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Nanosphere, Inc. (NASDAQ:NSPH)

2013 Credit Suisse Healthcare Conference

November 13, 2013 02:30 PM ET

Executives

Roger Moody - Chief Financial Officer, VP - Finance & Administration, Treasurer, Secretary

Analysts

Jeremy Joseph - Credit Suisse

Jeremy Joseph - Credit Suisse

Good morning. Thanks for coming. I am Jeremy Joseph. I work on the Tools and Diagnostics team. And today we have Nanosphere, Roger Moody, the CFO.

And just some housekeeping. At noon we actually have two lunch panels. Track two, exchanges in the changing landscape. And track four, the dynamics of the biotech IPO market.

Roger Moody

Great, thanks Jeremy. It’s a pleasure to be here, I appreciate Credit Suisse giving us the opportunity to speak. I will be presenting, I am Roger Moody, CFO at Nanosphere. Before I get started I have some obligatory forward-looking statement disclaimer remarks that I need to call your attention to, which essentially says that anything I say that's not based in fact is subject to revision.

Nanosphere is a molecular diagnostics company. We are focused in the infectious disease space. We are leading the conversion of casting to molecular methods in the area of microbiology. We have a menu of tests that we believe are compelling to drive this conversion of molecular methods from traditional culture methods into the new wave of testing faster, testing less expensively and testing more accurately.

Our capabilities of our Verigene System make us uniquely suited to be able to get at these complex tests that microbiology is so desperate to test in a more rapid fashion for. The first area that we focus on in infectious disease are in the area of some critical disease states particularly sepsis. We’re the first to market with a grand positive test, which detects pathogens in the blood in a far more rapid fashion also more accurately than traditional method. Also there is a growing body of clinical evidence that shows that by testing more rapidly in the area of sepsis and these other infectious disease that one, we can treat patients better and drive better patient outcomes also save significant money for hospitals.

This clinical evidence is really driving growth in both our customer base, as well as in our [evidence]. Beyond this infectious disease opportunity we also have opportunities in the area of cancer, as well as immunology and eventually cardiovascular by using our ultra-sensitive protein capabilities which I will touch on a little bit later. And finally we have very clear path to profitability as we begin to really ramp up the top-line of this business.

The drivers that are enabling this conversion to molecular methods are two-fold. First, its decentralization being able to make it simple to test in a decentralized basis is critical, making hospitals able to test for these diseases in the hospital close to the patient is absolutely essential as opposed to sending these tests out to centralized labs.

The second driver here is being able to get a complex test. Through Q4 many companies have been able to simplify the testing, but they have been able to do it for single target test not for these complicated tests that requires answers to dozens of things rather than one thing at a time.

Nanosphere is uniquely positioned to be able to provide not only the sample to result, easy to perform testing in hospitals that can get all the way down to community-based hospitals, but also to be able to get at the complex tests that are absolutely necessary for dealing with detection of sepsis and enteric pathogens.

Our focus is in hospital-based laboratories. There are about 4,000 hospital-based laboratories in United States alone and that’s our primary focus. The testing system that we have could eventually be deployed in hospitals or in doctors’ offices or other clinical sites, but our first effort here and our first focus is getting this system placed in as many hospitals in the United States and outside the United States as possible.

I mentioned we have a growing and compelling test menu. It started with the respiratory virus test. We added to it last year a test for gram positive, which is 65% of the blood stream infections that lead to sepsis in patients. We also added a C difficile test. And this year we submitted to the FDA in September a test for gram negative which really rounds out the blood stream infection menu that we have. And then finally we have a test called enteric pathogens and that is viruses and bacteria in the gut that cause infections. We are in clinical trials currently and plan to submit this test to the FDA by the end of this year.

If you look at the value of these tests on a per customer basis, we expect that if you sum up the value, we have the potential to generate $280,000 per customer per year with this full menu of test. Now we don’t expect to have everyone of our customers use everyone of these tests. There are couple of tests in here that are variable such as the respiratory virus test which not only is competitive, but it also is very seasonal in terms of whether there will be high [food protons] each year. But if you take the core products where there is a serious differentiation where no other good social exist in the market today, our gram positive, our gram negative test and the enteric pathogen panel that’s coming to market next year that represents half of that $280,000. And therefore by next year we could envision seeing our customer base generating $140,000 per customer who are adopting those three tests.

