T2 Biosystems' (TTOO) CEO John McDonough on Q4 2015 Results - Earnings Call Transcript

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T2 Biosystems, Inc. (NASDAQ:TTOO)

Q4 2015 Earnings Conference Call

February 16, 2016 4:30 pm ET


Matt Clawson - IR, Pure Communications

John McDonough - Chief Executive Officer

Moe Castonguay - Chief Financial Officer

David Harding - Chief Commercial Officer


Bryan Brokmeier - Cantor Fitzgerald

Isaac Ro - Goldman Sachs

Kevin Chen - Leerink Partners

William March - Janney Montgomery Scott

Mark Massaro - Canaccord Genuity

Steve Brozak - WBB Securities


Greetings and welcome to the T2 Biosystems Fourth Quarter 2015 Year-End Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Also as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Matt Clawson of Pure Communications. Thank you. You may begin.

Matt Clawson

Thank you very much. Good afternoon, everyone. Thanks for joining us for T2 Biosystems Fourth Quarter and Year-End Results Conference Call. On the call this afternoon to discuss results and operational milestones for the period ended December 31, 2015 are President and CEO, John McDonough; Chief Financial Officer, Moe Castonguay; and Chief Commercial Officer, David Harding. John and Moe will lead off the call with some prepared remarks followed by a question-and-answer period.

I'd like to remind everyone that comments made by management and responses to questions today will include forward-looking statements. Those include statements related to T2 Biosystems' future financial and operating results and plans for marketing and developing new products.

Forward-looking statements are based on estimates and assumptions as of today and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by those statements, including the risks and uncertainties described in T2 Biosystems' filings with the SEC, the Risk Factors section in the registration statements on forms S-1 and 10-K as updated from time to time, as well as other risks and uncertainties detailed in subsequent SEC filings. The Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law.

With that, I'd like to turn the call over to John McDonough for his opening comments. Good afternoon, John.

John McDonough

Thank you, Matt, and good afternoon everyone. Thank you for taking the time to join us on the call today. As Matt said, joining us today for the first time is David Harding who joined the Company as Chief Commercial Officer in November and is already making a significant impact. David is arriving at an exciting time with international launch activities underway and a second product in the pipeline that is closing in on commercial viability. With all of that going on, we are grateful for David's expertise and his ability to develop a truly global vision and integrated commercial strategy. I won't force him to play a speaking role in his first quarter here but I will feel free to pass along the tough questions to him during the Q&A.

On another note related to the executive team, I'd also like to announce that Michael Gibbs who has been our in-house attorney and a valued member of the team has been named Vice President and General Counsel. Mike has played a key role across the organization from private and public financings to strategic partnerships and contract negotiations, and we welcome him to the executive team with his well-deserved appointment.

Now on to the business at hand. We had a productive fourth quarter. I'm pleased to say that we continued to make substantial progress and that in our opinion the hospital community through its adoption of our platform seems to be demonstrating its belief that time and sensitivity are indeed the critical factors in impacting the [substance] [ph] crisis in hospitals. We are pleased with our progress on important commercial metrics, engaging the hospitals on our target list, presenting our technology and its value proposition, signing new hospitals and now seeing the utilization commence following system initiations at our first adopters.

Commercially, we closed out 2015 strongly with 11 new hospitals including two hospital systems delivering commitments in the fourth quarter for the adoption of our T2Dx diagnostic instrument and our T2Candida rapid diagnostic test. That gave us 30 hospitals and hospital systems in all for the year, which had been our goal since we first began to talk to investors during our IPO roadshow in the summer of 2014. As we projected, the rate of hospital commitments grew throughout the year with 10 in the first half, nine in the third quarter and 11 in the fourth quarter, for a total of 20 in the second half of 2015. We believe that momentum will continue to grow in 2016.

In the fourth quarter, two of the account wins were with large hospital systems that plan to utilize T2Candida and up to 22 hospitals in one case and up to 14 hospitals in the second case. This means that in total, our 30 closed accounts as of December 31, 2015 could roll out testing in over 60 hospitals in the United States, far exceeding our expectations. We are excited about the reception we are receiving in the hospital community and the commercial momentum we have established. We are right where we hoped we'd be and anticipate that 2016 will be a banner year for us with continued adoption and use of the T2Candida diagnostic panel and a growing number of hospitals which should set a strong foundation for our expected launch of T2Bacteria in 2017.

As of the end of the year, nine of the hospitals had completed the installation and verification process. They were up and running, implementing our T2Candida diagnostic panel to test patients at high risk of sepsis and generating revenue. That number includes three that went live in the fourth quarter but we expect the pace at which hospitals are going live to improve as we go forward. On average, hospitals are implementing T2Candida in three to six months after contract signing, which is consistent with our initial expectations. Most of the account closings in 2015 occurred in the third month of each quarter however, which is why only 9 of the 19 accounts closed as of September 30 were online by year-end.

