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Edited Transcript of TTOO earnings conference call or presentation 30-Jul-19 8:30pm GMT

Q2 2019 T2 Biosystems Inc Earnings Call

Lexington Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of T2 Biosystems Inc earnings conference call or presentation Tuesday, July 30, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John M. Sprague

T2 Biosystems, Inc. - CFO & Senior VP

* John P. McDonough

T2 Biosystems, Inc. - CEO, President & Chairman

* Sandy J. Estrada

T2 Biosystems, Inc. - VP of Medical Affairs

* Thomas J. Lowery

T2 Biosystems, Inc. - Chief Scientific Officer

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Conference Call Participants

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* Benjamin Charles Haynor

Alliance Global Partners, Research Division - Analyst

* Jordan Lawrence Abrams

Cantor Fitzgerald & Co., Research Division - Associate

* Mark Anthony Massaro

Canaccord Genuity Corp., Research Division - Senior Analyst

* Patrick B. Donnelly

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Puneet Souda

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

* Stephen Gilbertpaul Brozak

WBB Securities, LLC, Research Division - Senior Equity Analyst

* Yi Chen

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Matthew Clawson

W2O Group - Practice Lead of IR

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Presentation

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Operator [1]

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Greetings and welcome to the T2 Biosystems 2019 Second Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Matt Clawson of W2O Group.

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Matthew Clawson, W2O Group - Practice Lead of IR [2]

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Thank you, Diego, and good afternoon, everyone. Thanks for joining us for the T2 Biosystems Second Quarter 2019 Financial Results Conference Call. On the call to discuss the results and operational highlights of the quarter ended June 30, 2019, are President and CEO, John McDonough; and Chief Financial Officer, John Sprague. We are also joined today by Tom Lowery, Chief Scientific Officer; Sandy Estrada, Vice President of Medical Affairs. The executive team will open the call with some prepared remarks, followed by a question-and-answer period.

I'd 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 results to differ materially from those expressed or implied by those statements, including the risks and uncertainties described in T2 Biosystems' annual report on Form 10-K filed with the SEC on March 14, 2019, 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.

And with that, I'd like to turn the call over to President and CEO, John McDonough. John?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [3]

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Thank you, Matt. Good afternoon, everyone, and thank you for joining us as we discuss the progress, results and outlook following the second quarter of 2019. There continues to be strong interest in building momentum for T2Bacteria and T2Candida in the market. And we are pleased that new T2Bacteria customers that began testing patients during the first half of the year are tracking at or above our expectations in terms of test utilization. To build on this, today we announced several updates to put T2 in a strong position to execute on our growth strategy and drive adoption of T2Bacteria.

First, we are pleased to report that we have entered into 2 financing agreements that provide us with the possibility to access up to $60 million of capital at market level. These agreements provide us with flexibility to access capital and timing of selling shares are at the option of the company subject to certain limitations on volume. With certain limitations, these vehicles allow capital to be raised solely at the option of the company, and we plan to be opportunistic in accessing the capital markets, including through these agreements. We will remain open to other potential sources of additional capital both from a traditional financing perspective and through business development opportunities.

Second, we have initiated a plan to potentially reduce our cash burn by up to 30%, expected to get quarterly cash burn to less than $8 million per quarter by the fourth quarter of this year without reducing the scope or efforts behind our commercial strategy and program.

In terms of the second quarter, we continued to secure new contracts and worked with new T2Bacteria customers through the validation and evaluation processes. Combined with steady growth from our T2Candida business, we achieved second quarter product revenue of $1.3 million and delivered 12 new contracts. Most importantly, revenue from T2Bacteria grew over 80% from Q1 as new customers went live in testing patients and testing from live accounts group.

In June, we saw the pace of new contract growth in the U.S. was slightly less than we expected. In addition, the time it takes customers in the United States and international markets to complete the validation and evaluation period was also proving to be longer than expected, tracking to an average of 6 to 9 months instead of 3 to 6 months. Together, these factors, flow of new contract adds and flow of ramp-up periods, are impacting our revenue outlook for the second half of the year.

In addition, due to a delay in the closing of an anticipated contract, we now anticipate that a portion of the research revenue expected this year will shift from 2019 into 2020. The good news is that our confidence in this agreement being signed is unchanged. Only the timing has changed, having been pushed back 3 to 4 months. If we deliver on our contracted activities, we will still receive the full agreed-upon revenue, but it will roll over to next year. In addition, we continue to work on other partnership opportunities that could further grow research revenue and expand the applications of our technology to potentially open new market opportunities.

More importantly, we continue to see excitement and interest in our products and have a dynamic sales funnel that gives us confidence that the long-term opportunity for T2Bacteria remains strong and is growing. This is also evidenced by the experience and patient impact being realized by those hospitals who are live and using T2Bacteria to test patients at risk assessment. In light of these market dynamics, we continue to evolve our sales strategy based on our analysis of the first half of 2019 to further focus on the key drivers of more rapid contract wins and progress to customer utilization.

I will now provide some detail on the feedback and activity we saw in the field that is driving the measured pace of new contracts and systems coming online and our go-forward strategy. In situations where our sales interaction is primarily with a hospital lab, we are seeing a slower sales and validation process, while in situations where this interaction is inclusive of the infectious disease and the pharmacy specialist on the stewardship committees, we are seeing a faster process. Accordingly, we are placing a greater focus on reaching the infectious disease and pharmacy specialist members of the stewardship committee earlier in the sales process and honing in our team's capabilities and skills to sell onto this group, which is different than selling directly into the hospital lab.

