NanoString Technologies' (NSTG) CEO Brad Gray on Q2 2016 Results - Earnings Call Transcript

| About: NanoString Technologies (NSTG)

NanoString Technologies Inc. (NASDAQ:NSTG)

Q2 2016 Earnings Conference Call

August 03, 2016 4:30 PM ET


Doug Farrell – Vice President-Investor Relations and Corporate Communications

Brad Gray – President and Chief Executive Officer

Jim Johnson – Chief Financial Officer


Tycho Peterson – JP Morgan

Doug Schenkel – Cowen & Company

Steve Beuchaw – Morgan Stanley

Dane Leone – BTIG

Catherine Ramsey – Robert W. Baird

Paul Knight – Janney Montgomery


Good day, ladies and gentlemen, and welcome to the NanoString 2016 Second Quarter Financial Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

Now I’ll turn the conference over to your host, Doug Farrell, please begin.

Doug Farrell

Thank you, operator. Good afternoon, everyone. On the call with me today is Brad Gray, our President and CEO; and Jim Johnson, our CFO. Earlier today, NanoString released financial results for the second quarter ended June 30, 2016, and a copy of the press release can be found on our website at

During this call, we will make statements that are forward-looking, including statements about financial projections, existing and future collaborations, future business growth, trends and related factors, prospects for expanding and penetrating addressable markets, interactions with third-party payers, the timing and outcome of any reimbursement related decisions, our strategic focus and objectives, and the development, status, and anticipated success of recently planned product offerings.

Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, including the risks and uncertainties described in our SEC filings. Our results may differ materially from those projected on the call today and we undertake no obligation to update these projections.

With that, let me turn the call over to Brad.

Brad Gray

Thanks, Doug. Good afternoon, everyone, and thank you for joining us today. Before I discuss the results for the second quarter, I’d like to introduce a new member of the team. Doug Farrell recently joined NanoString as our Vice President of Investor Relations and Corporate Communications. Doug brings 30 years of direct experience in healthcare that includes pharma and biotech as well as life science tools and diagnostics. This includes roles of Schering Pharmaceuticals, Genentech, Vertex and most recently Affymetrix. Doug has been working in IR and communications for the last 28 years. We expect Doug to be an invaluable resource for both our management team and investors. We’re excited to welcome him to NanoString.

In the second quarter, we continue to strengthen our leadership in precision oncology and make substantial progress in establishing nCounter as the platform of choice for oncology research and clinical obligations. Our second quarter was more of like outstanding commercial execution and rapid progress in our biopharama collaborations. I’d like to recognize the commercial team for what was a stellar performance in the quarter.

Well, Our Q1 shortfall was out of character the team’s reaction to it was not. The group accepted accountability and then demonstrated the commitment and discipline that has allowed them to deliver a compound annual revenue growth of more than 40% since our IPO in 2013. The result was accelerating instrument placements, strong consumable pull-through and record Prosigna sales.

Total revenue for the second quarter was $22.6 million, up 73% year-on-year and well above the high end of our guidance range of $18.5 million to $20.5 million. Product and service revenue grew 40% reaching $17.5 million. Demand was robust across all product categories and geographies. Most notably instrument revenue increased 46% over the prior year to $6.4 million driven by record SPRINT sales.

In Q2, we increased our installed base to more than 410 systems and our average annualized consumable pull through with more than $100,000 per system. Year-over-year, we doubled our Prosigna sales and generated over $5 million in collaboration revenue driven by success in our Biopharma Partnerships. In addition to our commercial success, the scientific momentum of our technology is building. During the second quarter, our customers published that 1,200 peer-reviewed paper based on our nCounter platform, which is a pace of more than eighty new publications per week.

We felt this momentum first hand in June when we participated in the American Society of Clinical Oncology Conference in Chicago. This year’s ASCO was a breakout meeting for our nCounter technology. At a conference that is focused on Clinical Oncology, there were more than 30 posters and board presentations based on our nCounter platform. A wide range of studies demonstrated nCounter’s extensive capabilities and robust performance across not only a diverse set of cancers, but also numerous sample types that include FFPE, peripheral blood and urine.

Our technology is enabling our customers to address their most pressing challenges in drug discovery and patient selection. And that has not gone unnoticed. At ASCO, we had dozens of discussions with potential customers whose interest span from research and translational applications to validating diagnostic signatures for the clinic. We believe that this is a great indicator that nCounter is becoming must have technology in cancer research.

Overall solid execution during the second quarter substantially increased our momentum across the commercial, operational and scientific dimensions of our business.

Now I'd like to turn to our strategic objectives for the year. Our first strategic objective is to better penetrate our commercial opportunities by building an installed base of nCounter SPRINT systems. Following a challenging first quarter, we have doubled our focus on validating and appropriately staging our pipeline of instruments and the benefits are visible.

