Nanosphere Incorporation Q1 2008 Earnings Call Transcript

Nanosphere, Inc. (NSPH)

Q1 2008 Earnings Call

May 13, 2008 5:00 pm ET

Executives

William Moffitt - President, Chief Executive Officer and Director

Roger Moody - Chief Financial Officer, Vice President - Finance & Administration, Treasurer, Secretary

Michael McGarrity - Chief Marketing Officer

Analysts

Kristen Stewart - Credit Suisse

William Quirk - Piper Jaffray

Bruce Cranna - Leerink Swann & Company

Presentation

Operator

Good day ladies and gentlemen and welcome for the first quarter 2008 Nanosphere Incorporated earnings conference call. My name is Eric and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of the conference. (Operator Instructions).

Now Nanosphere would like to state that certain statements made during the conference call which are not based on historical facts, maybe deemed to constitute forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. Because these following statements involved known and unknown risks and uncertainties there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements.

Such factors include those risks described from time-to-time in the Nanosphere’s filings with the United States Securities and Exchange Commission including without limitations the risks described in Nanosphere’s current filings with the SEC. Please note that Nanosphere undertakes no duty to update this information. I would now like to turn the call over to Mr. Bill Moffitt, President and CEO of Nanosphere; please proceed.

William Moffitt

Thank you Eric. Good afternoon everyone and thank you for joining us for Nanosphere’s investor conference call, covering the first quarter. In a few moments I will turn the call over to Roger Moody, Chief Financial Officer of the Company who will review the results we released this afternoon and to Mike McGarrity, Chief Marketing Officer of the Company who will provide an update on our sales and marketing programs. But before turning the call over to Roger and Mike I would like to discuss with you the progress we are making toward building Nanosphere into a leader and molecular diagnostics and specifically address some of the events of the first quarter.

First as you maybe aware we initiated a recall of certain lots of Warfarin Metabolism Test cartridges during the quarter. This was a Nanosphere initiated recall, which is now completed. As we continue to ramp customer placements during the validation process we noticed signals from some cartridges that were sufficiently high to have the potential to produce aberrant results. The rate of this occurrence was determined to be less than 1%; nonetheless we initiated the recall so we could recover all cartridges that could have exhibited the same characteristics, so we could test them to find the source of the issue.

We determine this to be the result of a specific step in the production process, which was subsequently adjusted and validated. During the course of this period of investigation we temporarily halted new customer validations. As a result we did not work completely through the original pipeline of 30 customers within the first quarter. However, we will achieve that milestone and more in the second quarter and believe we will meet our internal goals on a quarterly and annual basis.

As we all know new companies and new technologies get one chance to form a first impression and we are committed to delivering the highest levels of quality in everything we do. Ultimately this recall affected only eight customers and eight different lots of warfarin metabolism cartridges, but it was very important to us to react quickly, resolve the issue and ensure our customers received only high quality products and that we not continue new customer placements until we've resolved the matter. We are confident that this is behind us.

As you know we are working to commercialize an ultra-sensitive test for cardiac troponin. We have developed a comprehensive marketing program to begin to position our assay. We initiated the program during this years meeting of the American College of Cardiology, where we held a symposium with a panel of distinguished experts in the fields of cardiovascular, emergency and laboratory medicine. The panel discussed advances in diagnosis, risk stratification and treatment of patients with cardiovascular disease with an emphasis on the importance of even greater sensitivity in troponin assays; often the only two available to provide a definitive diagnosis.

As Doctor Frank Peacock, Vice Chief of Emergency Medicine and Director of Clinical Operations at the Cleveland Clinic observed 13.2 million people show up at emergency departments in the US every year with chest pain and shortness of breath, classic symptoms of a heart attack. However, only about 2% of these folks are having an ST segment elevation myocardial infarction or STEMI as it's known visible on an EKG. That leaves 98% of the patients to be diagnosed through longer-term continued observation of clinical symptoms, assessment of other risk factors and primarily a troponin blood test. This takes anywhere eight to 24 hours or more depending on the severity of cardiovascular damage and indeed many unstable angina patients go undiagnosed.

