Accelerate Diagnostics' (AXDX) CEO Lawrence Mehren on Q2 2016 Results - Earnings Call Transcript

| About: Accelerate Diagnostics, (AXDX)

Accelerate Diagnostics, Inc. (NASDAQ:AXDX)

Q2 2016 Earnings Conference Call

August 8, 2016 04:15 PM ET

Executives

Laura Pierson - Investor Relations.

Lawrence Mehren - President and Chief Executive Officer

Steve Reichling - Chief Financial Officer

Analysts

William Clark - Piper Jaffray

Karen Koski - BTIG

Brian Weinstein - William Blair & Company L.L.C

Patrick Donnelly - JPMorgan

Operator

Good afternoon and welcome to the Accelerate Diagnostics Inc 2016 Second Quarter Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be a question-and-answer session. Please note this event is being recorded.

I would now like to turn the conference over to Laura Pierson of Accelerate Diagnostics. Please go ahead.

Laura Pierson

Before we begin, I would like to advise you that information presented during this conference call may contained forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of 1934. Forward-looking statements include statements about our future and statements that are not historical facts may contain expectations regarding revenues, earnings, operations, and other results, and may include statements of future performance, plans and objectives.

Forward-looking statements include statements pertaining to among other things our projections as to uncertainty business milestones maybe achieved including authorization by the FDA of the Accelerate Pheno System and the Accelerate Pheno Test BC kit for positive blood culture. The commercial launch of the accelerate Pheno System and accelerate Pheno Test BC kit for positive blood culture expect to results of our Phase II clinical trial, the potential of our technology generally or estimates as to the size of our market, opportunity and our competitive position and our future development plans and growth strategy including with respect to Research & Development.

These statements represent only are believe regarding future events, many of which are inherently uncertain. You are caution that any such forward-looking statements are not guaranteed of future performance and involve risk and uncertainties and then actual results may differ materially from those projected in the forward looking statements as a result of various factors. Information regarding important factors including specific risk factors that could cause actual results to differ perhaps materially from those in our forward looking statements is contained in reports we filed with the SEC. You should read and interpret any forward-looking statements together with the reports we filed with the SEC.

I will now turn the conference call over to Mr. Lawrence Mehren, President and CEO of Accelerate. Larry.

Lawrence Mehren

Thank you, Laura, and good afternoon, everyone. I appreciate you joining us for our Q2 2016 conference call. Over the last quarter, the company has taken some important steps forward. These include our submission to FDA, initiation of Phase II of our clinical trial, our first commercial contracts and solid progress in research and development. I will cover these topics in order and then turn the call over to Steve Reichling to review the quarter’s financials. We will then open it up for questions.

Let's begin with our FDA submission. Needless to say, we couldn't be more pleased that our submission is with the FDA. It's a significant milestone for the company and I believe an impressive document. The submission is over 10,000 pages long and includes data on over 100 assays, multiple analytics studies and other important validations of our Pheno systems performance.

As we have mentioned previously we believe a 140 assays met our acceptance criteria. Of these we have submitted a 118 to FDA for De Novo clearance, a form of 510(k). The remaining 22 assays are RUL and will not be submitted, but our intended to be launched with the product under a specific research use only mode of operation.

We have high confidence that our submission will receive a fair and timely review by the agency. This confidence is the result of over three years of productive discussions, negotiations and document review with FDA including the creation of a mark submission. This document is representative of our final submission and the agency's review which we received earlier in the second quarter helped us fine tuned our final De Novo submission.

In terms of timing I will reiterate that while review timelines are variable we believe our teams work with the agency should result in the most efficient review process possible. Accordingly, we remain hopeful to have a decision as early as Q3 2016.

We have also initiated our Phase II clinical trial at six of the original clinical trial sites. This trial is being done primarily to continue testing assays, not reaching sufficient powering during the initial trial and therefore is much smaller in scope than the first.

