T2 Biosystems, Inc. (TTOO) CEO John McDonough on Q4 2018 Results - Earnings Call Transcript

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About: T2 Biosystems, Inc. (TTOO)
by: SA Transcripts
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Earning Call Audio

T2 Biosystems, Inc. (NASDAQ:TTOO) Q4 2018 Results Earnings Conference Call March 8, 2019 4:30 PM ET

Company Participants

Zack Kubow - Investor Contact, W2O Group

John McDonough - Chief Executive Officer

John Sprague - Chief Financial Officer

Conference Call Participants

Stephen Brozak - WBB Securities

Max Masucci - Canaccord Genuity

Patrick Donnelly - Goldman Sachs

Paul Knight - Janney Capital Markets

Jordan Abrams - Cantor Fitzgerald

Soumit Roy - JonesTrading

Edward Marks - HC Wainwright

Puneet Souda - Leerink Partners

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the T2 Biosystems Fourth Quarter and Full-Year 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

It is now my pleasure to turn the call over to Zack Kubow of W2O Group. Please go ahead, sir.

Zack Kubow

Thank you, operator. And good afternoon everyone. Thanks for joining us for the T2 Biosystems fourth quarter and full-year 2018 financial results conference call.

On the call to discuss the results and operational highlights for the quarter and year ended December 31, 2018 are President and CEO, John McDonough, and Chief Financial Officer, John Sprague. The executive team will open the call with some prepared remarks followed by a question-and-answer period.

I would like to remind everyone that comments made by management today and answers to questions will include forward-looking statements. Those include statements related to T2 Biosystems’ future financial and operating results and plans for developing and marketing 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’ annual report on Form 10-K filed with the SEC on March 19, 2018 and other filings that the company makes with the SEC from time to time. 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 President and CEO, John McDonough. John?

John McDonough

Thank you, Zack. Good afternoon, everyone, and thank you for joining out as we discuss the progress, results and outlook following the fourth quarter and full-year 2018.

2018 was a significant year for T2, headlined by the FDA clearance and market launch of the T2Bacteria Panel, the first and only FDA cleared test to identify sepsis-causing bacteria direct from whole blood.

Combined with the T2Candida Panel, we now offer a tool to hospitals that we believe will enable earlier, more effective therapy for patients suspected of bloodstream infections that can lead to sepsis.

The ability to identify deadly forms of bacterial and fungal infections directly from whole blood without waiting for the results of a blood culture has been a significant pursuit in medicine for the past century.

Additionally, we believe that while pharmaceutical companies have developed develop more effective means to fight these infection, their utilization have been hampered by the inability to rapidly identify the actual infection.

We believe that the medical community and government agencies are now recognizing the difference that T2Direct Diagnostics can means for preventing sepsis, which is the number one cause of mortality in hospitals and the cause of over $27 billion of hospitalization costs, the most expensive health condition for US hospitals.

Before T2Direct Diagnostics, frontline treatment option for patients suspected of sepsis identify pathogens in one to six days' time, with a 50% to 65% sensitivity rate, which every single other company offering an FDA-cleared product for bloodstream infections is dependent upon.

Due to the lengthy time to results and poor sensitivity of blood cultures, hospitals have used a probability-based system based on the premise that if you can guess right quickly enough, mortality rates are reduced by 8% for every hour you speed up getting a patient suffering from sepsis on the right targeted drug.

With T2Direct Diagnostics, certain pathogens are identified in 3 to 5 hours directly from a patient's blood sample with greater than 90% accuracy, which we believe is a huge step forward and a win for patients and the healthcare system. As I will discuss in more detail, we believe that hospitals with strong antimicrobial stewardship efforts dedicated to the task and guided by our experience are becoming the vanguard of physicians and institutions that have found a better option with the $150 T2Bacteria test panel.

Results have shown that only one T2 test result can be as accurate as 3.81 culture sets, which are all required for all other diagnostics of bloodstream infections. We believe that the time has arrived where antibiotic treatment decisions early in the progression of disease can be based on identification of the actual pathogen infecting the patient rather on guesswork.

And while systemic change is conscious in the hospital setting, we believe that the data is beginning to show that a willingness to adjust protocol provides measurable clinical economic benefit.

In addition, we believe there is an opportunity within our selling process of target institutions to identify and engage a customer segment that has shown the willingness to adopt and move fast, which we will discuss on the call today.

During 2018, we also advanced our other new product initiative, which have the potential to further expand our market opportunity for our core T2Dx platform. Taken together, we believe that our progress of 2018 has positioned the company to enter a period of sustained and significant growth in the years to come.

I will provide an overview of our key growth initiatives a milestone for 2019, but we'll begin with a high-level review of the financial results and commercial metrics for the quarter which provides the foundation for our business outlook heading into the year. After my remarks, our CFO, John Sprague, will provide a detailed review of our fourth-quarter and full-year financial results and outline our 2019 financial guidance.

In the fourth quarter, we remain focused on the execution of the T2Bacteria Panel launch and delivered results that were in line with our expectation. Total revenues were $1.8 million and product revenue was $1.3 million.

Product revenue was flat year-over-year and up slightly compared to Q3 2018, reflecting growth in testing volume primarily related to the T2Candida Panel.

Capital sales were stable as more new customers selected the reagent rental model in the quarter, which has minimal upfront customer costs and, therefore, minimal revenue for T2, but stronger margins on recurring sales.

As a reminder, new prices related to the T2Bacteria Panel in the second half of 2018 were in the implementation phase in Q4 and we expect these systems to begin to contribute recurring testing revenue this year and some have already begun to be sold in Q1 2019.

More specifically, on T2Dx instruments, we continue to build momentum with new contracts, securing 14 contracts with customers in Q4. This contract number puts us at the high-end of guidance previously provided. In total, we estimate that this will provide over 80,000 new high-risk patients with access to a T2Dx instrument, well ahead of previous guidance.

On full-year basis, we secured 30 new T2Dx instrument contracts, covering more than 250,000 high-risk patients, including 25 contracts in the second half of the year.

To put this in context, as of December 31, 2018, we had 89 instruments placed per contractor to be placed with nearly all of the associated recurring revenue coming from T2Candida Panel utilization. As we enter 2019, we expect the new contracts from the second half of 2018 to complete the three to six month validation and startup phase and begin testing patients, which will begin to layer on meaningful T2Bacteria Panel sales.

