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Nanostring Technologies (NSTG) Q1 2019 Earnings Call Transcript

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Nanostring Technologies (NASDAQ: NSTG)
Q1 2019 Earnings Call
May. 09, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and welcome to the NanoString 2019 first-quarter financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Doug Farrell, vice president of investor relations. Sir, please go ahead.

Doug Farrell -- Vice President of Investor Relations

Thank you, Lauren. On the call with me today is Brad Grey, our president and CEO; and Tom Bailey, our CFO. Earlier today, we released our financial results for the first quarter of fiscal-year 2019. I'd like to remind you that during this call, we may make various statements that are forward-looking, including statements about financial projections, existing and future collaborations, future business growth trends and related factors, prospects for expanding and penetrating our addressable markets, our strategic focus and objectives and the development status and anticipated success of recent and planned product offerings.

Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on the call today, and we undertake no obligation to update publicly any forward-looking statements. I'd also like to remind everyone that we'll be at the UBS Healthcare Conference the week of May 20. We look forward to seeing many of you there.

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Now I'd like to turn the call over to Brad.

Brad Grey -- President and Chief Executive Officer

Thanks, Doug. Good afternoon, and thank you for joining us today. I'm pleased to tell you that 2019 is off to a strong start. During the first quarter, our core nCounter business drove 18% growth in product and service revenue.

This included solid double-digit growth across all geographies and both academic and biopharma customer segments. In addition, customer interest in our GeoMx Digital Spatial Profiler continues to build, setting up a new growth driver for the second half of this year. I'll begin the call with an update on our strategic objectives for 2019 before turning over the call to Tom to review the details of our operating results for the first quarter. As we outlined on our March call, our first strategic objective for 2019 is to sustain double-digit growth in our core nCounter business.

This growth will be driven primarily by consumable revenue, which is expected to leverage strong pull-through into our steadily expanding installed base. Our total consumable revenue in Q1 was $14.5 million, an increase of 25% over the prior year. Annualized consumable pull-through was in the top half of our guided range of $75,000 to $80,000 per system. Strength in life sciences offsets slower growth in diagnostics.

In the first quarter, revenue from panel products set an all-time record, growing in excess of 40% year on year. Our immuno-oncology panels were a highlight, as both our PanCancer immune profiling panel and our IO 360 panel achieved record sales during the quarter. We're also pleased with the performance of our Custom CodeSets business, which grew during the quarter. We continue to penetrate non-oncology accounts like immunology and neurology in which panel revenue grew 65% year on year.

In addition, we remain on track to launch several new panels over the balance of the year, including addressing important research topics such as metabolic pathways and fibrosis. The improvements we have made on our channel over the last year continue to pay dividends. The bifurcation of our salesforce has achieved exactly what we envisioned: accelerating sales of our consumables and providing our regional managers with additional bandwidth to focus on our instrument funnel. Demand for nCounter systems remains healthy, and we expect instrument revenue for the full year to be consistent with 2018.

During Q1, we expanded on our installed base of nCounter systems to approximately 760 systems, putting our installed base approximately 19% above where it was a year ago. The majority of our instrument sales in the first quarter were our high throughput systems, the result of strong demand for MAX systems from biopharma companies and as part of GeoMx DSP bundles. Oncology applications accounted for approximately 70% of new instrument placements, with the balance going to immunology and neurology. The activity level at the recent AACR meeting demonstrates the continued impact of nCounter oncology as our customers presented over 60 studies, including data from nCounter.

During AACR, we had substantial customer dialogue focused on our CAR-T panel, which we believe will find utility in the development, characterization and manufacturing of cellular therapies. On the diagnostic side, Prosigna saw solid revenue growth in Europe during Q1, where the appeal of decentralized testing is strongest. Performance in North America was weaker as competitor counter detailing shifted market share away from us in some accounts. Late last month, Celgene announced that the ROBUST study, a phase III trial evaluating the addition of Lenalidomide to standard of care in a subgroup of DLBCL patients did not achieve its primary endpoint of improved progression-free survival versus standard of care.

