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Nanosphere, Inc. (NASDAQ:NSPH)

Q2 2012 Earnings Call

August 7, 2012 10:00 AM ET

Executives

Bill Moffitt – President and CEO

Mike McGarrity – Vice President, Sales and Marketing and CCO

Roger Moody – Vice President, Finance & Administration and CFO

Analysts

Brandon Couillard – Jefferies

Bill Quirk – Piper Jaffray

Scott Gleason – Stephens

Matt Dillon – Roth Capital

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Nanosphere Earnings Call.

Nanosphere would like to state that certain statements made during this conference call, which are not based on historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Because these forward-looking statements involve known and unknown risks and uncertainties, these are important factors that could cause actual results, events or developments to differ materially from those impressed or implied by these forward-looking statements.

Such factors include those described from time to time in Nanosphere's filings with the United States Securities and Exchange Commission. Please note that Nanosphere undertakes no duties to update this information.

I would now like turn the presentation over to your host for today, Mr. Bill Moffitt, Chief Executive Officer. Please proceed.

Bill Moffitt

Thank you Clarissa. Good morning everyone and thanks for joining us for Nanosphere's Investor Conference Call covering the second quarter of 2012. In a few moments I'll turn the call over to Mike McGarrity, Chief Commercial Officer and Roger Moody, Chief Financial Officer. But first I'll give you my perspective on our progress.

There is one primary point today. With the clearance to market our bloodstream infection Gram-Positive Assay our business has achieved an inflection point that will enable us to fulfill the promise of this technology and our company.

In a few moments Mike McGarrity will review the significance of this assay and its impact not only on our business but also on patient care. We stand alone in the market with a test that addresses the clinical requirements for early diagnosis of sepsis, the number one driver of hospital costs and death.

The value proposition for this assay is clearly understood by the market and we expect it to fuel an increase in Verigene system placements over the coming quarters. Moreover our customers are excited about this assay and the pipeline of products that we have coming to the market over the next quarters that will continue to address critical issues in patient care.

Before providing you an update on our progress with that pipeline let me turn the call over to Mike to update you on our progress in the market, our plans for expansion of our commercial organization and the significance of the recently cleared bloodstream infection Gram-Positive Assay. Mike?

Mike McGarrity

Thanks Bill. We had 25 new customer placements in the second quarter bringing our installed customer base to 166 worldwide. The FDA clearance of our Gram-Positive blood culture test at the end of Q2 is serving as the placement catalyst we anticipated in the U.S. In addition, our recent exhibition at the American Association of Clinical Chemistry and the associated excitement by this audience served to confirm that we will continue to build our pipeline in the coming quarters.

We are focused on building this customer base and moving them through the validation process to drive increased utilization. The profile of our customer base and pipeline is represented by the full spectrum of hospital microbiology labs, from community based to academic teaching centers. The considerable awareness and demand for this assay is driven by the fact that sepsis is the leading cost of inpatient stay in the U.S. at over $15 billion annually, carrying a mortality rate of one in six patients.

We are the only assay on the market that can provide broad identification of bacteria and drug resistance and a sample to result on-demand test. Recently cited publications demonstrated the benefit of reduced mortality in the intensive care unit from one in two patients to one in 10 as well as a 6.2 day reduction in length of stay saving over $21,000 per patient.

Clearly the value proposition of our blood culture test can save lives, money as well as efficacy of critical last line therapies reducing the risk of resistance. As we update you today we are upgrading our current VerigeneSP customers with new software to run the blood culture assay and are providing the validation support to them as well as new customers coming online. The significant and comprehensive data generated during the FDA clinical trials serves as validation to the sensitivity and specificity of our assay.

Customers are required to conduct their own confirmatory validations and we will begin to get visibility to the timing from installation, training and validation to provide guidance on time to utilization in the U.S. for our new customers. On average we would expect this to mirror similar adoption profiles of 90 days in the U.S. and 120 days in our international markets. These efforts underway in Q3 will serve as the basis for the corresponding revenue ramp beginning in Q4 as customers go live.

As a result of initial market response and the significant opportunity this presents we are in the process of expanding our direct U.S. sales force as well as the technical and clinical resources to support our customer base. The size of this sales and customer organization will double over the next few quarters.

