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.

If you would like to ask a question, please press star 1 on your telephone keypad. Your first question comes from the line of institution JP Morgan. Please go ahead.

Your line is open.

Hi, this is on for Rachel Vanstall from JP Morgan. Thank you for taking the question. I just wanted to ask quickly on the guidance. You know, so far this year consistently beat the street on the top line, but you've modestly lowered the 23 guide. It touched on this a little bit during the call, but can you unpack for us the updated guidance? How much of the guide down is macro-related versus perhaps related to the injunction in Europe? Thank you.

Yeah, thank you. I'd say you highlighted the two primary reasons that we took a more cautious, that we narrowed the end of our guidance range towards the more cautious end of our previous full year range. I mean, the first fact that's changed is, of course, that we are now enjoined from selling our number one selling product into 17 European countries, which, you know, slows down the revenue recognition of Cosmex overall. And then second, you know, we have begun to see some elongations in the sales cycles of our higher priced equipment. And, you know, we're hearing a number of our peer companies express some caution as we head into the fourth quarter. You know, I'd say the cautionary notes include things such as the possibility of a government shutdown and sort of caution that could emerge in the markets for academic researchers. as well as just more cautious outlooks for biopharma companies. In general, though, I think we feel really good about the long-term fundamentals of our marketplace. We feel that we're very fortunate to be at the forefront of this ongoing spatial biology revolution, and in any case, our full-year revenue growth is going to be outstanding.

Thank you. And just a clarification, are you assuming some sort of modest 4Q budget flush at the midpoint of the guide?

Yes. One of the differences between the bottom and the top of the guide is at the bottom of the guide, we would expect, you know, a more modest budget flush, and at the top of the guide, in the middle and top of the guide, more, you know, a larger Q4 budget flush.

Great. Thank you.

Your next question comes from TD Cowan. Please go ahead. Your line is open.

Hey, good afternoon. This is Kyle. I'm for Dan. Thanks for taking the questions. I just had a quick one on the gross margin profile here exiting 24. You said in the prepared remarks that we should see, you know, some gross margin benefit next year as consumers become a bigger portion of overall revenue. How should we think about that relative to, you know, pre-23 where you were sort of in the low 50s range? Is it possible we can get back to that range in 24?

Yeah, I think most of the street models, Kyle, are in that range. And we'll guide early in the year and get more explicit commentary. But I think with the consumables mix improving and our production costs improving, that we would hope to track back towards where the company has been historically.

Got it. Thank you. And then just on the burn in cash needs, how should we be thinking about your cash position as you move closer towards profitability in 2025? Will there need to be any races between now and then, or are you confident that you can get to that position?

Our objective is still to get the cash break even on our existing resources, nothing around that. thought process or approach has changed and you can see both actions that we've taken with the business to reduce costs we expect will support that next year as we mentioned we think the street models in general are about 15 million dollars high relative to where operating expenses will be before we get started next year in addition to that the transaction we just did with the note holders offers us the opportunity to pick interest next year which gives us a really great support from the note holders next on that path to profitability. So all of those factors combined together on top of what Brad mentioned is what we feel is a really robust long-term opportunity for our spatial franchises and the stability of NCounter, we think put us in a really good position to get where we need to be on our existing cash resources.

Our perspective on that is unchanged. Got it. Thank you.

Your next question comes from the line of Baird. Please go ahead. Your line is open.

Hey guys, thanks for the questions. Catherine Schulte here. Brad, you mentioned expecting to carry a COSMICS backlog into 2024. What was the COSMICS backlog at the end of the third quarter and what do you expect it to be heading into next year?

Catherine, thank you for the question. We're no longer reporting the quantifying publicly our backlog on COSMIC, so I'm not sure I'm in a position to satisfy you on that. We are, I'll say, in a mode of continuing to work down the backlog. As you know, we've accumulated an enormous backlog of pre-orders that required some customers to wait up to a year to receive their To continue, we are steadily working down the backlog to a situation where customers would be able to receive their instrument either during the same quarter that they ordered the instrument or the quarter subsequent. So that's the trajectory we're on. We will continue to carry backlog into 2022.

Okay, got it.

And then what kind of top-line growth is needed to underwrite your full-year profitability in 2025? You know, would the street revenue outlook get you there? And then just on the OPEX side, recognize your comments on street probably being $15 million high, but, you know, is most of that leverage going to come from R&D? Any sort of bridge you could give to the 2025 full-year profitability would be appreciated.