During the second quarter, we sold of more every model of nCounter instrument relative to Q1. Consistent with our expectations we captured during the quarter about 50% of the instrument opportunities that had slipped from Q1 and we expect to be fully caught up by year end.

In Q2, we sold 17 SPRINT instruments, which accounted for about half of the units sold and represents records SPRINT revenue. The majority of SPRINT instruments were sold for oncology and immunology applications. And two-thirds of SPRINT sold in the quarter penetrate new academic institutions or biopharma companies. This demonstrates that – is expanding our reach and is a leading indicator of new streams of consumable revenue.

During the second quarter, our commercial team also – strengthened our instrument funnel identifying many new opportunities for the second half of the year. We continue to expect that roughly half of all systems sold this year will be SPRINTS. Longer term we're confident that there are thousands of new customers that we can reach with SPRINTS compelling combination of high performance and affordability.

Our second strategic objective for 2016 is to expand our suite of 3D Biology products. 3D Biology is an initiative to enable the simultaneous measurement of DNA, RNA and proteins from a single biological sample on any nCounter system. The value proposition is to empower customers to extract as much biological information as possible from each precious samples, which is especially important in cancer.

At the AACR Meeting in April, we launch the first Vantage Panel’s, which will provide a foundation for our 3D Biology business. Over the past few months we’ve engaged with a series of early access sites and gained positive feedback on these products. The vast majority of interest in 3D Biology applications is coming from biopharma customers and several Q2 instrument sales to biopharma customers were partially motivated by our 3D Biology offerings.

Importantly about two-thirds of the specific users of our 3D Biology applications are new to the nCounter platform. A good indicator that 3D Biology is expanding our reach to new customers. We will continue introducing additional Vantage Panels in the second half and expect this product line to become an important growth driver in 2017 and beyond.

Our third strategic objective for 2016 is to extend our leadership in the development of commercialization of molecular diagnostics. To achieve this goal, we’re growing our Prosigna business and building a pipeline of companion diagnostic tests in collaborations with biopharma companies. I’ll start with Prosigna, where we generated record revenue of $1.2 million in Q2, more than 100% higher than the prior year. During the quarter, we achieved important reimbursement milestones with Prosigna including positive coverage decisions from both Aetna and Cigna.

We now have more than 135 million covered lives in the U.S., which we believe represent over 80% of patients that are indicated for Prosigna testing. In companion diagnostics, we’ve established a first mover advantage and position of leadership and tests that are based on gene expression signatures. In addition to the $18 million in upfront funding generated from the two new collaborations sign during Q1.

Our diagnostic development team achieved another $13.5 million in milestones from these new collaborations during Q2. Overall, this team has executed brilliantly driving these programs forward even more quickly than we have planned. For example, under our collaboration with Medivation and Astellas and just a few short months, we achieved a $5 million milestone by successfully transferring a new gene signature algorithm from RNA-Seq to nCounter system and receiving a determination from the FDA, allowing the use of the resulting assay in our Phase 3 clinical study of enzalutamide in patients with triple negative breast cancer. This illustrates the effectiveness of our diagnostics team and underscores how efficiently nCounter can be used to commercialize diagnostic content, discovered using next-generation sequencing.

Similarly, in June, we delivered an important milestone in our Merck collaboration worth $8.5 million, such as successfully developing our diagnostic assay and deploying it for test insights in the U.S. and Europe.

Our colleagues at Merck highlighted the development of nCounter based gene expression assays and several presentations and posters at the ASCO meeting. The Merck and NanoString teams demonstrated that the nCounter based assays show strong analytical and clinical performance across multiple genotypes and outperformed conventional PD-L1 IHC techniques and predicting response to KEYTRUDA in a head-to-head comparison.

Based on disclosures made by Merck during the ASCO meeting, we are now in a position to describe the diagnostic assay that we are developing for KEYTRUDA, which we refer to as our tumor inflammation signature. This assay measures the expression of 18 genes that indicate the type and functional status of the immune cells within a tumor, which are important metrics in predicting patient response.

This test is currently being incorporated into three KEYTRUDA clinical trials that are already enrolling. Two of these clinical trials focus on the esophageal cancer, while the third, is innovative back to trial which is enrolling patients with ten different solid tumor types. We are delighted to be part of such a cutting edge clinical initiative that is focused on significant unmet medical needs.

As a reminder, our collaboration with Merck, allows us to partner the tumor inflammation signature with other drug developers and we are engaged in discussions with a number of biopharma companies.

Finally, in addition to the steady progress that we’ve made in our existing CDx partnerships, we continue to expand our pipeline of collaborative opportunities to diagnostic pilot studies that now includes 33 projects with 17 different biopharma companies.

