NanoString Technologies, Inc.

Good afternoon. My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the NanoString third quarter operating results. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I will now turn the conference over to Doug Farrell, investor relations. Doug, you may begin.

Thank you, operator. Joining me on the call today is Brad Gray, our president and CEO, as well as our CFO, Tom Bailey. Earlier today, we released our financial results for the third quarter ended September 30th, 2023. 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, future cash flows, current and future instrument orders, as well as our manufacturing capacity, prospects for expanding and penetrating our addressable markets, our strategic focus and objectives, and the development status and anticipated success of recent product offerings, as well as investor expectations regarding the impact of our convertible node exchange and the impact of macroeconomic factors. Forward-looking statements are subject to risks and uncertainties, including those described 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 Q3 financial results and guidance for the balance of 2023. 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 the call, all financial measures will be GAAP unless otherwise noted. You can also find reconciliations of GAAP and non-GAAP measures, as well as the description, limitations, and rationale for using such measures 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 RFS Relations homepage that include a presentation of non-GAAP or adjusted measures and other selected financial data. I'd also like to remind everyone that next week we'll be participating in the Stiebel Healthcare Conference in New York. as well as the Jefferies Healthcare Conference in London. 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.

Good afternoon and thank you for joining us today. The past several months have been incredibly productive for NanoString. I'm happy to have this opportunity to expand on the strong operating results that we pre-announced on October 10th and to update you on some key developments in more recent weeks. Our Q3 revenue of more than $48 million was a record high and an increase of more than 60% over the prior year. We reduced our cash burn by about 50% sequentially in the third quarter, and the reorganization that we announced last month is expected to reduce our operating expenses by more than $15 million annually. With our solid revenue growth and leaner operating model, We believe we are putting the company on track to become profitable in 2025. Just as importantly, we work with the major holders of our convertible debt to exchange approximately $216 million of our convertible notes for new senior secured notes with an extended maturity to September of 2026. pushes the maturity to a point in time at which we expect to be profitable, which we believe will give us a broader menu of options to retire the debt, while also removing a near-term financial overhang that may have kept some investors on the sidelines. We have also strengthened our leadership team. In August, we welcomed Todd Garland as our Chief Commercial Officer. Todd joins us with 25 years of experience in life sciences, spanning the full spectrum from discovery to clinical markets. Todd has been traveling in the field extensively for a couple of months now and has been impressed with the passion and the talent of our commercial team. He has some great ideas on how to continue to improve our performance and I have the utmost confidence that Todd will drive the effectiveness of our commercial organization and our future growth. I'd now like to provide an update on our progress towards our strategic objectives for the year. Our first objective for 2023 is to increase our penetration of the spatial biology market. During the third quarter, spatial biology demand was healthy across both instruments and consumables. We exited Q3 with an installed base of more than 500 spatial biology systems, an increase of more than 50% over the prior year. Our cosmic spatial molecular imager remains the primary growth driver of the business, accounting for most of our spatial instrument orders, as the single-cell resolution of the platform attracts discovery researchers who are expanding from droplet-based single-cell research into spatial biology. Demand is especially strong from new to nanostrain customers, who accounted for more than 90% of COSMICS orders during the third quarter. Academic and government-funded researchers continue to account for about 65% of new COSMICS orders, with biopharma companies and the CROs who serve them growing to account for about 35% of new orders in the third quarter. While ongoing litigation slowed the pace of orders in Europe, strong demand in North America drove overall COSMICS momentum. Despite what we believe are our competitors' efforts to misuse preliminary court rulings to create anxiety for customers and eliminate competition, we have successfully defended our sizable COSMICS instrument order book to filling or retaining approximately 95% of cumulative orders. Cosmix has now been used to generate approximately 20 peer-reviewed publications and 25 preprints across multiple applications. Our atomic spatial informatics platform provides telemetry that allows us to monitor customer success, and we can see that researchers have collectively created more than 1,000 studies across more than 100 customer sites. We are continuing to enhance our Atomix platforms, features, functionality, and usability by listening to customers and implementing a series of software upgrades, and we are excited about Atomix's continued evolution. One of the biggest advantages of Cosmix over competing spatial imagers comes from its higher Plex, which we are convinced is the single most important product attribute for imagers. Scientists have a huge fear of missing out that drives them to seek the broadest content panels available. We have seen time and again that as we add Plex, customer demand goes up. This is the same characteristic we saw in the next generation sequencing market as it moved from focus panels to whole genome sequencing. Our competitors are offering targeted RNA panels of just a few hundred Plex. The COSMICS 1000 plex RNA assay that we offer today provides twice the plex of competing assays, and our COSMICS assay roadmap is designed to push plex to the limit. In September, we released our first public 6000 plex dataset, which was generated from human brain tissue. The dataset nicely demonstrates the value of maximizing plex as COSMICS was able to detect over 3,000 unique genes in the