Patient selection for enrollment in the study was conducted using our LymphMark assay, but the results of the study do not support seeking regulatory approval for a LymphMark as a companion diagnostic for that indication. That being said, there remains a significant unmet medical need for subtyping DLBCL patients based on the cell of origin as per WHO 2016 lymphoma classification guidelines. And we believe that LymphMark can provide clinical value in this disease. We continue to explore a commercial path for LymphMark independently as a cell of origin subtyping test and/or in partnership with one of the approximately 25 different biopharma companies who have run pilot studies using the assay for patient stratification.

Our second strategic objective for the year is to launch our GeoMx digital spatial profiler on a trajectory for long-term success. Our market development efforts for GeoMx began more than two years ago with the introduction of our Technology Access Program, or TAP, which provides service based on our prototype instruments. Demand for TAP has consistently exceeded expectations, and we have now completed more than 90 projects for a diverse set of more than 70 customers. During these interactions, we gained invaluable insights into how researchers are likely to use DSP, including preferred experimental design, consumable formats and analytical techniques.

These insights have provided real-time input for our product development efforts, allowing us to anticipate and address the needs of researchers who are hunting for cancer biomarkers, and to deliver a complete integrated solution for spatial biology. In addition to the high throughput GeoMx instrument, this solution provides a suite of validated consumable content, powerful and intuitive visualization software and partnerships with other leading companies that form a larger GeoMx ecosystem. Our full commercial launch for GeoMx took place at the American Association of Cancer Research Conference last month, generating record customer interest and booth traffic. In total, we generated more than 1,000 new customer leads during AACR, which is about four times as many leads as the prior year.

We estimate that 70% of the customer dialogue at AACR was driven by GeoMx, with the balance focused on nCounter. During AACR, we unveiled our pricing and consumable strategy for GeoMx. The GeoMx DSP instrument will be priced at $295,000, which is comparable to high-end slide scanners used widely throughout pathology. GeoMx launches with a menu of validated consumable panels initially supporting immuno-oncology and neuroscience research and expanding over time.

At launch, all GeoMx RNA and protein assays are enabled for readout on any of our nCounter platforms. The initial portfolio will include six tissue morphology kits or regions of interest selection, 10 modular protein panels spanning 130 protein targets and one RNA panel that profiles more than 80 key targets in immuno-oncology. This modular consumable format allows customers to tailor the content to their experimental design. For instance, customers can choose highly targeted panels at a more affordable entry price per sample or buy up to more comprehensive content by adding more markers or regions of interest.

We expect the average price per sample for translational researchers to be about $500 per sample, which is about twice the average revenue per sample that our current customers spend on nCounter panels. During AACR, we also showcased our GeoMx software, which provides an intuitive interface to directly map expression profiles to spatial context, opening a new era of discovery for novel biomarkers, gene signatures and translational research. Our GeoMx software demonstrations drew a steady stream of researchers interested in seeing the capabilities of the platform to our AACR booth. Customers were impressed by the completeness of the software solution available at launch, which contrasts with other platform launches that often add software only post launch and leave early customers to fend for themselves.

Many customers were captivated by the ability to visualize, analyze and browse back and forth between high-resolution tissue images and deep molecular profiling all on the same screen. Other capabilities of particular interest were the toolkit for segment and tissue samples and the biological compartments based on cell phenotype, creating separate molecular profiles for the tumor versus the microenvironment. Finally, AACR provided an excellent venue for us to announce several partnerships designed to build an ecosystem around GeoMx, expanding its capabilities and content and automating its workflow. Our first partnership on the RNA content front is with the advanced cell diagnostics or ACD business at Bio-Techne.

