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

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

Good day and welcome to the Accelerate Diagnostics, First Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded.

I would now like to turn the conference over to Laura Pierson. Please go ahead..

Before we begin, it is important to share 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, forward sales estimates, timing of clinical outcome data, timelines associated with the severe bacterial pneumonia test kits, for use on the Accelerate Pheno system along with other plans and objectives.

Forward-looking statements include those 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 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 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 Diagnostics.

Larry?.

It is great to speak to you all. I have just finished doing a full review of our two focus areas for 2018, revenue and respiratory. What I thought was encouraging, but also highlighted some timing risks that I want to share with you. So let's begin with commercial progress in EU. Overall, we believe this geography is progressing quite well.

We have just returned from ECCMID the largest infectious disease congress in the EU. We showed quite well there with significant booth traffic, quite a bit of funnel progression and 100s of attendees in our symposia highlighting the benefits of rapid susceptibility in general and the Pheno system in particular.

At this congress alone, 12 posters were presented highlighting the speed, accuracy and clinical benefit of our system and test. This now takes us to over 60 posters and publications worldwide that continue to demonstrate the utility of this system and more importantly are now showcasing the clinical value of the system.

In particular, they demonstrate the Pheno's unique ability to enable dramatic improvement to antibiotic prescribing, allowing for both rapid escalation and de-escalation of antibiotics.

And this is changing outcomes as evidenced by the data and presentations from La Princesa Hospital in Spain and Basingstoke & North Hampshire Hospital in the United Kingdom.

In Basingstoke, for example, they have shown antibiotic treatment optimization, reduction in overall antibiotic use, narrowing of patients' antibiotics and implementation of infectious control procedures all a day and half faster on average than they were able to do before.

All of this is contributing to a bit of a tailwind in the EU, and while first quarter numbers were as we guided earlier very light, we did see meaningful progress. In Italy, for example, we now have seven customers up and running clinically with numerous customers deep in the funnel and expected to close over the coming quarters.

We also are expecting a catalyst that we believe will continue to drive business in this country. In the fourth quarter, we expect AMCLI the Italian Association for Microbiology's clinical care working group to include our solution and guidelines for treatment of critically ill patients affected by bacterial infections.

This is great for patients in Italy and we hope we will be duplicated in other countries across the EU. Other countries in the EU are also making progress, France, Germany, Spain and the UK among them. In each of these countries, we are implementing specific market access programs that are having a positive impact.

For example in Germany, the biggest EU market, we have two active customers and expect many more. One sticking point in driving faster adoption was a lack of the German specific health economic outcome model with live data from German hospitals. This is something we have now remedied.

With this in hand, we expect progressive commercial traction from Germany going forward as well as the rest of our EU business. Lastly, our business in the Middle East has been doing quite well and we expect good things from this region later this year.

Overall good progress and as expected we should see a strong third and fourth quarter from this geography. There is also progress in North America to start with our U.S. pipeline remains quite strong. We continue to add scores of accounts to our funnel and many accounts are in the latter stages of acquisition and implementation.

Our conversion of evals continues to be nearly perfect with very little attrition post-evaluation and instrument performance that we believe has been excellent. And while exciting changing the practice of medicine is not easy. I had the opportunity to have dinner this past Saturday with the mentor of mine, Dr.

Tom Grogan, the founder of Ventana Medical Systems, my former employer. Ventana eventually was a hugely successful company, but Tom reminded me that the first few years of Ventana's launch like most diagnostic launches was quite challenging with first year sales of just three instruments. And I do also see risk in our commercial launch.

A year into it we have tremendous interest and good progress. However, I believe our funnel remains congested. Sales are still taking too long and our efforts at speeding the process up have had mixed results. For example, while we are increasing the speed of evals and connections to the LIS, the contracting process remains challenging.

In numerous institutions across the country, we have the support of clinicians the lab and the C suite, yet final sign off on our POs continues to extend. I believe this is all about urgency. Many of you have done the same work we have done surveying hospitals to see if they know of the Pheno and plan to buy it.

And we believe the results of these surveys remain encouraging. Usually a resounding yes, yet their urgency is different than ours. We don't want them to acquire tomorrow. We want them to acquire today. So we are redoubling our efforts to create the sense of urgency necessary to un-stick these accounts and most of these programs are already underway.