sample, with an average of over 500 unique genes in each individual cell. We remain on track to begin shipping our 6,000 plex RNA assay kits during the first quarter of 2024, and will provide customers a sneak peek of this new assay when we begin offering it via our Technology Access Program service later this quarter. Plex is not the only advantage of COSMICS relative to competitors. COSMICS also provides highly accurate cell segmentation, which allows the instrument to find the boundaries between cells and properly assign the RNA or the protein molecule detected to the correct cell. A failure to properly segment cells in a tissue causes this molecule to be assigned to the wrong cells. making the data generated useless, or even worse, misleading. Next week, we'll be highlighting the COSMICS roadmap at the annual meeting of the Society for Neuroscience, where our scientists and customers will present more than 20 studies showcasing our spatial platforms. Some studies will include the new 6,000-plex RNA datasets generated on human brain samples, while other studies will demonstrate the power of using both our new 1000-plex mouse RNA panel and our 64-plex COSMICS mouse neuroscience protein panel on the same slide. While geomics continues to account for a minority of our new spatial system borders, it drives most of our spatial consumable revenue. Our installed base of geomic systems remains highly productive, generating more than 320 peer-reviewed publications to date. This body of research nearly doubled in the last 12 months, showcasing many exciting applications for spatial biology. And the investors may not appreciate the importance of proteomic applications in deriving geomics utilization. Protein applications account for about half of the geomic sample volume and half of its peer-reviewed papers. protein applications have remained a focus for our geomics roadmap. In September, we announced a groundbreaking new assay for geomics called the IO Proteome Atlas, or IPA. While many spatial biology systems provide protein applications of modest plex, the geomics IPA represents something completely new. At 570 plex, the IPA covers virtually every target in oncology and immunology for which an IHC antibody has ever been developed. IPA offers more than five times the spatial protein content of any competing platform. And its comprehensive coverage makes it ideal for screening clinical trial samples for new drug targets and biomarkers. The unveiling of IPA has already resulted in a surge of new interest in geomics. Last week, we highlighted the GEOMICS IPA during the Society for Immunotherapy of Cancer, or CIPSE, conference, as two early access customers presented data that they had generated with the new assay. Researchers from the Mayo Clinic demonstrated how the IPA provides a simple way to explore the long tail of potential protein biomarkers, discovering targets in breast cancer tissue that would have been missed in smaller panels. researchers from Mass General Hospital combined the geomics IPA with the RNA whole transcriptome atlas into a single multi-omic assay that was more effective than RNA-seq at finding patterns that predict drug response in pancreatic cancer. Customer feedback on these presentations was extremely positive, with many customers in awe of the enormous increase in protein plex that we have delivered, calling it a game-changer. Many are looking forward to giving the IPA a try after we begin shipping the IPA to customers later this quarter. Our second objective is to deliver predictable revenue growth. So far this year, we have beat our revenue guidance in every quarter. In Q3, we exceeded the upper end of our revenue guidance by about $1 million as we successfully scaled up instrument manufacturing and continued to work through our substantial COSMICS backlog. The team is working hard in the fourth quarter to install as many cosmic systems as possible, but we still expect to carry a backlog into 2024. We've also seen improvement in encounter instrument sales throughout the year, and we're implementing initiatives to keep this foundational business a steady contributor. In an effort to ensure investor expectations remain in line with our revenue outlook during the fourth quarter, we're today narrowing our guidance range. The updated guidance reflects the impact of the preliminary injunction that prevents us from delivering Cosmex units to customers in some European countries. The top end of the range represents healthier year-end spending by our customers, while the bottom end of the range keeps revenue approximately flat from Q3 to Q4 and reflects uncertain macroeconomic factors and the potential elongation of capital equipment sales cycles. Our third strategic objective is to demonstrate progress towards cash break even. As we shared with many investors during September, our company operates two franchises with very different profitability profiles. Our encounter business, the leader in the midplex chain expression market, already provides an estimated 30 plus percent EBITDA margin based on its consumable heavy revenue mix and minimal R&D. Our spatial biology franchise is rapidly growing, but not yet profitable based on the instrument heavy revenue mix and ongoing investments in product innovation. The team remains laser focused on our path to profitability. During Q3, increased operational discipline helped cut our cash burn by about 50% sequentially. Early last month, we reorganized our research and development and manufacturing operations eliminating over 100 positions. The impact of this expense reduction is not yet reflected in street models, which we believe overestimate our operating loss in the coming years. Importantly, despite this reduction in force, we remain in a position to deliver the product roadmap that we have described publicly. To conclude my remarks, I'll provide an update on our ongoing IP litigation. In September, our competitor, 10X Genomics, was granted a preliminary injunction in the new European Unified Patent Court, or UPC, that prevents us from selling our RNA detection assays for COSMICs across the 17 European Union countries based on what is referred to as the 782 patent. We have appealed this decision to the UPC Court of Appeals in Luxembourg and expect this appeal will be heard in December. The full UPC proceedings on the merits of 10x claims are expected to take place in the second half of 2024. On October 10th, the UPC ruled in our favor in a second case related to what is referred to as the 928 Act. The court denied 10x's request for a preliminary injunction and raised questions on both the validity and infringement of this