NanoString Technologies, Inc.

Good day. Thank you for standing by and welcome to the NanoString third quarter 2021 operating results. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Doug Farrell, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Operator. Joining me on the call today is Brad Gray, our President and CEO, and Don Bailey, our CFO. Earlier today, we released our financial results for the third 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 launches. 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 any forward-looking statements. 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 unless otherwise noted. You can find reconciliations of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using such measures in 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 third quarter of 2021, as well as for each quarter of the full year 2020. I'd like to remind everyone that we'll be participating in this people virtual healthcare conference next 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, and thank you for joining us today. Spatial biology is having a banner year, and nanospray continues to extend its lead in this exciting market. During the third quarter, we posted record geomics revenue as our whole transcriptome assays using next-generation sequencing readout appealed to customers across both discovery and translational research. Earlier today, we unveiled our new Cosmix Spatial Molecular Imager by publicly releasing a data set and manuscript that described the power of this platform to image the expression of almost 1,000 genes and biobank samples stored as oral and fixed paraffin-embedded tissue. Meanwhile, our encounter franchise posted strong instrument placements, while consumable revenue continued to be impacted by residual effects of the pandemic. Let me now review progress towards our 2021 strategic objectives before handing over the call to Tom Bailey to review our results and outlook. Our first strategic objective for 2021 is to extend our lead in spatial biology through the broad adoption of the Geomix Digital Spatial Profiler. Three quarters through the year, our spatial biology business is right on track with the Geomix franchise performance trending towards the top end of our guidance range for both instrument orders and overall geomics revenue. During the third quarter, geomics instrument orders grew 40% and are now on track for the full year geomics instrument order growth of about 50% compared to 2020. Customer interest in using next-generation sequencing as the readout for GeoMix experiments is a key growth catalyst in about 75% of GeoMix instruments ordered during the third quarter or purchased for use with MGS readout. GeoMix consumable pull-through remains strong at an annualized rate of about $95,000 per system. Our GeoMix whole transcriptome atlas, or WCA assays, which were introduced during the first half of the year, leverage MGS readouts and are the first system-wide products that we've ever offered. In Q3, our assays for MGS readouts accounted for about 75% of Geomic's consumable orders, as revenue from our human whole transcriptome atlas increased 70% sequentially from the second orders. Repeat orders were strong, with about half of our WTA customers already placing follow-up orders. Nanostream has a strong history of serving translational researchers who are focused on disease research, and our whole transcriptome assay is really no exception. In fact, about half of the translational researchers who originally had dropped the geomics to use with protein assays using encounter readout are now also using whole transcriptome atlas assays with NGS readout. The WCA assays are also getting traction in the large market for basic discovery research, helping us expand beyond the translational research market that has historically represented our core focus. Mice are the most important model system for discovery research, and researchers with interests as diverse as immunology, neuroscience, infectious disease, and developmental biology have embraced our mouse-full transcriptome assays. In the third quarter, about 20% of our geomics instrument orders came from customers who adopted DSP specifically for mouse whole transcriptome research. We're also seeing strong leading indicators of demand from discovery researchers via our technology access program, which delivered results from a record number of projects completed in the third quarter as we continue to work through a large backlog of projects that were committed earlier in the year. A full 90% of new projects were for NGF-based products, and mouse whole transcriptome assays accounted for about 25% of new projects. In October, we unveiled the first spatial organ atlas, which includes whole transcriptome images of key functional tissue structures for five human organs, including the human brain, kidney, colon, pancreas, and lymph nodes, as well as the mouse brain, Much like the Cancer Genome Atlas and the Human Cell Atlas efforts, we expect our Organ Atlas to become a reference database for spatial gene expression by organ, including both healthy and diseased tissue. We introduced the Spatial Organ Atlas during the American Society of Human Genetics, or ASHG, meeting last month and have been taking it on a roadshow ever since. These data sets can be found on the Spatial Organ Atlas page of the Geomix PSP section of our website, and interest has already driven a meaningful bump in website traffic and lead generation, as well as commitments from several external groups to extend the Atlas to additional organ types. Overall, Geomix continues to drive rapid growth of our leading spatial biology franchise, and we're excited by how quickly this opportunity is unfolding. Our second strategic objective for 2021 is to expand our spatial biology franchise with high resolution offerings by advancing the development of our spatial molecular imager and seeding the market for the commercial launch that's planned for next year. Molecular imaging is shaping up to be an important new category in spatial biology. Imaging