NanoString Technologies, Inc. (NASDAQ:NSTG)
Q1 2014 Results Earnings Conference Call
May 07, 2014 04:30 PM ET
Lynn Pieper - Westwicke Partners
Brad Gray - President and CEO
Jim Johnson - Chief Financial Officer
Jordan McKinnie - J.P. Morgan
Elena Popova - Robert W. Baird
Good day, ladies and gentlemen, and welcome to the NanoString 2014 First Quarter Financial Results Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference call is being recorded. I would now like to turn the call over to Ms. Lynn Pieper. Ms. Pieper, you may begin.
Thank you. Earlier today, NanoString released financial results for the quarter ended March 31, 2014. If you have not received it’s news release or if you'd like to be added to the company's distribution list, please call Westwicke Partners at 415-202-5678.
Before we begin, let me remind you that the company's remarks include various forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including projections of future business growth and the factors underlying such growth, expectations regarding Prosigna's competitive profile and market acceptance, expected timing and availability of Prosigna testing services, the timing and nature of Prosigna reimbursement related decisions, plans for and timing of applications and decisions regarding inclusion of Prosigna in treatment guidelines and projected financial results for 2014.
Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond NanoString's control, including risks and uncertainties described from time to time in NanoString's SEC filings.
NanoString's results may differ materially from those projected on today's call. NanoString undertakes no obligation to publicly update any forward-looking statement. Additionally, non-GAAP financial measures will be referred to during today's call. A reconciliation of these non-GAAP measures is included in today's press release, which is available on the NanoString website.
With that, I'd like to turn the call over to Brad Gray, President and CEO of NanoString. Brad?
Thank you, Lynn. Good afternoon and thank you for joining us on our Q1 call. We are pleased to report strong first quarter results and we are up to a promising start in 2014, executing our strategy to become an integral part of cancer research and diagnostics.
I will start today’s call with an overview of our results and recent achievements and will then turn the call over to our CFO, Jim Johnson, who will provide an overview of our financial results and outlook for 2014.
After that, I'll come back and make concluding remarks and we will open up the call for your questions.
We began 2014 with significant momentum. Through strong commercial execution, we delivered a substantial installed base growth and have now passed the dual milestones of over 200 nCounter Analysis Systems installed worldwide and over 400 peer-reviewed publications generated by our customers.
In addition, we achieved key milestones with the launch of Prosigna Breast Cancer Assay testing services in the United States and the hiring of our U.S. Prosigna commercial team. We are pleased with our recent progress and optimistic about our prospect for future growth.
For the quarter, we delivered a total of $8.8 million in revenue, 54% growth over the same quarter a year ago. This growth was driven predominantly by new instrument placements, which increased instrument revenues to $3.4 million, up 110% compared with the prior year. We believe that this is the highest quality growth we can deliver, because expanding our installed base is a leading indicator of higher consumables and Prosigna kit revenue in the future.
I would like to highlight some important trends in our instrument sales. First, with the acceleration and instrument placement that need experience over the last two quarters, our installed base is now approximately 50% larger than it was a year ago.
Second, about half of our new instrument sales during the first quarter were in international markets reflecting investments that we have made over the past year in both direct and distributable channels outside North America.
Third, we're seeing strong demand for the recently launch FLEX configuration of our nCounter System. A dual mode version which upon installation can run all of our research assays and which can properly qualify clinical labs can be enable to run the Prosigna Breast Cancer Assay.
On a global basis, approximately 40% of our Q1 instrument placements were FLEX customers, which, underscores the synergy between our research and diagnostic efforts. We have found that the FLEX system appeal [bolster] clinical laboratory and traditional research customers to take comfort in knowing that the system has been part of an FDA clearance and value the option to begin Prosigna testing at some point in the future.
Finally, during the first quarter, the use of nCounter technology in cancer research and treatment for the substantial majority of our new instrument placements, we believe the importance of our technology in cancer is growing every quarter and we expect this trend to continue in the future to fortify our expanding product offering and the success of our oncology research customers in generating peer-reviewed publications.
For example, we recently launched a new PanCancer Pathways Panel, which offers researcher a simple and robust assay to investigate cancer biology across 770 different genes in all major cancer pathways.
