Nanosphere's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Nanosphere, Inc. (NSPH)
by: SA Transcripts

Operator

Good morning and welcome to the Nanosphere’s Third Quarter 2013 financial results and corporate update call. Today’s conference is being recorded. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Paul Hunt [ph], Investor Relations, please go ahead sir.

Unidentified Company Representative

Thank you Michael and good morning and thank you for attending the Nanosphere Inc. third quarter financial results conference call. We appreciate your continued interest in the company. Today from Nanosphere are Michael McGarrity, President and Chief Executive Officer and Roger Moody, Chief Financial Officer.

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. Nanosphere cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated.

Among the factors that could cause our actual results to differ materially include but are 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 regulatory 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 other risk factors identified from time to time in our reports filed with the Securities and Exchange Commission.

Any forward-looking statements made on this conference call speak only as of today's date, Wednesday, November 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 at www.nanosphere.us. All participants on this call will be on listen-only mode. The call will be followed by a brief question and answer session.

I will now turn the call over to Michael McGarrity, President and Chief Executive Officer of Nanosphere.

Michael McGarrity

Thanks, Paul and Michael, and thank you for joining us for our Q3 2013 results call. As Paul mentioned 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 third quarter provided evidence of that progress which I would like to highlight. First we achieved 45 new customer placements up from 35 placements in Q2 and $2.4 million in revenue in the quarter. Our installed customer base continues to grow as those are new customer pipeline. It is important to note that our U.S. microbiology install base is now comprised of over 200 customers, the majority of which are running or in the process of validating our gram-positive blood culture test.

Second, we submitted our gram-negative blood culture assay to the FDA in Q3. We believe the performance of this assay will mere the best in class sensitivity and specificity as our gram-positive blood culture test. Additionally, we strengthened our balance sheet with our fully underwritten direct offering which netted proceeds of $27.8 million dollars. We’re confident that this will provide us the capital to not only reach positive cash flow but to continue investments in our commercial and strategic initiatives all focused on building our customer and revenue base.

Importantly we now visibility to significant leverage in our current customer base to accelerate our revenue growth. This is based on conformation through our customers running our gram-positive blood culture test of their intent to bring on the gram-negative assay when cleared by the FDA. In addition, a significant majority of our customers plan to bring our enteric panel when cleared.

Each of these developments in the quarter coupled with our single focus on execution in all operating disciplines within Nanosphere provide us with the confidence and conviction that we’re building a sustainable customer and revenue base.

Now, I would like to turn the call over to Roger to comment on our operational results.

Roger Moody

Thanks Mike. This morning I’ll summarize Nanosphere’s third quarter 2013 financial results. For additional information please refer to the related news release and 10-Q filings both available on our website www.nanosphere.us. As Mike noted we’re beginning to see some positive results in our infectious disease business. First, our customer base is growing with 45 new customer placements in Q3 bringing the total to 375 worldwide customer placements.

Second, we’re seeing a steady progression in the rate of customers converting to live clinical utilization of our blood culture gram-positive tests. Based on increasing trend and customers entering live utilization in the third quarter and expect continued acceleration in the fourth quarter.

And third, initial orders from customers that have converted into live utilization are consistent with our assumption of $50,000 per customer, per year. We’re encouraged by the initial signs of adoption and believe that added test to our infectious disease menu will help sustain our customer and revenue growth.

Now, let me turn to the third quarter results. Revenues were $2.4 million compared to $0.9 million in the third quarter of 2012 and $1.9 million in the second quarter of 2013. This growth was driven entirely by blood culture gram-positive test and instrument sales. Costs of product sales increased to $1.5 million in the third quarter of 2013 from $0.6 million in the third quarter of 2012 due to the increased volume.

Gross margins increased from 26% in the third quarter of 2012 to 38% in the third quarter of 2013 driven by greater revenue contribution from higher margin gram-positive blood culture tests as well as conversion to a lower cost substrate.

