Good day, and welcome to the Accelerate Diagnostics, Inc. 2020 Q1 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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, 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 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, 2019, and other reports we file with the SEC. It is my pleasure to now introduce the company's President and CEO, Jack Phillips..

Thank you, Laura. Good afternoon, everyone, and welcome to our first quarter 2020 earnings call. On today's call, we will review our Q1 progress prior to the COVID shutdown, provide insight into the subsequent impacts of the pandemic on our business and detail the steps we are taking to mitigate these impacts.

Before we begin, I would like to send a word of gratitude to our global Accelerate team. In the span of only a few days, we planned and fully executed a transition plan that allowed us to conduct our business with a limited on-site team and 90% of our workforce working remotely.

For our essential on-site production team, we have implemented social distancing measures, staggered shifts, and cross-trained our teams to ensure their safety and continuity of production. Thanks to our team's relentless dedication, our systems, supply chain and overall ability to service our customers is not yet to be.

And I am excited about the progress that we continue to make as a company during this pandemic. In addition to these measures to protect the health and safety of employees, we have taken a number of additional steps to mitigate the financial impact of the pandemic on our business, which Steve and I will provide more detail on later in the call.

Before discussing this progress, I will briefly review our financial results during the quarter. In the first quarter, we reported revenue of $2.3 million, which was weighted heavily towards test kit revenue, utilization within our existing base of live Pheno Instruments continue to prove both durable and predictable through the first quarter.

It's worth noting that during the month of April, we began to see a decline in test order volume from certain customers. While a number of large hospitals remain at capacity and have continued their normal pace of ordering, other hospitals have been experiencing record vacancies, driving lower test volumes at those facilities.

However, while it's difficult to predict the specific timing, we remain fully confident that those testing volumes will return to normal levels as elective procedures and overall inpatient emissions begin to ramp back up again. New contracts in go-lives were progressing as anticipated through February.

In March, however, hospitals shifted their focus to preparing for and treating COVID-19 patients and placed meaningful restrictions on hospital visitors. This abrupt change limited our access to customers, which in turn led to significantly lower-than-expected new contracting go-lives for the quarter.

We were very pleased with the strength of our annuity for the first quarter, along with our progress in bringing contracted customers live through the first two months of the year. However, the ensuing delays in go-lives and the potential for lower customer testing volumes will have an impact on our revenue over the balance of 2020.

And as previously announced, we have withdrawn our revenue guidance for the full year. Despite these disruptions, we are far from standing still.

While we continue to sharpen our site-by-site strategies for bringing contracted customers live and getting new customers signed, we have also leaned into the opportunity provided by COVID-19 and are in the process of commercializing a new fully automated chemiluminescence immunoassay analyzer and SARS-COV-2 test for the detection of IgG and IgM antibodies.

Before providing additional operational details from the quarter, and an update on our three focus areas for the year, I would like to hand it over to Steve to review our first quarter financial results.

Steve?.

Thank you, Jack, and good afternoon, everyone. Net sales were $2.3 million in the first quarter, compared to $1.8 million for the same period in 2019 or a 34% year-over-year growth. Nearly all of first quarter's revenue and all of our year-over-year growth was the result of higher consumable sales.

This is driven by an increase in the number of live customers. The capital revenue deals we anticipated for the quarter were forecasted to close in March, and these were delayed due to pandemic-related disruptions. Cost of goods sold were $1.3 million in the first quarter, resulting in gross margins of 45%.

This compares to cost of goods sold of $916,000 or a gross margin of 48% from the same period in 2019. Gross margins remained relatively unchanged over these periods, as [indiscernible] charges in the first quarter offset benefits from lower fixed cost per unit derived from higher production volumes.

Selling, general and administrative expenses were $12.9 million for the first quarter compared to $12.7 million for the same period in 2019. This small increase was the result of increases to non-cash stock-based compensation expense.

Excluding this non-cash increase to expense, cash spend in selling, general and administrative expenses reduced by over $1 million over this period, driven by reductions in discretionary spend like travel. Research and development costs were $5.8 million for the first quarter compared to $6.9 million from the same period in 2019.

This approximately $1 million reduction was a result of increased efficiencies and lower external study set. Our net loss was $21.3 million for the first quarter, resulting in a net loss per share of $0.39. This net loss contained $4.2 million in non-cash stock-based compensation expense. Net cash used was $16.4 million for the quarter.

