NanoString Technologies, Inc.

Good afternoon. Thank you for attending today's NanoString third quarter 2022 operating results conference call. My name is Megan and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Doug Farrell with NanoString. Doug, please go ahead.

Thank you, operator. Good afternoon, everyone. Joining me on the call today is Brad Gray, our president and CEO, as well as Tom Bailey, our CFO. Earlier today, we released our financial results for the third quarter of 2022. During this call, we may make statements that are forward-looking, including statements about financial and operating projections, future business growth, trends and related factors, expectations regarding future operating results, cash flows, current and future orders, prospects for expanding and penetrating our addressable markets, our strategic focus and objectives, and the development status and anticipated success of recent planned product launches, as well as the impact of macroeconomic factors. Looking forward, these statements are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially from these projected, and we undertake no obligation to update those. Later in the 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, calculations of which are described in detail in our press release. Throughout the call, all financial measures will be GAAP and most otherwise noted. You can also find the reconciliation of GAAP to non-GAAP measures as well as the description, limitations, and rationale for using these in this afternoon'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 non-GAAP or adjusted measures or other selected financial data. I'd like to remind everyone that next week we'll be participating in the Speedfall Healthcare Conference in New York, as well as the Jefferies Healthcare Conference in London. We look forward to having the chance to speak with many of you then. Now I'd like to turn the call over to Brad.

Good afternoon, and thank you for joining us. Spatial biology is a dynamic field. yielding powerful scientific insights. While expansion will last a decade or more, the next few years will determine the mix of technologies in which key discoveries will be made. While there are other emerging spatial biology providers, we believe that our early mover advantage, best-in-class technology, ecosystem of synergistic platforms, and blue chip partners position us to lead. For this reason, our top priority is to maximize the number of our spatial biology instruments placed in leading research labs worldwide. During the third quarter, we made great progress on this top priority, generating orders for approximately 60 spatial biology instruments, an increase of approximately 70% compared to the same quarter a year ago. We have now sold more than 100 cosmic spatial molecular imagers and accumulated a revenue backlog valued at approximately $23 million. We expect this backlog to increase in Q4 and to set us up for robust growth for 2023. During Q3, we also advanced our scientific leadership. Images generated by our customers using the Geomics Digital Spatial Profiler were featured on the cover of not one but two of the world's leading scientific journals. The seminal description of Cosmex was published in another leading journal, and we strengthened our informatics ecosystem through a partnership with Visiopharm. whose mission is to transform pathology through AI-based image analysis and workflow standardization. The degree to which customer interest in spatial biology is trending towards platforms that provide spatial imaging at single-cell resolution has been even greater than we previously expected. The intense customer focus on single-cell imaging resulted in fewer orders for the geomics instrument, and in Q3, we captured 20 geomics orders compared to the 25 to 30 orders we had expected for the quarter. Fortunately, our cosmic spatial molecular imager is a leading product in the single-cell imager category, and we are capturing demand at a significant pace. We generated approximately 40 COSMICS orders during Q3, substantially exceeding the 25 to 30 COSMICS orders we had guided for the quarter. As a result, while we recognized less geomics revenue than previously expected, we exceeded our guidance for overall spatial instrument orders. While our spatial biology instrument orders were strong, Q3 was a challenging order for consumable sales, which were the largest contributor to the shortfall in our Q3 revenue relative to guidance. We experienced a decline in annual consumable pull-through per system for both encounter and geomix, which we believe was due to a combination of lumpy ordering patterns, customer life cycles, and macroeconomic factors. For encounter, and seemed to be driven by decreasing demand from the older systems in our installed base. For Geomix, the weakness seemed to be primarily a product of lumpy ordering patterns and the impact of a relatively large number of newly placed systems still ranting to their full consumable run rate. In both cases, weakness was exacerbated by broader market conditions, including continued clinical trial delays among large pharma customers reduced spending in cash-strapped small biotechs, and COVID-19 lockdowns in China. While we are clearly disappointed by this shortfall, I remain confident that we are set up for a strong 23 and beyond. Importantly, we have recently reevaluated our key priorities to ensure that we invest in the most promising aspects of spatial biology while streamlining our cost structure. As a result of this review, we are eliminating approximately 95 positions and reducing spend in other non-personnel areas. While these decisions are difficult, especially as we consider the impact on our people, these actions will ensure that a more substantial portion of expected 2023 revenue growth falls to our bottom line and that we are positioned to deliver on our commitment to achieve break-even without the need for additional financing. Tom will provide more details on our financial outlook during his prepared remarks. Before I hand the call over to him, I'd like to provide an overview of our progress towards our strategic objectives