Turning to expenses, research and development expenses were $3.9 million in the third quarter of 2013 as compared to $4.6 million in the same period last year. This decrease was driven by reduced spending on development goods and materials as well as the capitalization of certain raw material inventory items that were previously expensed.

Selling, general and administrative expenses in the third quarter of 2013 were $6.1 million compared to $4.4 million in the third quarter last year. The increase in SG&A was due to expansion of the field sales and customer support teams as well as clinical trial expenses associated with test menu expansion.

Total operating expenses in the third quarter were $10 million as compared to $9 million in the third quarter of 2012. Net cash increased in the third quarter by $17.3 million due to financing activities of $27.3 million offset primarily by operating activities of $9.5 million. In September we completed a $27.8 million underwritten public offering to strengthen our balance sheet and provide the capital necessary to establish market leadership. We finished the quarter with $49.3 million in cash.

We reaffirm our 2013 guidance of $10 million to $11 million in revenue and 150 to 200 new customer placements. Summing up, we’re pleased to see initial signs of new customer placement and revenue growth. This momentum is driven by our customers’ recognition of the value of our expanding infectious disease menu.

Now let me turn the call back over to Mike.

Michael McGarrity

Thanks Roger. I would like to conclude with two compelling examples of the confirmed support and clear understanding of our ability to significantly improve the diagnosis and treatment of patients with critical and complex diseases.

In September the Centers for Disease control, issued a landmark report titled antibiotic resistance threats in the United States which outline the significant burden and threat of antibiotic resistant infections to human health. The report emphasizes key findings and actions to be taken. Of the findings within every year more than two million people in the U.S. get infections that are resistant to antibiotics during a significantly higher risk of disability and death. And that estimates of the total economic cost of antibiotic resistance infections in the U.S. are as high as $35 billion per year. Recommendation for action included improved antibiotic stewardship and appropriate targeted therapy and reduction of unnecessary use of critical last line therapies.

And finally, the call for development and utilization of new diagnostic tests to provide timely and clinically actionable information, trying to improve outcomes and reduced inappropriate antibiotic use. It is clear that these observations and recommendations point to exactly the value of our capabilities an immediate term menu provide.

Evidence of this value can be found in a recent publication in the Journal of clinical microbiology and a recent infectious disease week abstract, both from customers of ours that highlighted the outcomes based value of the Verigene gram-positive blood culture assay. Conclusions reached in these studies showed the following. The Verigene gram positive test provided 100% accuracy in the combined results of both studies. Results from the Verigene gram-positive tests were available on average of 42 hours for those of conventional methods. Time to administration of targeted therapy was reduced by 23 to 42 hours, mean houseful length of stay was reduced by 22 days and a cost savings of over $60,000 per patient.

100% of patients received appropriate therapy upon initial result generated by the Verigene system, and finally the capability of the Verigene to rule out infection due to contaminants was shown to save on both molecules and cost and lead to earlier discharge or avoidance of admission altogether.

We view each of these compelling findings as validation of our value proposition and collectively represent a significant advance in the diagnosis and treatment of life-threatening infections. Our entire organization is committed to execution to enhance medicine by reducing costs and improving patient outcomes.

Again, I would like to thank all of you for your interest and support of Nanosphere. We look forward to reporting on our continued progress toward delivering value to our customers, patients and shareholders and now I will turn the call back over to Michael for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Bill Quirk with Piper Jaffray.

William Quirk – Piper Jaffray

Great, thanks. Good morning everybody. So, first question from me Mike is, can you just talk about the overall competitive dynamic within the bloodstream infection market and we obviously have -- new competition in the form of maladie instruments one approved couple coming online here, and some other molecular companies waiting in the wings as well. Can you just talk about it, I guess, kind of what you are seeing out there and to what extent your competitors are potential looking at other systems can maybe help us think about your win rate, etcetera? Thank you.