Overall, we ended the year right where we expected to be with the launch of the T2Bacteria Panel. We have a strong sales pipeline of opportunities for the T2Bacteria Panel entering 2019 and we remain confident in the long-term opportunity for T2Direct Diagnostics.

John will provide full detail on our guidance, but in short we expect to approximately double our total revenue in 2019 and deliver 70 to 80 new instrument contracts, consistent with prior guidance.

Turning to an update on the T2Bacteria Panel launch, we have recently reviewed our sales and marketing progress. And while we have hit the projected number of contracts, we believe there is growing interest and demand.

Based of this analysis, we've altered our strategy from the first six months of the T2Bacteria Panel launch due to identifying several encouraging data points that we are integrating into our key initiatives to drive the T2Bacteria Panel of 2019.

We're encouraged with the feedback from the market and are executing against a robust pipeline of interested hospitals and hospital targets. We delivered 24 new proposals in the fourth quarter, up from 15 in Q3 and continued the strong trend we saw leading into and following the FDA clearance of T2Bacteria.

Moving into 2019, we will no longer provide the proposal number for each quarter as our focus as a result of our activity will shift to securing new contracts and driving utilization.

In terms of new contracts, when we analyzed our new customer wins from the second half of 2019, we were encouraged by the data. Every new account in the United States that closed in the second half of the year had a 30 to 90 day sales cycle, which is much faster than our expected average of 6 to 12 months and also faster than anything we saw following the launch of the T2Candida Panel.

We believe that the accounts that closed quickly typically have active stewardship effort that are clearly focused on improving sepsis management patient care. Said differently, we believe that our more educated buyer is our best customer and the sales process moves fast with such buyers because they appear to see the potential of our product.

These faster-closing accounts in the second half of 2019 will balance with the number of potential T2Bacteria Panel customers that are trending towards the more traditional 6 to 12-month sales cycle range and that we will focus on in closing in 2019.

Given the potential of a rapid sales cycle, starting in Q1 2019, our sales reps are dedicating more time to broad outreach to hospital in their territories in order to engage with additional accounts that could fall into this category, while also advancing existing, more traditional opportunities.

In January, the sales team secured first meetings with over 250 hospitals with whom we were not previously engaged that have expressed interest in one of our solutions.

We believe this may accelerate the new account close rate of our sales force, which includes 16 representatives in the United States and ensures that we maintain a broad pipeline of opportunities.

In terms of utilization, we've received positive feedback on the service provided by our team of medical liaison. This team is led by Sandy Estrada who implemented the T2Candida Panel at Lee Memorial Health System in Florida, one of our flagship accounts.

They are working directly with the sales team and the sales process to ensure the value of testing patients is understood by new customers and to support the validation and startup process by showing best practices and strategies to maximize the benefit of the T2Dx instruments for their patients.

The T2Bacteria Panel customers signed in 2018 are starting commercial activity in Q1 2019. And as more accounts go live over the course of the year, we believe our medical liaisons will increase customer satisfaction and support growth in T2Bacteria Panel utilization.

On the marketing front, we have several activities and campaigns planned for 2019 to support the momentum of the T2Bacteria Panel launch and expand awareness of the benefits of the T2Direct Diagnostics platform.

Highlighting the T2Bacteria Panel clinical data is one of the key components of our strategy as we have seen the importance of data in the adoption of the T2Candida Panel.

In the first half of this year, we expect the results of the T2Bacteria Panel pivotal FDA clinical trial to be published in a peer-reviewed medical journal.

For many physicians and healthcare providers, the publication of this data in a peer-reviewed journal is an important validator of our technology. Over the course of the year, we expect the clinical evidence to continue to build with more clinical results to be added to many studies already reported using T2Bacteria Panel, expected at the 29th European Congress of Clinical Microbiology & Infectious Diseases, or ECCMID, which will take place in Amsterdam from April 13 to April 16.

In total, we have five scientific posters accepted for presentation at ECCMID and we are sponsoring a major symposium with US and European experts in T2Direct Diagnostics.

We will also have a strong presence at several US and European customer meetings in February and March, leading into ECCMID, providing multiple opportunities to highlight T2Direct Diagnostics and our T2Bacteria Panel data set.

In the first two months of this year, we have receive additional external validation of our technology. On January 30, our Chief Scientific Officer, Tom Lowery, participated in the Presidential Advisory Council On Combating Antibiotic-Resistant Bacteria, or PACCARB, in Washington DC.

At the request of PACCARB, Tom provided information on T2Direct Diagnostics in support of their current task of identifying new priority areas for the next iteration of the US government's 2020 to 2025 national action plan for combating antibiotic-resistant bacteria.

If you did not have the opportunity to view the live webcast of the meeting, a reply is now available on YouTube and at the PACCARB website and I encourage you to view Tom' participation, which highlights our technology and the interest from PACCARB.

In February, T2 Biosystems was ranked in the top 10 of the world's most innovative biotech companies by FastCompany based on the FDA clearance and launch of T2Bacteria. We are honored to be listed with a mix of well known and emerging companies that are transforming industries and shaping societies.

Outside of the United States, we have a team of six direct sales and marketing professionals, managing our international distributors, covering parts of Europe and the Middle East.

In 2019, this team will be focused on going deeper in these existing market with both the T2Bacteria and T2Candida Panels, while also supporting entry into new countries.

Turning to our new product pipeline, we have several opportunities to expand our market opportunity and leverage our core technology.

The newest pipeline opportunity I'd like to highlight is expanding on our T2 carba-resistant plus panel, which I've highlighted on previous calls, and for which we develop in partnership with Allergan and CARB-X and introduced at ID Week in late 2018.

The T2 carba resistant plus panel was the first direct-from-blood antimicrobial resistant panel and could be used to determine if a patient is resistant to the first-line therapy associated with certain deadly gram-negative bacterial infections.

We have since expanded on the initial panel, which was focused on carbapenemase-resistant gene and are announcing a more comprehensive panel called the T2Resistance Panel. This panel includes detection and identification of 13 resistance gene from both gram-positive and gram-negative pathogens.

These include detection of clinically-important carbapenemase-resistant genes that are listed on the CDC urgent threat list for our antibiotic resistance.