In April, we brought on a new Vice President of U.S. sales, Scott Isacksen, who is helping to drive this process. Scott has over 25 years of experience in health care sales, including significant experience building teams, selling into the hospitals and working in the antibiotic space. Importantly, he has sold to the same members of stewardship committees that we are focused on as well as the hospital lab, although to a lesser extent. We believe his background and experience will be helpful as we evolve our sales strategy and place more focus on pharmacy and infectious disease specialists who appreciate the impact our products can have and can educate the lab and serve as an advocate for T2 in the sales process as needed.

In addition to Scott, we also added a national accounts program focused on the large integrated delivery network and group purchasing organization. Our refined strategy is also focused on accelerating utilization in existing accounts and helping customers move through the validation and evaluation process as fast as possible. The time line for this process is extending beyond the 3- to 6-month period we had previously seen and expected as more accounts are adding on a mini-evaluation phase as though they have completed the process in order to fine-tune their algorithm for which patients they will initially test with our products.

Shortening the startup period is an important opportunity because once new accounts go live, we've been encouraged by the commercial ramp. This gives us confidence that we can see similar results with other customers and therefore we're placing a major focus on supporting them through the process driven up by our clinical specialists. As we have more customers up and running, this will help drive new contracts and utilization with other new customers as we can share utilization data and experiences.

Outside of the United States, our international business is performing well, though we are seeing similar trends in terms of extended time frames from implementation to live testing of patients. Interest is very high, and our distribution partners are excited by the market opportunities in their respective territories. During the first half of 2019, we entered into distribution agreements covering 5 new international markets: Estonia, Greece, Ireland, Saudi Arabia and South Africa. We are now in 32 countries and have plans to continue expanding this year. Taken together, we believe our strategy in the United States and expanded international market opportunity will allow us to deliver at least 10 to 15 new contracts in each of the third and fourth quarters of 2019 while also moving a greater portion of new U.S. T2Bacteria customers into full commercial mode. For context, if we were able to ramp up our existing global installed base alone to full utilization, we believe we could generate $30 million to $35 million in product revenue annually on a recurring basis. So as the installed base grows, this annual opportunity grows with it. As I said earlier, we are excited about the clinical benefits being realized by patients and hospitals based on T2Bacteria.

I will now turn the call over to Sandy Estrada, our Vice President of Medical Affairs, for an update on T2Bacteria from a clinical perspective.

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Sandy J. Estrada, T2 Biosystems, Inc. - VP of Medical Affairs [4]

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Thank you, John, and good afternoon. Through the first half of the year, we have been encouraged to see the first several of U.S.-based T2Bacteria customers began testing patients and beginning to scale that effort. I'm excited to report that we have received a number of specific reports of T2 having a significant impact on patient care. The first case I want to highlight comes from a hospital customer in the emergency department. A nursing home patient came to the ER with suspected pneumonia and was started on vancomycin, ceftazidime and clindamycin. T2Bacteria and blood cultures were ordered. T2Bacteria was also positive for Klebsiella pneumoniae and negative for all other targets. Based on the institution's antibiotic protocol, therapy was changed to meropenem to effectively cover the Klebsiella pneumoniae. In addition, vancomycin and clindamycin were discontinued due to staph aureus being negative. The patient rapidly improved. The patient's white blood cell count declined to normal, and the patient was able to transfer back to the nursing home to complete 7 days of meropenem therapy. In this case, the initial blood culture remained negative. Without T2Bacteria, the patient would have likely remain on 3 ineffective antibiotics and not received effective antibiotic therapy because they were blood culture negative, impacting patient care, costs and antimicrobial resistance.

The second case also comes from the hospital in the emergency department. An end-stage renal disease patient presented to the ER after becoming unresponsive during dialysis treatment. Sepsis was suspected, and the patient was started on vancomycin and piperacillin-tazobactam. Both the T2Bacteria test and blood culture were obtained. The T2Bacteria test was positive for staph aureus and negative for all other targets. And as a result, piperacillin-tazobactam was discontinued. Importantly, the utilization of T2Bacteria in this scenario allows for the almost immediate deescalation after one dose of unnecessary therapy that potentially could have been toxic to the kidneys.

The third case comes from the hospital with an admitted patient. An 81-year-old female was admitted with fever, weakness and confusion. She had a history of urinary tract infection, and the hospital took blood and urine cultures and provided IV antibiotics. The initial blood and urine cultures grew E. coli, and the patient critically improved on ceftriaxone and was eligible for discharge. However, the treating physician wanted to wait to confirm that a follow-up blood culture was negative for 48 hours. Interestingly enough, one of the patient's family member was aware of T2Bacteria and requested the test be ordered to confirm that E. coli was no longer present in the patient's blood so the patient could be safely discharged. The hospital did not have T2Bacteria. However, another hospital in their system was able to run T2Bacteria for them. The T2Bacteria test resulted negative for E. coli, and the patient was able to be discharged a day earlier, preventing additional costs as well as risks to the patient such as hospital-associated infections, confusion and falls. We are now entering discussions with this hospital to obtain their own T2Dx Instrument.

These were just 3 cases out of many that demonstrate the clinical value of T2Bacteria, the limitations of blood culture-based testing methods and the importance of rapid pathogen identification and treatment. We are seeing the benefit of T2Bacteria across 4 categories of clinical use. Number one, T2 positive results that yield a faster time to effective therapy. Number two, T2 negative results that lead to earlier antibiotic deescalation. Number three, T2 positive results could help avoid premature discharge and readmission in the emergency department. And number four, T2 negative result that help support earlier patient discharge. We are posting clinical cases every week, and more can be found on our website.

