Ladies and gentlemen, once again, I’d like to welcome everyone at this time to the Accelerate Diagnostics’ Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions.

[Operator Instructions] Please note, this event is being recorded. At this time, I’d like to turn the conference over to Laura Pierson of Investor Relations. 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 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, 2017, and other 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?.

Thank you, Laura. It is great to have you all with us this afternoon to review our fourth quarter and full-year 2018 results. After what can only be described as a disappointing start to 2018, I'm pleased to report an improvement in our commercial progress during the fourth quarter.

Over the course of 2018, our focus was to identify and resolve several commercial challenges, which I will discuss in further detail later in my remarks.

The initial results from these efforts have been encouraging as we achieved a significant uptick in our rate of commercial placements during the fourth quarter, putting the company on a positive trajectory as we move into 2019 and beyond. In 2019, our focus will be on three principal areas.

First, continuing to penetrate the market by adding materially more customers and commercial placements; second, driving rapid customer go lives and consumable revenue generation; and third, advancing key areas of product and geographic development.

I would like to begin this afternoon by having Steve review our fourth quarter and full-year 2018 financial results. I will then provide a further analysis of these results.

Finally, I will describe our expectations in 2019, providing key metrics and catalysts that we believe investors will find helpful in evaluating our progress against those expectations over the course of the year. With that, I'll pass it over to Steve to review our financial results for Q4 and full-year 2018.

Steve?.

Thank you, Larry, and good afternoon, everyone. Net sales were $1.8 million for the fourth quarter and $5.7 million for the full-year. This compares with $2.1 million and $4.2 million for the same period in 2017. The fourth quarter decrease was due to nearly all of the U.S.

commercial contracts in the quarter being placed under our reagent rental option. This was not available in the prior year. The year-over-year increase was driven by the 202 new Accelerate Pheno systems contracted during the year, 133 of which were contracted in the fourth quarter.

Approximately 25% of the systems added during the year were purchased outright, while the balance were placed under reagent rental agreements and will generate consumable revenue, inclusive of enough charge for the value of the instrument.

As the fourth quarter, in the diagnostic industry, is traditionally the largest, we expect the sequential step down from these levels in Q1.

However, we do expect the substantial year-over-year increase in the number of first quarter placements and sequential growth over the remainder of the year as we march toward our 2019 target of 300 to 400 instrument placements.

Cost of goods sold was $1.3 million for the fourth quarter and $3.2 million for the full-year resulting in gross margins of 29% and 44%, respectively. We incurred unfavorable impacts to gross margin associated with investments in-service and manufacturing capacity in excess of production demand.

Excluding these impacts, gross margins were 53% for both the quarter and the year. It is our expectation that these effects will diminish over the course of 2019. These figures compared with gross margins of 69% in the fourth quarter and 76% for the full-year of 2017.

These prior year gross margins were artificially inflated by the sale of pre-FDA inventory, previously written-off to R&D. Excluding these effects, gross margins were 53% and 55%, respectively. Selling, general and administrative expenses were $13.4 million for the fourth quarter and $55.2 million for the year.

This compares with $11.5 million and $45.1 million for the same period in the prior year. These increases were driven by the expansion of the U.S. sales team and costs related to increased global sales and marketing activity.

Research and development costs were $6.9 million for the fourth quarter and $27.6 million for the year compared to $6.1 million and $22.3 million for the same period in the prior year.

These increases are attributable to continued investment in clinical outcome studies and costs incurred in preparation for the respiratory FDA registration and outcome studies. Our net loss was $22.2 million for the fourth quarter and $88.3 million for the year, resulting in a net loss per share of $0.41 and $1.62, respectively.

These net losses contain $2.2 million and $14.7 million in non-cash stock-based compensation expense, respectively. Net cash used was $14.1 million for the quarter and $64.1 million for the year. The Company ended the year with cash and equivalents of $166.5 million.

We believe our cash position is sufficient to meet our near-term plans and in 2019 expect net cash burn to be similar to or just below 2018 net cash burn. I'll now hand it back to Larry to review our 2018 commercial results and additional detail and discuss our outlook for 2019.

Larry?.

First, continuing to penetrate the market by adding materially more customers and commercial placements; second, driving rapid customer go lives and consumable revenue generation; and third, advancing key areas of product and geographic developments.

Regarding our first focus area, penetration, we are driving to close between 300 and 400 new instrument placements. While we will monitor our sales cycle closely, we do not believe material new investment nor changes in commercial strategy are required to achieve this target.

