T2 Biosystems, Inc. (TTOO) Q3 2022 Earnings Call Transcript

T2 Biosystems, Inc. (NASDAQ:TTOO) Q3 2022 Results Conference Call November 10, 2022 4:30 PM ET

Company Participants

Emma Poalillo - IR, Gilmartin Group

John Sperzel - Chairman, CEO

John Sprague - CFO

Brett Giffin - CCO

Conference Call Participants

Kyle Mikson - Canaccord

Vidyun Bais - BTIG

Steve Brozak - WBB

Operator

Ladies and gentlemen, welcome to the T2 Biosystems Incorporated Third Quarter 2022 Earnings Conference Call.

Your host for today, Emma Poalillo. You might now begin.

Emma Poalillo

Thank you, operator. 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 these statements including the risks and uncertainties described in T2 Biosystems' annual report on Form 10-K filed with the SEC on March 23, 2022, and other filings 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 would like to turn the call over to Chairman and CEO, John Sperzel. John?

John Sperzel

Thank you all for joining our third quarter 2022 earnings call. Today, I will review the company's performance during the third quarter, highlighting a number of recent accomplishments and discuss the progress we are making across our 3 corporate priorities. I will then turn the call over to John Sprague, our Chief Financial Officer, who will review our third quarter financial results before I provide some closing remarks and we open the call for questions and answers.

During the third quarter, the T2 Biosystems team achieved total revenue of $3.7 million, including product revenue of $2.6 million and R& D revenue of $1.1 million. Importantly, our product sales included $2.4 million of sepsis and related product revenue, which excludes COVID-19 product sales, representing a 24% increase compared to the prior year period. We entered into contracts for 11 T2Dx instruments during the third quarter, including 3 in the United States and 8 internationally, bringing our year-to-date totals through the first 9 months of 2022 to 20 instruments in the U. S. and 18 internationally. Our team has realized a number of important accomplishments in recent months.

During the third quarter, we achieved the highest quarterly sales of our sepsis and related products in company history, and we have continued to increase our installed base of T2Dx Instruments. We have continued to expand our international commercial strategy, and we have entered into a territory exclusive distribution agreement in the Baltic region. We have advanced our near-term product pipeline by meeting milestones in the ongoing U.S. clinical trials for the T2Resistance Panel and the T2Biothreat Panel. We also attained multiple milestones related to the T2Lyme panel, including the receipt of breakthrough device designation from the FDA and receipt of the LymeX award from the U.S. Department of Health and Human Services and the Cohen Foundation.

Finally, we recently regained compliance with the NASDAQ minimum bid price listing requirements. These accomplishments support our mission to fundamentally change the way medicine is practiced through transformative culture independent diagnostics to improve the lives of patients around the world.

Given the recent developments with our T2Lyme panel, we are now expanding our target markets to include Lyme disease, along with sepsis, both of which represent significant opportunities within the infectious disease field where the current standard of care is leading to poor patient outcomes. Sepsis presents one of the greatest challenges to health care systems worldwide and claims approximately 11 million lives each year.

In the United States, sepsis is the number 1 cost of hospitalization, costing our health care system approximately $62 billion annually. The number 1 cause of death in hospitals, claiming approximately 270,000 American lives annually. And the number 1 cause of 30-day hospital readmissions, requiring nearly 20% of sepsis survivors to be readmitted within 30 days and nearly 40% to be readmitted within 90 days.

The current standard of care for patients at risk of sepsis relies on broad empiric protocols to administer antimicrobial therapy. Despite the fact that such protocols are only optimal in approximately 1/2 of cases, and can contribute to the growing problem of antimicrobial resistance. The current standard of care also continues to rely on a positive blood culture to identify the presence of a bloodstream infection, which can take anywhere from 1 to 5 days to turn positive and is widely understood to have poor sensitivity.

Rapid detection of sepsis causing pathogens and antibiotic resistance genes is critical for treatment decisions and improving patient outcomes as each hour of delayed targeted antimicrobial treatment can lead to increased mortality risk of up to 8%. Lyme disease is a bacterial infection caused by the Bacteria Borrelia and is considered the most common vector-borne illness in the United States.