I will now turn the call over to Tom Lowery, our Chief Scientific Officer, for a pipeline and technology update. Tom?

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Thomas J. Lowery, T2 Biosystems, Inc. - Chief Scientific Officer [5]

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Thanks, Sandy. Those are certainly exciting patient case studies. Since our last call in early May, T2 has participated in several medical meetings that provided us the opportunity to showcase T2Bacteria, T2Resistance and potential future applications of our technology. We plan to continue this activity at conferences this fall such as IDWeek 2019 in October, including in-booth presentation, highlighting clinical cases and approach to presentation on T2Resistance.

At these recent meetings, we highlighted new T2Bacteria customer patient cases and experiences as an important part of our strategy to drive new interest and adoption. If you have not, I encourage you to view the presentation videos available on our website.

In addition to presenting customer data on T2Bacteria and T2Candida, we also highlighted our new product pipeline and data supporting potential future use of our technology. I'll recap a few of those highlights now.

In the near term, there's growing excitement and anticipation for the T2Resistance research use-only panel. We plan to make it available by the end of the third quarter. Data from our presentations demonstrated that the T2Resistance Panel provides at least a 2-day time advantage compared to conventional methods with a baseline blood culture that take up to 95 hours for a result. The feedback on this data and capability has been positive, and we believe there is an increasing demand for this panel.

In addition to the RUO version, we remain on track for a CE Mark version by the end of this year to allow for a commercial launch and for full-scale testing for patients for clinical use outside of the United States. We are excited about the enthusiasm we're seeing in Europe and other regions of the world for T2Resistance.

We have reached an exciting juncture on our T2Lyme development program. Our clinical data clearly demonstrate the sensitivity of T2Lyme far exceeds that of current on-the-market, direct-from-blood PCR tests offered by CLIA laboratories, which are not available inside a hospital.

We've completed 2 head-to-head clinical studies showing T2Lyme detects many more positives than these conventional PCR methods. The initial clinical data showed that the overall percent agreement of T2Lyme with confirmed infection blood culture and tissue biopsy exceeds that of seroconversion, CDC-recommended 2-tier tests and other blood PCR methods. Additionally, our specificity is 100%.

Based on a review of our panel and early clinical data, FDA asked us to expand the scope of our intended use and pivotal study to include patients without an EM rash with those early- and late-stage Lyme disease. We now have frozen bank blood samples from over 300 patients. These patients include those with confirmed, probable symptomatic Lyme disease with and without an EM rash. We are working with FDA on a proposed intended use from our preferred approach for analyzing the data from our clinical samples. As a result, our T2Lyme clinical study time line will be extended. But if it's approved, we will have a much broader label when we go to market.

An increasingly important application of our technology is the area of Candida auris with the T2Candida auris RUO panel, which can help address the recently emergent superbug, Candida auris. This is highly relevant if hospitals prioritize the continued elimination of this superbug. We recently had a customer in Europe who had been using this panel for monitoring and controlling outbreak in their hospitals. We believe it's indicative of growing awareness and interest in our panel.

Outside of the traditional health care sector, we recently presented new data that shows that T2MR technology can detect biothreat pathogens, enabling future panels to detect biothreat pathogens with no pre-culture required in whole blood, environmental samples, other biofluids and swab samples with unprecedented sensitivity like our other tests.

Lastly, we presented new data showing that T2MR technology has the potential to detect more than 250 pathogen species, providing coverage for greater than or equal to 99% of bloodstream infections. Our technology has also demonstrated the ability to potentially detect resistance markers for all blood-borne antibiotic resistance threats identified by the CDC. These diagnostic capabilities could allow us to develop a panel that provides comprehensive coverage of all bloodstream infections. Our next-generation product would have the potential to replace the use of blood culture, especially as an upfront screen for infections.

I'll now turn the call over to our CFO, John Sprague, for an update on our financial results.

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [6]

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Thank you, Tom. I'll begin today with an overview of our new financing agreements and then provide a review of the second quarter results and our updated guidance. Today, we announced that we have established an ATM facility and an equity credit line, which, combined, may enable us to possibly raise up to $60 million subject to limitations. These will allow us to be laser-focused on the execution of the T2Bacteria launch and the advancement of key development opportunities. Subject to limitations with each agreement and under law, shares can be sold at our option, and we anticipate accessing the capital under these agreements opportunistically and judiciously. We are pleased to have these agreements in place as a potential source of additional financing.

The key features of these agreements follow: Through the ATM, we can opportunistically, and at our option, direct Canaccord to use commercially leasable best efforts to sell our common stock at prevailing market rates and raise up to $30 million. Through the equity line of credit, at our option, we can sell shares of our common stock each day at market rates and raise up to $30 million. Pricing is equal to the average of the lowest closing share price of 3 days during the past 10 consecutive business days. Our partner, Lincoln Park Capital, is obligated to purchase shares of our common stock when we choose to draw on the equity line of credit, subject to a cap on the total number of shares equal to 20% of our outstanding common stock if the price we are selling shares is at or below $1.52 a share. Both options, subject to limitations with each agreement, are not commitments by the company to issue shares, which consistent with our strategy of opportunistically accessing capital on attractive terms based on market conditions. Both facilities enjoy low fees and simple capital structures relative to other potential sources of financing and include only the sales of straight common stock without warrants or yield enhancements.