Sure, Catherine, I think, you know, We'll reserve comment on the revenue side until we guide in 2024, but I think that we're generally comfortable with where street models are right now. We can say that. We'll comment more explicitly as we get into 2024. On the OpEx side, most of the leverage that we're talking about in that $15 million number is out of a combination of R&D and out of operations, which is where most of the reorganization activity is. So thinking about updating your models, if you're taking OpEx down, I would take most of it out of R&D, and then a little bit of it supports that better gross margin number because it comes out of the operations side of the business, which gets reported out of cost of goods sold. Yeah, and then maybe just to build on Tom's answer, Catherine, we've always said that between $200 and $300 million in revenue was where we thought a business of our type should be breaking even. And I think street models on 2025 are just about the midpoint of that range right now.

So I think it's consistent with our past commentary.

Great. Thank you.

Your next question comes from the line of Stiefel. Please go ahead. Your line is open.

Hey, guys. This is Evan for Dan. Thanks for the question. I kind of want to dig a little bit deeper into the previous question. I mean, I think that the backlog is something that people are going to be pretty focused on. I understand maybe your peers aren't given too much visibility to that, but I think people are, especially with the guy down here, I think people are, you know, I guess you're a little bit of a different situation. And so is there any kind of commentary that you can give that can give people comfort as to, you know, how next year is going to shape up and, like, you know, how you're going to exit the year? I feel like a lot of the commentary you were giving previously was, you know, we have this big backlog. We're probably going to exit the year with a – I think you said something similar to kind of where you were. So if you're really – if you're starting to draw that down, I think people are going to start to get a little concerned as to, maybe how the outlook is into next year. So anything you can give there would be really helpful.

Thanks for the question, Evan. I think Tom, in answering Katherine's question just a moment ago, without guiding 2024, said that we were comfortable with where the current street models are. So hopefully that should provide some reassurance. Most companies don't carry massive amounts of backlog around, like we have been, and can continue to grow well without it. Certainly, backlog is a good thing in the minds of investors in terms of providing predictability and revenue, but it's a bad thing in terms of the customer experience because it provides long delays between when people want to get their hands on a piece of technology to begin their science and when they, you know, and when they actually can. So we want to always keep those things in balance. So it's hard to disappoint if we are not going to be overly quantitative on backlog. Most companies choose not to be. And, you know, we'll provide commentary, I think, about sort of the market potential here and the ongoing growth and orders, which I think, as you can see, both across NanoString's reported results and that of our primary competitor, you know, this is a market of extraordinary growth. I mean, I think we're seeing a kind of pace of total instrument placement that has hardly been seen in any product category in the history of our industry. I think you're seeing, you know, two companies simultaneously reporting greater than 200% year-on-year growth in revenue. So, you know, and, you know, NanoString is neck and neck with our competitor and fighting for market leadership here. And I think, you know, that kind of, Leadership in a market of very strong secular growth is the primary thing that customers should be looking at to gain confidence in our outlook.

Gotcha. So, I mean, if you're not willing to give any commentary about the backlog, is there anything you guys can say about orders in the quarter and how that kind of was up sequentially or year-over-year comparison? Maybe that would be helpful in terms of framing where things are versus last quarter.

And then, again, I'm going to disappoint you here. We're no longer and haven't been reporting water trends in quite some time on our spatial biology business. Yeah, other than to say we felt really good about the water trend. It was robust. And, you know, we're pleased with how things are going.

All right. And, yeah, I guess that's it. I appreciate the help, guys. Thanks.

Your next question comes from the line of Canicware Genuity. Please go ahead. Your line is open.

Hi, this is Alex . Thanks for the update, guys. One quick question. Just to kind of dive into the recent legal proceedings, I was just curious if those have had a meaningful impact on COSMIC's placements and or the order book over the past quarter. Thanks.

I think your question was, have the most recent UPC proceedings had an impact on the order book or the demand over the last quarter? So the answer is yes and no. Yes, within the European countries, of course, being enjoined from selling our COSMICS instrument for RNA assays has slowed down the pace of new orders coming out of Europe for COSMICS. And we've experienced a handful of order cancellations from customers who had not yet received their COPMIX instrument for R&A and, of course, now could not do so. So that has had an impact. But I'm pleased to say that that impact has not spilled over into other markets. As I mentioned in my prepared remarks, while instrument orders slowed down in Europe, the robustness of the North American market continue to drive the overall momentum of our spatial biology franchise.