for the year. Given the tremendous customer interest, I will start with an update on our objective to launch COSMICS as the industry-leading molecular imaging platform. Customer interest in COSMICS has exceeded our expectations throughout the year. As we prepare to ship our first commercial systems in the weeks ahead, we are more confident than ever that COSMICS SMI has the best performance system to be a platform of choice. COSMICS leads with best-in-class performance metrics, including highest Plex RNA assays, the capability to image proteins, and robust data quality, all done in challenging FFPE tissue. COSMICS is helping us reach new customers and shows strong synergy with the whole transcriptome capabilities of GEONIX, boding well for our long-term leadership in spatial biology. In Q3, two-thirds of Cosmix instrument orders came from new to NanoString customers, showing how Cosmix is extending our customer base into discovery research. One-third of these new customers chose to adopt both Cosmix and Geomics at the same time by purchasing a bundle. Meanwhile, one-third of all Q3 Cosmix instrument orders came from labs who had previously adopted Geomics, primarily within translational research. To date, COSMICS has penetrated only 20% of the geomics installed base, suggesting many more opportunities for cross-selling going forward. In the near term, we expect our spatial instrument order mix to remain COSMICS heavy. COSMICS represents about 60% of opportunities added to our spatial instrument funnel in Q3, and we expect COSMICS to continue to account for about two-thirds of spatial instrument orders. Our beta program is progressing well, with Cosmics instruments installed and integrating with Atomics as three beta customer sites. Customer feedback has been overwhelmingly positive, and through these interactions, we've identified several training and software updates that we are incorporating into the final commercial rollout. We're concluding the validation of Cosmics and Atomics as an integrated solution, and are preparing our first commercial systems for shipments in the weeks expect to ship between five and ten Cosmic systems before the end of the year, and we can't wait to see the great science these systems will generate. Our second objective is to drive geomics CSP further into mainstream research, broadening adoption across multiple areas of research. From a scientific perspective, our Cosmic customers had a wildly successful third quarter. Papers and images generated using geomics grace the covers of two prestigious scientific journals, Nature Genetics and Clinical Cancer Research. In total, our customers published more than 30 new papers, bringing our total to more than 160 peer-reviewed publications as of September 30th. This productivity underscores the utility of geomics, particularly in translational research for human oncology and immunology. Demand for geomics instruments from translational researchers remains strong, even as discovery researchers opt for single-cell resolution of COSMICS. And translational researchers drove the vast majority of the approximately 20 geomics instruments ordered during the third quarter. We remain focused on ramping the consumable pull-through of our growing installed base of geomics systems. We've observed that customers take time to build their pipeline of spatial projects, reaching steady-state utilization 12 or 18 months after instrument purchase. While geomics consumable revenue has grown, the large number of instruments sold in the second half of 2021 and activated in the first half of 2022 have weighed on the consumable pull-through per system. We are bolstering our support for customer ramp and consumable pull-through going forward by refocusing our PhD field application specialists primarily on spatial biology experimental design, helping customers accelerate their pipeline of projects on our platforms. We expect this will benefit both geomics and cosmics pull-through in the long term. Meanwhile, we continue to invest in partnerships that enhance the geomics workflow. Using VisioPharm's AI-driven digital pathology software, Oncotopics Discovery, researchers will be able to analyze four color fluorescent images combine these images with those using traditional H&E staining to better understand the number and type of cells that are present within regions of interest. We expect the combination of these technologies will accelerate biomarker discovery and validation for both whole transcriptome RNA and high-flex protein analysis. We're committed to delivering informatics solutions that enhance research productivity, bringing us to our third strategic objective, which is launching our Atomics Spatial Informatics Platform. Spatial experiments require unprecedented bioinformatics capabilities to support image analysis, data visualization, and global collaboration. We believe that the highly scalable compute and storage capacity of our cloud-based Atomics platform is essential to drive broader adoption of spatial biology and that Atomics is an underappreciated competitive differentiator. We expect to achieve our goal of launching Atomix in the weeks ahead, as Atomix becomes available to the first customers receiving their commercial COSMIC systems. We expect to roll Atomix out to our GeoMix users during the first half of 2023. Atomix employs a flexible data structure, so it's ready to be leveraged using artificial intelligence and machine learning from day one. Together, Nanostring and VisioPharm are exploring opportunities for further integration by connecting our Atomics to VisioPharm software so that researchers can leverage artificial intelligence and machine learning to provide spatial biology for both of our spatial biology platforms. Our fourth objective for 2022 is to sustain our Encounter franchise. Q3 was a challenging quarter for Encounter. as new instrument placements and consumable pull-through both fell short of expectations. Instrument placements flowed among academic researchers, especially in Europe, and were hindered by a year-on-year decrease in the number of geomics plus encounter bundles that were being sold. Consumable