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Edited Transcript of TTOO earnings conference call or presentation 3-Aug-17 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 T2 Biosystems Inc Earnings Call

Lexington Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of T2 Biosystems Inc earnings conference call or presentation Thursday, August 3, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darlene M. Deptula-Hicks

T2 Biosystems, Inc. - CFO and SVP

* John P. McDonough

T2 Biosystems, Inc. - CEO, President and Director

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Conference Call Participants

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* Isaac Ro

Goldman Sachs Group Inc., Research Division - VP

* Max Masucci

* Paul Richard Knight

Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Analyst

* Stephen Gilbertpaul Brozak

WBB Securities, LLC, Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Greetings and welcome to T2 Biosystems' 2017 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

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Darlene M. Deptula-Hicks, T2 Biosystems, Inc. - CFO and SVP [2]

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Thank you and good afternoon, everyone. I am Darlene Deptula Hicks, Chief Financial Officer of T2 Biosystems and welcome to our second quarter 2017 financial results conference call. With me today is John McDonough, President and CEO.

Before we get started, I would like to remind everyone that comments made today by management will include forward-looking statements. Those include any statements who do not relate to matters of historical facts. Forward-looking statements are based on estimates and assumptions as of today and are subject to risks and uncertainties that may cause the actual 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 15, 2017. 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 President and CEO, John McDonough, for his opening comments. John?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [3]

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Thank you, Darlene. Good evening, everyone and welcome to our second quarter 2017 earnings call. Let me begin with a brief agenda for today's call. I will begin my prepared remarks with a high level summary of our financial results for the second quarter of 2017, a review of the key drivers that contributed to our performance during the quarter and an update on recent business highlights. I will then turn the call over to Darlene who will discuss our quarterly financials results in detail and review our financial guidance for 2017 which we are pleased to report we are updating this evening's earnings release. Following Darlene's review of our 2017 guidance, I will share some closing remarks before we open the call up for questions.

We are pleased with our results in the quarter and through the first half of the year. We have made solid progress on all of our top priorities. One, we have achieved product revenue growth that exceeded our prior guidance. Two, we are exceeding the number of high-risk patients associated with closed contracts and are increasing our guidance. Three, we achieved CE Mark status for T2Bacteria and are preparing for commercial launch in Europe. Four, we are on track with T2Bacteria to file with the FDA within 4 to 6 weeks and are on track to potentially receive approval by the end of the year. Five, we closed 4 T2Bacteria contracts in the United States with hospitals that will be under a new research use only or RUO program. Six, we expanded our international partner channel to 7 distributors that cover more than 20 countries. Seven, new customer success stories are emerging and are eating in the sales process. And eight, the product pipeline continues to advance and remains on track.

Regarding our financial objectives, during the second quarter, we are happy to report that we achieved total product revenue of $735,000, which was up 16.5% sequentially and ahead of the guidance provided on our Q1 conference call of 10%. The second quarter product revenue increase is primarily related to the growth in testing of patients with T2Candida around the world and an increase in instrument sales. This reflects the hard work of our commercial organization and continuing to educate hospitals about the significant clinical and economic benefits of our products. Use of the T2Candida panel at several of our hospital accounts is progressing towards being included in hospital sepsis protocols. This means assuming that hospitals adopt the T2Candida panel in their sepsis protocols. In the coming months, many hospitals maybe routinely ordering the T2Candida panel when patients meet certain protocols established at hospitals where the risk of sepsis is high. This is the ultimate goal for T2Candida and T2Bacteria.

Screening all patients at high risk of sepsis is where T2Candida and T2Bacteria may provide the greatest benefit in impacting the lives of patients and hospital economics. We continue to measure our progress using metrics that we have highlighted on past calls, including changes on the number of high-risk patients, the customer facilities under contract. Within the quarter, we increased the number of high-risk patients to hospitals under contract by approximately 50,000 patients bringing the total number of high-risk patients added since the beginning of the fourth quarter of 2016 to 180,000 high-risk patients. We continue to run ahead of our expectations. And as a result, we are increasing the target from 200,000 to 220,000 high-risk patients by the end of the third quarter this year. This represents the second quarter of increasing the high-risk patient target during this 12-month period. Recall, that the T2Bacteria panel runs on the same instrument as the T2Candida panel. So, the number of high-risk patients at customer facilities represents what could be tested with both T2Candida and T2Bacteria available in Europe now and plan to be available in the United States following the FDA clearance.