Michael McGarrity

Sure Bill. Yes, I will comment on both aspects. I guess first starting on maladie, we have been in the market with maladie on a research basis for the past year since our initial launch, and I think what we have seen is demonstrated by our installed base is that we are, we believe were complimentary to maladie. Maladie is a good tool for a number of different applications, I think that what we see from our customers is that it validates the rapid identification of positive blood cultures but the challenge is it doesn't provide the clinically actionable aspect that our resistance results provide. So, what we have in a number of centers is that we are running alongside on maladie, I think, you can argue that's probably somewhat validated by the BMI association with BioFire even from a standpoint of the applications from all the adjunctive and parallel probably to a rapid identification and resistance for targeted therapy and leading to that as far as additional competitive dynamics in the market, we continue to see a number of -- key things. Number one, our performance of our task in our customer's hands mirrors the data that I just highlighted from the two studies from the standpoint of accuracy, both sensitivity and specificity.

We believe that holds up well, competitively in the marketplace. I think secondly, we continue to see the design of our panel in our approach to surprising fit well with what our customers need and view from the way they are going to run and apply the test from competitive dynamics standpoint and we also believe that our pipeline is showing that it's continuing to build going out over the next few quarters with our gram-negative and enteric panel and that our install base has that leverage I pointed to the with the intention of our customers to bring out gram-negative and enteric when available. So while we accept and respect, the competitors coming into the marketplace, we think there is and additionally some market development and support efforts for building the value proposition associated with this and a significant market opportunity out there and we are confident with our competitive position.

William Quirk – Piper Jaffray

Very good and then Mike obviously talked about getting the gram-negative filing into FDA and maybe said it and I missed but can you just remember, remind us, excuse me, where we are timing for enteric? Thanks.

Michael McGarrity

Yes. Our plan is, to submit the enteric to the FDA in December and we have visibility to that from where we are with our clinical studies inspection.

William Quirk – Piper Jaffray

Perfect. Great, thanks guys.

Operator

We’ll go next to Shaun Rodriguez with Cowen and Company.

Shaun Rodriguez – Cowen & Company

Hi, good morning guys. Thanks for taking the question. So first on the install based, I think you mentioned that you are now over 200 U.S. micro lab. So, if you could be more specific on the number actively validating or number that actually gone live or positive?

Michael McGarrity

Yes, Shaun, we have an 188 U.S. blood culture customers and we have 83 of those that are currently live and we are seeing a good, I guess we have visibility to the expected acceleration that we plan to see in both customers going live, as well as to Rogers point, the utilization and protected revenue assumptions for each of these customers and we are continuing efforts with our sales and support organization in the field to continue to not only drive customers to live but to bring that timeline in and as we get better visibility to that we will share that with you. But we are very encouraged by the progress we are making that I think that a couple of the studies that I highlighted really helps advance that enterprise sale that we are pushing from the standpoint of additional constituents within the decision-making process particularly pharmacy and the power that those -- that data brings, particularly hat it's one run on our instrument. And again, I keep pointing back to the key aspect of performance with the 100% sensitivity, specificity and 100% of those patients getting the correct therapy when analyzed retrospectively based on the Verigene result.

Shaun Rodriguez – Cowen & Company

Okay. That's helpful and so you seem to be signaling positive trends in the gram-positive implementation process. I think in the queue this morning, it said, you saw implementation times in six to eight months or pretty similar to first half levels. Are you are noting that you saw some positive trends on this, over the course of the quarter and to this quarter in Q4?

Michael McGarrity

Again, I am going to say that we anticipated acceleration is what we saw it's early to point to the trend that says that rate is decelerating. But we have every effort and expectation under way and currently that we will be to contract that time line.

Shaun Rodriguez – Cowen & Company

Okay and actually another one from the queue. You note in there a respiratory pathogen, expanded analyze in development. It wasn't listed in the comparable table last quarter. So let's hope that you could talk about that, that pipeline program and eventually time line associated with it.

