NanoString Technologies, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the NanoString fourth quarter 2020 operating results. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised this conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Doug Farrell, VP of Investor Relations. Thank you. Please go ahead.

Thank you, operator. Good afternoon, everyone. On the call today with me is Brad Gray, our president and CEO, and Tom Bailey, our CFO. Earlier this afternoon, we released our financial results for the fourth quarter and fiscal year 2020. During this call, we may make statements that are forward-looking, including statements about financial projections, the impact of the COVID-19 pandemic, future business growth, trends, and related factors, prospects for expanding and penetrating our addressable markets, our strategic focus and objectives, and the development status and anticipated success of recent planned product offerings. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, including the risks and uncertainties that are described in our SEC filings. Our results may differ materially from those projected, and we undertake no obligation to update these forward-looking statements. Later in the call, Tom will be discussing our financial results and 2021 guidance. In connection with this guidance, we've made modifications to our earnings release and guidance approach that we believe will make it easier to interpret and compare our financial results. We have prepared as a supplement to GAAP financial measures selected non-GAAP adjusted measures, the calculation of which is described in detail in our press release. Throughout this call, all financial measures will be GAAP unless otherwise noted. You can also find a reconciliation of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using these metrics in our press release. To aid analysts and investors in building their models, we have posted exhibits under the financial tab of our investor relations homepage that include a presentation of our non-GAAP or adjusted measures and other selected financial data for each quarter and for the full year 2020 and 2019. I'd like to remind everyone that we'll be participating in the Cowan Healthcare Conference later this week. We look forward to having the opportunity to speak with many of you there. Now I'd like to turn the call over to Brad.