platforms measure expression of a targeted number of RNAs or proteins at the single-cell or sub-cell resolution. Our spatial molecular imager provides the perfect complement to hold transcriptome analysis using Geomix PSP, a perspective held by numerous Geomix customers who've already expressed interest in acquiring an SMI and further collaborated and corroborated by several recent customer surveys published by CellSight Analysts. We are in an exciting period as we're beginning to reveal more details about our spatial molecular imager. Let me focus on three key developments outlined in a press release that we issued this morning. First, we've unveiled a brand name for our imager, which is COSMICS-SMI, chosen to provide a celestial complement to our geomics DSP brand. The COSMICS brand is aspirational, captures the imagination, and invokes our mission to map the universe of biology. Second, we publicly released a high-resolution data set generated using the COSMICS SMI, highlighting the unique performance characteristics that set COSMICS apart from competing imagers and allow researchers to see for themselves the power of this new platform. This data set includes RNA expression, massive single and subcellular resolution within eight non-small cell lung cancer specimens. Two key attributes of this dataset contrast with data released by others in the past. First, the COSMIC-SMI dataset maps RNA from almost 1,000 genes, approximately twice the number of genes covered by competing platforms. Second, this was generated using formalin-fixed paraffin-embedded, or FFPE, tissue samples. The compatibility of COSMICS-SMI with challenging FFP samples sets it apart from competing imagers, allowing researchers to unlock value in archival samples as well as to apply the platform to clinical samples. The COSMICS-SMI dataset can be accessed through NanoString's website and analyzed by the research community. The complete dataset consisting of over 800,000 single cells 260 million transcripts, and a spatially resolved cell-type map of non-spellful lung cancer tissue across 150 square millimeters. The data can be explored through an interactive viewer and downloaded for analysis using an open source of third-party informatics packages. Early feedback from luminaries in the field about a sneak peek at the data prior to release has been overwhelmingly positive. and we look forward to discussing it with the broader research community in the months ahead. Our third major revelation regarding Cosmic SMI is the release of a manuscript providing details of the chemistry that powers the platform and the performance that it achieves. This manuscript, which can now be viewed in the online journal bioRxiv, will serve as a reference for customers considering a Cosmic SMI purchase. It describes the performance of COSMIC in FFP tissue, including resolution, sensitivity, and reproducibility, as well as key applications of the platform, such as identifying cell types and measuring cell-to-cell interactions. In addition to providing details on the RNA expression capabilities of SMI, the paper provides a teaser of COSMIC's protein capabilities, showing 81-plex protein expression data in FFP, further differentiating COSMICS from competing molecular imagers powered by genomic chemistry, fluorescence, or mass spec. Together, the COSMICS SMI and Geomics CSP represent a compelling product suite that will span the continuum of applications in spatial biology. The next major event to highlight this portfolio will be our fourth annual Spatial Summit. which we will host on Monday, February 28, at the Advances in Genome Biology and Technology, or AGBT, meeting in Orlando, Florida. This half-day session will provide more details on COSMICS SMI and will showcase early work from outside groups coming out of our SMI Technology Access Program. This session will be open to the investment community, and you do not need to be registered for AGBT to attend. We hope to see many of you there. Our third strategic objective is to return our encounter business to the growth dynamics seen prior to the COVID-19 pandemic. During the third quarter, our encounter performance was mixed, with strong instrument sales offset by a slower-than-expected recovery in consumable sales. Our strong encounter instrument sales demonstrate the continued demand for encounter's unique combination of simplicity, power, and robustness. The sales of encounter instruments during the quarter exceeded consensus estimates for instrument sales by 25% at roughly $6 million. Here today, our instrument revenue is similar to the first three quarters of 2019, indicating that we are returning to pre-pandemic levels on the instrument side of our business. We continue to diversify our encounter into new areas beyond oncology. as about half of our encounter systems were sold for non-oncology applications in the third quarter, including immunology and infectious disease. Meanwhile, the pace with which our customers are publishing papers using Encounter has never been higher. Over the past 12 months, our customers have published more than 1,000 new Encounter papers, bringing the total publications enabled by our technologies to over 5,000 papers to date. Our encounter franchise remains healthy and our customer base vibrant. That being said, slower than expected encounter consumable sales during Q3 illustrate the lingering impact of COVID-19 on one particular segment of our encounter customers. That is, biopharma companies focused on oncology biomarker studies. An estimated 70% of encounter users pursue oncology research, while about 25% of encounters are owned by biopharma companies and CROs. These customers typically analyze samples that have been collected during clinical trials. As the COVID-19 pandemic began, oncology clinical trial enrollments slowed. The downstream consequence of this slowdown was lower volumes for biomarker discovery studies today. which translates into slower sales of encounter oncology panels. Let me illustrate how this phenomenon impacted encounter consumables in the third quarter. During