Also, during the first quarter our research customers use nCounter technology published twice as many peer-reviewed papers in the field of oncology and during the same period in 2013. In April, at the AAPR Annual Meeting at San Diego, our customer presented at least 23 studies incorporating nCounter data helping to drive record volumes of NanoString's news booth traffic and new sales lead at that important meeting.
The importance of cancer in the market was also evident in our consumable revenue, which during Q1 grew 29%, nearly $12.8 million maintaining our annualized consumable pull through at approximately $100,000 per system. The strongest driver of consumable growth was demand from biopharma customers who use nCounter technology primarily for cancer biomarker discovery and validation.
During the first quarter, our biopharma customers drove over 40% of our consumable revenue. We believe that this trend is a testament to the robustness of our technology and that our successful penetration in the biopharma market may lead over time to opportunities to collaborate and develop in continued diagnostics. Meanwhile we further strengthened our offerings to clinical labs with the full commercial launch of our nCounter elements chemistry which includes our element concept and element master kits.
nCounter elements are general purpose regents develop specifically to meet the needs of translational researchers and clinical labs allowing them to independently develop custom multiplex assays by combining nCounter elements with oligonucleotide that they have selected and sourced from another manufacturer.
Response to the launch of element has been enthusiastic, with substantial customer interest and developing assays to detect gene expression copy number variations and gene fusions. Long standing customers who have previously published papers describing nCounter-based gene expression signatures have recently demonstrated excellent correlation between their original work based on our standard [footprint] chemistry and the same signatures implemented using our new elements chemistry.
One clinical lab has used elements to develop an assay to detect copy number variations in cancer and have submitted the assay for approval by the New York States Department of Health. Meanwhile in response to customer interest in developing assays to detect gene fusions, we’ve initiated an R&D program to further improve the performance development for this application.
Continuing on our impact in clinical diagnostics let me now turn to Prosigna. For the first quarter, we reported Prosigna kit revenue of $61,000, in line with our previous commentary that we expect new Prosigna testing volume to be relatively slow in the first two to three quarters of the year and so ramp gradually as more clinical lab providers come on line, our sales team begins to educate physicians and we begin to gain reimbursement.
During the first quarter, we continued to grow our installed base for Prosigna enabled nCounter systems. As of today on a worldwide basis, a total of 19 clinical labs have ordered nCounter diagnostic analysis system with expressed intent to offer Prosigna testing services. So far six of these labs have launched Prosigna with another 13 labs worldwide currently preparing to do so.
Outside the U.S., we continue to lay the foundation for board long term adoption of Prosigna. We currently have four active ex-U.S. Prosigna testing service providers with six more ex-U.S. clinical labs currently preparing for launch.
During the first quarter, two systems were ordered by clinical labs outside the U.S. one each in Canada and Spain. As we announced yesterday, Prosigna was recently clear for sale by Canadian health authorities and we expect Prosigna testing service to be available in Canada later this year.
Focusing on the U.S., during the first quarter two clinical labs launched Prosigna testing services LabCorp in January and ARUP in March. Both of these labs have made Prosigna a key part of their breast cancer testing menu and a focus with their sales training and print advertising.
Currently a total of seven more U.S. clinical labs are preparing to launch Prosigna. These include Quest Diagnostics, the three cancer centers we previously announced and three additional U.S. clinical labs that we launched Prosigna enabled nCounter systems during Q1. One of these new systems is going to Genoptix Medical Lab, a part of Novartis that has become the fourth U.S. commercial lab with nationwide reach to enter into an agreement to begin marketing Prosigna testing services.
The other two Prosigna enabled nCounters ordered during the first quarter are one of the large U.S. hospital systems planning to begin offering Prosigna testing services later this year. The most important commercial development during the first quarter will be establishment and training of our new U.S. Prosigna sales and market access teams. As of now, we have fully hired and deployed our initial team of 15 field based Prosigna sales reps and five market access professionals. We're extremely pleased with the talented individuals we have been able to attract.
Every member of the team brings extensive experience in oncology at an average of about 15 years of relevant experience. The sales team became active in the first week of April, following several weeks of training and have already engaged with oncologists at many leading cancer centers and physician networks. We expect to begin to see their impacts in the quarters ahead.
For members of the market access team who are dedicated to win a reimbursement from U.S. payers bring a particularly impressive track record of successfully gain a coverage and reimbursement from oncology therapeutics. They have collectively launched more than a dozen oncology products including CONTROLIPs, rituxan and (inaudible) and have already delivered some important progress with Prosigna. In February, we were notified that Prosigna identified both a unique and McKesson Z Code and a unique MAAA CPT code.
