Accelerate Diagnostics Inc

NASDAQ:AXDX

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and welcome to the Accelerate Diagnostics, Inc. 2023 Third Quarter Results Conference Call. [Operator Instructions] After today's presentation, there will be a question-and-answer session. Please note, this event is being recorded.I would now like to turn the conference over to Laura Pierson of Accelerate Diagnostics. Please go ahead.

[Laura Pierson, executive]

Before we begin, it is important to share that information presented during this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include projections, statements about our future and those that are not historical facts. All forward-looking statements that are made during this conference call are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. These are discussed in greater detail in our annual report on Form 10-K for the year ended December 31, 2022, and other reports we file with the SEC.It is my pleasure to now introduce the company's President and CEO, Jack Phillips.

[Jack Phillips, executive]

Thank you, Laura. Good afternoon, everyone, and welcome to our third quarter earnings call. In the quarter, we initiated our clinical trial for Arc, continue to hit development milestones with our Wave platform and continue to grow the market through our partnership with Becton, Dickinson.Turning first to Arc. As a reminder, the Arc system is designed for clinical laboratories as a simple load and go workflow that automates direct from positive blood culture sample preparation for downstream microbial identification using MALDI-TOF. This solution enables on-demand processing of samples without the need for an overnight culture incubation, reducing the wait time for identification results. Customers will now have an automated cost-competitive alternative for rapid positive blood culture ID compared to molecular solutions by using their existing MALDI-TOF systems.Clinical laboratories are under pressure to run FDA-cleared devices with increased legislation and enforcement of laboratory developed tests, thus, there will be great value in providing labs with an FDA-cleared device. We have already initiated our clinical trial and one site has already completed fresh sample enrollment. Our intent is to submit to the FDA over the coming months, which will ensure seamless laboratory adoption with the first FDA-cleared automated sample preparation. We are making great progress with Arc and hopefully, more exciting news to come shortly.Moving on to Wave, our next-generation rapid AST platform. We made good progress in the quarter and achieved several milestones. As a reminder, Wave will provide a comprehensive susceptibility testing menu, which will address both the 130 million tests performed from isolated colonies as well as the over 7 million tests performed from positive blood culture samples globally. Based on customer workflow pain points, we built Wave to optimize lab workflows.Key differentiators between Wave and existing emerging susceptibility platforms includes high throughput sample processing with improved time-to-result of less than 4.5 hours on average, random access for continuous sample loading and platform scalability to service all hospital segments. Wave beta modules are now fully operational in our labs. The systems performed well with minimal challenges, have great reliability, and our lab technicians love the easy-to-use features.Time-to-result and performance continues to look good. We have developed a comprehensive image library for evergreen data analysis. Our goal is to see clearance for approximately 300 Gram-negative bug drug combinations. This is over twice the size of the current menu on Pheno. Most results are available well within 4.5 hours. We are seeing drug-induced morphology changes well within 4.5 hours, which is what allows us to produce accurate early results. Time-to-result is a significant differentiator of the Wave system by enabling labs to deliver same shift reporting for all antibiotic susceptibility testing.Marketing has received significant voice of customer feedback on the Wave system. Customers continue to confirm their excitement about Wave, driven by the differentiated features of a consolidated AST menu on a single platform, same shift supporting scalability and improved economics. We plan to produce data readouts and submit an ESCMID abstract by year-end, complete a preclinical trial early next year, followed by clinical trial for the Wave system and comprehensive Gram-negative PVC menu. We will look to submit to the FDA in mid-2024 with a commercial launch in early 2025.Overall, we are excited about the progress of the Wave program and the promise of this game-changing technology. With plans to begin premarketing activities next year, we are actively exploring Wave commercialization options. Turning to our performance in the quarter. While the new contracted Pheno systems were less than anticipated for the quarter, our commercial partner, BD, continues to develop new opportunities and progress the funnel. We successfully secured a large portion of our customer base to long-term contracts in preparation for the Wave launch.Now, I would like to turn it over to David Patience, our Chief Financial Officer, to review our preliminary third quarter results. David?