The first program is evidenced something that we are actively driving. In addition to the 61 publications and posters on the Pheno, we expect an additional seven to be presented at the upcoming ASM. Included in the publications, we now have clinical outcome results to further a test the value Pheno was providing.

We are also initiating a registry for both our blood and respiratory kit that we expect will show the significant improvements to patient outcomes driven by Pheno results. Most importantly, evidence is also coming that we expect will be a major driver later this year.

In late 2017 two institutions, the Mayo Clinic, Rochester and UCLA, secured IRB approval to conduct a randomized clinical trial investigating the efficacy and associate health economic outcomes of Pheno. The trial randomized patients with gram-negative infections into two cohorts.

One group received therapy based on standard of care the other care informed by Pheno. Needless to say, this was a difficult study for which to secure approval given the potential challenges of clinically impactful information and earlier optimized therapy.

Regardless, the study is nearing completion, and we expect enrollment to finish in Q3 with early data soon after. If this study concludes as we hope it will demonstrate the improved outcome for these critically ill patients with positive impact on mortality and morbidity length of stay stewardship and cost. We can't wait.

The second program is securing contracts with group purchasing organizations, many of which are compliant. And I’m happy to report that we are also making steady progress here. These contracts represent access to over 3,000 institutions and unlock a huge part of the market currently close to us.

This past week, final revisions were completed for the first of these contracts, and we expect their counter signing in the next days. We expect the others to be concluded in the coming quarters.

And while there is no guarantee a broad adoption in these institutions, this should be a significant catalyst for our sales efforts and speed up the contracting process. Thirdly, our KOL strategy is also working. We now have arguably the two most prestigious children's hospitals in the country as paying customers.

We also have a number of the most prestigious cancer centers and tertiary hospitals using our device clinically. Also notable are the number of community hospitals that are finding the Pheno useful, even indispensable. We continue to be humbled by the stories of lives saved and overall improvements in hospital outcomes, including to the bottom line.

It is also helpful that a number of these customers have become real evangelists of the technology, and not hired guns. These folks are just so darn excited by what they are doing and changing sepsis outcomes using the Pheno that they are encouraging others to consider our system. This is how it should work.

Finally, we have also reorganized the sales team to take advantage of the momentum created by these efforts. We have substantially increased our sales organization and recently completed extensive training of the new team we have brought to the effort.

And while it’s a ramp time for the new team as expected, we are already seeing benefits that will accrue in the coming quarters. So all in all we believe much to be encouraged about, solid data, great KOL support, good anecdotal evidence of clinical outcomes with definitive clinical data to come.

For me, I now believe that we are no longer managing, if we will become standard of care in much of the world, but when? That is a good feeling and has the team very pumped up. So as we guided previously, we have the very light Q1 we expected and still expect to have a light Q2. We do expect to see a heavy Q3 and even heavier Q4.

The funnel right now looks to get us to the bottom end of our guidance range albeit with some risk, and how we end Q2 will obviously have a material impact. And with that, I will turn it over to Steve to review our financial performance.

Steve?.

Thank you, Larry, and good afternoon everyone. Revenue for the first quarter was $801,000 compared with $530,000 from the same quarter in the prior. This increase was a result of sales of the Accelerate Pheno system and Accelerate PhenoTest BC kit across the U.S., Europe and Middle East.

Cost to goods sold for the first quarter was $492,000, resulting in a gross margin of 39%. This gross margin includes one-time charges and the effects of excess capacity, which negatively impacted our quarterly margin. We believe these items will not have an impact on our outlook for a strong full-year gross margin.

Selling general and administrative expenses for Q1 was $14.4 million compared with $10.5 million for the same period from 2017. This year-over-year increase was driven by higher selling personnel related costs in the U.S. Research and development costs for the quarter were $6.8 million and $4.3 million for the same period in the prior year.

This year-over-year increase was due to investments made for the preparation of our U.S. respiratory clinical trial and expanded clinical affairs activities. Our net loss for the first quarter was $20.8 million resulting in a net loss per share of $0.37 on weighted average basic shares outstanding of 55.6 million.

This net loss contains $5.6 million in non-cash based stock compensation expense. Net cash used for the quarter was $16.2 million.