Let’s talk about sepsis, as it’s the biggest catalyst driving our business right now. First of all it’s one of the biggest unmet medical needs in the healthcare system today. The costs outrageous, there are $15.4 billion we spend on sepsis in the United States alone. Second large problem is antibiotics stewardship. What this is, is the problem with the increasing resistance to antibiotics therapies. And the CDC actually just put out a landmark study or landmark report identifying how big of a problem this is and how rapidly it’s growing that the conclusion, four conclusions, one of them was that improved diagnostic testing was a critical way to deal with this rising problem.

And finally the mortality rate is huge with sepsis. If you are in the hospital, if there is 16.5% chance you will die, if you have sepsis. If you are in the ICU, it’s one and two, a 50% chance of death.

So what does it take to deal with this complex problem? First of all it takes better diagnostics and it starts with, you’re never answering one question, there are so many different pathogens that can be in the blood and many of these different pathogens come in different species some of which are resistance to certain antibiotics some are not. And so being able to perform a multiplex test, meaning testing for dozens of things on a single panel is absolutely critical.

Next, disease to be accurate, there is no way that a physician is going to change a patient’s therapy if there is a chance that that diagnostic test provides the wrong answer and either misses something or call something incorrectly. So the sensitivity and specificity of the test needs to be extremely high, at least 95% or greater.

It needs to be fast and easy to use. Time is of the essence for these patients. As you saw, the mortality rate is very high and the sooner these patients can get onto the appropriate antibiotic therapy, the more likely we are going to be able to save their lives. And it needs to be deployed in any hospital. Hospitals can’t wait to send this out to some centralized reference lab, it needs to be local.

So how are sepsis patients being treated today? It’s very complex and quite frankly it’s the same way they have been treated for decades. While there have been some new antibiotic therapies, the way in which we determine which therapy to give these patients really hasn’t changed much. In fact they start with drawing blood from the arm, they then went through a blood culture test which within 8 to 10 hours usually determines whether the patient actually has a blood stream infection or not.

At that point, they then go into a complicated series of some culturing and then susceptibility testing that takes two to three days. By that time this patient is usually either it’s too late to save this patient or this patient was saved through a series of broad spectrum antibiotics that are highly toxic and could cause other complications for that patient.

What Nanoshpere does is we cut that two to three day period it takes to identify the pathogen and the susceptibility. We cut that down to 2.5 hours that happens after the blood culture bottle goes positive providing a much, much better opportunity to save lives, to save time and to save money for the hospital and reduce this problem of antibiotic resistance.

So going back to the three problems that I talked about before, let’s talk about saving money. We just had a customer of ours run a study that they published in the journal of clinical microbiology. University of Florida Shands ran a study that determined, they actually got their patients with sepsis out of the hospital 21 days or actually 21.7 days earlier by using our test. That's a $61,000 savings per patient in this study, that's compelling against the cost of a test which is about $65, $75, it’s an obvious no [brain] to use this from economic perspective to the hospital.

Another study that was just published by actually a local hospital here in Phoenix, Banner Health, they actually have a number, I think several hospitals here in the Phoenix area, they actually did a study that said, how our physicians using this test versus what were they doing before hand? And what they determined was one they were able to accurately indentify the appropriate antibiotic therapy 40 hours earlier than they were able to using culture methods.

The second thing that's compelling is that after waiting the two to three days for the cultures to come back, they were only deescalating their patients off of these toxic blood spectrum antibiotics 35% of the time. They increased that to 90% of the time with the Verigene System. So that’s a huge, huge success story in this problem of antibiotic resistance of having too many people on antibiotics that are not necessary.