The protocol of the trial will be nearly identical to the first but we will include a greater portion of specifically targeted fresh samples to provide the necessary rare organism powering. We believe that the trials performance will be in line with the positive performance we saw in Phase I. This would allow us to add additional nice to have assays to the panel in a timely manner, as early as Q1 of 2017.

Moving onto commercial progress, here we have seen significant activity in the quarter. In the U.S. we have largely completed the build out of our go-to-market team, recently hiring a rep for the important Boston territory. Including this hire, we believe we now have 23 absolutely world-class sales professionals who have an outstanding track record of success in diagnostics.

And they have been very active. Not only have they been building a large funnel of potential accounts but we have now begun converting them to contract of which we have more than a few with many more under hospital administrative review. These contracts are design to allow customers to do a systematic evaluation against the pre-determent endpoints. These endpoints from that including FDA approval, the contracts convert into acquisitions.

Further, during the evaluation period, we expect to begin generating kit revenue from customer share in the cost of these valuations. We couldn’t be more excited about the progress here, which we believe is quite good for a system at this stage.

As mentioned in our Q1 call, the team also has established the number of excess sites. Well among other activities will begin publishing data from the studies with the Pheno. At this time, three of the 13 sites is completed their studies that are working on menu scripts for publication. During the quarter, the number of sites increased from 12 to 13 with the addition of a large Canadian hospital.

In general, performance scores are similar to what we have seen at the clinical trial sites. Further, on time to results a critical measure at the hard of our value proposition. We continue to see savings exceeding our expectations ranging from 21 to 45 hours over the current standard of care method.

We believe, we will have multiple menu scripts submitted the top-tier generals in Q4 2016 out light indeed and other important advances. Commercial progress in the EU is also proceeding as anticipated. Again, we have put in place a highly experience team of industry veterans and we believe they are using needs considerable skills to great effect.

As mentioned in Q1, we are excited about this market and believe that the long-term test potential could equal or exceed that in the U.S. due to higher incidence rates with serious infection. However, due to the tender process had extended the sale cycle, we expect relatively slow ramp.

That being said, we volume our EMEA team is doing an outstanding job and we have seen solid gains in many countries not only in front of development, but in headwinds any valuation contracts of which we have many currently sign.

A recent visit to one of the EU customers currently in the process of their valuation yielded exciting insights on how our platform can drive unique benefit in the European market. Specifically this believe that the Pheno is ease of use would enabled off shift testing dramatically improving hospitals ability to optimize a patients therapy around the clock days earlier than is possible today.

Now on to Research & Development, where we also believe progress is that solid. First, as mentioned on our Q1 call, we have been working on a simplify QC process that is as easy to use as our Pheno System and blood culture kit. I’m happy to report that the team is finish development on this assay and we will be rolling the new assay out for testing in the next couple of weeks. We believe this will have a positive impact on the customer experience and decrease the time and complication on the verification process.

In addition, the team has made progress on our beyond the MIC formally refer to as SIR-2.0. On beyond the MIC program uses our proprietary technology also morphokinetic cellular analysis to deeply interrogate the Pheno type of the pathogen enabled by high-speed optics and supercomputing MCA simultaneously NOIs thousand of single cells for multiple features to determine useful clinical data.

The project began with the gathering of hundreds of patient samples type actual clinical outcome data. For each of these samples, we have the patient record including clinical presentation which antibiotics forgiven and what quantity and what the outcomes were. Using this large annotated data set we run the Pheno to generate a bacterial signature and correlate it to the outcome data.

While common in other areas of science, engineering and medicine we believe we are the first to do this type of data mining in microbiology. The creation of this cohort is now nearly complete and over the next months, we will be analyzing the Pheno signatures and doing the data mining. If this goes as we planned we will have a number of unique parameters that are more predictive than the current MIC, perhaps creating a new gold standard and giving us a strong strategic position.

Finally, we continue develop additional system and assay capabilities enabling our next test kits and instruments. This quarter we developed an advance sample preparation method, which we believe will be critical for directly testing higher complexity samples like respiratory.