Our European and Asia Pacific sales and marketing efforts are advancing as well with all of our distribution partners expected to contribute to our accelerated placement and revenue growth in the coming quarters. In addition of a C. difficile assay a full enteric panel and a Gram-Negative panel to our microbiology menu will fuel growth in placements and drive customer utilization worldwide. All of our global geographies are engaged in building a world class commercial organization focused on delivering timely and clinically actionable information enabled by the VerigeneSP.

Now let me turn the call back over to Bill.

Bill Moffitt

Thank you Mike. As we previously discussed the breadth and applicability of our test menu is the key driver of market penetration. A strong pipeline will enable us to continue to accelerate growth over the coming quarters as more new products come to market. As microbiology converts to molecular diagnostic methods Nanosphere is positioned to be a leader in the field, providing comprehensive test panels that solve critical care problems in the area of infectious disease and hospital acquired infections with an on demand point of care format enables us to uniquely meet customer needs for better tools to support the diagnosis of life threatening conditions.

Clinical trials for our C. difficile assay have concluded. We await final processing of samples through the reference methods to confirm assay performance and at the same time we're beginning to draft the 510 K submission which we expect to make later this quarter.

This assay is unique in that it tests for toxigenic strains of C. difficile using both the toxin A and toxin B genetic markers and it tests for the O27 strain, more commonly referred to as the hypervirulent strain. Although we can never predict FDA review times and clearance timelines we are hopeful this assay should be in the market in the U.S. no later than the first quarter of 2013.

We have two additional infectious disease assays at various stages in the development process with both creating significant customer interest. Our enteric pathogen panel is headed into validation and early customer trials in this quarter and we are working hard to file with the FDA by around the end of this year. As always the exact timeline for clinical trials is dependent upon the prevalence of positive samples, in this case across a broad panel of pathogens including bacteria and viruses.

We have a number of clinical trial sites awaiting our delivery of the final design of the product to commence the trials. At the recent annual meeting of the American Association for Clinical Chemistry that Mike referenced the enthusiasm for this enteric panel equaled that of the bloodstream Gram-Positive test. At the same time our bloodstream infection Gram-Negative panel is progressing through development with clinical trials targeted to begin this fall.

Our regulatory timing here is somewhat different as this assay is of greater market significance in Europe than in the U.S. Therefore we will CE mark this assay and launch in Europe in advance of the U.S. regulatory submission. This assay is a key market driver for microbiology labs in Europe. Clearly we are building a test menu that will continue to drive market penetration and a significant revenue ramp.

Now let me turn the call over to Roger Moody to review the quarterly financials and comment on our recent financing? Roger.

Roger Moody

Thanks Bill. This morning I will summarize Nanosphere's second quarter 2012 financial results. For additional information on our second quarter please refer to the related news release and 10Q filing. Both are on our website www.nanosphere.us.

Regulatory clearance of our blood culture Gram-Positive test made the second quarter a clear inflection point. This clearance is the catalyst for immediate placement and revenue growth. Our robust infectious disease pipeline will further accelerate and drive Nanosphere to and beyond positive cash flow.

Now let's dive in to the second quarter results. Revenue was $1.3 million, nearly all driven by product sales. This compares to $500,000 in the second quarter of 2011. Second quarter 2012 revenue was essentially flat sequentially due to modest flu season winding down. Operating expenses in the second quarter were $8.9 million, as compared to $8.6 million in the second quarter of 2011.

Gross profit increased to $500,000 in the second quarter of 2012 from $100,000 in the same period 2011 driven by increased volume and margins. Gross margins year-over-year increased to 34% from 27%. Research and development expenses were $4.7 million in the second quarter of 2012, as compared to $4.6 million in the same period last year. This modest increase was due to goods and materials associated with clinical trials.

Selling, general and administrative expenses in the second quarter of 2012 were $4.2 million, compared to $3.9 million in the second quarter last year. The increase in SG&A was due to sales and customer support expansion, partially offset by reductions in equity compensation expense. Net cash used in the second quarter of 2012 was $8 million and we ended the quarter with $23.7 million in cash.

Following the end of the second quarter we completed an underwritten public offering of our common stock. This added $26.9 million in net proceeds. We expect the proceeds of this offering will fund our operations through positive cash flow.

