T2 Biosystems, Inc.

Ladies and gentlemen, welcome to the T2 Biosystems Incorporated Third Quarter 2022 Earnings Conference Call. Your host for today, Emma Palillo, you may now begin.

Thank you, Operator. I would like to remind everyone that comments made by management today and answers to questions will include forward-looking statements. Those include statements related to T2 Biosystems' future financial and operating results and plans for developing and marketing new products. Forward-looking statements are based on estimates and assumptions as of today and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these statements, including the risks and uncertainties described in T2 Biosystems' annual report on Form 10-K filed with the SEC on March 23, 2022, and other filings the company makes with the SEC from time to time. The company undertakes no obligation to publicly update or revise any forward-looking statements except as required by law. With that, I would like to turn the call over to Chairman and CEO, John Spurzel. John?

Thank you all for joining our third quarter 2022 earnings call. Today, I will review the company's performance during the third quarter, highlighting a number of recent accomplishments, and discuss the progress we are making across our three corporate priorities. I will then turn the call over to John Sprague, our Chief Financial Officer, who will review our third quarter financial results before I provide some closing remarks and we open the call for questions and answers. During the third quarter, the T2 Biosystems team achieved total revenue of $3.7 million, including product revenue of $2.6 million and R&D revenue of $1.1 million. Importantly, our product sales included $2.4 million of sepsis, and related product revenue, which excludes COVID-19 product sales, representing a 24% increase compared to the prior year period. We entered into contracts for 11 T2DX instruments during the third quarter, including three in the United States and eight internationally, bringing our year-to-date totals through the first nine months of 2022 to 20 instruments in the U.S. and 18 internationally. Our team has realized a number of important accomplishments in recent months. During the third quarter, we achieved the highest quarterly sales of our sepsis and related products in company history, and we have continued to increase our installed base of T2DX instruments. We have continued to expand our international commercial strategy, and we have entered into a territory exclusive distribution agreement in the Baltic region. We have advanced our near-term product pipeline by meeting milestones in the ongoing U.S. clinical trials for the T2 Resistance Panel and the T2 BioThreat Panel. We also attained multiple milestones related to the T2 Lyme Panel, including the receipt of Breakthrough Device Designation from the FDA and receipt of the LymeX Award from the U.S. Department of Health and Human Services and the Cohen Foundation. Finally, we recently regained compliance with the NASDAQ minimum bid price listing requirement. These accomplishments support our mission to fundamentally change the way medicine is practiced through transformative, culture-independent diagnostics to improve the lives of patients around the world. Given the recent developments with our T2 Lyme Panel, we are now expanding our target markets to include Lyme disease along with sepsis. both of which represent significant opportunities within the infectious disease field, where the current standard of care is leading to poor patient outcomes. Sepsis presents one of the greatest challenges to healthcare systems worldwide and claims approximately 11 million lives each year. In the United States, sepsis is the number one cost of hospitalization, costing our healthcare system approximately $62 billion annually. the number one cause of death in hospitals, claiming approximately 270,000 American lives annually, and the number one cause of 30-day hospital readmissions, requiring nearly 20% of sepsis survivors to be readmitted within 30 days and nearly 40% to be readmitted within 90 days. The current standard of care for patients at risk of sepsis relies on broad empiric protocols to administer antimicrobial therapy, despite the fact that such protocols are only optimal in approximately one half of cases, and can contribute to the growing problem of antimicrobial resistance. The current standard of care also continues to rely on a positive blood culture to identify the presence of a bloodstream infection, which can take anywhere from one to five days to turn positive, and is widely understood to have poor sensitivity. Rapid detection of sepsis-causing pathogens and antibiotic resistance genes is critical for treatment decisions and improving patient outcomes, as each hour of delayed targeted antimicrobial treatment can lead to increased mortality risk of up to 8%. Lyme disease is a bacterial infection caused by the bacteria Borreliae and is considered the most common vector-borne illness in the United States. Borrelia burgdorferi is transmitted to humans through the bite of infected ticks, by deer ticks in the northeastern, mid-Atlantic, and north central regions of the U.S., and by the western black-legged ticks on the Pacific coast. According to the U.S. Centers for Disease Control and Prevention, or CDC, approximately 476,000 Americans may get Lyme disease each year in the United States. Typical symptoms include fever, headache, fatigue, and skin rash. And if left untreated, infection can spread to joints, the heart, and the nervous system. The current CDC recommended serological testing for Lyme disease relies on the presence of antibodies and can only be used accurately four to six weeks after infection. We believe there is a significant unmet need for a sensitive diagnostic test to detect early Lyme disease, and the initial performance data on our T2 Lyme Panel is very encouraging. We