NanoString Technologies, Inc.

Hello and welcome to today's NanoString fourth quarter 2021 operating results. My name is Elliot and I will be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to hand over to our host, Doug Farrell, Vice President of Investor Relations. Please go ahead.

Thank you very much, Operator. On the call with me today is Brad Gray, our President and CEO, and Tom Bailey, our CFO. Earlier today, we released our financial results for the fourth quarter and fiscal year 2021. During this call, we may make statements that are forward-looking, including statements about financial projections, the impact of 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 recently planned product offerings. Statements are subject to risks and uncertainties, many of which are beyond our control, including 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 statement. Later in this call, Tom will be discussing our financial results and 2022 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 and non-GAAP measures as well as the description, limitations, and rationale for using each such measure in this afternoon's press release. To aid analysts and investors in building their models, we've posted exhibits under the financial information tab of our investor relations page that include presentation of our non-GAAP or adjusted measures and other selected financial data for the fourth quarter and fiscal year 2021, and for each quarter for the full year 2022. I'd like to remind everyone who will be participating in the Callen 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. Nanostring Exit 2021 on a high note. as interest in our spatial biology platforms during the fourth quarter generated more than 70 instrument orders across our geomics digital spatial profiler and our cosmic spatial molecular imager. This robust demand is a testament to the appeal of our unique product portfolio, which addresses scientific questions at any scale of spatial biology and makes NanoString a one-stop shop for researchers in the field. 2022 is already shaping up to be another exciting as we've just completed our fourth annual Spatial Genomics Summit, which was hosted jointly with Illumina. More than 1,200 researchers joined on the online event to learn about the cutting-edge science being conducted by our spatial biology customers and to preview the COSMICS spatial molecular imager and the powerful informatics solutions we will release later this year. During the call today, I'd like to provide a brief review of our 2021 performance before outlining our goals for 2022. During the fourth quarter, we posted record geomix revenue of $18 million, which put us $2 million above the top end of our guided range. This was driven by more than 50 geomix instrument orders and annualized consumer pull-through of approximately $109,000 per installed system. At year-end, we'd established an installed base of approximately 255 geomix systems. We also achieved several important COSMICS milestones. We published a manuscript in the Journal of BioArchive describing COSMICS technology and performance. We also released a data set mapping nearly 1,000 RNAs in situ at single-cell resolution. This data was generated using formal and fixed pair of embedded or FFPE samples, and is the largest publicly released data set of its kind. Together, these releases have created quite a buzz around COSMICS, as evidenced by the nearly 6,000 downloads of the manuscript and 400 downloads of our grant application package for COSMICS. No statistics provide stronger evidence of customer interest in COSMICS than instrument orders. We generated orders for 20 Cosmic Systems in 2021, the start of an order book that we plan to build out over the course of this year. The first 20 orders demonstrated the highly complementary nature of our two spatial biology platforms, as 95% of the Cosmic Systems ordered were either bundled with a new geomex or sold to an existing geomex customer. Meanwhile, encounter instrument sales were strong in Q4, and return to pre-pandemic levels for the full year. This demonstrates the healthy demand for this platform, even as consumable pull-through remains suppressed relative to pre-pandemic levels. Turning now to 2022, I'd like to outline our four strategic objectives for the year. Our first objective is to drive geomic CFD further into mainstream research, broadening adoption across multiple areas of discovery and translational research. When GeoMix launched, it was initially embraced by early adopters with a strong interest in new technologies. Many of these early adopters were focused on translational research within oncology and had been nanosprint encounter customers for years. In 2021, the introduction of the GeoMix whole transcriptome atlas, or WTA, provided a universal assay that reached out on the vast installed base of aluminum sequencers. This is allowing geomics to reach scientists studying the fundamentals of biology in areas outside of oncology. During 