[David Patience, executive]

Thank you, Jack, and good afternoon, everyone. In the third quarter, U.S. contracted 6 new Pheno instruments. We ended the quarter with a revenue-generating installed base of 339 Pheno instruments and a backlog of 70 instruments pending implementation. Additionally, we secured more than 20 existing customers to multiyear contract extensions for rapid positive blood culture susceptibility testing during the quarter.Net sales were approximately $3.3 million in the quarter and $9 million year-to-date. This compares to approximately $3 million and $9.8 million for the same period in the prior year. Our increase in quarterly revenues year-over-year, but decrease in revenues year-to-date has been driven by inconsistency of opportunities to secure capital revenues over the reported period. Gross margin in the quarter was approximately 40% and 34% year-to-date, excluding $1.2 million in noncash adjustments to inventory, which compares to approximately 20% and 25% for the same period in the prior year. This increase was a result of lower service-related expenses, lower consumable manufacturing expenses and inclusive of sales of depreciated instruments.Selling, general and administrative expenses were $7.8 million for the quarter and $25.4 million year-to-date. This compares to $8.3 million and $30.4 million for the same period in the prior year. SG&A expenses, excluding noncash stock-based compensation, were $6.3 million for the quarter and $22.8 million year-to-date. This compares to $7.3 million and $23.9 million for the prior period. Reductions in SG&A expenses are a result of lower employee-related expenses.Research and development expenses were $7.0 million for the quarter and $19.8 million year-to-date. This compared to $7.3 million and $20.9 million for the same period in the prior year. R&D expenses, excluding noncash stock-based compensation, were $6.7 million and $18.7 million year-to-date. This compares to $7.1 million and $19.8 million for the prior period. Reductions in R&D expense is driven by lower third-party consulting spend as our next-generation program, Wave continues to advance through development.Our nonoperating income for the quarter was $15.7 million, which included a fair value adjustment to our derivative liability related to our convertible notes. Our GAAP net income was approximately $910,000 for the quarter, while we had a net loss of approximately $48.6 million year-to-date, resulting in net income per share of $0.06 for the quarter and a net loss of $4.13 per share year-to-date. Our net loss from operations, excluding noncash stock-based compensation expense was $12.8 million for the quarter and $39.3 million year-to-date. Net cash used was $9.6 million for the quarter and we ended the quarter with cash and investments of $21.2 million.Now back to you, Jeff.

[Jack Phillips, executive]

Thanks, David. We would like to now open up the lines for Q&A from our analysts.

[Operator]

We will now begin the question-and-answer session. And the first question comes from Andrew Brackmann with William Blair.

[Dustin Scaringe, analyst]

Dustin on for Andrew. Wondering on Wave, if you could talk about and provide more color on why this same shift patient results are so important with Wave and how that compares to the current standard of care?

[Jack Phillips, executive]

This is Jack, and no problem. I'm happy to take that one. Yes. So today, just to put it in perspective, for example, Pheno is really the market leader in time-to-resolve for rapid positive blood culture and in the U.S. of around 8 hours time-to-result. And so we're close to being within that window of same shift reporting. When you look at some of the other solutions on the market and the age old traditional solutions that are on the market, it's often days before results can be realized and reported out. It's really the same with -- as we move into the isolate market, again, the much higher volume market, about 130 million tests globally. All of the automated solutions on the market are much greater than same shift. And it's definitely next day.And so what customers are looking for and one of the key value propositions of Wave is faster turnaround time to where you can actually get results for both positive blood culture and isolated colony testing in the same shift. And in 4.5 hours, as I mentioned, that's what we're seeing today. And the impact of that is dramatic for patients because it allows clinicians to get those patients on the optimal therapy much quicker day sooner than what the standard of care is today. And so as we talk about Wave in the market, we're now out talking to many customers about Wave and the value proposition. While there's several things that customers point to from automation, random access, drug bug, menu, et cetera, one of the things that's always on the top of the list relative to clinical value is time-to-result in the same shift period.

[Dustin Scaringe, analyst]

Then just on maybe the BD partnership, wondering if you guys can talk a little bit about the stage progression and funnel velocity with customers? And then maybe how that's varying by geography.