In terms of the number of contracts, we secured 5 new contracts in the second quarter, 3 of these contracts were with hospitals and hospital systems in the United States and 2 of these contracts were with international hospitals. One of the hospitals in the United States is an almost 1,000-bed hospital ranked as a top 10 institution for cancer treatment one of the significant patient populations at high-risk for sepsis. In the quarter, we also continue to make significant progress in our T2Bacteria rapid diagnostic panel. Last month, we are pleased to announce that we have received CE Mark for T2Bacteria, which now enables sale and distribution of that product in Europe and other countries that accept the CE Mark. With the CE Mark in hand, we are now in the process of educating our distributors and preparing for the commercial launch in Europe of what we believe represents a comprehensive rapid sepsis diagnostic solution that includes the best standard of care with our products, including T2Candida and T2Bacteria. We call this the T2Sepsis Solutions.

We are off to a strong start in Europe as one of the two closed contracts in the quarter includes T2Bacteria and we believe that this account maybe the first to go live and begin testing patients for clinical purposes later this year. Regarding the status of our T2Bacteria filing in the United States, we are pleased with the product performance to-date and expect to be filing for market clearance with the FDA within the next 4 to 6 weeks. Data either from the clinical trial was beginning to be closed out and drafting of the FDA filing is in process. This timing keeps us on track to potentially receive FDA clearance for T2Bacteria by the end of the calendar year.

In the second quarter we began offering the T2Bacteria Panel in the United States under a research used only RUO program in which customers can begin early validation testing which may enable acceleration of adoption post FDA clearance. As of June 30, four customers in the United States had already sign contracts for use of the T2Bacteria Panel product under the RUO program. And we have a strong pipeline of other hospitals and expect to close more contracts in the third quarter. In addition T2Bacteria RUO program providing hospitals with the opportunity to begin validation testing ahead of FDA clearance, we believe the RUO program will provide independent data for hospitals to present at conferences and for publications later this year and into 2018.

The T2Bacteria Panel remains a very important product for our company for a number of reasons. Being able to offer T2Bacteria alongside of our already FDA cleared T2Candida Panel which both brought won on our key T2Dx Instrument expands the size of the available market. In addition to be estimated 6.75 million high risk hospital inpatients that could be tested with T2Candida and T2Bacteria, T2Bacteria may also be used successfully estimated 2 million patients presenting in the emergency department or ED each year for a risk of sepsis pathogen infection. Our T2Bacteria Panel identifies approximately 90% of all gram-negative infections coming in through the ED and approximately 70% of community acquired infections in the ED. With the strong reimbursement structure in place providing about $290 of direct hospital reimbursement for testing these patients and the ability to provide test results in the ED quickly T2Bacteria may be the only product that can meet the significant unmet need for patients.

Next the T2Bacteria Panel upon FDA clearance along with the T2Candida Panel combined with the best standard of care creates the T2Sepsis Solution. This may provide hospitals with access to an accurate and rapid diagnostic solution that may enable approximately 95% of all patients with the sepsis pathogen infection to be treated with the white targeted therapy and as fast as four hours after blood is drawn from a patient. The availability of a comprehensive sepsis solution offers health business millions of dollars in potential economic value and more importantly can impact lives by allowing a faster and a more targeted therapeutic approach to treating patients. To help educate hospitals and clinicians, we continue to focus on utilizing the increasing number of customer success stories. Recently data on our T2Sepsis Solution were presented by clinical experts at the 2017 American Society for Microbiology Conference that supports a significant value of a comprehensive solution.

