – and so we had that experience in the data to drive that in the parallel. Those were all going serially. So, well, we don't have data yet to tell you that we're contracting that eight-month timeline. We have the expectation based on the initiatives we're moving forward with the data and the experience in those parallel have to take that down.

Jeff Frelick - Canaccord

Okay, that was helpful. Thanks. And then just maybe update us on the establishment of the clinical teams, is that growing? Are you adding some bodies there? And are you seeing these folks starting to get some traction and kind of reporting back, are you majoring that progress, I guess, with the clinical teams? Thanks.

Michael McGarrity

Jeff, I just want to understand when you refer to the clinical teams, are you talking about our clinical study teams or our clinical support people?

Jeff Frelick - Canaccord

Support.

Michael McGarrity

Yeah, we're putting them out in the areas where we're targeting accounts and customers that we know have a process that's going to be a little bit more complex and we're putting them into these situations to drive that in support of the sales representative but also to be able to drive that in parallel of its sales reps efforts to continue to move customers through and build their pipelines.

Jeff Frelick - Canaccord

Did you say in your earlier comments, Mike, you expanded the folks in that group as well along with the sales force?

Michael McGarrity

Yes. We're really building that group because remember this is separate to our commercial organization. You can think about it as the sales organization, the field service engineering, our clinical support application's team that does the training and works customers through the validation. This is an additional new research that we're putting in with people that have clinical experience with implementation across more therapeutic areas which is pharmacy and infectious disease.

Jeff Frelick - Canaccord

Okay, thank you.

Operator

Thank you. The next question comes from Bill Bonello from Craig-Hallum. Please go ahead. Your line is now open.

Bill Bonello - Craig-Hallum

Hi. Thanks guys. Just a handful of follow-up questions if I can. I guess the first one and maybe this is a little bit going off where Jeff was, but as the focus on trying to accelerate the timeline to implementation at customers that's already taken a system, is that at all a distraction to the sales reps and is that having any impact on sort of ability to go out and place new systems and win new accounts or is that a completely independent function?

Michael McGarrity

I think that's part of the function of increasing our sales reps to make sure that we're not getting caught with that. I think it's always a balancing act from a sales rep standpoint. You want them to own the responsibility or the relationship and the success of the customer and as well to build their pipeline. I would tell you that our compensation program is designed to incent the right activity. And I think that's part of the reason for two things that we've done from an investment standpoint; increase the number of sales reps and also add this medical science liaison role that we think will make sure that we don't run into that situation.

Bill Bonello - Craig-Hallum

Okay. And I'm sorry, when did you sort of start adding that role and how many people are doing that? And (inaudible) for that I apologize.

Michael McGarrity

We just added two – put two people on that role here in Q2 and we'll continue to accelerate both roles as needed.

Bill Bonello - Craig-Hallum

Okay, thanks. And then are you planning – is there anything about the customers that you're actually adding that's causing the implementation to just take a little bit longer than you had expected? In order words just, I don't know, being less familiar or just anything about the nature of the customers at all?

Michael McGarrity

I think we've cut it so many different ways. If I looked at our top 10 revenue producing customers for blood culture only that are well above our average projection of 50,000 per year and looking at those, the top customers, I can tell you that the range of time to implementation from those went round the gambit from the original what we thought which would be 60 to 90 days all the way through this 8 to 11 months timeframe on some of those, and that the range of – obviously they tend to be larger hospitals just based on the volume but I would tell you that our customers that are in utilization are a mix of community base; 200, 300 bed hospitals up to academic medical centers. So, there's not an absolute related to it. One of the key that we're driving with our sales approach in our initiative that we know now and have dated a support is getting the key champions and pharmacy and infectious disease. I'll just add one comment that the data I cited related to the de-escalation is very compelling piece of data for a pharmacy resource who is attempting to drive targeted therapy and clinical change of therapy where appropriate and that piece of data really drives that process. So I think there's a number of different factors that we think we're on from the standpoint of pushing it back and the range is across the customer base which we view as a positive.

Bill Bonello - Craig-Hallum

Got it. And then just one last question. Any update on what's happening with Hitachi?

Michael McGarrity

No. I think it was commented that we don't expect immediate results from that relationship. They're continuing to provide the support and the activity associated with moving us through the registration and regulatory process. We've had meeting with them recently. We continue to be very positive and optimistic about that partnership but nothing specific to report.

Bill Bonello - Craig-Hallum

Okay, thank you.

Operator

Thank you. The next question comes from William Quirk from Piper Jaffray. Please go ahead. Your line is now open.

