NanoString Technologies, Inc. (NSTG) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the NanoString's First Quarter 2021 Operating Results. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Doug Farrell, Vice President of Investor Relations and Corporate Communications. Please go ahead.
Doug Farrell: Thank you, operator. Good afternoon, everyone. Joining me on the call today is Brad Gray, our President and CEO; and Tom Bailey, our CFO. Earlier today, we released our financial results for the first quarter of 2021. During this call, we may make statements that are forward-looking, including statements about financial projections, the impact of COVID-19, future business growth, trends and related factors, prospects for expanding and penetrating addressable markets, our strategic focus and objectives and the development status and anticipated success of recent and planned product launches.
Brad Gray: Thanks, Doug. Good afternoon, everyone, and thank you for joining us today. Before I provide a quarterly update, I'd like to take this opportunity to welcome two new directors that joined our Board during the first quarter, Dr. Dana Rollison as Vice President, Chief Data Officer and Associate Center Director of Data Science for the Moffit Cancer Center. Janet George is Group Vice President of Autonomous Enterprise, Advanced Analytics with Machine Learning and Artificial Intelligence at Oracle. These appointments underscore commitment to capitalizing on the unique, informatics and big data opportunities presented by spatial biology, and I'm honored to have Dana and Janet join our Board. 2021 is shaping up to be an exciting year for NanoString. Spatial biology is on a period of tremendous growth, revolutionizing research and field spanning from oncology to COVID-19 to neuroscience. During Q1, we extended our lead in this dynamic market with GeoMx DSP instrument orders setting a new record and exceeding the guided range of 40% to 50% year-on-year growth. The launch of our GeoMx Whole Transcriptome Atlas is off to a great start and drove more than 60% of our record 94 new GeoMx Technology Access Program projects during the quarter.
Tom Bailey: Thanks, Brad, and thanks all for joining us today. For the first quarter of 2021, product and service revenue was $31.4 million, representing year-over-year growth of 28%. Q1 GeoMx revenue was $9.7 million, up 37% as compared to Q1 '20 and above the high end of the Q1 guidance we provided in March. $7 million was derived from approximately 30 instruments shipped and $2.7 million was derived from consumable sales. For nCounter, Q1 instrument revenue was $4.8 million, representing year-over-year growth of 43%. The Q1 nCounter consumable revenue was $13.3 million, representing year-over-year growth of 21%. As anticipated by our Q1 guidance provided in March, COVID continued to moderate lab activity in selected customers and geographies, yielding annualized nCounter pull-through of about $56,000 in Q1. As our full year guidance contemplated, we currently expect modestly lower lab activity in some geographies may persist through Q2 and therefore, nCounter pull-through in the current quarter is expected to be about the same as we realized in Q1. We continue to anticipate a recovery in the second half of the year, and we are reiterating our guidance of 60,000 to 65,000 in annualized nCounter pull-through for the full year.
Brad Gray: Thanks, Tom. 2021 is off to a tremendous start. NanoString has a market-leading product portfolio and the hottest field in life science research, spatial biology. The launch of our GeoMx Whole Transcriptome Atlas has added to the substantial commercial momentum of our GeoMx franchise, while the unveiling of our Spatial Molecular Imager is driving customer anticipation of its 2022 launch. Our nCounter platform is the mainstay of oncology research and continues to reach new customers. Our strong balance sheet supports targeted growth investments to capture our substantial market opportunities, and we are confident in our ability to fulfill our mission to map the universe of biology. With that, we'd like to open up the line for your questions.
Operator: Your first question comes from the line of Tycho Peterson from JPMorgan.
Tycho Peterson: Couple of questions, I guess, on pull-through. Overall, GeoMx pull-through was a little bit late, I know WTA is going to be accretive. So can you maybe just touch on those 2 dynamics, how pull-through in the quarter kind of trended versus your own expectation? And then as we think about WTA and the funnel building there, how do we think about overall pull-through trending?