Borrelia burgdorferi is transmitted to humans through the bite of infected ticks, by deer ticks in the Northeastern, Mid-Atlantic and North Central regions of the U.S. and by the western black-legged ticks on the Pacific Coast. According to the U.S. Centers for Disease Control and Prevention, or CDC, approximately 476, 000 Americans may get Lyme disease each year in the United States. Typical symptoms include fever, headache, fatigue and skin rash. And if left untreated, infection can spread to joints, the heart and the nervous system.

The current CDC recommended serological testing for Lyme disease relies on the presence of antibodies and can only be used accurately 4 to 6 weeks after infection. We believe there is a significant unmet need for a sensitive diagnostic test to detect early Lyme disease, and the initial performance data on our T2Lyme panel is very encouraging. We believe the T2Lyme panel will allow clinicians to detect active infections and ensure patients receive appropriate therapy faster, and prevent the negative impact of a delay in delivery of treatment and the overuse of antibiotics.

To advance our mission and create value for our stakeholders, we're focused on 3 corporate priorities: one, accelerating our sales; two, enhancing our operations; and three, advancing our pipeline. I'll now provide an update on our recent progress as it relates to each of these corporate priorities. Starting with our first priority, accelerating our sales. Our commercial strategy is focused on driving adoption of our T2Dx technology by expanding our instrument installed base globally and increasing utilization of our sepsis test panels.

As I mentioned earlier, third quarter sepsis-related revenue was $2.4 million, representing a record number for a single quarter and an increase of 24% compared to the prior year period. We entered into contracts for 11 T2Dx instruments for sepsis testing, increasing our installed base of instruments to 170, including 101 in the United States and 69 internationally, including clinical trial instruments.

We generated sepsis test panel revenue of $1.5 million, representing growth of 25% from the prior year period. From an instrument pull-through perspective in the United States, we achieved annualized sepsis test utilization of $104,000 per legacy instrument. We continue to believe that annualized U.S. sepsis test utilization will reach $200,000 per instrument, and we have a number of customers that have already surpassed that target. The record quarterly sepsis and related revenue was driven by our growing installed base of T2Dx Instruments and our ability to bring new accounts online faster than we have in the past.

As a reminder, it has historically taken 4 to 6 months from contract close to go-live testing at hospital labs. Through improvements integrating our sales and field operations teams and streamlining our processes, we're seeing improvements, and we are targeting 3 months from contract close to go-live testing. This should translate to new customers consuming tests earlier and contributing to our sepsis test revenue faster.

The second driver of sepsis revenue in the quarter was growth in sales of the T2Bacteria Panel in the U.S. and internationally. It's encouraging to see customers realize the value of the T2Bacteria panel and increase their utilization. We have typically seen customers adopt the T2Candida panel first, followed by the adoption of the T2Bacteria panel. We're beginning to see some customers start with T2Bacteria because of its unique ability to detect the most critical sepsis causing pathogens. We believe we are benefiting from our work to increase awareness of the benefits of this panel.

Following the field force realignment, our medical affairs personnel are making progress improving customer engagement and leveraging the increasing library of peer-reviewed clinical data that demonstrates the value of the T2Bacteria panel. The core market opportunity for our sepsis products targets hospital microbiology labs, which we believe represent a market opportunity exceeding $2 billion. We are in the early innings of commercialization, and we're encouraged by the potential that lies ahead. Our ability to place instruments across all types of hospitals ranging from large academic hospitals to critical access hospitals gives us confidence we can continue to expand our installed base of instruments and accelerate growth of our sepsis test panels.

We recently sold a second T2Dx instrument to one of the leading U.S. laboratory service providers to be deployed for sepsis testing in one of that provider's managed hospital laboratories. We believe there is potential to further expand our business in the laboratory service providers in their quest to expand their managed hospital laboratory business. We now have multiple end user customers that have added a second T2Dx instrument to expand their testing capacity or to add an additional testing site within their system.

