NanoString Technologies, Inc.

Good day, and thank you for standing by. Welcome to the NanoString second 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. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. And if you require any further assistance, you may press star zero. Without a further ado, I would like to welcome your first speaker for today, Mr. Doug Farrell, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, operator. Thank you, everyone, for joining us today. On the call with me today is Brad Gray, our President and CEO, as well as Tom Bailey, our CFO. Earlier today, we released our financial results for the second quarter of 2021. 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 and planned product offerings. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected, and we undertake no obligation to update this forward-looking statement. Later in the call, Tom will be discussing our financial results and 2021 guidance. We have prepared as a supplement to GAAP financial measures selected non-GAAP-adjusted measures, the calculation of which are described in detail in our press release, Throughout this call, all financial measures will be GAAP and less otherwise noted. You can find reconciliations of GAAP and non-GAAP, as well as the description, limitations, and rationale for using each such measure in this afternoon's press release. They're also available under the Investor Relations page on our website. I'd like to remind everyone we are participating in the UBS Genomics 2.0 conference next week, as well as the Baird and Morgan Stanley Health Care Conferences in September. 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, and thank you for joining us today. The momentum of our spatial biology franchise continues to increase each quarter. We continue to extend our lead in translational research, while the rapid adoption of NGS readout for geomics is opening up a vast new market in basic discovery research. Our spatial molecular imager is garnering interest from existing geomics customers as well as single-cell genomics researchers who are engaging with nanostrain for the first time. Meanwhile, our encounter franchise is humming along, continuing to generate strong instrument placements and great science more than a decade after its introduction. Our first strategic objective for 2021 is to extend our lead in spatial biology through the broad adoption of the GeoMix digital spatial profiler. In the second quarter, we generated a record number of orders for GeoMix DSP instruments and delivered sequential growth in GeoMix's consumable pull-through-per-system, of geomics instrument orders grew approximately 50% year-on-year at the top end of our guidance range of 40 to 50% growth. The recent launches of our human and mouse whole transcriptome atlases, or WTA, propelled annualized consumable pull-through to $94,000 per system during the second quarter near the top of our previously provided guidance range of $85,000 to $95,000. The impact of WTI on consumable poultry is pushing our geomics revenue expectations for 2021 towards the top half of our previously guided guidance range, and importantly, increases our estimates for the long-term value of our geomics franchise. Expanding the use of next-generation sequencing to read out geomics experiments is a key growth catalyst for our spatial business. The recent launches of our first whole transcriptome products are driving the momentum. These are the first system-wide products that we've offered, and they are appealing to researchers in both translational and discovery research. During the second quarter, approximately 60% of new geomics instruments were sold to researchers intending to use MGS as their primary readout. In addition, many researchers who initially used their geomic systems within counter-based readout have now begun to utilize assays with MGS readout as well. So far this year, approximately one-third of our geomic installed base has ordered either our whole transcriptome atlas or our cancer transcriptome atlas assays. Together, these MGS readout assays accounted for approximately two-thirds of total geomic's consumable revenue in the second quarter. we expected the expanded research applications of our MGS-enabled assays will drive broad adoption of geomics, while the higher revenue per sample of these assays will continue to increase consumable pull-through per system through the balance of the year. During the second quarter, we expanded our MGS-enabled geomics portfolio with the launch of the MOUSE pull transcriptome atlas. The MOUSE is the most important model system for basic discovery research. And our market research suggests it may represent up to 30% of the spatial biology TAM. In February, we began offering the mouse WTA through our Technology Access Program, or TAP. This new offering is generating strong interest from researchers with diverse areas of biology, including immunology, neuroscience, infectious disease, and developmental biology. Our technology access program enables researchers to test drive geomics while evaluating an instrument purchase and provides us with another strong indicator of customer enthusiasm for MGS readout. We generated more than 90 new tap orders in the second quarter, more than doubling the number of projects over the prior year, with MGS readout using about 90% of the new projects. While our whole transcript on ATLAS is driving us into basic discovery research, we continue to build on our track record of leadership among translational researchers focused on human disease. NanoString has been serving the translational research community for more than a decade, and we have a strong brand and deep understanding of their unique requirements. We