As hospitals implement our systems and testing with T2Candida becomes more routine, it's important to note that we are building a growing annuity business related to T2Candida cartridge sales. In the future, instrument replacement should become a predictable driver of future revenues as contract utilization and revenues grow and new products such as T2Bacteria are launched that leverage the installed base of instrument placements.

We continue to receive encouraging feedback from physicians and hospital administrators who are using our product and seen firsthand the value of our T2MR technology. One physician who spoke at our recent sales meeting told us about the impact our products are already having on the health care of patients in the hospital itself. She indicated that they are saving roughly $500 per tested patient due to the reduction in antifungal drug use alone. This means they are realizing a 2x return on their T2MR investment purely from drug savings, not including any other savings such as those associated with reduced length of stay in the hospital for patients. This institution is currently compiling that data and hopes to present at a major conference later this year.

We are of course compiling economic savings results of our own and will also be encouraging others to present the fiscal benefits of adoption of T2Candida at conferences and industry forums whenever possible as we move through 2016. Our goal is to create a steady stream of new evidence that demonstrates the extraordinary value of this technology. These savings are all accomplished while we help doctors and hospitals deliver improved health outcomes to patients.

In terms of the volumes of testing at the hospitals online, we are actively tracking the use of our products, and while it's too early to identify consistent patterns, these initial volume ramps are obviously an important metric and revenue driver for us. The initial volumes are consistent with what we expected. Our plan is to track these test volume numbers as they grow and at some point as the year progresses report what we see in order to provide more clarity in how institutions come online and how testing volumes ramp at hospitals. For now, everything is on track. Needless to say the two contracts closed in Q4 with 22 and 14 hospitals associated with their network could provide volumes significantly greater than a typical single hospital contract. So we'll provide a high level of support in all regards.

As of December 31, we had 15 direct sales reps onboard in the United States. Our plan this year is to grow the sales team to 20 reps by the middle of 2016 and then to assess the potential scaling the organization further as we prepare for the launch of T2Bacteria which I'll discuss in just a moment.

Additionally, we plan to bring onboard two distributors to focus on certain European market opportunities in Q1 and plan to enter at least two additional European markets later this year. We are evaluating our go-to-market approach and expansion into other European regions as we progress through the year.

The opportunity for T2Candida is significant in Europe as the cost of antifungal drugs is up to 3x greater than it is in the United States. There is also tremendous opportunity for T2Bacteria in our hemostasis products in Europe. We are expecting to close our first hospital accounts through distributors in the second half of this year.

I'm very pleased to also report that we began patient enrolment in the T2Bacteria FDA pivotal trial in December, as planned. We expect to complete the trial in Q3 which would keep us on track with our goal of filing with the FDA this year and receiving FDA clearance early next year, assuming a similar timeline is followed by the FDA as T2Candida.

We're building a powerful recurring revenue business model with T2Candida now and we anticipate the hospitals that are implementing T2Candida to become a highly attractive customer base for the adoption of T2MR products starting with T2Bacteria. Remember that the addition of T2Bacteria more than doubles our market opportunity and will run on the same T2Dx platform as T2Candida. With an expanded product set, we also would plan to expand our target market beyond the top 450 hospitals in the United States, which is our primary focus today with T2Candida.

T T2HemoStat, our initial hemostasis product is also on track to commence its FDA clinical trial in Q3 and it continues to draw a growing interest among trauma surgeons and other specialists facing the dual patient problems of bleeding and clotting in the aging baby boomer population that is prone to blood thinning treatment regimen.

As a reminder, T2MR is capable of detecting all of the key hemostasis parameters needed to measure platelet activity, fibrinogen, clotting time, fibrinolysis and other key parameters from a single small blood sample in about 5 to 45 minutes. This year, 41 million trauma patients were estimated to arrive in emergency rooms in the United States and over 10 million of them to have symptoms of impaired hemostasis. Today, the diagnostics needed to assess the risk of these patients for clotting or bleeding are typically run on separate instrument platforms and can take hours to produce a result.

To save precious time, clinicians often have to make treatment decisions based only on what they see and all their experience rather than using actual diagnostic data. In other words, they are in a similar position to infectious disease doctors who today are waiting for blood culture results and have to make educated guesses on how to treat patients.

Published data supports that mortality rates could be reduced by 50%, for institutions it could be reduced by 50%, and significant cost to be saved if accurate and rapid diagnostics were available. Easily the initial market opportunity for screening trauma patients alone is about $500 million in the United States.

Finally, the T2Lyme project through a partnership with Canon US Life Sciences is also on track and progressing towards an FDA clinical trial. We are jointly developing a diagnostic test panel that can rapidly detect Lyme disease, a potentially deadly bacterial infection caused by ticks. By applying T2MR to Lyme disease, similarly to what we are doing with sepsis, we believe we can have a significant impact on patient care while saving the healthcare system substantial time and money.

