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NanoString Technologies (NASDAQ:NSTG)

Q2 2014 Results Earnings Conference Call

August 5, 2014, 04:30 PM ET

Executives

Jim DeNike - Senior Director, Corporate Communications and IR

Brad Gray - President and CEO

Jim Johnson - CFO

Analysts

Tycho Peterson - JPMorgan

Dan Leonard - Leerink

Jeff Elliott - Robert W. Baird

Operator

Good day, ladies and gentlemen, and welcome to the NanoString 2014 Second Quarter Financial Results Conference 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 conference over to you host Mr. DeNike, Senior Director of Corporate Communications and Investor Relations. Mr. DeNike, you may begin.

Jim DeNike

Thank you, Bridget. I am delighted to have recently joined the NanoString team and look forward to working with our analysts, investors and stockholders.

On the call with me today is Brad Gray, President and CEO and Jim Johnson, our CFO.

Earlier today, we released financial results for the second quarter ended June 30, 2014 and a copy of the press release can be found on our website at nanostring.com.

During this call, we will make a number of statements that are forward-looking, including statements that are financial projections, existing and future collaboration, future business growth and related factors and our actions with regulators and third party payors and any related decision and the development and status of additional product offerings.

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today's call. We undertake no obligation to publicly update any forward-looking statement.

So as I turn things over to Brad, I should mention that he is fighting and stomach flu and thank you in advance for you understanding during the rest of the call. So Brad if you are ready?

Brad Gray

Thanks Jim. Even I am feeling pretty rough today reporting our solid Q2 results, the great motivation to get me up and out of bed. Good afternoon and thank you for joining us on our Q2 call.

We're pleased to report strong second quarter results with important progress across all aspects of our business. We sustained our recent momentum with a third straight quarter of greater than 50% year-on-year revenue growth, delivering a record revenue of $10.9 million. [indiscernible] the Companion Diagnostic Collaboration with Celgene providing our first foray into what we believe is an exciting area of growth.

Finally we continue to make important progress in our ongoing launch of our Prosigna Breast Cancer Assay. On the call today, I will review our continued execution of each of these core areas, our focus; Jim Johnson will summarize our financial performance and guidance and then we will invite your questions.

Our first core area of focus is instruments and consumables, which have been the primary drivers of our recent revenue growth. During the second quarter we continue to add those research and clinical lab customers and now have a world-wide install base of approximately 220 nCounter Analysis Systems.

During the same period, our customers use nCounter to generate peer-reviewed research articles at a pace of approximately five papers per week recently reaching the milestone of 500 peer-reviewed publications.

Total revenues generated from instrument sales during the second quarter were $3.8 million, up 49% compared to the prior year and we maintained a number of positive trends consistent with our prior several quarters. First, penetration of international markets continued with approximately half of the new systems being placed outside of North America.

Second, oncology continues to be a primary driver of nCounter instrument sales accounting for approximately 80% of the new system placements. Third, the popularity of the dual [new] FLEX configuration of our nCounter Dx Analysis System continued as approximately 50% of our Q2 instrument placements were for this configuration validating our strategy of combining cancer research and diagnostics on a single platform.

In an encouraging new development during the second quarter, a record number of our customers purchased additional nCounter Prep Station. Customer feedback indicates that the primary motivation for having an nCounter with two prep stations is increased throughput for larger projects. Therefore, we believe that this could be a positive leading indicator of future growth in consumable sales.

The second quarter was very strong for consumable with annualized pull through well above $100,000 per system, resulting in record consumable revenue of $5.9 million, an increase of 36% over the prior year; consumable sales academic customer surge during the second quarter, driven in part by coordinated purchases from nCounter users collaborating across multiple laboratories.

Our biopharma customers continue to account for a disproportionate fraction of our consumable sales contributing approximately 30% during Q2.

Our new PanCancer Pathways Panel was launched in April that made a meaningful contribution to consumable growth during the quarter and has been the most successful new gene expression power launch in our history. This panel offers research of simple and robust assay to investigate biology across 770 different genes in all major cancer pathways.

More recently we've achieved two important milestones in our continued expansion into clinical laboratories via our nCounter Elements Reagents. First in July, the [indiscernible] Medicine at Roswell Park Cancer Institute announced approval by the New York State Department of Health of its OmniSeq Target assay.

