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Executives

William P. Moffitt III - Chief Executive Officer

J. Roger Moody Jr. – Chief Financial Officer

Michael K. McGarrity - Chief Marketing Officer

Nanosphere, Inc. (NSPH) Q2 2010 Earnings Call August 5, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Nanosphere Incorporated Earnings Conference Call. My name is Kaleen and I’ll be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions).

As a reminder this conference is being recorded for replay purposes. Before this call begins, Nanosphere would like to state that certain statements made during this conference call which are not based on historical fact may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements.

Such factors include those described from time to time in Nanosphere's filings with the United States Securities and Exchange Commission. Please note that Nanosphere undertakes no duty to update this information.

I would now like turn the presentation over to your host for today’s conference to Mr. Bill Moffitt, CEO. Please proceed.

Bill Moffitt

Thank you, Kaleen. Good afternoon everyone and thanks for joining us for Nanosphere’s Investor conference call covering the second quarter of 2010. In a few moments I’ll turn the call over to Roger Moody, Chief Financial Officer and Mike McGarrity, Chief Marketing Officer. But first let me give you my perspective on our progress toward near term milestones that will drive growth over the next several quarters.

We continue to make good progress with all the programs that will provide the foundation for our goal of building a global molecular diagnostics company, with a primary focus on creating customer and shareholder value through menu expansion and greater functionality and applicability of our Verigene System.

As I review the progress we've made, there are three key points about our business that I want to make sure I deliver. First, we're making progress against our milestones for expanding the test menu for the Verigene System in the areas of infectious disease, human genetics, pharmacogenetics and protein assays. These tests will increase the applicability of the Verigene System and will generate increased utilization resulting in greater disposable cartridge volume.

Second, the tests that we have in development address critical market needs, ranging from faster, more accurate infectious disease assays to pharmacogenetic assays where testing at the point of care that enables timely and accurate therapy is becoming increasingly important.

And third, as we expand our test menu, the Verigene SP with its simplicity and sample to result operation will become even more applicable. This should fuel greater market penetration and increased utilization.

Now let me spend a few minutes providing an update on some key product development programs. In the pharmacogenetic market segment, we are about to file a PMA with the FDA for our 2C19 assay used to guide anti-platelet therapy using clopidogrel more commonly known by the brand name PLAVIX. In our pre-IDE discussions with the FDA, we learned that if we want approval for an intended use statement that links the assay to the dosing of clopidogrel the submission must be a PMA as the assay falls into the class III category, essentially acknowledging the increased risk of using an in vitro diagnostic assay to specifically guide drug selection and dosing. You'll recall the FDA re-labeled clopidogrel with a black box warning specifically calling out genetic mutations that affect an individual's ability to metabolize the drug to its active form. Approximately over 50% of the population depending upon ethnic background has one or more mutations that lead to inadequate metabolism of the drug, thereby significantly reducing the effectiveness of the drug. This reduced effectiveness of clopidogrel leads to a higher incidence of adverse events following both acute coronary syndrome and percutaneous coronary intervention such as stenting.

These complications include death from cardiovascular causes, myocardial infarction, stroke as well as stent thrombosis. There is a significant market interest in this assay as Mike McGarrity will review with you in a few moments. We expect to submit the PMA application to the FDA within this month.

In infectious diseases, we have commenced our FDA 510(k) clinical trials for an expanded respiratory virus panel. Once cleared this new respiratory panel will be the most comprehensive rapid panel on the market. The panel will contain Influenza A, Influenza B, RSV A and B and sub typing for seasonal H1, seasonal H3 and 2009 novel H1N1 or swine flu as it has become known.

This panel is also designed to include detection of viral mutations leading to oseltamivir resistance or commonly known by the brand name Tamiflu. We are working with the FDA to determine guidance for submission of this resistance marker. So we will proceed with clinical trials and submission of the panel withholding that marker until we have further clarifications on its inclusion.