understand that while robust and reliable results from formal and fixed pair of embedded or SFPE tissue is a table safe for any platform, Translational researchers demand much more. They want automated solutions that can drive high sample volumes and provide consistent site-to-site performance needed for collaborating across networks. They also want to analyze both RNA and protein on the same platform. GeoMix is the spatial biology platform that meets all of these requirements, helping establish its market-leading position in translational research. To be clear, while other companies are adapting their technology to be FFP-compatible, nanostrange platforms were developed using FFP from the outset. Recent product updates from other companies neither shifted the competitive landscape nor impacted our leadership in translational research. Among other requirements, translational researchers value that geomics provide protein assays enabled by a portfolio of several hundred validated antibodies, and that's in class plus. For the researchers focused on protein assays, encounter readout remains the preferred configuration and represents approximately 40% of geomic systems sold during Q2. Half of these systems, or about 20% of all geomic systems sold during the second quarter, were packaged as geomic plus encounter bundles. In most cases, these bundles are going to translational researchers who are new to administering customers, further expanding their lead in this important market. Overall, Geomix continues to provide a strong growth driver for 2021 and a setup for long-term success, transforming our company. Our second strategic objective for 2021 is to advance the development of our spatial molecular imager and to seed the market for the commercial launch that's planned for next year. Molecular imaging is shaping up to be an important new market that we expect will be highly complementary to spatial profiling. We're making great progress in developing our spatial molecular imager, or SMI, which remains on track to ship commercial instruments in the second half of 2022. Our SMI is expected to be the best in class and distinctive from other imagers in several important ways. First, we expect SMI to lead the class with both the highest class and the highest sensitivity. Second, we expect SMI to show superior performance than FFPE tissue samples. And third, unlike competing platforms, SMI will launch with both RNA and protein access. We've developed a technology access program for SMI, and we've been fielding interest from a diverse set of researchers. To date, about half of the SMI TAP projects have come from existing geomics customers, while the other half come from single-cell researchers just beginning to embrace spatial biology. The experiments we are running span many areas of biology, including oncology, immunology, and neurology. Some researchers are interested in using spatial molecular imaging to create an atlas of cells within a tissue, while others are looking to characterize interactions between individual cells. Our TAP service is already oversubscribed for the year, and we've been allocating our capacity to high-impact science with key opinion leaders. Researchers continue to reach out with interesting projects, creating a reservoir of demand that will keep us busy well into next year. Our third strategic objective is to return our encounter business to the growth dynamics seen prior to the COVID-19 pandemic. Our encounter franchise remains robust, with our install base increasing about 14% over the prior year and customers publishing another 300 peer-reviewed papers during the recent quarter. which is a major milestone in our encounter business in Q2, selling our 1,000th system. As of mid-year, our 2021 infinite revenue almost exactly matches what we generated during the same period in 2019. This signifies a full recovery of infinite placements to pre-pandemic levels, and we expect this trend to continue through the second half of the year. In Q2, we generated another sequential increase in consumable pull-through to about $57,000 per system annualized, with recovery most notable in North America. We expect consumable pull-through to continue recovering from pandemic lows during the second half. Oncology researchers continue to embrace encounter. We recently entered an exciting collaboration with the Parker Institute for Cancer Immunotherapy focused on the molecular characterization of cellular therapies. The objective of this collaboration is to define the characteristics that will make a cell therapy effective, providing a standardized approach to developing CAR-T regimens that may improve patient outcomes across all cancer types. The collaboration will leverage the cell therapy expertise of Parker's extensive network of world-class research centers, and Parker plans to make the findings publicly available to the scientific community. In another exciting development, we recently entered a long-term umbrella contract to supply the National Institutes of Health as part of its IMATCH program. The NIH and NCI sponsored thousands of clinical trials per year, and under this agreement, NIH researchers will now have expanded access to our encounter platform to assess the immune status of solid tumors from patients in clinical trials. We continue to push encounter into new areas beyond oncology. In the second quarter, about half of our encounter systems were sold for applications outside oncology, and consumable growth was especially strong in infectious disease and immunology. During Q2, we launched a new stem cell characterization panel for the analysis and optimization of cell lines used in the development of novel therapeutics. Our new panel measures eight