Outside of the U.S., there is also a significant market opportunity for our products. Our international go-to-market strategy includes a network of exclusive distributors that sell and support our products in specific countries or regions. And we're focused on continuing to expand our international presence.

We recently executed a territory-exclusive distribution agreement covering the Baltic region, including Lithuania, Latvia, and Estonia, where we believe our products offer a solution to drive meaningful improvement in the management of sepsis patients. In fact, studies have shown that the Baltic region has a higher average incidence of sepsis per population than Western Europe, and guidelines have been issued in the region to improve sepsis management. We expect further international expansion in 2022 and 2023.

As we have discussed, we have taken steps to expand and realign our commercial team. We are confident that sales, medical affairs, service and support teams are aligned to execute our strategy, including spending appropriate time pursuing new instrument sales and working with existing customers to increase sepsis test utilization.

At the beginning of 2022, we communicated our belief that sales of our COVID-19 molecular diagnostic test, the T2SARS-CoV-2 panel would decrease during the year and provide an opportunity to convert COVID-driven instruments to sepsis testing. While the conversion process has taken longer than we anticipated, we continue to believe this represents a potentially meaningful growth opportunity to increase sepsis test utilization.

Moving to our second priority, enhancing our operations. In the current macroeconomic environment, we recognize that operating efficiently is a critical success factor. As such, we've prioritized improving our product gross margins and reducing our operating expenses, and we have taken steps to address both priorities. The product gross margin improvement initiative includes the T2Bacteria and T2Candida panels and has resulted in a reduction in the manufacturing cost of those 2 products.

In June, we made changes to improve our overall cost structure, including reducing our workforce and operating expenses by approximately 20%. We expect both improvements to be more apparent in the coming quarters as we continue to increase volume and fully absorb our overhead and onetime costs related to the organizational changes.

Finally, our operations team has worked to ensure that there is an uninterrupted supply of products to our customers. And we are effectively managing longer lead times and inflationary pressures. While supply chain challenges continue to exist across the industry, our team remains confident in our ability to continue supplying our customers without interruption.

Moving to our third priority, advancing our pipeline. We're advancing the development of multiple new products that leverage both our technology platform and our scientific expertise. Our product pipeline is supported in part by a milestone-based product development contract awarded by BARDA, the U.S. Biomedical Advanced Research Development Authority, which is valued at up to $62 million, if all options are exercised. We recently completed Option 2B of the contract following our team's successful completion of all milestones for advancing the U.S. clinical trials for the T2Resistance Panel and the T2Biothreat Panel and advancing the development of the next-generation instrument and comprehensive sepsis panel.

We were awarded Option 3 valued at $3.7 million to finalize U.S. clinical trials and complete FDA submission for the T2Biothreat Panel and the T2Resistance Panel. Several products are being developed with the goal of expanding the test menu on our FDA-cleared T2Dx instrument, including 4 products that I will highlight on today's call, the T2Biothreat Panel, T2Resistance Panel, T2Lyme Panel and T2Bacteria Panel enhancements. We believe these new products could potentially be commercially launched in 2023, subject to regulatory approvals. Each of these new products represent a differentiated solution to rapidly identify harmful pathogens and potentially allow clinicians to achieve faster targeted therapy.

The T2Biothreat Panel is a direct from blood test panel designed to run on the T2Dx instrument and simultaneously detect 6 biothreat pathogens identified as threats by the U.S. government in just 3 to 5 hours. This program is funded under our BARDA contract and we believe the target customer for this panel would be the U.S. government. We initiated a clinical evaluation for the T2Biothreat Panel in December 2021, which is very near completion, and we remain on track to file an FDA submission in 2022.