Our fourth strategic objective for the year is to expand our addressable market through new applications that leverage our optical barcoding technology. This includes our multiplex digital immunohistochemistry or digital IHC, as well as our Hyb & Seq single-molecule sequencing program. At the AACR conference in April, we presented proof-of-concept data on digital IHC. Using a prototype instrument together with our existing nCounter system, we were able to demonstrate a simultaneous profiling of 30 protein targets in spatial context with a parallel dynamic range and near single-cell resolution. This is a rapidly expanding market in which we believe we have a unique product with key advantages.

Customer interest in this technology has been tremendous, particularly from biopharma companies looking to profile multiple proteins from a single FFPE slide. We had numerous meetings with interested customers at both AACR and ASCO and responses of substantial demand, we plan to introduce the technology access program for digital IHC, offering a service to a limited number of high priority customers well in advanced of commercializing a kit based offering. This would allow us to enter the market quickly, generating valuable customer feedback and optimizing the workflow and user interface. I look forward to updating you on our progress later this year.

Meanwhile, we have continued to advance our Hyb & Seq program, increasing the number of sequencing cycles performed and the uniformity of hybridization across targets. The next public disclosure of our technical progress is planned for the American Society of Human Genetics meeting in October, so stay tuned.

Now I’ll hand the call over to Jim, who will review our second quarter financial results and guidance.

Jim Johnson

Thank you, Brad. Total revenue for the quarter was $22.6 million, up 73% versus the second quarter of 2015. Total product and service revenue was $17.5 million, 40% higher year-over-year. Foreign exchange rate fluctuation had a negligible impact on product and service revenue growth for the quarter. Instrument revenue was $6.4 million, 46% higher than in the second quarter of 2015.

Total consumable pull through for the quarter was $10.3 million, up 39% year-over-year, consistent with our historical run rate of over $100,000 per system on an annualized basis. Life sciences consumable revenue, the largest component of system pull through, was $9.1 million, up 32% as compared to the second quarter of 2015. Our payroll business accounted for about 45% of this total and biopharma customers continue to be the power users of our platform, generating approximately 40% of life sciences consumable sales in the quarter.

Prosigna IVD kit revenue, the other component of pull through, was $1.2 million for the quarter, more than doubling year-over-year. With ex-U.S. markets continuing to generate the majority of sales. We recorded $5.1 million of collaboration revenue for the quarter, compared to $568,000 in the second quarter of 2015. The increase resulted from our new collaborations with Merck and with Medivation and Astellas. The second quarter collaboration revenue was well above our expectations, largely due to $8.5 million in milestones, achieved in June that we had expected to be third quarter events.

Gross margin on product and service revenue for the quarter was 55%, up from 53% reported for the second quarter of 2015. The improvement was driven by higher gross margin on consumable revenue, which resulted from efficiency to scale and a favorable mix of consumable products sold during the quarter.

R&D expense was $8.8 million for the quarter, up 52% over the second quarter of the prior year. The increase was driven by work performed under our biopharma diagnostic collaborations, as well as increased investment in new technology and product development programs.

SG&A expense was up 21% year-over-year to $15.5 million for the quarter. And the increase largely reflects costs associated with added staff to support the company’s growth, most of which went toward continued scale up of our commercial infrastructure.

Stock based compensation expense was $2.4 million, compared to $1.7 million for the second quarter of 2015. Our net loss decreased to $10.3 million or $0.52 per share from $12.4 million or $0.66 per share for the second quarter of last year. We ended the quarter with approximately $57 million of cash and investments unchanged since the end of Q1. This included $5 million that we drew down for the requirements of our existing term loan facility and while we achieved several milestones of $13.5 million for the quarter, only $5 million of that was received in cash with the remaining $8.5 million in accounts receivable at the end of June. We received those payments in July, so we expect Q3 to be another strong quarter from a cash flow perspective.

I’ll close with an update to our 2016 financial guidance. We’re raising our total revenue guidance to a range of $89 million to $93 million for the year, which corresponds to revenue growth of 42% to 48% over 2015. Our previous guidance was for $86 million to $90 million in total revenue and the increase of the result of raising collaboration revenue from $15 million to $18 million.

We’re maintaining our guidance for product and service revenue of $71 million to $75 million including Prosigna revenues of approximately $5 million. As the result of our strong second quarter performance we now expect product and service revenue growth to be more balanced between the first and second half of 2016. Based on the strength of our instrument funnel we also expect instrument revenue growth to outpace consumables growth in the back half of the year.

For the third quarter of 2016, we expect total revenue of $23 million to $24 million including product and service revenue of $18 million to $19 million and collaboration revenue of approximately $5 million. This represents year-over-year total revenue growth of 47% to 53% and 29% to 37% for product and service revenue. For the full year, we continue to expect gross margin on product and service revenue to be in the range of 54% to 55% with collaboration revenue excluded from the calculation.