the third quarter, sales to academic researchers returned to more than 90% of pre-pandemic levels in North America and to approximately 80% in both EMEA and APAC. In contrast, consumable utilization by biopharma companies remains deeply suppressed at about 60% of pre-pandemic levels. The specific encounter consumables that were most impacted were immuno-oncology panels that were used extensively in supporting clinical trials. Pharma pull-through has not improved thus far in Q4, and it's difficult to project when pharma biomarker studies will resume at full pace. On this basis, we expect the encounter pull-through will remain below pre-pandemic averages in Q4, recovering further in 2022. To summarize, we continue to see healthy demand in spatial biology with solid momentum in translational research and increased penetration of the discovery market. Our Cosmix SMI is on track to begin shipping in the second half of 2022 and has demonstrated best-in-class RNA flex capability and unique compatibility with FFP samples. Lastly, our encounter business continues to generate strong instrument sales offset by slower recovery than we had previously anticipated on the consumable side of the business. 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 third quarter of 2021, product and service revenue was $36.9 million at the middle of our Q3 guidance range, representing year-over-year growth of 23%. Q3 geomics revenue was $13 million, up 47%, as compared to Q3 20 and at the high end of guidance we provided in August. $8.5 million was from approximately 35 instruments shipped, and $4.5 million was pull-through was about $95,000 per installed system in Q3. NCounter delivered a solid quarter for instrument sales, with $6 million posted in Q3, 11% year-over-year growth, and the second highest Q3 total ever for NCounter instrument sales. In contrast, NCounter consumables continued to be impacted by residual effects of the COVID-19 pandemic. Q3 end counter consumables revenue was lower than expected at $13.5 million for year-over-year growth of 10%. End counter utilization during the quarter impacted most materially in our pharmaceutical industry customers. Annualized consumables pull-through was about $53,000 in Q3. Service revenue was about $4.4 million for the quarter, representing 24% year-over-year growth, and was driven by Geomix DSP tap and increased service contract revenue from our growing instrument installed base. Turning to margins and expenses, I'll provide results on a non-gap 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 on how our non-GAAP or adjusted measures are prepared. Q3 adjusted gross margin was 56% consistent with our annual guidance range and about a 100 basis point improvement compared to Q3 of last year. Improvement was driven primarily by growth in geomics DSP revenue and was partially offset by additional investments made in our manufacturing capacity and increased costs associated with providing our tap service. Adjusted R&D expense was $16.6 million, an increase of 31% 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 COSMICS SMI development program. We expect R&D expense will increase through the balance of the year as COSMICS SMI development continues. Adjusted SG&A expense was $23.8 million, an increase of 43% year-over-year. The Q3 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, as well as costs related to licensing and implementation of new information technology solutions to support our commercial operations and finance functions. Adjusted EBITDA loss was $19.7 million, and we exited the quarter with approximately $370 million of cash, cash equivalents, and short-term investments. Turning to guidance, three quarters through 2021, the full-year outlooks for our geomics and encounter franchises have trended in different directions. Our spatial biology franchise continues to be our major growth driver, with geomic system orders and revenue trending towards the top end of our guidance range. We now expect full year 2021 geomics revenue will be in the range 49 to 50 million, driven by instrument order growth of approximately 50% for the full year at the upper end of our annual guidance range. Our updated annual encounter revenue guidance range of 91 to 94 million is based on a continued and an updated 2021 full-year consumables pull-through expectation of approximately $55,000 per installed system. Our updated NCounter pull-through guidance range reflects the potential impact of residual pandemic-related issues on consumables utilization similar to what was observed in Q3. At this time, we believe these residual issues could continue to impact NCounter consumables pull-through into 2022. We will offer further updates when we report fourth quarter results and provide our 2022 outlook in March. For Q4, we expect product and service revenue to be in the range of $38 to $42 million, representing year-over-year growth of 6% to 18%. This range includes $15 to $16 million of geomics revenue, driven by what we expect will be about 40 new geomics instrument orders in Q4. Our guidance range also includes $23 to $26 million of end-counter revenue, with annualized end-counter consumables pulled through in Q4 expected to be approximately $55,000 to $60,000 per installed system. Now I'll turn the call back over to Brad for our closing comments. Thanks, Tom. In closing, our spatial biology franchise is having a banner year as we continue to extend our lead in this dynamic market and to fill our mission to map the universe of biology. Geomic CFP instrument orders are growing 50% year-on-year, and we're successfully expanding beyond our core strength in translational research and into basic discovery. As we reveal more details about our COSBIC spatial molecular imager, its market-leading Plex and unique FFP sample compatibility are capturing the attention of the research community. Together, geomics and cosmics create the most compelling product suite in spatial biology and promise to drive strong top-line growth for years to come. With that, we'd like to open up the line for your questions.