We will however, continue to support this effort by investing in clinical studies. We believe these outcomes data will continue to demonstrate our unique clinical and economic impact for acquiring hospitals.

We expect 10% to 15% of our anticipated 300 to 400 placements will be purchased outright with the balance to be placed through reagent rental contracts. Average unit prices per instrument will be about the same at $50,000 per instrument.

While this capital mix is a substantial departure from our prior year expectations, the strength of our test kit annuity along with opportunity to dramatically increase our installed base make the reagent rental model the optimal strategy for us.

Our second focus area driving rapid customer go lives is about ramping each of our contracted instruments to fully productive revenue generating status as quickly as possible.

Each of these targeted 300 to 400 instruments and a portion of our installed base starting the year will require the completion of implementation steps before going clinically live and generating consumable revenue.

For sites converting from a prior evaluation, instruments need to be connected to the laboratory information management system and site personnel need to be trained on the clinical pathways necessary to ensure prompt action on Pheno results.

The increasing number of hospitals acquiring without any evaluation typically will require installation, verification, LIS connection, and clinical pathway implementation. Both go lives take time ranging from four to nine months post contracting with an average of approximately six months.

Consequently, we expect a meaningful pickup in consumables revenue in the back half of 2019 from the 133 instruments contracted in Q4. Once live, we expect our annuity will range from $45,000 to $65,000 per instrument with U.S. customers on the upper end of that range and EMEA pulling down the overall average.

Finally, in our third area of focus in 2019, we will advance our plans to launch our next test kit for the Pheno system, our severe bacterial pneumonia assay, and also plan to initiate the registration trial required to access the Chinese market.

The severe bacterial pneumonia assay will be an important new test for us as these serious pneumonias are an often deadly and costly condition.

The addition of this assay will increase our current TAM for North America and the EU from approximately 4 million tests or $850 million to over 6 million tests or $1.3 billion at an average test price exceeding that of the current blood kit.

In addition, it will demonstrate the versatility and platform potential of the Pheno and its ability to replace significant portions of the current microbiology lab workflow. We continue to anticipate initiating our respiratory clinical trial in the first half of 2019 and conclude the trial within the year.

We will also launch a multi-site outcome study set to run concurrently that we believe will demonstrate the improved accuracy and clinical outcomes of this new test. Now moving on to the Chinese market opportunity.

Based on strong existing reimbursement and a sizable 2.3 million tests per year market, we have begun the process to obtain registration and commercialized Pheno in this important geography. In the second half of 2019, we will initiate the clinical trial necessary for obtaining regulatory approval of our device for sale in the Chinese market.

Achievement of this milestone will position us to begin selling in China in the first half of 2021. In summary, we exit 2018 and enter 2019 with profound learnings from our early commercial missteps.

With clarity on our commercially-focused 2019 plan and with confidence that with consistent execution, we will be able to capitalize on the tremendous $2 billion opportunity in front of us.

Despite the challenges we faced in 2018, we are gratified that our system is making such a significant impact on patient care and in so doing changing the practice of medicine.

We are also encouraged that powerful data continues to demonstrate that hospitals realize only limited benefits from identification-only systems and that the clinical interventions made possible by the rapid susceptibility results provided by the Pheno, dramatically improve patient outcomes and reduce hospital costs.

And with that, we would be happy to answer any questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Bill Quirk of Piper Jaffray. Please go ahead..

Great. Thanks. Good afternoon, everyone, and a nice work on the fourth quarter installs guys..

Thanks, Bill..

Thanks, Bill..

So I guess first question for me is just thinking about, I guess, the pace of system installed over the course of 2019, you had some comments recently that suggested that you placed 30 in roughly the first week or so of the year, which is obviously presumably running ahead of guidance certainly for annualized that over the course of the year, so help us to think a little bit about the pacing of these things over the first and second half? Thanks..

Yes, sure. Bill, I think what we are seeing in Q1, we believe that we should have a good quarter. We can't go into much detail on the Q1 results, but these combined with our internal funnel map indicate that we will see a sustained change from prior year's trajectory, leaving us confident that we will hit the 300 to 400 that we are guiding to.

I would say, however, and it's really the question that you're asking, I would expect these placements to follow typical diagnostics industry calendarization with Q1 being one of the smaller quarters and Q4 certainly being the largest period..

Okay. Got it. And then, again, I appreciate the color on the lower respiratory trials and certainly caught that you're going to have that wrapped up here by the year-end. Is that also hold true for the outcome study, Larry? Should we expect that to be completed as well? Or is that something that you see could possibly go into 2020? Thanks..