[Jack Phillips, executive]

Yes, sure. Happy to take that one as well. And so first of all, I want to acknowledge that the quarter from a new contracted placement standpoint was disappointing for us. We had planned on having more new contracted instruments that we brought in. Several of those deals that we had planned on bringing in for the quarter were delayed. They're still very active in the funnel and we're still working through those, but they were, in fact, delayed. From a funnel progression standpoint and also just building new opportunities, we continue to be very happy with our BD partnership.Absolutely, it's taken some time to get the many sales reps up to speed, comfortable in selling rapid susceptibility testing, comfortable with Pheno. And -- but they're coming along. The funnels are building, and we continue to make good progress progressing the sales funnel. You mentioned in each geography. So that's in the U.S. very much the same in EMEA. The only thing I would add about EMEA is one of our challenges was a bit different in EMEA early days for a while, and it was really around the business model that we had that limited BD's ability to really contract Phenos in a tender type environment, which is what EMEA is.And what I'm happy to say in the quarter, I don't believe I mentioned this in the prepared remarks. But in the quarter, over the past month or so, we were successful at signing a new agreement with BD that really opens the door for them to now successfully respond to tenders in the EMEA markets and have Pheno and Arc there on the tenders within their overall BSI tenders that they're responding to.

[Dustin Scaringe, analyst]

And then if you look at integration between yourself and BD, are there upcoming major milestones that we should look out for. Most of the team has been cross-trained already, and it's more about execution here going forward.

[Jack Phillips, executive]

Do you want to take that one, David?

[David Patience, executive]

Sure, Dustin. This is David. And so the first about 6 to 9 months has been bringing the 2 organizations together, as Jack mentioned, in training and aligning the sales process. We're still working together. We're learning together every day. By bringing the bloodstream infection solution together is a pretty comprehensive portfolio that BD is really separating themselves from other players in the market with bringing that offering together. And so it's a big message and it's taken a little bit longer than we would have liked to come out. But we are seeing those early indications that this will be a very successful and comprehensive portfolio. Customers are really responding to very favorably. So, we are very excited about what we're seeing as the 2 organizations come together. The sales organizations are very much aligned and then the leadership organization that accelerate in both BD are very much aligned and we're very happy with the progress we're seeing.

[Dustin Scaringe, analyst]

One last one for us. Just given where OpEx spending came in the quarter, how are you thinking about that going forward? And how does that compare versus your long-term plan you laid out just a few months ago?

[David Patience, executive]

Great question. And so as we pivoted the commercial strategy to bring BD in as our commercial sales agent, we are now realizing and seeing the synergies that we were hoping to, both with SG&A as well as in Europe as well. And so overall, what we're seeing as BDs taking on more of the sales and marketing effort, we're seeing the fruits of that both in the funnel, but also we are seeing our OpEx coming down sequentially quarter-over-quarter as we refine and focus on our 2 strategic priorities, which are delivering Wave as well as supporting the BD partnership. And so as we move into the next quarters, we're very focused on those 2 strategic initiatives and refining our cash burn accordingly.

[Dustin Scaringe, analyst]

Next question is from Alex Nowak of Craig-Hallum.

[Albert Hu, analyst]

This is Albert Hu on for Alex. So, I know you mentioned some updates here on Arc enrollment, but can you give us just the latest on the pathway for, let's say, approval and timing?

[Jack Phillips, executive]

Yes, sure. So, just to remind everyone on what we're driving towards with Arc in the U.S. We are in clinical trials currently for Arc in the U.S. That trial is going very well. One site has completed enrollment. The other one is underway. And we are still looking to submit for our FDA submission here in the coming months. And what that will do is give us really an incredible opportunity in the market to have a workflow solution for MALDI that will be the only validated solution in the market for basically a sample prep device used in conjunction with the MALDI platform in the U.S. So, it will be a Class II 510(k) approval.Again, we've already done all the work with the FDA relative to pre-subs and obviously started clinical trials and those continue to go well. This is something that BD is very excited about as well because as a reminder, BD is one of the main distributors for MALDI platforms in the U.S., the Bruker Biotyper. And that's what the Arc will be validated for use with. So, we're really excited about that. And then I would also make a comment about Arc in EMEA. We are on market for Arc in EMEA. Again, some of the business opportunities that we had to fix with BD have slowed down Pheno and Arc. But I'm happy to say that we've closed several deals for Arc in EMEA. We've got several evaluations going on as well. And overall, things are starting to gain traction in EMEA for Arc today, which is on market.