2022, we will push adoption into these groups even further with a three-pronged approach. First, we are providing RNA assays that cover virtually every area of biology. The centerpiece of the geomics portfolio are the whole transcriptome assays, which serve the needs of the two most common model systems, When our human WTA was launched last year, it quickly became the most successful launch of any consumable product we've ever offered. We followed with the launch of the mouse WTA, accelerating geomics uptake as the mouse is the primary model system for discovery research. For 2022, we're expanding our offering to cover the long tail of discovery research by launching fully customizable RNA assays. Second, we are enhancing the GEOMIX workflow. Last week, we announced the expansion of our partnership with Leica, enabling full automation of the GEOMIX RNA assay workflow. This will reduce the hands-on time of our RNA assay protocol to less than four minutes per slide and allow customers to prepare up to 30 samples at a time using the Leica Bond Rx autostainer system. In addition, we've introduced a protocol for the co-detection of both RNA and protein from a single FFPE section. We have demonstrated the co-detection of over 145 proteins alongside of our human WTA from a single colorectal cancer tissue section. And finally, we've expanded our customer experience team to accelerate GeoMITS installation, customer training, and site activation. we will publicize data sets and publications that illustrate the power of geomics. In Q4, we released the first installment of the Spatial Organ Atlas, containing data from six organs for which key structures had been profiled with the whole transcriptome atlas. These data have generated interest from researchers across diverse fields of applications, who've downloaded the data sets more than 1,700 times. During 2022, we plan to expand the spatial atlases to include additional organs, and we expect these to become popular reference data sets that customers can access to quickly discover how organs function in both healthy and diseased states. In addition, we recently saw the publication of the 100th peer-reviewed paper that leveraged spatial biology using geomics, and we're tracking many more papers being prepared for submission. Finally, we're looking forward to an action-packed AGBT meeting in June that will feature three oral presentations and nine abstracts using GeoMix. Our second goal for 2022 is to launch Cosmix as the industry-leading molecular imaging platforms. Cosmix provides single-cell and subcellular resolution that perfectly complements GeoMix, enabling a wide variety of experiments. The COSMICS launch will double the size of the spatial biology market that we serve, covering virtually all of the $6 billion TAM for spatial research. In a noisy imager market, COSMICS stands above the competition. COSMICS provides the highest Plex assays of any imager available, already covering up to 1,000 RNAs. COSMICS is the only platform to demonstrate the ability to image both RNA and proteins, COSMICS has demonstrated compatibility with the most important sample type in medical research, which is FFPE tissue. COSMICS will come with a dual run mode capability that allows the system to be tuned to the specific needs of a particular experiment, regardless of whether it is for discovery or translational applications. With tunable run modes, COSMICS enables discovery research by providing hyplex and unbiased whole slide analysis, as well as translational research with low-flex, high-throughput, biology-driven analysis. Cosmix will also benefit from NanoSeren's brand, reputation, established commercial channel, and leading portfolio of spatial solutions that spans the entire continuum of applications. When we put all these attributes together, we believe that Cosmix is poised to become the market-leading imager. The COSMICS launch will be supported by a steady cadence of data presentations and releases throughout the year. Yesterday, our fourth annual Spatial Biology Summit featured several leading researchers who are applying the COSMICS system to solve important biological questions. Jody Carter from the Mayo Clinic presented a study that verified the high fidelity of COSMICS cell segmentation and cell typing. as well as the strong correlation between COSMICS data and the PD-L1 clinical assays she had applied in triple negative breast cancer. Jacob Estes of Oregon Health and Science University presented a study that used the subcellular resolution of COSMICS to distinguish those cells with viral infection from those with virus simply bound to the cell surface. And then he studied the gene expression differences between these cells. We are now actively promoting COSMICS, and we expect to accumulate dozens of orders ahead of the commercial shipments in the fourth quarter. We plan to ship our first beta systems to customers during Q2, allowing us to get feedback on installation, training, and workflow. Around