Thanks, Doug. Good afternoon, everyone, and thank you for joining us today. It is only the beginning of March, and already 2021 is shaping up to be a banner year for nanostring's spatial biology business. This year began with the journal Nature naming spatially resolved transcriptomics the 2020 method of the year, signaling the revolutionary impact of spatial biology. In February, we hosted our third annual Spatial Genomics Summit, which highlighted the explosive innovation in this field and served as the perfect venue to launch our new Geomics Whole Transcriptome Atlas. Researchers from Bristol-Myers, the Fred Hutch Cancer Center, the Harvard Medical School, and the Singer-Wellcome Institute discussed how spatial biology can improve our understanding of drug mechanism of action, response or resistance to immunotherapy, and potentially enabling significant advances in personalized medicine. Panelists also highlighted the need for a portfolio of spatial technologies that extend from multicellular analysis down to single-cell and even subcellular applications. Geomix DSP users from five leading research institutions demonstrated the power of coupling Geomix DSP to Illumina MGS readout, sharing data from some of the first projects using our cancer transcriptome atlas and whole transcriptome atlas assays, while our CSO, Joe Beecham, previewed our spatial molecular imager. Our summit drew more than 2,000 registrants from over 90 countries, highlighting the growing interest in spatial biology. This morning, we kicked off the 2021 Advances in Genome Biology and Technology Conference, or AGBT, for which we are this year's gold sponsor. Over the next few days, Nanostring and our collaborators will highlight an impressive body of spatial biology research, including three world presentations, and more than 20 posters on the Geomics DSP and our Spatial Molecular Imager. I'm proud to tell you that Nanostring has the most abstracts accepted for H-EBT in any participating company by a substantial margin, and more than five times as many as any other spatial biology providers. A testament to our innovation. Prospective customers and members of the investment community can find a replay of the Spatial Genomics Summit on our website, and details from the HUBT presentations and abstracts are available through a hyperlink included in the HUBT press release that we issued this morning. I'd now like to take a step back and provide an overview of our strong 2020 performance before outlining our strategic objectives for the year ahead. I'll then turn the call over to Tom to review our operating results for the fourth quarter and to provide our financial outlook for 2021. 2020 was a year of major accomplishments for Nanostring. We successfully achieved all four of the strategic objectives we set for the year, which is remarkable given the operating backdrop of a pandemic. We submitted GEOMICS position as the platform of choice among translational researchers, while entering the discovery segment of spatial biology by launching the GEOMICS NGS readout. We generated approximately 90 new GEOMICS instrument orders, achieving our original pre-pandemic order guidance and bringing total cumulative GEOMICS orders to over 180 systems. We also pivoted our HymanSeq program into spatial biology by announcing our new spatial molecular imager platform in December. We enter the year with a portfolio of spatial products that spans the continuum of customer needs. From this position of strength, we will focus on three strategic objectives for the year. Our first objective is to extend Geomix DSP's leadership into spatial biology with the launch of the whole transcriptome Atlas. When we began developing Geomix, we targeted what we then estimated to be a $1 billion translational market using our in-counter analysis system as the readout. Our leadership position in translational research is built on GeoMIC's robust performance in FFP samples, our ability to analyze both RNA and protein, and a fully automated instrument that provides a simple workflow, consistent performance, and high throughput. The in-counter readout offers a streamlined workflow well-suited to meet the needs of customers running spatial protein analysis or targeted RNA panels that are below 100 flex. of the 42 reviewed studies published today, all but one has used in-counter readout for their research. As we look to 2021 and beyond, we believe that a majority of future geomics growth will be driven by customers leveraging Illumina NGS readout. The launch of NGS readout last year doubled our estimated geomics addressable market to $2 billion in research by tapping into demand for HyPlex RNA assays. By Q4, geomic systems intended for NGS readout already accounted for 40% of new DSP instrument orders. Last week, we announced the launch of the Geomics Whole Transcriptum Atlas, or WTA, our first universal assay that is applicable to any field of biological research. With our WTA, researchers can perform true hypothesis-free experiments in virtually every aspect of human biology and will no longer be required to preselect the genes they want to analyze. This will allow geomics to reach scientists in fields that go well beyond the oncology, immunology, and neurology that typified geomics early adopters. expanding the research market served by GEOMIX to an estimated $3 billion. At the price of $1,750 per sample, WTA is a great value, providing roughly 200 times the biological content of our in-counter RNA assays at less than 40 times the cost. We plan to begin shipping the human whole transcriptome atlas this month, followed by a mouse version of WTA in the second quarter. These products are expected to strengthen GeoMix instrument and consumable revenue, particularly during the second half of this year. The leading indicators of demand for WTA are very strong. Customers have expressed enthusiasm for WTA ever since we began offering it through our technology access program during Q4. Human WTA accounted for 40% of our Q4 TAP projects and has already grown to 60% of TAP projects ordered so far this quarter. We are also beginning to see WTA published in papers and presented at major meetings, which should further increase customer interest. Researchers from the Broad Institute recently published the first peer-reviewed study that uses both our cancer transcriptome atlas and whole transcriptome atlas products in the journal Nature Medicine. There will be a dozen WTA abstracts presented at AGVT this week with both human and male research. spanning applications in breast cancer, immuno-oncology, Alzheimer's disease, knockout models, and COVID-19. Several studies demonstrate the strong synergy between the Geomix whole transcriptome atlas and more traditional single-cell RNA-seq. For instance, researchers at UT Southwestern used Geomix WTA to study bladder cancer. spatially localizing cell clusters previously found using single-cell RNA-seq and identifying how the location of cells within tissues influence the expression patterns of otherwise similar cells. Overall, we're delighted with our geomics momentum and the early interest in the whole transcriptome assay. Our second strategic objective for 2021 is to advance the development of our spatial molecular imager and to seed the market for its anticipated commercial launch next year. Geomics is the market-leading platform for experiments that require high-flex, high-throughput, multi-cell spatial profiling. we have identified a separate market need for an imaging platform that measures biology at even higher resolution, as highlighted in our Analyst and Investor Day presentation from this past December. Our Spatial Molecular Imager, or SMI for short, is designed to enable customers to perform imaging down to the single cell and even subcellular level, which opens up important new applications such as cell typing and cell mapping. This platform is currently at the prototype stage, and the balance of our development program is focused on building and optimizing the commercial instrument, the software, and user interface ahead of a planned launch in the second half of 2022. We believe SMI will set the bar for performance in spatial imaging. SMI has already demonstrated market-leading 1000 plex gene expression and challenging FFP samples. The SMI is derived from our Hyvenseq program. It is enabled by a robust and scalable chemistry that benefits from a significant investment and many years of research. The lack of amplification keeps the probe small and bright, offering exceptional sensitivity that allows the accurate detection of genes at high plex down to a very low copy number. SMI will be a single instrument solution that handles sample prep and imaging in the same box and analyzes both RNA and proteins. There are a total of seven SMI posters that will be presented at AGVT this week, adding detail beyond the information shared during our December Analyst and Investor Day. One study validates SMI performance on FFP samples from five different tissue types, demonstrating market-leading capabilities, including high sensitivity, big cordons with RNA-seq, and subcellular resolution in three dimensions. Another study demonstrates the amazing discovery in cell-typing applications that are possible with 1,000-plus imaging, which can identify both individual cell types and neighborhoods of cells that interact with each other. Two studies being presented by our first external collaborators illustrate some of the likely applications for SMI. In one study, researchers from the Fred Hutch Cancer Center used SMI to measure more than 1,000 transcripts in a kidney cancer biopsy at single-cell resolution, confirming observations they had previously made using single-cell RNA-seq and TCR sequencing, and mapping those observations spatially. In a second study, researchers from the Dana-Farber Cancer Center used SMI to perform high-throughput CRISPR screens, enabling them to screen hundreds of thousands of cells in each run with a single-cell resolution. As we bring SMI to market, we intend to follow the same playbook that we used successfully during the geomics launch. This morning, we announced the opening of our Technology Access Program for SMI, which will allow researchers to send samples to Seattle for processing on our prototype systems. The Technology Access Program, or TAP, was a key element of our success with GeoMix as it drove early peer-reviewed publications and provided customer input into our product development process. We're beginning to take TAP orders today and expect to begin delivering results in Q2. We believe that the multi-cell capability of geomics and the single-cell resolution of SMI are perfect complements and provide a comprehensive portfolio that covers the continuum of spatial research applications. By expanding into the imaging segment, we believe that we will double the size of the spatial research markets we serve from $3 billion to $6 billion. We look forward to updating you on the development of the SMI platform over the year ahead. Our third objective is to return our encounter business to pre-COVID growth levels. Demand for our encounter systems remained robust in 2020 despite a challenging operating environment. The pandemic impact peaked during Q2, and our encounter business recovered throughout the balance of the year. During Q4, we generated double-digit sequential growth for both encounter instruments and consumables. By year-end, the pace of encounter instrument sales had returned to pre-pandemic levels, resulting in an install base of more than 950 systems, an