Second quarter 2019 financial results. Second quarter 2019 total revenues were $1.8 million compared to last year's second quarter revenues of $3.9 million. Product revenues, primarily T2Candida Panel, T2Bacteria Panel and T2Dx Instrument sales, were $1.3 million, 8% higher than last year's second quarter product revenues of $1.2 million and were driven by growing T2Bacteria Panel, T2Candida Panel and T2Dx Instrument sales. T2Bacteria Panel sales are ramping up, and we are pleased to report that revenue increased over 80% in the first quarter of this year. We delivered 12 new system contracts in the second quarter of 2019 and 23 in the first half of 2019.

Research and grant contribution revenues were $500,000 compared to $2.7 million in last year's second quarter. Costs and expenses, excluding cost of product revenue, were $10.8 million compared to $11.4 million in last year's second quarter, and we are at the low end of guidance. Total costs and expenses include depreciation and noncash stock compensation of $2 million in the second quarter compared to $4.5 million in last year's second quarter, a decrease primarily due to last year's vesting of performance-based RSUs.

Operating margins were a loss of $13.8 million compared to a loss of $10.9 million in last year's second quarter. Net interest expense and other income was $1.9 million compared to $1.4 million in last year's second quarter. Our net loss was $15.6 million, $0.35 per share compared to a net loss in last year's second quarter of $12.3 million, $0.32 per share. Weighted average shares outstanding were 44.4 million compared to 38.3 million in last year's second quarter.

2019 outlook. The following forward-looking statements reflect estimates based on information as of July 30, 2019, and are subject to uncertainty. For the full year 2019, we are revising our financial guidance as follows: For the full year 2019, total revenue is expected to be $8.7 million to $9.6 million, and we expect product revenues in the range of $5.7 million to $6.1 million. This considers lower-than-previously anticipated T2Bacteria system placement, partially offset by continued growth with T2Bacteria customers that are online, T2Candida and growth in our international business. Research and grant contribution revenues for the full year are expected to be in the range of $3 million to $3.5 million contingent on a possible research collaboration. As John noted, we have a pending contract that is expected to close 3 months later than previously anticipated.

For the third quarter, we expect product revenue to be in the range of $1.4 million to $1.5 million. For 2019, we expect to close 43 to 53 T2Dx Instrument placement contracts or 20 to 30 contracts in the second half of the year and 10 to 15 in the third and fourth quarters. As you consider product revenue growth, please keep in mind the following guidelines that we have outlined on prior calls.

Historically, it took new instruments an average of 3 to 6 months to go live and begin patient testing. As John outlined today, for T2Bacteria this time has extended beyond 6 months, for many customers it is averaging closer to 9 months. During this period, the company typically receives nominal revenue once the instruments have been purchased by the hospital, which in the United States occurs about 15% of the time.

International distributors typically purchase instruments at a 30% discount off the list price of $100,000 per instrument. We expect a continuation of average sales prices of $150 per test for the T2Bacteria Panel and $200 per test for the T2Candida Panel. International distributors typically receive about a 30% discount per test panel.

We estimate that a single T2Dx Instrument is capable of running about 3,000 tests per year. We expect average utilization to be in the 1,000 to 2,000 test range after testing ramps up over time. Therefore, we expect each T2Dx Instrument to generate an average of about $300,000 in annual revenue from the combination of T2Bacteria and T2Candida Panel testing when hospitals fully ramp up testing patients. This is confirmed by our early experience with T2Bacteria customers that went live during the first half as these customers are on track or ahead of expectations in terms of ramping to this run rate.

We expect to take actions to reduce our cash burn rate to under $8 million per quarter by the fourth quarter of this year, which will allow us to continue executing on our growth strategy while reducing expenses to be in line with our updated revenue expectations.

Operating expenses, excluding cost of product revenue contingent on closing our research collaboration, are expected to be $10.5 million to $11.5 million in the third and fourth quarters of 2019 and $7 million to $8 million absent the research collaboration in the fourth quarter. Total costs and expenses include noncash depreciation and stock compensation of approximately $1.5 million per quarter. Noncash stock compensation expenses may be impacted by the timing of performance-based RSU vesting.

Our cash and cash equivalents were $28.4 million at June 30, 2019, which we expect will take us through the second quarter of 2020 without any additional capital from our ATM or equity credit line. We are currently compliant with the terms of our CRG debt facility. Our weighted average shares outstanding of 44.4 million may be impacted by stock option exercises and shares sold under the ATM and equity credit line.

Thank you, and back to John McDonough for closing remarks.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [7]

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Thank you, John. Before closing the call, I want to briefly address the leadership succession plan we announced in conjunction with our second quarter results. I'm excited to report that I've been appointed Chairman of the company. After nearly 12 years serving as the founding CEO of T2 Biosystems, we will begin a process that will lead to a transition to a new CEO. I am delighted to move into this new role, and I look forward to working with our Board and ultimately a new CEO through this process and beyond.

We have created a breakthrough technology and, in fact, a new market with a whole new approach to diagnostics. We have received FDA clearance for 3 products that we were told 10 years ago was not possible. We have seen the benefits of these products on patient care in the United States and outside the United States, and our commercial utilization efforts have only just begun.