In March, we have submitted a technology assessment application with the MolDx program and are currently awaiting feedback from the Palmetto team. We continue to be optimistic that we could receive a positive coverage decision by as early as Q3 2014. In addition, since providing a few weeks ago our market access team has had multiple communications in face-to-face meetings with decision makers from top 10 private payers and we believe that most of these payers are beginning to review their coverage policies with respect to Prosigna.
We're pleased with the level of engagement, but also realistic about the fact that these payers typically require many months to make coverage decisions.
Meanwhile, the body of literature that will our support reimbursement and guideline inclusion has expanded to a total of six peer reviewed publications. Two newspapers describing the performance of Prosigna were published during the first quarter. The first was published in the journal Clinical Cancer Research in February and described the late recurrence results from the ABCSG-8 study. The second newspaper was published online in the journal BMC Cancer in March that described a multi side analytical validation of Prosigna. Taking together these papers from a substantial body of evidence and we feel good about the strength of our applications from inclusion in the (inaudible) and guideline and for reimbursement.
We continue to study the potential for Prosigna to approve clinical decisions in the treatment of breast cancer. Our collaborators are currently taking two additional manuscripts for peer review and at the upcoming ASCO meeting in June we will present at least one oral presentation and three posters.
In summary, we've achieved a great deal in a short period of time, the nCounter platform is being rapidly adopted in both research and clinical lab settings. And we are aggressively growing our installed based.
The development and launch of the Prosigna Assay demonstrates the power of our business model to potentially translate the discoveries of our research customers and the high value in future diagnostics. With these pieces now in place we are executing our strategy while looking for even more opportunities to leverage and validate our platform.
I'd now like to hand it over to Jim Johnson.
Thanks Brad. First I will review for the first quarter and I'll provide some detail on our recent $45 million term loan transaction. Finally, I'll review our financial guidance for 2014. Total revenue for the first quarter of 2014 was $8.8 million, up 54% over the $5.7 million reported a year ago in first quarter of 2013.
Instrument revenue was the largest driver of year-over-year growth, increasing by 110% to $3.4 million. Consumable revenue was $4.8 million for the first quarter, up 29% from $3.7 million for the first quarter of 2013. Prosigna test kit revenue was modest as expect at $61,000 for the quarter.
Gross margin for the quarter was 51% compared to 49% in year earlier. Product mix had a significant impact on this comparison, as instrument revenue increased from 29% to 39% of total revenues between the two periods.
The shift in mix partially offset the consumables margin improvement we continue to generate through increased scale and related cost efficiencies.
R&D expense was $4.7 million, up 55% over the first quarter of 2013, this increase reflects increased investment in the advancement of our nCounter technology, (inaudible) related to the design and engineering of our benchtop system.
SG&A expense was $10.7 million for the quarter, up substantially from $6.1 million a year ago. The increase reflects Prosigna launch costs, including the establishment of our oncology salesforce, investments to expand and drive revenue growth from our existing Lab base sale channel and increased cost of becoming a public company.
Operating expense for the quarter included $1 million of stock compensation expense compared to $231,000 a year earlier.
For your reference, we've included a schedule of non-GAAP financial information in our press release, which among other things, shows our operating results, as if all pre-IPO preferred stock has been didn't converted to common stock.
On a non-GAAP basis, our net loss for the quarter was $9.5 million or $0.56 per share compared to $5.7 million or $0.62 per share in the first quarter of 2013. Please refer to that schedule for detailed reconciliation of GAAP and non-GAAP results.
During the first quarter we completed a follow-on offering which brought in $57 million of net proceeds. And we ended the quarter with $85.8 million in cash investments. In early April, we entered into a term loan agreement with Capital Royalty which provides the company with up to $45 million of available borrowing capacity.
In April we drew the first $20 million on this facility, which we used to pay off our previously outstanding term loans. We’re required to draw another $10 million within six months. And then subject to meeting 12 months revenue target, we have the option to draw up to $15 million more no later in the second quarter of 2015. We believe this facility provides us with added strategic flexibility in coming year.