The company ended the quarter with cash and investments of $92 million. The first quarter is typically the highest cash burn quarter of the year as annual premiums in subscriptions are paid and AP and payroll timing leads to a shift of cash clearing related to December expenses into January.

Due to these timing factors and ongoing efforts to carefully manage expenditures, we expect reductions in net cash burn in the subsequent quarters of the year. After evaluating a range of different scenarios, we believe we are on track to be favorable to our net cash burn guidance of $49 million for full year 2020.

I will now hand it back to Jack to review our first quarter results in greater detail.

Jack?.

driving U.S. commercial excellence, continued focused geographic expansion, and growing our product portfolio. While these priorities remain unchanged after considering the impact of the pandemic, our near-term tactics have evolved to also include our efforts to maximize our commercial relevance in the current COVID-19-focused health care environment.

Turning first to our U.S. commercial results, we added 17 net new instruments during Q1. These closes occurred in the first two months of the quarter, and we're tracking with our internal forecast. Traditionally, we see the vast majority of new signings in the last few weeks of a given quarter.

However, as I mentioned earlier, our progress in March was essentially halted as customers turn their focus to COVID-19. And this usual quarter end phenomenon simply did not occur in Q1. We also brought 33 instruments live in the quarter, which through February was tracking in line with our expectations.

We ended the quarter with 197 revenue-generating instruments, with another 239 in the process of being implemented at customer sites and not yet generating revenue. We have not lost any U.S. revenue generating accounts, and our U.S. annuities were in line with our expectations during the quarter.

However, in April, we started seeing certain customers lower their order volumes, which is the result of lower admissions and occupancy rates as elective surgeries were postponed and patients, in general, have been more inclined to avoid the hospital.

While we're pleased with the durability and predictability of our test kit utilization in the first quarter, we do expect to see a negative impact to our annuity stream until admissions and occupancy rates return to normal.

Although these headwinds on placements and go-lives have continued through the first several weeks of the second quarter, we are beginning to see anecdotal evidence of the go-live and sales process starting to move forward at certain institutions.

While these green shoots are certainly encouraging, it's too early to call them a trend, and we expect these headwinds to continue over the near term. However, while the specific timing is difficult to predict, we do believe that these negative effects will weigh in as hospitals begin to ramp back towards normalized levels of activity.

Turning now to some of the key initiatives we undertook to further U.S. commercial excellence. During the first quarter, we rolled out a number of new tools, including new return on investment calculator, incorporating recent outcomes data, a formalized customer reference program and a new customer implementation process.

We saw early signs of success with these in the first two months of Q1, prior to the COVID-19 shut down in mid-March. We also continue to see engagement from external parties advancing NTAP and CPT reimbursement initiatives and CLSI guidelines, and we still expect these to conclude within the year.

In addition to advancing these projects we initiated prior to the pandemic, we have quickly adapted to the current environment, maximizing our productivity and potential for near-term commercial relevance.

First, our sales and implementation teams are engaged in detailed account-by-account strategy reviews to ensure readiness once our prospective customers and implementation sites reengage.

We are also launching a new awareness program, which educates health care professionals on how Pheno's Rapid ID/AST delivers proven length of stay outcomes, resulting in improved bed capacity. Managing ICU bed shortages has been a key issue for hospitals and a criteria for easing restrictions moving forward.

Moving now to our second area of focus, international expansion. Our EMEA team began experiencing pandemic-related disruptions in February, and these impacts have persisted through April.

In the first quarter, no new customers were added in EMEA and four instruments were moved – were removed from pre-selective sites as part of our initiative to redistribute instruments to more productive sites.

Two existing commercially contracted customers drove rapid go-lives during the quarter to reduce lab staff exposure to patient samples and to increase bed capacity. Despite this encouraging small win, we continue to expect pandemic-related impact to our EMEA business to be significant at least through the second quarter. Moving on to China.

China is a promising market opportunity with significant sepsis challenge, a large population and a government focused on health care. Last quarter, we described that our ongoing registration and local trial process for Pheno was on hold due to COVID-19.

We recently received word that our application to the trial were accepted and we are currently in the queue to begin the initial analytical and safety testing portion of the trial. However, it remains unclear as to when this will begin. Accordingly, it remains difficult to estimate how long the registration and trial process will actually take.

In the meantime, we will continue partnering with key opinion leaders throughout 2020 to conduct studies and plant seeds for commercialization in this market. Our third focus area is advancements in product innovation and portfolio expansion.

First, we are in the later stages of a multi-site clinical trial to add new antibiotic features to our current Pheno blood test kit. These new drugs are important to de-escalation agents that further differentiate us from old-line AST providers, who are often slow to add new drugs to their panels.