The T2Resistance Panel is a direct from blood test panel designed to run on the T2Dx instrument and simultaneously detect 13 antibiotic resistance genes known to cause antibiotic-resistant infections in just 3 to 5 hours. This program is funded under our BARDA contract. As a reminder, we are currently marketing and selling the T2Resistance Panel in Europe under a CE Mark, and we are on a pathway to apply for FDA clearance prior to U.S. commercialization. We initiated a U.S. clinical trial for the T2Resistance Panel in December 2021. We are currently enrolling patients at 8 hospitals, and we are adding 2 additional hospitals to increase patient enrollment. We anticipate completion of the trial in early 2023 and plan to subsequently file with the FDA. As a reminder, the T2Resistance Panel was previously granted breakthrough device designation from the FDA, which provides for a prioritized FDA review process.

The T2Lyme Panel is a direct-from-blood-test panel designed to run on the T2Dx instrument and detect active Borrelia infections, the bacteria that causes Lyme disease in just 3 to 5 hours. We expect it to be used to aid in the diagnosis of early Lyme disease. Earlier this week, we announced that the T2Lyme Panel was selected as a winner in the Lyme Innovation Accelerator, or LymeX, a partnership between the U.S. Department of Health and Human Service and the Stephen and Alexandra Cohen Foundation, the largest public private partnership for Lyme disease. While we plan to potentially commence marketing and sales of the T2Lyme panel as a lab-developed test in 2023, we also plan to initiate discussions with the FDA with the purpose of pursuing FDA clearance.

The T2Lyme Panel was also granted breakthrough device designation from the FDA, which again, provides for a prioritized review process.

Finally, we have initiated studies to expand the number of pathogens detected on our FDA-cleared T2Bacteria Panel to include the detection of acinetobacter Baumannii. Acinetobacter is a cause of bloodstream infections, especially in critically ill patients, which can reign from benign transient bacteremia to septic shock. And has been reported to have accrued ICU mortality rate of 34% to 43%. Acinetobacter can be resistant to many antibiotics, including carbapenems, highlighting the importance of rapid detection and targeted antimicrobial treatment. Acinetobacter infections rarely occur outside of health care settings in the United States and can disproportionately impact those with weakened immune systems, chronic lung disease or diabetes.

Adding Acinetobacter detection to the T2Bacteria Panel, will provide clinicians with a rapid direct-from-blood diagnostic that will provide actionable data for the appropriate antimicrobial treatment for patients. We plan to submit for FDA clearance in early 2023.

with that, I'll now turn the call over to John Sprague to provide a detailed update of our third quarter 2022 financial results and our financial outlook for the remainder of the year. John?

John Sprague

Thank you, John. Total revenue for the third quarter of 2022 was $3.7 million, a decrease of 50% compared to the prior year period. Product revenue was $2.6 million, a decrease of 39% compared to the prior year period, driven by an 88% decline in sales of COVID-19 tests from $2.4 million offset by increased sepsis test sales. Research contribution revenue was $1 million, a decrease of 67% compared to the prior year period driven by the timing of enrollments in the T2Resistance trial.

Product costs for the third quarter of 2022 were $6.1 million, an increase of $1.4 million compared to the prior year period, driven by increased supply chain cost and efficiencies. Research and development expenses were $6.4 million, flat compared to the prior year period.

Selling, general and administrative expenses were $7 million, a decrease of $1.5 million compared to the prior year period, driven by decreased medical affairs spending. Net loss for the third quarter of 2022 was $17.4 million, $2.95 per share compared to a net loss of $14 million or $0.21 per share for the prior year period. Cash, marketable securities and restricted cash were $21.5 million as of September 30, 2022. ATM sales were $22.9 million for the third quarter, and we raised approximately $700,000 since September 30, 2022.

We redeemed the Series A preferred stock in October 2022, and there are no longer any preferred shares outstanding. We remain in compliance with the CRG loan agreement covenants. And today, we announced an amendment to the agreement, extending the interest-only period and a maturity date December 30, 2024.

For guidance, we now expect full year 2022 total revenue of $22 million to $23 million, including product revenue of $11.5 million to $12 million and research contribution revenue of $10.5 million to $11 million, and we expect to close 50 to 55 T2Dx instrument contracts in 2022.

Thank you, and back to John Sperzel for closing remarks.

