Accelerate Diagnostics Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 6 speakers on the call.

Operator

Day, and welcome to the Accelerate Diagnostics Inc. 2023 Q2 Results Conference Call. Today, all participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions during the session. Please note, this event is being recorded.

Operator

I would now like to turn the conference over to Laura Pearson of Accelerate Diagnostics. Please go ahead.

Speaker 1

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 In greater detail in our Annual Report on Form 10 ks 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.

Speaker 2

Thank you, Laura. Good afternoon, and welcome to our Q2 earnings call. Today's call will focus on our Q2 results and include several updates on our strategic priorities. My commentary will focus on our top three strategic priorities. First, I would like to review our innovation advancements with our next generation susceptibility platform Wave.

Speaker 2

Our second priority is to continue to grow market share through our Becton Dickinson partnership with Pheno and our sample preparation instrument ARC. And finally, continuing to build financial strength, which I will touch on closing out our debt restructuring transaction And we will now begin the call to review our financial results. Before I discuss these important strategic priorities further, I'd like to hand it over to our Chief Financial Officer, David Patience to review our preliminary Q2 financial results. David?

Speaker 3

Thank you, Jack, And good afternoon, everyone. In the Q2, the U. S. Contracted 13 new Pheno instruments. We ended the quarter with a revenue generating installed base of Net sales were approximately $2,900,000 in the 2nd quarter $5,700,000 year to date.

Speaker 3

This compares to approximately $3,900,000 $6,800,000 for the same periods in 2022. The decrease in revenues were driven by a few large capital deals in the prior period, which did not repeat in the current quarter. Cost of goods sold were $2,100,000 $3,900,000 Year to date, resulting in a gross margin of 27% for the quarter and 32% year to date. This compares to cost of goods sold of $2,800,000 $4,900,000 in gross margins of 28% for the prior period. The decline in cost of goods sold was driven by fewer pheno capital instruments as discussed, as well as a reduction in equity based compensation.

Speaker 3

Selling, general and administrative expenses for the quarter were $7,600,000 $17,700,000 year to date. This compares to $11,500,000 $22,200,000 for the prior period. SG and A expenses excluding non cash stock based compensation were $6,300,000 for the quarter and $16,500,000 year to date. This compared to $8,300,000 $16,500,000 for the prior period. The decrease in SG and A expenses for the current quarter were due to lower employee related expenses, while year to date figures included Non reoccurring debt restructuring related transaction expenses.

Speaker 3

Research and development expense for the quarter was 5,800,000 and $12,800,000 year to date. This compared to $7,600,000 $13,600,000 for the prior period. R and D expenses, Including non cash stock based compensation was $5,600,000 $11,900,000 year to date. This compares to $7,000,000 $12,700,000 for the prior period. The decrease in R and D expenses Was primarily driven by reductions in consulting spend as our WAVE program continues to advance through development.

Speaker 3

Our GAAP net loss Was $26,000,000 for the quarter $42,800,000 year to date, resulting in a net loss per share of $2.36 and $4.11 respectively. Please note on July 11, we effected a 10 for 1 reverse stock split Of the company's outstanding shares of common stock, all shares and per share amounts have been retroactively adjusted for all periods presented to reflect the reverse stock split. Our non operating expenses for the quarter were Approximately $13,400,000 which included several notable non cash related expenses for our debt restructuring transaction. Our net loss from operations excluding non cash stock based compensation expense was $10,900,000 for the quarter and $26,400,000 year to date. Net cash used was $15,200,000 for the quarter and $28,900,000 year to date excluding cash flows from financing.

Speaker 3

Notable drivers of increased cash burn for the quarter And year to date, we're professional and legal fees related to our debt restructuring transactions. We anticipate our quarterly burn to reduce in the 3rd Now back to you, Jack.

Speaker 2

Thanks, David. Now turning to our strategic priorities. Delivering innovation with our Wave platform, Growing market share through our partnership with BD and finally, building our financial strength. First, I will review the importance of our innovation with our next Generation susceptibility platform Wave. To best understand our overall market opportunity, it's important to understand the total available testing market.