And with that I will now hand over the call to Steve Reichling. Steve.

Steve Reichling

Thank you, Larry and good afternoon everyone. Revenue for the second quarter was derived from royalties and amounted to 20,000, an increase of 1,000 over the same period in the prior year. Selling, general and administrative expenses for the quarter were 9.2 million compared to 4.8 million in the same period in 2015. This increase was principally driven by personnel related costs in our U.S. and EU sales and marketing organizations.

Research and development costs for the quarter were 8.1 million, up from 7.1 million from the same period in the prior year. The 14% increase is driven by clinical trial costs and the cost of prelaunch inventory. Our net loss for the quarter was 17.9 million, resulting in a net loss per share of $0.35 on basic shares outstanding of 51.2 million. Net cash used for the quarter was 14.3 million. The company ended the quarter with cash and investments of 102.4 million.

I will now hand the call over to Larry for some closing comments.

Lawrence Mehren

Thank you, Steve. In summary, we have been continuing the hard work and our enthusiastic about the progress the team has made on the FDA submission, Phase II of the clinical trial, commercial expansion and research and development.

While there is still much to do we are more confident than ever in our Pheno system and our company has real potential to create a sea change in microbiology, providing rapid actionable results to microbiologists, physicians and pharmacists for helping their patients fight serious infectious diseases.

A special thanks for the team at Accelerate, who worked incredibly hard this past quarter to complete our clinical trial, prepare our submission and advance other priorities. And finally, thank you to all our shareholders whose steadfast support has made this all possible.

And with that, I will open it up to questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. And our first question Bill Clark with Piper Jaffray.

William Clark

First question, I guess I wanted to hit on one of the items you spoke about in your prepared comments, which was a new sample prep methodology. Can you elaborate a little bit on that? And historically you have talked about a sample assuming a second specimen being released as soon as the end of 2017 and I'm just curious kind of how critical is this new sample prep methodology to making sure that you can direct specimen testing?

Lawrence Mehren

So Bill, it's not a need to have, it's nice to have. It's just an improvement on our gel technology. It does a few things for us. One it decreases our cost of goods significantly allowing us to use another metrics that less expensive, which is a real positive for us.

And secondly, it further concentrate the sample, so it allows us to take samples that previously would have been outside of our dynamic range and bring them into the system and tests and improve our report ability, so it’s quite positive development. But again, all these things are nice to have, not mean to have for the future products that will come out in the Pheno.

William Clark

Got it, got it. Understood and thanks for the clarification. And then just kind of stay on the pipeline for one more here and I got a couple after this. When we start to see some of the data on the respiratory example. Is that something that ACMED next year or ASM or possibly aims. Just trying to get a sense what we should be expecting from a pipeline data standpoint?

Lawrence Mehren

It’s a good question Bill, and I’ll have to get back to you on that. I mean, it should be soon, but I can’t give you specific time right now.

William Clark

That’s fine. And then just thinking about, I just some of our early diligent suggest that you remaining. Even though it seems obvious that the time savings will translate into better outcomes for patients. At least, one side to suggest they wanted to see some of that data, even though they share that observation.

Can you talk a little bit about some of these early access studies? I know you have got these one outcome study in the works, but how, should we be expecting that sort of data from some of these early access sides or do you think it’s going to be more of kind of the early study seeing largely performance based? Thanks.

Lawrence Mehren

So our strategy was that the early studies would be performance based and then the lateral studies would be outcome based. The outcome studies are obviously much more difficult to do and we regardless of continued to do that. And you should see those over the course of the next quarters.

William Clark

Okay. Got it. And then just last one for me on the FDA submission, if 140 of the assays net your criteria. What was the thinking behind, I just committing fewer than that and I certainly recognize, you are going to have a follow-up submission here, but just trying to parts that out? Thank you.

Lawrence Mehren

So are you talking about the RUO assays that we are submitting and that which you mean Bill?

William Clark

Yes. That’s correct. That’s right.