The current testing standards have low clinical sensitivity with data that suggest that 90% of patients never get diagnosed. More than 360,000 people are affected by Lyme disease each year according to the CDC and 3.4 million tests are run annually.

Across all of our product pipeline applications, I think it's important to reiterate that time to diagnosis is not our only key differentiator. A three to five hour [for] [ph] sepsis test is a significant advantage over competitors that all need blood cultures which take days. So we're not just about early detection, we also offer distinct advantages in terms of sensitivity and accuracy.

As we announced at the Leerink Conference last week, recent head to head studies with the detection of Candida demonstrated that T2Candida Panel had a sensitivity of 96.4%, up from the 91.1% in our FDA clinical trial. This compares to 60% for blood culture, which means that 40% of patients with candidemia and candidiasis are missed by blood culture. All of the products that we are aware of that are in the market of are in development are entirely based on using a positive blood culture, which means they do not address at all the 40% of patients who are deemed negative by blood culture.

The head to head studies are significant in that they have allowed us to change our labelling and market for T2Candida Panel with a claim of superior sensitivity as compared to blood culture for the detection of candidemia and invasive candidiasis. This is a very big deal. As we continue to demonstrate the widening gap between our technology and those blood culture based technologies currently in use, we expect that our test will grow in usage and become a standard of care in each of the diagnostic categories that we are pursuing.

Now I'd like to turn the call over to our CFO, Moe Castonguay, who will give you the financial details of the quarter and our outlook for the coming period. Moe?

Moe Castonguay

Thanks John. As John indicated, we hit our goal of 30 hospital commitments for the adoption of T2Candida by the end of 2015. It is notable that more than 18 months ago when we were in our IPO process, months before we had FDA approval, we had a reasonably accurate vision of how this first year would roll out commercially. At the end of the year, nine hospitals were up and running and generating revenue to us.

Total revenue for the fourth quarter was $1.01 million, which consisted of $343,000 of product revenue and $668,000 of research revenue. Product revenue for the quarter was primarily derived from the sale of consumable diagnostic tests. Total revenue for the full year was $2.8 million made up of $599,000 of product revenue and $2.2 million of research revenue. Product revenue included sales of T2Dx instruments and consumable diagnostic tests to the various hospitals.

Total operating expenses for the fourth quarter increased to $11.6 million as we continued to increase our investments in our sales force and increase the R&D cost on new applications that feature T2MR. The quarter's operating expenses were lower than anticipated, primarily due to lower personnel related costs. For the year, operating expenses were $44.4 million.

The net loss applicable to common shareholders for the fourth quarter was $12 million or $0.56 per share, compared to $9.1 million or $0.45 per share in the fourth quarter of 2014. The increase was primarily due to increased operating expenses. It was also impacted by the weighted average increase in common shares outstanding due to the December secondary public offering of our common stock.

For the full year 2015, the net loss applicable to common shareholders was $45.3 million or $2.21 per share, compared to $36 million or $4.15 per share, after adjustment for accretion of redeemable convertible preferred stock prior to our August 2014 initial public offering.

The Company's balance sheet as of December 31, 2015 showed total cash and cash equivalents of $73.7 million. That balance was bolstered in December by a secondary public offering of common stock, raising net proceeds of $33.26 million. We also drew down the remaining 10 million from our line of credit in December.

Now looking forward, in order to best project our performance in the coming year, it's helpful to look at 2015 and understand how we fared against our base modeling assumption. The answer is, right on track. Let's look at data and provide some general modeling guidance and then we will provide more specific guidance for both Q1 and for full year of 2016.

We set a goal to secure commitments from 30 hospitals and we came in right on target. The 30 hospitals included two hospital systems that could rollout testing to 22 hospitals in one system and 14 in the other. We stated that we expected the average test price for T2Candida would be between $200 and $250 per test. We are right in the range as expected. We expected that 60% or more of the initial 30 contracts would likely occur in the second half of 2015. Again, about two thirds came in after June 30.

We assumed it could take from three to six months for each facility to get up and running from contract signing through validation and to first patient testing, and thus far the average is within our expected range. We anticipated that after systems got up and running, it could then take an additional 6 to 12 months for a customer to ramp to testing all of their high-risk patients, as they most likely will start by testing a segment of their high-risk patient population. On that statistic, as almost all of the hospitals that went live did so in the last four months of 2015, it is too early to tell with any certainty how we are measuring up, but we certainly don't see anything in the cadence that it isn't a reasonable assumption.

Once the hospital goes live, there are a number of factors that affect the amount and timing of testing and product revenue. A couple of these factors are worth noting as we head into 2016 for modeling purposes. While our quarterly contract [indiscernible] remained on pace throughout the year, the majority of contracts were signed in the latter half of the quarter. In fact, about two thirds of contracts were signed in the last month of the quarter in 2015. While we've put a focus on trying to smooth out that pattern, we may continue to see that dynamic.