Doctor Peacock stressed the need for both an earlier diagnosis of non-STEMI patients and those with unstable angina to enable earlier therapeutic intervention to stop the loss of heart muscle. Most significantly for the emergency room he stressed the need for a definitive rule out test to enable rapid disposition of non cardiac patients. Dr. David Morrow from the Brigham & Women's Hospital, where he is Assistant Professor of Medicine at Harwood Medical School and a Researcher in the Timmy Study Group, presented data from an early clinical study using a research version of our troponin assay.

The results clearly demonstrated the ability of our ultra sensitive assay to provide earlier detection of non-STEMI patients, which could lead to direct therapeutic interventions and improved risk stratification to identify and diagnose unstable angina patients and the potential to provide a definitive rule out diagnostic. Dr. Allan Jaffe, Professor of Medicine in the Department of Cardiology and Vascular Medicine at the Mayo Clinic, also addressed the potential to monitor patients with chronic diseases such as diabetes, hyper tension, kidney disease and congestive heart failure; diseases that can ultimately lead to heart damage.

We are excited about the prospects for our ultra sensitive troponin assay to change the practice of medicine by diagnosing cardio vascular disease at much earlier stages, thereby enabling earlier intervention with the prospects of significantly better outcomes. In addition, for the emergency room, our product will address the need for a definitive rule out test to enable more rapid disposition of non cardiac patients. Moreover, the use of the assay to monitor comorbidities, could double the market opportunity for our assay.

We have developed the series of clinical studies and trials that we will implement over the coming months and quarters that will provide the data not only to seek regulatory clearance, but also to provide the evidence for even greater utility of our cardiac troponin assay. We have begun to work with specific sights and investigators to define the protocols and logistics. If we continue to make good progress, this assay could be launched about mid 2009; with that said, we are continuing to do our best to accelerate that time line. In addition to the cardiac troponin assay, we have a number of assays in various stages of development. Our cystic fibrosis assay is now in clinical trials, as we progress toward regulatory submission to the FDA.

We expect this test to be the next assay launched on the Verigene system. We believe our competitive advantage for this assay lies in our ability to perform direct detection on a high count multiplex panel, thereby creating a simple to use assay format that requires very little hands on technician time. A number of current and prospective customers had expresses great interest in this assay. Additional assays in development scheduled for commercialization over the coming quarters include a respiratory panel with expectations that we would be in the market by the ’08, ’09 flu season. A number of additional programs underway will enable us to provide optimal solutions for customers who seek to build molecular diagnostic capabilities and expand the test offerings to respond to continued clinical demand.

Now let me turn the call over to Roger, our Chief Financial Officer who will review the financial results for the first quarter of 2008.

Roger Moody

Thank you Bill. This afternoon I will review Nanosphere’s first quarter 2008 financial results, which are accompanied by today’s press release and 10-Q filing with the SEC, both of which you can find on our website, which is www.nanosphere.us. Please note that is nanosphere.us. First quarter 2008 revenue was $576,000 compared with $270,000 in the first quarter of 2007. Revenue growth was driven by initial product sales comprised to Verigene instruments, reagent rental agreements and Test Cartridges.

Product sales grew to $303,000 in the first quarter of 2008, from $51,000 in the fourth quarter of 2007. First quarter revenue from grants and contracts increased to $273,000 in 2008, from $223,000 in the same quarter last year. We expect the bulk of our future revenue growth will be driven by product sales rather than government grants and contracts.

Cost and operating expenses in the first quarter, were $9.6 million as compared with $7.1 million in the prior year. This increase reflects investments and product commercialization, manufacturing scale up and expanded product development, as well as expenses related to operating as a public company.

Cost of product sales was 349,000 in the first quarter of 2008 resulting in a nominally negative gross margin on product sales. We have several cost reduction programs underway, as we scale to higher volumes. These programs such as conversion to multi-cavity moulds and cartridge assembly automation are proceeding on schedule. Sales, general and administrative expenses in the first quarter of 2008 were $3.4 million versus $2.2 million in the same period one year ago.

This increase includes approximately $400,000 in audit, legal and consulting fees necessary to operate as a public company, approximately $300,000 in non-cash stock compensation expense, and approximately $300,000 in sales, general and administrative staffing expenses.

R&D expenses increased to $5.8 million in the first quarter of 2008 from $4.9 million in the first quarter of 2007. This increase was driven predominantly by investment in personnel focused on research and development of infectious disease and ultra-sensitive protein tests.