Brad Gray: Yes. Thanks, Tycho. I would say that Q1 got pull-through was directly in line with management expectations. We said at the beginning of the year that GeoMx because of the Whole Transcriptome Atlas launch would be about 40% of revenue in the first half and 60% in the second with pull-through increasing seasonally as the WTA launch began to have more of an impact. In Q1, pull-through was around $85,000 per system per year, which was pretty much exactly what it was in the third quarter. So on a seasonal basis, where we normally expect Q1 to be relatively low on pull-through. That's right where we want to see it. Our guidance for the full year remains intact of consumable pull-through at the $85,000 to $95,000 basis annualized. So that implies, Tycho, that we're towards the bottom end of that range right now, I think we should expect to see strengthening over the course of the year as the Whole Transcriptome Atlas becomes a more major part of our consumable revenue. We didn't say in the prepared remark, but Whole Transcriptome Atlas contributed modestly to consumable revenue in the first quarter. We didn't begin shipping that product until March. So it was only a few hundred thousand dollars of our overall consumable revenue and will make a much bigger contribution for us to come.
Tycho Peterson: And then Brad, you alluded to customers with NGS readout being that higher pull-through as well. Are you able to just kind of give us a rough sense of the magnitude there? I know you're not ready to fully quantify it, but...
Brad Gray: Just to -- I would just say, we have a high 5 figures pull-through that we're seeing so far in nCounter readout, GeoMx, and we're seeing NGS customers pull-through, yes, well into the 6 figures. It's early days, but that is a pattern that we had (inaudible) that we would see. And so far, it looks like it's playing out.
Tycho Peterson: And then on the commercial side, I got two questions here. One, you touched on the proteomics market. I'm curious if there's efforts underway to kind of tap into that market a little more. And then on the sales force front, you're hiring 100 reps. Just maybe talk a little bit about how that's going.
Brad Gray: Yes. On the proteomics front, I don't think we're trying to reposition the company in any way as a proteomics company. But I do think the proteomics capabilities of GeoMx are a huge differentiated factor in the spatial biology marketplace, through market research that we outlined at the December Investor Day did highlight that 30% of the overall TAM is in protein, 90% of our publications have been based on protein assay so far. And that is a place where GeoMx just absolutely excels. And it's particularly important and appealing for the highly contested translational research market. In terms of sales force expansion, things are off to a good start. We have made hires throughout the first quarter. We'll be continuing to make hires throughout the second quarter with the goal of having all of those new commercial hires on board by midyear. In terms of when I would expect to see their impact on our revenue line, and normally, it takes some months for commercial hires to come up to speed, up to 6 months depending on the position. So that's really going to contribute to our growth and strength in the second half.
Operator: Your next question comes from the line of Dan Arias from Stifel.
Dan Arias: Brad, can you maybe just comment a little bit more on the selling and spending environment that you're seeing right now? Just a bit of a mixed bag in terms of the commentary we've gotten so far on sort of the state of the academic lab base when it comes to centralized versus decentralized labs. And just the level of incremental spending increases that you saw in 1Q and might be expected in 2Q. Anything you can help us with there and just COVID challenges and to the extent -- in the extent that they still are in play here.
Brad Gray: Sure, Dan. I'd say it's a tale of 2 businesses for NanoString. The GeoMx and spatial biology business is robust, and it's really powered through the COVID-19 pandemic. I'll remind you that in 2020, we ended up achieving our original full year guidance that was issued pre-COVID-19 with a large growth of our installed base and strong consumable pull-through. So that -- this really was unimpacted in 2020 and I would say it remains unimpacted in 2021. And the reason for that is we're in the midst of a spatial biology revolution where this has been made major event of the year, there's very high-profile papers coming out and many institutions feel like they must acquire this capability to remain competitive. In contrast, our 1,000 -- approximately 1,000 instrument in nCounter installed base is working across a wide area of research. Some of it urgently needed and related to COVID-19 in high-priority areas and some not. In addition, geographically, the nCounter has a global installed base. And I would say during Q1, the improved utilization of our nCounter installed base in North America was really partially offset by challenges experienced in some European countries where lockdowns reemerged at various points in the quarter. So overall, I'd say net-net, the nCounter utilization is right where we expected it to be, which is about flat sequentially from Q4 to Q1, points to improve as the impact of vaccines takes hold and people getting back in their labs using their nCounters in the second half.
Dan Arias: Okay. Very helpful. Maybe just sticking with spatial. Obviously, AGBT brought a few new platforms out of the shadows there. I'm just curious whether you saw anything or you heard from customers anything that sort of informed the product development process for the SMI or the GeoMx system, I suppose. But just when it comes to specs or performance or capabilities that you want to have setting your instrumentation apart?