Once cleared, this assay will offer costumers the ability to run a comprehensive flu assay, including sub-typing, in one test that will run on the easy to use sample to result Verigene SP system. We expect to file our 510(k) for this assay in the fourth quarter and we will be prepared to launch ahead of the flu season.

Also in infectious diseases, we're making great progress with development of a bloodstream infection assay. We expect to commence FDA regulatory trials for the gram positive panel about the end of the year. This product is designed to cut days off the time to identification of blood borne infections that can lead to sepsis.

We recently withdrew the 510(k) submission for our cardiac troponin assay. We plan to submit a new 510(k) application using a different predicate device. As you know, our original submission was based upon the Beckman AccuTnI assay and the potential for inconsistency as noted in Backman's regulatory filings has complicated our data and results analysis.

At the same time, we're taking the opportunity to migrate the assay to the Verigene SP, originally developed to run on the Verigene 1, moving the assay to the Verigene SP will allow our costumers to co-locate cardiac troponin testing and the 2C19 assay for clopidogrel metabolism using one common instrument platform. A number of costumers' have indicated the desire to run the 2C19 assay at the point of care. We also anticipate costumers willing to run the troponin assay in the stat lab [ph] that supports the emergency department.

At same time, our fast track clinical trial will reach conclusion of the follow-up phase at the end of the year. As you may recall, initial enrollment was concluded in December of 2009. We are anticipating using the fast track samples to run the clinical trials in support of our new 510(k) submission and believe we can commence these trails around the end of the year.

Before turning the call over to Mike and Roger let me briefly comment on our continuing intellectual property dispute with Eppendorf. You may recall that Eppendorf filed a lawsuit against us in 2009 alleging Infringement of certain of their intellectual property. While we are prepared to vigorously defend our position and believe we have a very strong case, we are currently in settlement discussions with Eppendorf. However let me caution that there can be no certainty we will reach a settlement agreement and we are prepared to continue to litigation process. Roger will discuss how this matter is reflected in our second quarter results shortly.

Now let me turn the call over to Mike McGarrity who will provide an update on our commercialization programs. Mike?

Mike McGarrity

Thanks Bill. While our placement rate remains relatively unchanged depending regulatory submissions, the commercial organization continues to build the pipeline of target customer awaiting our menu with passion in both infectious disease and pharmacogenetics. It is evidenced through our market development work that the area of microbiology affords us the ideal venue to position our Verigene SP with a verity of multiplex solutions.

The conversion from traditional gold standard culture methods as well as life sensitive rapid methods opens up the market opportunity for faster, more sensitive and multiplex panels to provide timely and clinically actionable results. This is supported in both of our respiratory efforts as well as and potentially even more uniquely in the area of bloodstream infection and enteric panels.

A recent abstract release from Ohio State University supported the value of these efforts from both a clinical and economic perspective. The study evaluated the clinical impact of staff orient blood culture test with infectious disease and found D intervention at a large academic medical center. It concluded the following; first, a significant difference was observed in critical patients in days to switch from broad spectrum to targeted therapy. Second, among patients who survived bacterimia the time to discharge was reduced by seven days from 20 to 13 in the tested population.

And third, a reduction in hospital cost during anabatic day's therapy was also observed. It is important to note that this outcome data resulted from testing for a single species target that counts for less than 20% of all positive blood cultures. Our multiplexed approach will allow for coverage of up to 95% of infectious targets significantly enhancing clinical and economic benefits across the entire healthcare system.

Similarly, our genetic and pharmacogenetics value propositions are gathering support to developing understanding of drug selection and dosing catalyzed by the Black Wax label to from post PCI play with emission. This warning said considerable data social outcomes is what our work with tier peer leaders thanks to three characteristics as drivers to acceptance and adoption.

But first is random access and rapid turnaround time to demanded in the acute setting. Second is the need for multiplexing throughout our expanding panels. And third it’s the simplicity of samplers result reported by modern complexity designation. We are experiencing is significant increase about our ability to deliver this clinically actionable test in a manner that will allow for compliance to the label change in the acute setting.