First quarter 2008 R&D expenses, also included $300,000 in non-cash charges for the disposal of manufacturing and development equipment which was replaced by equipment the company needed to support scale up of our manufacturing and development capacity. Our net loss was $8.7 million for the first quarter of 2008, as compared with $6.6 million for the same period in 2007.

Our cash balances as of March 31, 2008 was $104 million. First quarter cash flow used in operations was $8.4 million, which includes payments of approximately $1 million related to franchise taxes and annual bonuses both of which were accrued throughout 2007.

Cash flows used in financing activities included final IPO expense payments of $779,000 and scheduled debt repayment of $351,000. Summing up, our business progress and financial benchmarks are essentially on track with our plans and expectations.

Now let me turn the call over to Mike McGarrity, Nanosphere’s, Chief Marketing Officer who will review our continued customer expansion, as well as our market preparation activities related to our next product launches.

Michael McGarrity

Thanks Roger. Our sales and customers part team continued progress towards our goals of increasing marketing penetration, accelerating utilization and planed expansion. Through the end of the first quarter we shipped Verigene Systems, to 25 customers for validation all of whom have either completed or are in the process of completing validation. Our customer and perspective customers continue to recognize the value of our approach from both an efficiency and ease of use standpoint.

While still relatively early to draw conclusions cartridges utilization by our validated customers is greater than we anticipated for our hypercoag test and our Warfarin customers are in the process of implementing pharmacogenetic programs. In this regard, there are a number of perspective large scale clinical studies such as the collaboration between Medco and the Mayo Clinic.

While we are confident that these studies will yield compelling results and support our efforts we are also committed to helping our customers both greater awareness and expand our programs on a local basis have providing assistance with clinical studies and education to integrate the resources of the hospital laboratory and pharmacy with clinical practice. To that end we have set up retrospective and prospective data collection efforts that will support and drive the adoption of the test of these key constituents.

We believe these efforts will lead to greater awareness for value of warfarin metabolism testing and increased utilization by our customers. It is clear that our assay has recognized as the ideal approach for pharmacogenetic testing in general and warfarin metabolism specifically based on the key requirements the on demand, rapid result and multiplexing capabilities of the Verigene.

In parallel we are excited about the response from both current and prospective customers to the additional test that we are commercializing. Our pipeline includes both cystic fibrosis and respiratory panel customers. We are encouraged by the unsolicited interest in our respiratory assay that is in development and will begin to position that assay with our current and prospective customers.

This continued interest and acceptance by development plans is validation of our benefits of work efficiency and ease of use taking the whole of this customers request additional test, best suited for the decentralized molecular laboratory. As Bill noted we have also begun marketing and commercialization efforts to position our ultra-sensitive troponin assays. We have commissioned sample acquisition sites for our clinical, regulatory and marketing studies and it began developing our value models for target customers from both an economic and clinical aspect.

As we speak with thought leaders in the market it is exciting to see the value of this assay resonate with laboratory, emergency medicine and cardiology. We believe this assay represents a major step forward and we look forward to building up best-in-class program of excellence, for the diagnosis and risk ratification of cardiovascular disease.

I’ll be happy to answer any questions and these developments during the Q-and-A and I will turn the call back over to Bill Moffitt.

William Moffitt

Thanks Mike and Roger. Before moving on to take your questions, in concluding this afternoons call, I would like emphasis three points that were made today. First our programs are in full swing and we are confident in our ability to meet customer demand and continue to penetrate the market.

Second we have four new products moving through various phases of the commercialization process. If we remain on schedule, these could enter into the market over the coming quarters, expanding our product offering and increasing the value of our Verigene platform and third the introduction of ultra sensitive protein tests where we expect our troponin assays to have a significant impact in the market; will clearly demonstrate the flexibility and adaptability of our platform and enabling Nano technology.

We believe our continued efforts to generate significant customer value will translate into greater shareholder value and we thank you for your continued interest and support. Now we will be pleased to take any questions you may have. Eric I’ll turn it back over to you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bill Quirk with Piper Jaffray. Please proceed.

William Quirk - Piper Jaffray

Yeah Mike I just wanted to double check; you said 25 validated customers, that since the launch right, that wasn’t in the quarter.

William Moffitt

That’s correct Bill.

William Quirk - Piper Jaffray

Okay great and then can you just remind us how many instruments you did placed in the quarter?

Roger Moody

There would have been 12 in Q4, 13 in Q1.

William Moffitt

We finished Q4 with 12 and so 13 more in Q1.