This assay uses our technology to detect copy number variation in cancer and is the first U.S. laboratory developed test to incorporate nCounter Elements. We will participate in the commercialization of this assay, both through sales and elements reagents and through commercial uses for those reagents.

Second, in response to growing customer interest in using elements for detecting cancer gene fusion, we've introduced an enhancement that allows us to provide highly automated and specific alternatives to Fluorescent in situ hybridization or FISH assays, which we believe represent a market today of approximately $200 million.

Our new universal junction design is based on technology driven license from Harvard University and was launched under an early assay program at the AACC meeting last week.

Overall, we remain optimistic about the potential for our nCounter Elements chemistry, Prosigna Breast Cancer Assay and FLEX systems to penetrate the clinical laboratory market.

We continue to invest in innovative new products and applications as well. We have been receiving enthusiastic customer interest and the potential use of our nCounter technology and protein expression, which was described in the January publication in the journal Science Translational Medicine.

We are currently engaging in early assets research collaboration with a select group of leading companies and antibody manufacturing diagnostics and biopharmaceuticals to refine the techniques described in the original paper and [indiscernible] rate the power of the platform before potentially making approaching application more broadly available in 2015.

Development of our next generation nCounter system, which will be targeted at the more price sensitive research market is progressing well. We received our first batch of manufacture and prototypes and are currently optimizing the software. So far, we like the performance that we see.

Following a recent review of the development timelines and seasonal dynamics, we've decided the target that we'll launch of the new system for the first half of 2015. This timing allows us to put the new system through the appropriate testing, while avoiding potential disruption through a mid quarter launch.

Meanwhile commitments to our nCounter technology for leading cancer researchers are driving our strong instrument and consumer revenue growth today and we believe that this will create a steady stream of potential future diagnostic products.

Our research customers have already discovered and published over 25 unique oncology gene signatures, several of which have the potential to sort patients by tumor subtype and thereby match them to drugs.

This leads me to our second core area of focus and a new and important new avenue for our growth, Companion Diagnostic. In June, we announced that we had entered into a Companion Diagnostics collaboration with Celgene that perfectly illustrates the value of this new market.

NanoString research customers associated with lymphoma and leukemia molecular profiling project noted in the field as the LLMPP, published a paper in the journal Blood, describing the development and validation of a 20 gene expression signature with subtypes diffuse large B-cell lymphoma or DLBCL using our nCounter analysis system.

This new DLBCL signature copy attention of both NanoString and several drug developers and we quickly secure license to the relevant intellectual property and entered the collaboration with Celgene.

Under our agreement with Celgene, we will support the development of Revlimid for the treatment of DLBCL by developing an in vitro diagnostic kit that will be in use to a lot of patients in our phase II study of Revlimid for the treatment of a specific subtype of DLBCL.

We believe that having a broadly adopted global gold standard test to identify the subtypes of DLBCL is important to delivering the best care to patients.

The structure of the collaboration has some unique features and we believe demonstrates an attractive model for future companion diagnostic collaborations. The development of the IDB assay has been fully funded by Celgene via a $5.75 million upfront payment, plus up to $17 million in development and regulatory milestones.

Also Celgene is committed to commercial support that will ensure NanoString to participate in a reasonable portion of the commercial value created assuming the clinical trial is successful.

In addition, we have retained the flexibility to independently developing commercialized additional indications for the assay including potential partnerships with other companies developing drugs to treat the DLBCL.

We are currently engaged in discussions with five other biopharma companies regarding how we can use the same IDB assay to support development of other therapeutics for DLBCL. We believe that over time Companion Diagnostic partnerships will become a meaningful growth driver for NanoString.

There are several factors that make NanoString a compelling partner for development of multi-analyzed Companion Diagnostic areas. First, our nCounter analysis system has already become a central part of the biomarker discovery and validation efforts at many of the major biomarker companies so they are familiar and comfortable with our technology.

Second, our nCounter system has already been part of a successful FDA regulatory clearance, which we believe both reduces regulatory risk and demonstrates our clinical and regulatory capabilities.

Third, our strategy of decentralizing oncology testing into labs all over the world is perfectly matched to the global nature of oncology therapeutic products and resonates strongly with biopharma companies.

Our third area of core focus is the Prosigna Breast Cancer Assay, our first in vitro diagnostic product. During the second quarter, we continued to make important progress in a number of key areas of the Prosigna launch. Sales of our Prosigna assay in the second quarter were $181,000, up from $61,000 in the first quarter.