For operating expenses, we continue to expect a total of $94 million to $99 million for the year including approximately $8 million to $9 million of stock-based compensation expense. We’re also guiding to a reduced operating loss for the full year. We now expect our operating loss to be in the range of $37 million to $40 million versus our previous guidance for the loss of between $40 million to $43 million, a reduction of about 7%.

We continue to expect interest and other expense to be between $5 million to $5.5 million for the year. And we now expect our net loss for the year to be in the range of $42 million to $45 million or $2.15 to $2.30 per share. The previous guidance had been $45 million to $48 million or $2.30 to $2.45 per share.

From a balance sheet perspective, there's no change in our outlook. We continue to expect the collaborations with Medivation & Astellas and Merck together will bring in $40 million to $45 million of cash for the full year of 2016. With a bias towards the high end of this range given the progress we've made so far this year. This should put us very close to net cash flow breakeven for the year.

So with that, I’ll turn it back over to Brad to wrap up.

Brad Gray

Thanks, Jim. In summary we had a solid second quarter marked by outstanding execution and commercial momentum. We generated strong revenue growth through accelerated instrument placements robust consumable pull-through and record Prosigna revenue. The commercial teams strengthened our funnel of instrument opportunities increasing our visibility to growth in the second half of 2016.

Finally the companion diagnostic milestones that we have achieved were a important source of cash for the company and demonstrate a world class capability as a partner for developing gene expression based diagnostics. We believe that our business is firing on all cylinders and we are confident in our ability to continue delivering market leading growth.

I would now like to open the line for your questions.

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question is from Tycho Peterson of JP Morgan. Your line is open.

Brad Gray

Can you hear Tycho?

Tycho Peterson

Yes. Hey, sorry about that. Congrats on the quarter. Brad, for the diagnostic pilot studies that you talk about, can you just provide a little bit more color. Is that a revenue opportunity or do you have to wait to those to potentially convert into bigger partnerships.

Brad Gray

Sure. So the diagnostic pilots do drive revenue as we charge the biopharma companies who are gaining access to our diagnostics and development for that access. But that's really a small part of the reason we do it. The real reason that we make our three diagnostics available under these types of pilot studies is to generate data that will make the biopharma companies excited about using them with companion diagnostics. We believe that the scale of companion diagnostic collaboration that we are undertaking which involves substantial upfront investments, and significant milestones as we've seen, really is going to require biopharma companies to gain conviction about the predictive power of these assays by having some experience using them in their own hands. And really that’s the primary reason that the diagnostic pilot program exists. To the extent we generate revenue from these programs. It shows up in some combination of our consumable line and our collaborations line depending on the nature of the study.

Tycho Peterson

And then I guess on the instrument side I appreciate the fact you captured about 50% of the slippage from the first quarter. Can you may be just talk to what – the normalized revenue looks like adjusting for those push outs and as we think about the back half of the year, with NIH funding picking up potentially how do you think about the trajectory.

Brad Gray

Sure. So if you recall during the first quarter we under shot our revenues guidance by about $1.5 million and really that’s the magnitude of what we attribute to the Q1 instruments slip. So during the second quarter, we captured about half that $750,000 or so and we call at recapture Q1 slipped instruments. If you normalize our Q2 revenue growth adjusting down for that $750,000. We still would have grown about 30% year-on-year on our instrument revenue. I think that demonstrates that the performance we put up in the second quarter is really not just a to catch up on instrument revenue. It's really a return to strong instrument revenue growth that you’d come to expect from us over the past several years.

As we look at the half of the year I think you hear on our voice stronger great confidence. That's because simultaneous capturing the Q1 slip in to second quarter, the commercial team was able to substantially expand the funnel and instrument opportunities that we're working on. Both through great lead generation efforts at mediums like AACR and ASCO and really by just continuing to educate the much expanded market on the power and affordability of SPRINT. And so as we look at the back half the sales funnel on the back half, we feel a good degree of confidence about our ability to continue to grow instrument revenue. And as you heard from Jim, we actually think instrument revenue will outgrow that will outpace in terms of growth rate consumable revenue in the second half.

[Multiple Speakers] It's a part of that, but let less from an increase in a budget perspective Tycho than rather than in the budget cycle, the grant cycle that's coming up. If you recall we launched last July and really the first grants that are coming, they are being awarded that would have included our strength written into the grant application will be coming really in the second half of this year. And so we're the SPRINT one cycle of benefiting from that grant cycle.

Tycho Peterson

And then just one last quick modeling question on the Merck and Medivation collaboration revenues the $8.5 million that you received in 3Q show up in 3Q or does that get amortized to a couple of quarters.