As Mike and Bill mentioned, the regulatory clearance of our Gram-Positive blood culture test is an immediate catalyst for new customer placements. Revenue growth from these new placements will lag by a few months as customers complete their validations. The clearance of our blood culture Gram-Positive test is one of several key catalysts for driving future revenue growth. We expect that operating cash flow will begin to improve in the fourth quarter 2012 as both customer utilization of our Gram-Positive blood culture tests and next year's flu season are underway.

Now let me turn the call back over to Bill.

Bill Moffitt

Thanks Roger. Before moving on to take your questions let me reemphasize my primary point today. Our business has reached an inflection point that will enable us to continue to drive a significant commercial ramp. The strength of our product pipeline and critical infectious disease testing and the capital generated from the recently closed financing will enable us to drive this company to profitability and generate significant shareholder value.

Now we'd be happy to take your questions and I'll turn the call back over to Clarissa.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question will come from the line of John Wood of Jefferies. Please proceed.

Brandon Couillard – Jefferies

Hi, this is Brandon Couillard in for John. How many of the 25 system placements in the second quarter were cash instrument sales versus reagent rentals and then if you could give us a split between the U.S. and international, that would be helpful.

Mike McGarrity

Yes, about two thirds to three quarters were reagent rentals versus cash sales. The cash sales were related to mostly international sales which was also about a third of the 25.

Brandon Couillard – Jefferies

Okay, and then should I take your commentary to suggest that you anticipate minimal blood stream infection assay revenue in the third quarter?

Mike McGarrity

Yes, I think that's a fair assessment. What's happening right now is we've got all of the installed base of customers as well as new customers coming online, coming up and coming through their validation processes. Those validation processes are required by the various inspecting agencies under CLIA regulations and they have to do some number of each of the targets on the assay. So they've got to come up with enough samples to work their way through it. There is also a QC protocol that's about three weeks long. So it takes them a little bit of time to get through this. So what we're really trying to say at a high level is we're really going to see placements in one quarter drive revenue in the following quarter. So there were 25 placements last quarter Q2. Obviously we've guided to a much higher number for Q3. Bottom line is while you will see some revenue from the blood stream infection in this third quarter I think the bulk of that will begin to show up in the fourth quarter.

Brandon Couillard – Jefferies

And then Roger on the operating expense front, can you give us a sense of what your expectations are in terms of R&D and SG&A in the back half of the year and then perhaps an update on the cartridge cost reduction initiatives?

Roger Moody

Sure. The R&D will stay essentially flat from where it had been consistently over the last several quarters. SG&A will grow, it will grow based on expanding sales and customer support resources. It will not grow in our view at a greater rate than gross profit contribution will grow, which will be driven by two things. One if the growth in utilization and revenues as we ramp up the business and two the expansion of margins which you asked about. We have several different cost reduction programs underway as we speak, the largest of which is our internal substrate.

As you know we have been purchasing our substrates from third party providers at a fairly significant cost. I think about half of the cartridge cost. We have taken a license to what we found to be the best coating of our slides. We have ramped up internal production and we are in the process of going through validations product by product. Those validations will take us a good part of the next six months to convert over. So as we convert over we will see a fairly significant reduction in the product cost and entering next year we will have essentially the full benefit of the internal substrate at which time we will start to see some benefits of both cartridges as well as higher volumes that will further take our costs down in 2013.

Brandon Couillard – Jefferies

And then lastly could you give us a sense of how the order book has developed the BSI approval announcement early in the third quarter and how that fares relative to your initial expectations?

Mike McGarrity

Yes, I think we have a well-defined pipeline Brandon in the U.S. that we've been obviously building pending clearance. So we'll expect that to work through the pipeline based on our previous projections and we feel good about that continuing to build as well as additional menu coming on board in the next couple of quarters as well.

Operator

And your next question comes from the line of Bill Quirk of Piper Jaffray. Please proceed.

Bill Quirk – Piper Jaffray

Just a couple of questions for me. First is, given the software upgrades and various validation time periods, should we expect to start selling the actual bloodstream infection products probably what, in September month. Is that about the way to think about it guys and then obviously ramping it in the fourth quarter?