William Quirk - Piper Jaffray

13 more place in Q1, okay great and then Bill there are a couple of changes in the works in September coming out of FDA. Frankly I think that probably could cause a little bit of confusion possible trip up on your competitors in the cystic fibrosis market, so does that help kind of accelerate internally or how should we think about that vis-à-vis the launch of the CF assay.

William Moffitt

Well, that’s a good question. We are in clinical trials with our assay right now. We have the first -- we do three sites, right? So the first site is concluded, the second site is up and as soon as site two is concluded we will move on to three, so timing wise I mean you don’t know until these studies are done; what the data really looks like, but assuming all goes well, we should be able submit this to the FDA, I would think -- again assuming things go well, sometime in June. So, depending upon what the FDA clearance time is, we obviously hope that we can be in the market, before the end of the year. Some of the changes that have occurred, I think will bring greater focus to bear here; we certainly hear from our existing customers that they’re interested in this. We have new customers in the pipeline that are there in part because of this assay and in part because it’s just another step in rounding out our total offering. So, we’re feeling pretty good about it, but again I’ve seen these things flair up in their face before, so we feel good but, we’re not going to get our expectations internally beyond, what they’ve been all along.

William Quirk - Piper Jaffray

Understood Bill, I understand that your ability to predict the future is obviously limited as in cases. Two additional questions from me and I’ll jump back into the queue. First is, in light of obviously continued plan from troponin in mid ’09 are there any additional studies we should be thinking about in terms of up coming conferences and then secondly, we are just hoping you could remind us how many markers and for that matter which markers will be included in the respiratory panel?

William Moffitt

Okay let me take your last question first because it’s a short, my answer is Influenza AB and RS VAB and that, if you remember now, our respiratory panel, there is our first generation and there is a second generation assay and the first generation assay of necessity has sample prep external to the Verigene System. It’s the Verigene two, the second generation Verigene two system, which we have intent to bring to the market in mid ’09, that system will incorporate sample prep and it will incorporate sample prep both for whole blood for human genetic assays as well as prep from things like swab tubes and so forth for infectious diseases. So the first generation assays for respiratory RS VAMB influenza AB pre Verigene system sample prep. Second generation product scheduled for the following year, commensurate with the launch of the Verigene 2 will be an expanded panel of targets, but packaged in a variety of ways, so we are not going to just put on one big broad test menu and say that the customer -- a sort of this or nothing. We actually will break that up into the relevant panels, which turn out to be relevant in large measure by age groups as well. So there is a sort of a pediatric look at it, there is a sort of geriatric look and sort of an out patient view as well as even perhaps use in patients so….

William Quirk - Piper Jaffray

And presumably Bill, that's obviously going to be flexible with respect to reimbursement.

William Moffitt

Absolutely and that the reason for the flexibility is obviously a couple of things: number one, it’s just compliance. Physicians have to medically and clinically justify why they order certain tests or medicare just don't reimburse and a lot of pairs don't, so we know that our customers need that kind of multiple panel approach of flexibility. We even see it today in the HyperCoag Panel, where we offer different configurations of that panel and we sell all three different configurations that we offer. We fully expect to see that in the flu panel and again that just speaks to the underlying ability of using a microwave approach here, we can sort of mix and match and do what we need to in a given cartridge. So you will see up in the second generation, put sample prep onto the Verigene System itself as well as have an expanded menu of targets as well as have additional flexibility into what sub sets of panels one could -- a customer could purchase through the cartridge.

William Quirk - Piper Jaffray

And that should give you very strong competitive Bill, if anybody serves the offerings -- you actually have separate sample prep at this point?

William Moffitt

Right, exactly.

William Quirk - Piper Jaffray

And then on the troponin side and I will jump off?