Brad Gray

Yes. From a cash flow perspective, it definitely shows up in Q3. But because those really were earned contractually in Q2, we started to record a small proportion of those revenue in Q2 and that will continue on a proportional basis in Q3 and beyond. Our model is based on essentially like a percentage of completion of the projects. So we’ll gradually recognize that as revenue over the remaining development period.

Tycho Peterson

Okay, thank you.


Thank you. Our next question is from Doug Schenkel of Cowen & Company. Your line is open.

Doug Schenkel

All right, good afternoon, guys. Thanks for taking the questions and congrats on the strong quarter.

Brad Gray

Thanks, Doug.

Doug Schenkel

Maybe just I guess another Q2 recap question. Can you provide any color on geographic dynamics with regard to instrument placements? I think last quarter you talked about being pretty strong in Asia, enough where you called it out with SPRINT, U.S. was about in line with what you expected and Europe was a little bit sluggish. How did things progress in this quarter, in a quarter where things seemed to go not just to expectations, but a little bit better than expectations?

Brad Gray

Yes, instrument growth was – instrument demand, I would say, is strong across all regions during the second quarter. Europe, in particular, had a great quarter, total revenue growth in EMEA was over 60%, and instrument revenue growth year-on-year was up over 50%. So we saw a great recovery from the team in Europe and really my congratulations go out to that team.

We saw a good growth elsewhere, not all of which was realized during the quarter as we carried some of it in backlog based on the way revenue recognition works, but fundamental demand was strong everywhere. SPRINT, in particular, continues to resonate strongly in markets that are under-penetrated and that are more price sensitive. And we’ve seen about 50% of the SPRINT sales during the quarter go into EMEA and APAC. So that trend, which we also began to see in the first quarter, continued. But overall we’re pleased with the demand and the recovery in instrument sales all across the regions.

Doug Schenkel

Okay. Thank you for that. And then maybe a follow-up to one of Tycho’s questions on the NIH grant cycle. You previously had mentioned that the first wave of NIH grants could have been written to include SPRINT will come out, or I guess should have come out in July. Based on what’s out there now, have you been able to take a look and see if that’s something that would make you feel better or worse about the outlook for maybe a stronger mix of SPRINTs in Q3 and Q4, than we saw in the first half of the year?

Brad Gray

Yes, I mean, without speaking specifically to the grants that would have been awarded by the NIH, speaking generally about what I see when I look at the overall funnel, I do feel high degree of confidence about the instrument opportunity in the second half. Yes, we think that over the course of the year, SPRINT is going to account for about half of our instrument placements, which I think is consistent with really what we’ve guided the entire year but which we’ve obviously track a little behind on in terms of being just less than half of the instrument placements in the first half.

We see strong demand coming for – across those the MAX and FLEX systems that we’ve been selling for some years now and SPRINT, we feel good about both.

Doug Schenkel

Okay, and then one Prosigna it was a good quarter. How is expanded coverage impacting demand in the early going? I’m just wondering if you saw anything that might have prompted you to at least contemplate increasing guidance, given some of the momentum that’s been building?

Brad Gray

Yes, I mean, we obviously are gaining advance for Prosigna’s launch and adoption has been reimbursement we’ve made a great deal of progress in the first half of this year. All of that progress though was anticipated and was part of what we took into account as we set guidance at the beginning of the year, we have visibility into those dialogues. So while they are great progress, they are baked into guidance.

In terms of how reimbursement is playing into demand though, it is having a real impact. On one hand the laboratories that had previously acquired FLEX systems with the hope of offering Prosigna, many of them had held off on actually offering the task while promoting it in an environment where they didn’t have reimbursement and now we’re beginning to see those laboratories turn on.

On the other hand some new laboratories are beginning to look at adopting Prosigna locally now that the business case for Prosigna makes much better sense than it had previously. So I would refer you to lot of the growth, the year and you’re doubling to exactly what’s happened on reimbursement. But I think it’s too early and too aggressive to think about it and anything like an inflection that would make us raise guidance for the second half.

Doug Schenkel

Okay. One last one and then I’ll hop back into the queue. A few weeks ago in July, the FDA issued draft guidance for principles for co-development of an in vitro diagnostic device with a therapeutic product. Any thoughts on how this may affect your competitive positioning in future deals if at all? Thank you.

Brad Gray

It’s great of course to see the FDA laying out framework that make it easier and less risky for drug companies and diagnostic companies to work together in personalized medicine. When we looked at the guidance document we didn’t see anything that we really hadn’t anticipated. So that great. I think everything in that guidance document is very consistent with the times [ph] where our team operates and what our strategy to date has been. I don’t think it shifts the competitive dynamic of our platform versus any others – any particular direction. But I do think it is having more clarity on precision medicine is kind of a tie that floats all the boats. So we’re obviously excited about it. But I don’t think it shifts the competitive landscape in anyway.


Thank you. Our next question is from Steve Beuchaw of Morgan Stanley. Your line is opened.