Mike McGarrity

Yes, Bill, each customer is a little bit different the way they validate. Some will go through a pretty straight forward process. We actually had some of our customers validate the originally cleared staff assay, in which case some of them will just choose to do a prospective follow on validation of the additional targets. So it does really range, I think we'll get better visibility as we go through the quarter but I think to Bill's point, I think a good number to think about is 90 days in the U.S. and 120 days internationally but it's important to note that even if the customer validated the staff we do have to upgrade their software so that can report out the full Gram-Positive panel and with that some people believe they will want to re-validate but that should be a straightforward process for those and the remainders are working through that process now. It's kind of a three step install train which is a very, very brief, a day for our system and then they'll start to go through the validation process and go live.

Bill Moffitt

Bill, it might be appropriate just to make another comment here, a little more broadly about sort of how it's going if you will because I think both you and Brandon have questions here about are things developing along the lines we expected and the answer is an unqualified yes. In fact I would say we already have a handful, I mean it's only a handful though, as Mike was just talking of customers that are up and using the assay and buying. We're shipping and selling the assay.

The vast majority of the customers are going through the installation and the validation process. It's always interesting. I pay particular attention to the validation procedures because despite the fact that the ran some 18,000 tests during all of the clinical trials you watch carefully as the assay goes into the market across a much broader number of customers and so far I can tell you that just on anecdotal basis all of the validations are going quite well and the small, small number of discrepant results, so the customers running a validation, they run our assay, they fun a different method of some sort to validate ours and the small number of discrepant results we've seen have ultimately been adjudicated in our favor and in fact the competitive system was producing erroneous results. So we're actually quite pleased with the way things are going up to this point.

Bill Quirk – Piper Jaffray

And you kind of bring up an interesting topic there. As you guys are well aware there is a couple of different competitors out there looking at bringing up their own blood stream infection products. I guess I was hoping you could just speak to the overall competitive dynamic. Obviously you guys fell pretty good about where you're positioned, kind of first out of the gate but would love to hear your thoughts there.

Mike McGarrity

Bill, obviously, first out of the gate is important but we're also confident in the way our assay is set up and the offering, I would just point to two key aspects. Our direct protection capability on our blood culture assay where we do not amplify as a significant advantage and has been spoken in the marketplace with regard to not amplifying containments and being able to truly rule in or rule out a clinically relevant systemic infection versus a Coagulase negative Staph of other type of contaminants. So our sensitivity and specificity numbers without amplification are obviously the gold standard level and we think that's going to be really important as other technologies pursue both the clinical and regulatory pathways as well as the practical implementation of an assay that would reduce amplification.

Bill Quirk – Piper Jaffray

So Mike, what you're basically arguing is that you're going to have fewer false positives than either one of two techniques of using RT-PCR.

Mike McGarrity

That's correct, and the cost of the false positives we have documented to be over $9,000 per patient. So I've had customers give feedback that they actually see the rule out value of our ability to determine a containment or Coagulase negative Staph as it is important as the ruling value. As far as the way we developed our panels, we have a Gram-Positive panel, we have a Gram-Negative panel.

The feedback, not only on the panel but the kind of configuration of it was significantly and solely driven by market feedback that we have gathered over the past couple of years and the basement fact that customers, microbiology labs will continue to and are virtually mandated to Gram Stain after a positive blood culture and we feel that that will direct them, a Gram-Positive Gram Stain or Gram-Negative Gram Stain will direct them to the appropriate assay to run and not report out additional results that were not ordered as directed by the Gram Stain which is a highly complex (inaudible) assay or aspect of the blood culture process in a microbiology lab.

So we obviously have a multiplexing capability on our assay that we could easily go after a configuration that would have Gram-Positive or Gram-Negative. We believe that the way the customers run blood cultures and identification and resistance is directed by the Gram Stain. Therefore a Gram-Positive assay and a Gram-Negative assay are ideally suited.

Bill Quirk – Piper Jaffray

And then last question from me and I'll jump back in the queue here. It's one for Bill. I realize that we're only a little over a month into the quarter. Obviously it seems like you guys are generating a lot of interest in Verigene based on what your team is looking like HCC [ph]. Bill, can you talk a little bit to the level of confidence you have in the 40 to 60 unit placements. I know it's not characteristic of you guys to talk about business quarter to date or anything like that but just give us some sense as to kind of what you're thinking? Thank you.

Bill Moffitt

I'd say that the activity we see in the market, the pace at which we're bringing up the previously installed base, the number of new customers coming in, the flow through the pipeline, sort of all of these data points combine to give us good confidence that we will hit the range we have previously forecasted.