the same time, we will use beta systems to expand the capacity for our COSMICS Technology Access Program, or TAP, which is currently fully subscribed. Overall, the COSMICS launch strategy follows the same playbook that we used successfully with Geomix, so we are confident in its success. Our third strategic objective of the year is to launch our cloud-based spatial biology portal. With this launch, we are aiming to provide a seamless informatics solution for both Geomix and COSMICS users, allowing them to access the massive computing and storage capabilities that are required for spatial genomics. Spatial research typically involves a team approach, integrating the lab technician, pathologist, biostatistician, and principal investigator. Migrating to the cloud will allow this team to collaborate and share data in real time within an institution or across broad networks of researchers. This portal will include a suite of state-of-the-art tools for data analysis and visualization. will integrate with industry-standard platforms, such as Illumina's BaseSpace, as well as a growing universe of open-source software. During our Spatial Genomics Summit, a panel of experts from Weill Cornell Medical College, Boston University, and Illumina identified benefits of migrating spatial biology data to the cloud, including scalable compute and storage capabilities that can leverage the power of AI for complex spatial datasets. We believe that this powerful cloud-based informatics solution will be another important competitive advantage for us, completing our portfolio of spatial capabilities. Our spatial biology portal is expected to progress into beta testing in Q2, and we plan to launch this offering in the fourth quarter. Our fourth objective for 2022 is to sustain the growth of our encounter franchise. Our encounter analysis system provides rapid, highly multiplexed bulk gene expression. The encounter franchise provides the solid foundation on which we are building our spatial business and funds our global commercial channel. Our instrument business has returned to pre-pandemic levels, and we expect a healthy pace of instrument placements to continue in 2022. Consumable pull-through has decreased during the pandemic, especially among biopharma customers. We have a number of initiatives in place to help revitalize this customer segment over the year ahead. We also have a roadmap to expand our NCounter consumable portfolio into new applications that are important in biopharma. We recently introduced a new T-cell repertoire, or TCR, diversity panel that allows researchers to measure the usage of TCR variable regions and shifts in TCR diversity with a simple assay that can deliver results in less than 24 hours. During 2022, we also plan to target cellular and gene therapy applications with new features and assays tuned to that application. In addition, we have recently expanded our BioPharma sales team to ensure that these important customers are being well served. Now I'd like to turn the call over to Tom to review the details of our operating results to provide our financial outlook for 2022. thanks brad and thanks all for joining us today for the fourth quarter of 2021 product and service revenue was 42 million dollars at the upper end of our q4 guidance range representing year-over-year growth of 18 percent q4 geomics revenue was 18 million 48 growth as compared to q420 and above the upper end of our guidance range $11.9 million was from approximately 50 instruments shipped, and $6.1 million was from consumables sales. Annualized Q4 Geomics consumables pull-through was about $109,000 for installed systems. Encounter and service revenue was $24 million in Q4. Encounter instrument revenue was $5.7 million, approximately in line with Q4 of last year. Q4 end-counter consumables revenue was $13.8 million, about flat year-over-year, reflecting lower pandemic-impacted utilization trends. We've detailed previous quarterly calls. Annualized end-counter consumables pull-through was about $53,000 in Q4, but the same as we recorded in Q3. Service revenue was about $4.6 million for the quarter, representing 20% year-over-year growth, driven by Geomix DSP tap and increased service contract revenue. from our growing installed basis systems. 