believe the T2 Lyme Panel will allow clinicians to detect active infections and ensure patients receive appropriate therapy faster and prevent the negative impact of a delay in delivery of treatment and the overuse of antibiotics. To advance our mission and create value for our stakeholders, We're focused on three corporate priorities. One, accelerating our sales. Two, enhancing our operations. And three, advancing our pipeline. I'll now provide an update on our recent progress as it relates to each of these corporate priorities. Starting with our first priority, accelerating our sales. Our commercial strategy is focused on driving adoption of our T2DX technology by expanding our instrument installed base globally and increasing utilization of our sepsis test panels. As I mentioned earlier, third quarter sepsis and related revenue was $2.4 million, representing a record number for a single quarter and an increase of 24% compared to the prior year period. We entered into contracts for 11 T2Dx instruments for sepsis testing. increasing our installed base of instruments to 170, including 101 in the United States and 69 internationally, including clinical trial instruments. We generated sepsis test panel revenue of $1.5 million, representing growth of 25% from the prior year period. From an instrument pull-through perspective in the United States, we achieved annualized sepsis test utilization of $104,000 per legacy instrument. We continue to believe that annualized US sepsis test utilization will reach $200,000 per instrument, and we have a number of customers that have already surpassed that target. The record quarterly sepsis and related revenue was driven by our growing installed base of T2DX instruments and our ability to bring new accounts online faster than we have in the past. As a reminder, it has historically taken four to six months from contract close to go-live testing at hospital labs. Through improvements integrating our sales and field operations teams and streamlining our processes, we're seeing improvements and we are targeting three months from contract close to go-live testing. This should translate to new customers consuming tests earlier and contributing to our sepsis test revenue faster. The second driver of sepsis revenue in the quarter was growth in sales of the T2 Bacteria Panel in the US and internationally. It's encouraging to see customers realize the value of the T2 Bacteria Panel and increase their utilization. We've typically seen customers adopt the T2 Candida Panel first, followed by the adoption of the T2 Bacteria Panel. We're beginning to see some customers start with T2 Bacteria because of its unique ability to detect the most critical sepsis-causing pathogens. We believe we're benefiting from our work to increase awareness of the benefits of this panel. Following the field force realignment, our medical affairs personnel are making progress improving customer engagement and leveraging the increasing library of peer-reviewed clinical data that demonstrates the value of the T2 Bacteria Panel. The core market opportunity for our sepsis products targets hospital microbiology labs, which we believe represent a market opportunity exceeding $2 billion. We're in the early innings of commercialization, and we're encouraged by the potential that lies ahead. Our ability to place instruments across all types of hospitals, ranging from large academic hospitals to critical access hospitals, gives us confidence we can continue to expand our installed base of instruments and accelerate growth of our sepsis test panels. We recently sold a second T2DX instrument to one of the leading U.S. laboratory service providers to be deployed for sepsis testing in one of that provider's managed hospital laboratories. We believe there is potential to further expand our business in the laboratory service providers in their quest to expand their managed hospital laboratory business. We now have multiple end-user customers that have added a second T2DX instrument to expand their testing capacity or to add an additional testing site within their system. Outside of the U.S., there is also a significant market opportunity for our products. Our international go-to-market strategy includes a network of exclusive distributors that sell and support our products in specific countries or regions. and we're focused on continuing to expand our international presence. We recently executed a territory exclusive distribution agreement covering the Baltic region, including Lithuania, Latvia, and Estonia, where we believe our products offer a solution to drive meaningful improvement in the management of sepsis patients. In fact, studies have shown that the Baltic region has a higher average incidence of sepsis per population than Western Europe, and guidelines have been issued in the region to improve sepsis management. We expect further international expansion in 2022 and 2023. As we have discussed, we have taken steps to expand and realign our commercial team. We are confident the sales, medical affairs, service, and support teams are aligned to execute our strategy, including spending appropriate time pursuing new instrument sales, and working with existing customers to increase sepsis test utilization. At the beginning of 2022, we communicated our belief that sales of our COVID-19 molecular diagnostic test, the T2 SARS-CoV-2 panel, would decrease during the year and provide an opportunity to convert COVID-driven instruments to sepsis testing. While the conversion process has taken longer than we anticipated, we continue to believe this represents a potentially meaningful growth opportunity to increase sepsis test utilization. Moving to our second priority, enhancing our operations. In the current macroeconomic environment, we recognize that operating efficiently is a critical success factor. As such, we've prioritized improving our product gross margins and reducing