Operator

Your next question comes from the line of Scott Gleason of Stephens. Please proceed.

Scott Gleason – Stephens

We were talking about some of your sales reps at the recent American Association for Clinical Chemistry and it sounded like you guys might have had some hospital networks that are potentially in the pipeline. Can you talk about that a little bit in terms of just maybe groups of hospitals there looking at the blood stream infection product?

Bill Moffitt

Yes, Scott. I would probably categorize our customer prospects and pipeline in three categories. They are kind of an individual community based hospital, an academic cheating institution and then as you know in the middle I'm depending on geographies of these integrated delivery networks or multiple center hospitals within a group and I think what you probably heard is that we have a number of customers in our pipeline that are part of one of those networks and as we get more definition to how they bring up the assay, what we're seeing is they'll probably have a center within the network served as the evaluation validation site and then determine a protocol to disseminate the testing to additional sites and/or figure out where their volume and treatment protocols and algorithms go. So we're excited about that on two fronts. Obviously it's probably the most common. If you look at covered lives in the U.S. I think a majority of covered lives are in an integrated delivery network and so from a clinical treatment standpoint as well as a market penetration standpoint that was probably the excitement you heard from a sales rep because they're looking at adoption over multiple sites in a particular geographic area that's part of their territory.

Scott Gleason – Stephens

And then Bill, there has been a lot of talk about validation timelines and when you look at the 90 to 120 day guidance you guys gave, that seems to be kind of your typical validation timeline for kind of a singleplex molecular test. Just kind of using Luminex as a little bit of a case study. They've had a lot of challenges I guess with their entire pathogen panel getting hospital through that validation process, just given the complexity of the assay, I guess are you guys pretty confident that that 90 to 120 days is kind of the right trajectory and that it might not take a little bit longer for some hospitals to get up and running.

Bill Moffitt

I'm going to let Mike comment on that again.

Mike McGarrity

Yes, Scott. I think that we will get better definition of the range. There will always be outliers depending on faster and maybe slower depending on the way their validation and/or prevalent. Sometimes it's strictly a volume, you could expect a higher volume hospital to validate potentially more quickly because they get better coverage over the course of the panel, for lack of a better term. I think when you look at the Luminex assay you sighted, some of those are bacteria and virus which can take longer to get the full coverage. A number of our customers are, we would encourage in some cases to do a prospective validation where as soon as your prevalence and accuracy is at the right point for a particular target you can begin to report that target out and then do a follow on prospective add in to the additional targets. So there is just a number of different ways that we work with our customers and the way they approach their validation and that's why I think our guidance is probably appropriate but we'll obviously define it as we get more history behind us.

Scott Gleason – Stephens

And then I guess just last question. The C. diff launch coming up, obviously that’s a high interest in hospitals, large market opportunity. Can you guys talk a little bit about how you plan to kind of competitively differentiate yourselves in the marketplace and I guess if you are going in to a hospital account where they already have a C. diff testing regimen in place I guess how do you try and display I guess an existing established now player.

Bill Moffitt

Yes, Scott. Good question. I think the first thing to note here is that at the end of the day we all really expect to see difficile to drive that many new placements if you will. We expected only to drive some volume for established placements. We've had a strategy all along of multiplexed panels, panels that require half a dozen to two or three or four dozen targets on them and so here comes a reasonably straightforward, what looks like single analyte assay. It's a is a single analyte assay but there are actually I think six targets in here to be sure we cover all the strains here and as I said we go after both the toxin A and the toxin B. Biologically you can find publications, it would tell you that a toxin A or toxin B gene is present, the other one is there as well. But we've seen enough mutations in enough of these infectious pathogens to say that we didn't really want to rest the quality of our assay on the fact that the bug was going to stay static if you will over time. So we will have the only assay in the market that tests distinctively for both the toxin A and the toxin B gene as well goes out to the 027 hypervirulent. So if you want to use that technicality as a differentiator it's there but I would tell you my expectation would generally be the reason this assay is in the market is because customers ask us for it. They looked at our development of the bloodstream infection Gram-Positive, Gram-Negative, the enteric panel and they said look, we run one off single C. Diffs all the time. If we're going to use your platform this broader array of tests, why don’t you put a C. diff on it for us as well. So I really don’t expect to be out there extolling the greatness of assay so much as we expect it to meeting a customer expressed need in established accounts.