increase of about 13% over the prior year. We sold about 110 systems in 2020, down only slightly from the approximately 125 systems sold in 2019. As these additional encounter systems come online, they will generate consumable revenue, which is the primary growth driver for our encounter business. The pandemic has had a more pronounced impact on encounter consumables as institutions reduce their lab activities to keep researchers safe. Our consumable pull-through per instrument dropped to a COVID low of about 50% utilization in Q2 before improving to roughly 90% of typical pull-through in the fourth quarter. Today, most labs remain in a partially open state with a reduced pace of activity. We expect this to result in modest COVID-related headwinds for encounter consumables through the first half of the year with improvement in the second half following more widespread vaccinations. Throughout 2020, we continued to diversify our installed base beyond oncology, adding new panels that help drive encounter adoption to new areas such as immunology, neurology, and infectious disease, which collectively accounted for about half of our new instrument placements. In 2021, we expect to continue to expand our menu of panels in the fields outside of oncology. For instance, we plan to expand within infectious disease research by outing a mouse post-response panel that will complement the human version of this panel launched last year. We will also introduce new panels for cellular therapy and regenerative medicine, both areas of significant investment by the NIH and biopharma companies. Overall, we see continued growth for our encounter business in 2021 as our install phase grows linearly and Consul pull-through normalizes. With that, I'd like to turn the call over to Tom to review the details of our operating results. Thanks, Brad, and thanks all for joining us today. For the fourth quarter of 2020, product and service revenue was $35.7 million, representing pro forma year-over-year growth of 9% and sequential growth of 19%. Recall that our pro forma measures reflect the December 2019 transaction with Verisight as if that transaction occurred at the beginning of the comparative period. Pursuant to the terms of the Verisight transaction, we now recognize about one-third of the previous per signum revenue over the same units sold. Q4 geomics revenue was $12.2 million, up 44% as compared to Q4-19. $9.3 million was derived from approximately 40 instruments shipped, and $2.8 million was derived from consumable sales. Q4 encounter instrument revenue was $6 million, a return to approximately flat encounter instrument revenue year over year. Throughout the pandemic, encounter consumables revenue has been most impacted by lower lab activity, and this continued to be the case in Q4. While lab activity improved in Q3 and Q4, a total recovery to pre-pandemic activity levels has yet to occur, in particular given the surge in COVID infections and lockdowns in late December and into January. Q4 encounter consumables revenue was $13.8 million, 11% lower on a pro forma basis as compared to Q4-19, and sequential growth of 12% as compared to Q3. Our Q4 encounter consumables sales imply annualized pull-through of about $60,000 per system, up from about $55,000 in Q3, and recovering to about 90% of our pre-pandemic encounter pull-through expectation of approximately $65,000 per system per year. Service revenue derived from both encounter and geomics-related service was about $3.8 million for the quarter, or 29% year-over-year growth, driven primarily by increasing geomics DSP tap projects and increased service contract revenue due to our growing instrument installed basis. Turning now to margins and expenses, I'll provide results on a non-GAAP or adjusted basis, which remove the impact of stock-based compensation, depreciation, and certain one-time items. Please refer to our press release as well as the exhibits we've posted to our investor relations webpage for detailed information on how our non-GAAP or adjusted measures are prepared. Q4 adjusted gross margin on product and service revenue was 54%, or about 400 basis points lower than Q4 last year. Most of the change was driven by increased instrument revenue as a percentage of our total sales mix due to the acceleration of geomic sales, coupled with lower COVID-impacted and counter-consumable sales, and the impact of the VeriSight transaction, whereby we realized a lower ASP on proscina sales than in previous periods. We reduced operating expenses compared to the quarter a year ago, primarily as a result of expenses we eliminated due to the Verisight transaction. Adjusted R&D expense was $12.3 million, a decrease of 20% year over year, with Verisight transaction-related savings being partially offset by investments we are making in our various spatial biology products and initiatives. Adjusted SG&A expense was $19 million, a decrease of 14% year over year. The Q4 SG&A expense decline was also driven by Verisight-related savings, as well as savings realized from pandemic-related reductions in travel and trade show activities. These savings were partially offset by investments made in our spatial biology-related commercial initiatives, including investments in our service and customer support group and certain digital marketing initiatives. Adjusted EBITDA loss was $11.8 million, an improvement of 35% as compared to the prior year. Turning now to full year 2020 performance, although we suspended our full year 2020 guidance on April 6th due to uncertainty related to the pandemic, our geomics results landed at the upper end of our pre-pandemic guidance range. Encounter, in particular consumables revenue, was more materially impacted by reduced lab activity. For the full year 2020, product and service revenue was $111.4 million, representing year-over-year growth of 14%. Adjusted gross margin was 55%, in line with the upper end of our pre-pandemic guidance range. 2020 adjusted R&D expense was $53.4 million, representing a year-over-year reduction of 11%, and adjusted SG&A expense was $75.2 million, representing a year-over-year reduction of 9%. Cash used in operating activities and for capital expenditures was approximately $89.1 million. we exited the quarter with over $440 million of cash, cash equivalents, and short-term investments. Transitioning from 2020 results to our 2021 outlook, we expect 2021 product and service revenue of $140 to $150 million, representing annual growth of 26% to 35%. For geomics, we expect revenue of $45 to $50 million, or annual growth of 29% to 43%. We expect about two-thirds of Geomic's revenue to derive from instrument sales and about one-third from consumables. Having caught up on Geomic's instrument deliveries during 2020, we expect Geomic's instrument bookings and shipments to be approximately equal in 2021, with instrument bookings growing at about 40% to 50% year-over-year. For geomics consumables, we are raising our pull-through guidance and expect geomics pull-through to now average between $85,000 and $95,000 on an annualized basis, with pull-through expected to ramp over the course of the year as NGS-enabled instruments are installed and our WTA panels are introduced across that customer base. For geomics, we expect to see a seasonal revenue pattern that is weighted to the second half of the year due to the expected impact of the launch of WTA on consumables revenue and of the significant investments in our commercial and customer support organizations we've been making and are continuing to make in the first half of 2021. Overall, we expect roughly 40% of geomics revenue to be recorded in the first half of the year and about 60% in the second half. For our historical encounter business, which also includes all service and tap revenue, we expect 95 to 100 million, or about 24% to 31% year-over-year growth. In 2021, we expect encounter instrument revenue to return to about pre-pandemic levels or approximately flat as compared to 2019. Our guidance also assumes encounter consumable pull-through of approximately $60,000 to $65,000 per installed system on average for the full year. Our guidance assumes the pandemic will continue to impact lab activity more significantly in the first half of the year. We are experiencing encounter... expecting any kind of pull-through to normalize in the second half of 2021, and as a result, we could see a seasonal revenue pattern that is modestly more weighted to the second half of 2021 as compared to the first half. We expect adjusted gross margin to be in the range of 55% to 57% in 2021, consistent with 2020, as our revenue in 2021 will continue to be instrument-heavy given the growth of geomics. We have also added facility and overhead expenses as we scale in anticipation of the WTA launch. Transitioning to operating expenses, in 2021, we expect to post approximately 15% increase in total adjusted operating expenses year over year, reflecting investments in our spatial biology products and market opportunity. For adjusted research and development expenses, we expect to record approximately $58 to $63 million, or about a 9% to 18% increase compared to 2020, and reflecting continued investments in geomics consumables and software, as well as in development efforts for a recently unveiled SMI product candidate. For adjusted selling, general, and administrative expenses, we expect to record $87 to $92 million, or about a 16% to 22% increase as compared to 2020, and reflecting significant investments to expand our commercial reach and customer support efforts for geomics and SMI, including in about 100 new commercial employees we expect to add during the course of the year. Adjusted EBITDA loss is expected to be about 65 to 70 million, approximately flat as compared to 2020, reflecting the balance of our expected revenue growth and the long-term investments we are making in our spatial biology initiatives. For the first quarter, we expect product and service revenue of approximately 28 to 31 million. Our Q1 range includes about $8 to $9 million in geomics revenue and encounter and service revenue of about $20 to $22 million. Our geomics range balances our expectation of continued significant instrument order growth and about a one-to-one book-to-bill pattern for instrument revenue. Our guidance ranges are also indicative of lab capacity and activity continuing to be below 100% in Q1, which we expect will impact encounter consumables most significantly, and of typical sequential seasonal patterns whereby revenue is usually lower in Q1 as compared to Q4. Now I'll turn the call back over to Brad for our closing comments. Thanks, Tom. NanoString has a market-leading product portfolio in the hottest field of life science research, spatial biology. Our leadership is on display as we speak at the ATBT meeting, where breakthrough science is being presented using our geomic CSP and our spatial molecular imager. Our strong balance sheet supports targeted investments to capture the estimated $12 billion spatial biology TAM. With continued growth and geomics DSP instrument bookings and increased expectation for the consumable pull-through generated by each geomic system, 2021 is poised to be a year of outstanding growth. Before opening the call for questions, I'd like to correct one minor misstatement from our previous prepared remarks. To clarify, WTA is a great value at $1,750, providing roughly 200 times the biological content of our Geomix RNA assays for encounter readout at less than four times the cost. With that correction, I'd like to open up the line for your questions.