William Quirk - Piper Jaffray

Great, thanks. Just one quick follow-up for me and that's a topic that ironically it didn't come up on the conference call you had, if it has I've missed it, but a lot of moving parts are on reimbursement right now, particularly around the generics side of people, the assay portfolios. So any comment here, Mike? Are you seeing – are you customers getting paid and certainly there are a lot of problems with that. Does this have any impact in the business, et cetera? Thank you.

Michael McGarrity

Bill, we've seen no impact from that in the space that we're operating. And we don't see or hear anything and the people that we work with both from a customer and consultant basis that would say there's anything in the near term that would give us concern. We'll continue to update if we do see or hear anything.

William Quirk - Piper Jaffray

Got it, thank you.

Operator

Thank you. The next question comes from Shaun Rodriguez from Cowen & Company.

Shaun Rodriguez - Cowen & Company

Hi, guys. Thanks for taking the question. I guess just in thinking about the number of labs that are in the process in validating the blood culture assay but aren't up and running yet, is there a proportion that you view as particularly at risk as you go through your account by account review as you noted in the prepared remarks? Is there a number that you can provide or a proportion where you say they've been kind of stale for a while and that's an account there that we don't have the highest degree of confidence that they're ever going to get up and running?

Michael McGarrity

Shaun, I wouldn't point anything specific. We've set an expectation with our sales force that 90% of the customers they bring up, 90% or more will go through the validation, implementation, full utilization and purchase contract from a standpoint of retention that's designed to two things; obviously to drive the appropriate behavior and activity, to get customers through that as well as drive quality in the customer placement qualification process with the customers replacing and we see no reason to believe at this point that that's a bad assumption.

Shaun Rodriguez - Cowen & Company

Okay, thanks for that. And I guess another one just trying to understand the guidance lowering, just the different levers there. It sounds like you're comfortable in terms of the annualized utilization once the lab gets up and running. I think you said the 50,000 annualized rate you're comfortable with. Clearly you spent a lot of time talking about just the rate at which you're getting labs up and running is it the primary driver, but I guess the other variable I'd be curious in getting an update on is the expectation for the ramp in utilization once the lab is fully validated, they turn the lights on, how quickly are they getting up to a consistent utilization run rate?

Michael McGarrity

We believe our assumptions on the volumes average sell price and run rates untapped. We don't see a whole lot of variability in the ramp up. I would say a majority of them ramp up into pretty full utilization once they're ready to go live. We do see some that step and a step is usually related to a shift based step from a standpoint of they're going to validate or report out on their initial shift and not involve one or two – if they're running 24 hours, second or third shift in the validation process. So then there's a follow-up just training validation for that group and/or that they're reporting first to critical care and then they open it up to other areas of the hospital based on – usually paced by information technology, implementation reporting results. So I think there's probably a lag there that we've talked about, so maybe it takes a quarter or so. When a customer goes live on the utilization to believe they're in full utilization. So I think that that's probably a good indicator.

Shaun Rodriguez - Cowen & Company

Okay. And just lastly from me and I apologize if you already touched on this, but you noted a lot of early interest in enteric obviously ahead of the launch. But when you look at your existing U.S. microbiology lab customer base, is there a proportion that you're comfortable sharing just in terms of how many of them you think would at least be interested in evaluating enteric once it's launched or just any early really indications on more specifically the interest ahead of that launch?

Michael McGarrity

I would say the majority at this point. We feel like we have a good representation, a strong representation of our current customer base that is planning to adopt enteric in addition to an additional pipeline of customers that are awaiting enteric and we would even expect the reverse to happen where they may bring in that enteric first and then follow-on with the blood culture.

Shaun Rodriguez - Cowen & Company

Okay, thanks for taking the questions.

Operator

That's all the time we have for questions-and-answers. I will now hand the call over to Michael McGarrity for closing remarks.

Michael McGarrity

Thanks, Joanne. Thanks all for your time today. We look forward to reporting progress. I think that just last comment here as we believe we're dealing with the timing aspect of our business assumptions from how long it would take our customers and we're reporting that out, we're looking to drive it down and we believe we have – it's fundamentally a stronger business as we did coming into the quarter, going out of the quarter and we look forward to reporting on our efforts to bring down most timelines and drive the revenue ramps. So thanks for your interest and time and we'll look forward to reporting. Thank you, Joanne.

Operator

Thank you. This concludes today's presentation. Thank you for your participation on today's conference. You may now disconnect your lines. Have a good day.

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