Steve Beuchaw

Hi, good afternoon guys and thanks for time. I’ll keep my questions all focused on the consumable story. Jim, I wonder if you could give us even directional color on what on a same-store basis the pull through trend is looking like maybe consumables per instrument on FLEX and MAX now particularly that SPRINT is becoming a bigger piece of the denominator, that’d be really helpful.

And then Brad, I wonder if you could build on the commentary that you made regarding the early feedback on 3D Bio and the Vantage lineup. Can give us a sense for how you want to go about rolling out the product over the next 18 months? How is the thinking that you laid out at the Analyst Meeting last September regarding the 3D Bio opportunity evolving, now that you have a little bit more real-world experience.

And then sorry to pile on here a little bit, but I wonder how you’re thinking about the rate of growth, not necessarily this year but in the medium-term for operating expense given that you have validation now of the breadth to the opportunity for SPRINT and 3D Biology. At what point does it make sense to step on the gas a little bit in terms of putting feet on the street? Thanks so much.

Jim Johnson

Okay, hi, Steve this is Jim. I’ll go first and take your question about consumables. Overall if you look at our consumable pull through in Q2 of this year, it’s up a little bit from Q2 of last year and I think that it’s clearly is up a lot from Q1 because of the seasonal impact that we always see. When we started the year our guidance really was that – we expected to see fairly stable pull through rates per system in 2016 versus last year. And so far this year that’s really what’s playing out.

I said we’re up a little bit but if you think about the same-store sales with MAX and FLEX it’s been pretty stable. We’ve got and I think as we expected we’re still early days in the SPRINT launch but I think we still believe that we’re going to see pull through rates lower than MAX and FLEX for those systems. Still not a lot of systems, so it’s not impacting the pull through rate overall that much. But then Prosigna had a really strong quarter, and that probably more than offset SPRINT to a little bit this quarter.

So I would say the short answer is, MAX and FLEX, what we’re seeing today is stable and we think that we're on track to meet our guidance for the year roughly $100,000 per system overall.

Brad Gray

Steve, thanks for the question on 3D Biology. It’s coming up on 11 months or so ago since we introduced the term 3D Biology at our Investor Day. And we continue to be excited about 3D Biology as we were then. We think the ability to look at DNA, RNA and protein our technology is a key differentiator. And it's biologically match to one of the most important biomarker problems that our customers are working on which is how to combine targeted therapies which DNA mutation made determine response with immunotherapies or protein expression and gene expression may predict response.

And we are very committed to 3D Biology. I’d say we're right – we’re about what we expected to be in terms of the product rollout. The most of our product dialogue has been around the protein dimension of 3D Biology because that was the first set of products that we've brought to market. And maybe not surprisingly it's resonated more strongly with biopharma companies who are most attuned to the immuno-oncology biomarker problem that the technology is focused on initially. So about 70% of our customers and 90% of the revenue on a protein as the date has come out of biopharma and we're starting to see repeat ordering for the first product that we launched back in fall of 2015, which is encouraging.

Interestingly many times the customers in these biopharma companies are customers that we haven’t interacted within the past. There are scientists we would have thought of themselves as proteomic rather than genomic researchers. And so that’s very exciting to us in terms of taking the technology into some labs even within the same companies that haven't adopted in nCounter platform as I mentioned in my prepared remarks, we saw that impact in the second quarter. The other dimensions of 3D Biology, the DNA, fusion, and mutation dimension is much earlier in terms of where it is in the spotlight were really in early access date with us but response has been positive.

On the fusion dimension, looking at DNA fusions and lung cancer and hematological cancers, there's been a strong interest from clinical laboratories, especially those overseas where its compliance were up to sell those technologies for clinical use. And the early feedback on our mutation panels from our alpha customers has also been a very positive. We look forward to expanding that product line over the balance of the year. In terms of how it rolls out over the next 18 months I mean I think we – our goal has always been to end 2016 with a critical mass of product offerings then make 3D Biology in real where our customers can mix in that from these different vantage panels and perform real 3D Biology experiments.

And that makes 2017 kind of the year where I think there is potential to see meaningful pull through of these types of products. And we of course won’t stop introducing new panels at the end of 2016. We’ll continue to do so. So 2017 will be an important year to see what the true commercial uptake and measurable commercial uptake really is for 3D Biology.

Steve Beuchaw

I’m looking forward to it. Thanks guys.

Brad Gray

Thanks. But see, I didn’t answer. You had a question about operating expense growth. Let me come to that one. Yes, I think we are very encouraged to see the SPRINT launch playing out the way we imagined. That it’s reaching new customers and new institutions for us. We had scaled up our commercial organization and anticipation launch, I'm glad we did. We will obviously evaluate what the rational commercial channel looks like. And we don't have near-term plans to expand the sales and marketing organization further. But we will evaluate that as we come up on our planning for the 2017 cycle.

