Good afternoon, and welcome to the Accelerate Diagnostics First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, this 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 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 risk, 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, 2018 and other reports we file with the SEC. It is my pleasure to now introduce the company's President and CEO, Larry Mehren..

Thank you, Laura. Good afternoon, everyone and welcome to our first quarter 2019 earnings call. I am pleased to report that our strong momentum in commercial placements, which began in the fourth quarter of 2018, continued into the first quarter of 2019.

Our 75 commercial placements in Q1 of 2019 exceeded our total from the first quarter of 2018 by over 6x. This step function increase in our commercial installed base over the last 2 quarters puts us on track to achieve meaningful consumable revenue growth in the back half of the year.

In addition to our strong year-over-year placement growth, we booked revenue that was in line with our previously discussed expectations for the quarterly cadence of the year, began preclinical testing for our respiratory registration trial and reached principle alignment with the NMPA, China's equivalent of the FDA, on our clinical trial plan for accessing the Chinese market.

All of this represents solid progress that I am eager to review with you in greater detail later in the call. But first, we will begin this afternoon by having Steve review our first quarter financial results. I will then review our progress against our 3 key focus areas for 2019 and conclude with the Q&A session.

I will now hand it over to Steve to review our financial results for Q1..

Thank you, Larry, and good afternoon, everyone. Net sales were $1.8 million for the first quarter compared to $801,000 for the same period from the prior year representing a 125% year-over-year increase. Consumable revenue was the primary driver of our year-over-year growth.

Instrument revenue for the quarter was also consistent with our expectations as both capital mix and capital average unit price were in line with the ranges we have communicated previously. Cost of goods sold was $916,000 in the first quarter resulting in a gross margin of 48%.

This compares to cost of goods sold of $492,000 or gross margin of 39% from the first quarter of the prior year. This improvement in gross margin was driven by higher consumable production levels in Q1 and the sale of pre-FDA approved inventory that had previously been written off to Research & Development expense.

Excluding the effect of previously written-off inventory, 2019 first quarter gross margin was 45%. Selling, general and administrative expenses were $12.7 million for the first quarter compared with $14.4 million for the same period in the prior year.

This slight decrease was due to lower noncash stock-based compensation expense incurred while most other costs remained consistent with prior year. Research & Development costs were $6.9 million for the first quarter compared to $6.8 million for the same period in the prior year.

This small increase is attributable to additional costs associated with our outcome studies. Our net loss was $21.7 million for the first quarter resulting in a net loss per share of $0.40. This net loss contained $3.5 million in noncash stock-based compensation expense. Net cash used was $15.6 million for the quarter.

The company ended the quarter with cash and investments of $150.9 million. We believe our current cash position is sufficient to execute against our strategic initiatives and continue to expect 2019 net cash burn to be similar to or just below our 2018 net cash burn.

I will now hand it back to Larry to review in greater detail our key commercial results and development updates.

Larry?.

Thank you, Steve. As you may recall, on the previous quarter's call, we outlined 3 principal areas of focus for 2019. First, continued penetration of the market by adding materially more customers and commercial placements. Second, driving rapid customer "go-lives" and consumable revenue generation.

And third, advancing strategic product initiatives and geographic expansion. Our mission to do more for patients afflicted with serious inflections begins with the broad placement of our Pheno system.

We continue to see strong evidence, based on over 100 papers and publications, that patient's experience dramatically improved clinical outcomes and that hospitals realize significant cost savings when Pheno is put into routine clinical use.

In the first quarter, we continued to make strong progress on this front, building upon our fourth quarter momentum by adding 75 net new instruments globally. These additions bring our total number of commercially contracted instruments to 355 as of quarter end.

Most of our placement growth for the quarter was in the U.S, which accounted for 57 of our global placements. These placements continue to span all key market segments and contained a healthy mix of evaluation conversions and sites contracting without an evaluation.

Our first quarter new instrument contracts included academic medical centers, VA hospitals, regional and community medical centers and several large integrated health networks. This quarter also brought the addition of several key influencer sites, such as the University of Chicago.