Hi, Bill. Yes, the outcome study will go into 2020. It will run concurrently, but I believe that the outcome study will printout about a quarter after the registration trial..

Okay. That's helpful. And then, I guess, a two-parter here from me. You also had some comments recently about adding some additional sales resources. Is that sales will still be thinking about that for modeling purposes at the end of 2019? And then lastly, Steve just following-up on your comments about gross margin.

I think I heard you correctly that the overall pace of gross margin should improve over the course of the year, presumably given that you expect the inflection and consumables in the second half. Is it reasonable to assume [indiscernible] sort of step up there over the first half? Thanks..

Yes. Bill, I can take the gross margin piece of this. Yes, we certainly expected higher manufacturing volumes certainly on the consumable side than we actually realized in 2018. And accordingly, we invested in field service on the instrument install side and fixed overhead that was in advance of that demand.

As we mentioned in 2019, we would expect those volumes to ramp up, certainly field activity has already started to ramp and we'd expect that those kind of negative drags on gross margin to diminish in their impact over the course of 2019..

And Bill, as it relates to additions to the sales force, as we move into the year and as we see a Q1 and Q2 unfold and if we continue the trajectory that we saw in Q4, a very important rate limiting step will be the number of salespeople that we have and accordingly you can expect us to start adding sales people in the second half of the year and likely a significant number..

Perfect. Thanks, guys..

You're welcome..

You're welcome..

The next question today will come from Alex Nowak of Craig-Hallum Capital Group. Please go ahead..

Great. Good afternoon, everyone. Larry, I just want to ask on the changing terms around the new instrument installed. So prior to this quarter, we used the terms evaluations and commercial placements where commercial placements were the live instruments that were running samples where the evaluation systems were still evaluating the system.

So now that you're just reporting the commercially contractive systems, my question is, are any of these placed systems still in essence evaluating Pheno? Or have all these placed systems signed a minimum reagent order contract and now it's just a factor of getting them to go live in the hospital?.

Yes. When we talk about commercial contracts or commercial placements, Alex, we are talking about customers that have agreed to install and run the system clinically.

And to your point, the gaining item for us to revenue is getting them installed through the verification connected to the LIS as quickly as we can so that we can begin generating revenue..

And then, I guess just a follow-up to that, if they go through their evaluation, do they have the option of returning the system at that point?.

Of course. Yes, we have never seen that Alex, but, yes..

Okay. I'm just trying to get to the durability of the annuity stream, but I think I can kind of back into that. Another question here just on the Mayo UCLA trial, you mentioned that Mayo is looking at doing two more internal studies here, I believe that was the correct number.

Did they see the data here and decide to launch into these new trials? Or will they ultimately blinded to the results of the original trial and decide to run the new trials on their own? I'm just trying to get a sense, if they saw the data, they liked what they saw and then they move forward with the additional studies?.

Yes. Sorry, Alex. The other two studies are not being done by Mayo and UCLA. They are being done by other institutions. They are both randomized controlled trials investigating different things. The first one is length of stay reductions for those with complicated UTIs.

And the second study is a head-to-head Pheno versus an ID-only system, I believe its BioFire. Both of those studies are being run by different institutions independent of Mayo and UCLA. As it relates to Mayo, they did do an interim readout of the data last year at ECCMID and the analytical performance of the study was quite good.

So the data at that point, but I don't know whether they've seen the full dataset after the conclusion of enrollment in October..

Okay, understood. And then just last question for me, just on the lower respiratory panel, you mentioned the path, there is problems using the gold standard as your comparison here.

Where do you stand with talking with FDA about using your secondary reference method? And do you still expect a de novo 510(k) filing for approval?.

Yes. So we've concluded with FDA positively and we believe in our favor. This allows us to conduct the trial in a very efficient and rapid fashion and also demonstrate the inadequacy of the current reference method in the majority of hospitals in the U.S. and Europe. So we’re enthusiastic about that.

Ultimately – what was the second half of the question?.

The second question was related to the de novo, but we are actually aligned with them that it is 510(k). It no longer have to follow our de novo path, but will leverage the existing blood product as a reference..

That's great to hear. All right. Congrats guys on the good quarter. Thanks..

Thank you..

Thank you..

The next question will come from Brian Weinstein of William Blair. Please go ahead..

Hi, guys. Thanks for taking the question. In setting your guidance for the 300 to 400 for the year, can you talk about the specific process that you went through to get to those numbers just to understand given the challenges that you guys have had in some of the forecasting in the past.