pact. In issuing this ruling, the UPC considered elements of our arguments that were not addressed by the German court when it evaluated the same 928 patent in May, giving us another path forward in our appeal in Germany next year. Next week, we'll be in the U.S. District Court in Delaware for another IP lawsuit filed against us by 10X. that alleges that Geomix infringes patents that they acquired from a company called Prognosis. The trial is expected to begin on November 13th and last for five days. We're confident in the merits of our arguments that we intend to present and on the lack of infringement, as well as the invalidity of the patents asserted by 10X. We will, of course, update you as soon as we know more about the outcome of this hearing. Now I'd like Tom to take us through the details of our Q3 operating results. Thanks, Brad, and thanks all for joining us today. For the third quarter of 2023, total revenue is $48.1 million, representing 63% year-over-year growth. For our spatial biology business, Q3 revenue is $28.9 million, representing growth of more than 200% year-over-year. Spatial biology instrument revenue is $21.1 million, approximately 350% year-over-year growth. We shipped about 90 and installed about 65 spatial instruments during Q3, growing our spatial instrument install base to approximately 510 instruments. As a reminder for those updating their models, the number of instruments we install during a quarter can differ as compared to the number of instruments we ship. Revenue recognition is based on instruments we ship during the quarter as opposed to installations. Q3 spatial biology consumables revenue is $7.8 million, representing consumables pulled through Q3 seasonality and continued stocking orders of COSRX consumables. Q3 encounter revenue, which includes all service and other revenue, was $19.2 million, reflecting the continued stability and durability of the encounter platform. Encounter instrument revenue was $2.5 million, consumables revenue was $10.5 million, and service revenue was $6.2 million. At the end of Q3, our encounter installed base was approximately 1,140 instruments. Turning to margins and expenses, I'll provide results on a non-GAAP or adjusted basis, which removes the impact of stock-based compensation, appreciation, amortization, and certain other items with no correlation to continuing operations. 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 41%. impacted by a revenue mix heavily weighted to spatial instruments, which are currently selling at lower than planned gross margins due primarily to higher unit production costs occurred than expected. For the full year, we now expect gross margins will be the low to mid 40% range, with the higher than planned instrument production costs partially offset at Q4 by the cost benefits of the reorganization announced on October 10th. Adjusted R&D expense was $13.4 million, a decrease of 8% year-over-year, with lower per Adjusted SG&A expense was $26.7 million, a decrease of 6% year over year, reflecting lower personnel costs and lower trade show and other marketing-related expenses. We expect SG&A expenses to be modestly lower in the fourth quarter as a result of the same factors. Q3 adjusted EBITDA loss was $20.2 million. Adjusted EBITDA loss is expected to decrease by about 50% or more in the fourth quarter, compared to the third quarter, driven primarily by operating expense savings from the reorganization. Our cash, cash equivalents, and short-term investments were approximately $97 million as of September 30, 2023. Turning to guidance, for the fourth quarter, we expect revenue to be in the range of $47 to $52 million, representing about 45% year-over-year growth. This range includes $27 to $31 million of spatial biology revenue and $20 to $21 million of encounter and service revenue. With that Q4 range, we are updating our 2023 annual revenue guidance range to $175 to $180 million. Our updated annual range includes spatial biology revenue of $96 to $100 million and encounter revenue of $79 to $80 million. Given the lower expected gross margin range and the partially offsetting reduction in Q4 operating expenses, we now expect full-year 2023 adjusted EBITDA loss of approximately $80 to $85 million. Heading into 2024, we expect gross margins to improve driven by increasing consumable sales as a percentage of our total revenue and improved instrument production costs. We also expect with the reorganization that operating expenses will be sequentially lower in 2024 as compared to 2023, at least $15 million lower than what street malls currently reflect, which should support full year of profitability expected in 2025. We will offer more details when we provide our annual guidance for 2024, early in the new year. Finally, I'd like to comment on the exchange we concluded for our convertible notes, a transaction we consummated with two large holders representing approximately 94% of the total principal amount. The old notes were exchanged for new senior secured notes with amounts due in September notes bear interest at 6.95% and will occupy a senior secured position in our capital structure. As part of this transaction, we granted 16 million common stock warrants to the note holders, replacing about 4.5 million shares potentially issuable under the old convertible notes. During the first year, interest may be paid in kind at our option, saving the company about $15 million in cash investors for their strong support of the company. Their enthusiasm for NanoString's future is aligned with ours, and we appreciate their partnership. These new longer-dated notes provide the window needed for us to achieve profitability prior to maturity, which we believe will support improved terms and availability of any new financing required by that time. Now I'll turn the call over to Brad for our closing comments. Thanks, Tom. In closing, the spatial biology market is experiencing explosive growth, and our innovative technologies and compelling roadmaps who is at the forefront of this exciting field. We are running the company in a disciplined manner and have taken a series of steps to rapidly improve the financial profile of the company, which may have in the past clouded investor interest. These steps include consistently exceeding our revenue guidance, substantially reducing our cash burn, adjusting our operating expenses, addressing our convertible debt, and seeking to achieve profitability in 2025. With these improvements, we hope investors will take a fresh look at NanoString as we refocus attention on the strong fundamentals of our business. Now we'd like to open the line for your questions.