Ladies and gentlemen, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from Tycho Peterson with JP Morgan. Your line is open.

Okay, thanks. Brad, I'll start with the SMI, just, you know, to the back half of the year for the launch there. I guess, can you just talk to, you know, have you locked down the prototypes? Is there any kind of technical hurdles that still need to overcome? And then with the TAP program, what's the earliest you think we could start to see, you know, some publications? And then also, when you do launch, how do you think about the selling cycle between SMI and geomics, you know, in the sense that customers may be evaluated both?

Thanks, Tycho. So for point of clarity, the spatial molecular imager instruments will launch in the second half of 2022, not the second half of the current year. The technology access program is open today. We're beginning to take orders and accumulate interesting studies that we think showcase the power of the spatial molecular imager. We have 10 prototype instruments here at NanoString. They are in various stages of preparedness to receive samples. Really, as we think about the product development efforts, the focus is on fully engineering those instruments to be robust in the hands of our customers, making them easy to use with great software and great user interfaces that can make our customers successful. And that's really the lion's share of the work that will be taking place between now and the launch in the second half of 2022. In terms of when we'll begin to see publications on SMI, you know, my hope would be that the types of studies that we're showcasing at AGVT this week and that we'll be doing with other technology access program customers in 2021 will yield publications beginning in 2022 so that those begin to come out around the same time that we begin selling our instruments. That was a similar dynamic to what we had with Geomix, and it served us extremely well. In terms of the sales cycle, I think SMI is expected to be a piece of capital equipment at a similar price range to what GeoMix is. We think we'll be selling it to precisely the same customers, the core lab facilities that serve both translational and discovery research. Our market research efforts really indicate that those core labs are going to want both capabilities. They're going to want the GeoMix digital spatial profiler for its high throughput automation, its ability to profile a whole transcriptome, and the control over the regions of interest and focus of the assays that it provides. And they'll complement that with the high resolution at modestly lower flex that Spatial Imager will provide. So we really believe it will be the same set of customers, and of course we'll probably be going to the existing geomics customers who already experienced the power of spatial biology first during that product launch.

And then are you able to say what's the vetting guidance for tap revenues this year? And then separately, you mentioned hiring 100 sales reps. I'm just curious how you think about the scale up there.