The company ended the quarter with cash and investments of $193.6 million, which includes net proceeds of approximately $100 million from the convertible offering, but excludes the additional approximately $21 million of net proceeds from the greenshoe exercise in April. Additionally, today, we have signed agreements for 345 instruments.

Of these, 256 are under evaluation contract and 89 are placements. We anticipate filing the 10-Q for this quarter later this evening. And I will now hand it back to Larry to review our progress on research and development..

Thank you, Steve. In Q1, we made considerable progress on our second focus area for 2018, the completion and trial of our severe bacterial pneumonia test kit for use on the Pheno system. First, as we have previously mentioned, we remained in active discussions with FDA and these continue to go well.

The dialogue continues to center around trial design and necessary analytical studies. We have however received surprising and encouraging news from the agency on the regulatory classification. They notified us recently that the products will be a 510(k), a de-classification from the sepsis kit, which was reviewed as a de novo device.

The net result of this is a shorter path to approval and a less complex review process. And while we are hopeful that these discussions will conclude soon, we are taking this opportunity to introduce a recently developed automated sample preparation instrument into the trial.

We believe this device proved upon current microbiology sample preparation workflows, enabling the use of Pheno on numerous sample products and applications including respiratory. One of the immediate benefits of applying this is improved reportability from complex samples particularly those with interfering substances such as anti-microbial.

Lastly, we believe the output of this device is suitable for diverse microbiology application, enabling it to feed other workflows we are currently developing. Needless to say we are excited about this device and believe securing his approval as part of our respiratory trial while adding some schedule risk is well worth it.

In Q1, we also completed adding three additional drugs and to IV targets to the pneumonia panel to make the product even more appealing allowing it to assist and guiding treatments for some severe community acquired, potentially increasing the products overall progress. Given this progress, we continue to expect to initiate the U.S.

regulatory trial in Q2 or Q3. Further, given our $0.05 classification we expect a launch relatively soon thereafter. We will let you know more as soon as we conclude with the FDA. Lastly, we are nearing initiation of a multicenter clinical outcome study in support of our severe pneumonia product.

This study is targeted to begin in Q2 and includes a number of leading academic hospitals. The first phase of the study will establish a baseline for the time to current culture based antibiotic to susceptibility results in serious pneumonia, along with outcomes and management practices.

The second phase will be a perspective, randomized clinical trials that will evaluate both analytical and clinical performance. This outcome study is powered to demonstrate impact on length of stay, mortality and serious complications associated with hospital on set and ventilator acquired pneumonia.

We expect to have data available from this study right around the time we launch and believe this evidence will significantly shorten time to adoption. And with that, I will open it up to questions..

Thank you. We will now being the question-and-answer session. [Operator Instructions] Today's first question comes from Tycho Peterson of JP Morgan. Please go ahead..

I guess Larry given the magnitude of the miss relative to The Street, I think there is a lot of focus here on what is going to take to un-stick these account. You talked about a little bit of it, but you had that posters and publications out there for a little while. Your placement did get cut half sequentially.

I guess can you help us get some comfort that you know these initiatives are actually going to pay off here? Can you also address the fact that you didn’t preannounce given the magnitude of the miss? And then it sounds like you've about 25 million worth of systems that have been in the field for about a year a 100 or so.

Why haven’t these converted at this point?.

Okay, so Tycho I appreciate the questions. You will have to help me, if I forget one of them there is a lot of them there. So I think in the first case as it relates to The Street's guidance, we didn’t provide guidance on a quarterly basis, and accordingly, we didn’t see what was necessary to preannounce.

At the end of the day, we did guide that our first quarter would be quite light. Our second quarter would also be quite light. The third quarter would be heavy and the fourth quarter would be heavier. So, I think we are on track to achieve just that. And further, we reiterated our guidance for the year on this call.

Secondly, I’d say that in the first quarter we had a number of new pieces of evidence presented including that which was recently presented at ECCMID. I think that will help and I think the rest of what we are doing as articulated in the conference call will also be quite helpful. You had another question which I missed that third question..

You have had a decent number system sitting in the field for over a year. I think it's around $25million worth.

Why haven’t these converted? Some of the earlier evals, why are they still under evals and haven’t converted at this point?.

So, I think the good news Tycho is they all imply. So, we haven’t watched the single one. I think it's taking quite a long time to contract. We do not have the benefit of being a reimbursed device.