William Moffitt

Yes, on the troponin side, there are a number of different clinicals that could be run here and bluntly there are more that can be run that we could do at anyone point in time, because when the fault leaders start thinking about the possibilities, there is ultra-sensitivity, you can start making a pretty long list of all the clinicals that would be interesting to run, but that said we are focused on, I would say three or four primary wins up front. The first and immediate up front, would be to be sure that we on a timely basis get through the regulatory process; that’s a 510 K comparing our assays to other assays in the market if you will and those are fairly straight forward. Albeit, we do have discussions ongoing with the FDA just to make sure that we don’t make any assumptions that turn out to be invalid. The second area of clinical investigation that people are really excited about is this concept of a rule out. There are at least -- of that $13.2 million people that come in the emergency room with chest pain and shortness of breadth, there is at least half of them, are non-cardiac chest pain; yet, because the single greatest contributor to malpractice suites and the rates of malpractice insurance in the emergency room is miss-diagnosed myocardial infarct. Because of that emergency physicians will just hang on to these patients for a long period of time, just making certain, it’s not the heart. You know the statistics probably as well as we do. Despite all the best efforts in the US, every year there are still a 100,000 people discharged from emergency rooms who are told it’s not you heart go home and they a coronary within 30-days and a quarter of them die. So, that’s a significant effect if you will on the practice of medicine in the emergency room. So, the -- so as Dr. Peacock would said to you, “for the best thing, you can do for me right up front here, is just tell me who these half are. That’s not their heart, I can get them on to the kind of care, they should be getting and get them out of this sort of high cost observation mode, which can run for 10, 12, 20 hours or more.” So, how do you prove that and the way you do that is with the sufficiently large study on a prospective basis that you say, we looked at X number and we have to have statisticians to help us power that, but I will go out on a lim and say its something in that 1000, 2000 patient range probably. That we have to have especially a large perspective study to say that when we go through that and look at it and then follow these patients up for some, reasonable period of time 30 days, 90 days whatever the right follow-up period is here, that our assay within a very brief period of time that’s becoming emergency room of 60s quote normal for I don’t know what the right number is, the study will tell us; two, three assays over the course of a couple of three-hours that it’s not the heart you can move them on. So, that’s a huge work relief in the emergency room and obviously would sort of cut down the number of people that get discharged and go home and have a coronary. So, the rule out study is certainly one that’s high in everybody's mind. The next one is this notion of a risk stratification rule in. If you read through the literature we talk about people being either a steamy or an in steamy or unstable angina. The fact is the difference -- the fact is all of them have a blood clot somewhere. The steamy is so sever that it creates sufficient damage, that it causes a sort of a rerouting if you will of the neurotransmissions across the heart that create the beat and it shows up as an elevation in the ST segment of the waive on the EKG. Bluntly these people are off to the cap lab before the troponin result even comes back from the lab, because it’s that apparent. The problem that they have -- and that’s only 2% of the people -- the problem is the other sort of half of the people that have either a minor blockage somewhere, a minor clot or early damage from unstable angina, the ability to risk stratify that because that’s a big raise on if you will and so that’s where the belief is that a much more sensitive assay we will give you a much better look at the very earliest on set of the event and it remains to be seen whether or not for example the rate of rise in troponin in the earliest hours is indicative of sort of the severity of the damage. There are people in the community who have done work in this area, research in this area; they proposed that that might be the possibility. So, there is another set of experiment that says let us look at our studies -- I should say they say let us look at a number of people and figure out whether or not you can even better risk stratify, but frankly if you talk to all the constituents involved in this the rule out is the number one in their minds. So, I know it's a long answer to your question, but the answer is there are just lots and lots of studies that we can do and the key for us is to prioritize them so that we give the market the answers and the data they need as early as possible for the biggest impacts in the market.

Operator

(Operator Instructions) Your next question comes from the line of Kristen Stewart with Credit Suisse. Please proceed.

Kristen Stewart - Credit Suisse

Good. I was just wondering if you could just go back and address kind of the recall, maybe you just kind how they are when these things kind of unfolded. I did go back and I saw that something was in the FDA and a portion of the reports, but didn’t see any sort of press release or anything like that. Maybe help us understand kind of when this occurred, whether or not there was an impact on just the first quarter results, whether this going to be an impact going forward and maybe just kind of help us get our arms around it a little bit more?