Huntsville Hospital reported that T2Candida tests have superior sensitivity to blood culture and that with T2Candida their hospitals are identifying far more infective patients than was possible with blood culture. They are also reducing the use of unnecessary antifungal therapy. Negative T2Candida results have led to cessation or initiation of costly antifungal therapy in 64% of patients. Dr. Thomas Kirn reported that Robert Wood Johnson University Hospitals including the T2Candida Panel as a standard automated order in their sepsis protocol, meaning with the order a same time as the first blood culture for certain high risk patients. In addition negative T2Candida results have led to cessation are no initiation of antifungal therapy in 67% of patients. They also share their experience as part of the T2Bacteria pivotal trial reported that initial data generated at their institution suggest that the T2Bacteria Panel maybe identifying patients that would likely be missed by blood culture due to the insensitivity of blood culture which has been demonstrated to miss 35% or more bacterial infections.

The potential for T2Bacteria's usage was also discussed by Dr. Mitch Cohen, Director of Surgery at the Denver Health and the University of Colorado School of Medicine. Dr. Cohen discussed the important role the T2Sepsis Solution may play in the ED and he reported that T2Bacteria can be easily integrated in the ED settings due its rapid turnaround time while blood culture reliant test cannot. Finally, we believe that more hospitals will adopt the T2MR platform where it includes both T2Candida and T2Bacteria. And usage of T2Candida will therefore increase when T2Bacteria is available. As data is emerging on T2Bacteria today and hospitals realized the product is closer to market we are already seeing acceleration and expansion of our hospital contract pipeline.

Now turning to our commercial efforts, we continue to focus on T2Candida and prepare for the potential launch of T2Bacteria and are continuing to invest in our commercial organization. Currently within the United States our sales organization includes 18 people covering the hospitals with access to the highest risk patients. We expect to expand the size of the organization by approximately 10% by the end of the year. With T2Candida only we have been targeting the top 450 hospitals in the United States. We are now beginning to expand this target market to include the top 1,200 hospitals in the United States. Internationally, we expanded our distribution partner channel to seven distributors covering over 20 countries who have been selling T2Candida and now shortly also plan to offer T2Bacteria.

Before turning the call over to Darlene for a complete review of our quarterly financial performance, I would also like to provide a brief update on one of our key pipeline efforts, the T2Lyme Panel. The T2MR powered T2Lyme Panels being developed in partnership with Canon USA and we remain on target to complete preclinical studies this year and be in a position to start the FDA pivotal clinical trial in 2018. We believe this product may be able to make a significant impact on the lives of patients with Lyme disease by identifying patients missed by current diagnostic products that measure the body's immune response to an infection. T2Lyme is designed to directly defect Lyme disease causing bacteria from a patient's blood sample and may be able to identify many of the estimated 300,000 plus patients that the CDC estimates are never diagnosed in the U.S. today.

Recent data conducted by our team here at T2 Biosystems in collaboration with researchers and clinicians at Massachusetts General Hospital and Harvard Medical School among others were published in the Journal of Clinical Microbiology that showed strong evidence for our test to detect Lyme disease causing bacteria in clinical samples. The study compared T2MR against PCR and found that T2MR is only the protection of 5 to 8 cells per ML with more than 10 times more sensitive than standard PCR which are at over 100 cells per ML. More importantly T2MR outperformed standard PCR and clinical samples. Out of the 21 clinical samples tested seven samples that were negative by PCR were positive with T2MR demonstrating the ability of T2MR to detect Borrelia and early stage Lyme disease at a higher clinical sensitivity.

In summary this study demonstrates that T2MR can better defect Lyme disease in both confirmed cases as well as in samples of probable cases of Lyme disease more quickly and more accurately. The speed and high sensitivity of T2MR may provide significant advantages over existing Lyme disease tests. We are were encouraged by this initial data and look forward to advancing this program and providing additional updates on future calls.

Now let me turn the call over to Darlene who will review our second quarter results in greater detail. Darlene?