Based on industry averages, we had estimated that 20% of the contracts would be instrument purchases with the remaining coming in as reagent rentals. In year one, 90% of placements were reagent rentals, a bit higher than we anticipated. So that fact did have a small impact on our initial customer revenue totals but low initial revenue is of course recaptured over time as the utilization of the reagent rental model is more lucrative to us due to the higher revenue per test.

Now for specific guidance for the coming year and quarter, in the coming year we anticipate doubling our placement rate and ending year with 90 commitments translating to 60 additional hospitals and hospital systems in 2016. In the seasonal contracting cycle, we expect commitments in the first quarter of 2016 to be relatively flat with our closed commitment volumes in Q4 of 2015.

Moving to revenue, the Company anticipates research revenue remaining relatively unchanged from the fourth quarter of 2015 through the first quarter of 2016. We also anticipate higher product revenue in our first quarter of 2016 than what is realized in the fourth quarter of 2015, primarily as a result of more hospitals going live and other hospitals starting to ramp the number of patients tested. We expect six to seven accounts to go live in the first quarter and begin testing patients.

The Company anticipates total first quarter operating expenses to be between $13 million and $13.4 million, including approximately $1.9 million in non-cash expenses that consist primarily of depreciation and stock compensation expenses. Virtually all increases in operating expenses are associated with investments in building our sales and commercial capabilities both in and outside the United States, new product development, the clinical trials associated with new products and building the infrastructure required to support the scale of business we expect to realize in 2017 and beyond.

We expect weighted average shares for the first quarter of 2016 to be 24,200,000 and for the full year we are forecasting 24,700,000. This reflects the shares issued in the secondary stock offering in December 2015 as well as projected stock option exercise and shares sold to employees during the employee stock purchase plan.

With that, I'll turn the call back over to John.

John McDonough

Thank you, Moe. First of all, regarding our guidance, I want to reiterate that our focus for 2016 has always been primarily twofold. First, broadening the adoption of our T2MR and T2Candida technologies across the most active institutions in the United States, and second, successfully completing the clinical trials necessary to get T2Bacteria onto the market.

Nothing has changed regarding our guidance. While our revenue ramp is right on track and is expected to grow nicely during the year staying on plan, it is the growing foundation of installed and active users combined with the ability to leverage it with a second powerful product, T2Bacteria, that we expect will generate the more significant revenue trajectory.

Now let me summarize the key takeaways from the quarter and the year. We achieved our goal of 30 hospitals committing to our technology in 2015. These 30 hospital commitments represent over 60 hospitals in the United States. Our products are being implemented in the timeframes we expected and our customers are seeing the impact in patient care and economic savings as they come online.

We are very excited to be right on track commercially and financially and to hear the proof of concept and the positive changes our T2MR technology is already having in hospitals. We believe we are contributed to saving lives and already demonstrating a strong ROI right now. We know about the positives because we are hearing from the hospitals who are using our technology. We believe 2016 will be an important year for sharing the great benefits our technology is having in the hospital market and is offering to people who are actually being tested with our technology.

We see our commercial ramp with hospitals increasing in 2016, especially as our sales force has expanded in 2015 and each new rep is getting up to full speed more rapidly as they benefit from our collective experience in the marketplace. We plan to continue to grow the sales force to 20 people by the middle of 2016 and we have two international distributors coming onboard that should further expand our footprint.

We expect to see a continued flow of publications related to T2Candida, T2Bacteria and T2HemoStat, with a focus on customer economic savings from the utilization of T2Candida. It is through recent publications that we've been able to expand our FDA label in Q4 to state that T2Candida provides superior sensitivity as compared to blood culture for the detection of candidemia and invasive candidiasis.

We are enrolling patients for the T2Bacteria FDA pivotal trial and we're on track for potential commercial launch early next year. The customer base we are building today with T2Candida will be fully leveraged as T2Bacteria comes online.

As I said earlier, we believe today more than ever that our T2MR technology will prove to be the next big breakthrough in medical diagnostics. It can detect single cell 25 to 30 times faster than any other diagnostic and with greater accuracy. That enables the very rapid treatment of patients, meaning we help the hospital get the right patient on the right drug as quickly as possible. This is what the market refers to as precision medicine, often thought of as the future of medicine, but something we at T2 Biosystems are delivering today.

With that, I'd like to turn the call over to the operator for questions. Operator?

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Bryan Brokmeier from Cantor Fitzgerald. Please go ahead.

Bryan Brokmeier

Could you provide some color on your hospital pipeline, and in doing so could you provide some details on how you arrived at the 60 new contracted hospitals in 2016?

