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What to Watch When NanoString Technologies Reports Q2 Results

Maxx Chatsko, The Motley Fool

To say investors are excited about NanoString Technologies (NASDAQ: NSTG) might be an understatement: The share price of the life sciences laboratory equipment developer has more than doubled so far this year. The business is still coughing up sizable operating losses each quarter, but a recent new product launch has the potential to change its trajectory.

The product in question launched at the end of March, so it was on sale for the entire second quarter -- a period that could quite possibly mark an inflection point for the business. While three months typically wouldn't be much time to generate meaningful sales for a piece of niche lab equipment, investors are intrigued by the fact that this product can be purchased as a simple add-on for the 760 machines developed by NanoString Technologies that already reside in R&D labs across the globe. Are investors getting ahead of themselves? We'll get an idea about that when Q2's results are announced on the final day of July.

A pair of stretched arms holding a pair of binoculars overhead.

Image source: Getty Images.

By the numbers

The nCounter Analysis System is the bread and butter of NanoString's portfolio. It uses optical barcoding technology to count single molecules in a biological sample, such as a tissue biopsy, allowing researchers to condense the time required for experiments in which they must quantify biomarkers. The machine represents the foundation of the company's business, supporting sales of add-on products including gene expression diagnostics, molecular assays and panels, as well as the chemical reagents that are used in operating each machine. 

NanoString Technologies has navigated its path as a niche lab equipment provider reasonably well. The financials aren't necessarily appealing, but investors have been willing to gloss over growing operating losses and instead bask in the tailwinds of accelerating immuno-oncology R&D trends. They may be on to something.  

Metric

Q1 2019

Q1 2018

% Change

Revenue

$27.7 million

$23.1 million

19.9%

Total costs and operating expenses

$48.1 million

$40.9 million

17.6%

Operating income

($20.5 million)

($17.9 million)

(14.5%)

Data source: NanoString Technologies. 

Double-digit percentage revenue growth could become the norm now that NanoString Technologies has launched what might be its most significant add-on for the nCounter: the GeoMx Digital Spatial Profiler (DSP). It allows nCounter machines to detect the precise locations of molecules in a tissue sample, which can be used to determine where immune cells are attacking. That information could elucidate important immune response pathways to tease out the effectiveness of drug candidates in earlier stages of R&D, or discover entirely new drug candidates.

The installed base of nCounter machines provides a strong starting point for GeoMx DSP sales, especially as immuno-oncology research ramps up. That said, a single quarter of sales might not provide enough data from which to draw reasonable conclusions about how well the add-on will sell over the long term.

Therefore, while investors should certainly keep a close eye on signs that GeoMx DSP hit the ground running, a more important indicator might be how well the company's more established add-on products did in terms of maintaining their impressive growth trajectories in Q2.

Priced for perfection?

Considering that NanoString Technologies exited March with $142 million in cash, investors might be willing to continue overlooking operating losses, especially if increasing expenses can be chalked up to sales activities for GeoMx DSP.

But investors may want to ground themselves. Ramping up sales of a new product can take time. In the long run, though, it will be interesting to see if the GeoMx DSP lives up to the hype, and if it drives new sales of nCounter machines to labs that had been on the fence about investing in NanoString's gear.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.