This growth is consistent with our previous commentary that we expect the U.S. Prosigna testing volume will be relatively slow in the first two to three quarters of the year and to ramp gradually as more clinical lab providers come online, our sales team begins to educate ordering physicians and we begin to gain reimbursement.

During the second quarter, we made progress on all three of these dimensions of the commercial launch as well as achieving important milestones outside the United States. Focusing on the U.S., we probably have five labs actively offering Prosigna services, including large commercial lab, LabCorp, ARUP and Genoptix and hospital systems, UPMC and Providence Health Care.

Another six labs are currently preparing to launch Prosigna, including new additions, Thomas Jefferson University and Core Diagnostics in Palo Alto. Our oncology sales team is now fully deployed and focus their effort during the second quarter on performing strong and productive working partnerships with their counterparts at LabCorp and introducing Prosigna to oncology practices.

We estimate that since the beginning of April, we reached over 300 oncology practices with over 2200 sales calls, including over 100 joint sales calls with LabCorp. We were encouraged by the physician interest that these efforts have generated.

However, many oncologists are not willing to prescribe [test] (ph) if there is a risk their patient will be billed for is. In order to facilitate access among eligible patients whose insurance does not yet cover Prosigna as well as to cover eligible patients who are uninsured, we want to mid July, a Prosigna patient support program.

Clinical labs participating in the program and eligible to receive free Prosigna kits to replace any kits used in providing Prosigna test not covered by insurance for qualified patients enrolled in the program and who meet certain income criteria.

This program is expected to facilitate access to Prosigna for patients who not otherwise afford the test, accelerating the uptake of Prosigna and generate a steady volume of insurance claims that will help motivate payors to update relevant coverage policies.

As reimbursement comes online, we expect to covert physician interest in Prosigna in the testing orders. Our market access team is working diligently to remove the reimbursement barriers. They are actively engaged with all of the top 10 private payers and we are pleased with the team's access and level of engagement. We look forward to additional progress with these payers in the coming months.

Despite some considerable progress in many areas we expect that some payers will be more challenging to convert. For example, like approximately 75% of new diagnostic technologies evaluated over the past few years Prosigna was initially determined by the Blue Cross, Blue Shield Technology Evaluation Center or TEC to not meet its criteria for inclusion.

We plan to continue our dialogue with the TEC while simultaneously engage indirectly with individual's plans, which can make coverage decisions independent of the TEC's conclusions.

On the Medicare front, during the second quarter, two Medicare Administrative Contractors or MACs, which together cover more than eight million lives has indicated their intent to process claims for the Prosigna test.

Because these carriers do not publish medical policies related to breast cancer testing, we'll be looking forward to confirming their coverage as claims are paid in the months ahead. Securing Medicare reimbursement through Palmetto's MolDx program remains a focus for the team. Since submitting our application in March, we held several meetings with the MolDx team.

In June, the MolDx team released on our website updated guidance documents on our Clinical Test Evaluation Process or CTEP. As a result of these new guidelines in late June the MolDx team requested that we modify our applications, to address the new guidelines and respond to questions raised during their initial review.

Based on our most recent interactions, we believe that the MolDx coverage determination and what if any additional information we will need to provide in connection with our application will be strongly influenced by the updates to the NCCN guidelines expected later this year. We do not expect MolDx to make a coverage determination until sometime after the NCCN guidelines update.

We submitted a request for NCCN Breast Cancer treatment guidelines during the second quarter. Our request was supported by a strong body of evidence including our FDA clear label and fix peer review paper prescribing Prosigna's performance.

The submission process for NCCN inclusion is somewhat different from other submission as there is no addition opportunity for interaction once the request has been submitted.

We understand that the guidelines can really net during July, but we do not expect to receive any feedback from the committee until the guidelines are made public. The exact timing of the NCCN guideline update varies from year-to-year, but typically occurs between September and December.

During the second quarter, we continued to make to steadily lay a foundation for broad long-term adoption of the Prosigna outside the United States of the United States. The number of labs outside the U.S. planning to provide Prosigna testing has continued to grow and is increased to a total of 13. As of today six of these labs are actively providing Prosigna testing.

We are currently focused on cultivating local physician champions for Prosigna and pursuing a private payer market, while in parallel applying for government reimbursement. In Spain, we have received positive reimbursement decisions from government payers and in the Catalonia and Madrid regions.