This broad-based adoption indicates that the benefits of the Pheno system are resonating with customers of different sizes, structures and priorities confirming our access to thousands of U.S. hospitals. In addition, 25% of our new U.S. contracts were conversions of evaluation customers, while 75% closed without an evaluation.

This is a positive sign that we will continue to convert our evaluation installed base until exhausted and close an even larger population of future customers largely without the use of an upfront evaluation process.

Our continued commercial progress supports our belief that the changes we made to our commercial strategy in 2018, including a more clinically-driven sales process, an increased focus on outcomes data and the introduction of our reagent rental program will continue to deliver durable placement growth in 2019 and beyond.

In EMEA, adoption continued at a steady pace with 18 net new instruments contracted. These new contracts spanned 4 European countries and included a large multi-instrument sale in the Middle East. In April, we featured prominently at the European Congress of Clinical Microbiology and Infectious Diseases or ECCMID, our largest global annual meeting.

Customers and members of our Scientific Affairs team led presentations of 13 papers, posters and symposia. The results, all positive, were broad-based across reductions in length of stay, cost savings and, most importantly, improved patient outcomes.

One of the most notable studies was presented by Peninsula Regional Medical Center, which demonstrated a 2-day length of stay reduction and lower readmission rates. With Arkansas' Q3 2018 readout of the 3-day length of stay savings, we now have an academic and a community hospital with statistically significant reductions in length of stay.

You will recall that length of stay is among the most important return on investment considerations for hospital administrators as it represents an opportunity to reduce nonreimbursed costs, while also freeing up beds more quickly for the next reimbursed patients. Thereby increasing the velocity of revenues.

Looking just at cost savings, a 1-day length of stay is worth approximately $2,000. Accordingly, this 2 to 3-day length of stay savings equates to $4,000 to $6,000 in cost savings per test or a 20 to 30x return on each and every kit purchased.

Clinical evidence in the form of patient outcomes data continues to be an important driver of our ability to rapidly increase market penetration. In addition to the positive data presented at ECCMID, we plan to add numerous new sources of clinical evidence, including data readouts from 3 prospective randomized control studies.

The first of these key studies to read out will be the Mayo-UCLA ARLG study. This study included over 500 patients and evaluated time to first antibiotic intervention for patients with gram-negative bacteremia in addition to various secondary endpoints.

Time to antibiotic intervention is a foundational outcome, which, if positive, would indicate that Pheno results lead to significantly faster optimization of therapy. In comparison, a study conducted by the same ARLG team on BioFire was not able to demonstrate that results were actionable for this critical patient population.

We have just been notified that this independent study's results were submitted for presentation at IDWeek in October. The 2 additional randomized control studies are specifically powered to evaluate length of stay and economic outcomes for emergency department patients with differential economic outcomes of rapid AST versus rapid ID interventions.

These studies remain on track to read out near year-end. Based on the fact that we achieved Q1 placements consistent with our expectations, along with the tailwind we anticipate from new outcomes data releases, we are reiterating our target of contracting between 300 and 400 new instruments this year.

Our second focus area driving rapid customer go-lives is aimed at helping customers complete the processes required to begin patient testing. As a reminder, each of the commercially contracted instruments that we add require several implementation steps before going clinically live and generating consumable revenue.

These steps include installation and verification, connection to the laboratory information system and training physicians and pharmacists on the clinical pathways necessary to ensure prompt action based on Pheno results.

Each of the 76 instruments added this quarter as well as a significant portion of our previously contracted instrument base will require the completion of these steps in the coming months before they begin generating consumable revenue.

Sites converting from an evaluation enjoy the benefit of having already completed the installation and verification steps. While hospitals acquiring an instrument without an upfront evaluation, which makes up a large and growing percentage of our commercial contracts, must complete all of these steps before they begin patient testing.

As such, the time to go-live for new commercial instruments range from 4 to 9 months once the contract is signed.

While nearly all of the go-lives during the quarter were consistent with this time frame, we have begun to see a trend where individual hospitals move through this process more quickly, whereas multihospital implementations typical of health networks are trending toward the high end of this range.

While we will continue to monitor these trends as our installed base grows, we still believe the near-term lag to go-live from contract signature is 4 to 9 months. Meanwhile, we have a number of initiatives underway to expedite this process.