NanoString and Bio-Techne will copromote a workflow that combines our GeoMx RNA assays with ACD's RNAscope kits, a unique and popular set of assays that enable the visualization of RNA targets across an entire slide with high sensitivity. We have already demonstrated the feasibility of a workflow that utilizes RNAscope kits as morphology reagents to guide the selection of regions of interest for deep molecular profiling on GeoMx. During AACR, we introduced a white paper that demonstrated the workflow and results to both ACD and NanoString customers. And we announced the immediate availability of RNAscope capabilities within our Technology Access Program.

Our second partnership focuses on rapidly expanding the GeoMx protein content in partnership with Abcam, a leading provider of antibodies. Abcam will provide all of the conjugated antibodies for use with the GeoMx DSP, drawing from its library of approximately 6,000 antibodies validated for IHC on FFPE tissue and leveraging its far-reaching global distribution channels. This will provide our customers with convenient access to a vast a la carte menu of antibodies that we could not make available very easily on our own. Finally, to automate tissue processing for GeoMx, we've partnered with Leica Biosystems, a Danaher company, to co-market GeoMx DSP to their BOND RX autostainer customers.

Leica Biosystems sells the Bond RX instrument, which automates standing protocols for protein immunohistochemistry and RNA in situ hybridization, and which will now provide GeoMx customers with an autostainer solution with reproducible results at a throughput matched to that of the GeoMx DSP instrument. Leica Biosystems will promote GeoMx DSP on its website, through its sales representatives and by making automation protocols available to its customers through software updates to the BOND platform. With more than 1,000 Bond RX systems installed worldwide, this partnership provides a great way to increase awareness and adoption of GeoMx. Customer reaction to these three partnerships has been overwhelmingly positive.

Customers expressed appreciation that we've anticipated and proactively addressed their needs. And we're encouraged that we are working with market leaders they already know and trust. In addition to our launch activities at AACR, we showcased 13 scientific studies based on GeoMx DSP, including those from research customers at cancer centers like MD Anderson and Vanderbilt and biopharma companies like Janssen Pharmaceuticals and H3 Biosciences. These bring the cumulative number of GeoMx studies presented to date to more than 25 scientific abstracts and a total of three peer-reviewed publications.

Despite the fact that our GeoMx commercial team was primarily focused on preparing for launch throughout Q1, we continue to feel strong interest from customers looking to place pre-launch orders for GeoMx DSP instruments. I'm excited to tell you that during the first quarter, we expanded the number of preordered systems from the more than 30 orders reported at year end, to more than 40 orders as of March 31. We are delighted by the Q1 order flow, which is especially impressive when you consider that during Q1 we were no longer providing all of the attractive promotional elements that had been previously offered under the GeoMx priority site program last year. With more than 40 orders in the book heading into launch, we believe that we are on a launch trajectory that compares favorably to other product launches in our field.

To date, about two-thirds of our preorders are made up of academic customers and one-third are industrial customers such as biopharma companies and CROs. So far, about 25% of our pre orders have pulled through a new nCounter instrument, with the vast majority of these being our high throughput MAX system. We are on track to begin installing our first commercial GeoMx systems beginning in the third quarter. During the second half of this year, we expect to install 25 to 30 of the GeoMx preorders that we received in 2018.

The incremental orders that we booked over the balance of this year are likely to be fulfilled in 2020. In parallel to commercializing GeoMx, we have continued to invest in our third strategic objective, which is to advance our Hyb & Seq platform toward a commercial launch in 2021. During Q1, our efforts focused on reducing sample input requirements, increasing the number of targets simultaneously profiled and refining the use of the platform for gene expression profiling. The next major technical update is planned for the AMP conference this coming November, when we expect to provide a technical update on the utility of the Hyb & Seq platform in clinical applications.

Now I'd like to turn the call over to Tom to review the details of our first-quarter results.

Tom Bailey -- Chief Financial Officer

Thanks, Brad. For the first quarter of 2019, product and service revenue was $21.4 million, which was above the high end of our guidance range. Product and service revenue grew 18% year over year and included $4.3 million in instrument sales, $12.1 million of life science consumable sales, $2.3 million in Prosigna sales and $2.6 million in service revenue. Revenue growth during the quarter was driven by a nearly 20% expansion in our installed instrument base of 40%-plus increase in demand for panels and service revenue that benefited from the continued strength of our GeoMx Technology Access Program.