Yeah, the TAP revenue is embedded in our guidance, and the TAP revenue from SMI is really modest. You know, this is not meant to be a revenue driver for us in 2021. It really is designed to showcase the power of the instrument. So I'm guessing it's maybe a million dollars in guidance, but probably not a lot more than that. In terms of, I'm sorry, your second question, Tycho, remind me.

You mentioned hiring 100 sales reps. Yes.

Yes. Yeah, we are now facing a TAM opportunity that vastly exceeds that which we had either with Encounter alone or even with GeoMix with the Encounter readout alone. So we are scaling up the instrument sales force in particular to take advantage of the human that we have to place first geomics instruments and later SMI. Our sales force is not bifurcated between discovery and translational. They're generalist reps who are capable of addressing both of those market segments. And we'll be hiring most of them first in our direct markets of North America and Europe, and then I expect we'll be expanding to go direct in some markets where we're not direct today in Asia late this year or early next year.

Okay. And then last one on geomics, you know, your split previously on readout had been, I think, 60% on counter, 40% on GS. Where do you see that going this year? And then as we think about whole transcriptome, you know, can you just talk about where the early interest is? Is it mainly oncology? Is it immuno-infection disease? Where are you seeing the early interest?

Yeah. So I think if we look at where our funnel is today, our funnel of people who are considering purchasing a geomix instrument, it's split about 50-50 across people who plan to use encounter and NGS readout. And that's up substantially from what INVESTOR DAY, WHERE IT WAS STILL A MINORITY OF THE FUNNEL REPRESENTED BY NGS READOUT. AND SO I BELIEVE THIS YEAR WE'LL BE AT LEAST 50% OR In terms of where the whole transcriptome atlas interest is coming from, it's a long tail of different applications. Oncology remains the number one application because many of the customers that we know best are interested in oncology. But other areas of high demand include infectious disease, specifically a lot of COVID-19 research, rare diseases of the tissue like rare kidney or skin disorders, and of course neurology, which is an area of high spatial interest but where we did not have a targeted MGS panel built. But I expect that will continue to broaden. There's a very long tail of esoteric uses below that top three or four. And we look forward to getting to know researchers who have engaged with encounter and administering in the past using the whole transcript of MALIS.

Okay. Thank you.

Our next question is from Douglas Shankle with Gowen. Your line is open.

Hey, good afternoon, guys. Thank you for taking our questions. Just starting on guidance, you know, as I kind of think through, you know, the toggle, you know, essentially where things could go a different way in your guidance construct, one of the things that jumped out at me is you indicated that you expect gross margin to remain close to 20 levels. because you expect the year to be capital heavy. Essentially, you expect the mix to be tilted towards capital. Through the pandemic, instrument placements were pretty strong. So I'm just wondering if part of what you're thinking is that You want to be mindful of the risk associated with COVID-19 uncertainty. And by extension, you know, that uncertainty means you're not exactly sure what lab activity is going to look like over the course of the year. But you know that instrument demand is going to remain strong like it was in 2019. And if that's kind of the logic behind your guidance, does that mean that if things do return to normal a bit more quickly than one might expect, that there would probably be both consumable and margin upside relative to where you're starting targets for 2021? Yeah. Thanks for the question, Doug. You know, I think we are guiding a small expansion in gross margin relative to 2020 levels. And that is, I think, reflective of a modest increase in consumable mix in 2021 by compared to 2020, right? So we do expect encounter consumables to begin their sort of normal per instrument run rates in the back half of the year, though admittedly we think there will be a tempering of consumable expectations in the first half relative to normal run rates. And as Tom said, our geomix instrument net, our revenue mix, rather, overall is two-thirds instrument, one-third consumables, which is clearly a lot more instrument heavy than our historical encounter mix has been. So I don't think we're signaling any kind of concern about overall consumable demand. I think it's substantially there. But just given how many geomics instruments we're placing, the mix is going to remain enriched, for instance. I did make in my prepared remarks, respecting gross margin as well as we are, investing in capacity to ramp up for the WTA launch. We have been and will be throughout the year. So, we factored that into our gross margin range. With that said, if things recovered more quickly, there could potentially be some upside to that range, absolutely. Okay. Yeah, that's helpful. That's kind of what I was getting at. I mean, it wasn't meant as a sign that you guys, you know, were being overly conservative. It's just more, you know, running through the numbers, it does seem like you're assuming some improvement but not fully making it a return to normal, which I would guess is probably the prudent thing to do as we're sitting here at the beginning of March. So that color is helpful. At your analyst day, you highlighted how Geomix is well-positioned for adoption in both translational and discovery research, as well as for clinical purposes down the line. Could you envision a scenario where you might actively seek partners to help develop more clinical-focused products? And I keep that, and I think of that just because I think there is an opportunity to clearly not just in translational research, but down the line in the clinic. But I also recognize that you did move away from some of your clinical ambitions with the divestiture of clinical assets associated with NCounter. So I'm just trying to think about longer term how to reconcile these things. Yeah, we absolutely agree with you, Doug, that there's a huge diagnostic opportunity for geomics over time. And as a reminder, overall, of our $12 billion spatial biology TAM, $6 billion in total is reserved to an estimated $6 billion within diagnostics. We haven't made a commitment one way or another about how we'll choose to address that problem. $6 billion diagnostic TAM. Today, we're really focused on simply enabling early lab-developed test organizations, mostly academic medical centers like Mayo Medical Labs and Oregon Health and Science University, with whom we have formal partnerships for geomics LDT development. And really, over time, we could go one of several ways. We could simply enable LVTs for the foreseeable future and allow the innovators out there to build diagnostics on our platform, really sort of serving as the arms dealer. We could partner with either service or IBD kit organizations to commercialize we could easily restart that effort ourselves, and certainly our corporate DNA kind of retains the programming, let's call it, for how to start up an IVD, both development and commercial organization, if the opportunity warranted. So I think it's a little early for us to declare, but we really want to see what the nature of that diagnostic opportunity is, and we'll remain flexible on how we pursue it. Okay, and last one, Brad. You closed the year with over $400 million in cash and equivalents. Traditionally, most of your capital has gone to investing in growth organically. As you think about the year ahead and how well you are positioned with your existing technologies but also with your balance sheets, Are you more open than maybe you have been in the past to making external investments that could augment your positioning? Yes, we are absolutely more open and capable today than we have been in the past to think about bringing technologies or companies into Nanostream that could bolster our portfolio. I mean, we have an enviable organic innovation engine here, and between the Geomix whole transcriptome assay and the spatial molecular imager, I think we have one of the most exciting roadmaps around. That being said, we don't believe that we have a corner on the market for innovation in this field, and there are a lot of exciting things happening in spatial biology and elsewhere that we keep a close eye on, and certainly today, with the strength of our balance sheet and the market leading nature of our brand, and the size and shape of our channel, we could be a very natural owner or acquirer or partner for other technologies. So I think we are more capable of that and more interested than we have in the past, but we'll continue to remain targeted and thoughtful in anything we do in the future. All right. Thanks a lot. I appreciate the time. Thank you.