In the second quarter upon pay-off of our existing term loan, we incurred a prepayment premium about 2% prepaid the $990,000 in the term payment and wrote-offs some other related deferred costs. The related charge to interest expense in Q2 will be approximately $1.4 million in total.
Now I’ll review our financial guidance for 2014. We continue to expect total revenue of $45 million to $50 million for the year, which represents approximately 43% to 59% growth over 2013. We’ve not changed our overall gross margin guidance of 55% to 58%. However based on our actual results for Q1 and our current expectations for revenue mix over the remainder of the year, we would expect our gross margin to fall near the low-end of the previously provided range.
For operating expenses we continue to expect the total of $70 million to $75 million for the year support approximately one-third to R&D and two-third to SG&A including approximately $4 million to $5 million of stock-based compensation as for the year, which has been increased by $1 million versus our pervious guidance due to a higher underline stock price. Our operating loss for the year is still expected to be in the range of $40 million to $50 million.
As a result of the Q2 charge related to our term loan refinancing, interest expense is now expected to be approximately $4 million for the full year and our expectation for capital expenditures remain to $3 million to $4 million for the year.
With that I will turn it back over to Brad to wrap up.
Thanks Jim. We are off to a slow start in 2014. We are aggressively growing our installed base of nCounter Systems in both research and clinical labs worldwide. The strong inputs in our two new FLEX system is validating our strategy of combining cancer research and diagnostics on a single platform provided by a single company.
Our customers are making an important discovery in the field of oncology and those discoveries have been rapidly translated in the clinical diagnostics. Finally, with our Prosigna commercial team now in place and are growing with the clinical lab partners, we believe we are well positioned to execute and succeed in the launch about Prosigna breast cancer assay.
We look forward to updating you on our progress in future calls. We now like to open up the lines for questions.
Thank you. (Operator Instructions) Our first question is from Tycho Peterson with JPMorgan. Your line is open.
Jordan McKinnie - J.P. Morgan
Hi, this is Jordon McKinnie on for Tycho. I was wondering can you give us a sense of what you’re expecting for cadence in operating expense for the rest of the year. I mean it looks like you came in a lot better than our estimates in terms of SG&A and R&D for the quarter, so I’m just wondering how expect that to ramp?
Sure. It is expected to ramp up toward over the course of the year. I think if you look at the first quarter, a lot of the hiring for our commercial organization occurred in the phase of second half of Q1. We mentioned, we have them all hired and trained by the end of the quarter, so I think that that will got some ramp in subsequent quarter this year.
I think also really our R&D expense, while we would expect as we continue the work on the Gen 3 system and also increase the clinical activity rate of the Prosigna, I think you expect that increase over the course of the year as well.
Jordan McKinnie - J.P. Morgan
Okay. And then do you have any updates on the reimbursement front in Europe?
This is Brad. Reimbursement in Europe is expected to be the gating item for growth over the next couple of years. We are (inaudible) have been to a partner with the local testing providers leading oncologist and major cancer centers to conduct particular impact studies to demonstrate the health that (inaudible) in local market and then together to use that information to advocate the endorsement.
We have particular impact study that have -- and completed in Spain, one that’s active in Germany and we intend to start one more in another European country later this year. Those are naturally leading to reimbursement dialogues, but we don’t have any substantial update on reimbursement at this time. Most of the current testing volume that’s performed in Europe is based on private banks.
Jordan McKinnie - J.P. Morgan
Got it, okay. And then just real quick, could you talk about competitive dynamics and your expectations for pricing pressure going forward?
Sure. So I will maybe just to clarify, which of our product lines are you thinking of? Are thinking of the instruments and consumables or Prosigna?
Jordan McKinnie - J.P. Morgan
I was thinking more on instruments?
Sure. Well, I would say the competitive dynamics have not change substantially, we are usually competing with other technology providers who are looking to win with the multiplex gene expression market for customers who are looking to upgrade from singleplex quantitative PCR to a pathway based approach to biology. Most often we're competing with provider of (inaudible) quantitative PCR systems.
And I think the product offering in that space had not changed materially to-date. Obviously RNA sequencing represents an alternative to multiplex gene expression that we're watching closely. We have not seen a substantial improvement of RNA sequencing into our marketplace yet so that’s something we’ll keep our eye on.
Jordan McKinnie - J.P. Morgan
Thank you. And our next question is from Dan Leonard with Leerink. Your line is open.