Additionally, we recently filed for FDA emergency use authorization for our Pheno respiratory test kit, positioning its benefits for ventilated COVID-19 patients.

If approved, this authorization will provide Accelerate an avenue to reengage prospective and current customers, obtain useful analytical and clinical data on this new test and help some affected patients. Pheno 2.0 is also progressing with sample testing on initial prototypes across multiple sample types now occurring daily.

Lastly, through a recently signed collaboration agreement with BioCheck Ltd, we have begun commercializing the MS-FAST fully-automated chemiluminescence immunoassay analyzer and SARS-COV-2 test for the detection of IgG and IgM.

This partnership has the potential to provide both an avenue to reengage prospective customers on Pheno, as well as a near-term revenue uplift.

The performance data for these assays are best-in-class with sensitivity and specificity estimated as exceeding 95% for both assays based on over 100 samples collected at the source of the pandemic, Wuhan, China. Since announcing the partnership on April 15, we have received several indications of interest across the global business.

We are continuing to work with the FDA on our emergency use authorization for commercialization in the U.S., and we have taken initial orders in EMEA. While we are tremendously excited about this collaboration agreement and are eager to play a role in fighting this pandemic, it remains too early to estimate the revenue potential of this opportunity.

In my 30 years in Diagnostics, I have never experienced a period of such profound disruption.

However, with this disruption comes the creation of new opportunities, the near-term impact from this pandemic to Accelerate and most other health care companies is significant while at the same time shining a brighter light on the value of rapid diagnostics for infectious disease.

Governments around the world are making unprecedented investment into COVID-19 testing, and it is my belief that these investments will soon broaden to other areas of infectious disease testing. Pheno and MS-FAST are positioned incredibly well to take advantage of both immediate and intermediate tailwinds.

Lastly, I would like to recognize our customers and other health care professionals who are battling this pandemic. On behalf of our global Accelerate family, we sincerely thank you for your heroic efforts.

I would also like to extend my sincere gratitude to our Chief Scientific Officer, Romney Humphries, who is returning to her roots in the microbiology lab to run the clinical microbiology department at Vanderbilt University.

During her three years of Accelerate Diagnostics, Romney has been a tremendous asset in helping us navigate a number of complex and clinical regulatory pathways, and we wish her all the best in her next endeavor. 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 a follow-up meeting to investors@axdx.com. Thank you..

[Operator Instructions] The first question today comes from Steven Mah with Piper Sandler. Please go ahead..

Hi guys. Thanks for taking the questions. So first question here, given that your sales force is doing in an account-by-account analysis of the prospects.

And once things start opening up, do you expect there's going to be a gradual ramp back up in potential customers or signing customers up? Or is there going to be kind of a big immediate uptick based on kind of pent-up demand and backlog?.

So thanks for the question, Steven. So, a couple of things on that front. First of all, the two things – our sales has really been focused on a number of things, but two things has been around building their regional strategies out. And then, as I mentioned, the more specifically account-by-account strategies.

And what we expect from that as we come out is really to continue on where we left off, if you will. So, we had – going into the pandemic, we had a very strong funnel of opportunities that were looking great for 2020 and lots of momentum building in many, many sites across the U.S. and Europe.

And so as we look at this, really what we've been doing is staying in close contact the best we can with our – clearly, our current customers and our opportunities as well. Obviously, the majority of that has been on the phone and through email. And so what I can say right now is these opportunities haven't fallen off.

They – we fully expect them to get back on track, but they will get back on track, and then we'll start advancing them pretty much where they left off..

Okay. Great, thanks for the color. And maybe just one more question for me. On the BioCheck collaboration, my understanding is FDA has revised their policy for serology testing a couple of days ago.

I haven't read that actual new policy, but my understanding is that they're requiring some of the cross-reactivity data, specificity data, sensitivity data, and requiring that the test should have been run on human specimens with confirmed COVID-19 infection.

Given that the samples were collected and China, maybe give us a little bit of sense where the FDA stands on your submission, if there's been any changes?.

Yes. Thank you for that question to. I'm aware of the new guidance that came out. We are actively engaged with the FDA right now. This new guidance really hasn't changed anything for where we're at today. We have an EUA submitted, as I mentioned, for IgG and IgM combo test.

We're also going to be submitting an EUA for individual tests for both IgG and IgM over the next couple of days. The FDA has already come back to us with a few pieces of data that we need to follow up on, which is pretty standard. And we're working on that now.