our operating expenses, and we have taken steps to address both priorities. The Product Gross Margin Improvement Initiative includes the T2 Bacteria and T2 Candida panels and has resulted in a reduction in the manufacturing costs of those two products. In June, we made changes to improve our overall cost structure, including reducing our workforce and operating expenses by approximately 20%. We expect both improvements to be more apparent in the coming quarters as we continue to increase volume and fully absorb our overhead and one-time costs related to organizational changes. Finally, our operations team has worked to ensure that there is an uninterrupted supply of products to our customers, and we are effectively managing longer lead times and inflationary pressures. While supply chain challenges continue to exist across the industry, our team remains confident in our ability to continue supplying our customers without interruption. Moving to our third priority, advancing our pipeline. We're advancing the development of multiple new products that leverage both our technology platform and our scientific expertise. Our product pipeline is supported in part by a milestone-based product development contract awarded by BARDA, the U.S. Biomedical Advanced Research Development Authority. which is valued at up to $62 million if all options are exercised. We recently completed option 2B of the contract, following our team's successful completion of all milestones for advancing the U.S. clinical trials for the T2 Resistance Panel and the T2 BioThreat Panel, and advancing the development of the Next Generation Instrument and Comprehensive Sepsis Panel. We were awarded option three valued at $3.7 million to finalize US clinical trials and complete FDA submission for the T2 BioThreat Panel and the T2 Resistance Panel. Several products are being developed with the goal of expanding the test menu on our FDA cleared T2DX instrument, including four products that I will highlight on today's call. The T2 BioThreat Panel, T2 Resistance Panel, T2 Lyme Panel, and T2 Bacteria Panel enhancements. We believe these new products could potentially be commercially launched in 2023, subject to regulatory approvals. Each of these new products represents a differentiated solution to rapidly identify harmful pathogens and potentially allow clinicians to achieve faster targeted therapy. The T2 BioThreat Panel is a direct-from-blood test panel designed to run on the T2DX instrument and simultaneously detect six bio-threat pathogens identified as threats by the US government in just three to five hours. This program is funded under our BARDA contract, and we believe the target customer for this panel would be the US government. We initiated a clinical evaluation for the T2 BioThreat Panel in December 2021, which is very near completion, and we remain on track to file an FDA submission in 2022. The T2 Resistance Panel is a direct from blood test panel designed to run on the T2DX instrument and simultaneously detect 13 antibiotic resistance genes known to cause antibiotic resistant infections in just three to five hours. This program is funded under our BARDA contract. As a reminder, we are currently marketing and selling the T2 Resistance Panel in Europe under a CE mark and we are on a pathway to apply for FDA clearance prior to U.S. commercialization. We initiated a U.S. clinical trial for the T2 Resistance Panel in December 2021. We are currently enrolling patients at eight hospitals and we are adding two additional hospitals to increase patient enrollment. We anticipate completion of the trial in early 2023 and plan to subsequently file with the FDA. As a reminder, the T2 Resistance Panel was previously granted breakthrough device designation from the FDA, which provides for a prioritized FDA review process. The T2 Lyme Panel is a direct-from-blood test panel designed to run on the T2DX instrument and detect active Borrelia infections, the bacteria that causes Lyme disease, in just three to five hours. We expect it to be used to aid in the diagnosis of early Lyme disease. Earlier this week, we announced that the T2 Lyme Panel was selected as a winner in the Lyme Innovation Accelerator, or LymeX, a partnership between the U.S. Department of Health and Human Service and the Stephen and Alexandra Cohen Foundation, the largest public-private partnership for Lyme disease. While we plan to potentially commence marketing and sales of the T2 Lyme Panel as a lab-developed test in 2023, we also plan to initiate discussions with the FDA with the purpose of pursuing FDA clearance. The T2 Lyme Panel was also granted breakthrough device designation from the FDA, which again, provides for a prioritized review process. Finally, we have initiated studies to expand the number of pathogens detected on our FDA-cleared T2 bacteria panel to include the detection of Acinetobacter baumannii. Acinetobacter is a cause of bloodstream infections, especially in critically ill patients, which can range from benign transient bacteremia to septic shock, and has been reported to have a crude ICU mortality rate of 34% to 43%. Acinetobacter can be resistant to many antibiotics, including carbapenems, highlighting the importance of rapid detection and targeted antimicrobial treatment. Acinetobacter infections rarely occur outside of healthcare settings in the United States and can disproportionately impact those with weakened immune systems, chronic lung disease, or diabetes. Adding acinetobacter detection to the T2 bacteria panel will provide clinicians with a rapid, direct-from-blood diagnostic that will provide actionable data for the appropriate antimicrobial treatment for patients. We plan to submit for FDA clearance in early 2023. With that, I'll now turn the call over to John Sprague to provide a detailed update of our third quarter 2022 financial results and our financial outlook for the remainder of the year. John?