Our next question is from Daniel Arias with Stiefel. Your line is open.

Hey guys, thanks for the questions. Brad, on the discovery assays, how do you think the mix for whole transcriptome and cancer transcriptome assays evolves over the course of the year? And I know it's early, but if you had to take a stab, what kind of split could you envision there if we fast forward to this time next year?

You know, it's a good question, Dan. I think, you know, the cancer transcriptome atlas, which was our first MGS-enabled GeoMix product, has the benefit that it appeals directly to our existing GeoMix install base. When you think about that first 186 that we have taken orders for, the vast majority are cancer researchers. So I believe we'll continue to sell that assay directly into our existing installed base at a very good clip. The whole transcriptome assay will certainly appeal to our existing installed base to a certain extent too, but what the real excitement of the WTA is, it's allowed us to appeal beyond the field of cancer. So, you know, the first-order impact of the whole transcriptome outlet And I think, as a result, you know, it will take time before the whole transcriptome atlas eclipses CTA in terms of which of the assays is more popular. And by time, I mean several orders. By this time next year, I think we'll probably be entering a period where the whole transcriptome is more of the dominant assay or the larger assay. And I hope that's because we've begun to have an installed base in areas of science far beyond cancer.

Yeah, okay. That is very helpful for the model. Let me ask another one that might also be helpful for the model on whole transcriptome. I mean, obviously the number of samples that are run per year is an important element or variable there. I know it's early as well because we're seven days into the launch period. But are you able to give some guideposts to work with there, if nothing else, in the context of the 150 samples per year assumption that you had for the translational assays?

Yes, as you said, it's very early days in terms of determining the number of samples that NGS-enabled geomic systems will process on an annual basis. You know, today we formally increased our consumable guidance from the previous $75,000 to $80,000 per system per year to $85,000 to $95,000. And I'd say that is derived predominantly from a view that NGS systems will pull more in the past, we had described that encounter-enabled geomic systems would process about 150 samples per year at $500 per sample, and we estimated that NGS-enabled systems might do approximately half the number of samples per year at about twice the value per year. I think our cue Q3 and Q4 experiences with CTA showed that the number of samples that early CTA customers were seen to be running was higher than that, 75 per year. That's really what drives up the relative, the increase that Tom described in our overall expectations. But it's still quite early days, and, you know, my hope is that over time we'll learn that there's very enthusiastic adoption of these genomics plus NGS assays and that, you know, we'll be raising that guidance in the future. But, you know, we're going to need several quarters of real customer behavior before we can provide an update there.

Okay, super. Thanks a bunch.

Our next question is from Dan Brennan with UBS. Your line is open.

Great, guys. Thanks for getting the questions. I guess first one is just trying to think through the geomics outlook for 2021. Can you just remind us, what was the backlog exiting the year? And when you talked about 40% to 50% order growth, what was the total number of orders that you had in 2020?

Yeah, so Dan, I'll take that since Tom. So we had about, as you recall, right around 90 orders for the full year. And we reported that our installed base at the end of the year was about 130, but that we'd shipped 160 instruments. So that means we've got 30 instruments that are waiting to be installed. And then when you look at the total number of orders versus the total number shipped, we have about 20. that are still waiting to be shipped, i.e. orders that were in backlog headed into this year. And our expectation would be that throughout the year we'd maintain about that backlog. So that's where you get the commentary on the 40% to 50% order growth lining up with the revenue numbers and split that we commented on in guidance.

Got it. And then any more like qualitative, you know, Brad, you physically will discuss number of leads or things like that. I'm quite opposed to put that in the model, but just wondering... qualitatively any other color you would suggest about what the funnel looks like for 2021?

Yeah, well, the lead generation pace has remained incredibly high, you know, through the events that we held with our Spatial Genomics Summit, which has, you know, 2,000-plus registrants last week. You know, I was dialed into the AGBT Gold Sponsor Workshop that we held that had over 600 people on it earlier today. Yeah, I think we're getting a very high level of engagement and, therefore, lead generation coming out of a whole transcriptome Atlas launch. That being said, it's a six- to nine-month sales cycle. So those types of leads that are just going into the funnel now are going to take nine months to mature into purchase orders. And so I think we're going to see strengthening of the actual order book in the back half of the year. But I'm very pleased overall with the level of interest that we're monitoring.

