NanoString Technologies, Inc.

Thank you for standing by. Welcome to the NanoString first quarter 2021 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. Please be advised that today's conference is being recorded. To ask a question during the session, you need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Doug Farrell, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Operator. Good afternoon, everyone. Joining me on the call today is Brad Gray, our President and CEO, and Tom Bailey, our CFO. Earlier today, we released our financial results for the first quarter of 2021. During this call, we may make statements that are forward-looking, including statements about financial projections, the impact of COVID-19, future business growth trends and related factors, prospects for expanding and penetrating addressable markets, our strategic focus and objectives, and the development status and anticipated success of recent and planned product launches. Forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties that are described from time to time 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 our guidance. We have prepared as a supplement to GAAP financial measures selected non-GAAP-adjusted measures, the calculations of which are described in detail in our press release. Throughout the call, all financial measures will be GAAP unless otherwise noted. You can also find reconciliations with GAAP and non-GAAP measures, as well as a description, limitation, and rationale for each measure in Southampton's press release. To aid analysts and investors in building their models, we have posted exhibits under the financial information tab of our investor relations homepage that include a presentation of our non-GAAP or adjusted measures and selected other financial data for the first quarter of 2021, as well as fiscal year 20. I'd like to remind everyone that we'll be participating in the UPS Healthcare Conference later this month. We'll also be attending the Jefferies Healthcare Conference in early June. We look forward to having the opportunity to speak with many of you there. With that, I'd like to turn the call over to Brad.

Thanks, Doug. Good afternoon, everyone, and thank you for joining us today. Before I provide a quarterly update, I'd like to take this opportunity to welcome two new directors that joined our board during the first quarter. Dr. Dan Rolison is Vice President, Chief Data Officer, and Associate Center Director of Data Science for the Moffitt Cancer Center. Janet George is Group Vice President of Autonomous Enterprise, Advanced Analytics with Machine Learning, and Artificial Intelligence at Oracle. These appointments underscore our commitment to capitalizing on the unique informatics and big data opportunities presented by spatial biology, and I'm honored to have Dana and Janet join our board. 2021 is shaping up to be an exciting year for nanostrategists. Spatial biology is in a period of tremendous growth, revolutionizing research and fields spanning from oncology to COVID-19 to neuroscience. During Q1, we extended our lead in this dynamic market with Geomics DSP instrument orders setting a new record and exceeding the guided range of 40% to 50% year-on-year growth. The launch of our Geomics whole transcriptome atlas is off to a great start and drove more than 60% of our record 94 new technology access program projects during the quarter. Meanwhile, our encounter business sustained its durable growth with steady demand for new instruments continuing more than a decade after the platform's introduction. Our encounter instrument revenues were particularly strong, increasing 43% year-on-year. While the geomics and encounter instrument sales are powering through the pandemic, COVID-19 does continue to impact our encounter utilization, reducing encounter consumable pull-through per instrument relative to historical levels. We expect this pandemic-related reductions in lab activity will continue to impact in-counter consumables through the mid-year with improvements during the second half of 2021. I'd like to provide an update on the three strategic objectives that we focused on in 2021 before turning the call over to Tom to review the details of our operating results for the first quarter and our financial outlook for Q2. Our first strategic objective for 2021 is to extend Geomix VFP's leadership in spatial biology. During the first quarter, we capitalized on the opportunity to sell Geomix instruments into the large installed base of aluminum sequencers, with NGS readout driving more than half of the Geomix system sold. Geomics consumable revenue for the NGS readout is also accelerating, with NGS readout assays accounting for more than half of geomics consumables sold during Q1. While it remains too early in the adoption cycle to predict how geomics consumable pull-through will differ between systems that use encounter readout versus NGS readout, early signs point to strong utilization of geomic systems attached to NGS. We are working closely with Illumina to illustrate the power of geomics paired with MGS. We recently announced a new collaboration with Illumina Accelerator and their portfolio company, Doloromics, to bring spatial biology to the development of a new generation of pain therapeutic units. Looking forward, we plan to provide a geomics DSP technology access program grant to at least one startup from each Illumina Accelerator funding site. The most important event of the first quarter was the launch of our whole transcriptome, ATLAS, or WTA for short. Nanostring is historically known for providing customers with powerful disease-focused panels in fields such as oncology, immunology, and neurology. The human WTA is the first genome-wide assay that we've ever offered and serves the needs of any researcher studying human tissue samples. The launch of the WTA allows us to introduce the geomics