Speaker 2

Wave will be performing antibiotic susceptibility testing on positive blood cultures or PBC And isolated colonies or sometimes referred to as isolates. Positive blood cultures, which are taken directly from a PVC bottle are approximately 5% to 8% of any given labs testing volume. While PVC samples are lower volume, These samples are arguably the most critical samples in microbiology because they provide actionable results for the patients who are in critical condition due to a bloodstream infection. Isolates on the other hand can be both High acuity and low acuity samples and represent nearly all other antibiotic susceptibility testing within the lab. Isolates are microorganisms, which come from any sample and are separated or isolated from clinical samples such as respiratory, And over 7,000,000 tests from PBC samples globally.

Speaker 2

Leveraging our deep experience in rapid susceptibility testing, We work with customers to develop our next generation platform Wave to build on our PVC testing menu and include the much higher volume segment of isolate testing on a single platform. The WAVE system will offer a comprehensive test menu covering all susceptibility samples, catering to diverse hospital Antibiotic formularies and incorporating essential features to optimize workflow across laboratories. With full random access for continuous sample loading, WAVE's scalability addresses the needs of various healthcare settings From small community hospitals to large academic centers and reference labs. Speed is paramount in susceptibility testing and Wave's swift results will establish a new standard for turnaround time, Empowering clinicians to respond within the same shift. Moreover, Wave's competitive cost of goods sold ensures it will compete effectively with incumbent platforms aligning with existing lab budgets.

Speaker 2

Over the past year, we have continued to validate Wave's critical product specifications with key clinical and lab stakeholders. Prospective customers confirmed our platform approach, rapid turnaround times enable same shift results And our planned extensive menu addresses formulary requirements. Our gram negative PBC algorithms are near completion. We are running 1,000 wave cards a week on our fleet of alpha AST modules. With more than 100,000,000 images taken to date to support algorithm development, performance is meeting our expectations.

Speaker 2

Our algorithms comprehend not only growth metrics of microorganisms, but also morphological contributions to each drug response enabled by our proprietary dynamic holographic imaging. This approach enables early and real time of resistant clones, which ensures both accurate and timely susceptibility test reporting. We achieved this with our technology's ability to focus on a single cell morphology in real time. These exciting program developments confirm Wave's ability to deliver comprehensive susceptibility testing in microbiology labs. Our recent progress with the WAVE program reinforces our commitment to providing preclinical study readouts by year end, followed closely by the initiation of clinical studies for subsequent FDA submissions.

Speaker 2

Now turning to our 2nd strategic priority, which is to continue to grow market share through our Becton Dickinson partnership. We continue to track our progress through 2 key metrics, commercial reach, which is tracked by the number of new sales opportunities into the funnel In sales effectiveness, which is measured by funnel progression and velocity to eventual close. The U. S. Commercial teams continue to integrate as evidenced by the growth of the combined portfolios new opportunities.

Speaker 2

Thus, commercial reach continues to be a strength with consistent growth of new opportunities coming into the funnel. After just 7 months into the partnership being launched, we are pleased with the progress of the BD Commercial team's ability to position Pheno within the breadth of a combined bloodstream infection portfolio. Additionally, in the Q2, we saw more opportunities advance further in the sales funnel. Sales velocity Is notably increasing with a couple of account closes in less than 90 days of the opportunity being created. We are encouraged to see BD's strong relationships being leveraged into quick wins for the partnership.

Speaker 2

The 13 newly contracted phenos for the quarter was our strongest quarter since 2021, and we continue to expect to deliver Incremental quarterly placement growth. As mentioned in our prior quarter earnings calls, our EMEA commercial effort is more complicated given Tender driven markets, which has led to a delay. We continue to work collectively to roll out a simplified contract, which will allow BD to represent the full product portfolio in tenders. This approach should improve both contracting and adoption rates as it will allow us to win not only new tender opportunities, but also be added to existing tenders. We remain enthusiastic about our automated ARC system, which rapidly cleans up PBC samples to enable direct multi talk microbial identification to eliminate the overnight culture step.

Speaker 2

We are currently seeing growing interest in the EMEA market through our BD partnership. Further, in the U. S, we are poised to initiate clinical trials in the short term to ensure a Class 2 510 system is launched next year. In summary, the BD partnership is progressing and we remain encouraged by the strong sales metrics and improved closes in the quarter. We expect this momentum to translate into increased placements and future revenues as we continue structuring late in the Q2, which allowed us to extend our convertible debt maturities out three and a half years.