All of these results are available within 3 to 5 hours direct from blood and blood culture independent like our other T2Dx panel, which we believe will expedite accurate treatment for antibiotic-resistant bloodstream infections.

The infections detected by the T2Resistance Panel are life-threatening, can lead to sepsis and result in high mortality rate. Under the current standard of care, diagnosing bloodstream infections caused by resistant pathogens requires a positive blood culture and subsequent analyses that can take three or more days to receive an actionable result.

With T2Resistance, we believe that the time to receive an actionable results will be shortened to just a few hours.

Feedback from potential customers indicate that real-world use could include both running on certain positive T2Bacteria Panel results in certain patients and expanded the screening for certain patients before they are empirically treated with drugs for gram-negative and gram-positive infections.

We're encouraged by the feedback and planning to rollout the T2Resistance Panel as a research use only product in the United States and to receive a CE Mark, enabling a market launch in Europe, before the end of this year.

From an FDA perspective, we are delighted that the FDA has granted breakthrough device designation for the T2Resistance Panel. The FDA's breakthrough device program is intended to expedite patients' access to breakthrough technologies that will provide effective treatment or diagnosis of life-threatening or irreversibly debilitating conditions or diseases by expediting their development, assessment and review.

We are honored to receive this breakthrough designation from the FDA and appreciate the productive partnerships with CARB-X and their funding agencies, BARDA and WellcomeTrust.

We look forward to working towards bringing the first-ever culture independent, direct-from-blood test for resistance markers to target.

The second pipeline opportunity is the T2Lyme Panel in which we began enrolling patients in the pivotal FDA study in 2018. We will continue collecting data for our pivotal study in 2019 and are already encouraged by the preclinical data on this panel.

If these results carry through to our FDA trial and we can secure regulatory approval, we will be positioned to offer a new tool to diagnose Lyme disease in an approximately $700 million market.

In addition to these opportunities, our R&D team continues to work on expanding our testing menus for existing and future applications and we look forward to sharing additional updates on our pipeline as appropriate.

With that, let me turn the call over to John Sprague who will review our fourth quarter and full-year 2018 financial results in greater detail. John?

John Sprague

Thank you, John. Fourth-quarter 2018 total revenues were $1.8 million, a 6% increase over last year's fourth quarter revenues of $1.7 million and within the range of guidance.

Product revenues, primarily T2Candida Panel and T2Dx instrument sales, were $1.3 million, level with last year's fourth-quarter product revenues, and were driven by growing T2Candida Panel sales and the timing of T2Dx instrument sales.

T2Bacteria Panel sales are just commencing to ramp up after our July 2018 launch due to hospital, new diagnostics validation protocols of 3 to 6 months.

Research revenues were $0.5 million compared to $0.3 million in last year's fourth quarter. Costs and expenses, excluding cost of product revenue, were $9.8 million compared to $9.7 million in last year's fourth quarter and were $1 million below the low range of guidance and include depreciation and non-cash stock option compensation and restricted stock unit, or RSU, grants of $3 million in the fourth quarter compared to $1.8 million in last year's fourth-quarter, an increase primarily due to the vesting of performance-based RSUs.

Operating margins were a loss of $13.6 million compared to a loss of $14.4 million in last year's fourth quarter.

Net interest expense and other income was $1.6 million compared to $33.8 million in last year's fourth quarter and decreased due to the absence of the derivative charge in 2018.

Our net loss was $15.1 million, $0.34 per share, compared to a net loss in last year's fourth quarter of $18.2 million, $0.51 per share. Weighted average shares outstanding were $44.1 million compared to $35.7 million in last year's fourth quarter.

Our cash and cash equivalents were $50.8 million at December 31, 2018. We believe our cash and financing sources are sufficient for the first half of 2020.

2018 financial results. We delivered 14 new system contracts in the fourth quarter of 2018 and 25 in the second half of 2018, but it was at the high-end of our guidance.

On our last call, we estimated these instruments were expected to provide access to at least 75,000 patients suspected of sepsis in the second half of the year and the fourth quarter achievement alone of more than 80,000 exceeded that goal. The number of high-risk patients is important as it represents the current existing market opportunity for the T2Candida and T2Bacteria Panels if every patient at hospital is under contract was tested at the time they showed symptoms of infection.

However, this metric is becoming increasingly difficult to accurately track and report and, ultimately, will become less meaningful as we expand our install base and drive adoption into this high-risk population, which will be reflected in our utilization and recurring T2Bacteria and T2Candida Panel sales. Therefore, we will discontinue this metric in 2019.

Revenues for 2018 were $10.5 million and increased 123% over revenues of $4.7 million for 2017 and were driven by growing T2Candida Panel sales and T2Dx instrument sales.

Product revenues, primarily T2Candida Panel and T2Dx instrument sales, were $4.8 million, a 41% increase over last year's product revenues of $3.4 million.

Research revenues were $5.7 million compared to research revenues last year of $1.2 million.

Cost and expenses, excluding cost of product revenue, were $40.2 million compared to $46.5 million last year and included non-cash depreciation and stock option compensation and RSUs of $12.3 million compared to $7.8 million last year and increased primarily due to the vesting of performance-based RSUs.

Operating margins were a loss of $45.1 million compared with a loss of $53.9 million last year.

Net interest expense and other income was $6.1 million compared to $8.5 million last year.

Our net loss was $51.2 million, $1.26 per share, compared to a net loss of $62.4 million, $1.94 per share last year.

Weighted average shares outstanding were 40.6 million compared to 32.1 million last year.

2019 outlook. The following forward-looking statements reflect estimates based on information [indiscernible] and are subject to uncertainty.

We reaffirm our guidance as outlined on our third quarter 2018 conference call. Overall, we expect revenue to double in each of 2019 and 2020 as our customer base grows and accounts go live testing with T2Bacteria.

In 2019, we expect product revenue to grow over 100% and for research revenue to grow by 40%. For the first quarter of 2019, we expect revenue in the range of $1.3 million to $1.5 million, with revenue ramping over the course of the year.

In 2019, we expect to close contracts with placement of 70 to 80 instruments, roughly double the number in 2018. This includes 8 signed contracts expected in the first quarter, which aligns with hospital purchasing seasonality and historically has been our lower T2Dx instrument quarter, especially outside the United States.