Well, we have recently submitted our application for public reimbursement in Germany. Meanwhile, our German decision impact study continues to steadily enroll patients and then expected to complete by the end of the year.

We also continue to pursue regulatory approvals to extend Prosigna into new markets. I'm pleased to report that we have recently received market approval from the Australian Therapeutic Goods Administration, clearing the way to market Prosigna in Australia.

And if you ask we have submitted to the FDA an application that would expand our U.S. Prosigna label and patient reports to include risk avoid recurrence, which may help inform the use of extended adjuvant therapy.

Finally, we continue to strengthen the already compelling body of evidence for Prosigna. We have recently learned that another paper describing Prosigna's ability to asses of late recurrence has been accepted for publication in a major oncology journal. Overall, we're pleased with our momentum on multiple fronts and are optimistic about our continued growth.

I would now like the call to turn -- turn the call over to Jim Johnson for our review of our financial results and financial guidance.

Jim Johnson

Thanks Brad. From a financial perspective, the company had another strong quarter. Total revenue for the second quarter of 2014 was $10.9 million, up 51% over the $7.2 million reported for the second quarter of 2013.

Instrument revenue for the quarter was up 49% compared to Q2 2013. And consumable revenue was the largest driver of growth. At $5.9 million it was up 36% from $4.3 million for the second quarter of last year. Prosigna test kit revenue was modest as expected at $181,000 for the quarter, and up roughly three-fold from the first quarter of this year.

The proportion of our product and service revenue from outside North America continues to grow, driven by our expanding install base and 28% in the second quarter of last year to 34% this quarter.

In the second quarter we began recording revenue from the Celgene collaboration. Although we received $5.75 million upfront, and we have the potential to receive additional milestones by the end of this year, the amount we will record as revenue in 2014 is much less.

The accounting rules require us to recognize revenue over the projected five-year development period and a rate proportional for the cost that we incurred, not when the cash is received. As a result, a substantial portion of the cash we'll receive in 2014 is deferred and will be recorded as revenue in future years. For the second quarter collaboration revenue was $618,000.

Gross margin for the quarter was 53% compared to 51% in the second quarter of last year. We calculate gross margin based on product and service revenues only. In other words, we exclude collaboration revenue from the calculation.

Product mix was relatively similar between the two periods and have little impact on the comparison. Gross margin improvement we're seeing is generally from increased scale and related cost efficiencies in our consumables manufacturing operation.

R&D expense was $5.3 million, up 45% over second quarter of 2013. And the increase reflects increased investment in the advancement of our nCounter technology, including the engineering of our next generation system as well as cost related to the Celgene collaboration

SG&A expense was $12.9 million for the quarter, up substantially from $6.7 million a year ago. The increase reflects Prosigna launch costs, including the establishment of our oncology sales force, investments to expand and drive revenue growth from our lab-base sale channel and the increased cost of becoming a public company.

Operating expense for the quarter included $1.3 million of stock-based compensation expense compared to $257,000 a year earlier.

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 $18 million of term loans.

In doing so, we incurred a prepayment premium of approximately 2%. We prepaid the $990,000 in the term payment and wrote-off other related deferred costs. The resulting charge to interest expense in the second quarter was approximately $1.4 million in total.

Note that 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 have been converted to common stock.

On the non-GAAP basis our net loss for the quarter was $10.5 million or $0.58 per share, compared to $6 million or $0.65 per share in the second quarter of 2013. Please refer to that schedule for detailed reconciliation of GAAP and non-GAAP results.

We ended the second quarter with approximately $80 million of cash and investments. And together with additional borrowing capacity of up to $25 million under our new term loan agreement, we believe the company is well positioned to carry out its business plan.

Now I’ll review our financial guidance for 2014. We continue to drive the total revenue of $45 million to $50 million for the year, which represents approximately 43% to 59% growth over 2013. Based on our current visibility, we are tracking towards the midpoint of this range. In modeling for the second half of the year there's several factors that should be considered.

In our base business we expect to see our normal seasonal pattern with relatively stronger performance in the fourth quarter compared to the third quarter. In the reasons that Brad discussed related to reimbursement, Prosigna revenue is likely to be only modestly higher in Q3 compared to Q2.