pull-through was challenged by an increasing age of our encounter install base, which first commercially launched back in 2009. At this stage in the encounter lifecycle, we believe that some older systems are becoming inactive as researchers who originally purchased them transition to new roles or take their research in new directions. While the annualized considerable pull through on each active encounter system has remained relatively stable over the last 24 months, growth in the number of active encounter systems has flattened as the number of new encounters being placed approximately equals the number of older encounter systems being inactivated. While we do not view Encounter as a future growth driver, it remains an important foundational business that continues to generate great science and provide substantial cash flow to support our global commercial channel and innovation. I'd now like to turn the call over to Tom to review the details of our financial results and outlook for the balance of the year. Thanks, Brad, and thanks all for joining us today. Revenue for the third quarter was $29.5 million, reflecting a cosmically that are forecast syndicated and about a $1 million negative foreign currency impact. For Cosmix, we generated orders for about 40 new systems in Q3, adding approximately $9 million revenue backlog to be recognized in future periods. As of September 30, 2022, our cumulative Cosmix orders stated over 100 systems, translating to a total revenue backlog of about $23 million. Q3 geomics revenue is $9.3 million, Geomix instrument revenue was $4.7 million, reflecting approximately 20 new system shipments, and consumables revenue was $4.6 million. Q3 annualized Geomix consumables pull-through was about $58,000 per installed system. At the end of Q3, our Geomix installed base was approximately 330 instruments, with about 15 new instruments installed during the quarter. For our end-counter business, which includes all service, Q3 revenue was $20.2 million, End counter instrument revenue is $3.3 million, consumables revenue was $12 million, and Q3 annualized end counter consumable pull-through was approximately $44,000 for installed system. At the end of Q3, our end counter installed base was approximately 1,105 instruments, with about 20 new instruments installed during the quarter. Turning to margins and expenses, and certain other 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. Q3 adjusted gross margin was 57%, an improvement of 100 basis points as compared to Q3 of last year and an improvement sequentially, reflecting management of manufacturing personnel and other expenses COSMICS instrument shipments and consumables. Adjusted R&D expense was $14.5 million, a decrease of 12% year-over-year, primarily due to the capitalization of approximately $3.5 million of software-related product development costs that will be expensed in future periods. Inclusive of capitalized amounts, our Q3 R&D spend reflects continued investment in our spatial biology platforms, including hardware, primarily by investments made in spatial biology-related commercial initiatives. Q3 adjusted EBITDA loss was $26.1 million, and our cash and cash equivalents at September 30th were $230.5 million. We also announced today that we have taken steps to streamline our cost structure by eliminating selected positions and activities while maintaining key investments in spatial biology. As our business mix has evolved, we decided to take these steps to prioritize our portfolio of technologies, operational and commercial initiatives. These steps will allow us to better leverage our operating expenses while investing in our spatial biology business and will support our objective of reaching cashflow break even with our current balance sheet resources. We expect to record a charge of approximately 3.5 million in the upcoming fourth quarter related to these changes. Turning to guidance, our Q4 outlook reflects a revised mix through rates for geomics and encounter based on our Q3 experience with the upper end of our guidance ranges assuming modest Q4 driven seasonal improvement. For the fourth quarter, we expect to receive orders for over 60 spatial biology systems with an approximately 66%, 33% mix between cosmics and geomics, implying a cumulative total of over 200 spatial systems sold in 2022. Spatial biology revenue of $12 to $13 million, which we expect will derive from sales of geomic systems, the shipment of our first cosmic systems, and from consumables. We would expect approximately $7 million to come from instrument sales and approximately $5 to $6 million to come from consumable sales. We expect Q4 end counter revenue of $21 to $22 million and total Q4 revenue of $33 to $35 million. We have also updated our 2022 full year Our updated full-year outlook also incorporates approximately one month's impact of our announced cost reduction initiatives. Looking ahead to 2023, the Cosmic Systems orders we've already secured in 2021 and 2022 provide the foundation for expected revenue growth of 40% to 50% in 2023. We also expect improvement in our E-to-DA loss next year, reflecting expected revenue growth combined with a full year's impact of our cost reduction. ending 2023 with approximately $140 to $150 million in cash. We look forward to offering more details when we provide our 2023 annual guidance for our usual process in February. Now I'll turn the call back over to Brad for our closing comments. Thanks, Tom. We are focused on the dual objectives of spatial biology market leadership and achieving cash flow repeat on our current resources. We believe our leadership in spatial biology is best measured through the pace of new instrument orders, and by that measure, we are having a solid year. Our successful launch of Cosmix sets the stage for strong revenue growth in 2023. We're addressing trends in our encounter and geomics business with decisive action and are streamlining our cost structure to maintain balance. With our unique spatial biology portfolio and strong balance sheet, we believe we are poised to deliver both market leadership and future profitability. With that, we'll now open the line for questions.