For most cases, there are opportunities to drive faster go-lives by delivering more streamlined implementation services. In addition, we are working to increase our customers' sense of urgency by illustrating the clinical and financial opportunity costs of delaying their go-live.

For example, based on the Peninsula Regional and Arkansas length of stay data, a 1-month delay in go-live has an opportunity cost of $120,000 to $180,000 not to mention the potential impact on patient outcomes.

Given this timeline, along with the fact that over half of our commercial installed base was contracted in the last 2 quarters and is yet to go live, we expect a meaningful pick up in consumable revenue in the back half of 2019, particularly in the fourth quarter.

Once live, we continue to see an annuity stream in the range of $45,000 to $65,000 per instrument, with U.S. customers falling at the upper end of this range and EMEA pulling down the overall average.

Finally, we have made progress in our third area of focus for 2019, readying the trial and launch of our severe bacterial pneumonia assay and progressing towards initiating 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 a costly and often deadly condition.

In addition to expanding our available market, this new test will demonstrate the versatility and platform potential of the Pheno and its ability to replace significant portions of the current microbiology lab workflow. In the first quarter, we began preclinical testing at several of our clinical trial sites.

The results of this testing have been encouraging. ID results are accurate and AST is consistent with the reference. However, we are not yet satisfied with the reportability of the current assay and are making a final adjustment to bring this up to our standard.

We expect these improvements to be complete within a few weeks and anticipate beginning the trial in the first half of the year, although, these final improvements could potentially push the start date further out into the summer.

At ECCMID, we presented the data from our evaluation of the current standard of care for testing lower respiratory samples.

Not only did we find a lack of standardization and repeatability amongst lab protocols, but we also discovered that the current standard of care often misses common pathogens, including staph aureus, which is the largest contributor to serious pneumonias. Similar results were shown by independent investigators for UK laboratories at ECCMID.

We plan to amplify and expand upon these results with a multi-site outcome study, which is set to run concurrently with the FDA registration trial. Now onto our progress towards obtaining approval and launching Pheno in the Chinese market. During the quarter, we had significant dialogue with the U.S.

FDA equivalent in China, NMPA, and we are nearing on a plan for the preclinical testing phase as well as the registration trial. This initial preclinical phase is called type testing and contains an instrument and assay component. The assay component will be based solely on QC testing, which should enable a rapid start up.

And while not final, we received favorable alignment that we would be able to leverage our FDA trial data for some bug/drug combinations, which would be supplemented with local testing. Both of these developments give us confidence in achieving our target to initiate the clinical trial in the second half of 2019.

Achievement of this milestone would position us to begin selling in China in the first half of 2021. In summary, our first quarter results were right on target. Placements, go-lives and the resulting consumable revenues were all consistent with the goals we communicated as part of the guidance we provided earlier this year.

These achievements, along with our progress in respiratory and China, further our confidence that 2019 will be a highly productive year for Accelerate.

While we are far from declaring victory, the commercial traction that we are seeing as well as mounting evidence of the benefits of our system instill optimism that we are on a path to establishing Pheno as a new and superior standard of care. Before beginning our Q&A, I would like to highlight a Pheno customer's success story.

In the first half of 2017, University Hospital, Augusta was the first customer to purchase a Pheno system. Last year, the hospital tracked mortality outcomes from rapid intervention based on Pheno results and found that 48 patients' lives were saved.

This result is all the more impressive at an institution with a pre-Pheno mortality rate among the lowest in their region.

A significantly higher number of patients were able to avoid the negative side effects of excess antibiotic use, and a small but important step was taken toward protecting the effectiveness of our antibiotics for future generations. And with that, we would be happy to answer questions from our analysts.

Should others on the call have questions not addressed, we would welcome you to send these questions or request for a follow-on meeting to investors@axdx.com..

[Operator Instructions] The first question is from Brian Weinstein of William Blair..

Maybe we can start out with the placements. So a good number, 70, in the quarter and the reiteration of the full year.

Can you talk a little bit about the pacing that you expect through the year? What you're seeing in your funnel now? And how that's grown maybe, or how that's growing post ECCMID?.