Revenue recognized from collaborations was $6.3 million, and we received cash from collaborators of $2.9 million. Gross margin on product and service revenue was 59%, approximately 200 basis points higher than last year, primarily due to strong consumable sales. R&D expense was $16 million, an increase of 16% over the prior year. The increase was driven by continued investments in our GeoMx DSP platform and consumable content, as well as spending on our Hyb & Seq program, with Hyb & Seq spending offset by funds received from Lam Research.

SG&A expense was $23.4 million, an increase of 21% over the prior year. The growth in SG&A expenses was primarily due to higher professional fees as compared to last year, which were driven by Sarbanes-Oxley compliance and other audit-related activities. These additional audit-related expenses were booked entirely in the first quarter, and we therefore expect SG&A growth to slow in subsequent quarters, consistent with our previously provided full-year SG&A expense guidance. For the first quarter, stock-based compensation expense was $2.9 million, and depreciation and amortization expense was $1.2 million.

We ended the quarter with over $142 million of cash, cash equivalents and short-term investments, which includes the net proceeds of $68.3 million received for our March equity financing. Transitioning to guidance, we are maintaining our full-year 2019 financial outlook as provided on our March 7 conference call and outlined in today's press release. For the second quarter, we expect product and service revenue to be in the range of $21.5 million to $22.5 million, consistent with previous guidance that we expect to generate approximately 45% of our total nCounter-related product and service revenue in the first half of the year, and 55% in the second. For GeoMx, we expect to begin installing commercial instruments during the second half of the year.

So our Q2 guidance does not include any GeoMx revenue. We expect to begin recognizing GeoMx revenue in the third quarter, and our total GeoMx revenue guidance for 2019 is unchanged at $6 million to $8 million. For collaborations, we expect to record revenue of approximately $7 million in the second quarter, which includes the acceleration of approximately $3 million of remaining deferred revenue from our collaboration with Celgene. The accelerated recognition of the Celgene revenue does not change our full-year guidance for approximately $20 million of collaboration revenue.

As noted on our March 7th call, we expect to recognize the balance of remaining deferred revenue from collaboration to this year as we conclude activities with both Celgene and Lam. Total revenue representing the sum of our product and service and collaboration revenue is expected to be in the range of $28.5 million to $29.5 million for Q2. Now I'll turn the call back over to Brad for some closing comments.

Brad Grey -- President and Chief Executive Officer

Thank you, Tom. In summary, 2019 is off to a solid start. nCounter is going in line with our expectations, driven by strong sales of panels into our core oncology market. The spatial profiling market is poised to explode, and GeoMx DSP provides a compelling solution that has already demonstrated nice order flow and high customer engagement.

We look forward to updating you with continued momentum on both of these product lines as the year advances. With that, we'll open your line for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] And our first question comes from Dan Brennan with UBS. Your line is open.

Dan Brennan -- UBS -- Analyst

Questions guys. So I guess the first question, Brad, just on GeoMx. Maybe can you provide a little color? You gave us an update kind of backlog number, which I wasn't sure if we were going to get. So maybe first question on that front, going from, call it, 30 to 40 plus.

Just what's the activity with your marketing team or sales team going out and seeking these orders? Like how aggressively are you doing that in the midst of as you're preparing for the commercial launch? And how do we think about possibly the 10-plus increase in backlog, how that might translate into kind of backlog growth in the rest of the year?

Brad Grey -- President and Chief Executive Officer

Yes, thanks, Dan. So as you can imagine, during the first quarter, our team was primarily focused on preparing for the full commercial launch, which took place really the first week of April at AACR. That being said, many customer dialogues that were initiated during the second half of 2018, as part of our GeoMx priority site program marketing efforts, continued into the first quarter. And for those customers that maybe could not find funds during 2018 to take advantage of the incentives but still were eager to get access very early on to a GeoMx instrument, we remain engaged in customer dialogue.