At the same time, I've had the privilege to build the best management team I have ever worked with and a team that is totally committed to patient care. We are reshaping medicine as it relates to the treatment of sepsis. I've always believed that a CEO should transition at least after 10 years. And for that and for personal reasons, this is the right time for me to transition the CEO role. I'll be working closely with the Board as we begin the process to find the right person to lead the company for our next phase of growth. And I look forward to working with this person through a smooth transition while taking on this new role after he or she comes onboard.

We have just initiated a national search for new CEO, and while it's difficult to predict the time line of the succession, I plan to remain on my current position until a successor is identified and onboarded to ensure a seamless transition. It is my firm belief and that of many industry luminaries that the T2MR technology is one of the seminal breakthroughs in the identification of human pathogens in the resistance markers directly from patient samples and as such, will be responsible for the sparing of countless lives over time. It has been my pleasure to have played this role and bring it to market and establishing as a new standard in rapid sepsis diagnostics.

I want to take a moment to thank all of my past and current T2 colleagues for their hard work and dedication to our mission, and I look forward to continue pursuing our goal as Chairman of our Board of Directors. I also look forward to seeing you all at upcoming conferences and meetings.

With that, we will now open the call up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Patrick Donnelly with Goldman Sachs.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Maybe just one starting off from the financing. Can you maybe just talk us through why this avenue makes the most sense and what went into the decision just in terms of the structure why this is the best move for the company?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [3]

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Yes, you bet, Patrick. So there's a couple of reasons for that. Obviously, our current cash takes us through Q2 of next year. There's no reason why we need to access capital right now. Although we have 2 vehicles that we put in place that we can exercise at our option to essentially sell shares at market rates. Now that's not to say whether we will or not utilize these options in the short run, but it gives us optionality without any requirement to pursue the financing options.

ATMs are just good governance these days. And the deal with Lincoln Park is really an unusual one or an extraordinary one that provides optionality and, in fact, a firm commitment that has certain limitations on volume, but it is absolute firm commitment that we can raise capital at rates that approach the market and probably at rates that might even be better if we did a more traditional secondary offering.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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Okay. That's helpful. And then maybe just on the sales cycle. Trying to think through how you guys can shorten that. What do you view as the catalyst that can speed up the implementation process with key accounts and get that sales cycle tightened up?

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [5]

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Yes. The key to speeding that up, I mean, there's -- there truly is tremendous excitement in the market and growing excitement in the market based on the work of our sales team, our marketing team, our clinical team. And as these accounts even go through the sales process, never mind post the sales process when you're in the implementation phase. The big question is which patients are you going to start testing first. And sometimes, that follows the sales cycle down, and sometimes after we close a sale, an account, we'll do a mini -- what we call a mini-validation period, maybe 90 days in length ideally or more than 90 days in length, where they're experimenting with different patient types.

Now the typical hospital, and they're all different, could test on average about 3,000 patients with the T2Bacteria product. We've always said we don't expect to get to that number, we expect to get to about half that number and it will be a ramp. A ramp of these cycles probably take 18 months after they go live and testing patients. And that ramp starts with -- starting with a certain segment of the patient population so that the hospital gets experience, sees the value and then expands the patient that they're testing today.

So it's that process of identifying who to test first, that causes this 90-day window. Now what's going to change that is us helping customers identify that earlier in the sales process and will make the biggest difference because that is more and more accounts go live, that's going to play itself out with real hospital stories about who they started with and how they ramped that others will ultimately follow on.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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Okay. And maybe just one last one, just on the guidance reduction. Should we think of that entirely -- I know you talked about some pushout to 2020. Should we think of that entirely as a pushout? Or should we be assuming some lower base in 2019 to build off of?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [7]

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Well, for sure, when we talk about the research revenue, that's a pushout, 100% pushout into 2020. When you look at the product revenue, probably the right way to think about it is if there's just a quarter delay in the revenue ramp or so primarily being driven by the mini-validation period that's pushing 6 months to 9 months. So that's less of a catch-up into 2020 and more of a delay in the ramp.

Having said that, I just want to point out a couple of things. One, T2Bacteria revenue grew 80% from Q1 to Q2, which is a really solid number and we're very, very pleased with that. In fact, that exceeded even our own internal expectations. And on your last question, I should have added in terms of accessing capital, it's important to point out that we estimate that we need roughly $40 million in capital to get to cash flow breakeven. So obviously, having these financing vehicles in place can help bridge that, could potentially fill in its entirety if we were to use that to that extent, more likely to pursue other financing sources as a part of building that bridge to cash flow breakeven.

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Operator [8]

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Our next question comes from Puneet Souda with SVB Leerink.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [9]

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First question on -- I think this is a significant lowering of the guidance. Just trying to understand what your level of confidence is here. I mean we are 1 year into the launch of an FDA-approved product, which you're most excited about and T2Bacteria was the largest opportunity. So I'm just trying to get a sense of how conservative is your guide at this point. And is there any potential for -- a further potential for a further step down here just given the challenges that you've had over the last couple of months and overall in the sales process?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [10]

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Yes, that's a fair question, Puneet and obviously a very difficult one to answer because if we say it's conservative, and we just increased our guidance, so we're not going to do that. I would just say we are more confident in this guidance than any guidance that we provided. We've done a thorough vetting. We think the probability of doing better than the guidance is higher than lifting the guidance, for sure. And that's about all I can say on that point. We feel very, very comfortable with the guidance that we have provided, and we think we've looked at all factors when setting it.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [11]