Great, thank you. And just one, I just want to kind of build up the last question up there. So just curious on how you intend to grow placements in 24. I guess just given like, you know, current macro headwinds and whatnot, like if there were some, you know, initiatives, you know, that'll be coming into play in the near future or some marketing efforts or anything of that sort there.

Well, you know, as I said, maybe the answer to an earlier question, we're seeing a market in spatial biology that has extraordinary secular growth. I mean, we're in a major adoption cycle of a new form of science. And these kind of new revolutions that are often declared nature's method of the year, you know, they play out over seven to ten year time frames. And we're right in the steep part of the curve of the adoption cycle here. So I think the secular growth of spatial biology, will be the most important driver of continued momentum in 2024. Of course, on top of that, we have a very exciting series of product launches and a roadmap to support them that we should keep customers interested in our technology at the forefront. The most important of those is the launch of our Cosmix 6000 plex RNA assay, which will put our technology at 12 to 15 times higher Plex than the competition. There's already tremendous customer interest in that, and that'll become available for shipment in the first quarter. And then on the Geomix side, the recently launched Geomix IO Proteome Atlas, which is five times higher Plex than any other protein panels offered by other companies is driving a resurgence in interest in that platform. So I think, you know, the secular interest in spatial biology combined with, you know, our specific and compelling product offerings should be the key drivers of growth in 2024 on the instrument side. And then I guess maybe finally, you know, we've placed a tremendous number of COSMICS instruments during 2023 that will just be becoming active and utilizing consumables in 2024. And so we expect to see, you know, that we expect that to drive spatial consumable growth, which has the benefit of also expanding our gross margins in the way that Tom alluded to in his prepared remarks. So I guess those are the three big catalysts, you know, the Cosmic 6K, the Geomics IPA, and the activation and consumer utilization of our rapidly growing

spatial biology install base. Great. Thank you. That's very helpful.

Again, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of UBS. Please go ahead. Your line is open.

Hey, everyone. You have Christian on for John. You know, thanks for taking my question. I guess, you know, starting off on the COSMICS in Europe, you know, I know you guys previously put out some, I guess you could say, workarounds in terms of having customers kind of ship their samples to CROs in jurisdictions not affected by the injection. You know, I was just wondering if you can give any update and, you know, maybe even if you can maybe possibly like quantify how well that's working, the customer reception for that, how it's been, et cetera.

Yeah, so we obviously want science in Europe to continue to benefit from our market-leading cognitive spatial molecular imager. We think it would be a tragedy for European science if they were constrained to work on the less flexible offerings of our competitors. So we're working as flexibly as we can with those groups to help them get access to our technology by shipping samples to either CROs or to NanoString, so the samples can be processed where there's no injunctions. And I'd say we've had modest success on that. I think a number of our customers are still in the process of figuring out how best to do that. And our customers have been very supportive of the company. I'd say overall, the scientific community is rooting for NanoStrand to succeed in our litigation and to maintain choice in the marketplace. I don't think I can really be too quantitative about that. I think overall, it's fair to say whatever commerce results from those types of activities is going to be a modest part of our overall mix. The primary driver of our growth will be the continued you know, sale of our technologies into those major markets that are not enjoying it. And just as a reminder, I think we issued this kind of important fact at the time of the UPC injunction, the nations that the 17 countries that are part of that UPC jurisdiction only account for about 10% or less of our overall COSMICS demand and backlog. So it's, while it's obviously a headwind, It's not one that should overall change the overall shape of the market.

No, thanks for that. That makes a lot of sense. And then switching gears, I know China isn't the most material geography for your revenue mix, but can you give us some color on what you have been seeing over there? And then also, it looks like just throughout time, you guys have been changing the mix in terms of the COSMICs. from primarily academic, it's still primarily academic, but biopharma and CROs are becoming a bigger mix of that pie. Is the primary driver of that actually like more CROs buying instruments, demand from that side? Or are you seeing anything on the academic where sales cycles have been slowing and then maybe purchasing hasn't been up to, previous levels, if that makes sense.