As John mentioned, it typically takes new instruments an average of 3 to 6 months to go live and patient testing centers as hospitals are required to validate any new diagnostic testing instruments.

During this period, the company typically receives nominal revenue, unless the instrument has been purchased by the hospital, which, in the United States, occurs about 15% of the time.

And our national distributors purchase instruments at a 30% discount off a list price of $100,000 per instrument. We expect a continuation of average sales prices up $150 per test for the T2Bacteria Panel and $200 per test for the T2Candida Panel. International distributors typically receive about a 30% discount per test panel.

We estimate that a single T2Dx instrument is capable of running 3,000 tests per year, but expect average utilization to be in the 1,000 to 2,000 test range after testing ramp up over time. Therefore, we expect each T2Dx instrument to generate in average about $300,000 in annual revenue from a combination of T2Bacteria and T2Candida Panel testing.

We expect quarterly operating expenses to be $10.5 million to $11.5 million in 2019 and during the first quarter, including non-cash depreciation and stock option and RSU compensation of approximately $3 million per quarter. Non-cash stock compensation expenses may be impacted by the timing of performance-based RSU vesting.

We estimate that we will achieve cash flow breakeven between $65 million and $75 million in annual revenue. We expect our gross margin to be roughly 45% to 50% at these revenue levels.

Our weighted average shares outstanding of 44.1 million may be impacted by stock option exercises.

Thank you. And back to John McDonough for closing remarks.

John McDonough

Thank you, John. In summary, we believe 2018 was a landmark year for the company and are pleased that we delivered on our operational and financial goals for the year.

The T2Bacteria Panel launch is progressing as planned and we have a comprehensive strategy in place to continue building momentum, secure new T2Dx instrument contracts and drive utilization.

We believe change is happening and will accelerate in the hospital environment as will the subsequent impact on our financials.

In 2019, we also anticipate important milestones for our new product pipeline, providing incremental growth opportunities for the company.

Taken altogether, we expect that this should allow us to double our revenue in each of the next two to three full years.

Thank you for your participation in today's call and for your continued interest in T2 Biosystems. That concludes our prepared remarks this evening.

Operator, we'll now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Thank you. And our first question is coming from the line of Steve Brozak with WBB Securities.

Stephen Brozak

Thank you, gentlemen, for taking the question. Like every analyst, I'm preparing notes for tomorrow's summary on what you've just been talking about, but one thing comes out that's a little bit different.

A few days ago, a blogger came out with some statements that were pretty much replete with factual errors, mistakes in science and just basic sloppiness. But, obviously, it's had a bearing on the stock price. And the question that I'd like to ask right off the bat is what did this blogger ignore, got wrong and what do you think the most important takeaway. And I'd like to have some follow-up questions about that afterwards.

John McDonough

Okay. Thanks, Steve. Thanks for being on the call. I know the report that you referred to. And, I guess, I'd have a couple of comments on those. Definitely appears to have had a pretty significant impact on the stock price.

The first point, I'd say, is everyone should look at the disclaimer at the end of the report, for anyone who reads it, that basically says that both the blogger and their clients are in a short position on the T2 stock. And it certainly is curious timing that that report would come out shortly after some pretty darn good news on the T2Bacteria Panel, the breakthrough status that had caused a runup in the share price, which probably isn't good for people in a short position.

It is definitely hard to see that someone's trying to make money which, of course, that's what it's all about, but do it in a way that basically is impeding a product that can save patients' lives.

One of five people in their lifetime will have sepsis and that would mean the author of that report has a 20% shot at being one of those people, and I can assure you that they would want our product in any institution that they show up in as them or anybody close to them should have one of these deadly diseases.

Generally speaking, as is common with these types of short reports, the report itself combines some factual statements in data with some subtle omission of key facts, there's inaccuracies, and that's all mixed up with a whole lot of opinion.

I don't want to spend a whole lot of time on it, but, I guess, I'll just make a few points. It is certainly odd that what's not mentioned in the report is that T2 is the first of the only product that can detect infections directly from blood, that can do it without a blood cultures, that could provide results in 3 to 5 hours versus 1 to 6 days, that we detect over 90% of infections versus 50% to 65% for blood culture, that one T2 result is the equivalent of 3.8 blood culture results, and somehow the product is compared and probably for a reader that doesn't understand the market is compared to a product of the post blood culture product that perhaps didn't too well, but although seems to be succeeding in the market. And then it's compared to product from Roche and Abbott that failed, that never got FDA approval because they couldn't detect between 1 and 10 CFU per ml. In fact, the comparisons to Roche and Abbott, again, never FDA cleared product, never offered in the United States, pulled from the market, in one case for sure, because they tried to get FDA clearance and were denied, but I think we can say for sure that companies of that size do nothing but reconfirm the size of this market opportunity, the fact that they would go after it in the first place.

It's really difficult to say that those technologies flopped and, therefore, we will. I think we're in a very different position with FDA clearance.

Additionally, just a couple of other points. The report tries to say species identification doesn't matter. I guess, our response to that would be that's just wrong. That's just completely wrong. 85% of clinical decisions are made based on species identification. There's a recent JAMA publication. A tier one journal, which probably everybody has heard about that confirms that. And I think the strength of JAMA would be very different than maybe the strength of the author of the report.

And, of course, we had a recent presentation by Tom Lowery at the President's Advisory Council and it was all because of the difference we can make in changing clinical decisions.

The FDA granted us breakthrough status because of the impact we can have on patients' lives. And, of course, lastly, the point on clinical validation is our customers. Lives are being saved. We have examples at Henry Ford Memorial Health System. There's a recent case where a physician is convinced because of the use of our T2Bacteria Panel. We identified an infection that blood culture would have missed, but from a type of infection that has 70% to 80% mortality rate. And this physician will T2 forever because he believes we saved his patient's life.

There's also a comment about breakthrough designation not being a big deal. It's very rare for a diagnostic company to receive breakthrough designation. And I'd just point out that, if you read the guideline, the FDA provides breakthrough designation when you offer significant advantages and where availability of a product is in the best interest of patients. And so, I would say, the FDA probably thinks our technology can make a big difference in the lives of patients.

But then, lastly, I'll just say, the report also downplays research revenue and that that's not recurring. I believe John Sprague just provided guidance that we believe our research revenue is going to grow 40% in 2019. So, seems like we're doing okay on that front.