And the Celgene collaboration work is going extremely well, and we now expect to be near the high end of the range of guidance we previously provided for the year for $2.5 million. But the majority in this revenue is expected in the fourth quarter due to the climbing of milestone payments that we increased the amount potentially recognizable as revenue.

Based on these revenue expectations and the related impact on product mix and our actual gross margin in the first half of the year, we are adjusting our gross margin guidance to 52% to 55% from the previous 55% to 58% for the full year.

For operating expenses, we continue to expect the total of $70 million to $75 million for the year to support approximately one-third to R&D and two-third to SG&A, including approximately $4 million to $5 million of stock-based compensation expense.

Our operating loss for the year is still expected to be in the range of $40 million to $50 million. We continue to expect interest expense to be approximately $4 million for the full year. And our expectation for capital expenditures is remained at $3 million to $4 million for the year.

So with that I'll turn it over to Brad to wrap up.

Brad Gray

Thanks Jim. Our momentum increased through the second quarter as we continue to execute our strategy to become an integral part of cancer research and diagnostics. We are rapidly growing our install base of nCounter Systems in both research and clinical labs, as the interest in our dual use FLEX systems and our elements chemistry validate our strategy of combining cancer research and diagnostics on a single platform provided by a single company.

The additional convenient diagnostic partnerships puts us at the nexus of cancer researchers, drug developers and treating physicians and represents a substantial new access of growth. Our Prosigna commercial team is having its first wins and we expect momentum to build as reimbursement comes online in quarters ahead.

We look forward to updating our progress during future calls. I would now like to open the line for questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) Thank you. Our first question is from Tycho Peterson with JPMorgan. Your line is open.

Tycho Peterson - JPMorgan

Thanks guys. First on Celgene, just wondering, you know, you've talked in the initial press release about additional indications. So can you maybe talk whether you've had a discussion for added indications beyond DLBCL? Also how quickly could you partner the original product with other companies? And then, what's the pipeline for additional diagnostic collaborations like the one you have with Celgene?

Brad Gray

Great. So starting first with the DLBCL update that we're in the process of developing for Celgene, I think there's a substantial interest from other developers of therapeutics for DLBCL today. Those -- that interest will take some time to convert into additional collaborations.

But really, as soon as the assay is available for use, hypothetically we could begin working on enrollment of the different study or the retrospective analysis of samples that we're collecting in previous studies. So, in terms of our relevant milestones I would expect that time that we hit that point in time around the end of this year. So that's I think the timeframe for some of those DLBCL discussions.

The relationship with Celgene is going extremely well. And I think part of our motivation for working in such a top two-tier biopharmaceutical company was the opportunity to grow that relationship over time. And while there's nothing specific to discuss, my expectation is that we will always explore those opportunities at Celgene. And hope that we will expand our relationship over the long term.

In terms of the pipeline of additional campaign diagnostic work you know there's several different sources of potential diagnostics. And we have a team that's already focused on understanding them. One is from our biopharmaceutical companies' customers themselves. About 20% of all of our research systems are placed in biopharma and the objective of the scientists using them is generally to determine panels of biomarkers that could predict response of the drug they are developing. So that's one great source that we intend to mine.

The other which is more similar to what we did in the DLBCL case is, of course, identifying some great work from our academic research customers that's captured the imagination both of NanoString and drug companies. And that's a greatest work, and as I mentioned during this script, they have now 25 gene expression based oncology aspect that are being published and more that have it.

And then finally, Prosigna and future diagnostics we're developing for DLBCL our products that are in development and obviously they represent very interesting avenues to support drug development and breast cancer and DLBCL respectively. So there's a number of different sources potential for paying diagnostic content, all of which will currently you're evaluating.

Tycho Peterson - JPMorgan

And then you mentioned in your comment the PanCancer Panel launch, obviously we saw the DAs butter the congress this week. Can you maybe just talk a little bit about how you think this may play out in particular for PanCancer Panel?

Brad Gray

Sure. So the PanCancer Panel is a researchers' only product. It is not intended for use as a clinical asset. In fact we had an impression or facts that suggested that one of our research customers was redeploying it as a clinical asset; we would stop selling the asset to them. And it's really designed to be a research tool that comprehensively probes the biology of cancer, helping identify which pathways are important so that those pathways can then be explored more deeply. So I do not expect the FDA LDT guidance to impact that PanCancer Pathways product at all.

