Laura Pierson - IR Lawrence Mehren - CEO, President and Director Steve Reichling - CFO, CAO and Secretary.

Bill Quirk - Piper Jaffray Brian Weinstein - William Blair Tycho Peterson - JP Morgan.

Good day and welcome to the Accelerate Diagnostics, Inc. 2017 Q4 Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will 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..

Before we begin, I would like to advise you that information presented during this conference 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 statements about our future and statements that are not historical facts. These statements may contain expectations regarding revenues, earnings, operations and other results and may include statements of future performance, plans and objectives.

Forward-looking statements include statements pertaining to, among other things, the commercial launch and demand for the Accelerate Pheno system and Accelerate PhenoTest BC kit for positive blood cultures; the potential benefits of the Accelerate Pheno system and Accelerate PhenoTest BC kit, including accelerated identification and susceptibility results and estimates of time reduction to results; expectations on placements, sales and product profitability; the potential of our technology generally; our belief that our expanded manufacturing capability will allow us to meet demand; our expectation of our 2017 and 2018 performance and our future development plans and growth strategy, including with respect to research and development as well as product expansion.

These statements represent only our belief regarding future events, many of which are inherently uncertain.

You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainty, and that actual results may differ materially from those projected in the forward-looking statements because of various factors.

Information regarding important factors, including specific risk factors that could cause actual results to differ, perhaps materially from those in our forward-looking statements are contained in reports we file with the SEC. You should read and interpret any forward-looking statement together with the reports we file with the SEC.

I will now turn the conference call over to Mr. Lawrence Mehren, President and CEO of Accelerate.

Larry?.

Thank you, Laura, and good afternoon everyone. I'm glad you could join us for our Q4 2017 conference call. We'll start with the review of our performance on our key 2017 goals. Next, Steve will review Q4 and full year preliminary 2017 financial results. I will then lay out our goals and expectations for 2018 and wrap up with Q&A.

Our focus in 2017 was threefold. First, a great launch of the Pheno instrument and PhenoTest positive blood culture kit. Second, maintain our product superiority and expand the attractiveness of our current system in kit. And third, achieve CE markings for our respiratory kit. Let's review our performance of each in order.

First our launch, by most measures our launch has been a success. At the top of the funnel, we saw strong and increasing interest in Accelerate Pheno system across the U.S. and the EU. This interest is tangible and translated into hundreds of accounts across the U.S. and Europe becoming qualified prospects.

And that since raising their hand and saying I want this system in my institution. Further, we saw many of these qualified prospects turning into active customers. In 2017, we signed agreements for 337 instruments of these 259 were evaluation contracts and 78 replacements. Pricing was solid for both instruments and reagents. For example in both the U.S.

and EU, reagent pricing on average remains above $200 for all our clinical customers. Globally, mix was also favorable to our model, with more than 80% of deals closed this year for capital. Annuity for customer also exceeded our expectations.

This was driven by an increase in the number of instruments per customer to approximately three while reagent pull-through per instrument remained confident at around one kit per instrument per day, all strong results.

However, as mentioned in our Q3 call the acquisition process for a new diagnostic device has become extremely complicated and time-consuming. This resulted in an unexpected increase in our sales cycle to around 14 months from the six to nine months we had originally anticipated. This intern delayed revenue.

Needless to say, this mix was disappointing and we immediately began a critical examination of our sales processes. In analyzing the challenge, we found four phases of the sales cycle right for significant streamlining.

In each of these areas, we have now deployed different mitigations, and good news, we are already seeing excellent results from our efforts. For example simply streamlining the language of our evaluation contracts had a positive impact in the fourth quarter, decreasing time to an evaluation contract by a number of months.

In addition to sales cycle issues I just mentioned a significant overhang in 2017 with that a large portion of qualified customers could not enter into any contract. Low budget or device that was not FDA approved.

As we enter 2018, you’re starting this year with FDA approval in hand and millions of dollars discretely budget for the acquisition of the Pheno, certainly a better place to be. Product superiority, our second call with an unqualified success.

Instrument reliability was excellent with performance at year-end of approximately one repair visit per year, a measure that we believe is best-in-class. We added three new drugs of the panel in the EU, while lowering kit cost of goods sold over 20%.

Customer feedback has been excellent with surveys of newly launch customers consistently saying, they are "satisfying with the device and the experience". Analytical performance of the instrument was excellent with overall sensitivity and specificity in the high-90s and EA and CA measures of our ASP performance consistently above 90%.