John Sperzel

Thank you, John. During the third quarter, the T2 Biosystems team generated a quarterly record of sepsis and related product revenue, and we remain on track to achieve record sepsis driven T2Dx instruments in 2022. We're excited by the progress with our near-term product pipeline including the T2Biothreat, T2Resistance, T2Lyme and T2Bacteria Panel expansion.

To close the year, we will remain focused on our 3 corporate priorities: accelerating our sales, enhancing our operations, and advancing our pipeline to support long-term growth and sustained value creation.

I'd like to turn the call over to the operator to open the line for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Kyle Mikson with Canaccord.

Kyle Mikson

I guess starting with the quarter. So gross margin pretty deep in negative territory this quarter. Revenue went down, COGS went up. It's not the best trend. I guess, just what caused that and was gross margin maybe elevated earlier when COVID test sells were kind of stronger? And then how are you rightsizing the gross margin -- the negative gross margin here? And do you have any visibility or kind of overall confidence that the margin will flip to the positive side and kind of remain there sustainable?

John Sperzel

John Sprague, would you like to take that?

John Sprague

Yes. So Kyle, it was driven by supply chain issues. So think of it as we typically buy probes and primers for our reagent tests that are under GMP manufactured, and we were forced to supply chain constraints to source research-grade materials, which come in smaller badges, and they have a much longer QA process that we have to subject them to. So that, coupled with -- we did ultimately get the GMP materials in, left us a bit long on those materials.

The other contributing factor was a modest amount of excess COVID inventories, given the fall-off in COVID sales. So we view this as an aberration in the supply chain. And overall, we're happy with our cost structure and source of supply and where the margins going forward.

Kyle Mikson

Now is there going to be any headwind, John, from FX, things like that going forward as well?

John Sprague

Not that we foresee at this time. It's something that we monitor and manage.

Kyle Mikson

Okay. All right. Sounds good. And then just going back to maybe the current state of the business. So maybe just talk a bit about the instrument backlog or the sales funnel at this point, and just based on the way that those 2 factors are kind of progressing. Maybe just speak to the -- like your optimism on our expectations for placements over the next few quarters. And in your opinion, guys, is '23 more about instruments or kind of like consumables bought through at this point?

John Sperzel

Well, I'd take that, Kyle. On a year-to-date basis through the first 9 months, as I mentioned, we've sold or placed 38 T2Dx instruments, 20 in the U.S. 18 internationally. We expected a 50-50 split when we started the year, and that's pretty much in line with what we're seeing. And we've guided for the full year to 50 to 55 instruments. Those are all sepsis-driven instruments. That will represent a record year.

When it comes to allocation of time amongst our commercial team, we're splitting that, roughly equally, between pursuing new instrument sales and driving sepsis growth. If I go back to your first question about product gross margins, one of the things that we can control is driving greater consumable sales, which helps to absorb our overhead faster and that has a direct impact on our product gross margins and our overhead consumption. So we're really trying to strike a balance between the 2, and that's the where we think about it going into 2023 as well.

Kyle Mikson

Okay, John. And then what about the kind of like the funnel and sort of backlog of instruments like -- do you see a lot of demand? Is there -- could there be any placements in the fourth quarter that are pulled forward from first quarter or things like that or maybe delayed into the first quarter? Just just curious like what the kind of the dynamics are that you're seeing in the kind of environment.

John Sperzel

I'll start with that, and Brett Giffin on the call, he can certainly add to it. As a general rule, we don't pull product forward from a subsequent quarter into the current quarter. It's not a good practice, and at some point, you pay the price for doing that. So that's not something that we engage in. We have sold 38 instruments through the first 9 months. We've guided to 50 to 55 million. So you can pick the midpoint of that, which means we expect a fair instrument quarter for Q4. And in total, we believe that will be a record for the year. So we feel pretty good about our overall instrument performance, and we know that, that's going to be a driver of sepsis consumables going forward.

Anything you want to add to that, Brett,

Brett Giffin

Yes. I mean I think that that's exactly right, John. Yes. We feel good about what we got in front of us here.