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Darlene M. Deptula-Hicks, T2 Biosystems, Inc. - CFO and SVP [4]

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Thanks, John and good afternoon again, everyone. Product revenue for the second quarter of 2017 of $735,000, increased by $584,000 on a year-over-year basis and increased 16.5% sequentially. The sequential growth was ahead of our 10% expectation highlighted on our last earnings call. The increase in product revenue was primarily driven by increased sales of T2Candida consumable diagnostic test as a result of increased usage at customer sites as well as new customers going live in testing patients for the first time and instrument sales. Product revenue for the first six months of 2017 of $1.4 million increased by $778,000 on a year-over-year basis. The increase in product revenue was also primarily driven by increased sales of the T2Candida consumable diagnostic test as a result of increased usage at customer site and new customers going live in testing patients as well as sales of T2Dx instruments.

Research revenue in the second quarter of 2017 of $221,000 exceeded our guidance expected in the second quarter of less than $100,000. Research revenue in the second quarter in six months period comparatively declined year-over-year as was expected due primarily to lower revenue recognition under our co-development agreement with Canon Life Sciences, which decreased $618,000 and $967,000 respectively. Additionally during the second quarter of 2017, we reached a $500,000 milestone with Allergan as a result of the product development milestone being achieved related to the development of the gram-negative resistance panel, T2GNR, which is under development. This payment will be recognized over time based on product development activities.

Continuing down the P&L, total operating expenses, excluding cost of product revenue for the 3 months ending June 30, 2017 increased by $359,000 to $12.9 million from $12.5 million in the prior year corresponding quarter. The increase in operating expense was primarily driven by a $743,000 increase in research and development expenses offset by a $384,000 reduction in SG&A expenses. The $743,000 increase in R&D expense was primarily due to cost associated with our T2Bacteria clinical trials, increased non-cash depreciation and amortization expense and consulting fees. Research and development costs include $341,000 and $393,000 of non-cash stock comp expense for the quarters ending June 30, 2016 and '17 respectively. The $384,000 decrease in sales, general and administrative expense is primarily due to reduced payroll and related expenses, decreased consulting expenses and decreased travel and legal costs.

SG&A costs include $826,000 and $902,000 of non-cash stock compensation expense for the quarters ending June 30, 2016 and '17 respectively. Net loss attributable to common shareholders for the second quarter of 2017 was $15.5 million or $0.50 per basic and diluted share compared to a net loss of $14 million or $0.58 per basic and diluted share in the same period prior year. The weighted average shares used to compute earnings per share were 30.7 million and 24.3 million shares for the second quarters of 2017 and 2016 respectively.

Now, turning to the balance sheet at June 30, 2017, we had cash and cash equivalents of $46.1 million. We also reduced our Q2 '17 burn over our Q1 '17 burn and management projects that the company has the cash runway into Q4 2018. Let me now turn to review of our 2017 guidance. As you may recall in our first quarter 2017 earnings call in May, we guided to a 10% increase in product revenue in Q2 '17. We are pleased to report that quarter-over-quarter in 2017 product revenue increased 16.5%. For the third quarter ending September 30, 2017, we project sequential product revenue growth of at least 20%. This guidance represent expected T2Candida growth from testing more patients at existing sites as well as new hospitals going live in testing patients with T2Candida and additional sales of instruments.

Research revenue should normalize in the range of approximately $100,000 per quarter for Q3 and Q4 as development continues of the gram-negative resistance panel. And we also expect operating expenses for Q3 to be in the range of $12.5 million to $12.9 million, of which approximately $1.6 million is expected to be non-cash expense which primarily reflects stock compensation expense and depreciation. The weighted average shares outstanding for the 6 months ending June 30, 2017 were 30.6 million and could be impacted in Q3 by stock option exercises if any.

Additionally, as John mentioned earlier, in Q2, we increased the number of high-risk patients at hospitals under contract by approximately 50,000 patients bringing the total number of high-risk patients added since the beginning of the fourth quarter of '16 to 180,000. Based on this better-than-expected performance, we are increasing our 12-month target from $200,000 to $220,000 high-risk patients by the end of the third quarter of this year, meaning that we expect to add at least 40,000 high-risk patients to our customer base due to close contracts in the third quarter of 2017.