John McDonough

So in terms of the pipeline, it remains strong and robust. We have grown our sales force now to 15 reps. Generally speaking each of them are targeting 20 to 30 accounts in their territory and we're in discussion with most of them. As we built our target in terms of account closings for 2016, we really rolled over the metrics that we actually realized in 2015 in terms of how long it takes for us to come onboard and when they start closing accounts and what they ramp up to. And as we have reiterated in the past and we can reiterate on this call, our goal has been to see how reps grow and be able to close on average six accounts per year once they are up and through the initial learning curve which is typically six to nine months.

By hitting those 30 commitments by the end of 2015, which of course translates into over 60 hospitals because of the 22 hospital systems and 14 hospital systems that we closed in Q4, but when you focus on the 30 commitments, indeed we proved that we were averaging at best that six target accounts per effective sales rep, which is what we’ve typically seen in fast growing and successful diagnostic companies.

Bryan Brokmeier

So are the other hospitals in that 22 and 14 hospital systems, are those hospitals definitely going to be adopting or they each individually have to make a decision?

John McDonough

That's a great question and there's a bit of two different answers for both of those questions. In the 22 hospital system, in fact it's in a large city situation with the hospital spread out. They do all of their testing for all of the hospitals in a single lab and indeed their plan is to roll it out to virtually all, and I believe all of the 22 hospitals in that particular system, and use a courier service as they do with blood culture and other diagnostics to bring the blood samples to that central location. So we do believe that they will roll it out in the 22. In the 14 hospital system, they typically deploy the technology at the hospitals themselves and we believe we will at least fit into most of those systems, but that's still a little bit to be determined in terms of how they will exactly roll that out.

Bryan Brokmeier

Okay. And last quarter you had indicated that you had touched the majority of the 450 hospitals. Just a simple math, 15 reps, 20 to 30 hospitals at the high end, gets you to the total of 450. So where do you stand now in terms of the number of that 450 hospitals? Have you touched them all or are you I guess at the 25 times 15 range?

John McDonough

So there's no doubt that we've 'touched' them all, but in terms of how many, we try to track it more of how many have we visited and there we've probably at this point visited in the order of 75% of those accounts.


Our next question is from Isaac Ro from Goldman Sachs. Please go ahead.

Isaac Ro

Wanted to think a little bit about 2016 with regards to the path from getting from your current contracts to sort of the year-end goal and was curious if you could maybe just kind of piecing together some of the stuff you gave us and maybe deconstructed on a couple of items, I'm curious if how much of it is tied to up-selling existing customers such as that large hospital you mentioned versus just benefiting from the broader sales force versus the demand that would be associated with sepsis, I'm just wondering if those three items and feel free to add others that I might be missing, but rank order them or just give us a sense of how much those items will drive the adoption curve this year?

John McDonough

That's a really hard question, so I'm going to let David Harding take that one.

David Harding

Thank you, John. This is David. So I would say that the vast majority of the new hospitals that we plan on closing would come from the 450 list originally, that is they would be brand-new accounts. There are certainly some hospitals that we have contracted with that have more nationalized networks that we would be planning to introduce once the flagship site goes live and shows really good results. But I would say the vast majority would be brand-new accounts that we would be penetrating over the course of the year.

Isaac Ro

Okay. And then for sepsis, I mean can you give us a qualitative sense of how important that is to catalyzing the next wave of customers, either in terms of if you were to tranche out that 450, is the 25% that you haven't touched yet, is it because those are customers that you just haven't been able to reach or maybe is it customers that you think would need to see sepsis, the full bacterial panel rather, in order to be engaged? Just curious like how important a swing factor you think that will be.

John McDonough

So in terms of the other 25%, and there little bit of giving you an opinion having all the data, but I think if I were to parse that, probably 10% of the 25% is just in remote locations that we haven't gotten to yet with the sales reps. And when you get to the other 15%, for the most part it's being driven by reps that just came onboard in December and we just haven't got out to them all yet. I would think that in the territories where we have reps, we will get a visit in virtually every account.

Now to get to your answer though, what I think you are trying to get at, which is how big a deal is the bacteria panel, it's a big deal, there's no doubt about it. There's specifically, as we see it, about 15% of the accounts we visit have told us, we are really interested, wildly interested in this technology but why don't you come back when you have the bacteria panel, there is a higher incident rate when we combine standard and bacteria and/or they really want to roll the testing out in one wave instead of one wave with Candida and then a second wave with the bacteria panel.

The other thing that I'd point out though in terms of the impact from the bacteria panel, it will help us with the top 450 but perhaps more profoundly it will allow us to go way beyond the top 450. We would expect to be targeting somewhere in the order of the top 1,500 and top 2,000 hospitals when the bacteria program goes online. Now we can go beyond the top 450 with Candida and in fact we have. Many of the 30 commitments we have in place are with hospitals that are in the top 450, but we have better to show and they are highly interested or [Indiscernible] Candida program and then we would close those accounts.