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So are there any changes to the actual sales process that you're contemplating? Or is that something you're expecting that would be implemented potentially later on? And then maybe around the sales process, too. I'm just trying to understand the reduction in burn rate and overall spend that you're talking about. Are there reductions in the commercial organization? And if there are not, maybe on other areas where you're cutting those. Maybe just help us just understand the reduction here.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [12]

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Yes, you bet. So I'll take the first half of your second question, all of your first question, and let John Sprague answer the second half of your second question. So hopefully I've confused you thoroughly. So there are no reductions planned on the commercial organization. We intend to fully staff it and in fact expanding the staffing. We've made a lot of changes to our sales organization, including bringing on a new Vice President of Sales who we're delighted with. We are absolutely changing the sales process, as I mentioned in my remarks, in I think a very substantive way, putting much, much more focus on selling to infectious disease specialists and selling to pharmacy who are members of the stewardship committee. In many ways, Scott Isacksen, our new Vice President of Sales, he was hugely successful at Cubist in bringing their antibiotic drug to market following a very, very similar sales strategy.

New antibiotic drugs need to be sold to the stewardship committees, and that includes pharmacy and infectious disease. And in many ways, our product is very similar. We are changing clinical decisions. We are changing therapeutic decisions in the same way a new drug would, only we're doing with a diagnostic that doesn't require all of the overhead of bringing a new drug to market. And so we're deploying a similar strategy, putting a much significant more focus on infectious disease, much more significant focus on the pharmacy. Additionally, we're -- also have hired a couple of people that are focused on selling to the IDNs, to the GPOs, so we have both a top-down and bottom-up strategy. And that is not a strategy that we've had in place, and it's one where we think we will make some real noise in that regard sometime here in the second half of 2019. As for where the reductions are coming from, I'll let John Sprague -- cost reductions are coming from, I'll let John Sprague take that one.

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [13]

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Sure. So we took a hard look at all of our operations and decided that commercial could -- should be rolled off and, as John has said, reorganized. But it's functioning fine. But we've made major cuts in the R&D area, smaller cuts in the science area. But we've also looked over and trimmed G&A pretty substantially as well. With all that said, we're looking at lowering our expense burn by 30% to 40%, contingent, however, on the research collaboration partnership, which we will still reduce our burn under that scenario but at a lesser pace as we guided to.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [14]

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Okay. And I'm getting a couple of questions around -- from investors. I just wanted to clarify this. With the new financing in place, there was a -- earlier, there was a bit of a noise around a debt structure and potential covenants that you have in place. Do those stay intact? Or does that change with this new financing in place?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [15]

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Yes. There's been noise around that, Puneet, but it's just noise. We are not in violation of covenants. And if -- the only covenant that really exists is a revenue covenant, which is very, very low. And if we missed that covenant, we would only have to pay back a -- 2x the revenue miss. So if we missed the revenue number by like $1 million, we would owe CRG $2 million. And that's assuming they wouldn't waive the covenant.

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [16]

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Which comes right off the principal with no penalty.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [17]

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Which comes right off the principal with no penalty, right. There are some advantages even paying the debt back, by the way, which is a good point. And of course, we have a capital, a, and we also have access to capital to pay that up. So that's -- that's a lot of noise that's been generated by people who have been obviously trying to put pressure on the share price in our view.

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Operator [18]

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Our next question comes from Mark Massaro with Canaccord Genuity.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [19]

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I wanted to start with going back to the sales organization. I know that you brought in a new VP of Sales. You're now focusing more on ID specialists and folks in the pharma stewardship committee. But can you just level set the number of territory-carrying reps you have in the field today? Was there any turnover in the field in the last 1 or 2 quarters? I'm just trying to get a sense for the stability of the commercial organization.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [20]

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There's -- we've turned over probably 1/3 or a little bit more of the sales organization to reorient to this new approach. We are on track to rebuild it all back to having 15 sales reps that would be in 3 territories with the addition of 2 to 3 people on top of that, that would be focused on the IDS.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [21]

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Okay. That's helpful. And then as we think about the validation period elongating. I know this isn't the first company in clinical diagnostics that has seen larger validation periods especially in sepsis. I guess can you help us diagnose maybe some of the particulars as to why the periods have taken a little bit longer? I suspect it might be on a case-by-case basis on the hospital systems. But can you just shed a little more detail as to why the validation periods are taking 3 to 6 months longer?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [22]

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Yes. So it's taking about -- on average, about 3 months longer, and it all has to do with -- it has nothing to do with getting the system up and running. That whole process is still taking 3 to 6 months. So what many of these accounts are doing, Mark, is they're running a mini-validation where they're collecting different patient samples of different types to determine when they go live and testing patients and which patients will they initially test. Because they're not going to test them all. We know that, and we've never expected that. But they're going to start in an area and then grow from there. Some start in the emergency room. Most of them start in the EV, but then they'll pick certain patient types presenting in the EV. Some start with patients in the intensive care unit. And what they do during this roughly 90-day period is they collect samples. They try to see what the positivity rate is among those patients. They try to analyze where clinical decisions would have been made so that they pick the right patients to test when they ultimately roll it out. It's a logical place to be. Once we can be more directive in where to start and what to expect, that should ultimately disappear for most of these accounts.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [23]

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Got it. And I guess going back to my prior question on the commercial organization. Do you think 15 or so territory-carrying managers is the right number? And if capital constraints were not present whatsoever, you do have $28 million of cash in the balance sheet. So I guess how do you think about the appropriate run rate to maximize your commercial opportunity in the near term?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [24]

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Yes. I think in the near term, 15 is definitely the right number. I mean I think when we're fully ramped, we could expect 15 sales reps to be just in -- and this is United States only remember, closing 50, 60, 70 new opportunities on an annual basis and maybe even more. We'll grow that over time. We think -- we're pleased that we have kept the size of the sales force on the smaller side, in part because we know we are bringing a new technology to market, a whole new approach to sepsis management, and it has clearly taken us a couple of cycles to really figure out the sales formula and how to sell this technology. We really do believe we have that in hand now. But it took time. Nobody has done this before. This is not like selling some of those other products that are post blood culture, where you're just displacing what some lab is already doing.