Scott Gleason – Stephens

And if I could just follow-on on that a little bit, it seems like we're increasingly seeing folks in molecular use price as the differentiating factor. Obviously it's a high volume test. Why not charge $20 well below kind of current market rates just from a volume basis and try and capture additional volume and the share associated with that product.

Bill Moffitt

I'll let Mike comment on that Scott.

Mike McGarrity

Scott I think that that's to be determined as far as different price point in the market. Our assay, we believe in pricing it based on the proprietary value we provide. Obviously C. diff could be perceived as more of a commodity. So I think we'll get better definition to that. To Bill's point, one of the ways to look at C. diff is it’s a stool based diagnostic tool. Our full enteric panel is going to provide a comprehensive identification of multiple bacteria and virus and we will probably determine that a little better as we go to market where people are priced and where our ideal price point is, to balance the adoption and where we want our price point to be in the market.

Operator

And your next question comes from the line of Matt Dillon of Roth Capital. Please proceed.

Matt Dillon – Roth Capital

So hopefully your last question on your placement guidance. Just wanted to kind of understand the range. It's a 50% increase to get to the high end from the low end. So what are the variables in there? Is that a geographic question or is it a question of timing of orders within the pipeline? Just a little more clarity there would be helpful.

Bill Moffitt

Sure, I'll let Mike handle it.

Mike McGarrity

Yes, I think my answer would be yes and as we get deeper in the quarter we will get a better sense of where we are. I think it’s both. It's geographic as well as just timing of – we got clearance the first of the quarter so it could be anything from how much vacation time there is in July and August to when they get back. What we feel very, very positive about regardless of whether it's at the low, middle or high end of that range is the next quarters and our visible pipeline are well-established, are moving through the pipeline and that gives us the confidence to provide the projection and just too early in the quarter to set the range.

Bill Moffitt

Yes, I think another to look at this too Matt, and maybe I'm repeating a little bit about what Mike said, if you look at our customer pipeline, we feel very, very good about the next three quarters. We have very good visibility. We have a little less visibility as to in exactly which calendar quarter things might flop in to and it really has to do again back with how quickly customers get validated. Do our field resources get a bit tied up in the validation process? Does that string things out a little or are we pretty efficient at getting things done and they accelerate a bit. So there is a number of variables here and as Mike said, I think as we get more experience under our belt, we will be in a position to more closely fine tune these projections.

Matt Dillon – Roth Capital

And I know you only have a few customers using the test to date but as we think maybe beyond this validation phase, what's your early feedback telling you in terms of how accounts will start to use the test? Is this something they will be measured with initially as they kind of compare this test result to their traditional culture and how quickly can they kind of turn the spigot on in terms of utilization.

Bill Moffitt

I'm going to make a quick comment and I'll let Mike follow up. Again, there's going to be range. There's going to be customers that are going to move into this somewhat slowly. I know of a couple of customers anecdotally who in their validation process discovered that our system was far more accurate than what they're using today and they went 100% the next day. So they can turn the spigot quickly but the reality is I think any time any new test in the lab gets introduced, there's going to be a bit of caution if you will.

Mike McGarrity

Yes, I would say Matt it's probably a normal distribution from a standpoint of if they were using a competitive technology that provided more rapid identification or they have an antibiotic stewardship program that's well advanced and in communication with the infectious disease, that was, (inaudible) I think we're driving and what I'm driving with our sales force is the upfront qualification of the customer, such that we note to Bill's point versus to get the most accelerated return and some will come on faster than others but I think we're right to think of it as a normal distribution.

Matt Dillon – Roth Capital

And then two follow ups. First on the upgrade cycle. I don’t know if you gave this but how many of your existing install base have taken a BSI upgrade so far?

Bill Moffitt

I don’t have an exact number on that Matt but obviously the majority of the placements we made our customers that are taking the upgrade. We've also scheduled those upgrades in correlation with where they are in the process I think we will be caught up in Q3 with previous placements upgrade it and then be on a normal timing with placing a customer. Obviously everything we're shipping now has the new software. If customers had inventory they don't need to change it because it is strictly a software change from a standpoint of the cartridge. So it's pretty straight forward for the customer and it will unwind as an issue here in the next few weeks as we conclude that and then that coupled with our increased investment in the technical and clinical support resources should get us in a normal pretty quick acceleration from a standpoint of getting customers set up the field and I did comment to the installation and training process is very straightforward. So that buys us time as well.