Obviously, the regulation of lab developed tests by the FDA brings good things and bad things for the company like NanoString. On the positive side, as a provider of a platform that's FDA cleared and with favorability for clinical development and regulatory submissions, we're well positioned to manage, to bring new test to market in a world where the FDA makes it more difficult from LDT to come along. So I think that's fundamentally good for our business.

Obviously, with our push of FLEX and nCounter elements [indiscernible] develop cash back to moving it in the opposite direction. But net-net, I think additional regulation is more likely to be good for NanoString in that.

Tycho Peterson - JPMorgan

And then last one on the model. Just, you know, the reduction in the gross margin guidance, just so we're clear, I mean that's really a catch up from the first half because we're thinking about the Celgene coming in at 100% margin or so later this year. So why wouldn't that maybe offset.

And then the comments on the MAC; are you agree? You said there's an agreement to process claims versus the push out of the [indiscernible], but there's adding the MACs are actually going to be paying claims. So for the back half of the year if you could just comment on both of those that'd be helpful.

Jim Johnson

Okay, Tycho, this is Jim. Why don't I start with the question about the gross margin? There's several factors that impact our gross margin that are difficult to predict and they vary from quarter-to-quarter. Mix is probably the most significant between instruments and some of those include Prosigna kits.

Geographic mix also comes into play. And then even within our consumable products the mix amongst those various types of consumables. So yeah, obviously, we now know how the first six months have played out. We can make better predictions about how those things are going to impact the second half of the year.

Now, you've mentioned specifically the Celgene revenue, but when calculating our gross margin that we're guiding to and that we reported in our comment, we don't include the Celgene revenue in that. It's basically those product and service revenues. So you're right. I mean you can look at the Celgene revenue of 100% margin type revenue, but truthfully if we try to figure out what the cost of that revenue is, there's some amount in our research and development expenses relate to that.

So from an accounting and reporting perspective, we've been told that we should keep that separate. And so, you're right. If you included that we'll probably not too far away from what our original margin guidance was. But under the kind of the pure standards of the accounting rules we were reducing the range to 52% to 55%.

But over the long term, I think the trends that we expect to drive higher margins I'm still aware we still expect to increase in scale and some of the new products that we plan to introduce over the next few years that the long-term trend for higher margin is still intact.

Tycho Peterson - JPMorgan

Okay. And then just lastly on the MACs, I mean you mentioned they are agree to process claims, you also talked about the push out, out of the [multi-Ex] (ph) decision. So just to clarify, you're expecting these claims to be paid in the back half of the year.

Brad Gray

It will depend on the geographic regions, Tycho. So the -- maybe there's a number of Medicare carriers around the country were engaging them all including the MACs, our MolDx program. The two, what I'll call wins, that reach both in Q2 that I described we're not on [indiscernible] they were other Medicare carriers with smaller numbers of covered lives.

But that is a positive step forward because patients who are tested in those regions we believe will now have their claims processed by their Medicare carriers. And we were in Beijing meeting the other carries with also we looking good, both of wins, more of those wins.

The MolDx decision, it covers geographically North Carolina as well as California, which is a very important geography for us because that's the location of LabCorp's Central Ave in North Carolina in Quest Diagnostics central lives in California. And so that’s the single most meaningful Medicare carrier decision. And that's why we've highlighted it repeatedly in our page two, page three. That's obviously going a little slower than we expected it to based on the changes in the detailed guidance that you put out in July.

Tycho Peterson - JPMorgan

Okay. Thank you.

Jim Johnson

Thank you, thank you.

Operator

Thank you. And our next question is from Dan Leonard with Leerink. Your line is open.

Dan Leonard - Leerink

Just one quick one. On the Prosigna patient support program how do you envision that rolling out? Is that something that your partners are going to actively advertize? And do you think this is something that can help bridge the gap between where we are today in getting reimbursement for Prosigna?

Brad Gray

Yes, Dan. Thanks for the good question. It is something that our clinical lab partners are absolutely embracing, because the course for that, it mitigates the risk of unpaid claims and it mitigates the blowback from physicians who may receive a bill for Prosigna test, which is very a important conversation to have with a physician.

So we think it's unlocking even more energy within LabCorp and we anticipate that it will with the other labs that will increase the promotional activity on Prosigna. And it gets trial usage by physicians around the country. So this is a technique that of course is used very often by clinical lab provides, clinical labs you wound want to do tests.