And then finally it saves lives. I talked about the one and two rate of patients dying in the ICU where rapid identification has shown to reduce that probability by 80%. So if your patient who has sepsis, you want it to be detected fast and get on the right therapy as quickly as possible.

Beyond these two recent studies we’ve had a number of key sites look at our system, run it and come to the same conclusion we have which is that analytically it is very, very accurate. And so here is the list of Cedars-Sinai, Cleveland Clinic, Froedtert Hospital, John Hopkins, OSU, UNC. This is a growing list of customers who when they bring our system in-house they compare it to reference methods and have determined that it’s highly analytically sensitive, as well as specific.

So what’s the next step for sepsis? Sepsis is a growing and compelling catalyst for us, but we see another one ahead and that’s in the area of enteric gastrointestinal disease. And this is either community-based or food poisoning. This is the bacteria and viruses in the gut. This is another huge problem for the healthcare system. There are $3.7 million emergency rooms visits in the United States as of 2010, 1.3 lead to in-patients where patients are being admitted. And it’s costing our healthcare systems $6 billion and $1.8 billion in in-patient stays.

So this is a huge financial problem as well. It’s a little bit different from sepsis. In that, today sepsis has a fairly good identification of in the traditional method, with enteric, the culture methods are not very good. So the labs who are performing the enteric testing, the culture methods are struggling with this. They spend 72 hours plating out the stool samples and 20% of the time they get the wrong answer. And so we think that this test is very compelling not only from being a large economic problem for hospitals, but it’s also a huge opportunity because the labs struggle with this, they have a shortage of techs and the last thing they want to do is [tie techs’] time up in doing a lot of this culturing of these stool samples.

We replaced that 72 hours with the 2.5 hour test that provide the sensitivity and specificity that is far better than the culture methods today. So we think this is going to be a very compelling test for us. As I mentioned earlier, we are submitting this test to the FDA sometime around the end of this year and we hope to have it in the market in the first half of 2014.

Beyond infectious disease, Nanosphere’s Verigene System is capable of testing for things well beyond nucleic acid. So everything we’ve been talking about today thus far has been in nucleic acid testing, testing for the DNA or RNA of the bugs or the viruses. We also can test for human DNA. And finally we can also test for protein. And we can test for proteins and nucleic acid on the same test which is something that we’re not aware of any other clinical applications that provides that capability.

What that allows us to do in the area of proteins is we can measure proteins at very low levels of concentration. We have very sensitive test in that area based on our gold nail particle approach and technology. It's given us an opportunity to prove that we can test for PSA for recurrent prostate cancer and look at the rise at very low levels for patients who have had their prostates removed. We've also had some early studies in Alzheimer’s and allergy as well.

But one area that's probably closest to commercialization is troponin. This is a protein that is unique to heart muscle tissue and spills into the blood when cells of the heart are dying. And we have some early studies that show that rising or elevated troponin level at very low levels is a risk indicator for cardiovascular disease. And that's the one that will probably have the first commercialization opportunity for us, although our core focus here again is infectious disease.

So how are we going to market? We have a direct sales force of about 20 sales people in the United States. We have distributors in Europe and Asia Pacific. We have Thermo Fisher in UK and Germany and Grifols in other parts of Europe. And in Japan we have Hitachi who we’re working with to get to the regulatory and reimbursement processes.

So our business is growing and it's growing predominantly based on our sepsis test. We're essentially doubling our customer base and our revenues on an annualized basis. And we hope and believe that this trajectory is going to accelerate as we expand our test menu with our enteric and our gram negative tests.

Let's turn to cost and how we're going to get this company to profitability. We have a very clear path to having a cost advantage in this market. And it starts with how do we drive our unit cost down of our cartridge. Recently our tests have cost us about $20 per unit. And the largest component of that cost was our substrate that was costing us about $9 per unit. We've recently gotten that cost down to 3.50, so that was a big jump already.

Plastic components are the next largest cost component of the cartridge. And we've been predominantly in single cavity count [mould]. We have been investing this year and next year we will continue to invest in increasing the cavity counts of our plastic moulding and that will drive the cost of our plastic components from about $6 down to under $4 sometime next year.