With that, I will now turn the call back to John for some closing remarks.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [5]

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Thank you, Darlene. In summary, we are pleased with our operational progress through the first 6 months of the year and I'd like to thank everyone on the T2 Biosystems team for their hard work and their focus on our mission of improving the lives of patients around the world. We are pleased with the progress in our key financial metrics and the growth in both our customer base and the progress in our sales pipeline. T2Bacteria achieved CE Mark status ahead of schedule and we are excited to now begin the commercial launch in Europe. The key metrics at our FDA pivotal trial are tracking well and we remain hopeful that we could launch T2Bacteria in the United States in early 2018. More importantly, we are seeing high interest from hospitals for T2Bacteria, which is best exemplified by the 4 accounts in the United States that will take advantage of our research use only program and the one European account that could be testing patients before the end of this year.

Thank you for your participation in today's call and for your continued interest in T2 Biosystems. That concludes our prepared remarks for this evening. Operator, we will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Paul Knight with Janney Montgomery Scott.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Analyst [2]

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Hi, John. Could you go over the addressable market on bacteria? I think you mentioned 2 million emergency room patients is that what you see is the U.S. market for the bacterial panel?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [3]

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Yes, great question, Paul. I hope all is well with you. So, the addressable market for T2Bacteria actually has two components, so you are right, there is the 2 million symptomatic patients that are presenting in the emergency department, but there is another 6.75 million symptomatic high-risk in-patients in hospitals. So, we see the total U.S. opportunity as 8.75 million high-risk patients and that they use an average price of just $200 to keep the math simple and it will likely be priced just below that. You are looking at $1.5 billion to $1.7 billion market.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Analyst [4]

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What do you think the throughput is of an instrument in terms of samples per year or what do you think an average could be?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [5]

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Yes, so the current instrument which has a relatively small footprint is only about 3 feet wide, can run somewhere in the order of 2,500 to 3,500 tests a year. Now that all depends on how many shifts you are running, you can run seven samples at a time, it's random access. So, as you go into some of these hospitals that can have 5,000 or 10,000 high-risk patients, we already have accounts that have two instruments and we can certainly see certain accounts that could have three or four or five instruments even.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Analyst [6]

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And then lastly on Lyme, the data is showing what, how many patients have been tested and could you refresh us on timeline for the Lyme panel?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [7]

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Yes. So, the timeline would be to start an FDA pivotal trial next year. We don't have the exact timeline, but in all likelihood, we'll be targeting the spring when Lyme season emerges. And we would have a good shot that it always comes down to patient enrollment and we have a good idea of what the FDA is looking for in that regard. We think we could finish that trial by the fall and probably be filed with the FDA potentially by the end of the year, but that's all pretty preliminary at this point.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Analyst [8]

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Okay, meaning filing with the FDA end of year, not expected approval?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [9]

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That's correct.

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Operator [10]

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Our next question comes from Isaac Ro with Goldman Sachs.

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Isaac Ro, Goldman Sachs Group Inc., Research Division - VP [11]

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Interested in your investments to commercialize bacteria, once you have that product in the market, how should we think about the investment you are going to make in the commercial side to realize the opportunity?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [12]

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Sure, Isaac. So, the sales organization today is 18 people, we'll likely add two or three more to that team between now and the end of the year and that likely won't change much in the first half of 2018. We will carefully monitor the opportunities, the growth in the opportunities and if there is a timing for taking that organization up, it's probably more gets addressed mid-2018 and in the second half of the year. We will be targeting the top 1,200 hospitals in the U.S. based on the size of the market we'd be attempting unless we take the addressable market up, we probably never need to get much beyond 25 direct reps to be able to successfully penetrate the top 1,200 accounts.

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Isaac Ro, Goldman Sachs Group Inc., Research Division - VP [13]

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And I appreciate the guidance you gave on sequential growth that you expect for product revenue, I think you said 20% sequentially into 3Q. As we think about the installed base getting a little bit bigger and obviously new products coming online next year, can you give us a range of reasonable outcomes for how sequential growth should evolve over the next four to six quarters, I know it's tough to give specific guidance, but my assumption is that the sequential growth should tick-up and I'd appreciate any guidelines you have around how you are thinking about that.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [14]

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Yes, great question and obviously one that we are not going to specifically answer at all. But we are definitely, as I said on the call, there's two components that we think should drive that sequential growth number up. And more importantly, we do believe there is going to be a tipping point in this market where there is just going to be an acceleration well beyond the kind of numbers that we are pleased to be seeing right now. And it's pretty hard to be able to put a tipping point question. So, we could [flex] philosophically about that for the rest of the call and we won't.