And so it's -- if there is a good track record of these kinds of programs, if you're really even pay claims which forces payers to engage in June picturing those claims which gives the Prosigna the attention we believe it deserves on the payer's medical policy agendas. So that's -- we expect that dynamic to play out.

Dan Leonard - Leerink

Got it. Thank you.

Operator

(Operator Instructions) Our next question is from Jeff Elliott with Robert W. Baird. Your line is open.

Jeff Elliott - Robert W. Baird

Thanks for the question guys. Just to follow-up on Dan's question first on the Prosigna Patient Support program, are you mitigated from I guess slightly from the downside in this one or have you reserved something and how should we think about the size of that investment?

Brad Gray

Yes, so I'll maybe speak to the dynamic and I'll let Jim talk to the accounting. I think this program doesn’t cost us very much because although we are on the hook for at risk for is replacement kits, Prosigna kits to labs who ran kits and didn't get reimbursed and as we described in the past, the incremental cost of good now for Prosigna kit is extremely low.

So the total magnitude of the investment that this requires is relatively modest. We believe the net effect on revenue will be delinquent because we've removed a major objection in the physician office about trial use and so we expect volumes to go up and that will be a net positive effect on our revenue line as well. So we think it's a very good investment. Jim, do you want to speak to the accounting treatment?

Jim Johnson

Sure, it's complicated obviously. Whenever you are going to do revenue accounting, its complex, but the program has been structured along the lines that most major drug companies have done for their drug replacement programs and so we believe that generally speaking when we are shipping products to these labs or be able to book revenue, and where I guess we can say the impact of the program comes into play a bit subsequent test utilization will be partially absorbed by three kits that have been in replacement.

So it does impact the amount of revenue that we will be recording that's diluted by essentially a patient for which the claims are not paid and for which free kits are distributed and be used for subsequent patients.

Jeff Elliott - Robert W. Baird

Got it. Okay.

Jim Johnson

I can continue, but hopefully that answers your question.

Jeff Elliott - Robert W. Baird

Yes, that's helpful and then I guess to follow-up on Tycho's question on the two max covenants, can you say where does they come in from a reimbursement standpoint and who are they, the covenant for I guess what is the coverage decision that they’ve offered look like.

Brad Gray

Well they, first as I mentioned, these two Medicare carriers do not publish medical policies that I can point to that describe the need for Prosigna, the types of claims that they are willing to process.

So I can't point you to our forced document. We believe that they are going to process claims for the new population of Prosigna, which is receptive positive early stage breast cancer, both negatively positive with one to three nodes and [women] (ph) the FDA approved label, in that my expectation of the patients will be covered in a way that Medicare carriers work are the event carrier to any given patient that the carrier that actually covers the geographic jurisdiction when the test is performed.

So this is most important to cancer centers and commercial labs who would be -- run test in those jurisdictions.

Jeff Elliott - Robert W. Baird

Okay. Thank you. And then on the desktop instrument, what are the steps you have to I guess to complete this relevant there and any updated thoughts on how you are positioning there from a pricing standpoint?

Brad Gray

Yes, so the remaining steps are once the -- now that the hardware the manufactured hardware in-house, we're going to continue to make tweaks and optimization to the software to optimize the technical performance of the instrument. So I will describe it as engineering optimization in a software domain as the remaining task. So I think that's relatively low risk from a technical perspective as we've described in the past.

We're not providing an update on pricing or positioning at this time as we would have in the past when I keep those details relatively close to the math in an effort to ensure that we don't have a dynamic customer end up waiting for it and the system that they've been trying to guess the performance kit for itself.

Jeff Elliott - Robert W. Baird

Got it. And then just one last one here. On Australia, congrats on that approval. How should we think about your commercial approach in that market?

Brad Gray

In our ex-U.S. markets we've taken a mix of direct and distributor approaches. In Australia we have a very strong distributor on the life sciences side that we expect also to be our distributor on the Prosigna side, so in that market will be -- we'll working through our distributor.

Jeff Elliott - Robert W. Baird

Got it. All right. Thank you.

Operator

Thank you. And I am not showing any further questions at this time. I will now turn the conference back over to you, Mr. Gray.

Brad Gray

Well, thank you all for joining our call today and we hope you have a great evening. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.

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Source: NanoString Technologies' (NSTG) CEO Brad Gray on Q2 2014 Results - Earnings Call Transcript

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