And of course, we're happy to take their orders. I will say it was not a primary focus of the overall team to generate orders in the first quarter. Obviously, our focus overall is to play the long game and really to support a very long-term success in installed base growth. We're delighted to have gained 10-plus new instrument orders in the context I just described.

That just builds our overall backlog and gives us increased confidence to invest in things like additional marketing effort and additional install capacity once we have of course sorted out the best process for install and customer support. And we continue-- we expect the momentum on orders to continue now that we're in the full commercial launch mode.

Dan Brennan -- UBS -- Analyst

And given the greater than 1,000 customers that have expressed maybe leads, if you will, I forget the word that you exactly used coming out of AACR, but kind of how did that maybe compare with your own kind of expectation, if you will? And what's the process for dealing with such a large bolus of customers that are expressing interest in the GeoMx? Like, how many can you actually facilitate, kind of bringing in training or maybe having them look at the product? Can you walk us through a little bit about the process for executing on those leads?

Brad Grey -- President and Chief Executive Officer

Yes. So the leads that we gained really from the beginning of the year through AGBT, through the AACR interactions and through a series of webcast presentations by some of our technology access customers and data customers that we've been calling the GeoCast series, we have accumulated a tremendous number of marketing-qualified leads that actually is well in excess of the 1,000 that we collected at AACR. To give you a sense of scale, we have already achieved two-thirds of our overall full-year goal of lead generation as we sit here today in early May. So we are running well ahead of what our expectations had been for overall customer engagement, which I think is a great leading indicator.

As your question implies, it is a challenge to follow up and process on all of those leads, and that will take us time. Luckily, we have invested in an inside sales capability in the last several years that's substantially expanded and upgraded. Those inside sales reps who have historically focused on lead generation activity for nCounter instruments, they're a subset of our inside sales people who are separate from our consumable reps, have been and are being trained on GeoMx and how to follow up on that tremendous number of leads. Obviously, it's also a priority for our field-based resources, such as our regional account managers, who are the instrument sales reps, and our technical sales specialists, to follow up with all of those hot leads.

Given the processing time and the sales cycle, most of the leads that we have generated I'd say at AACR are not likely to yield instrument orders until the latter half of this year, given that six months after AACR would be sometime in the fourth quarter. But it does set the stage for great momentum as we enter 2020.

Dan Brennan -- UBS -- Analyst

Got it. And then maybe final question would just be on the partnerships that you announced. I mean, they all sound like they're really interesting in and of themselves. Which of these potentially opens up the door in terms of even kind of greater access to maybe customers that might have interest in the product? Is it the Techne relationship, or is it the Danaher relationships? Obviously the Abcam is providing a rich library of antibodies.

But between Techne and Danaher, can you just give us a little color how we should think about both of those? Thanks, Brad.

Brad Grey -- President and Chief Executive Officer

Dan, you're asking me to choose between my favorite of my three children. They're all great, and I expect all of them to have a fabulous impact. Just going through them and really talking about how they translate into kind of increased addressable market or customer engagement, because each one contributes. So maybe starting with the Leica Biosystems partnership, that partnership gives us really instantaneous access to a customer base of over 1,000 installed BOND RX systems, which is one of the most versatile and popular autostainer that's used in the research context.

So that provides a really relevant and instant kind of installed base to begin to go educate. The Bio-Techne partnership also provides an entree to a very large number of enthusiastic RNAscope customers. We've all watched how well that business has grown under Bio-Techne's leadership. And there's a tremendous following for that approach.

And those are really highly validated customers who really, by virtue of using RNAscope, have demonstrated their desire to get multiplex spatial information. And then finally, I would say the Abcam partnership shouldn't be underestimated. It's not just that Abcam brings a tremendous library of antibodies to help us scale content, but they have a very broad usage and a very powerful electronic sales channel that can provide us an ability to access a vast IHC customer base out there. It's a little bit less directly relevant for new instrument placement.