Lawrence Mehren

Okay. So the assays that we are not submitting all met our acceptance criteria, but as they are not indicated on the antibiotic drug label, the FDA does not review this and accordingly, they are not submitted. They are run at the lab under in RUO mode.

William Clark

Got it. Thank you.

Lawrence Mehren

You are welcome.

Operator

And our next question is from Karen Koski with BTIG. Please go ahead.

Karen Koski

Hi guys. Thanks for taking the questions. And congrats on the quarter.

Lawrence Mehren

Hi Karen

Karen Koski

I guess just first for me, can you put line a bit more color around your, the comments you have made in the prepared remarks regarding some fine tunings that final submission based on the commentaries you received from FDA after the mass submissions?

Lawrence Mehren

Yes. I mean, I will tell you that all the pretty work that we did with the FDA was such there is a nature of their recommendations on the mass submissions were more in the form of preference. Data table presentation analytical study data presentation and those kinds of things Karen. So they are really no surprises, they were no nothing that was really of note there, it was really just a fine tuning.

Karen Koski

And then have you gotten any I guess comments or questions from FDA since you made the final submission? And just regarding the new QC method that has been developed, does that impact your initial submission at all?

Lawrence Mehren

So in terms of FDA's feedback, so the review process as you know is interactive and we would expect to receive questions as FDA has them and we will respond to them in a timely manner. At this point, we don't have anything material or any updates there. And in terms of QC, your question was again?

Karen Koski

Just regarding the new QC method that you have developed and I think you said you plan to roll it out to customers in the near term, does that impact your submission at all, or is that something that FDA has to review before they might grant you an approval?

Lawrence Mehren

So, in this case, we already have the QC method that's part and parcel to our submission. So no, the current QC method that we have and our submission are not impacted by this. It's an open question as to whether a change in QC method requires a new submission or not? And I think that's still under review here internally.

Karen Koski

And then just thinking about kind of the early success you have had with some customers in the U.S., and recognizing that. That maybe some of your conversations have to be a little bit more limited since you don't yet have the approval on hand but what has been the feedback from initial customers as far as the data you have been able to share with them thus far?

Lawrence Mehren

You mean, you are talking about in the U.S. specifically Karen?

Karen Koski

Yes, yes.

Lawrence Mehren

I think it's been quite good and we are pleased that we have a number of PDP contracts signed with many more under administrative review. And we think, as I mentioned in my prepared remarks for a system of our vantage we think that's indicative of the interest in the marketplace. So we are quite pleased. In terms of the data people have been really excited about the data. Our overall performance as you have seen is quite good and I think people in general were not expecting our performance to be as good as it is.

Karen Koski

And then just last one from me, we have been hearing maybe a little bit of mixed feedback from other companies that are looking to sell, or looking to place capital into the clinical microbiology market as of late. Have you gotten any kind of increased sensitivity around labs, any ability to make an outright capital purchase. It sounds like things are going pretty well, but just wondering if you could touch on that point a little bit?

Lawrence Mehren

So Karen as you know we have capitalized the company and arranged different financing to ensure that we can place instruments regardless of whether there will be capital sales or not. And so while we are sensitive and of course prefer capital, it's not required for the launch that we expect.

So far, with the sites that we have been interacting with, capital has not been an issue and we have not yet had to fall back on any kind of financing arrangement. And accordingly we think that's again a good sign. That being said, if we do and that becomes an issue, we have the instruments and place to ensure that we can continue to place instruments in the fashion that we expect.

Karen Koski

Very helpful. Thanks so much.

Lawrence Mehren

You are welcome.

Operator

And our next question is from Brian Weinstein with William Blair. Please go ahead.

Brian Weinstein

Hi guys. Thanks for taking the question. Just following up on Karen’s question a little bit there. So your intention is to continue to push forward with capital purchases here, you are not giving anything at all in terms of people being unwilling to go ahead and put that capital down. But how many systems are each of these kind of institutions taking or these kind of [once use] (Ph) or are they look at maybe buy two or three of these systems any thoughts on that?