But there's many accounts you get shut out of. They may only be seeing 10 or 20 Candida cases a year and they just don't want to bring in a whole new platform for that purpose. That is again the accounts that are outside of the top 450. But with the bacteria panel, that game changes significantly, I mean in terms of the number of patients who are positive and hence our ability to target a much bigger hospital base than what we are targeting today.

Isaac Ro

That's very helpful. Maybe one last one if I could, which had to do with your comments on Europe, I don't think we got an update on your plans for distributor partnerships in the first half. Wondering where you guys are on that process, and then Moe, if you could help us with how to think about the margin impact of distribution, as distributor relationships as those ramp up?

John McDonough

So in terms of Europe, our initial approach is through distributors. In most of the cases, the first two cases we are giving exclusive rights through a defined territory and it's a territory with firms that for the most part have in our [indiscernible] sepsis space and already have the relationship with the accounts and we treat them as an extension and in fact they are an extension of our U.S. sales force. We bring them in, we train them and they ultimately will be the ones doing the sales, they will close the sales, they will install and service that account and will really serve as kind of a Level 3 technical resource behind the scenes, and of course support them as much as we can and their sales efforts and marketing efforts. Moe?

Moe Castonguay

And with respect to the normal margin relationship will be like any other international customer. You would expect them to have sufficient funds to be able to provide a discount to their customers and make a good margin as well. That said, we'll be investing heavily with them initially to make sure they are launched properly.

John McDonough

Generally speaking, distributors are getting somewhere in the order of a 30% discount off of the U.S. price, so that there is margin for them. I will point out, because this is a question we've been asked a few times and I know Moe covered this, so in the United States we've been holding super-strong and pricing between $200 and $250 a test. We expect to see at least that in the first markets that we are entering in Europe.

Isaac Ro

Got it. Thanks for all the color, guys. Appreciate it.


Our next question is from Dan Leonard from Leerink Partners. Please go ahead.

Kevin Chen

This is actually Kevin Chen for Dan. So you guys mentioned that you are expecting about 90% reagent rentals. Could you give more color on that trend and are you seeing a difference in the verification periods in the capital placements or regent rentals?

John McDonough

So I'll take the first part. No, we are not seeing any difference at all in terms of verification and validation of a reagent rental versus capital. They are averaging right in the three to six month window that we expected and we are hopeful that that trends down over time, but we'll see. We are learning how to help customers do that quicker but then there are new things that regulations being [indiscernible] at labs that probably keeps arising up three to six month range despite our efforts to do better.

And in terms of the 90/10, we just see more interest in reagent rentals. I mean the 80/20 was sort of our best estimate coming out of the gate. The only thing that I'll point out is when you've got 30 commitments and you're at 90/10, the end there is still small, right, so there could be fluctuations. It doesn't take one or two instrument sales in all the segment back at 80/20, right. But I think 90/10 is the right expectoration going forward.

Kevin Chen

Sure, that makes sense. So last quarter you highlighted acute care hospital, had very quick sales cycle, less than 90 days I think. I was hoping you could give us an update on those accounts and are you seeing a faster pace of the verification process as well?

John McDonough

No, they are in the verification process. We expect that particular account to be right in that three to six month range. Everything is proceeding well but we don't see that as being faster just because it's acute care hospital. But to follow up on your question, there are definitely accounts that go faster. I mean we've had accounts go less than three months. We have one that might actually be on a six-week cycle as we speak. But then you find other accounts that are of course will have six month range because they want to do more verification or they're going to get their IT department involved in order to get everything well against the system and they don't want to do that, they [indiscernible] complete verification. So you are going to see variances. The average of three to six months I think seems to be holding up very well.


Our next question is from Paul Knight from Janney Montgomery Scott. Please go ahead.

William March

This is actually Bill March on for Paul. Maybe just piggybacking off of that, could you give us any update on accounts that have come online post 4Q close in terms of utilizing, if you've seen some of those from 3Q and 4Q adopting?

John McDonough

I think we will keep our comments to Q4 and we'll comment on Q1 when we get to that call, but nothing surprising going on, everything is proceeding on course, I will say that.

William March

Got you. And then maybe just talking a little bit more about Bacteria, could you remind us again maybe some of the timelines we should be thinking about as we head into 2016 with the clinical trial getting underway?

John McDonough

So with the patient collection underway, we're quite hopeful obviously. It's always dependent upon the clinical trials by following an enrolment cadence consistent with what you expect. But assuming that that goes as expected, we believe we can complete that clinical trial in Q3, and depending on when we complete the clinical trial in Q3, probably takes in the order of six weeks to close everything up and get to an FDA submission. Probably more likely that happens in Q4 based on the cadence we are seeing out every day.

William March

Great. And then maybe just one last one on the sales force now up to 15 and working with some distributors in Europe, do you think that sales stays kind of flat for a little bit or do you think you need to continue to add to the team?