Yeah, let me take the biopharma slide, and then I'm going to ask Tom to take the China piece. On the biopharma front, yes, we are pleased to see an increase in interest in the COSMIC system from the biopharma community. You know, I'd say overall, the translational research and biopharma communities have been slower adopters of non-spatial single-cell technologies, but I believe we're starting to see that tick up, and single-cell spatial technologies are ticking up right alongside it. CROs are, I think, a very great avenue for biopharma companies to access technologies that they're not 100% sure they want to scale internally yet. especially smaller, more cash-constrained biopharma companies who, you know, would be reluctant to, you know, spend $300,000 on a piece of capital equipment. So, you know, CROs have been a really great avenue for us to bring spatial biology to those segments of the market. Tom, maybe you can take the question on China. Yeah, on China, it's less than 10% of our revenue. It's consistent with what it was last quarter, and I would be I think remiss we would be to draw any macro trends from our sales in China. We've got a relatively new sales effort there. It's just, I would say, we're just too small of a portion of our revenue and our overall business and the dollars as a whole for us to draw any macro trends from it. But it doesn't, if you just look at it in and of itself, it hasn't been, our sales have been pretty consistent as a percentage of the total in China over the last several periods.

Your next question comes from the line of Morgan Stanley. Please go ahead. Your line is open.

Good evening, guys. This is Edmund. Just wanted to ask you quickly, Brad, how has the COSMICS ASP been trending lately? Was this a meaningful driver of the lower gross margins in third quarter? And how should we be thinking about the COSMICS ASP in 24, given that on the last call, you noted ASPs have been improving, but you're still continuing some of your discounting

I'm going to let Tom answer that question. Thanks for the question. Our ASPs were up a bit in Q3 over Q2, so we're up just over 230 on ASP. It's a little bit less than we had originally expected, and I wouldn't say that's necessarily due to any sort of overall It is a little bit lower than was originally planned. We would still continue to expect those to rise in coming quarters as there have been rising list prices across all the competitors in this marketplace, as well as the continued popularity of these products puts us in a position where pricing isn't really the key driver for these instruments. So I think as we get into next year, it probably should go up. But if I were modeling based on ASP alone, I think you could use 230 as a good number where we were in Q3. for your models for next year.

Got it. Super helpful. And then switching gears a little bit to looking at your Cosmix panel, I was wondering if you guys could provide some color on the mix of how or how your users are deciding which panels to use. I know you guys have a 1K panel. You guys have a human I.O. 100 plex panel and a mouse panel. I guess I'm trying to figure out with the upcoming 6K panel next year, what are your expectations for 1K panel usage?

Yeah, what we've seen every time that we provide a new panel of higher plex is that it does tend to cannibalize the lower plex panels. And that's consistent with my prepared remarks where I characterize scientists as having a huge FOMO or fear of missing out. You know, scientists are paranoid that if they don't include a gene in their panel, they'll somehow miss the most important insight. And As a result, more Plex is generally better. So just to take the couple of panels that you mentioned, when we initially developed a 100 Plex IO panel, we thought there would be great demand for that. On the system, it could run a lot faster than the 1,000 Plex, and it's more cost effective. There's been virtually zero demand for that panel. The 1,000-plus human panel today is by far our most popular panel, followed by I'm sure what will be good demand for the mouse panel as it's coming to market. Human accounts for the majority of the type of science that most of our customers do because they're focused on human translational biology. So that's most of it. But I would expect that as we bring the 6000 plex to market, we may very well see a rapid transition towards that higher plex panel, even at a price premium, because customers are interested in making sure they're not missing important biology.

Got it. Super helpful. And then, Brad, it's good to hear a strong early feedback for your immuno-oncology proteome atlas for the geomix. What are your contribution expectations for this in 24? And how should we be thinking about, I guess, geomix consumable revenue growth in the upcoming year?

Yeah, that's a really good question, Edmund. I think we're going to hold off on providing quantitative feedback on that until we do our 2024 guide. But I will say, you know, protein is a very popular application for geomix. Historically, it's been half of our samples, but much less than half the revenue because the average unit price of a protein panel at 50 plex is less than the average unit price of our whole transcriptome atlas. That will change with the IO proteome atlas. It's priced at a premium to our whole transcriptome atlas because there's really nothing like it in the world. And so I think that bodes well for the potential pull through on our existing install dates, and I'm excited about the early resurgence in interest in acquiring geomix instruments that has resulted from this new capability. But it's a little too early to quantify that. We'll provide an update on our February call in more detail.

Got it. Thank you for the time today.

Thank you. We have no further questions in our queue at this time. I will now turn the call over to Doug Farrell for closing remarks.

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