Michael McGarrity

Yes Shaun, we have lived two assays in development parallel one is our respiratory expanded panel and our used fungal panel for the blood culture and we are in the process of development that we are not yet projecting a submission or launch timeline that we will expect 2014 to be good estimates for both those tests. And the respiratory panel allows for us, select customer to select the expanded panel or subsets of the panel, which are our software allows for.

Shaun Rodriguez – Cowen & Company

That's interesting. Okay, and then lastly, SG&A jumped about a million sequentially, Roger, you called out that build over commercial team as well as clinical trials. So can you just help us, I guess just think about that line over the next well, say for this quarter Q4 but also moving forward is obviously some of the heavier clinical trial related expenses should presumably be coming down?

Roger Moody

Sure, a majority of that change was driven by the expansion of the field sales and customer support organization. There was a little bit of contribution from clinical trial activity. However that wasn’t as large going forward in the very near term, I wouldn't expect a substantial change as we go into next year, we will continue to build our sales or field sales force that's the menu expand and then that's what we will drive the future increase in SG&A, you are right that maybe in the first half of next year, clinical trials will reduce a bit, but I think that will be more than offset as we continue to expand the sales force.

Shaun Rodriguez – Cowen & Company

Okay. Thanks guys.

Operator

And we will go next to Bill Bonello with Craig-Hallum

Bill Bonello – Craig-Hallum

Hi Ray, just a couple follow-up clarifying questions. First just want to make sure I understand sort of how the blood culture editions are working. I think last quarter you talked about having a 150 blood culture customers and so if you added 45, was not everybody added a blood culture customer or was that kind of a round number you gave last quarter or maybe factored in Europe or something, just want to make sure I am tracking right?

Michael McGarrity

Yes Bill, there is a price and plus or minus and they are based on respiratory season. We have some customers that are running respiratory only we have some additional customers, that will bring it up, albeit not, not a significant portion of our installed base, our CLSA and we believe that the majority of those will also bring up the blood culture. Some of them are prioritized in respiratory based on the season and are doing some of their justification for blood culture upfront and parallel their RV, using validation. So there is probably, always going to be a little bit about plus or minus there but we like the over 200 U.S. microbiology base and the greater 188 blood culture and as we look out it's really important, I want to point back to the leverage that we see in that current installed base to provide that revenue acceleration. If you think about $50,000 for our gram-positive blood culture and assuming the majority of those will bring up the gram-negative as well as our understanding and consistent validation of the interest not only from that base of customers in the enteric, but also the expanded pipeline we have for enteric provides pretty straight forward and good visibility and that's the leverage we get for our revenue standpoint.

Bill Bonello – Craig-Hallum

Okay and then, just when I think about customers going live and I think, you been talking about some acceleration, maybe it was 40 or so customers that kind of live during the quarter based and what you had to say last quarter. Is that kind of a pace that makes sense to think of or we sort of at a bullish in the pipeline where we could start to see that becoming 50, 60, 70 customers, kind of going live in a given quarter?

Michael McGarrity

I think my answer to that question would be yes and yes, Bill. I think for right now, what you are assuming and assessing is correct with the – about the 40 number, but if our efforts to accelerate continue that could increase, I am just not putting that in the projection until we see it. But every effort field is focused on exactly that.

Bill Bonello – Craig-Hallum

Okay. And then, just one last question, it was an interesting disclosure in the queue that may be doesn't mean anything but you talked about the consulting agreement with Jean Cartwright and I think language was to assist in evaluating and reformulating the company’s strategic and operating plans, is that, I mean, is that just sort of consulting observations or is there something more significant going on there?

Michael McGarrity

No, I wouldn't read too much into that Bill, Jean joined our board earlier this summer and has quite a bit of experience in building diagnostics businesses and he had the time available to help us as we go through our planning cycle, and so he is, we have taken advantage of that time, but I wouldn't read more into it.