Sure, Brian. So Q1 came in as expected. As for Q2 and Q3, we expect placements similar to Q1 levels and, in terms of representing strong year-over-year growth, and Q4 is shaping up to be another very large quarter. As such, we're confident of the 300 to 400. However, I would say that I would expect some lumpiness in the quarters overall..

Okay. You talked about the IDNs in 2 different capacities, first, that you signed, or that you had some IDN customers this quarter, but they also take a lot longer.

I'm curious, with the IDNs, is it that you kind of, you get in at one place there, and there's opportunities to kind of expand that deeper within these networks? And then secondly, the same question, kind of around the VA, you mentioned that as well.

What's the opportunity there? They tend to try and to adopt these kind of things in mass, once one goes, we've seen others go as well.

So can you talk about the opportunities to go deeper in the IDNs and in the VA?.

Yes. Sure, Brian. So in terms of the IHNs, typically what we see is that they contract for a significant number of hospitals all at once. So in any given IDN, we might have 4 or 5, up to 7 different hospitals that have contracted with us all at once.

The coordination of bringing those all up and live at the same time is what takes the additional time because a number of hospitals won't be sequenced properly. And since they all usually want to go-live at the same time, we need to wait until they're ready to go.

And that takes much longer to coordinate than the small hospitals, so for example, for an independent hospital. So for example, you would see an independent hospital taking us 3 months to go-live, while a large IHN, IDN might take us 9 months. In terms of VA, we are as enthusiastic as you are about that.

We are now in most of the VISNs, which are the organizations that contract for the VA hospitals in their particular region. And we are seeing what you suggested, that once we are, once we do have a placement in one region and that VISN has approved Pheno for purchase that the other hospitals in that VISN's region are also purchasing.

So we see uptake as you've suggested..

Okay. And last one from me is, you did mention, on the severe pneumonia assay, that you're not satisfied with the reportability of that.

Can you just expand on what that means and how you specifically fix that?.

Yes. Sure. So in terms of, our assay has certain parameters that we set prior to going into the clinical trial. We want to have certain performance in ID, AST and reportability. Reportability is the number of times you put a sample into the instrument and it gives you a full result.

In our case, the reportability was lower than the 90% acceptance rate that we think is acceptable. And it was around the thickness of the mucosoids that we saw in some of the samples in our preclinical sites. So we adjusted the instrument allowing it to break down those mucosoids and exposed the bacteria more effectively. We had good results.

And we're in the process of rerunning that preclinical right now, and we feel very positive about it..

The next question is from Bill Quirk of Piper Jaffray..

This is Rachel on for Bill. So can you just help us think about the sales force ramp and associated timing with that? I know you guys have mentioned in the past that you're going to be ramping up your sales force. So any color you can give us on that would be great..

Yes. I would say our sales force productivity is generally tracking with our expectations. And should Q2, Q3 placements come in, in line, we likely will add reps to the sales team.

At the levels of productivity we're seeing and the size of the funnel we have, these additions will add a predictable increase to the velocity of our placement rate and represent a really strong return on investment. So you're likely to see that if we see a similar Q2, Q3 to what we saw in Q4, Q1..

Great.

And then next question, can you just give us an update on the European environment? And really how we should be thinking about that going forward?.

The European environment in terms of sales or, can you expand on that a bit?.

Yes, just in sales across the board?.

Okay. Yes. So in terms of the sales, we are seeing really solid traction in certain markets and in other markets, we're seeing it a bit slower. So for example, in Italy, in Spain, we're seeing very strong commercial traction. And in places like France, we're seeing very limited traction. And I think the average is what you see us reporting now.

We're bullish about Europe and the Middle East. We're excited about that, and we think it's an important component of our entire revenue story, and it's taking time to evolve..

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Lawrence Mehren for closing remarks..

Thank you. So in closing, I just want to say thanks to our team for working hard to make this a solid quarter. Our progress across multiple fronts is a testament to their hard work. Thanks to our Board of Directors for their guidance and to our investors for their steadfast support as we change the practice of medicine. You're all making it happen.

Thanks, and I look forward to speaking to you again next quarter..

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