Finally we continue market development efforts in both Europe and Asia Pacific where we've engaged key thought leaders and leading institutions. All have a valued interest in our approach to deliver diagnostic value in the areas of infectious disease and pharmacogenetic. We look forward to advancing our install base and utilization through expanded menu in areas where we are best suited to provide clinically valuable and actionable diagnostics information.

Now let me turn over the call to Roger who'll review our financial result. Roger?

Roger Moody

Thank you, Mike. This afternoon I'll review Nanosphere's second quarter 2010 financial result which are accompanied by today's press release in 10-Q filing both of which are available on our website which I invite you to visit at www.nanosphere.us.

In the second quarter as noted by Bill and Mike we continue to focus on menu expansion which we believe is a key catalyst to driving future financial performance. Revenue from product sale during the second quarter was $0.3 million as compared to $0.2 million in the second quarter of 2009 and $0.4 million in first quarter of 2010. Second quarter product revenue was predominantly driven by cartridge sales which increased both sequentially and annually.

In addition revenue from grant and contracts was $0.2 million driven primarily by our pharmacogenetic assay development project with Eli Lilly. Total of second quarter 2010 revenue was $0.5 million compared to $0.4 million in the second quarter of 2009. Cost and operating expenses in the second quarter were $14.2 million as compared to $8.5 million in the prior year.

The year-over-year increase was primarily driven by a $3.5 million reserve taken for potential settlement of -- and litigation expenses related to the Eppendorf matter. Taking a reserve for the Eppendorf matter is consistent with GAAP. However as Bill stated this should not be interpreted as an agreed up on settlement. We may not reach a settlement agreement and we're prepared to continue the litigation.

Investment in research and development in the second quarter of 2010 was $4.6 million as compared to $4.4 million in the second quarter of 2009. This increases was driven by higher clinical trial material cost.

SG&A expenses in the second quarter of 2010 was $9.1 million versus $3.7 million in the same period last year. again, this increases was primarily driven by the reserve taken for potential settlement and litigation expenses related to the Eppendorf matter. Excluding litigation expenses and the reserve taken for the Eppendorf matter, our net loss in the second quarter of 2010 increased by $0.4 million over the same period in 2009. This normalized increase is attributable to non-cash stock compensation expense.

Cash used in operations was $8.1 million, debt repayment was $1.3 million and investing activity was $0.2 million, totaling $9.6 million of cash used during the second quarter of 2010.

Cash utilization was essentially flat compared to the previous quarter. Also our debt facility was fully repaid subsequent to the end of the second quarter. Cash of June 30, 2010 was $57.7 million. As previously reported we continue to project our cash reserves to fund operations for approximately two years.

Summing up, we plan to continue to focus our investments on product development as we further expand our test menu we will shift focused to ramping up field sales and service commence her up with demand.

Now let me turn the call back over to Bill.

Bill Moffitt

Thank you, Roger. Before moving on to take your questions, let me summarize our key points this afternoon. We continue to make good progress with all programs aimed our menu expansion and system functionality. These programs and results from customer value creation will drive growth in our business and increase shareholders value. We're excited about our prospects and the product offering we're building in microbiology, Virology, human genetics, pharmacogenetics and cardio vascular disease.

We are equally enthusiastic about the research programs ongoing in autoimmune disease, allergy testing and oncology. We believe increased value for our customers will lead to increased shareholders value.

Now we'd be happy to take your questions. And I'll turn the call back over to Kaleen.

Question-and-Answer Session

Operator

(Operator Instructions) There are no questions in the queue at this time. (Operator Instructions).

Bill Moffitt

Kaleen, if there are no questions, then we will conclude the call at this time. And thank everyone for joining us.

Operator

There are no conference in the queue at this time. Ladies and gentlemen thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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