Bill Bonello – Craig-Hallum

Okay. Thanks

Operator

And we go next to Chris Lewis with ROTH Capital Partners.

Chris Lewis – ROTH Capital Partners

Hi guys, thanks for taking the questions. First of you mentioned the study improvement in the customers converting to large utilization here. Also can you just talk a bit more on the extended those improvements you have seen. Where are those improvements coming from at this point and then in the last quarter, I think you mentioned the validation and implementation stages was taken about eight months. So did you see improvements for those levels in the third quarter and or do you think that can get to as we look out into the next four quarters?

Michael McGarrity

Yes, the first part Chris, I think that what we are seeing is a better approach or more effective approach based on our experience as well as the data that we have now by our sales organization to be able to go in and sell the complete value proposition across the constituents and ask, are they are going to get involved and I think there are couple things are happening there, the bulk of which are positive is that we are getting that process going earlier, even in some cases before the actual placement. That’s not to say that we are holding off placements that we get further in sale cycle, but our reps are naturally are targeting and approaching the right groups upfront.

Secondly, the data that we now have to go to the pharmacy and to microbial stewardship the hospital infection control people and infection disease vaccine and provide them with data that points not only be accuracy but the value of actual, current patient population that are brought up to test are really leading to just a better sales approach. I think the second aspect of that as we have now established annually validation resource that covers every aspect experiential with the exact examples from other customers is to all the different aspects of the process to validate and implement, including results reporting pharmacy reporting as well as a what we call the blueprint which with the reps work with the customers and all the aspects that can hold up the implementation and the back side that has nothing really to do clinical adoption it can be IT integration or results. I think the comprehensive approach there is why we feel confident in our ability to continue to bring customers live. Again I would say until we see that materially contract that is my timeline we are not going to report that's going to happen although again every expectations of putting in the organization is that that will happen.

Chris Lewis – ROTH Capital Partners

Okay and then with the gram-negative submission and the enteric submission at the end of the year here, can you remind us what the expectations are for those two panels in terms of revenue per year and then how do you expect those implementation processes for current customers to add those tests to compare to adopting the gram-positive assay both in terms of time and I guess just overall integration process?

Michael McGarrity

Yes Chris, we do feel good that our blended time to implementation live will decrease for the reason that you just asked that the majority of our customers that have validated or in the process of validating our live with our gram-positive blood culture trying to bring up the gram-negative and we do anticipate a much more straight forward process for validation and time to live because that will be – they have already excepted and implemented all the critical aspects of changing the standard the way that they treat these patients and the gram-negative will be a straight forward metric comparison which will mirror more traditional laboratory validation timelines. I think for the enteric, we believe and we want to get some experience as well but we have reason to believe based on our discussions with our customers and our planning for their validations that that will be more of a laboratory based validation. Again more of a method comparison and while we will require an understanding as to how they are going to process and report results for enteric school samples that we – it would be reasonable to assume that those won’t take as long as the gram-positive but again we will build that and report.

The first part of your question as far as the revenue assumptions is what we are feeling positive about it. Our assumptions are that the gram-positive customers will be $50,000 in revenue per year that the gram-negative will be approximately $40,000 and the enteric will be $50,000 per year conservatively with some upside. So with our current customer base, you would see that revenue per customer potentially increased from $50,000 per year to $140,000 per year with our current installed base.

Chris Lewis – ROTH Capital Partners

And do you find any other customers potentially delaying the adoption of gram-positive now as they wait for those two panels to be available?

Michael McGarrity

Yes, we have a kind of a permutation of customers in our pipeline those that are waiting to bring up the assay based on approvals that they need to have prior to bringing in a new platform that they have planned on based on our value proposition. Second would be, customers that are waiting for the gram-negative is clear and then they will bring both in and the third will be the customers that are actually enteric is the catalyst for getting a system in from a justification standpoint and then they plan to additionally validate the blood culture assays. So that’s the view we get of our pipeline that gives us good visibility to how the customers base builds.