But we can see it's coming and really some of the first flashes of that is when we start seeing hospitals looking to making T2Candida a part of their standard sepsis protocol, right. When you become part of the sepsis protocol that typically means the physician actually isn't ordering the test, it means a physician is presenting with signs and symptoms and the test is automatically ordered based on the state of the patient. And with T2Bacteria, we think we will see the same thing happen even at a greater degree because of the higher influence of bacterial infections.

So, I think you are right, we're pleased that we exceeded the expectation on sequential growth in Q2. We are equally excited to be able to get on the call and say hey, we think that growth rate is going to even be higher in Q3 than Q2. I know often (inaudible) for companies Q3 is going to be tough quarters because of the August in the middle of that, but we feel good about the 20% growth or better in Q3. And we're pretty hopeful that we can see that number continue to grow and really pickup pace as T2Bacteria comes online, so that will be all additive to the growth rate we are seeing from Candida on a standalone basis.

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Isaac Ro, Goldman Sachs Group Inc., Research Division - VP [15]

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One last question for me would be just as we think about a point when you had T2Bacteria on the market, is it fair to assume that the combination of your installed base, time with customers on sepsis as well as the availability of bacteria, like that those factors combined to drive an acceleration in sequential growth from current levels?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [16]

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Yes.

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Operator [17]

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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 [18]

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One of the questions I have got is in reference to the placed units that you have got now for T2Bacteria. Can you just talk us through, because the term for research use is often deceptive and not well understood, can you talk us through what it means and what it means to the franchise and what people are looking at right now as far as T2 acceptance and what your thoughts are? And you can go into as much detail as you like.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [19]

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You bet. Thanks, Steve. Good afternoon. So, yes, now a great question, I think honestly perhaps the most exciting development is you have the rapid adoption. We rolled out this research use only program at the very early part of the second quarter and we have seen pretty rapid uptake with four accounts coming on-board in the U.S. and of course we have an additional test customer in Europe that's bringing on T2Bacteria.

So, what this program is all about is this is in the U.S., so this RUO program is only being run in the U.S. because we don't have FDA clearance. And so, in the U.S., the T2Bacteria product cannot be used today for clinical testing of patients and making decisions about how to treat a patient. So, the product is not being used for that purpose and certainly would not be sold or marketed in any way in that regard.

But there are hospitals that are interested in bringing the product on-board in its current state, in this RUO state and they are testing it. They are doing a lot of the same work and sometimes even additional work that they would be doing as they go through a verification or validation period before they go live in testing patients post FDA clearance. So, some of the work that they are doing now perhaps will speed up the verification and validation work that they might do later, but maybe more importantly, they are going to be up the speed in how to run the product and how to run a validation and verification program so that should speed up the whole process.

So, the interest on the part of the customers in participating really falls into two categories. One is kind of verifying, validating seeing how the product works, all that sort of stuff. And then the second is there is a number of customers that want to be the first in fact, we have a large number that want to be the first so that they can you get up at some of the industry conferences, they can publish data and talk about what they have learned even in some of these research use only mode studies that are going on.

I think the most important thing here is it should speed up commercial launch and revenue, but perhaps more importantly, I think it's a really, really positive indication of the market's interest in this product and what the uptake might be like once we get FDA clearance, because maybe the hospitals bringing it on-board, they're making a pretty significant investment to bring on-board products and instruments to do all of this work. And of course, the reason why they want to get involved in publishing the work is I think just to be a really big breakthrough and they want to be among the first to talk about it.