William Moffitt

You bet Kristen. First of all, we the company did not put out a press release on this because it's not a material event at all and it did not affect us materially in the first quarter, it certainly won’t affect go forward in the second quarter any point beyond that. This -- we first noted this in a customer validation; I am going to say some time in, it was early February may be and what we saw was the signal on a -- a signal on a cartridge that was higher than it should have been. Keep in mind when we do these validations with customers, we take a look at all the data they generate, so that we can understand how the product is performing in their hands. When we see something like that, the sort of unexpected that causes us to say “Okay what is that, why did had happen?” We went back and pulled the retains. The FDA requires when you make a product like this you sell it that you are required to keep as certain small percentage of the batch that you make to test should there be anything in product performance that’s questionable out in the marketplace. So, we came back and tested our retains and our retains did not show the problem at all. So now we are faced with the issue as a company at that point in time of just sort of say “well I guess there wasn’t really anything there” or say, “no we need to really chase this down.” In the early days of a company like this and frankly in this company at anytime, we are going to make sure we have got the highest quality out there; you don’t ignore things like that. So for us it’s a matter of how do we get more of these cartridges to test and they were all shipped out into the marketplace. So, basically we had to go to the marketplace to get them back and the minute you go to the marketplace to bring something back because you are investigating a problem that is a recall and you can say it's anything you want, but the FDA will tell you that’s a recall. So the company, we initiated a recall, so we can get these cartridges back to test them, just so that we could find out, what was going on and so all we did was pull these cartridges back and then give customer’s new cartridge in their place and so, what we did discover then was that there was a manufacturing process step that as we scaled needed an adjustment. We made the adjustment, we went through, we validated it, commenced it with the inside, GMP’s and QSR requirements, documented it and moved on. I mean it literally is that straightforward? So, it’s not like -- I don’t know; I don’t how to describe it, because it is a recall, but it’s a class two recall, it’s not a -- one of these “oh my gosh there is something seriously wrong with the product that’s out there.” In fact I could say that if were to have a lot more of those cartridges in the house, perhaps we could have tested them count the conclusion it’s a onetime aberrant event and move on from there, but the fact is we don’t have any, so we needed to get the ones that were out in the market. I don't know if that helps you, but it's just a -- I mean I can’t -- you never want to be seen as minimizing anything that has to do with your product performance. So, I would not want to be seen as minimizing, but it wasn't material and strictly a requirement and order for us to get the product back.

Kristen Stewart - Credit Suisse

Okay I know it was for that reason that you felt that you can necessarily do all the validations that you were anticipating?

William Moffitt

Well, at that point, when you ask yourself the question “until I figure out whether or not there is something here or not should I keep going replacing new instruments and starting up new validations” because you don’t know what you are dealing with. So you have a period of time there where you literally notify the customers, make arrangements, get the stuffs shipped back that takes a couple of weeks, you get it in house, you run through all the experiments. I mean literally you design out experiments to try to use as few cartridges as possible, test as many variables as possible because you got a finite number to work with, so there is about a -- I don't know; three week period of time or three and a half week period of time there where we just said “look let’s not run the risk until we know the answer that we expose ourselves more. So, let’s just stop adding validations right now.” Now the minute we had that resolved it was okay, back to full team ahead and I will tell you we crossed out the end of the quarter running full team ahead.

Kristen Stewart - Credit Suisse

Okay. And it was only on the warfarin, it was not on the hyper-coag?

William Moffitt

No, just -- they were just to the warfarin; it was just any lots and those lots were only in the hands of eight customers and keep in mind in these early days of us producing product here a lot itself is only about a 100 or 120 cartridges and I think by the time -- I mean the FDA recall information has all the exact numbers in it, but by the time we were recalling stuff we got only 300 or 400 back at most and this is a company decision. I mean this is the decision to go out in the marketplace, recover stuff, so that we could test it out early and if this happened tomorrow, I’d make the same decision again.

Kristen Stewart - Credit Suisse

And so the costs of all the recalls and what not is all included within the first quarter results?

William Moffitt

Absolutely it's trivial, it's trivial.

Kristen Stewart - Credit Suisse

Okay. So going forward then it sounds like even more than expect do you pick up whatever lost replacements you’ve had from the first quarter and your still kind of moving forward with your expectations for the full-year?

William Moffitt

Absolutely. In fact, I think we will make our -- meet our internal goals for Q2 and quarters in the balance of the year and the full year. This is not, materially disrupted to our efforts at all.

Kristen Stewart - Credit Suisse

Can you help us get a sense as to where, kind of your -- I know you were talking about the 30 initially but may be if we looked down a little bit further in terms of how you're expecting things to ramp up, any color there in terms of number of accounts and the placements for those number of the units placed or were those just customers, because I know customers can obviously order more than one unit?

William Moffitt

I will let Mike to respond first.