Brad Gray: Yes. I think there was a huge theme of spatial biology at AGBT. I'd say, overall, it's very positive for the market that so many players are out there talking about this field and beginning to offer products in the field. We feel very -- most of those -- I should say most of those new products that were previewed at AGBT were in what we would call the imager category. So products that do single cell or even subcell resolution using an imaging modality, and they would compete with our Spatial Molecular Imager. The SMI is positioned as the high plex offering, 1,000 plex compared to some hundreds of plex for the other offerings, and very high sensitivity relative to the other offerings. So we feel really great about the portion of the market that we're likely to occupy. I didn't see anything at AGBT that made me any less confident that SMI is going to be a successful project.
Dan Arias: Okay. Maybe just one more on SMI, and I'll get out of the way. I think last call, you said you had 10 instruments that were gearing up to receive samples, and you just mentioned that you have plenty of work to keep it busy, keep them busy. What would be the aggregate utilization level that you have across those 10 systems? I mean I know it's not a perfect indicator, but I feel like if we had a sense for whether they were running at 40% or 80%, it could be helpful is just sort of an indication there might be good.
Brad Gray: Yes. I think when you look across our product development activities, which, of course, use the same instruments and our technology access program, we are running every SMI system we have at very high utilization. We're pushing the limit of this technology from our product development perspective. And we have many eager key opinion leaders who are going to work with us to demonstrate the power of the technology. I don't really have a percentage number, but I know it's very high.
Operator: Your next question comes from the line of Dan Brennan from UBS.
Dan Brennan: Just wondering on the lab openness, if you will, sequentially, revenues are going to be up in Q2. And then obviously, you've discussed this more back half-weighted year. Any factors to call out when you think about tracking labs, the data you're seeing in terms of the relative change that you saw in Q1 versus Q4 and kind of what's implied in your guidance here for Q2?
Brad Gray: Yes, I think the guidance for Q2 is completely consistent with the commentary that we have provided, which is really no expected improvement in lab access from Q1 to Q2. I think Tom was pretty explicit, the nCounter consumable pull-through that we experienced, which was $56,000 persistent on an annualized basis is what we're also assuming we'll see in the second quarter with improvements in the second half. And just to reiterate, I think what we saw in the first quarter was some improvements in North America with labs continuing to increase their utilization, providing direct evidence of more people in the lab doing more work, really offset by weakness in Europe, where governments began to discourage people from being in the lab, maybe as much as they were in the back half of the year as there were -- they were in the outbreaks. This is all consistent with the guidance that we issued at the beginning of March. Our original annualized guidance had anticipated no strengthening and nCounter consumables pull through the second half. And really, that's what we're seeing.
Dan Brennan: Got it. And then in terms of the order growth, you said it was above the 40% to 50%. I think orders grew throughout the year last year. So any color -- was that surprising, or was that just maybe you had a little bit of an easier comp, sorry for the dog in the background, is that just because you had an easier comp on orders in 1Q? Or did the order strength surprise you guys in the first quarter?
Brad Gray: No, I'd say the order strength in the first quarter was great, but not a surprise. It came in slightly above the top end of our guided range. So we were pleased with it, but not surprised by it. And I do think the comps obviously do get harder as the year goes on because we were in a pretty steep launch curve last year as well. So 40% to 50% order growth remains our guided expectation.
Dan Brennan: Got it. And then when you think about some of the growth in TAP that you mentioned, how do we think about that kind of filtering through? Obviously, you had your guidances set, but it was a nice sequential step-up in TAP. Could that portend potential further strength above and beyond what you're guiding to? Or what do you expect that kind of strength in terms of the number of TAP projects in 1Q?
Brad Gray: Yes, I'd say a total number of projects. Our 1Q performance was right in line with our expectations. If anything exceeded the expectation, it was the continued -- the strength of the continued shift towards the Whole Transcriptome Atlas as the preferred modality there. I think about -- only about 15% of the TAP orders that we got in the first quarter were for nCounter readouts, which increasingly people buy without having to do a TAP, so 85% of new TAPs were for NGS readout. And I think in terms of how that plays through the instrument purchases, generally speaking, we see sort of a 9-month period from the time you order a TAP, and then you run your maybe it takes a quarter to run your actual project to get your results back. So it's 9 months from TAP to actual instrument order. So a strong Q1 in terms of TAP sets up a strong second half in terms of GeoMx instrument purchases.
Dan Brennan: Got it. And then maybe final one just in terms of color on customers for GeoMx. Obviously, now you're going into discovery, so it's going to be more influenced by academia as opposed to translational customers. But I'm wondering when you think about the mix CROs, pharma, academia, could you just kind of give us an update on kind of what's happening across the various customers.