essential components of stem cell biology and provides a standardized assay for evaluating factors that impact the viability in the development and manufacturing process. We hope it will help researchers scale up the stem cell therapy workflow, advancing this promising field. To summarize, we're making great progress on our strategic objectives, with NCOW returning to grow, Geomix reaching new customers through its MGS readout, and SMI generating excitement ahead of its 2022 launch. And 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 second quarter of 2021, product and service revenue was $33.6 million, representing year-over-year growth of 59%. Q2 geomics revenue was $11.2 million, up 66% as compared to Q2 of 2020, and above the high end of guidance we provided in May. $7.4 million was from approximately 30 instruments shipped, and $3.8 million was from consumable sales. Any light geomics consumables pull-through was about $94,000 per installed system in Q2, For NCounter, total revenue for Q2 was also above the high end of our May guidance. Q2 instrument revenue was $4.4 million, representing year-over-year growth of 25%. NCounter consumable revenue was $14.2 million, representing year-over-year growth of 80%. Annualized consumables pull-through was about $57,000 in Q2. Service revenue was about $3.8 million for the quarter, representing 29% year-over-year growth, and driven by new GeoMix DLP task projects and increased service contract revenue from our growing instrument installed base. Turning to margins and expenses, I'll provide results on a non-GAAP or adjusted basis, which removes the impact of stock-based compensation, depreciation, and certain one-time items. 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. Q2 adjusted gross margin was 56%, consistent with our annual guidance range at about a 400 basis point improvement compared to Q2 of last year, driven by both the growth in geomics DSP revenue and the recovery in counter-consumable sales compared to the prior year period. Adjusted R&D expense was $14.5 million, an increase of 6% year over year. R&D was higher compared to the prior year period due primarily to increased personnel and product development costs related to our SMI program. We expect R&D expense will increase through the balance of the year as SMI development continues. Adjusted SG&A expense was $21.7 million, an increase of 27% year over year. The Q2 SG&A expense increase was due primarily to investments made in our spatial biology-related commercial initiatives, including investments to expand our sales force and our service and customer support groups. Adjusted EBITDA loss was $17.3 million, an improvement of 12% as compared to the prior year. We exited the quarter with approximately $398 million of cash, cash rewards, and short-term investments. Turning to guidance for Q3, we expect product and service revenue to be in the range of $36 to $38 million, representing year-over-year growth of 20% to 26%. This range assumes a $24 to $25 million of encounter revenue and $12 to $13 million of geomics revenue. Regarding our full-year guidance, we are raising our full-year guidance range for geomics consumables pull-through to $95,000 to $100,000 per system per year, implying annualized pull-through of approximately $100,000 to $105,000 for the second half of 2021 based on strong early consumable utilization at NGS-enabled sites. We are also affirming our previous guidance of 40% to 50% growth in instrument orders as compared to the prior year. As a result, we are updating our full-year geomix revenue guidance range to $48 million to $50 million, representing annual growth of 38% to 43%. Our encounter instrument demand has rebounded to pre-pandemic levels globally, and our expectations for encounter instrument revenue remain unchanged. We are narrowing our full-year guidance for consumables pull group by a modestly slower pace to pandemic recovery in Europe and Asia. As a result of these updates, we are narrowing our full-year end-counter revenue expectation to 95 to 97 million, representing annual growth of 24 to 27%. The combined impact of these updates is an updated full-year product and service revenue guidance range of 143 to 147 million, representing annual growth of 28 to 32%, total revenue guidance remaining unchanged. We are also affirming our prior full-year gross margin operating expense and adjusted EBITDA loss outlook amounts as provided on our March 1st call. Additionally, as a reminder, we do not expect any material collaboration revenue to be recorded in future periods. Now I'll turn the call back over to Brad for closing comments. Thanks, Tom. As we enter the second half, we are shaping up just as we had envisioned. Our new whole transcriptome assays are driving geomics adoption and increasing consumable whole fruit, enhancing the long-term value of our spatial business. Our deep understanding of customer needs, combined with the unique throughput and multi-omic capabilities of geomics, are extending our leadership in translational research. Scientists across many fields of research are intrigued by our spatial molecular imager and are lining up to perform their first experiments. Meanwhile, our encounter franchise is still achieving important milestones more than a decade after its introduction. Our momentum is strong, and we are confident in both our near-term growth prospects as well as the long-term value of our spatial biology franchise. With that, we now like to open the line for your questions.

Thank you, sir. As a reminder, to ask a question, you will need to press star 1. Again, that is star 1 to ask a question. Our first question comes from the line of Tycho Peterson from J.P. Morgan. You may ask your question.