So, I don't know where these reports come from. I don't know what their motivations are. I just know there's a bunch of inaccuracies in there. Always disappointing to say that. but those things happen. We're going to do at T2 – our objective here is to keep bringing products to the market. We're going to drive this technology into the marketplace. We're going to impact patients' lives and we believe our share price is going to reflect that as we continue to do that moving forward. That's what we control. We don't control the rest of it.

Stephen Brozak

Thank you. And again, I very much appreciate the succinct answer on that. Going back to what you can say in terms of your internal – the specifics of your contracts, your placement, can you go through that path and explain how critical that is and how you approach that? Because frankly, it's one of the things that we monitor more than anything else. And I'd like to follow-up with the hospitals after that please.

John McDonough

Yeah, you bet. So, as we pointed out, over the course of 2018 and going back to the beginning of the year, the most important metric for us this year is the instrument placement because that shows that a hospital is adopting and it gets us into an institution where the technology can be adopted. And we know there is a 3 to 6 month process before accounts can go live. And so, we've got FDA cleared in the middle of the year and we're going to see revenue growth on T2Bacteria, as John mentioned, as we go through 2019.

But it's all about placements. And we are delighted with the result of the placement number of 14 in the quarter, 25 in the back half of the year. We basically took the instrument placement rate and almost doubled it in the second half of the year versus the rate that we've been running at. I think that's a real indication of hospital interest, hospital adoption of our technology and we were really pleasantly surprised, if not almost shocked, that the 30 to 90-day sales cycle we are seeing, nobody would have predicted that. This is a big game changing technology that – a big decision for a hospital to make. And for them to move that quickly, it just shows that there are a lot of people out there, --and the most educated ones, I might point out – that see the value of rapid species identification and the impact that it can have on their patients and the economics and their hospital.

Stephen Brozak

If you don't mind indulging me for a second, on the hospital systems, what can you tell us about that because that's obviously something that's critical to your growth?

John McDonough

We are seeing use at some of the larger systems. We are in multiple sales cycles with all of the major ones that you want to see us involved with and we think that will play a significant role in our achieving our goals for 2019.

Stephen Brozak

Okay. So, in analyzing that, you would look at – versus going out there and hitting singles or doubles, you could have multiples of that based on hospital system growth?

John McDonough

Absolutely. That's going to happen. In our opinion, the tipping point is coming and getting these accounts live and getting more and more stories about the patient lives being saved and the impact of the institution are going to drive to that point. And you can definitely see it in the interest building and the momentum in the market.

Stephen Brozak

So, if I were to go out there and use your words, in this particular case, what you're pushing for is a tipping point where the standard of care will now be challenged by your actual designation and your ability to go out there and discover these pathogens. Is that a good way of looking at it?

John McDonough

I think that's a great way of looking at it. And I think the presentation and being invited to the President's Advisory Council certainly is a big indication of that. As is the breakthrough device indication from the FDA. The leaders, the biggest experts that are out there are seeing the differentiator in the impact that we can have.

Stephen Brozak

And just on that one note, and then I'd like to actually go for PACCARB, but on the research use only designation, a lot of diagnostics that we cover will always use that if they are with companies that are specific, like Quest or anything else. They'll just have research use only. There is a financial model for that. But in your particular case, you've got a different metric and approach to that. Can you tell us anything about that or what can you share?

John McDonough

Well, what we can share about that is that having that research use only product available could really help seize the market. Ultimately, our objective with the T2Resistance Panel, of course, would be to get FDA clearance. That's where the breakthrough designation will help us and should accelerate that process and, hopefully, provide a clearer and smoother path.

But the research use only product can be used by pharmaceutical companies. It can be used in research. It can be used for creating and generating studies and publications that can be available at the time of the release of that product in the US. And, of course, getting the CE Mark will give full authorization for clinical use outside the US. And we're excited to be on track to be able to achieve that milestone before the end of this calendar year.

Stephen Brozak

Okay. Last question. Going to PACCARB and listening to the statements that were made by the chair, he came out and said pretty much something along the lines of, in his estimation, 90% of true sepsis could be picked up by a T2. And that was bookended by the VP of bioMérieux, basically saying that she thought that this was an investigative novel approach in diagnostics for direct sepsis. What were your thoughts about the entire panel and the discussion that took place at PACCARB and what do you look for into the future? And I'll hop back in the queue. And thank you again for answering these questions.

John McDonough

Well, we are excited to be a part of a dialogue at the national level for driving resistance out of the market. The big problem is the cause of superbug. 10% to 15% of the time, antibiotics won't work. And the reason why resistance is in play primarily is because of the overuse of antibiotics.

One of the things that's, I think, underappreciated about the T2 story is we provide rapid results – I think people understand that – that can get patients on the right drug, but we also provide rapid negative test results that can allow, in many cases, for a de-escalation of drugs. And that de-escalation of drugs is good for the patients, it's good for hospitals, also good for eliminating and reducing resistance in the first place.

Basically, what T2 is detecting with our species identification, we're detecting the pathogens that lead to sepsis. Sometimes people get confused. We're not detecting sepsis. We are preventing sepsis by getting patients on the right drug and identifying these infections much faster.

So, we're delighted with the presentation. We thought there was a lot of support. Dr. Tom Lowery did a great job. And we look forward to continuing to pursue these opportunities that put the opportunity of using our products front and center in the national conversation.

Stephen Brozak

Great. Well, thanks again for taking the time to answer these questions.

John McDonough

You bet. Thanks, Steve.

Operator

The next question is from the line of Mark Massaro with Canaccord Genuity. Please go ahead with your question.

Max Masucci

Hi. This is Max on for Mark. So, what percentage of the 14 contracts in Q4 were capital versus rental agreement? Can you just help me better understand why Q1 revenues will decline sequentially just given that more bacteria customers are expected to be live?

John McDonough

I will let John answer that question.

John Sprague

Yeah. Six capital sales in the fourth quarter.

John McDonough

The potential decline sequentially would be because of an expectation of fewer capital sales in Q1 relative to Q4. We expect reagent revenues to be decreasing from Q4 to Q1.

Max Masucci

Okay, that's helpful. And I appreciate the color on the full-year guide, segment breakdown. How should we think about the split of product and research revenues in Q1 and can you just help us understand your assumptions around the quarter-over-quarter acceleration in product revenues throughout the year?