Speaker 2

It simplified our capital structure and brought in new capital. Moving forward, as discussed in our prior quarter, we are focusing on improving operational efficiency and further reducing cash burn. I would now be happy to answer questions from our analysts And should others on the call have any questions not addressed, we would welcome you to send these questions or request a follow-up meeting

Operator

And today's first question comes from Alex Nowak with Craig Hallum. Please proceed.

Speaker 4

Hey, good afternoon everyone. This is Conor Chamberlain on for Alex. Thanks for taking my questions. First off, Can you give us the latest update on the pathway for ARC approval? I'm assuming a de novo 510, but And feeding off that, what are some studies you need to run with this as well?

Speaker 2

Yes. Hi, Connor. Thanks for the question. Sure thing. So we are well underway with our planning for a clinical trial for ARC in the U.

Speaker 2

S. The clinical trial hasn't started yet, but we're in the process of identifying the sites. We have Over the past couple of weeks, I've reviewed the clinical trial design as well and that we're ready to move forward with. So things are coming into place Fairly rapidly with everything we need to do to basically embark on a clinical trial. We expect the clinical trial to be frankly pretty straightforward given what we're actually Going to be doing the clinical study on, which is downstream multi.

Speaker 2

And then we're still looking to submit a successful clinical

Speaker 4

What's the pathway for WAVE approval? What clinical studies do we need on that? And do you have any timeline on that as well?

Speaker 2

Yes, so sure. So on Wave, as we mentioned in our prepared remarks, we're making really good progress in many areas with As we get closer to a clinical trial, first thing I would mention is We're first going to be proceeding forward with a preclinical study or trial ahead of that, just To confirm the results that we're seeing right now and the studies that we're doing relative to algorithm development, That's happening the preclinical study we expect to happen before the end of the year, be complete with that. We will be Then we also have again a partner already secured to help manage our clinical study. And we expect that clinical study to start Shortly thereafter, the preclinical study. So the clinical trial, I should say, will start shortly thereafter.

Speaker 2

Likely in Q1 of 2024 is what we're shooting for. It will be a gram negative focused positive blood culture study And then we'll be preparing in parallel for a submission on positive blood culture, gram positive and then also isolates. As a reminder, the system will for Wave will do really is set to do isolates as well as positive blood culture We'll be rapidly seeking to get approval for all those type of combinations.

Speaker 4

Excellent. And then just one more. Can you give us an update on the competitive environment for these rapid microbiology systems?

Speaker 2

You broke up a little bit there, but I think you said the competitive arena. Is that what you're talking about?

Speaker 4

Just an update on the competitive environment for these rapid microbiology systems.

Speaker 2

Sure. That's what I thought you said. Sure. No problem. So I mean, where we're at right now, I mean, clearly embedded with BD and our partnership is going very well, Selling a complete bloodstream infection solution from end to end, and that continues to go very well.

Speaker 2

And the solution that we have with Pheno continues to resonate in the market. Rapid Positive rapid identification with AST, AST only as well as ARC, Not launched in the U. S, of course, but in Europe. And that continues to resonate very well. Yes, as we expected, Emerging competitors are coming.

Speaker 2

We've seen them in Europe a bit, not so much in the U. S. Just because of clearance timelines. And we're very confident in our menu. We're very confident in the 80 plus studies that we already have published on Pheno, The confidence that our current customers have in Pheno.

Speaker 2

So while I think competition overall is a very good thing for any market, actually, It will make us better, make us stronger. And in essence, I think we're well suited, especially with our partnership with BD to compete with the emerging competitors.

Speaker 4

Awesome. Got it. Well, that's all I got. Thanks for taking my questions, guys.

Speaker 2

Thanks, Connor.

Operator

The next question is from Andrew Brackmann with William Blair. You may go ahead.

Speaker 5

Hey, everyone. This is Dustin on for Andrew. Thanks for taking our questions. First question on the BD Partnership. Just wondering what the status is on cross training of the sales team there and how the synergies in the sales team there It's translating into some reductions in operating expenses and if those are tracking to your thoughts at the start of the partnership.

Speaker 2

Perfect. I'll take the first end of that and let David take the second part of the question around Cash burn reductions and so forth. So, first of all, let me touch first on the U. S. We are fully trained we fully trained the entire U.

