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.