So, unlike other folks out there that can rely on reimbursement, we actually have to rely on demonstrating health economic outcomes and sometimes that’s challenging.

I think we have done a really good job of that and are in the process of the converting most of those instruments, and we expect frankly a majority of those to convert this year and that's what really driving our optimism that we will have the year that we projected..

And then just last one I guess thinking about the efforts of safety accounts.

Is there anyone in particular that stands out as potential being more meaningful? I mean, if I think about the sales reps that you are hiring, are you hiring at a more senior level? Or are there other factors that of those initiatives you've listed that could be more impactful?.

Yes, I'd say two things. First of all, the ARLG study which includes Mayo Clinic, Rochester and UCLA. If that comes out as we expect it will, demonstrating what all of our customers have so far experienced, which is a significant improvement in patient outcomes. And that’s done in a prospective way. It's very difficult for a hospital than to not adopt.

I think we will have created a situation where I don’t want to be hyperbolic, but it's almost malpractice not to have this. And I think that could be a significant catalyst.

Secondly, it's important to note that we increased our sales force by almost 50% and a number of those folks, I’d say over half our sales force has less than three months in the seat. So, those folks are coming up to speed right now. Frankly, they've just been trained and we are already seeing great things. So I remain quite optimistic..

And our next question today comes from Bill Quirk with Piper Jaffray. Please go ahead..

So, Larry, just going back to you comments about the lower respiratory product and specifically thinking about the frontend piece to that. You've mentioned that or kind of imply I think in your comments that could create some additional time and turnaround time rather with respect to the clinical trial.

Is the device itself, is it finished at this point any remaining clinical risk or anything like that associated with it? Or are we ready to go here from a clinical trial standpoint?.

Yes, I would say there is still technical risk and we will be optimizing and integrating write up until the day that we enter clinical trials.

We are always searching for perfect performance and as we are continuing to optimize I think if we run into a challenge it's not going to present binary risk because the test works great, but it creates a timeline. So with all that been said based on what we're seeing, we still expect to start our clinical trial in Q2 and Q3..

And given the preliminary data that's affiliated with that, which obviously was quite strong. So Larry, just a question of you have some optimality here where you can take this into the clinic without the sample prep device, if as to your point, you are optimizing up until the last second.

And if you don't get there, can you still move forward on this and incorporate this later? I mean, how should we think about that being a potential bottleneck to gain a clinical trial started?.

I think, yes, we do have optionality. At the end of the day what we're trying to do is have just a homerun here on both the technical perspective, overall performance outcomes, and we really wanted to drive as purpose of the product as we possibly can.

And were going to be as I said optimizing until the very last moment, but we already have something that works really, really well and is better than anything else out there..

And then just two more quick ones from me. On the accounting guidelines, can you talk about whether or not you're getting close with any other country? I assume perhaps you are up just giving the Pheno being there a little longer.

And then secondly, given the economic study that came out of university hospital or the mortality study came out in the university hospital.

Is that something that you guys are using with respect to trying to get these systems close faster? I'm just thinking about a scenario where you could you end up going to the hospital C suite and trying to do it kind of a top down push just try to get these things up in running curious on your thoughts there?.

So, as it relates to university hospital, yes, we are excited about the white paper that came out. It's been helpful to us and for sure it's assisting our salespeople moving stuff forward. I would say thought that because it's a pre-post observational study, it's not nearly as powerful as a study that is probably randomized like the Mayo Clinic study.

So, I think the Mayo Clinic study will be much more powerful and creates a much more of a tailwind than does the Augusta work, but the Augusta work as well as our other customers who have put forward a number of papers and publications about clinical data. Those are all helpful to us.

So were excited about that, but I really do think prospective randomized trial is the gold standard and more powerful. As it relates to Europe, I think the answer is, no. I don't think we are close to guidelines in any other country. But we are making a significant progress in Germany, as well as in France with reimbursement.

So those would be significant catalyst for us. And we expect by the third quarter to hear about whether we achieve the first step of reimbursement in both of those countries. So I think good news overall..

And our next question today comes from Brian Weinstein of William Blair. Please go ahead..

Larry and Steve, look at the funnel as it really growing that much right now, 259 now 253.

Can you talk about what's cutting the front end to that funnel to maybe not have any kind of acceleration there? Is that anything due to the competitive environment you are seeing today relative to competition versus like molecular ID and resistance products or molding? And do you think that your product actually can't live side by side with those other products in the lab? Or do you think it really has to be a one or the other?.