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Stephen Gilbertpaul Brozak, WBB Securities, LLC, Research Division - Senior Equity Analyst [20]

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So just in recapping one of the obviously critical items here is that the familiarity that they bring, it sounds like you will have a cold launch, because you obviously have the fungal detection system, but it's also now that you will have other people that can provide background information, third-party information to help the case for how significant T2 is, is that a good way of describing it?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [21]

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Yes. It's a great way of describing it and it's not something we have with T2Candida, so with T2Candida we weren't in the position of especially with a new instrument being launched to be able to have the kind of a research use only program ahead of the commercial launch. So, when we commercially launch T2Candida, it was a very cold start, nobody had done any of this work and you didn't have any references that you can talk to and there is a curve, you got to go up there as you go through that. This will put us in a very different and I believe stronger position with the launch of T2Bacteria.

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Operator [22]

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Our next question comes from Mark Massaro with Canaccord Genuity.

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Max Masucci, [23]

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Hi, this is Max Masucci on for Mark. Congrats on the quarter. How should we think about your funnel for partnerships and given the versatile nature of the T2 platform, can you speak to any new areas or applications where you are seeing interest from partners and if so, can you share what some of those are?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [24]

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Yes, great question, Max. So, we have a really healthy business development pipeline and partnership pipeline. I am not at liberty at moment to go into the application areas that are of interest. The one area we are definitely continuing to see interest in that we've talked about on the past, though I can't mention the (inaudible) but there are even new or extended uses of our technology where there are multiple opportunities coming together. So, it's difficult to predict when partnerships will happen, but I would say there is really active pipeline there and I would be disappointed if we don't have something to talk about hopefully here in the second half of the year.

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Max Masucci, [25]

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And so you mentioned the $500,000 milestone with Allergan in the gram-negative resistance panel, what are some of the upcoming milestones on your work with Canon in Lyme and also your work with Allergan maybe in terms of data or clinical trials?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [26]

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Yes. So, in the case of Canon, the next big milestone will be when we enter the FDA pivotal trial, so the next milestone there assuming we get into that trial in the spring is probably the late Q1 or maybe Q2.

And then in terms of Allergan, there is continued smaller milestone and there could be another comparable milestone achieved similar to the one we just achieved before the end of this year. And then there are couple of others that extend out into 2018 that ultimately culminate when we deliver product to Allergan that they can use internally.

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Max Masucci, [27]

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Have you seen any changes to your competitive environment or any changes to capital budgets or customers' appetite to purchase?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [28]

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We really haven't seen anything change on the competitive front. So, 100% of the competition, if you will or perceived competition, I guess I'll say it is on post blood culture tests. So, every other product whether it's in the category of species identification or susceptibility, it's all running on a positive blood culture and we know that takes one to five days and it's missing 35% to 50% of the positives that we pickup.

So, there are no other products directly from blood that can screen patients. I will put it this way. There is no other product in the market that could ever be a part of the sepsis protocol, right, they can't, right. They can run on a post blood culture that might be part of the sepsis protocol, but there is no other product that could be used for screening positive and negative patients as a part of a sepsis protocol. So, no change in that regard.

And I would say on the capital side, it's probably the same, but it might be a little better. We are seeing a little -- what's difficult for us to tell given our revenue volumes is whether we are seeing an improved environment, because we have more data and customer success stories or some people are far into the T2 story in terms of assuming the tremendous benefits or is it a macro environmental shift. I can always speak to it from a T2 standpoint. My guess is it might have more to do without some macro trend, but you know better than I do.

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Operator [29]

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(Operator Instructions) Our next question comes from Puneet Souda with Leerink Partners.

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Unidentified Analyst, [30]

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Hi, guys. This is (inaudible) calling for Puneet. Just want to follow-up on the RUO program, should we expect -- you talked about the data that some (inaudible) are looking to release, can we expect that in any upcoming venues or conferences or any publications later?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [31]

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I think we will see probably at least discussions of experiences and maybe some limited data as early as IDWeek, which is in early October. But yes, these companies or hospitals are just starting to get used to it. So, you shouldn't expect to see massive data, but I think you will definitely get views, thoughts and sharing of experiences and a little bit of data at IDWeek.

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Unidentified Analyst, [32]

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And kind of want to touch upon the differences between T2Candida and T2Bacteria execution. How do you expect the execution for bacteria to be a little bit different from the previous launch given the fact that it was slower than expected before? So, just give us some color on some of the improvements?