Michael McGarrity

And then Bill can comment on going forward guidance of projections, but -- and I think as we look at where we are Kristen in our initial months in the market, I think from a standing start with two assays we feel like we are approaching a footprint in almost 10% of the current hospital base molecular laboratories. So what that tells us and what we feel good about obviously is that’s validation of our approach sitting within our target customer which is these hospital base laboratories. I think if you look at the pipeline, the majority of these is we have talked about, we feel also confident that we can continue to pick-up customers that are already running Coag; we talked about on the last call putting our system end for warfarin because of its ideal fit for that test and based on the advantages demonstrated through that validation, the customer elects to move over Coag volume. That was my comment as far as our utilization actually running a little bit ahead, I think that we are actually pleased that we are picking up some higher volume Coag customers based on that approach. I think as we look at start up laboratories in these hospital based labs, so that this market continues to grow; the pace and the lead time associated with those is a little bit longer from a standpoint of getting our samples front methods up and getting their testing programs going. That’s bodes well, we feel for Verigene 2, and our approach there, so as we continue to build our footprint in the current labs and move towards start up and expansion in that growth model, we feel like our development plan matches our put forth to customer needs.

Kristen Stewart - Credit Suisse

Okay.

William Moffitt

Yeah, Kris as far as looking forward I mean you know we don’t as a company policy, don’t make projections, but I can say that right now we’re going at a good rate. I mean if you take through the end of the fourth quarter 12 instruments out, through the end of the first quarter with a hiatus there doing that recall activity, a 13 unit out, I mean and that’s worth the two tests that we have. Now with the CF coming along through clinical trials, I think that will also add to the value of the system, round out the menu further and I think and as we know looking forward at the pipeline that we have, there’s certainly customers there that are interested. It’s another we are saying that sort of like every test you add to the menu is another critical add and there is another group of customers that say “okay now you've made my critical mass,” that we feel pretty good going forward; no question about it.

Operator

(Operator Instructions) Your next question comes from the line of Bruce Cranna with Leerink Swann. Please proceed.

Bruce Cranna - Leerink Swann & Company

I apologize I have been going back and forth between calls here. I heard the installed based number, did you guys talk about that placement number in the quarter and the break between existing molecular labs and there is -- that had no MDX footprint?

William Moffitt

We didn’t actually make a distinction between the no port and the existing labs, Mike you want to comment on that.

Michael McGarrity

Yes I think our focus Bruce has been on the existing labs and mainly I think by design its driven fairly well by rep priority. In other words I think our reps have prioritized where there is existing testing volume that we can move over to our platform and I think as we go forward and expand that basis, as I commented to Kristen we will start to see more of the startups. That process time from the initial rep contact, to interest, to bringing up a new molecular lab, there’s obviously a number of variables in fact we used to time that, so, we have just prioritized the initial menu, but we still feel good about our system being a great fit for the startups.

William Moffitt

I maybe repeating what you said Mike, but it’s pretty natural to expect -- if you recall what we first started talking about the Company publicly, we said that initially we thought the vast majority of interest for this would be in the hospitals that don’t have molecular platforms simply because of the easy-to-use factor and we thought that the established labs would not have much interest simply because they already have a vested method of doing these things, well established etc and this would represent yet another capital expense, against an already installed base of capital and we were just wrong about that. There has been a tremendous amount of excitement about the product in the established molecular labs and frankly if you look at it, right now we’ve got systems in what is getting close to be 10% of the established molecular labs and I think the reason is they see the easy to use. So, now if I’m a sales rep out there and I say “well, wait a minute,” I go to established lab, they buy this product, they know what they’re doing, they have an installed capability if you will and they’re going to use my device and replace something else that’s there, that’s just easier to do than go start a community hospital that's building from the ground up. So, I agree with Mike; I think right now you are going to see for a bit a little bit higher mix of the installed base of systems out there or I should say labs out there coming over to this system driven by ease of use, but we also have in the pipeline no question, community hospitals are coming up for the first time.

Bruce Cranna - Leerink Swann & Company

Yes and of -- I guess it's what, 25 placements, is that right?

William Moffitt

25 -- well, yes through the end of the quarter 25.

Bruce Cranna - Leerink Swann & Company

And are those validated at this point?

Michael McGarrity

We are in the process there Bruce and mainly based on the warfarin that Bill commended on, we are still getting about catching up and moving through that in Q2.