Chris Lewis – ROTH Capital Partners

Okay and if I can just take one more in, Roger what percent of the sales the system placed during the quarter or cash sales and how should we think about that percentage training for placements going forward? Thanks.

Roger Moody

Sure. I am going to break it just for the quarter because I think it's too early and it's not something we segment but we have seen a consistent trend over the year that about a third of the systems have been reagent than we were about two third of them have been either cash sales or leased which will play cash sales to us. As I think we have discussed in the past, we would have expected that number of reagent rentals moving forward may increase particularly as we expand the menu.

Chris Lewis – ROTH Capital Partners

Okay. Thanks for the time.

Operator

And we’ll go next Jeff Frelick with Canaccord.

Jeff Frelick – Canaccord

Yes, good morning folks. Mike do you think the market is maybe significantly more receptive to molecular testing for sepsis that was a year ago? I guess I am going I am kind of asking it – is the selling process evolving more to a competitive sale largely may that transition in the mindset to move molecular or it's still educational?

Michael McGarrity

Yes, that's a great question Jeff. I think we are kind of crossing that transition from conceptual early adopters into more of a market awareness based planning and implementation. You will be attending the association from molecular pathology meeting next week and I think it's kind of palpable, the awareness and that was kind of my comment that’s paying competition as a positive but there is some market development and market awareness building that’s occurring that we do see that as we go into customers. I think we also get some more solicited interest from the field for customers reaching out to us based on our current customer base sharing their experiences as well they be in a territory with a local microbiology meeting or based on our publications, if you look at the journal clinical microbiology publication from Shane and Jacksonville, it's really, we believe pretty powerful and compelling illustration of the practical value of implementing versus not just the high level better patient care, but the economic and therapeutic value. So we think we are moving in that we are transitioning from that conceptual to more of a practical value base sale.

Jeff Frelick – Canaccord

Okay and if you look at the customers who been running the ground positive test now for about a year, how long does it to take for them to hit that 50,000 a year run rate, does it take two months, two quarters, just curious on that?

Michael McGarrity

What we have been seeing Jeff is that when customers come up, they come up with their full population of blood culture test. There are some customers that phased in through certain department like the ICU first. But the majority of our customers when they come up, they start ordering based on their projected volume of positive, gram-positive blood cultures, and so we haven't seen a kind of phase in time. Sometimes it takes a quarter or month or two to get the order patterns down. But there hasn't been any phase in as you described.

Jeff Frelick – Canaccord

Okay, last question is, I think New York State has a big sepsis campaign for 2013. Just curious, have you seen much activity in your business or other states following suit?

Roger Moody

No. Jeff, we are aware that and we are actually having conversations with a number of groups around the country that are initiating sepsis initiatives and actually working with some of the – I guess the steering committees and publishing committees of the guidelines related to those and I think there is good exposure to the value and that's really where our data comes in because to engage those people and get a really good actionable follow-up requires data, not just on the potential value, but the actual rotation value which we are now be able to provide and it's the entire sepsis approach that they are taking. So, one thing it's important to notice, they are really looking at systemic inflammatory response syndrome, which involves biomarkers as well as therapeutic and diagnostic test. And we think, as we look out that there is some opportunity for us to participate there from a standpoint of our protein detection and capabilities because the number of those biomarkers are protein based inflammatory markers. So, we are engaged in a number of different levels and across number of different spectrums in that process, we plan to stay really close to those groups. In New York, specifically, I can't point to anything that is right now an immediate action, but we are engaged with them over time.

Jeff Frelick – Canaccord

Okay. Thanks folks.

Operator

And we will go next to Brandon Couillard with Jefferies.