And in addition to that, I would say that we are submitting for a 510(k) for the MS-FAST instrument, and we're working on that currently as well with the consultant. Accelerate is the authorized legal agent for BioCheck.

And so we're basically spearheading all of the dialogue between the FDA and this opportunity, which is a good thing because of the vast experience we have with the FDA already. And so our expectation is, again, I guess, to be clear, there's been no setback at all relative to our submission, and the new guidance that has come out.

And then the last thing I would say is the performance data that we have already submitted with the FDA is excellent data. And it already meets the requirements that they have called out. Our sensitivity and specificity for both the IgG and IgM test or are both very solid.

And again, we're continuing to work with the FDA and hope to hear some positive outcomes here over the next couple of weeks..

Okay great. That’s a fantastic update Jack. I appreciate it. Thank you so much..

Thank you..

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

Hi guys thanks for taking the question. Just a follow-up since we were talking about the BioCheck thing.

I mean, just in general, at a higher level, Jack, what does the collaboration signal about the long-term strategy here? I know that you're taking advantage of an opportunity that's been presented to you, both in working with BioCheck and more broadly around the pandemic, but is there anything that this collaboration signals about kind of the long-term strategy of the business and the other things that you may consider at some point?.

Thanks, Brian, for the question. Really, really appreciate it. So, from a long-term strategy standpoint, I mean, the primary thing we have on our eye on with regard to this BioCheck partnership and really the opportunity long term, is opportunities in other areas of infectious disease that would complement what we do today.

So, some key markers like potentially procalcitonin, CRP, IL-6 other cytokine-type markers potentially – again, that would be offered on the MS-FAST system potentially. Some of those are already on the system outside the U.S. And so as we look at our business, I mean, this is something that could very much complement our core business.

It's in no way, shape or form an indication that we're moving away for one second from our primary area of focus, which is Rapid ID/AST, but if you look at our overall kind of purpose of the company in helping patients with serious infections, something like this could very much complement what we do long term.

And then clearly, I've talked before, in the immediate short-term, this is a tremendous opportunity to maximize the utility of our sales and support organization. It's an opportunity to help during the pandemic, more broadly help health care with our experience, our vast experience in commercializing diagnostics, we can play a big role here.

And then obviously, from a short to midterm standpoint, it does present revenue opportunities that we'll also take advantage of..

Yes. Understood. Okay.

And then on the decline that you saw in April from some customers on utilization, can you just be a little bit more specific about kind of the magnitude that you were seeing in some of those accounts? And conceptually, obviously, we've heard of patients who have things that you would think they'd still be going to the hospital for that are not things like MI and even stroke and appendix and appendicitis and things like that, but in your case, I wouldn't have thought that necessarily things like bloodstream infections would be able to be kind of postponed.

So, can you talk about kind of what explains why that utilization would be lower, and give us some idea about that magnitude?.

Yes, sure. And good question, and thank you. So, yes, the magnitude. The magnitude, relatively speaking, to what's happening in diagnostics today right now, Brian, is very small.

So our drop in current customer live revenue was less than 5% from what normal billings are so when you compare that to really more broadly, I mean, you know the numbers as well as I do, and you see them. I mean, it's diagnostics, aside from COVID testing, is down upwards of 50% or more in laboratory. So, you're absolutely right.

Your assumption is correct that because we provide testing that is vital testing in the area of infectious diseases.

I mean, we – while we saw some because of ICU beds, bed utilization actually being down across the country in some cases, but – so the drop was, again, minor, but it is something we felt like we should call out, and we'll be watching that, obviously, over the coming months to see how that trends..

Yes. And then last one for me. You talked a little bit about maybe things getting slightly better, some anecdotal evidence there.

Is that just in states where they're easing restrictions? Or is there anything you can kind of point to as just giving you confidence that your business is kind of going to be able to start to see things – open up a little bit more?.

Yes. So, I'll address both Europe and the U.S. So, I've been on the call – I've been on calls with the commercial teams from both Europe and the U.S. over the past week. And in the U.S., the specifics that I can highlight is, we actually have specific appointments, specific face-to-face meetings that are being set up in May and in June.

So, in addition to that, we're also getting notifications from some major health care systems that, "Hey, we are now lifting the restrictions on vendors. These are the requirements that you need to follow from a PPP, PPE standpoint. Setting meetings, et cetera.” We've received several of those notifications over the past couple of weeks.