And when you think about the impact from COVID with labs still being operating not at full capacity, is there any way to quantify, like if we were at like steady state today, just wondering how much is really baked in, if you will, for the still, you know, less than 100% demand outlook?

Yeah, I think every quarter we've given an update to you on the status of labs according to our own CRM system. We provided the last update, I believe, on that around November where we said 15% of labs were fully open and 85% were what we'll call partially open. And I had hoped that by now we would have improved, but we haven't. I mean, we're really in a steady state there. of 85% partially open. And I think the best way to measure what that really means is to look at our encounter consumable pull-through, which in the fourth quarter was maybe 85% to 90% of what it would have normally been. only been in a fourth quarter. And I think that through the first half of this year, if you look at our expectations for seasonality on encounter consumables, you're going to continue to see that play through. Now, strengthening, of course, in the second half, we believe that as people are vaccinated, they will come back into the lab at full speed and resume their research at the pace that we're accustomed to.

Got it. And then this spread sort of on the competitive front, I know 10X has their FFPE product on a new chemistry. Just how do we think about, I know the market is a large one where multiple players can compete, but I'm just wondering, you know, if you think about 2021 and the ramp, how are you thinking about the competitive landscape? Has it changed at all? Has anything factored into that?

Well, spatial biology is obviously a field that's been declared by leaders like the journal Nature as really the most important kind of new set of applications in the field of life science research. We have both incumbents like 10X Genomics and many smaller companies who will be introducing products uh into this field and you know at its infancy uh which is where i described spatial biology today there's plenty of room for everyone uh but net i feel that nanostring through the launch of geomix which is the first really elegant and complete solution in this field has carved out a leadership position and a great brand and a great set of investor dialogues that will continue to benefit from In terms of the Visium formalin-fixed paraffin-embedded product that will be coming from Senex Genomics, it has not yet begun shipping. We'll look forward to seeing more data on that as it comes out. I'm sure it will create a certain amount of customer interest and competitive noise in 2021, but I think there's three things to keep in mind about that. One is Formal and fixed paraffin embedded compatibility is not the only advantage that geomics has held in translational research that's made as possible. We also benefit from high throughput, automation, which increases the reliability of the results, and region of interest selection that enables novel experimental design. And we'll continue to benefit from all of those things. The second thing to bear in mind is, Really, the Visium approach, which provides a broad landscape picture of tissue, is quite different than the Geomics approach, which really zooms in on regions of interest and provides all that profiling exactly where researchers want it. And so they're actually complementary products, and many leading centers are already using both. And the third thing is, unlike many other life science tool markets where you're selling two different instruments that are competing for the same capital dollars in the same bench space, Geomix and Visium compete in quite a different way. You know, Visium is provided only as a consumable product, whereas Geomix is an automated instrument. So it's really a false dichotomy to say that customers are going to adopt one or the other. And we really do see customers buying Geomix systems for large for that kind of broad angle and landscape to serve from time to time. And so I don't see that changing in 2021. We feel really confident in our translational leadership and expect to maintain it.

And then the final one, I think Tycho asked, but I'm sorry if you answered it. Just on M&A or just how do we think about the balance sheet is obviously in great shape. Just what do we expect from now in 2021?

Yeah, I think we're obviously not guiding that we're in a hurry to deploy that capital into inorganic growth. You know, NanoString has never done an acquisition in our history, and we really have neither ever had the need nor, you know, the balance sheet to be assertive about it. But now it's different. As I said to Taika, I think we have a lot of innovation that's happening in the field of spatial biology. NanoString has a great channel and a great brand and a deep, deep understanding of what that market needs. We're not guiding by any stretch that we're intending to acquire something this year, but we are saying clearly that we're in a position to do it should the need and opportunity arise.

Great. Thanks, Brad. Our next question is from Catherine Schulte with Bayard. Your line is open.

Hey, guys. Thanks for the question. I guess first, last year you gave us kind of a quarterly pacing roadmap for GMX orders. How should we think about that quarterly order cadence in 2020, given the pretty recent whole thing from Atlas Launch? You talked about kind of first half versus second half waiting, but curious from a quarter perspective.

Yeah, I think, you know, I think to reiterate some of the main points Tom made, you know, it's 40% to 50% order growth over the course of the year. And I think that's probably a number to look at on a quarterly basis as well. And then in the first overall geomics revenue would be 40% in the first half and 60% in the second half. And I think a way to think about that is, During the first half of this year, I expect to be primarily selling new geomics instruments to customers who began evaluating their purchase six months ago when our offering was centered around the encounter readout for protein and the cancer transcriptome analysis, which was, of course, newly launched at that time. And really, in the second half of 2021, for this instrument into those who are buying it for the purposes of the whole transcriptome atlas in areas that look beyond oncology. And a way to simply, specifically as it relates to instruments, Catherine, to think about that quarterly, We said about two-thirds of our overall guidance would be instruments, and that 40% to 50% order growth would be about right at each quarter, and that we would be closer to one-to-one book-to-bill, which is a bit of a nuance relative to last year where we entered with a pretty big backlog of orders. So if you do the math that way, you'll get to a pretty tight range that aligns with what we guided for the full year and would give you a sense for what the quarterly pacing could look like this year. Okay.

Yep, got it. I appreciate the commentary around GeoMix for 2021, but if we step back and take a longer-term view, do you have any updated thoughts on what percent of encounter boxes could have a GeoMix coupled with it over the next couple of years, and similarly, what kind of penetration you could see in sequencing-only labs over the next two to three years?