John McDonough

So we plan to get up to 20 reps by the middle of the year, and then we will re-evaluate, we might even re-evaluate quicker than that, and a lot of it will be analyzing the productivity trends and also just trying to prepare ourselves for the T2Bacteria launch and really assessing what the size of the sales organization should be as we launch into what will be a bigger targeted customer base in terms of the number of hospitals that we'll go on.

In terms of revenue, revenue as we've been saying, it can be up and it can be down, you sell one instrument, you don't sell one instrument in a quarter with these numbers, come online at the beginning of the quarter, At the beginning of the quarter the numbers are just really low. So it's tough to show that cadence. We do think Q1 revenue will be higher than Q4, and I think as we get to perhaps Q3, maybe Q2 but probably more likely Q3, we should start to see some trends in revenue that makes it a little bit, ultimately just becomes somewhat predictable revenue model, but as you're getting this thing ticked up and the numbers are low, it can be up and down a little bit. But I think we'll start to see some interesting trends and predictability starting to emerge in the Q3 timeframe.


Our next question is from Mark Massaro from Canaccord Genuity. Please go ahead.

Mark Massaro

John, I wanted to ask you, with the guidance for 90 hospitals for 2016, wanted to pick your brain to see if at some point in the future you might start guiding to number of units as opposed to number of hospitals contracts. The question is especially, I'm asking especially given the two large hospital systems that you added in Q4, and just kind of want to get a sense for how many systems per hospital you think are likely as you look out one or two years.

John McDonough

Mark, that's a great question, and yes, I do anticipate that we'll make that shift probably when revenue predictability becomes part of what's going on, so perhaps as early as the second half of this year. Of course, what you really want to see is, okay, what's the average revenue per instrument. Today the numbers vary enough that probably if you are doing any analysis like that looking at it at committed hospitals and people adopting the technology and what's the opportunity, we think it's just a better way of looking at it in the short run, but I think when you get to the mid-term, certainly 2017, maybe even the second half of 2016, you want to start looking at how many instruments are placed where and what kind of productivity are you getting per box.

Mark Massaro

Okay great. And would love to take your thoughts on what percentage of your 30 contracts today are in systems that are using both your Candida test as well as a post blood culture solution, and as you look out a year, do you think this mix or the percentage mix of folks who are using both will trend roughly flat or do you think there's an opportunity for folks that are using post blood culture to cease using post blood culture and migrate to your platform?

John McDonough

So of course every account that's doing blood culture is doing post blood culture, right. So I think what you're talking about is the PCR and mass spec and kind of more the rapid post blood culture analysis. And because we are targeting the big accounts, most of them are viewing mass spec really, and that's the big accounts, that's what you really see, sometimes you'll see some other boxes from some others but almost all of them are using mass spec in some way, shape or form. I think as you get to mid and smaller hospitals, you might see some differences because the capital cost of mass spec might cost that particular solution out.

I think that over time and as we build out more and more panels, we're definitely going to have an impact on blood culture volume and I've been made aware of one account in Q4 that actually they were deciding whether to expand what they're doing in blood culture or bring in T2Candida, and it wasn't – because they were really competing for one versus the other, but there was a budget question of how many things can we do, we only got to do one or which one is going to have the bigger impact, and they brought in T2Candida.

That's the only situation that I'm aware of where there was that kind of head to head concern, and to be honest with you, we found out about that after the fact not in the middle of it. So I think blood culture is going to continue to be around for a long time probably, and I think the post blood culture products are going to continue to bring value because they do speed up speciation and we know every hour of the late therapy makes a huge difference. Now that's driven the adoption of mass spec for that purpose and those products will be used for a long time I think.

Mark Massaro

Okay great. And just last question for me, you mentioned that the research revenue is likely to be comparable in Q1 versus Q4. Is that a reasonable expectation beyond Q1, in other words roughly flat or how do you see research revenue trending?

John McDonough

I think that's a reasonable assumption, Mark, and if it became something different, then we'd probably give an update on one of these calls.


Our next question is from Steve Brozak from WBB. Please go ahead.

Steve Brozak

Most of the questions have been asked and answered, but there is one thing that I would like to come back to. The labs that you are dealing with right now, since you're looking at changing by orders of magnitude how diagnostics work, turnaround times and accuracy, what is the feedback that you're getting from them directly as they've come onboard and as they are currently coming onboard? Are there any positives, obviously that would be the first thing I'd be looking for, but are there also any other comments that they have, we'd like to see this, this or this, if you can answer that, and then I've got one follow-up please?

John McDonough

To be honest with you, that's the real highlight of 2015, it's the accounts that are coming online and the impact that we are having and the excitement of the users who are willing to test out, and most importantly, we're seeing patients being detective [indiscernible]. I mean there was a story I heard just this morning of one account went live and they were testing patients and the patient was on an antifungal and they thought the infection had [indiscernible], the blood culture came back negative and the candidate came back positive because blood culture missed it because the presence of antifungal prevents growth. So that patient is going to stay on the antifungal drug but may have been pulled from that drug.