Speaker 2

S. Organization within BD. And Just a reminder, I mean, Beck and Dickinson is one of the largest microbiology and diagnostic companies in the world. So They have a lot of sales reps, a lot of marketing, regions, etcetera. So, it's a comprehensive organization.

Speaker 2

We've had very successful trainings in the U. S. We have all the marketing materials In their hands, we have ongoing training as well. So we've done initial training and then we're doing ongoing training on a regular basis out in the field. We have also online learning sessions as well And overall going very well.

Speaker 2

In Europe, it's taken a bit longer and it's just really because of the nature of Europe with the many countries, The many different languages, etcetera, etcetera. So, we've been training in Europe and we're about complete in the initial training in Europe for Most all the countries in the Wave 1 cycle that we'll be focused on, and that's complete. We also Plan to do ongoing follow-up training in all those countries as well as we come up to speed and start ramping up our efforts. But overall, again, I think the training has been going very well, not only for Pheno and Arc, But also, the overarching strategy for BD, which is their bloodstream infection strategy that really focuses on a comprehensive Solution for bloodstream infections across the entire continuum of care from sample collection Through blood culture, through identification and then ultimately rapid susceptibility with FeNO. So all of that's coming together as well.

Speaker 2

That's new for the BD sales team as well, Espino. And I got to say, we're really happy with While it's taken a while to get it off the ground, we're really starting to see great activity. As I mentioned in some of the remarks, I mean, we've got really good activity going on. We definitely need to put more closes on the board, but we had the best quarter we've had In quite a long time in Q2, and we look for better quarters moving forward. And then your second part of the question on the how is this Doing relative to cash burn, I'll turn it over to David for that one.

Speaker 3

Yes. And as it relates to the cash burn and Thereof in SG and A. About this time last year is when we announced a restructuring of our commercial organization in the United States to reflect the selling strategy we're going to implement with BD. And so with that, it would be a focused effort in the Accelerate selling effectiveness to bring opportunities further and further into the funnel to close. And so with that, we had a restructuring back in August of 2022.

Speaker 3

And with that, those numbers were a bit muddied in the Q1 of this year due to SG and A related expenses to the debt restructuring transaction. The debt restructuring transaction did close in the Q2, but the accounting for those fees related to professional and legal fees of the debt restructuring When into debt and equity issuance costs and so the year to date figures reflect legal and professional services from our transaction, but The second quarter figures are more cleaned, if you will, to give you a further run rate and then a non cash stock adjusted basis of that SG and A spend. And so looking at the 2nd quarter number is a cleaner way to look at it. And then understanding that these expenses are one time non recurring to the transaction give you kind of a forward looking number that we're looking to operationally improve on a go forward basis. And so with that, taking a step back, having the transaction behind us and furthering the Wave development program allows us to lower for our spend with 3rd parties.

Speaker 3

And so moving forward, we anticipate our cash burn to materially come down over just the next quarter, the rest of the year as well as into 2024.

Speaker 5

Understood. Appreciate the color there. And second question, we've been hearing a lot from competitors on turnover at labs and hospitals in terms of staffing. Just wondering, Is there any derivative impact to you guys and the conversations you're having with lab directors there? Or you're not really Exposed to that as much?

Speaker 2

Yes. So great point. And the answer is yes. We see this we see that as well. There's an incredible amount of turnover post COVID within health care in general and definitely in the laboratories.

Speaker 2

It's at both the staffing level. So the microbiologists and the other lab technicians, it's there. And it's also at the management and senior management level. And so that is challenging for sure. It's definitely something that it slows down go lives.

Speaker 2

We've had a couple of go lives that did not go live in the quarter because of Management change and the key champions that were part of the Pheno or Accelerate implementation with us and BD Have changed, but those are still going to be on track. It's just delayed because of a new microbiology manager or Lab director being replaced or leaving. So we're seeing that turnover. I have I do expect it to settle down. I mean, that's what typically happens.

Speaker 2

And I expect it to get back to more normal. But it's something that we continue to address. In some cases, it does create new opportunities for us as Lab directors move from site to site and they're proponents of rapid susceptibility, Eno and BD, etcetera, those are also positive examples to where this where change within the laboratory Can be good and we've seen some of that as well where we've seen change and new directors come in that really know the value of rapid Susceptibility and Pheno and we immediately have a sales opportunity overnight. So I think it goes both ways, But it is definitely something that we continue to address on a daily basis out in the field.