We will obviously give you any updates on our spending profile when we provide guidance in early in 2017. We’re now closely monitoring that’s and obviously carefully considering the trade-offs between investment and growth and management of operating expense.

Steve Beuchaw

Understand. Thanks, again.


Thank you. Our next question is from Dane Leone of BTIG. Your line is open.

Dane Leone

Thank you for taking the questions. Congrats on a strong quarter. So I guess I just want to clarify the update to your guidance as it relates to collaboration revenue. So I think last quarter you had stated somewhere around $15 million for the year. Is that still the same or is that changed at all.

Jim Johnson

It's been increased to $18 million from $15 million. And basically I think what we’ve seen in the last three months is that the like greater visibility about certainty and the timing of milestone payments, which has a pretty significant impact on that number. So we’ve increased our overall revenue guidance by $3 million and it’s basically all in collaboration revenue.

Dane Leone

Okay. And so as it kind of – we look at the back half of the year. I guess I’m just trying to be careful that you still have maybe 50% of that catch up from 1Q or $750,000 I guess. Yes, how is that play out in 3Q versus 4Q. I know you guys kind of stay away from giving quarterly guidance, but do we kind of expect I guess similar seasonal trends in the instrument placement or maybe the third quarter is bit more flattish with 2Q and then you have a bigger uptick in 4Q or yes, kind of any nuance you can provide in terms of how that catch up work for back half I think would help people?

Brad Gray

Well, I think the dynamic of the back half of Q3 versus Q4 is dominated by the dynamics of the year end budget flush rather than the catch up on any instrument slippage for Q1. So and then Q4 is always our biggest quarter of the year, because for capital expenditures both especially in the biopharma companies it’s a big, big quarter. And so we would expect, in terms of absolute numbers the overall back half to be weighted heavily towards the fourth quarter as it always is for us.

I think as every quarter goes on, we would expect to capture the Q1 slip more – less and less every quarter, right. So we continue to work these opportunities and I would expect that most of the stuff would have been captured by the end of the third quarter. But I think that that is very much secondary to the much bigger impact which is a Q4 budget flush.

Dane Leone

Okay. And kind of layer on to that, well, we've discussed in terms of the grant funding that’s been reported or started in July. What – can you remind us what kind of lag or lead is incorporated into that, and just so people don’t start sticking a bunch of systems in third quarter, how those kind of work through the funnel.

Jim Johnson

Yes. I think you are right to recognize that there's a difference between when grants are awarded and when the cash is actually released. And I think that is another reason to think, the overall instrument revenue in the second half will be more focused in the fourth quarter. Working the other direction Q3 is the end of the fiscal year for the NIH. So there's a dynamic within NIH about where September 30 is an important dynamic. But again, I think all of these things are secondary to the Q4 budget flush, which would make instrument revenue much bigger in the fourth quarter than it is in the third, in any year, not just this one.

Dane Leone

Okay. Can I just end with kind of a higher level question on the collaboration? Yes. So the channel checks I’ve gotten back from your customers on the biopharma side have been very positive, even in kind of the smaller company area. A question that’s kind of come to mind through these discussions is as you sign new collaboration agreements, are these companies that are looking to partner on using your products as kind of an IVD for their clinical trials, are they overly concerned whether that the trials that they’re using, the products then would ultimately be likely to come to market for that sub-segmented population? Or are you sensing that there’s actually a shift towards better science with more information, I guess partially catalyzed by the interest in immuno-oncology and the cross discipline nature of it.

Meaning that people are warming up to the idea of partnering with companies such as NanoString just given that there’s kind of a conscientious move towards more information is empowering and allows us to essentially do better science that will lead to better results?

Brad Gray

Yes, I think there’s a secular trend towards precision oncology that is going to have a much larger fraction of the new cancer drugs developed at personalized medicines that are paired with diagnostics then have been true in the past. And I think if you just look at the statistics of FDA approvals and how that’s – how many are paired with diagnostics over the last couple years, you’ll see that. And certainly, if you look at drug pipelines, you’ll see that. That’s true not just for our platform but for others as well. We think – and we’re going to have an important part to play in that. And for those diagnostics that require gene signatures with algorithms, we’re really going to be the platform of choice. And I think we’re seeing that in the way that we sign up new companion diagnostic partnerships.

We’re seeing it, I think, in the way that our technology is being used by biomarker groups within biopharma companies, big and small. And I think potentially, the companies that are smaller and later to the game in different drug classes may be even more inclined to adopt companion diagnostics as a way of creating competitive advantages and identifying patient populations that are distinct from what the first movers have addressed, where their drug can really fit in standard of care. So if anything, I would expect smaller companies to embrace personalized medicine even more aggressively.