This is a product that changes treatment of patients, and it does it within the first 6 to 8 hours. There's never been product across the market like this, and so the sales approach has taken us a little while to figure out. And by keeping the sales force a little bit smaller, we've been able to tweak that algorithm to the point where we're at now. Now we will assess progress on a quarterly basis and ultimately over time grow it. And I wouldn't anticipate going beyond the numbers I gave you before the end of this year. But potentially, as we go into 2020, we may just want to do that. But we'll do it based on seeing a little more progress than what we've seen to date.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [25]

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Okay. That's helpful. Of the 12 new contracts placed, were any of them capital? And is there any way you could give us the split between U.S. and OUS?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [26]

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John?

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [27]

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Sure. It was 3 U.S., 9 OUS. One of the U.S. was capital, and 8 of the international were capital.

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Operator [28]

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Our next question comes from Steve Brozak with WBB.

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Stephen Gilbertpaul Brozak, WBB Securities, LLC, Research Division - Senior Equity Analyst [29]

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Most questions have been asked and answered. So I've just got one. On the T2Resistance, can you build for us what that's going to mean in terms of what we should expect on interest, your thoughts on future sales for that and what that will mean both here and overseas?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [30]

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Yes, you bet. Sandy, do you want to take a shot at that one? You've lived in the world of treating patients, and I think everyone would benefit from hearing your response to Steve's good question.

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Sandy J. Estrada, T2 Biosystems, Inc. - VP of Medical Affairs [31]

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Sure. So as I understood the question, it was around the impact of T2Resistance on our products and on patient care. And so I see T2Resistance as the obvious next product for our company, and super happy that we have it coming soon. And from a clinical standpoint, really in the antimicrobial stewardship world where the goal is to get the right antibiotic for the right patient at the right time, having this information where we can now know which bacteria is or is not impacting the patient before the second dose of antibiotic is truly amazing. And we have that today. And to be able to add on to that, whether or not a resistance gene is present, has so many potential impacts for patient care. So the most obvious one is that we can hone the antibiotic therapy even a little bit further than we're able to right now.

And so there are some data that about 90% of antibiotic decisions can be made by species identification, which is what we have now. But there are those patients who do have a resistant organism, and being able to know that within a few hours can potentially have an impact on mortality because patients will be able to definitely get on the right antibiotic sooner. On the flip side of that, there are a lot of new antibiotics on the market that are geared towards drug-resistant infections and being able to know if a patient needs that antibiotic or not will hugely benefit the hospitals and the patients. And then there are other considerations such as infection control. And so if a patient comes into your hospital and they have one of these multidrug-resistant infections that might not even have good antibiotic treatment options, the ability to know on the first day within hours and appropriately isolate that patient and protect other patients as well as health care providers is really something that a dollar figure can't be placed on.

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Thomas J. Lowery, T2 Biosystems, Inc. - Chief Scientific Officer [32]

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I think, just to add to that, from what I've seen -- this is Tom Lowery. In Europe, we've had a few sites that have been running a precursor to the T2Resistance Panel, called the [Penrage] resistance [chains], and they're very enthusiastic and recommended very quick time line to be able to go live clinically because they're able to identify KPC-resistant patients within a matter of hours rather than waiting days. And in the U.S. even, what surprised us is the level of interest in the RUO version of the panel, we had a customer pay for an instrument upgrade just to be able to run the RUO panel that will be available this September here in the United States. So a lot of that inbound interest in it, and people really like the direct-from-blood resistance gene detection, there's a lot of enthusiasm.

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Operator [33]

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Our next question comes from Jordan Abrams with Cantor Fitzgerald.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [34]

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So just to touch on the instrument placement expectations, significant reduction in expectations from just 3 months ago. Can you comment on what's different in the market from a sales pipeline perspective from just 3 months ago? And why you're still confident that you could place 20 to 30 instruments in the back half of the year?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [35]

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Yes, you bet. Certainly, the expectation in the second half of the year is pretty consistent with what we saw in the first half of the year. But really the change -- reason for the change in the guidance has to do with some of the changes in the U.S. sales organization. International has been performing well. We don't have any changes in our expectations in that regard. But as we've made these changes to the sales organization, including bringing in new people, it has a short-term negative impact on closing new business.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [36]

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Okay. And a few times in the prepared remarks, you highlighted customers that are now live with T2Bacteria testing. And while the individual patient cases are helpful, do you have any early metrics on utilization?

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [37]

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We do. For the bacteria accounts that are live, they're at about halfway to what we think their potential is. So if you referenced that $300,000 per year of bacteria and Candida, about 80% of that is bacteria. And these accounts are already at the halfway mark, which surpassed our expectations.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [38]

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Is there a way you can place or you can frame timing? So how long ago did some of those customers come live with T2Bacteria?