I just wanted to understand the bottoms up kind of work that was done to get to 300 to 400 and why that's the right number?.

Yes. So we built it based on our funnel map, which is now we believe getting quite accurate. So we had done a number of things in the second half of the year to ensure that we are able to forecast accurately.

And the good news is, by Q4, our folks were able to accurately forecast the year-end, not only in terms of placements, but also in terms of revenue. We're rolling forward by the funnel map into 2019 and we believe that we absolutely will nail it..

Okay. Thank you.

And then as it relates to the commercial contract dealing going right, just talked about kind of the four to nine months, is there anything that you can do to further optimize that or is this sort of kind of optimized as it is right now?.

Brian, there are things that we can continue to do and we are doing those things. Perhaps, the most important thing is to ensure that the LIS connectivity gets done in a very, very rapid fashion.

And as more and more hospitals go live, we found that to become easier and easier, because not only do we have interfaces into all the major LISs now, but we have interfaces and instructions for many of the different flavors of ordering systems within those hospitals.

So for example, the last to go live, I think, happened – the last two – one was in 18 days, Steve, or something like that and the other one was in 51 days. So they are going very quickly and we believe there is upside to that four to nine-month number..

Great. And then last one for me.

You had mentioned previously and maybe you mentioned on the call and I missed it, but applying for NTAP reimbursement, the new technology add-on program with CMS asset, any update on that?.

Well, Brian, given that the call played twice, I'm surprised that you missed that, man. Look, we are cautiously optimistic and on-paper our strong outcomes data positions us really well for that program. On the other hand, we'd be one of the first diagnostics' companies to apply and successfully obtain NTAP reimbursement.

So we're watching a couple of other diagnostics' companies who applied for NTAP in 2018 to see and learn from their successes or failures. All that said, we do not need NTAP for clinical adoption, but having it could help us access more price sensitive segments of the market without having to substantially lower the price.

So we're cautiously optimistic..

Great. Thank you..

You're welcome..

Our next question today will come from Tycho Peterson of JPMorgan. Please go ahead..

Hi. This is Julie on for Tycho today. Thanks for taking the question.

So first off, just a follow-up on the two new studies that you're investing, and could you give us a timeframe of when do you expect to readout from these studies? Is this something we can expect within the frame of this year or can it potentially go into next year? And then you said you expect the Mayo UCLA readout in the first half, so just in terms of the system placement cadence what is your assumption in relation to the Mayo readout? Thank you..

So the two studies that I mentioned both the complicated UTI economic study as well as the head-to-head Pheno versus BioFire should readout in 2019 in the second half.

The Mayo study should readout in the first half and as it relates to our placements – while the successful outcome on the Mayo study could provide additional tailwind, it's not required for us to achieve the 300 to 400 placements that we've guided too..

Got it. Very helpful.

And then on the gross margin, I understand that you explained the gross investment in manufacturing capacity and service, I'm just curious why you didn't see this issue forthcoming earlier in the year or in 2Q and 3Q? What was the surprise element there, if any?.

Well, we did see it a bit in each of the quarters in 2018, but you're right, most of the impact was incurred in Q4 and that's principally a function of reacting to the forecast and the timing of things as they occurred.

We true up our absorption variances once a quarter and certainly have the consumable side that had a larger hilt relative to our standard than we anticipated. But as I communicated with the rapid production volume and increased field activity we are already seeing, we expect these impacts to be short-term in nature..

Okay.

And then lastly for me, you talked – 10% to 15% capital sales mix in 2019, I'm just curious why is this range lower than the 25% capital mix that you had in 4Q? I mean are there any changes in sales force incentives compared to 4Q?.

No. I think the principal differences for three quarters of the year. We did not have the reagent rental program available. In September, we launched that. And we saw very attractive take-up of that acquisition option and we expect that to continue in the New Year.

So really it's just reflecting the reagent rental program being the principal mode of acquisition in the New Year..

Got it. Thank you..

Ladies and gentlemen, at this time, we will conclude our question-and-answer session. I would like to turn the conference back over to Larry Mehren for any closing remarks..

So thank you for joining us today as we reviewed, not once, but twice, our performance in Q4 and for the full-year of 2018. We began the year with some real challenges. We need to execute across multiple fronts and thanks to the great work of the Accelerate team, we made solid progress.

By years then we had changed our trajectory, doubling our North American installed base and setting us for a positive 2019. I look forward to updating you as the year progresses. Thank you..

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