Brad Gray: Yes. You're right, Dan. Academics are becoming an increasing fraction of the new GeoMx instrument purchases as discovery becomes more of an exciting modality. I'd say within our direct markets where we have the best visibility into the customer types, academics outnumber pharma and CRO on about a 2:1 basis in the first quarter. So then 2/3 academic, 1/3 biopharma and CROs. So that's a continued enrichment of academics relative to biopharma.
Operator: Your next question comes from the line of Thomas Peterson from Bard.
Thomas Peterson: Just curious if you could comment on sort of core research activity heading into April and May and sort of how those purchasing activities have trended, especially if you could call out any pacing activity I know you called out the geographic commentary on academic research side earlier. But any pacing commentary to call in the quarter? And then sort of expectations in the back half around funding environments given expectations for a strong NIH global funding environment?
Brad Gray: Yes, Tom, I don't know that I have a lot to add to what I've already said. But just to reiterate it, I think we don't see a huge strengthening and lab access, as evidenced by our nCounter pull-through between the first and the second quarters by the second half, we expect fast citations to be widespread, kind of the return to work across all sectors of the economy, including lab research will be well underway. And I do expect a substantial strengthening of nCounter consumable utilization in the second half. But just as a reminder, spatial biology in contrast to nCounter utilization has powered right through the pandemic from the beginning. And really, I would say there's nothing about the COVID-19 pandemic that is impacting our GeoMx sales even either on the instrument or on the consumable side at this point. It's really isolated for us to nCounter utilization.
Thomas Peterson: Got it. Got it. Appreciate that. And then just quickly, you guys have been hitting a lot recently on sort of potential developments on the software and bioinformatics side. Just curious if you have any updated thoughts here or time lines as well as any particular customer feedback you're incorporating into development efforts here?
Brad Gray: Yes. Well, Informatics has been something we've always been focused on for spatial biology. And when we launched the GeoMx Digital Spatial Profiler, it came and comes with a very sophisticated data analysis suite that's run on instrument at this stage. And it has really delighted customers and allowed them to very quickly visualize and manipulate and understand their data. But we're not done there, we want to continue to make collaboration and sharing of data more possible, that means developing in the future services that would take place in the cloud, that would allow for storage of images and storage of the raw data sharing and collaborating across customers across sites. So look for us, I don't have a specific time lines. But look for us to continue to strengthen our offering in that aspect of spatial biology. It's probably more of a 2022 event than it is a 2021 event for us, but it's clearly an area of tremendous importance and investment.
Operator: Your next question comes from the line of Doug Schenkel from Cowen. Speaker 1.
Doug Schenkel: So, I have a couple of modeling questions. nCounter ASP was a bit lower than we expected in the quarter. Could you just speak to whether there was anything different relative to trend when it came to mix of types of nCounters placed in the quarter, which might have impacted ASP. And then nCounter pull-through would need to jump from, I think, about $55,000 annualized in the first half to $65,000 to $70,000 annualized in the second half to get into your guidance range for the year. I'm just wondering what you're seeing that gives you conviction that, that is actually going to pick up for those levels?
Tom Bailey: I think first, Doug, on. I'll take the ASP question, and then I'll toss it back to Brad for the trend question. On the ASP question. It was, as I mentioned in the prepared remarks and talking about gross margin, a bit of a tilt to distributor mix in the first quarter. And so it wasn't a difference really in the usual mix among SPRINT's and MAX plex. It was really a distributor mix that impacted the ASP modestly in the first quarter as compared to others.
Brad Gray: And Doug, this is Brad. I'll take the question on the consumable trend. I think a corollary to the question you've asked is really to say, how are we -- how confident are we that suppressed -- the relatively suppressed consumable pull-through that we saw in nCounter relative to pre-COVID rates, it's due to COVID, don't we look carefully at the correlation of pull-through on a regional basis to where COVID-19 outbreaks and COVID-19 lockdowns are taking place. And it's a pretty direct correlation. When we hear about lockdowns, we see reduced consumable pull-through in that region, and the inverse is also true. And so provided that the economy and the overall pandemic begins to relieve in the second half as vaccinations become widespread, not just in North America, but in European countries, we're a little behind, we should see a correlating strengthening in consumable pull-through in the second half. Back to levels that were -- call it, consistent with our pre-pandemic 2020 guidance. So that's what we -- I think that's what we're making our judgment on.