John Sprague

So, if you look at the first quarter, we are guiding to $1.8 million to $3.3 million, with product revenues being between $1.5 million and $2.4 million. So, that will be research at $300,000 to $900,000 in the first quarter.

Max Masucci

Okay. That's helpful. And can you just help us better understand the next steps with the FDA and timing regarding the T2Resistance Panel? I guess, when can we expect just roughly an FDA-approved version to, hopefully, hit the market?

John McDonough

We don't have a clear answer to that question, Max. We're in discussions with the FDA around trial design once we have all of that. And understand what the path is, the clearance, we can be more decorative. We certainly wouldn't expect it based on what we know today before 2020. We don't expect that that would happen in 2019. And we don't know enough even to be able to say it would happen in 2020. But we're in discussions. The breakthrough status is going to definitely help in terms of accelerating that and we'll report back later once we have a more clearer path of timing.

Max Masucci

Great. And then, just one more if I can. Regarding T2Lyme, how is enrollment going? And do you still – do you have to wait for the spring/summer to find more Lyme patients? Should we expect an FDA submission by the end of 2019 or is it looking more like in early 2020 then?

John McDonough

Yeah. We have no update on enrollment. It does require kind of the spring/summer season to be here in order to pick that up. And it's unclear whether we'll be able to do everything we need to do and complete enrollment to get a filing by the end of 2019. So, it's possible, but we just don't know until the enrollment is sort of recommenced.

Max Masucci

All right. That does it for me, guys. Thanks.

John McDonough

Thank you, Max.

Operator

The next question comes from the line of Patrick Donnelly with Goldman Sachs. Please proceed with your question.

Patrick Donnelly

Great. Thanks, guys. Maybe just on the new go-to-market strategy for T2Bacteria, can you just help us think what the key changes are there? What drove the decision to alter the approach? And then, on the back end of your expectations for the market change at all with the new approach in hand?

John McDonough

Yes. Great question, Patrick. So, in terms of the new approach, the biggest change to the whole approach is what we had discussed in the last call, building a medical affairs and a medical science liaison team. That team is now up to six people in the US, one person in the yard. And they're making a big difference in the sales cycle. When you get to that point in the sales cycle when customers are identifying patients that they're going to roll this product out to when they go live and testing patients and as they think that through during the sales process.

The other area that we've made a difference is getting into more accounts. We've put a much bigger push on getting into institutions that we haven't been speaking to. In fact, in January alone, we got introduced to more accounts than we had been introduced in the entire second half of 2018. And a lot of that is driven by the understanding that these sales cycles can be really quick. So, we want to be in front of and getting the sales team in front of these decision-makers, people who are on stewardship committees and sepsis committees, as fast as possible to identify whether they are potential for moving quickly.

Those are the two key points. I think what we expect out of that is reflected into our guidance. And as we implement these changes and start to see the effect of these changes, perhaps we'll come back and readdress guidance at a later date. But far too early to do anything like that today.

Patrick Donnelly

Okay, that's helpful. And then, certainly appreciate new customers take time to validate and ramp the product, but can you just talk about early trends on pull-through, utilization for T2Bacteria? And then also, just what's baked into guidance for 2019 on that front?

John McDonough

Yeah. So, the first accounts that purchased in the second half of the year are just going live now. The early utilization is as expected. But, boy, the data is too early because we expect full ramp in the first quarter and then a build as you go through the year. So, we're on track.

We expect that in the first half of the year, T2Candida will likely still be utilized more than T2Bacteria, but that will all change in the second half of the year as these customers have ramped up and the testing volumes are growing. And, ultimately, we would expect somewhere between 75% and 85% of our reagent revenue to be driven by T2Bacteria as compared to T2Candida.

Patrick Donnelly

Okay. And then, maybe just a last one, obviously, customer testimonials, word of mouth are big keys to driving adoption along with data. You guys have already shown. So, can you just talk about what you're hearing in the market on that front? How long do you think it will take to really cause an inflection for a new product like this to really gain traction in the eyes of customers? Anything you guys can do to kind of help that along outside of, again, just getting customer testimonials out there?

John McDonough

Yeah. We believe it's kind of a two-pronged approach. It's all about making sure customers can see that this product really works and it's working in the hands of institutions. So, customers testimonials are a big part of it. Our next significant conference will be at ECCMID in Europe, which I mentioned on the call. We'll be at the ASM conference in June, which is here in the United States.

And then, the other part of it is clinical studies and publications. We are hopeful and expect to see the publication from the clinical investigators, from the FDA pivotal trial that was run by going back to 2017 and to 2018. That will be a very, very important publication because it would be a large, 11-center study, covering a large number of infections and being able to go even deeper than what's on the label in terms of what the investigators can speak to on our FDA label.

And then, what we should expect to see as we work with a number of institutions to help them and guide them in studies that they are running and we expect to see a steady repetition and rollout of the one-off studies that will be going on at different situations as we go through 2019. But those are really important. Those will be really important for the next several years.

Patrick Donnelly

Appreciate it, guys.

John McDonough

You bet. Thanks, Patrick.

Operator

The next question is from the line of Paul Knight with Janney Montgomery. Please proceed with your question.

Paul Knight

Hi, John. Can you review the time of placement to panel sales on bacteria? And is that changing in terms of turnaround time, in your view, based on now that you've got six months' experience?

John McDonough

Yes. I think this is one of the areas that we do a really good job. Most diagnostic companies, as they were having calls like this one, they talk about 6 to 12 months validation periods before they go live in testing patients. And we have done a really good job in being able to shorten that to 3 to 6 months. But it still is 3 to 6 months. Labs are required to validate and test and some will do kind of little mini studies because they all validate it using whatever approach they deem appropriate.

We help by providing clinical samples and talking to them and sharing experiences and sharing other customer experiences, which is why I think we've done a really good job of getting that into the 3 to 6 month range. But because it is still in the 3 to 6 month range, our first closes in 2018 really happened towards the tail end of the third quarter, following the FDA clearance, which has happened at the end of the second quarter, which is why we still have truly nominal T2Bacteria sales in our fourth quarter numbers and the accounts are just now starting to come on and test patients.

Paul Knight

And as your sales force makes commentary in the field, what do you think it is? Is it the clinics, the hospital administrators still needing convinced on clinical utility or is it doc practice? What do you think the one, two, threes are that are giving you or you view as resistant?