Kyle Mikson

Yes. Okay. So it sounds like the jumping off point for '23 is constructive, it's positive. It's good. Maybe just thinking about the pull-through, John, so multiple customers above that 200,000 target that you have. Maybe just -- could you talk about the types of customers those are? And how long it takes to get to $200,000 per box for those customers? And in general, maybe I was just wondering if you could speak to like how utilization differs among various cohorts of customers by vintage or by the type of customer?

John Sperzel

Well, I'll start again, and again, Brett, feel free to jump in. We are seeing customers move from contract close to go live faster. We are also seeing some of our newer customers become some of our better customers faster. And I think that those 2 things are a direct result of our commercial teams working together and doing a better job on the sales process before we even get to contract close. And as we've discussed in the past, the call points that we have commercially are really in this order: the head of the microbiology lab, infectious disease, doctors and pharmacy.

And historically, the company had focused on that #1 target, which is the head of the microbiology lab and effectively got an instrument into an account. And then the hard work came behind it with infectious disease, doctors and pharmacy when it came to patient selection criteria and antibiotic stewardship. We're doing a lot of that work upfront, and I think that's why we're seeing the time from contract close to go live accelerating, and we believe that's going to continue to accelerate. Brett, you might want to talk about the differences between some of our larger accounts and some of our smaller accounts.

Brett Giffin

Yes. So I think, yes, everything really everything John said there. I think that, Kyle, I think one of the things, as John mentioned, it's been an important driver to is the fact that we're seeing much more rapid adoption of bacteria that we traditionally saw. And I think particularly, I think some of the legacy larger accounts, the typical pathway was that obviously Canada would be the initial and then a move to bacteria. And I think what we're seeing -- if you talk about sort of types of accounts as we begun to bring on more and more of the critical access hospitals more and more medium-sized-wise it's been much more where bacteria has been a much bigger part of that right front.

And as John mentioned, I think from a just from a sales and a messaging perspective, that we definitely leaned in very significantly. And I think having much more sort of traction with having a lot of those discussions across that wide swath of key contact points on the front end, which sometimes that can make the navigation process in the beginning sometimes take a bit longer. At the same time, we're certainly having success with that.

Kyle Mikson

Okay. That was great, guys. I guess I'll just ask a final question. Just thinking about what the international expansion, it's good to hear you want to keep doing that in the next year or 2. But I mean the question is kind of like how do you balance the spending and the cash burn expanding internationally? How do you kind of balance all these things? And how important is penetrating and expanding internationally in the near term to your kind of long-term growth strategy?

John Sperzel

It's very important. The market opportunity outside the U.S. is as large, if not larger, than it is in the U.S., oftentimes path to adoption internationally is faster than path to adoption in the U.S. I think the other thing to keep in mind is outside of the U.S., we sell the instruments to distributors and then they generally are putting those into customer accounts where they're absorbing the capital cost, they're putting it in as some kind of reagent rental replacement plan. So our distribution partners are making investments. And generally, they have been selling to customers for a very long time. So they have relationships with these accounts. They know the key opinion leaders. The relationships that they have are broad within hospital accounts. So their path to adoption can be faster in the U.S. where, in many cases, Q2 has not historically been known like they've been known to their customers. And we're starting up front with relationship building whereas they may have years of that under their belt. So it's a really important part of our growth strategy. We expect to continue doing it, and we're doing that with separate teams, small team managing our international partners and a team of 20 territories, of which 14 are filled in the U.S. today.

Operator

Our next question comes from Mark Massaro with BTIG.

Vidyun Bais

This is Vidyun on for Mark. On the next-gen instrument, any material updates there or in terms of timing for any supporting clinical trial work? I think you also made some headcount reductions earlier this year. So just how you're thinking about prioritizing investment in your pipeline?

John Sperzel

Thank you, Vidyun. So in terms of the next-gen instrument, we completed all of the milestones under contract option with BARDA to be, both for the instrument and for the comprehensive sepsis panel. Likewise, we completed all the milestones for the 2 products in clinical trial T2Resistance and T2Biothreat. In terms of option 3 contract that we're working under right now, we are entirely focused on the 2 products that are closest to FDA submission. That's the T2Resistance Panel and the T2Biothreat Panel, and that is at BARDA's request.