The next component after that is labor and overhead which is really driven down by increase in volume and absorption of both labor and overhead. And the reagents are not very expensive at all. So we have a very near-term path to get the cost down to about $10 or under and a long-term plan to get this cost down under $5 which has given the pricing that we have in United States of about $65 per test is a real opportunity to drive nice margins in this business.

As you can see, we are razor and razorblade business. The razor itself will probably the instrument, will probably never get much over 50% in margin. But the blades, the cartridges we see getting well into the 70% range driving the overall margins of this business at scale well up into the 70% range. When we move through breakeven in this business which is at about $75 million of revenue on an annualized basis, we see the overall margins being in the mid 50s.

So what do we see as being the long-term drivers for success in this business? One of the questions I get from a lot of investors is, there seem to be a lot of companies entering the molecular diagnostics space. There have been many companies that have been invested in and how do I sort all of you out, who is going to win in the end?

And so I think of it is being in four different categories. The first is ease of use, and I think we have a good handle on that with our Verigene SP System. We’ll continue to work on, continue on making improvements to our instrument, but we think that we currently have one of the easiest to use systems out there.

The next component is versatility and this is one where our proprietary technology really lends a hand. One in being able to perform high count multiplexing and testing for many things at one, but also being able to do, perform test that combine nucleic acids and proteins and can test quantitatively, as well as qualitatively.

The third element is performance and the performance that we've seen across our entire customer base has been stellar in terms of the bloodstream infection gram positive test. The trial we run on gram negative are very consistent with that and we would expect to see very high performance as well on our enteric test.

And finally and what I think will really be the key component for long-term success is economic value. And that being the low cost provider and being able to drive healthcare cost down overtime on a sustainable basis and as we went through some of the methods that we have to drive our product cost down, I think that we’re in a unique position to be that low cost provider overtime. As continued pressure exist in the market to lower the cost of providing diagnostic test. So with those four capabilities, we think we have a real opportunity to be the long-term success and long-term leader in molecular diagnostics testing.

That’s all I had for in prepared remarks. If there are any questions, I don’t know if we can take them here or there is a breakout room. Jeremy? Can you hear me?

Jeremy Joseph - Credit Suisse

Yeah. There is going to be Q&A in the breakout room for, but I guess I’ll just ask one since we have some time. Piggy banking off to your last slide about the competitive landscape, have you noticed any impact from some of these recent entrants?

Roger Moody

We have, I would say it’s probably too early to know what the long-term impact will be. When you look at bloodstream injection testing there really are two key players that I consider to be in the market today. It’s us and a company called BioFire that was recently acquired by bioMérieux. We think that we have a very good competitive position against BioFire and bioMérieux now. And that competitive position is based on the way we’ve designed the panel. And we’ve designed it in a way that gives the customer what they need. They can test for gram positive or can test for gram negative where with BioFire you have to test for all of it and pay twice as much which we think with the hospitals being under DRG and having fixed reimbursement that they don’t want to pay that much, in fact we see customers constantly telling us and we did a lot of research that they really want to pay for only the testing that they know is needed which is determined by this gram. So that’s one advantage, we think there are some other technological advantages as well. Thus far we feel comfortable in our position competing with them in that area. We really don’t see other competition near-term with sepsis. There probably will be some in the next couple of years.

A lot of people have asked me whether the MALDI, Mass Spec System from Bruker and bioMérieux is competitive? I really don’t think it is for several reasons primary reason being that it doesn’t provide resistance data. So it will tell you what pathogens in the blood, but what not, what drug it’s resistant to which is really the clinically actionable data that is necessary to save that patient. And so I don’t see that as being competitive. I also see bioMérieux buying BioFire because they have the MALDI as kind of evidence that they are complimentary more than they are competitive. In fact most of our customers or our larger customers have MALDI System.

Jeremy Joseph - Credit Suisse

Great. Well with that, we’ll take more questions in the breakout room number four.

Roger Moody

Thanks Jeremy.

Question-and-Answer Session

No Q&A session for this call.

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