DSP to numerous researchers in the basic discovery market who have not traditionally engaged with our company. The March Advances in Genome Biology and Technology, or the AGBT conference, was the perfect launch venue for WTA. There were a dozen WTA abstracts presented at AGBT in fields such as immuno-oncology, neurodegenerative disease, and COVID research. We plan to build on the WTA momentum during the second quarter by launching a mouse version of the whole transcript on Alice, addressing a critical model organism that we believe accounts for about 30% of the market opportunity in discovery research. We've been providing customers with the opportunity to test drive the WTA through our TAP service, which provides a strong, positive, and leading indicator of demand. We generated record TAP orders in the first quarter, with the number of projects ordered increasing about 75% over the prior year. Our WTA assay accounted for more than 60% of all Q1 TAP projects, up from about 40% of TAP projects during the fourth quarter. In addition to opening new areas of research, WTA captures significantly more revenue per sample than previous geomics panels. priced at about $1,750 per sample, WTA generates about three times the revenue per sample that we record for most geomics panels, which read out using in-cap. We expect that WTA will be a key growth catalyst in 2021 and beyond, expanding the overall addressable research market for geomics to what we estimate is about $3 billion per year. Now I'd like to shift gears towards the translational research where nanostrain has always been strong and where we continue to extend our market leadership. Protein assays for translational research are a popular and underappreciated application for Geomix, accounting for about 30% of the TAM, which have been featured in 90% of Geomix peer-reviewed publications to date. GeoMix is best in class for spatial protein analysis, enabled by the highest PLEX and the largest antibody menu of any spatial biology platform. Because of the simple workflow and fast turnaround time, we expect encounter readout to remain the preferred platform by translational research customers focused on protein analysis. During Q1, approximately 45% of GeoMix instruments ordered will be used with encounter readout. and in-counter readout assays drove about 40% of geomics consumable sales. The importance of spatial biology and translational research was prominently featured during the American Association of Cancer Research, or AATR, conference last month. Researchers presented eight geomic studies, including four studies by investigators from the Geomics Breast Cancer Consortium. an international network of researchers using geomics to develop a comprehensive atlas and data set of novel biomarkers for breast cancer. Dr. Christina Curtis from Stanford gave an oral presentation describing how her group used geomics to identify biomarkers that may someday help to select patients likely to benefit from novel therapies. Dr. Sandra Swain's group from Georgetown University used geomics to demonstrate that primary HER2-positive tumors have more immune cell infiltration than metastatic tumors, which may explain why metastatic disease is so much harder to treat. Peer-reviewed publications continue to be an important indicator of geomics productivity and a driver of future demand. A record number of geomics papers were published during Q1, increasing the body of peer-reviewed geomics publications by about one-third. Two recent papers in the journal Nature demonstrate the unique capability of geomics in COVID-19 research. Researchers from the Brogan Institute of Israel and Weill Cornell used geomics in conjunction with single-cell RNA sequencing to generate a spatially resolved cell atlas to discover fundamentally new mechanisms for COVID-19-induced fatalities. Overall, we're delighted with the expansion of the spatial biology market and with the leading position that genomics occupies. Our second strategic objective is to advance the development of our spatial molecular imager and to feed the market for the commercial launch planned for next year. The spatial molecular imager, or SMI for short, is designed to enable customers to perform high-flex imaging of proteins and RNA down to the single cell and even subcellular resolutions using a single instrument that handles sample prep, imaging, data capture, and quantification. We showcased our new spatial molecular imager at the AGBC conference, and customer interest was robust. seven SMI posters were presented at the meeting, including the first two presentations from our external collaborators at the Fred Hutch and Dana-Farber Cancer Centers. While other imaging platforms were also previewed at AGVT, our SMI demonstrated industry-leading flex and sensitivity, and we believe SMI will be the best in class amongst the emerging imagers. In Q1, we announced a technology access program for SMI with the objective of conducting a small number of high-impact projects with key thought leaders in spatial biology that will help build awareness and seed the market. Interest from collaborators has been high, and we've already booked enough SMI TAP projects to keep us busy for the balance of 2021. Based on initial customer feedback and our market research, we believe that the multi-cell resolution of GeoMix and the single-cell and sub-cell resolutions of SMI are highly complementary and provide a portfolio that covers the continuum of spatial research applications. We expect the launch of SMI will double the size of the spatial biology research market that we serve from 3 billion today to 6 billion in the future. We remain on track for our commercial launch during the second half of 2022, and I look forward to updating you on this program as it advances over the year ahead. Our third strategic objective is to return our encounter business to pre-COVID