This combined with an average improvement in time to result of approximately 40 hours, puts us in a class by ourselves. These data were confirm by numerous studies and papers documenting our ability to generate results up to 54 hours faster than the standard-of-care, while maintaining excellent performance.

More importantly, numerous study and now actual customer results are confirming that these rapid interventions are having a dramatic impact on the hospitals ability to manage the challenge of sepsis. For example, perhaps the most exciting development of 2017 was the data coming out of our first customer, University Hospital of Augusta.

As part of their implementation, they have been keeping detailed records of the clinical impact of the Pheno, and what they found is extremely encouraging. Using the Pheno, they were able to reduce overall depths from sepsis from approximately 12% to less than 4%, a 75% reduction.

The lab director told us recently that this equates to three lives saved each month at their institutions since implementing Pheno. And not only as the Pheno savings lives it's also saving money, antibiotic savings alone have tallied $90,000 since implementation. In addition, savings from lower readmission rates, fewer C.

diff infections and decrease morbidity are expected to deliver many times these savings, yielding a very high ROI. And while we are eager to duplicate this data across other customer sides, what we have already seen suggest, we believe that the Pheno could be the most powerful sepsis intervention ever launched.

We will be working with the site to publish these results and believe we will see these in a high impact journal in 2018. We will also be launching a registry to collect similar outcome results across our customer base.

The great performance of our sepsis solution is a solid foundation on which delivered our severe pneumonia solution, our third key initiative of in 2017. Severe pneumonia is steadily disease with high mortality and significant healthcare costs.

We believe our kit which is direct from sample reduces time to result by approximately 60 hours, a game changer for these critically all patients. It is also a large market with over 2.8 million possible tests and we will increase our overall time by over 50%. Needless to say, we are eager for the global launch.

Interestingly, we believe this flu season also demonstrated the importance of this test, as some who begin with viral flu, contract bacterial pneumonia often with devastating results. We believe our kit will help. For all these reasons, we have worked diligently in 2017 to move this towards a global launch.

Throughout the year, our development team made steady progress on the kit, culminating in our CE mark study. This multisite study demonstrated a strong performance of the device. Sensitivity and specificity were 97.3% and 99% respectively, while AST performance across 15 drugs was also quite good, with EA and CA at 93.8% and 96.9% respectively.

Most importantly, time to resolve was 57 hours faster than the standard-of-care, which we believe will translate into significant clinical value. In summary, 2017 was a solid year for Accelerate.

Commercially, we met or exceeded our expectations on most of our key parameters, including a number of qualified prospects, the number of evaluation contracts, pricing for tests and modules, capital mix and annuity per customer. However, we underestimated the length of the sales cycle, something which we believe we have now mitigated.

Our product superiority goal was achieved with new drugs, improved performance and consistent reliability. Finally, our third goal, the CE marking of our respiratory kit was also achieved with excellent performance rounding out the year, all in-all as I said, this solid performance and a good base on which to build a great 2018.

And with that, I will turn it over to Steve to review our preliminary financial performance.

Steve?.

Thank you, Larry, and good afternoon. Revenue for the fourth quarter was $2.1 million and $4.2 million for the year compared with $39,000 and $246,000 for the same period in the prior-year. These increases were driven by sales of the Accelerate Pheno system and Accelerate PhenoTest BC kit across the U.S. Europe and the Middle East.

Cost to goods sold for the fourth quarter were $649,000 and $1 million for the year resulting in gross margins of 69% and 76% respectively. These gross margins are in play due to instrument inventory sold in the past few quarters that were previously recorded to research and development expense.

Selling and general and administrative expenses for the fourth quarter were $11.5 million and $45 million for 2017, compared with $10.5 million and $37.2 million for the same period of 2016. These year-over-year increases were driven by higher personnel and evaluation related costs in the U.S. and Europe.

Research and development cost for the quarter were $6.1 million and $22.3 million for the year. This compared to $5.6 million and $29.5 million for the same period in the prior-year. This year-over-year decrease was due to clinical trial and prelaunch inventory costs incurred in 2016 that did not repeat in the current year.

Our net loss for the fourth quarter was $15.1 million and $62.9 million for the year resulting in a net loss per share of $0.27 and a $1.16 on weighted average basic shares outstanding of 55.4 million and 54 million respectively. These net losses contained 2.9 million and $13.9 million in non-cash stock-based compensation expense.

Net cash used for the quarter was $12.1 million and $51.8 million for the year. The company ended the year with cash and investments of $109.1 million. We anticipate filing the 10-K for the year on February 28th. I will now hand the call back to Larry to review our 2018 goals and outlook..