John McDonough

I would say that – the number one is oftentimes convincing the lab director in the hospital about the impact our products can have. It's rare that it's the clinicians. They know what they will do with the test results and they know they're going to change a clinical decision. But sometimes the lab directors are a little bit less than informed in that regard. And that's where you have the longer sales cycle because you need to bring those groups together.

I can share one experience where that was not the case, one that I was personally involved in where I spoke to the microbiology lab director, and I was the first person to actually introduce T2 to that person. That lab director is actively involved in their antimicrobial stewardship committee. What that means is, every day, he's on the phone, managing the 300 patients they see them up and were suspected of sepsis. And in each case, this group that gets on the phone and goes into a meeting every day, they're trying to decide and guess what drugs to give each patient next if the drugs aren't working because, again, it's all based on empiric therapy.

When I had this discussion with him, he completely got it totally. His question shifted to what's your specificity and what's your specificity; and, of course, when he heard 95% specificity, 98% specificity, the discussion changed really quickly. And less than 30 days later, they are adopting and they are in the middle of installation and, hopefully, will be going live and testing patients in Q2. All of that unfolded in the month of December.

So, when you hit that lab director who's involved at that level, they just move quickly. When they are not, they need to be convinced because, ultimately, they are the ones who run the tests and, ultimately, the cost of the test comes out of their budget. But I would say that's the number one area typically where things can sometimes take a little bit longer to convince people.

Paul Knight

Okay. Thanks, John.

John McDonough

You bet. Thanks, Paul.

Operator

Next question comes from the line of Jordan Abrams with Cantor Fitzgerald. Please proceed with your question.

Jordan Abrams

Hi, guys. Appreciate the color on the new sales strategy. Are you planning to add any reps in 2019? And if so, what sort of ramp in reps are you considering and how steep is the learning curve for adding new reps, to meaningfully contribute to adding customer accounts? Thanks.

John McDonough

Yes. So, we don't have any plans to go beyond the 16 in the first half of 2019. And we'll kind of pause it there and reassess midyear whether or not we'd go beyond that. We typically can get a rep out making calls as fast as 30 days after they come onboard. We have a pretty rigorous training schedule. We have them go make calls with other more experience reps. It's a deep educational process.

And I would say, in terms of realistic timeframe for when they might close their first piece of business, that's probably more on the 6 to 9-month range before you actually see some closing accounts after you hire them. We've had examples where that goes quicker, but more likely it's 6 to 9 months because you've got a sales cycle on top of a learning curve of the sales rep that, when you put them altogether, you're typically up in that 6 to 9 month range.

Jordan Abrams

Great. And then, a second, can you speak to the nature of how you're winning, signing accounts? So, are hospitals placing a T2Dx instrument in the emergency department first or are you getting traction outside the emergency department? And is it possible to provide a mix of customers that are emergency department only versus emergency department plus outside the ED? Thanks.

John McDonough

Yeah. In, virtually, all cases, the instrument itself is in the hospital microbiology lab, but the testing is going on in the emergency department. 70% to 80% of the accounts are going live in the emergency department first. But, yeah, now there are other areas of the hospital we are being used as well, the intensive care unit and others. And we've talked about the benefits in the emergency department. Over 50% of sepsis cases begin there and there's a strong reimbursement system in place.

And the objective is virtually every hospital has something that will be called a sepsis alert or a step 1 package or a step 1 bundle, they all call it something different. I'll call it a sepsis package for the purpose of this discussion. If a patient meets certain criteria in terms of how they are presenting in the emergency department, they automatically will go and put them on a broad spectrum of antibiotics and do all sorts of tests. And the objective is for T2Bacteria to be a part of that sepsis package. And as the hospitals go live, some are going straight to doing that. Others are taking a segment of that patient population and will grow – because they want to test it first and see the impact and try it on certain patients, and that's more typically the case. And that's consistent with what we expected and certainly consistent with the revenue ramp and guidance that John provided earlier.

Jordan Abrams

Okay. Thanks for taking the questions.

John McDonough

You bet.

Operator

The next question is from the line of Soumit Roy with JonesTrading. Please proceed with your questions.

Soumit Roy

Hi. Thanks for taking the question. Just wanted to get a little color on the data that's coming out in April. What are you going to see there? And are we going to see, post approval, any better controls, real world setting test data versus blood culture showing economic or clinical benefit?

John McDonough

Yes. So, there will be a number of poster presentations at the ECCMID conference, most of them on T2Bacteria. There will also be a symposium of clinical experts who will speak to their use of the T2Bacteria product. And then, absolutely, you should expect to see a series of other presentations and clinical publications coming out of different institutions. Some were users of the T2Bacteria research use only product. We expect to see more of those as we go through 2019.

Soumit Roy

Do you think that to be the key that's holding back the Wall Street more, believing in the product or its adoption, whereas they really want to see – rather than the revenue growth, they really want to see a real-world poster approval showing economic or clinical benefit there? What's holding the investors back?

John McDonough

I'm going to kind of punt on that question because I don't know exactly what's holding investors back. I think we have to do a better job making it clear what our differentiators are. I think sometimes people get confused and they don't understand maybe that we're direct from blood and that may be part of it. I think sometimes there's market factors in play. Yeah, I think some of it is show more revenue growth and a drive towards profitability. And that is our number one objective, is driving market adoption first through instrument placements where it all begins and then driving use of testing, so that we can drive top line and, ultimately, bottom line improvement.

And I think as we do that, investors are going to come onboard and see the benefit. Hopefully, we'll see a tipping point with investors too as they understand these very clear differentiators and the impact that we can and are having in the marketplace for patients and for hospital economics.

Soumit Roy

Just to get a little color, as you talk to physicians, right now, I suppose they are using both T2 and the blood culture to test. And at what point do you think that they would feel more and more comfortable using T2 Panel as the only testing panel? And the second one and last question is, when can we get a better clarity on the T2Lyme when the filing of the data we can see for 2019? Thank you.

John McDonough

Yeah, kind of a two-part answer. We don't believe, in the short-term or mid-term, the blood culture will be stopped at all. Based on the current panels we have on the market, that's not needed. That's not needed economically and not in the best interest of patients.