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [39]

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Sure. So the first account went live in January, February, March. They continue to go live through the -- obviously the end of the second quarter. And so it took them about 4 months to reach that pace, but now it's fairly consistent and increasing.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [40]

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Okay. That's helpful. Last one for me, John, why is this the right time to take a step back from the CEO role?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [41]

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Yes. There's a lot of reasons for that. Some of it is truly personal, so I'll leave that aside. But it's been 12 years, and I really believe that no one should stay in a CEO role for more than 10, to be honest with you. So for me personally, it's absolutely the right time. And I think for the company, it would be a good thing, too. New ideas, new voices, I'm like super excited. And I'll stay on board as Chairman of the company and work with the new individual. But it's kind of personal. And T2, I think, aligned in this particular case in terms of what's in the best interest of all.

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Operator [42]

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Our next question comes from Yi Chen with H.C. Wainwright & Co.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [43]

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So my first question is how long it would typically take a hospital to reach -- once they have the instrument and panel in place, to reach the full utilization rate? And what are the reasons that they are currently not using T2 panels on eligible patients?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [44]

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Yes. Yi, it's a great question. We don't -- we believe it will about 18 months to get the full utilization, and that's how we've built our model. But we haven't been out there for 18 months with live patients, so we can't say that without seeing the facts or data behind it other than being in the market and assessing the type of ramp that we expect to see from accounts. The real reason why it takes a while to ramp it up, and this again is totally consistent with our expectations, in fact, they've been ramping a little faster than we expected on average, it's a new technology, it's a new approach. People want to go a little bit slower with it instead of just kind of turning on the engine and shutting off the way you're doing things today. So I think it's a natural progression of adopting a new approach to anything.

I think over time, we'll see customers come online and get the full utilization quicker. But that will be once there's enough customers out there that can talk about the successes that they've already had doing that in their respective institutions.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [45]

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Got it. And my next question is the press release says you're going to reduce the quarterly cash burn to be below $8 million, and you need additional $40 million to get to cash flow breakeven. Does that mean that you expect to achieve cash flow breakeven in late 2020 or early 2021?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [46]

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Not necessarily, right? Because the -- you did straight math on $8 million, I see how you get there. But that burn rate, as you go into 2020, should -- is declining on a quarterly basis as the revenue is growing. So it might take a little bit longer than that, but it will be because the burn rate doesn't maintain that $8 million rate as we get into first half of 2020, second half of 2020.

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Operator [47]

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Our next question comes from Ben Haynor with Alliance Global Partners.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [48]

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First off for me, just on the expense reductions that you guys are going to be putting in place. What does that do -- and I'm sorry if I missed this -- to the required breakeven run rate? I think you were talking $65 million, $75 million previously. Does that bring that down pretty substantially? Or is it $5 million or so? What's a good way to think about that?

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [49]

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I think you continue to think about that breakeven level being at about the same point. We just think we can get there quicker, although we still have to achieve these revenue targets to do so.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [50]

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Yes. There are certain expenses that we're reducing, that as the revenue is ramping, we potentially would add back in, which would get to a breakeven point, that close to the same length.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [51]

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Okay. And then I just had a real quick few housekeeping questions. First off, can you also break out the U.S. versus international on -- in terms of units and capital units for last year as well so we have something to compare the figures you gave earlier?

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [52]

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Sure. Bear with me.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [53]

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And then maybe in the meantime, also I apologize if I missed this, how many accounts have you exited the quarter with? I believe it was 97 at the end of last quarter. Are you -- with the dozen, are you to 109 or whatever that is?

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [54]

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It's actually 107. We had 2 underutilizing accounts where we took back the reagent rentals to redeploy them to accounts with a greater need.

So for international, last year -- or excuse me, U.S./international, we had a total of 15 U.S. placements, 24 international -- excuse me, contracts we had -- yes, that's correct, 15 and 24.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [55]

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And do you have -- any chance you have the Q2 numbers? Sorry, I should have specified that.

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [56]

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Q2 of '18?

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [57]

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Yes.

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [58]

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Yes. It was 3 U.S., 6 international.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [59]

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And the capital breakdown there if you could.

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [60]

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6 international were all capital. The 3 U.S. were all reagent rentals.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [61]

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Got it. And then lastly for me, I understand the mechanics of the Lincoln Park transaction and the restrictions that you have there on -- for various things. But can you remind me on the aftermarket equity distribution agreements? How much theoretically can be sold in a day? And any restrictions there that we would need to be cognizant of?

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [62]

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Sure. So for the ATM, we can sell up to 25% of our average daily volume.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [63]

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Okay. But there's no restriction in terms of -- if there's 1 million shares a day, and you can sell 250,000 shares a day, you can do that up to the 30 million.

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John M. Sprague, T2 Biosystems, Inc. - CFO & Senior VP [64]

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Correct.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [65]

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Sure. And you may even opportunistically be able to sell more than that. But, again, no guarantee we're going to be selling at that level either.

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Operator [66]

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Ladies and gentlemen, there are no further questions at this time. I'll now turn it back to John McDonough for closing remarks. Thank you.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President & Chairman [67]

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You bet. We appreciate you all dialing in. We're -- truly believe that we are on the cusp of breaking through and hitting a significant inflection point in the commercial business. We're excited about developments that are underway that we believe will occur in the second half of 2019 and look forward to reporting back next quarter. Thanks very much for listening in this evening.

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Operator [68]

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Thank you. This concludes today's conference. All parties may disconnect. Have a great day.