It's very relevant for consumable pull-through once those installs are placed. So each one of them is great. I think the totality of having all three has an impact that is maybe greater than the sum of the parts. The perception among our customers is that GeoMx is coming to market with the support and the collaboration of market-leading platforms that they already use and trust, that this is not going to be a platform that's a flash in the pan but one that's going to have a continued ecosystem that's built around it.

And I think that intangible is also very important for us.

Dan Brennan -- UBS -- Analyst

Great. Thank you, Brad.

Operator

Thank you. [Operator instructions] And we have a question from Catherine Schulte with Baird. Your line is open.

Unknown speaker

This is actually Tom on for Catherine. I appreciate some of the color around orders. Just wondering, of the preorders you've received, what's kind of the customer mix between existing customers and new to NanoString nCounter? And then as a follow up, you guys had talked about sort of the pacing around getting that install team out. Have your thoughts changed around that given the strength of what you've seen so far?

Brad Grey -- President and Chief Executive Officer

Yes. Thanks for the questions. The customer mix has continued to be about 75% new customers and, I'm sorry, sorry, I reversed it. 75% existing nCounter users, and 25% customers who are really buying an nCounter for the first time for use with their GeoMx.

So I think that is exactly as we would expect. Of course, the people who engaged us earliest on the DSP platform in the prelaunch period were people with whom we already had relationships by and large. So that really explains why the majority of our customers, our existing orders are coming from people who have used nCounter in the past. We're delighted to see that a quarter of them are new to the system, and we've already begun to see a nice instrument sales benefit that comes along with that.

To your question on how are we-- whether the guidance that we've provided on instrument installs has changed over the last eight weeks since our last call, the answer is no. Our guidance remains that we will install 25 to 30 of the instrument orders that we have received during this year. As we described in the last call, our throttling, our instrument install pace to ensure that we're providing delightful service to that first wave of customers, we'll provide a little more commentary on the exact pacing as we get into that phase when we're on our August call. But we want to make sure that before we scale up our install capacity, we've worked out any kinks in how to install these systems and train our customers most efficiently and effectively.

And so we want to take the time to do that right as we initially roll out. So no change in our current guidance for current-year revenue. But of course, any incremental backlog just helps indicate an even stronger 2020 and beyond.

Unknown speaker

Great. And then maybe one more. I appreciate the color around the partnerships, particularly that Techne ACD. We've talked about it a little bit already, but do you have any thoughts about potential timelines on when we might see some actual kits coming out combining these technologies?

Brad Grey -- President and Chief Executive Officer

Yes, I think that's in the works. Obviously, the team began to kick off the coordinated efforts to optimize kits just a few weeks ago at the beginning of May. I think what we'll do is we'll already embed some of those kit offerings in their kind of prototype form into our Technology Access Program beginning immediately. That will help us, as it has in the overall GeoMx development, get real time customer feedback that we can put right into our product development efforts and introduce kits in due course.

Obviously, the primary focus of our team and all our customers in 2019 is going to be getting their instruments installed, trained, validated and doing some of those first experiments. So the vast majority of our revenue will be instrumentation, with really a negligible amount of consumable revenue this year. So I would say, like everything GeoMx, we want to take our time to get this right. Look for those kits sometime in the second half and really to contribute revenue, I would imagine, not until 2020.

Unknown speaker

Great, thanks for the color.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Doug Farrell for any closing remarks.

Doug Farrell -- Vice President of Investor Relations

I'd like to thank everyone for joining us this afternoon. If you did miss any portion of the call, there will be a replay available in the next few hours. For domestic callers, please dial (855) 859-2056. International callers, please dial (404) 537-3406.

The conference call ID number is the same for both, 9949158. With that, I wish everybody a nice day. Thank you.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Doug Farrell -- Vice President of Investor Relations

Brad Grey -- President and Chief Executive Officer

Tom Bailey -- Chief Financial Officer

Dan Brennan -- UBS -- Analyst

Unknown speaker

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