However, most typically, there are four blood culture sets run for patients. And it's because of that poor sensitivity of blood culture and they do the first two sets right away, but then the third one comes 12 hours later, the fourth one might come another 12 hours later. And, of course, all of that's just further delaying time to resolve.

One T2 test result, as I mentioned, is the equivalent of almost four blood culture sets, which is pretty remarkable in its own right, never mind the time advantage that we have in the first place.

So, the two run side by side. And the number of blood culture sets, though, when T2 is positive are likely to decline. If you get a T2 positive, you may not run that third and fourth blood culture set. You may still run the first two sets at the beginning, but you may not run the third and the fourth because you've identified the infection through the T2Bacteria or the T2Candida Panel. Over time, through our work with CARB-X and expansion of that, it's our intention to bring to market a product that will detect 20, 30 or more pathogens and resistance markers that probably will have a much, much bigger impact on how much blood culture is being run as that product is developed and come to market. Now, we're a couple of years away from that, for sure. But, ultimately, that one will be broader in scope and they have a bigger impact on blood culture. But in the short run, that's not the case nor is it required to be the case and we never actually ever talk to a hospital about that, almost ever talk to a hospital about that.

In terms of T2Lyme, we just have to see where that clinical study progresses. And, hopefully, later this year, for sure, we'll be able to provide a further update on what that timeline might look like. But really difficult to do so today and we're not even in Lyme season to be able to report much progress.

Soumit Roy

Thank you so much. And congrats on the execution.

John McDonough

Thank you.

Operator

The next question is from the line of Yi Chen with HC Wainwright. Please proceed with your question.

Edward Marks

Hi. This is Edward on for Yi. Just a few questions. So, T2Resistance and then a follow-up. What would the T2Resistance price be compared to the T2Bacteria and the T2Candida candidate? And then, in terms of the guidance that you provided, does this include any potential revenue from the T2Resistance in Europe if you're anticipating CE Mark before the end of 2019?

John McDonough

So, we have not established a price for the T2Resistance Panel. I think if you were trying to model, if you assumed pricing similar to T2Bacteria that's in the $150 price range, that's probably a good place to start, but we have not officially priced that product and we have work to do before we do that and we have time to do it. And, no, our guidance does not include any revenue from T2Resistance in 2019.

Edward Marks

Okay, thank you. And then, just looking at the space in general, I was wondering if you anticipate any competition or just see anything on the horizon really that could provide that sort of gene detection and produce results in that similar timeframe compared to T2Resistance.

John McDonough

We do not. We have not seen any clinical data that would suggest others can get into this 1 to 10 CFU per ml range. We're not aware of an FDA trial going on. We know a couple of little companies that talk about working on these things. There always has been. We think, if they are successful, they've got be at least a couple, three years away. And that's assuming they're successful. We know how difficult it is and we know the challenges of getting here. So, something we watch really closely, but we don't see anything coming anytime soon. That's for sure.

Edward Marks

Excellent. Thank you. And then, just a final question on T2Dx, just wondering if the guidance that you provided for 2019, that's going to be primarily driven around the T2Bacteria Panel or if you could provide a little more clarity on where those numbers are going to come from?

John McDonough

John, do you want to take that one?

John Sprague

Sure. About 50% is T2Dx sales and 50% is cartridge sales. And they are really 50/50, bacteria and candida, although towards the latter part of the year, bacteria will start to increase and exceed candida and be more in the range of 70/30 exiting the year.

Edward Marks

All right. Thanks both very much. I appreciate the time.

John McDonough

You bet. Thank you.

Operator

Thank you. Our final question is from Puneet Souda with Leerink. Please proceed with your question.

Puneet Souda

Thanks. Hi, John. I wanted to get a sense – and apologies if I missed this. How are you thinking about guidelines overall and what are guidelines still that you need to be in rather than attempting to convince each customer into the product or product purchase? Help us just understand. What can you do broadly to just drive adoption of the product?

John McDonough

The field of sepsis, we have a lot of work going on in the field of guidelines and working with the CDC and others. Guidelines in this space have less impact than they do in other cases, like cancer diagnostics, which is something I had experienced in my last company. And the reason for that is that the infection or the types of infections are different by a hospital. And so, one size fits all doesn't quite work. But the key to getting into those guidelines and they can and will be helpful is to do the clinical studies and have the data that shows the validation to get into those guidelines and we certainly have that in mind in our clinical studies that we have in progress and have planned for 2019 and beyond.

Puneet Souda

Okay. And then, on menu, what's been the feedback from customers on the overall menu on T2Bacteria?

John McDonough

It's been very positive. Again, I would say it can be slightly different by hospital. Again, infection rates are different. Generally speaking, the five species on our panel will cover 70% to 80% of the infections in the emergency department, over 50% of infections within a hospital. Sometimes you'll go into a hospital, though, that has different infection rates and those numbers might be lower. And then, they might not see the same value in the panel. But, oftentimes, statistically, 50% of the time, you'll see infection rates that are higher as well. So, generally speaking, it's been a positive reception for the panel. We cover 90% of the escape pathogens which are the most problematic ones and that's generally recognized when you go into an institution. So, we don't see that as a limitation, but sometimes it can be a part of a discussion.

Puneet Souda

Okay. And then, just the last one on – what's your expectation for overall growth in EU versus US now with Bacteria and Resistance Panel coming up and just wanted to get a sense of what's the split you expect there. And, sorry, if you covered that already.

John McDonough

No, we didn't. We expect to see comparable growth in both of those businesses as we go through 2019. The dynamic is a little bit different. The US market dominated with reagent revenue because most of those contracts are reagent rentals where the instruments are being placed where in Europe we're most often selling an instrument through a distributor. So, there is some revenue associated with that. So, you see more instrument sales coming from Europe, slightly lower reagent. And the reverse in the US. But we expect to see comparable growth rates for both areas in the year.

Puneet Souda

Okay, thank you.

Operator

Thank you. We've reached the end of the question-and-answer session. Now, I'll now turn the call over to John McDonough for closing remarks.

John McDonough

Well, thank you all very much for listening to the call. We are excited about the development in 2018. We're excited about the adoption rates. We're very excited about the accounts that are going live and the early impact we're seeing with T2Bacteria and T2Candida. We look forward to reporting back on the next quarterly call with more results and more clinical data. And we thank you all for listening in this afternoon.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.