growth levels. During Q1, we generated year-on-year growth of 25% in our encounter business. The encounter franchise had another impressive showing at the AACR conference, where about 45 encounter-based abstracts were presented. The encounter system remains a platform of choice in oncology research, even as we continue to expand our portfolio into new markets. It ended the first quarter with an installed base of nearly 1,000 encounter systems, an increase of about 15% over the prior year. Demand for new encounter systems is coming from a diverse set of researchers. During Q1, about 80% of new encounters were sold for both gene expression, and about 20% were sold for spatial biology, bundled with a geomix system. While roughly 60% of new customers were sold, sorry, while nearly 60% of new encounters were sold into our core application of oncology research, About 40% of system sales were driven by immunology and other applications. Encounter consumable sales also reflected the diversification of our customer base, as panels targeted towards host response, organ transplant, and fibrosis contributed to growth. Overall, we're pleased with trends in our business and our progress towards strategic objectives. Now 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 first quarter of 2021, product and service revenue was $31.4 million, representing year-over-year growth of 28%. Q1 geometry revenue was $9.7 million, up 37% as compared to Q1 20 and above the high end of the Q1 guidance we provided in March. $7 million was derived from approximately 30 instruments shipped, and $2.7 million was derived from consumable sales. For NCounter, Q1 instrument revenue was $4.8 million, representing year-over-year growth of 43%. Q1 NCounter consumable revenue was $13.3 million, representing year-over-year growth of 21%. As anticipated by our Q1 guidance provided in March, COVID continued to moderate lab activity in selected customers and geographies, yielding annualized NCounter pull-through of about $56,000 in Q1. As our full year guidance contemplated, we currently expect modestly lower lab activity in some geographies may persist through Q2, and therefore encounter pull-through in the current quarter is expected to be about the same as we realize in Q1. We continue to anticipate a recovery in the second half of the year, and we are reiterating our guidance of 60,000 to 65,000 in annualized encounter pull-through for the full year. Service revenue was about $3.7 million for the quarter, or 17% year-over-year growth, driven primarily by increasing GeoMix DSP cap projects and increased service contract revenue given by our growing instrument installed base. Turning to margins and expenses, I'll provide results on a non-GAAP or adjusted basis, which please refer to our press release as well as the exhibits we have posted to our investor relations webpage for detailed information on how our non-GAAP or adjusted measures are prepared. Q1 adjusted gross margin on product and service revenue was 52% and reflected investments in manufacturing and tap service capacity to support our expected revenue growth and expansion into new product and service offerings. To a lesser extent, gross margin also reflected a Q1 cutoff distributed markets, where realized average selling prices are typically lower. Adjusted R&D expense was $12.6 million, a decrease of 15% year over year. R&D was lower in Q1 primarily due to timing of certain expenses expected to be made for research supplies and personnel as we ramp investment in our SMI product development program. We expect R&D expense will increase through the balance of the year as SMI development accelerates. Adjusted SG&A expense was $21 million, a decrease of 7% year-over-year. Q1 SG&A expense change was primarily due to savings realized from pandemic-related reductions in travel and trade show activities. These savings were offset by investments made in our spatial biology-related commercial initiatives, digital marketing initiatives. Adjusted EBITDA loss was $17.2 million, an improvement of 27% as compared to the prior year. For the balance sheet, we exited the quarter with approximately $410 million of cash, cash equivalents, and short-term investments. For envisioning the guidance, we are reiterating our full-year 2021 financial outlook for revenue, gross margin, and expenses as provided on our March call. For geomics, We continue to expect a seasonal revenue pattern that is weighted to the second half of the year, with roughly 40% of Geomics revenue to be recorded in the first half of the year and about 60% in the second half. As a reminder, we do not expect any material collaboration revenue to be recorded in future periods. For Q2, we expect product and service revenue to be in the range of $31 to $33 million, representing year-over-year growth of 47% to 56%. This range assumes 21 to 22 million of encounter revenue and 10 to 11 million of geomics revenue. Geomics revenue guidance assumes about 40 to 50% instrument bookings growth year over year, consistent with our annual guidance established in March. Now I'll turn the call back over to Brad for closing comments. Thanks, Tom. 2021 is off to a tremendous start. Nanotrain is the market leading product portfolio in the hottest field in life science research. spatial biology. The launch of our Geomix whole transcriptome atlas has added to the substantial commercial momentum of our Geomix franchise, while the unveiling of our spatial molecular integer is driving customer anticipation of its 2022 launch. Our encounter platform is a mainstay of oncology research and continues to reach new customers. Our strong balance sheet supports targeted growth investments that capture our substantial market opportunities, and we are confident in our ability to fulfill our mission to map the universe of biology. With that, we'd like to open up the line for your questions.