Hey guys, this is Justin and thank you. So, just in terms of the placement I think you said 40% of the instrument placements were the FLEX systems this quarter. Question is, do you have a sense of how many of those are using or do you plan to use the Prosigna assay?
Yes, thanks Justin. So, the FLEX systems that we placed this quarter, we think about half of those are immediately become Prosigna enabled systems and began offering Prosigna testing services in the relatively near term and the other half of the FLEX systems, I think the investigators were either looking to have what they believe to be the most robust instrument offering we have, both to preserve the option to potentially offer Prosigna in the future.
Okay. And there was a mix between the U.S. and Europe right, in terms of those placements?
Yes, it was.
Okay. And just to make sure, I'm tracking this, it sounds like you had some customers in the U.S., some new clinical lab customers, including Genoptix, three other labs to large hospital systems. Are they included in that count or is that different?
So, first just a point of clarification, prior to this call we had announce a total of six diagnostic systems placements in the United States, the three large clinical lab ARUP, Quest and LabCorp and then three cancer centers. During the first quarter, in addition to those, we placed three additional systems. So, we took order I should say for three additional systems, one from Genoptix and two from large hospitals.
If you are trying to track the number, there may be a slight challenge, when I talked about those three systems, they were ordered for systems, not all of which were actually placed and recognized as revenue during the quarter. In fact one of them was a reagent rental system.
Understand, thank you for the clarification. And then how are things going over in Europe in terms of the studies you have underway. I think one in Spain is going to wrap up soon and Germany, it sounds like enrollment went pretty well there. And do you have any others underway as well or?
No, so we have -- we completed the Spanish decision impact study, we completed enrollment for it. We will be analyzing the results and presenting them at a major meeting later this year. But German study continues to enroll at a pace that we expect enrollment to complete around the end of this year. And now that the Spanish study has wrapped up, we will be initiating another study elsewhere in Europe but that has not yet begun. But we’re happy overall with how these studies are going. We like both that they’re generating data we believe will be useful in reimbursement and they’re also giving the physicians in those regions exposure for the first time to Prosigna and what it’s like both the order of testing and then interpret results.
Okay, great. And then just last one in terms of the peer review studies, I think your target for the first half was 6, you hit that already. Is there anything else on the way we should be on a look for?
Well the two manuscripts that are working our way to peer review are unlikely to publish in the very near-term. So I think with the 6 peer reviewed papers now, we think we have a very robust body of revenues, as a reminder it’s really 4 papers on the clinical utility or the clinical validation studies trends at (inaudible) ABCSG-8, one on the analytical validation of the Prosigna and then one actually on the use of Prosigna in metastatic disease and we believe response to gemcitabine. That’s a very robust body of evidence and we think it’s all meaningful now We do have two other manuscripts that will be their way through peer review but those are probably going to come out in second half given the natural pacing of publication.
All right, sounds good. Thanks a lot.
Thank you. (Operator Instructions). Our next question is from Elena Popova with Robert W. Baird. Your line is open.
Elena Popova - Robert W. Baird
Hey, this is Elena covering for Jeff Elliott. And I was just wondering now that you have a approval in Canada, can you talk a little bit about the market opportunity there?
Sure, Canada, the market opportunity in Canada is like many ex-U.S. countries, we have to go out and do reimbursement. Reimbursement has already begun to be offered for the category assessment at the provincial level. So, there is reason to be hopeful that reimbursement will come on line in Canada faster than it has been and as expected to in other European countries.
In addition Canadian investigators and oncologists have a long history of PAM50. One of the investors of the PAM50 gene signature was at British Columbia Cancer Agency; several other leading oncologists in Canada have been investigators PAM50 studies in the past. So I’d say relatively speaking the PAM50 gene signature then underlies Prosigna is reasonably well-known in Canada. So that gives us some optimism about our ability to come and drive penetration.
Elena Popova - Robert W. Baird
Okay, great. Thanks. And then just one more from me. Are you still thinking about a late 2014 months for generation 3 or how is that progressing?
The benchtop instrument system program is continuing to progress on pace for the late 2014 launch.
Elena Popova - Robert W. Baird
Okay, thank you.
Thank you. And I am not showing any further questions at this time. Please proceed with any further remarks.
Well, thank you all for joining us today and your interest in NanoString. We look forward to speaking with you on future calls and at upcoming analyst events.
Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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