Matt Dillon – Roth Capital

And then on Enteric, did you give us an updated timeline for that test?

Bill Moffitt

Enteric is headed into validation and the early customer validation in this quarter and then we're still working hard to get this in a position where we can file it with the FDA right around the end of the year. So the development of it is just about complete. We're doing some internal validation work and as soon as we complete that, so I would think over the course of the next, somewhere the next 30 days we will move out into some initial customer sites just to do some validation confirmation work and then move on into the clinical trials from there and then how long those clinical trials run, we're going to be at the mercy of how prevalent of some of these targets are.

Operator

And your next question comes from the line of John Wood of Jeffries. Please proceed.

Brandon Couillard – Jefferies

Just hoping to get an update on the Troponin clinical trial. I think you had initially expected to launch that in the second quarter and then has there been any update from the FDA on the CYP2C19 assay?

Bill Moffitt

Yes, on the Troponin assay we had originally hoped we would get the trial work done starting in the second quarter. Obviously we didn’t get that done. I think I made a comment on the last call Brandon that we have at same time been developing that assay on a higher volume open platform because the driving interest we have in that right now is from some of these specialty hard labs who want to use this for general cardiac risk assessment panels but also to use it to begin to think about monitoring chronic heart failure patients.

So we have delayed the start of the trial so that we could spend our time, put our resources on to moving the assay or developing the assay in parallel on this broader open platform. I can't tell you today where we stand in terms of anticipated time to redo the fast-track or run the fast-track trial. We're still working through how we would do that with respect to the FDA regulatory requirement for use of the test on the Verigene as well as now on this open platform and how we would manage the splitting of the samples and that sort of thing. And also I will say that there is no question that we have over the years been engaged in what I would call a parallel development path on these infectious diseases and on the cardiovascular side in general, including the 2C19, the thrombo (inaudible) panel and so forth but the current immediate priority infectious disease.

So most of our resources are dedicated to this infectious disease development and this program. The 2C19, we did I think talk on the last call that we had gotten a follow-up list of questions, request for additional information from the FDA. We had said at the time that we were sort of going back and forth with the FDA to clarify that. We have clarified everything. The one additional clinical work they want us to do, they want us to find a couple more of the very rare mutations. We have started, I think I mentioned in the last call we started blood screening process look for those. We have in the course of the last week or two now found half of the ones that we need. I'm going to guess and this is purely a guess that we need another couple of weeks to find the other half of them and then when we do, it's a well day I believe, protocol for the test that we need to run on it and so I would expect that sometime, I'm going to say early September, first half of September we will respond to all of the questions and requests for additional information that the FDA had and get that package back into them.

Where it goes from there, I don't know. Will they have additional follow-up information, there is no way to know. But we are on a track right now that would say the 2C19 follow-up request would go the FDA in the first week or two of September.

Brandon Couillard – Jefferies

And then Roger, have you already started the sales force expansion ramp and did you say you expect that to double in the back half? Should we look at that as being complete by the end of the third quarter and then perhaps an update on the expected cash burn for 2012 would be helpful.

Roger Moody

Sure, the sales force has already begun to expand as has the customer support group. We essentially increased it from six to nine over the past few months what Mike's comment was that we expect to double it yet again from the nine where we are right now over the next few quarters and so that's the process we're in. We are continually assessing and looking for good sales candidates.

In terms of the burn rate, because the second quarter expense had in it not only some of the additional resources but also recruiting expenses for the additional resources, you can expect that it will continue to grow at a reasonable rate over the next few quarters, the SG&A but we also expect that growth rate to be more than offset by gross profit contribution starting in the fourth quarter.

Operator

And there are no further questions. At this time I would like to turn the call back over to management for closing remarks.

Bill Moffitt

Thanks Clarissa. Thanks everyone for joining us today for our second quarter investor call. We appreciate your interest and support and your questions and as always look forward to chatting with you in the interim, if you have any questions or follow-up thoughts. Thanks and have a good day everyone.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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Source: Nanosphere's CEO Discusses Q2 2012 Results - Earnings Call Transcript

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