So any future funding for T2 next-generation instrument and the comprehensive sepsis panel would potentially come in future contract options. Outside of that, no update on the product timeline.

As far as prioritizing our pipeline, one of the shifts that you may have noticed in the prepared remarks is around our priorities of menu expansion on our current T2Dx instrument. And I think it's probably important to reinforce a little bit about why we're doing that. And because we think we have a number of quality shots on goal related to new product pipeline, particularly ones that we think can be commercialized in the U.S. in 2023. And those are not only catalysts, but also important revenue drivers potentially. I described those 4 products earlier. They would potentially go on our U.S. installed base, perhaps with the exception of the T2Biothreat Panel, but certainly T2Resistance, T2Lyme and the T2Bacteria Panel expansion -- and Yes, sure.

Vidyun Bais

Okay. Okay. Just a final one for me. Could you also just provide an update on the conversion of COVID-driven placements to sets I think in the past, you've talked about 80% conversion. Does that pose attainable? I think you also alluded to discussions with 2 large health systems on that front. So just curious how those conversations are going.

John Sperzel

Sure. Vidyun, would you like -- or Brett, would you like to take that, please?

Brett Giffin

Yes, certainly. So yes, I mean, we're still -- clearly, our target is the 80% conversion of that, and we certainly haven't haven't backed off of that. At the same time, I think that in terms of the conversion process, as we mentioned, I think it's been slower admittedly than we would have liked. There's a couple of factors to that. I think we -- as we mentioned, some of the earlier this year reorganization of effort we did by shifting more of a sales focus versus a medical affairs focus we had, I think, is -- but we certainly got full effort on that, and I think that those are going to -- that's going to continue along.

As I said, I think we're still comfortable with looking at it from an 80% conversion as a target for it. It's just taken a little bit longer than we would have liked at this point, but it's an important part of our targeting, and it's something that, as I mentioned from -- and as John mentioned earlier, from a sales perspective in the U.S., we -- the team is focused on that much more additionally than they were, say, earlier in the year when we're focused a little more on sort of new account is so we split that effort. And the last part of your question, I believe, was -- trying to think -- what was the last part of your question?

Vidyun Bais

Yes. So you were just talking about discussions that you have with --

Brett Giffin

Yes, sure Yes. So that's -- yes, we still yes, of course. Yes, we're in active discussions. That's -- we certainly moving that along. Those 2 groups do represent a significant portion of the accounts that are in that COVID bucket. So I think that we've -- we're working those discussions at the corporate level. And certainly, progress is continuing on it. I mean, certainly, we're working through that now and have gotten to the point where now at least we're being able to bring in much more of a medical affairs type of approach to it in addition to the sales discussions. So it's basically continuing.

Operator

Our next question comes from Steve Brozak with WBB.

Steve Brozak

Just one that you've pretty much asked and answered everything else, but just one. On your ability to go out there and meet any kind of demand or excess demand, let's just say. In terms of manufacturing and throughput, how would you say you're positioned for the ability to go out there and ramp up, given excess demand for devices of course in terms of being able to turn around and meet any demand into the future? And I'll hop back in the queue.

John Sperzel

Thank you, Steve. We feel really good about our ability to flex to respond to increased demand. The COVID obviously presented a lot of challenges for the supply chain across the industry. For us, we scaled our test capacity sevenfold at the peak of COVID and similarly scaled our instrument production output. The company was built to produce a lot more tests than we're producing today, that's part of the overhead absorption that we talked about earlier. So we feel really good about the potential to flex and increase production, both on instruments and on consumables.

Operator

[Operator Instructions] There are no callers in the queue at this time.

John Sperzel

I'd like to thank you all for joining our third quarter 2022 earnings call. We look forward to updating you on our future progress. Thank you very much.

Operator

Ladies and gentlemen, this concludes your call. You may disconnect at this time.