And so again, as I talk to, again, most of the sales organization here in the U.S. over the past week, those are the kind of key indicators that we're seeing that appointments are being granted and reps are welcomed back in.

Again, I want to stress, though, that in no way, shape or form, is it back to normal, and we still have a long way to go, but early signs are positive, and then much the same in Europe. As you probably have seen, Europe is starting to lift some of the travel and flight restrictions.

And so, we're actually starting to get some of the same responses in Europe where meetings are being planned out more so in June, but some meetings are being planned out, and we're starting to get more activity happening in Europe as well..

Alright. Thank you for that guys..

Okay, Brian. Thank you..

The last question today comes from Alex Nowak with Craig-Hallum. Please go ahead..

Hi, great. Good afternoon everyone.

Hi Jack, could you provide some more insight about what's happening within these microbiology labs within the past four weeks in particular? Are labs looking to bring on new technology at all, such as Pheno at this time? Like are they still working on new systems or is all the work effectively being delayed at this point?.

Hi Alex, thanks for the question. So again, I would say it's in pockets. And we are getting good indications from some customers in some parts of the country that they're willing to start moving forward with new automation and new equipment. And I would say it's across the board from the standpoint of go-lives.

We've taken customers live over the past several weeks from the standpoint of verification, where we have installations already in place and customers have started moving forward with validation, verification, LIS interfaces and things like that.

And then also, we have very specific examples where customers are moving forward with the sales process and evaluating Pheno and looking at pricing and so forth and so on. So, while it's obviously very much slowed. There's a lot of good indicators that we are going to see a return to a focus in other areas besides just COVID testing.

And I think, again, a large part of this is just dependent on whether or not you're in a hot zone or not. And that's – and basically, what's going on in each individual hospital as to the activity that's taking place.

I do expect, Alex, one last thing that as we continue to move out of this, I mean, hospitals will be evaluating what they learned from the pandemic.

And a big part of this will be, in my opinion, will be around how do you better manage infectious disease crises, how do you better manage secondary infections, how do you better manage bed utilization and staff utilization. And those are all things that Pheno directly addresses.

I mean, Pheno gets patients on optimal therapy much, much quicker, two, three days quicker, and get patients out of the hospital two to five days quicker in some cases.

And so with that, I mean, as health care providers look at these things, I mean, we fully expect them to be really having a heightened sense of interest in what we're doing in this space..

I appreciate that, Jack. That's very helpful. And prior to COVID in March, the business was tracking to a pretty good number of placements in U.S. go-lives.

In the new operating plan that you're implementing right now, what was working in January and February? And what still needs some improvement?.

Yes. So, the things that – in January and February, what was really showing positive signs are the new tools that I've talked about, we have a new economic ROI tool that's been implemented and it was implemented really at the start of the year. So, it has – it's something that's fairly new.

In addition to that, we've made tremendous progress in building our customer data, and even since over the lockdown in the pandemic, we really moved forward with a customer data portal that we now have that will be going live that essentially houses all data from the standpoint of clinical outcomes data, patient cases and customer stories.

That was going very well again before the shutdown in January, February as well, combining that data with ROI tools. And so what needs to improve, and I think the areas that we still need to improve is we just need to build a commercial excellence around all these things.

I mean, we have to develop, continue to – we had great momentum coming into the year that was paused because of COVID-19. And I think our biggest opportunity coming out of this, Alex, is that we continue to build that high level of momentum across all territories and regions. And I think if we do that, we'll see – we'll continue to see great success..

Okay. Understood.

And then just one last question, if I can? Can you just provide some more information on the respiratory test kit that you filed for EUA? Is this the same respiratory test that you were developing originally? And the EUA essentially allowed you to get the FDA approval for this product in a more expedited fashion, or are you still seeking de novo 510(k) for that product?.

Yes. So, yes. So, we have an EUA for respiratory filed, as you indicated. And that filing is really for the purpose of what the product is, which is to really help patients, help clinicians, basically better care for patients with secondary bacterial pneumonia. And so that EUA is still active. The FDA has been back and forth with us with questions.

The FDA's focus clearly right now is on COVID, and they have come back to us. So that will not, in and of itself allow us not to have to worry about a formal submission.

So, beyond the EUA, we'll still need to – once we get EUA approval for respiratory, I think the other side benefit is we're going to learn a lot from that, but we will still have to submit for a 510(k) FDA approval as well for that product, which we still plan to do..

Okay, understood. Thank you..

This concludes our question-and-answer session and also concludes our conference. Thank you for attending today's presentation. You may now disconnect..