Thank you, Steve. Now onto 2018, with instrument performance where we wanted to be, we now can be laser focus on two initiatives for 2018. The first of these will be achievements of our revenue guidance for 2018.

Specifically, we expect to generate revenue of between $21 million and $30 million for the year, with a very light first half and a very steep ramp into Q3 and Q4. We expect price will remain above $200 of kid supporting strong gross margins. Our confidence was high.

The learnings from 2017 with the resulting improvements to our sales process, which we recently rolled out at our national sales meeting have fired up our sales team. The addition of our new top sales representatives from BioFire, Cepheid, BioMerieux and Beckman is also contributing.

Our second focus will be on respiratory where we expect to initiate U.S. trials in late Q2, early Q3 with completion and submission shortly thereafter. Our trial on this, direct from specimen test, will be groundbreaking and it is difficult to predict FDA's ultimate requirements for size, and follow up and sample type among others.

Further, we expect to conclude an arm demonstrating clinical outcomes associated with using the device, something that we believe is also unique. Accordingly, while we can predict when we will start the trial, the completion and approval timing will require us to advance our discussions with FDA.

Given that we have already sent our pre-submission package to the FDA, a significant milestone, we anticipate that this conversation will occur over the next 90 days and expect to provide an update on this in our first quarter conference call.

In addition to these principal objectives for 2018, we are continuing research and development on additional sample types, a next generation Pheno instruments and other complementary instrumentation.

This combined with pharma partnerships and China expansion will definitely keep us busy, and we could be more excited to see the results of these efforts. And with that, I will open it up to questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Bill Quirk with Piper Jaffray. Please go ahead..

I guess first question to Larry. Thanks very much for the CE mark data on the respiratory test. As memory serves, I believe all of the threshold assuming that they could be replicated in the U.S.

data would be sufficient for us the approval, correct?.

That’s correct Bill, and hey, before I get your question, I just wanted to mention one thing. So I’m glad to know that our employees are listening.

I understand from ahead of customer service that customer feedback with the surveys of newly launched customers consistently say, they are not just satisfied, but very satisfied with the device and the experience, and this is the highest rating possible. So, I want to make sure I get that in for our customer service folks.

So excuse me, Bill, and now I'll answer your question. And the answer is, yes, absolutely, based on that data we would receive FDA approval, that’s correct..

That’s excellent news and certainly very glad to hear that that you’re your customers are rating in the highest category possible in terms of service and support.

Additional question is just thinking a little bit about the lower respiratory product and specifically the clinical trial to design to include clinical outcomes measure there, presumably that being designed in, one, to help no doubt speed eventual adoption? And secondly, I'm assuming this is being asked by some of your customer? Certainly we've heard in some of the surveys work we have done..

Yes, Bill, look I would say that the kind of results that we are seeing from the sepsis product are quite heartening, and we in hindsight would have proffered for that to be part of the clinical trial. If we could have seen that type of reduction in sepsis, right out of the gate, I think we would have had more of a tailwind for sure.

So, we want to make sure that we do that in this trial. I think that there is a potential actually to show even a greater impact on severe pneumonia and so we decided to take a bit of time and build in a clinical arm to the trial.

Now, this is unusual it's typically done in a diagnostic trial, but we are confident that we are going to see something that could be quite spectacular..

One question for Steve and then I'll let somebody else jump on here.

Steve, expected cash usage in 2018?.

Yes, coming out of 2017, we were pretty consistent with our expectations in the range of $10 million to call it $13 million per quarter. We expect this to ramp a little bit as we get into our clinical trial for respiratory and ramping up the sales team a bit, but nothing dramatic.

I think we'll still be in the range of 13 million to 15 million on the net basis per quarter..

The next question comes from Brian Weinstein with William Blair. Please go ahead..

Can you talk a little bit about where in the evaluation process? I think you said you have 259 as of 12/31.

Can you just talk a little bit more about kind of what's stage of that evaluation processes that these are in, are they weighted a little bit more towards the later stage of that? Or are they more in the early stage of the evaluations?.

I would say that they are various stages across the board. We have some evals that are complete and are moving towards acquisition. And we have some that are just at the very beginning of the process.

The good news is that some of those that are at the very beginning of the process were using our new "accelerated evaluation process" and so those should go faster than they have in the past that will allow those to move through the sales cycle more quickly than what we have experienced.