[Albert Hu, analyst]

The government, especially -- or they're more vocal, especially after the pandemic about the need for -- to prevent antibiotic resistant bacteria spread. So, is there a pathway to potentially working with the CDC or HHS to help enforce a requirement to need a phenolic solution at all?

[Jack Phillips, executive]

Yes. Thanks for that question. And so absolutely, you highlighted that the CDC has made this a major priority. They refer to this is the silent pandemic and they continue to work on this. I would say that they recently, actually recently had a meeting of many members of industry, and we were part of this in -- at the CDC. Our Head of Strategy and Marketing attended the meeting along with several other members of the industry and it was really all about continuing to focus on how we can really address AMR, ultimately address sepsis and doing it from a diagnostic perspective by providing rapid diagnostic testing for susceptibilities to get patients on the right therapy much quicker. And so yes, it's a big focus. It continues to be a focus, and we continue to work with the CDC.

[Albert Hu, analyst]

And can you provide us some color on the competitive environment for rapid microbiology systems?

[Jack Phillips, executive]

Yes. I mean it's a -- I think, again, I always say this. I mean competition is a good thing. I mean it's really -- it really helps to elevate the need for a change in the current methods of diagnosing and providing antibiotic susceptibility testing. Today, that testing is completely inadequate with the turnaround times and so forth and patients are suffering. And so with that, there's obviously a lot of focus in this area and the there's several competitors that are coming to market, looking to get approved on market.I won't get into naming names and so forth. But we still believe, though, as we look at the offering from a menu standpoint, as we look at turnaround times, as we look at not only the menu but also limitations associated with those menus. The Pheno is still a proven diagnostic solution and will continue to be very competitive with the emerging players that are coming to market. And then obviously, as we look beyond positive blood, Wave is going to be a whole another story because Wave will obviously take us not only into positive blood but into the isolate market as well. And as I mentioned there, most of the platforms in the isolate market are 30 and 40 years old and really provide much slower turnaround time than what we'll be looking at doing with Wave.

[Albert Hu, analyst]

Okay. Awesome. And last question from us. So, we heard some positive commentary on the BD partnership last quarter. But do you think we would see the BD partnership materially -- when do you think we would see the BD partnership materially boost the installed bases?

[Jack Phillips, executive]

Yes. I mean, it's a fair question. We had a better quarter -- last quarter, we had a better quarter than this quarter in new contracted deals. I would say -- and it was actually one of the best quarters we've had since '21. So, we did several new contracted customers then. This quarter was less than that, clearly. But again, it's hard to say exactly, but the velocity in the funnel and the number of opportunities continues to increase. And while BD continues to work on their forecast, they just -- they kicking their year off and they're training their salespeople, they have sales meetings going. And Pheno and Arc outside of the U.S. is a focus of their sales team and a big part of their BSI campaign. And so we expect to continue to see improvement quarter-over-quarter on the number of new opportunities that BD is bringing in.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jack Phillips for closing remarks.

[Jack Phillips, executive]

Yes. Thank you, everyone, and thanks for the time today. In summary, I'd like to just highlight a few things. First of all, we have made significant progress on our Wave program. This is our innovative technology that will allow us to not only tap into the rapid susceptibility market for PVC, but go well beyond that with isolate testing as well, 130 million test market. Customers and industry leaders continue to confirm Wave. The Wave system is a game-changing solution for all antibiotic testing, not just PVC. And over the next quarters, we will be providing much more data moving closer to a successful FDA submission sometime next year.Secondly, the clinical trials for Arc remain on track and performance data is looking quite good and we anticipate a successful FDA submission and approval -- submission in the coming months and approval after that. And then finally, as I talked today, we'll continue to make progress commercially with our BD partnership. It's a good one. And by incorporating Pheno and Arc into their bloodstream infection, it's really a winning total solution for bloodstream infections.On behalf of the entire management team, I'd like to thank you for your continued support and interest in Accelerate Diagnostics. Thank you again, and have a wonderful day.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.