Dane Leone

Great. Thanks, guys.


Thank you. Next question is from Catherine Ramsey of Robert W. Baird. Your line is open.

Catherine Ramsey

Hey guys, congrats on the strong quarter. You guys had nice commentary on SPRINT, but any color on mix between MAX and FLEX? And then for MAX, are you seeing any changes in ASP following the SPRINT launch? And can you talk about how cannibalization has compared to your expectations?

Brad Gray

Sure. So let me start with the pricing question. First, ASPs across our instrument lineup were solid in Q2. We did not run special promotions and we did not see an erosion of pricing across any of our three instruments. So pricing is stable there. Between MAX and FLEX, I think over the last few quarters, we’ve seen a healthy mix of both MAX and FLEX. A year or two ago, at the launch of FLEX that were I would say excitement about building a Prosigna install base was at its peak, we saw FLEX sales outpace MAX sales substantially because were in the process of building the now 60 lab install base of Prosigna sites.

That tempered as we penetrated the early adopting labs on Prosigna and as reimbursement took longer to come than we expected. And I still think that we’re seeing more MAX systems relative to FLEX as a result of that in recent quarters. But I think that’s a fine thing. We’re continuing to have good, healthy performance from both those product lines. Did I answer all of your questions, Catherine, or was there one more?

Catherine Ramsey

Yes, I think you answered them and I guess going back to your 60 lab install base for Prosigna sites, are all of those active or are some still in implementation mode?

Brad Gray

Some are still coming up through their validation and their launch phase. We estimate that about 45 Prosigna sites are active out of the total 60 today worldwide and those are split about evenly between the United States and the rest of the world.

Catherine Ramsey

All right, perfect. Thank you.


Thank you. Next question is from Paul Knight of Janney Montgomery. Your line is open.

Paul Knight

Congratulations on the quarter, guys. Also, and Doug, welcome aboard.

Doug Farrell

Thanks very much, Paul.

Paul Knight

Any sense upon what users are migrating over to your instrumentation platform? Is it in QPCR? Is it in sequencing? Is it in mass spectrometry? Where do you – what part of the lab is this format drawing attention? Can you gauge that?

Brad Gray

Sure. As has been the case historically, in most cases, when an nCounter is being purchased, the lab user was previously using quantitative PCR to look at gene expression and they’re really upgrading to a platform on which they can get many more genes of information out of the same sample. And so that is – that’s the typical use case. So I guess you’d say we’re taking market share from quantitative PCR. It also in many cases, the same lab is running a sequencer in RNA sequencing mode to scan the whole genome of their samples and select the genes that they want to study more carefully.

So often, nCounter is positioned just downstream of RNA sequencing in call it the overall scientific paradigm and workflow. And I think what you saw with Medivation and Astellas, and our partnership, is a great example of that. Medivation and Astellas didn’t know what the right biomarker would be for predicting Enzalutamide response in triple negative breast cancer. They use RNA sequencing over the whole genome to figure out what biology was predictive and then when they did and they wanted to develop a companion diagnostic, that’s when they came to our technology, which is robust, well validated for diagnostic use, and cleared with one existing assay and available in 60 clinical labs worldwide. So that’s a very typical use case as well that diagnostic – that content was first discovered on RNA seq and then validated or run at much larger scales on nCounter.

Paul Knight

And lastly, regarding modeling, with the 46% instrument growth, should we continue to expect sequential increases in instrument sales? And I’m assuming we should assume some acceleration from that 33% consumable growth.

Brad Gray

I think, obviously, in the second quarter there was a catch up that took place on instruments that was at the order of magnitude about $750,000 in instrument revenue that the recaptured slipped from the first quarter. Normalized growth would have been about 30% of year-on-year growth, which is by the way, I think, consistent with the midpoint of our guidance range for product and service revenue growth in the second half. So I think that’s something to bear in mind. We continue to think that consumable, the way to think about consumable revenue for us is to look at pull through on a per instrument basis.

And for the full year, we’ve guided to around our $100,000 per system per year benchmark and we continue to think that that’s a good way to model and that, you know, and if you do that then basically the total consumable revenue, the sum of Prosigna and Life Science consumables grow more or less at the pace of our install base. And when you do all that math, I think and you look at our funnel the way we can see it, we see a strong second half of product and service revenue with instrument growth slightly outpacing consumable growth.

Paul Knight

Okay. Thank you.


Thank you. There are no further questions at this time. I’d like to turn the call over to management for any closing remarks.

Doug Farrell

Thank you very much everybody for joining us today. If you did miss any portion of the replay, it’ll be available this evening. You can access that. Domestic callers, please dial 855-859-2056. International callers please use 404-537-3406. The conference ID number is the same for both, 42135981. Thanks very much for joining us and have a great day.


Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!