Look, as we mentioned we have a substantial funnel. I think it's grown significantly. I think we now have more than 750 prospective customers in North America alone. Again, this is a congestion problem. not a demand problem. And we actually didn't lose evals in Q1 we added 10 new customers and converted several more.

In addition, we had a number of -- a couple of customers purchased directly. It's important to note that total evaluation instruments that number is growing number and will decrease as customers convert. And frankly in Q1, finally, our sales team was really being reorganized. And that was the first priority.

I’d say we should see significant progression in Q2 Q3 and Q4. So I do not see this as a stoppage or anything, I think this was we took a pause to put in place the things that we needed to put in place. And my expectation is that Q2, Q3 and Q4 should be quite good. I’d also say this competitive situation is not always holding us back and off.

We are not in a situation where we are going to head to head against a molecular device and finding ourselves wanting. And I think in many cases we coexist. So we have many coexists with a molecular placement. And you will see then running a respiratory viral panel while we are running those blood samples.

So I would expect that to continue and a number of accounts. And frankly and some accounts we are going to head to head against molecular devices and typically we are winning..

Last quarter, you mentioned the China feasibility study that you had commissioned. Obviously, it’s a huge market and you said you might have an update for us on that in a couple of months.

Where is that now? And what are the results of that study, if you can share that?.

Yes, sure, China looks very good for us. Reimbursement looks quite good for us. And the market looks appealing. We are heading over -- our team is heading over to China in two weeks to deepen the investigation, meet with KOLs and commission, a number of studies. So, we're enthusiastic about progressions there..

And then at the end of the prepared remarks on the Q4 call, you did mention sort of pharma partnerships at that point.

Are you able to expand on what that comment was referring to and at time if you hear more about this?.

Look, I think in this case we are working with the number of pharma groups and a number of different deals and that's all I would like to say about it right now..

Our next question today comes from Sean Lavin of BTIG. Please go ahead..

My first one just kind of given the numbers of systems you have, if a while as Tycho brought up.

Is there a couple of points or are you at the point where you start taking some back to kind of encourage hospitals to start buying them?.

No, Sean, I mean we wouldn’t take them back unless the hospital said that they are not interested or not going to buy them. And so far we have not had that happen. So we're not finding the situation where we've got hospitals that are saying we don’t want to buy. Quietly often we're saying.

Most of our situations are that we have hospitals and are working very, very hard to purchase those instruments and it's an internal struggle for them..

But if a hospital can keep using a system and doesn’t have any threat of lose of your system.

And what makes them wake up on a certain day as I use payment what incentivize that?.

Well, I mean first of all it doesn’t make sense for us to be installed when that hospital is in the process of moving things through their various committees. I would give you an example like we have a number of hospitals where they have five, six or seven committees, each one meeting in a month or two times.

So while that hospital is moving through that process of acquisition and securing budget, and most of the time given where we are that's not something that have been budgeted for us in 2017. So, it's off-cycle budget which takes a longer time.

So, Sean, we don’t think it make sense to de-install them when they already are highly motivated to get this approved..

And as you think about your guidance and certainly the confidence in the back half, is there anything you can kind of point to that gives you that confidence? Or are there certain hospitals they said, we can rather pay in the third and fourth quarter? Or you've gone for a number of hospitals? You know, they kind of where they are in the different committees.

I mean, is there something kind of point to this? As you know, this should really pick up as you said kind of being hoped, but more kind of materials things you can point out?.

Yes, sure we have many customers that are in the bottom end of funnel that are past evolution those evaluations have been exceptional they've said they are going to purchase, and they are going through the committee right now, and we have enough of those that even with attrition we believe that we will be in good shape..

And thank you, ladies and gentlemen. This concludes today's question-and-answer session. I would like to turn the conference back over to Larry Mehren for any closing remarks..

All right, thanks for the questions, and I would say as usual a special thanks to our great team. They are doing a fantastic job. Another, great thanks to our dedicated customers and our really committed shareholders. You all are making it happen, and as I said earlier, I think it's just now about when and I think we are on our way.

We are absolutely on our way. Cheers and I’ll speak to you soon..

Thank you, sir. Today's conference has now concluded. And we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day..