We've had several cases where patients are on thick Lyme and the blood culture comes positive because often times they will draw the blood culture from the Lyme and they will draw the – they obtain the T2Candida from a different source and in that particular case, and several of those cases, it's actually been several at this point, under normal circumstances the culture comes back positive they pull the Lyme on the patient which is really bad for the patient. The patient is on Lyme because they need help, they need assistance, nutrition, et cetera, but they do it because oftentimes the Lyme is the source of the infection, it's called source control in the hospitals. And in all of these cases the T2Candida came back negative with blood culture as positive saving the patients from pulling the Lyme.

We've had many cases of just positive detections which of course is the most important thing that we are doing but in others – one hospital account that approached us and they have said, we do think antifungal use is my biggest challenge is that all my physician aren't aware that we are offering the tests in our hospital. Can you help us? Yes, we can help you.

We've got marketing materials, some of the salespeople were hiring, their job is just that. If you go down and educate physicians and hospitals that are closed accounts, we know that that's kind of challenged number [indiscernible] you get the account closed, they are all dressed up, they send out their e-mail and here's this test, there's some data, people are pretty busy, not all the clinicians that should be ordering test are going to order test. That's why we've always believed there's a ramp in the testing because even when you roll it out and say we're going to test everyone in the ICU, you're probably not going to test everyone in the ICU unless all the clinicians, all the critical care doctors are aware of it.

So it's been an awesome reception frankly as the accounts come online, and the most heartening thing for us, it's kind of joke but it really is true, it's not a joke, this technology really works. We really do detect patients that are being missed. We really can have an impact.

Steve Brozak

You actually started to hit on the follow-up. Given the prevalence of [indiscernible] infections and everything that's taking place, are you starting to get feedback that you're going to start to see a change in the standard of care or in the treatment protocols that you start to see with these patients or with the way physicians practice medicine, I should say that because the patients are obviously going to be the ones that the physicians decide on, are you looking at that, are you thinking about that and what kind of color can you provide on that, and I'll hop off, thank you?

John McDonough

So we really should change standard of care. I mean the standard of care is terrible, takes too long and they're missing 40% or more of the patients that are positive. I think it's way too early. I wish I could be on this call saying we're becoming the standard of care. I just don't think that would be an accurate assessment, although we are changing the way patients are being treated in the hospital for the segment of patients that are being treated. So at some level there is a standard that's starting to shift in a small way in the accounts where we've gone live.

We've even heard on two occasions, while we have assessed patients with this product, it would be malpractice if we didn't, right, and that's when you really get the standard of care and it isn't about the list of not testing but it's really more of a statement about the impact that this product can have if you do test patients. So, yes, we watch that one really closely, yes we believe that will happen, but it's really too early to make that kind of declaration. Hopefully in the future we can and we will.

Steve Brozak

Great. Looking forward to that declaration. I'll hop off. Thank you.


Our next question is from Bryan Brokmeier from Cantor Fitzgerald. Please go ahead.

Bryan Brokmeier

Thanks for taking the follow-up. How do hospitals that choose to purchase the instrument most differ from those that choose the reagent rental model?

John McDonough

That's a great question, Bryan. I get asked that a lot. So among just the two of us here on the line, I wish I could tell you that there is this deep economic analysis that's run in hospitals. Some do that but that's pretty rare, right. You would think, if you were out and doing this, you'd be saying [indiscernible] which one is economically the driver. That's really not what happened. Some institutions have rules that they will only buy equipment and we won't do reagent rentals. And so they may just buy equipment, they don't even want to talk about our reagent rental. That's rare but that does happen.

There are other hospitals where the lab director will say, just give me a reagent rental contract because the capital process is too difficult in this institution, so we just want the reagent rental. It's easier for us to bring it in, and if that changes in the future maybe we'll purchase the instrument in the future. That is typical situation. It's really more about the internal process of the hospital that typically is driving the reagent rental.

Bryan Brokmeier

Okay. And of the 15 that you installed in 2015, were any of those instrument sales or they are all reagent rentals?

John McDonough

Great question. I know there was at least one instrument sale in there, maybe two. So David is saying, two.


If there are no further questions, I'd like to turn it back over to management for any closing remarks.

John McDonough

Hopefully you got a good sense from this call today why were we excited about the developments in the business on all fronts. Most importantly, hospitals going online with T2Candida, continued adoption from the hospital base and really exciting to be in the T2Bacteria clinical trial which we know is going to take us to a completely different level from a commercial standpoint, hopefully in early 2017. And as I've said to many of you, keep your eye on hemostasis. We have a blockbuster we believe that is going to change the care of trauma patients in just the same way we're doing with T2Bacteria and T2Candida. In summary, we just have an awesome detection technology and we're just getting started and look forward to reporting back in the future. Thank you.


Thank you. This concludes today's conference. You may disconnect your lines. Have a nice evening.

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