Bruce Cranna - Leerink Swann & Company

Okay and then last question from me and again I'm sorry if I miss some of this, but did you guys provide an update on the RSV for flu season?

William Moffitt

Yes, we did and the comment was that first generation system will be our RS VAB and Influenza AB and it will -- in the Verigene system that got here today will carry a pre -- our customer external sample prep of necessity, but in the Verigene two system that we intend to bring to the market, by the middle of next year, we will carry an onboard, integrated sample prep and with that we will come a second generation influenza panel and we will also expand the panel at that point in time, but offer it in a very flexible format, so that you can sort of mix and match specific targets to create clinically relevant subset panels.

Operator

Your next question is a follow up from the line of Bill Quirk with Piper Jaffray. Please proceed.

William Quirk – Piper Jaffray

Yeah, thanks. Hey Mike, just one quick follow-up, how many sales you have sales guys do you have in the field right now?

Michael McGarrity

Seven.

William Quirk – Piper Jaffray

Seven, okay got it. Near term plans in terms of hiring?

William Moffitt

As we’ve talked Bill, as we’ve add menu and built out our product menu we will both build out the sales force accordingly and we have that -- that’s skewed up so we feel good about building that out as we have talked between now and the end of the year.

Michael McGarrity

And I would also say Bill, I think a big wildcard here is the time our troponin.

William Quirk – Piper Jaffray

To be sure Bill obviously once you get that out, I’d suspect you’re going to have quite a bit of need to expand the sales at that point, presumably, ahead of that actually.

William Moffitt

Well, absolutely, actually and we really always in the recruiting mode for good talent and that’s why I said it’s queued up, so we are not stopping and starting. Hey Eric, maybe we have time for one more question?

Operator

Okay. Your final question is a follow-up from the line of the Kristen Stewart, with Credit Suisse. Please proceed.

Kristen Stewart - Credit Suisse

Hello, mine is just a quick one for Roger. Roger the cash on the balance sheet what sort of rate of return are you getting at this stage?

Roger Moody

Not as high as one as I would like. We stay away from all of the kind of auction rate securities and anything that we think could jeopardized the cash. So we really had it all in money market and that rate of return has diminished as the Fed has lowered the prime rate and so it’s in the -- around the 3% range, but certainly not what we had originally expected when we originally raised the money, but I think that probably true for all companies that have cash invested in the market in safe securities.

Kristen Stewart – Credit Suisse

Okay and then, the impact from foreign exchange what is that related to and are there any updates on expansion plans internationally, I know that you have talked about in the past?

Roger Moody

Sure. The foreign exchange is simply that, it’s timing of when we receive an invoice from a foreign vendor, we purchase some equipment from companies in Europe who provide us with some things that help us in the manufacturing process and so the foreign exchange is simply as the dollar weakens our strength -- it’s been more of the former; we then take a loss or gain based on the difference in timing between the invoiced and the payments and in terms of international expansion we continue to evaluate the market over there. We continue to make good progress in going through a number of the steps needed to identify potential partners that we might work with over there, as well as early pilot customers with whom would adopt our platform and so have an active program with a couple of people dedicated to advancing our initiatives over in Europe primarily.

Kristen Stewart - Credit Suisse

Okay. So, it’s one think we should really expect to see ramping up in the…

Roger Moody

I wouldn’t see they’re making any kind of a meaningful impact this year, but certainly we were preparing ourselves so that in subsequent years will be in a position to drive placements over there as soon as we have gone throughout all of the regulatory hurdles as well as aligned ourselves with the right partners.

Kristen Stewart - Credit Suisse

Okay and just with the whole kind of pharmaco-genomics being talked about I know geno was about to be sign by the President. Have you guys talked to or would you be willing to talk to any of the pharmaceutical companies to work a little bit more on that kind of a platform?

William Moffitt

We talk with them from time-to-time, sort of on an ongoing basis, but it’s not necessarily aimed only at pharmaco-genomics, but also things like using the ultrasensitive protein detection for biomarker work and their drug discovery efforts as well, so we are constantly in the loop there for sure.

Kristen Stewart - Credit Suisse

Well, that’s it from me.

William Moffitt

Okay. Thanks Kristen. Well thanks everyone for joining us for our call today and again we appreciate your interest in the company and your support and look forward to continuing to work with you as the months and quarters go by. Thanks again everyone. Have a good day.

Operator

Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect. Have a good day.

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