I don't think, Catherine, we're in a position to provide long-term guidance or target ranges, but I would say nothing has really changed about our view on those topics since we probably last discussed them. This year, as I said earlier, I would expect about half of our new geomic systems to go into encounter readout, to be used for encounter readout, which would mean something on the order of 60 to 65 new systems for encounter readout. We're selling into a 950 encounter instrument install base, so it's making progress in terms of penetrating, but it's by no means saturating. that encounter readout at that stage. And then with NGS, you know, we have an enormous opportunity there. I think that the best analogy to look at continues to be the chromium system, which has very successfully penetrated the Illumina installed base. And certainly, you know, with the whole transcriptome assay, we think every single chromium system is addressable with a geomix spatial biology.

All right. And the last one for me, if you think about the launch more as kind of an indicator of interest rather than a revenue generator, what would you consider a success in terms of the number of customers and projects that come through that program? Should we be thinking about a similar ramp as to what you saw with GeoMix initially? And then can you just talk to how you're pricing that? top program on a, for example, a quick project basis?

Yeah. Yeah, I think, you know, we're going to have our half program from SMI this year is going to be highly targeted at key opinion-leading scientists who we think are doing interesting things with that technology that could yield peer-reviewed papers of a certain impact. And so it's, in a sense, a quality thing. game, not a quantity game for us this year. If we finish the year with, say, 20 really good projects ordered and initiated that could yield, I don't know, 10 peer-reviewed papers next year, that would be great. And that, to me, would be a fine definition of success.

All right, great.

Thank you. Our next question comes from the line of with Morgan Stanley. Your line is open.

Hey, guys. Good evening. So, Brad, maybe I'll start with SMI. I mean, the TAP program you've already launched here a little bit earlier than some of us may have anticipated. So, is there a scenario where we could see you start beta access in the fourth quarter rather than the first half of next year? And would that also mean a commercial launch perhaps in the middle of next year versus towards the back end or sort of too early to sort of make that call just yet?

Thanks for the question. You know, we wanted to use the opportunity of the AGBT meeting to begin to engage with the top genomics researchers in the world, and really with our first two customer data sets coming out this week, it was a perfect opportunity to begin to talk to key opinion leaders about what they would do with this platform and therefore initiate the TAP launch. It does not signal an acceleration in a previous previously communicated timelines for the SMI launch. You know, we want to get that early user feedback and incorporate it into the product development effort, incorporate it into, in particular, the software and the user interface that will be critical before we could ever place systems in a customer lab. So let's not get ahead of ourselves and pull that launch timeline forward. Yeah, I think what we communicated in December remains the overall timelines.

Got it. Fair enough. And then on GMX, one of the sort of more intriguing longer-term takeaways from the pre-AGPT session was obviously around the need for better data tools and more open data sharing across customers. Do you have any plans to help catalyze that as obviously, you know, one of the two important sort of players in Spatial at the moment beyond just your Illumina Dragon partnership?

Yes, we do, though we're not ready to talk about them much just yet, Tejas. We have, and I've said this many times, more people in software within our R&D organization today than we even do in engineering and molecular biology. It's the single largest group in our overall product development organization. There's clearly many opportunities and even needs for us to help our customers do things like store their imaging and geomics data in the cloud, share it across multiple users, gain access to the compute capacity to do the processing of the NGS data back into the graphics that enable geomics analysis. We have a lot in the works there, but nothing to announce yet today. Stay tuned over the course of the year ahead.

Got it. And then one final one for Tom on margins. Tom, I mean, I know you mentioned sort of your margin expectations for this year because of the investments you're making around the WTA kind of service offering plus instrument mix. But over what timeframe do you expect sort of margins to recover to that high 60s, 70%-ish range? I mean, you've obviously got the SMI launch coming up next year as well, which might sort of push out that recovery a little bit. So should we think about 65 to 70 is more of a 23 plus event at this stage? And then any color on that SG&A cadence given the 100 commercial reps that you're adding over here? Should we assume that's more front end loaded and just flat lines over the course of the year?

Sure. On margin stages, I would think longer term for that kind of margin expansion. And I think that you're thinking about it the right way in terms of having another instrument launch coming at the back end of 22, probably while at the same time the instrument mix for geomics continues to be fairly heavy. So even though we've got some bumped up pull through guidance and we feel bullish about where consumables are going, I think that's still a longer term process for margin expansion. the investments we'll be making over time. And we'll comment further in future quarters as we get visibility on what that might look like long-term and as pull-through dials in. With respect to the SG&A, I would expect that the expense to be more middle-to-back half of the year just takes time to hire that number of people. And then you don't pay them, obviously, for the full year. They don't have activity for the full year. Our intent is to get those folks hired as quickly as we possibly can. We're recruiting for a number of those positions as we speak, but I think that the expense ramp on the 100 folks that we expect to add would be more back half versus first half, taking into account the usual seasonal pattern we have with SG&A, where usually the first quarter is a little bit heavier for various reasons. So hopefully that answers your question. If you've got other clarifications, let us know.

Got it. Perfect. Thanks so much, guys.

Ladies and gentlemen, this concludes the Q&A session. And I'll turn the call back over to Doug Farrell for any closing remarks.

Thanks very much for joining us today. If you did miss any portion of the call, there will be a replay available in the next few hours. You can access that replay by dialing 800-585-8367. International callers, please The conference ID for both is the same. That is 309-3307. Once again, thanks for your time. This concludes today's conference call. You may now disconnect.