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. Q4 adjusted gross margin was 54% or about flat as compared to Q4 of last year. Margins were positively impacted by the growth in geomics DSP with that impact offset by investments we continue to make in manufacturing capacity to support geomics growth and the expected 2022 launch of COSMICS. Adjusted R&D expense was $15.7 million, an increase of 28% year-over-year. R&D growth was primarily driven by increased personnel and product development costs related to geomics and COSMICS development activities including investments we are making in software and technology to support data storage and analysis across our spatial biology platforms. Adjusted SG&A expense was $26.6 billion, an increase of 40% year over year. Our Q4 SG&A expense increase was due primarily to investments made in our spatial biology related commercial initiatives, including investments to expand our Salesforce service licensing, and implementation of new information technology solutions to support our commercial, operations, and finance functions. Our adjusted EBITDA loss was $19.6 million in Q4. Turning to full year 2021, product and service revenue was $144 million, representing year-over-year growth of 29%, and in line with the upper end of our updated guidance Archaeomics results landed above the upper end of our updated guidance range and represented 49% annual growth. And encounter results landed near the middle of our updated guidance range and represented 20% annual growth as compared to a pandemic impact in 2020. For the full year 2021, adjusted gross margin was 54% in line with our updated guidance range. 2021 adjusted R&D expense was $59.3 million, representing year-over-year increase of 11%, and adjusted SG&A expense was $93 million, representing year-over-year increase of 24%. Total adjusted operating expense growth in 2021 was about 18% as compared to our 29% revenue growth. Adjusted EBITDA loss was $73.8 million, and we exited the quarter with approximately $349 million of cash, cash equivalents, and short-term investments. We expect that our current cash resources will be sufficient to achieve cash flow breakeven while sustaining the key investments in our business. Transitioning now to our 2022 outlook, we expect 2022 product and service revenue of $170 to $180 million, representing annual growth of 18% to 25%. For geomics, we expect revenue of $73 to $78 million, representing annual growth of 41 to 50% or similar to the Geomix revenue growth we achieved in 2021. We expect Geomix instrument revenue growth of about 25 to 30% year over year. We expect Geomix consumables pull through to be between 95 and $100,000 on an annualized basis. For Geomix overall, we expect to see a quarterly and seasonal revenue pattern that is substantially similar to what we experienced in 2021 with roughly 40% of geomics revenue to be recorded in the first half of the year and about 60% in the second half, with pull-through similar to last year being seasonally lower in the first quarter and then ramping through the course of the year. For end-counter, which includes all service revenue, we expect 97 to 102 million, or about 5 to 11% year-over-year growth. In 2022, we expect end-counter instrument revenue to remain approximately flat as compared to 2021. Our guidance assumes encounter consumable pull-through of approximately $50,000 to $55,000 per installed system for the full year and makes no assumptions as to the timing of any recovery in encounter consumables pull-through to pre-pandemic levels. We expect to see a quarterly and seasonal revenue pattern for encounter that is substantially similar to what we experienced in 2021. Lastly, to be clear, we expect to record our first COSMICS revenue in 2023, and therefore our 2022 guidance does not include COSMICS revenue. We expect adjusted gross margin to be in the 56% to 58% range in 2022, with our revenue mix in 2022 continuing to be instrument heavy given the growth of GeoMix. In 2022, we expect operating expenses to grow more modestly as compared to 2021, as we begin to harvest the benefits of the substantial investments we've made in R&D and our commercial organization. For adjusted research and development expenses, we expect to record approximately 60 to 65 million, a 5% year-over-year increase at the midpoint, reflecting sustained investments in our spatial biology platforms. For adjusted selling general and administrative expenses, we expect to record 95 to 100 million, a 5% year-over-year increase at the midpoint, and customer support efforts. Adjusted EBITDA loss in 2022 is expected to be about $55 to $65 million. For the first quarter, we expect revenue to be in the range of $34 to $38 million, reflecting typical sequential and seasonal patterns. This range includes $12 to $14 million of geomics revenue and $22 to $24 million of encounter revenue. Now I'll turn the call back over to Brad for our closing comments. Thanks, Tom. In closing, 2022 will be the year that NanoString moves from pioneering the spatial biology revolution to establishing ourselves as the clear market leader. The momentum provided by geomics gives us a strong growth outlook, while our cosmics and spatial biology portal launches provide additional catalysts as the year progresses. We believe that our brand recognition, more than a decade of serving the market, and our global commercial channel for sales and support make nanostring the natural choice for researchers who are investing in new spatial biology capabilities. With our compelling product portfolio and healthy balance sheet, we're poised to lead the spatial biology revolution over the next decade. With that, we'd now like to open the line for your questions.