Speaker 5

Understood. Last question for us, just on the reintroduction of ARC, when that eventually comes to the U. S. Market, how impactful do you think On eventually driving momentum with BD once this occurs?

Speaker 2

I mean, we're very bullish on the value proposition for ARC and so is Beck and Dickinson and as well as Other people that are focused in the Maldi sector, I mean, it's a just a reminder of what ARC is. ARC addresses a real unmet medical need within microbiology. There are about there's 1,000, I mean, over 10,000 MALDI platforms placed globally in laboratories today. It was a Great advancement in technology and microbiology for a number of reasons. It's very cost effective to run MALDI.

Speaker 2

It's a very, very wide range menu that MALDI produces, fairly easy to use, Good results. And so it's well planted in microbiology. But one of the drawbacks, it's been A real drawback from day 1 is, if you want to run a rapid identification off of MALDI, That's just not possible in the current state without doing something different because today, multi identification is run through a first Performing an isolated colony and then spotting MALDI from there. What ARC does is ARC automates that entire process In 2 steps in about 1 hour and allows you to then plate the MALDI platform and get your result in the same shift. And so when we came on the market in the U.

Speaker 2

S, we saw immediate interest uptake. We had significant number of evaluations signed up. And that's only while The as we've talked, I mean, we're going back and getting a Class II claim from the FDA. In the end, that will actually be that will be a favorable feature to have, a favorable claim to have, A valid more of a validated platform out in the market. The unfortunate thing, it just takes time to go through the Very excited about this, and we believe it's going to be a good alternative for customers globally to Really, they're seeking a rapid identification off of Maldi.

Speaker 5

Understood. Thanks for taking our questions.

Operator

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

Speaker 2

Yes. Thanks. I appreciate it, Chris. So just a couple of things from my side in closing. First of all, thanks for dialing into our Q2 earnings call.

Speaker 2

It's greatly appreciated. Just a couple of things to highlight as we think about our strategic imperatives that we've highlighted today. First of all, our next generation platform, Wave, Continues to we continue to make really good progress and hit our milestones on this platform. It is a platform that will open up a much, much larger market within microbiology. It will be the platform that will Form isolates, which as I mentioned is over 100,000,000 tests globally.

Speaker 2

And that's going to be very important and a very important segment for us to address. Things continue to go very well with Wave. And as I mentioned, we And we will not only have isolates on the platform, we'll also have positive blood on a single platform, random access, scalable. So This platform will fit in community hospitals, but also reference labs and regional labs as well as Academic center. So it's a truly a scalable platform that's so important as you look at the entire health system.

Speaker 2

So more to come there. And we finally, we continue to see very good quality performance on our initial studies that we've been going through, Over 100,000,000 images taken now off of our 15 Alpha units that are running day and night in our laboratory here in Tucson. And then the second thing I'd say with our partnership with Becton Dickinson and our commercial effectiveness, As I mentioned, very large microbiology company in BD. They're a terrific partner, and we've got it's taken us a while to get through training to get reps comfortable and confident In selling rapid identification and susceptibility, we're getting there. Every day is a better day out in the field and in the market.

Speaker 2

Our reach continues to grow, and that means new accounts coming into the funnel continues to grow. Our sales effectiveness is also improving our ability to actually bring FeNO into the overall blood infection portfolio with BD, that we're getting much, much better at that as well. And as a result, what we're seeing is we're really starting to advance sales opportunities quicker. And We're in labs with that are BD shops within the hospital. I mean, we're advancing these opportunities much, much quicker.

Speaker 2

So, this is work in progress that we continue to make progress on every day, and we expect to see again continued Good success there. And then the last thing I'd mention is really our financial strength as a company. That's something David and I focus on frequently every day. We now have debt restructuring behind us. We're focused on reducing our burn rate.

Speaker 2

We're focused on preserving cash everywhere we can. And then obviously, revenues We'll take care of that as well as we continue to increase revenues and drop margin to the bottom line. So with that, more to come, and I appreciate you tuning into the Q2 earnings call today. And again, should you have any further on questions, please contact us at axdx.com, and we're happy

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