I think in general as we have said based on what we have seen in the past we will see like Q1 Q2 with lots of conversions in Q3 and Q4..

And then you’ve talked about the progress you made by changing the contract, I mean in the language on the frontend into the evals. One of the other issues that you guys have mentioned in the past were kind of getting the IT systems up and going.

So can you give us an update on the IT incentives that you guys were using to work on the software during evaluation and contracting and if that's also shaping of some months of the process as well?.

In that case, we’ve not had a situation or many situations yet where we've been able to exercise that. We are doing a lot of other things. For example, we now have contractual relationships with all of the significant LIS providers. I think we have finished or soon to finish all of the interfaces between our instruments and those LISs.

Accordingly, we’ll see that part accelerates for sure just by those interfaces being pre-built and over the course of the next two quarters, we'll start to see some of the incentivized sites who are going to do this concurrently also happen.

As a matter of fact, I think, on Monday, we reviewed a site that is actually doing the LIS before they're doing the evaluation, but that's just kicking off right now. So I can't tell you what the overall savings yet will be, Brian..

And then can you just describe a little bit of price of the accounts you’re winning? Are you taking share away or winning head-to-head accounts from guys that were considering going with kit and molecular ID and resistance products? Or are you winning accounts that are more kind of old school culture or something else? Just any kind of an update on what you're typically seeing there?.

Yes. Thanks, Brian. Great question and we're excited that we are mostly in head to heads against molecular products. We see a number of different companies out there, often, Luminex with their Nanosphere product line, and we are winning those head-to-heads as far as I know, we’re batting a 1,000 there.

So it looks really, really good and some of the closes that you're going to see early in the year are direct takeaways from folks that are running molecular, right now..

[Operator Instructions] And our next question comes from Tycho Peterson with JP Morgan. Please go ahead..

This is actually Julia for Tycho. Thanks for taking the question. First one is, the 78 instrument that you’ve been started as of today. Could you just breakout the specifics between the U.S.

and Europe?.

It's about 70% U.S., 30% Europe right now, roughly. Actually excuse me, that’s the revenue split. The revenue split is about 70% U.S., 30% Europe. While commercial contracts were roughly 50%, 50%..

Okay. Got it. And then next you mentioned the capital sales mix is currently about 80% very strong there. What is the specific breakout between the U.S. and Europe? And….

Sure, so we saw coming out of 2017 that nearly all of the contracts that we closed in North America were for capital. And we saw roughly 60% of contracts closed in Europe were for capital, 40% were rate and rentals which is a very typical model for the European market.

Our expectations are that we will still see a majority of overall global contracts with the close in 2018 for capital..

And then in terms of the order conversion I know you talked about a number of measures that you are taking to include the situation.

Just any of them are involved changing your system pricing? And how do those system pricing looks like in the capital placement contracts?.

Yes, I mean generally what we have seen is that pricing is not an issue, it's been somewhat binary for hospital. Once we convinced them that they have a need and this is a right solution then we move through pretty quickly, so not an issue there.

So we don’t anticipate having to change either, our kit pricing nor our instrument pricing dramatically heading into '18. On the instrument side, generally we target about $200,000 for an average customer call it two module system and of course there is discounts for customers taking on additional instruments at initial acquisition..

And then lastly from me what kind of revenue scale do you think is require for you to reach your long term target of 70% plus growth margin? And just longer term what kind of operating margin are you targeting at scale?.

Well, I think that certainly the foundation for good operating margin is a strong gross margin and the track to getting into the 70s I think is right in front.

We've built manufacturing capacity for 1,000s of instruments a year and 100s of 1,000s of consumables, and we have over the past year implemented a lot of changes to fundamentally decrease the cost of the kit.

So I think sets us up very well for scale, now we just have to run a volume through the system that we built to achieve those targets in the 70s..

Olay just to clarify because you've previously talked about next year expectation of growth margin more about low 60s, so like, is that still your latest expectations for this year?.

I don’t think we particularly guided gross margins for this upcoming year and the picture there is pretty complex. I think we will be somewhere around that mark, but there is a lot of factors at play..

And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Lawrence Mehren for any closing remarks..

All right, thanks. So in closing, I want to thank all of our employees, our investors, and our customers for the great quarter through 2017. You hard work and strong belief in our company and our technology has put us in a great position to have a banner 2018. We couldn’t be more enthusiastic. Thank you all and I'll speak to you soon. Bye-bye..

The conference is now concluded. Ladies and gentlemen thank you for attending today's presentation. You may now disconnect.