Brandon Couillard – Jefferies

Hi, good morning. Understanding maybe a little early in the season, but can you give us a sense of how you see the current blue season shaping up and what percentage of your installed base are existing RBP users?

Roger Moody

Brandon, it's probably early, I think that we may get a better sense as we go out to amp but I think even there, it's a lot of protection from the standpoint. We normally look at the CDC for their updates. And we haven't seen a meaningful rise there in the early southern hemisphere projection was for, I think below average. So we are not anticipating, we are not building into our plan significant respiratory and we don't break out the exact respiratory numbers but I think if you think about a 25% number, I think it's the way we look going forward as we would expect with our current panel for about 20%, 25% of our customers to bring up our respiratory. It's important to note to the earlier question that a number of them are waiting on our expanded panel and we think competitively that provides some flexibility for customers that actually run two different platforms or systems in the laboratory, one for shorter panel for influence and another for more expanded potentially inpatient or any compromise patient population and our unique ability to provide flexibility based on the software selection to run a subset of those panels, we think it's a good opportunity for us to position that assay and obviously we will provide more visibility to that as we go into 2014.

Brandon Couillard – Jefferies

Thanks and then Mike with by prior to coming under the umbrella of the larger well-capitalized parent. How does that inform or influence your sense of urgency around investment priorities, either in the pipeline or commercially if at all?

Michael McGarrity

Yes, Brandon, I guess, I can't find any immediate change in our plan of execution or a strategy based on that, we are focused on accelerating and we know that menu development is the catalyst to our customer placements and that execution in our commercial organization of the catalyst to revenue and we are focused on both of those that hasn't changed on an anticipated changing, it's probably a little bit early for us to really be able to assess any dynamic that the acquisition has provided in the market but we will obviously be able to update as we go forward there.

Brandon Couillard – Jefferies

Thanks and then last one, Roger, gross margins, and from encouraging sequential improvement. Can you give us an update on the progress in terms of the manufacturing cost reductions which we should anticipate in terms of progress there over the next couple of quarters?

Roger Moody

Sure, as you know, there are several different projects we have underway to drive product cost down. The most substantial one today that we have move forward on is our internal substrate capability where we have been able to drive down the largest, what used to be the largest cost component of our cartridge. The largest project that we have currently underway that will start to see benefits for a - from in 2014 is going to hire a cavitations for the plastic moldings for the plastic parts which are now the largest cost component of the cartridge. We also have some additional projects that are in the development plan for next year that will probably start to see benefits for as we move in either the later part of 2014 and 2015 and they revealed more with reagents.

Brandon Couillard – Jefferies

Great, thank you.

Operator

And we will take a follow-up question from Shaun Rodriguez with Cowen & Company.

Shaun Rodriguez – Cowen & Company

Hi, thanks guys. Just actually a follow-up on point of Brandon there. So, on the sequential revenue ramp implied and getting into guidance range. Obviously, a lot of the discussion today is on the trend, variable to get there, you said, you are not expecting much on flu but just to be clear, you are saying that flu dynamics aren't really a key variable or a risk for you to get the guidance?

Michael McGarrity

Yes, Shaun. We are not depending on a significant full season to reach our guidance we have a plan of execution based on no relics in the respiratory market to the season. Obviously, if you look at Q1 that's where we saw the significant uptake in respiratory last year and the blood culture build is really seen in Q3 because this quarter we did not see any for respiratory revenue at all.

Shaun Rodriguez – Cowen & Company

Thanks guys.

Operator

And it appears that there are no further questions at this time. Mr. McGarrity I would like to turn the conference back to you for any additional or closing remarks.

Michael McGarrity

Yes Michael, no real comments, I would like to just reiterate, we appreciate this for -- the questions and the interest and we look forward to reporting continued progress as we go forward. Thanks for your interest. Michael, that's it.

Operator

Thank you very much and ladies and gentlemen that does conclude today’s conference we thank you for your participation.

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