Lawrence Mehren

So first, of all Brian, we have not yet had the push back that you are describing. Secondly, none of these are once use, so there all multiple system placements. And three, as mentioned, we do have a number of alternative acquisition programs, if it becomes an issue.

But so far, we have not and, we think we are doing a good job with these folks. In particular, because many of them have not plan for this capital acquisition in this capital acquisition cycle. So they are taking capital likely from other alternatives and using it to acquire system, which we think is another good sign.

Brian Weinstein

Got it. And then following up a little bit on what Bill is saying about - when you are talking about the outcome studies. I’m assuming, you are referring to clinical outcomes there. Any additional work on economic outcome studies and when we would be able to see some data published on that?

Lawrence Mehren

Yes. Sorry. I was referring to Pharmacoeconomics studies, which typically have a clinical and an economic endpoint Brian for those with typically be combined. The clinical outcome, typically drive and economic outcome. And so in our case, we are combining both of those together.

Brian Weinstein

Perfect, thank you. And then you mentioned to European tender win, I know you said not to expect to a whole lot of revenues, this year. But can you give us some idea about kind of scoping size of that win and if there was anything other than the obvious that helps you when that tender?

Lawrence Mehren

Look, I mean, we are pleased with winning the tender and we are also pleased with EU performance overall. Frankly, in Q1, it was early days and we weren’t really ready to talk about how well or we would or would not do in Europe. It looks like we are going to do better than we thought, we are seeing a number of PVP contracts come through and tender wins, it is of course dependent, but things will go there and we are pleased. We think, the market is responding well to our product in Europe.

Brian Weinstein

And last one for me, on manufacturing, when I was out there several months ago. We went to the facility attached to your headquarters there. Your were building stuff out, can you just talk about where the build out is on manufacturing your capacity since for initial launch and if there is any incremental CapEx that you guys think that you will need to quick to work to kind of finish that off? Thanks.

Lawrence Mehren

Yes. You bet Brian. So right now, we have manufacturing capacity both for instruments and reagents to take us through our planning period and the facility next door is now complete and the build out internally is being done components-by-components and the majority of the components are also complete. And so soon we will be manufacturing all our reagents internally. The real benefit for us there is both control and cost of goods.

Brian Weinstein

That’s it for me. Thanks.

Lawrence Mehren

Thanks Brian.

Operator

And our next question comes from Tycho Peterson with JPMorgan. Please go ahead.

Patrick Donnelly

Hey, thanks guys, it's actually Patrick Donnelly in for Tycho. Just on the contract that you guys have in place. I mean can you discuss kind of the conversations you had with lab directors on the pricing side, how much pushback if any on the kind of premium pricing is going to push through on the testing and obviously you are still in the time savings, maybe just talk through those conversations?

Lawrence Mehren

So, Patrick on the PVP contract that we have won clearly, we had to use the various tools and studies that we have done so far to show the economic benefits of the system. And we are premium priced products and believe that we should be a premium priced product and so far we have been able to maintain that premium price.

And we anticipate continuing to do so. I think as we move through more-and-more customers and move out of the segment that we are targeting right now into other segments we are going to need more data and we are in the process of generating that data right now. But in the segments that we are targeting today, so far, things look quite good.

Patrick Donnelly

And then just on the sales force ramp up, I know you mentioned you have 23 reps in the U.S. now, I mean I think I have seen you in the past talk about kind of mid-to-high 20s, I mean are you actively filling any positions, or you feel pretty content with the current team going into possible launch?

Lawrence Mehren

I think we have two open positions right now to take us to 25, but we feel quite good with the 23 that we have now.

Patrick Donnelly

Okay. Thank you.

Lawrence Mehren

You bet.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Larry Mehren for any closing remarks.

Lawrence Mehren

I think that’s it. Thank you very much folks and we look forward to talking to you all again soon. Have a good day.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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