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [33]

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Yes, that was a great question. So, I think there are a number of very significant differences. Number one, we have an installed base of customers that already have the T2Dx Instrument. They have experience with T2Candida. They know the direct from blood story and that's the best place to go, right.

We would expect over some reasonable period of time for almost all of the existing customer base to adopt T2Bacteria that really is what our expectation is. So, obviously, it won't all happen in the first quarter or second quarter, but within the year I would think the majority, if not the vast majority, adopt the T2Bacteria. And of course, we didn't have any customer base with instruments when we are starting with T2Candida.

Secondly, of course, we have the research use only program. So, we are going to have customers that are already using the product with the intent I believe that they are going to adopt post-FDA clearance and we didn't have that with T2Candida. There was only much of a -- we got FDA clearance and off we go.

Third, the T2Dx Instrument is now a robust and stable environment. I mean, we have expanded the usage of the instrument, even things like of course the first generation of any instrument is what's labeled in later generations of the instrument. And so, the overall platform is not much more robust, which should drive more rapid adoption as well.

Next, really importantly, the challenging part of the sales cycle for us with T2Candida has been convincing the lab director to bring in an instrument to tests for fungal infection. And most often as we have talked on prior calls, lab directors don't see it as a big problem, and need to be educated and while we eventually get there, it can sometimes take they really, really long time and then they may even still restrict initial usage of the product because they just don't think it is big of a problem as it is, but carry on sections, they understand, they really do. Some lab directors, and I don't need to tell you this is the majority, but just to give you a sense, some lab directors don't even know that Candida in sepsis. They all know Bacteria in sepsis. So, we think we are going to get a different and significantly more favorable reception in the lab based on our real experience and that's even been confirmed in market studies that over 3x the number lab directors get excited with T2Bacteria than they get with Candida when you kind of hit them with it for the first time.

And then lastly, T2Bacteria opens up this emergency department market where T2Candida doesn't fit and that is a really, really unique opportunity. I think we can probably all intuitively understand the need for a rapid diagnostic and how blood culture could never ever work in the emergency department for screening patients. And yet there is a critical decision that needs to be made for these 2 million patients, which is do we admit or do we not admit, do we send them home, a lot of them have holding areas where they keep patients for 8 hours to 12 hours.

And so, this is a significant unmet need where in a critical, let's call it four-hour period we can provide a rapid diagnostic result that can lead to admitting a patient into the hospital and having them on the right antibiotic so that that CRG code reimbursement has the lowest cost associated with it.

And then layer on top of that a really healthy CPT code reimbursement of $290 in test which is very different dynamics for T2Candida as well. And we really see for many, many of these hospitals that the emergency department may be the beachhead for getting into hospitals initially and then expanding usage of both Bacteria and Candida later.

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Unidentified Analyst, [34]

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And just one last question about your operating expenses, I think you got it (inaudible) which is kind of flat with the Q2 as well. Just trying to get some color, I want to see if perhaps the Bacteria trial were older and maybe the R&D could go down or SG&A could go down as well?

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Darlene M. Deptula-Hicks, T2 Biosystems, Inc. - CFO and SVP [35]

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Yes. Sure, no, that's a good question. Exactly, the clinical trial for Bacteria is coming to an end here and as we all know, those are expensive things to do. So that's coming to an end, so we are going to be seeing the R&D expenses come down. Now, we will see that increase again next year a bit. We think that the Lyme trial will require less patients, so comparatively it should be less expensive. I think we are also doing some belt-tightening, you started to see some G&A expense come down a little bit this quarter-over-quarter prior year as well. So, I think you will continue to see the expenses go down a little bit the next several quarters.

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Operator [36]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to John McDonough for closing comments.

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John P. McDonough, T2 Biosystems, Inc. - CEO, President and Director [37]

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Well, thank you very much everyone for dialing in. We are very excited about the progress in the first half of the year and equally excited to be in the third quarter and look forward to presenting more good results in the near future. Thank you for dialing in.

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Operator [38]

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This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.