Doug Schenkel: Okay. Super helpful. One more along those lines. On a couple of different points, but pulling them together. You talked about the mix of GeoMx being placed with sequencers on the back end versus nCounters on the back end. And we also talked about consistent with what we've heard across the group, activity is picking up a little bit more at the larger core and major genome centers and maybe lagging a little bit at some of the smaller labs. When I pull those things together, I'm wondering if the mix of GeoMx being placed in front of sequencers is skewed in part by where there's activity or if this is really a normal mix that we should expect moving forward. Do you have any thoughts on that, Brad? Is this impacted by lab activity levels? Or is this the norm that we should be expecting in terms of mix moving forward?
Brad Gray: Doug, I think it's the norms of what you should expect from mix moving forward. I think on our March call, we described that we expect at least 50% of genomic systems being shipped this year to go in front of NGS. And I'd say that remains true and it could very well be higher. NanoString has not observed this differentiation between cores and smaller labs and some other management teams have talked about on their calls. I'm not saying it's not there, it's just we haven't had direct experience with that. So I would say everything we're seeing with respect to NGS readout string is fundamental to the capabilities that NGS provides the tremendous installed base of the GS systems, which outnumber nCounter by a factor of between 15 and 20 to 1 and the excitement about the Whole Transcriptome Atlas and what that enables in terms of science that could be done on GeoMx in combination with sequencing.
Operator: Your next question comes from the line of Tejas Savant from Morgan Stanley.
Yih-Ming Tu: This is Edmond. I guess my first question, I'm going to circle back to your SMI TAP. Outside of your strong demands that you're seeing for this new technology, what are some of the key learnings you guys are seeing through this program so far? And to what extent have these learnings impacted sort of the spec evolution of the new platform? And is it still evolving very quickly? Or are you essentially locked down in the kind of the output prototype if you want to call it that?
Brad Gray: Yes. I think maybe the one key learning that is most informative to our product development is the tremendous appetite for 1,000 plex assays that we're seeing. That's the place where the SMI is most different from the competing imagers that are being offered elsewhere and the excitement about what's possible at 1,000 plex, is palpable. And I think that has just made us more confident that this idea of taking the plex leadership position within the market and serving the need not only of translational researchers who are more comfortable with targeted assays, but also discovery researchers who demand plex, I think that's bearing out to be the right strategy for us.
Yih-Ming Tu: Got it. That's very helpful. And given that the NC2 imager will involve a CapEx purchase, how important is it to, I guess, be a first mover in this market, how important is this first-mover advantage here?
Brad Gray: I don't think that the exact order of product launch is critically important. To the extent that we are out front talking about the capabilities of our system and providing researchers the opportunity to experience those capabilities. The wave of imagers that's coming to market is we're all coming to market in a relatively short window. And I think one group getting to market a matter of months to for others, it's not a huge shift in competitive dynamics.
Yih-Ming Tu: Got it. And then just one more on the SMI TAP program. I think you guys mentioned earlier that you have 10 instruments running R&D internally and also running the TAP programs. And it's already a pretty high utilization capacity. Are there any thoughts on expanding that to maybe something a little higher to accelerate some of the TAP programs or taking more TAP programs and potentially accelerating the time line?
Brad Gray: Yes, there are. I think over time, we will expand our SMI TAP program. At the beginning, though, where the SMI alpha prototypes, they're really not nearly as capable as even the betas or the full launch instruments will be. We don't want to overinvest in capacity on alpha systems. So we're thoughtful about how many alphas we dedicated to SMI versus waiting to dedicate more capable betas versus dedicating -- in a future more capable full commercial system. So we're really growing our capacity in a way that makes sense. Our strategy is for 2021 to really work with a highly select group of GeoMx researchers to demonstrate the capability of the system and the way that allows us to educate the market. In 2022, we'll move into a higher gear, where we're really providing test drives directly to the people who we want to sell our instruments to. It's a little early right now for us to be doing that given that the full instrument launches until the second half of 2022. So we will scale up capacity as we get closer to that launch.
Operator: There are no further questions at this time. I'll turn the call back over to Doug Farrell.
Doug Farrell: Thank you, operator. If anybody did miss any portion of the call today. The replay will be posted in the next couple of hours. The conference ID number is 949 3413. We ask domestic callers to dial (800) 585-8367. International callers please dial (416) 621-4642. With that, thanks for joining us, and have a great day.
Operator: This concludes today's conference call. Thank you for participating. Bye. You may now disconnect.
