Good afternoon, ladies and gentlemen, and welcome to the Talis Second Quarter 2021 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Ms. Emily Faucette, SVP, Corporate Communications and Investor Relations. Ma’am, please go ahead..

Good afternoon, and thank you for participating in today’s conference call. Joining me, we have Brian Coe, our Chief Executive Officer; Roger Moody, our Chief Financial Officer; and Doug Liu, our Chief Operating Officer. Earlier today, Talis released financial results and business progress for the quarter ended June 30, 2021.

A copy of that press release can be accessed on the Investors page of our website at talisbio.com. Before we get started, I would like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled, forward-looking statements, in the press release Talis issued today.

For a more complete list and description, please see the Risk Factors section of the company’s 10-Q filed with the SEC on May 13, 2021, and in its other filings with the Securities and Exchange Commission.

Except as required by law, Talis disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast August 10, 2021.

With that, I would like to turn the call over to Brian Coe, Talis’ Chief Executive Officer.

Brian?.

one, obtaining FDA emergency use authorization for our Talis One COVID-19 test in the United States; two, building scalable manufacturing capabilities and the sales organization in preparation for commercial launch; and three, expanding Talis One test to additional respiratory infections as well as to women’s health and sexually transmitted infections.

I will now walk through an update on our progress with these objectives. Starting with obtaining authorization of our COVID-19 test. We submitted our EUA application for Talis One on July 23, following the successful completion of our point-of-care clinical validation study.

Our view of the data we submitted is very positive, and the results on clinical specimens exceed FDA’s guidance for 95% concordance with the comparator test results, including both the positive and negative percent agreements. We look forward to sharing more detailed data concurrent with our receipt of FDA authorization.

In addition to these results, we actively monitor new COVID variants as they arrive. Specifically, we continue to conduct in silico analysis to determine the extent to which mutations may impact our test performance, and execute in vitro testing of analytic and clinical samples with these specific mutations to confirm the loss of patented detection.

As a participant in the RADx program, we had the opportunity to assess the impact of 10 distinct COVID-19 variants for our Talis One test. We were pleased to observe that Talis One performed very well, demonstrating high sensitivity of detection. At the time of testing in June, the emerging Delta variant was not available to be included in the study.

Subsequently, a small internal study showed correct identification of the Delta variant in clinical specimens. Of further note for our FDA submission, we did include findings from this RADx assessment in our EUA submission with the goal of having variant detection reflected in the Talis One package insert.

We believe it is important to share this type of data and welcome the opportunity to benefit public health in this way. Turning to our efforts to prepare for commercialization. We are scaling production of our COVID-19 assay to meet demand and prioritizing a thoughtfully planned phase strategy to drive adoption and long-term success.

While we are very enthusiastic about our EUA submission, we cannot predict the FDA’s timing for authorization, and we still need to finalize validation of our automation lines. Furthermore, variability in COVID testing demand makes it difficult to project the precise ramp of our commercial launch.

To advance this next phase of operational growth for Talis, we have recently promoted Doug Liu to Chief Operating Officer. Doug’s strong leadership and experience in these areas, including roles in both Qiagen and Bayer will be instrumental in our efforts to continue to establish our manufacturing and R&D programs.

Doug will be speaking with you directly later on this call to share further insights into the extensive preparations underway for our manufacturing readiness.

On the commercial front, we strive to anticipate customer needs, create exceptional user experiences and ensure that our Talis One solution successfully meets the needs of providers and patients alike. To that end, we’ll execute a controlled launch, beginning with target customers to evaluate Talis One followed by a broader market launch.

To support these objectives, we continue to build an experienced commercial organization led by our Chief Commercial Officer, Rob Kelly.

With more than two decades of sales and marketing leadership experience in the diagnostics industry, including posts at Illumina and Genalyte, Rob has established what I believe to be a world-class commercial organization for Talis, including a global marketing team to create awareness and demand, an enterprise sales team to drive adoption in a variety of health care and congregate settings such as schools and the workplace and a direct sales team to call on urgent care centers, smaller hospitals and physician practices.

Finally, we are building our customer service and commercial operations to anticipate user needs and create an exceptional experience that leads to long-term loyal use of Talis One tests.

I am extremely proud of the talent we recruited for these roles, and I’m confident that we have the team in place to drive an effective commercial launch and sustained growth. Transitioning to R&D in our pipeline. Our objective remains to broaden our test menu to meet the needs of customers and expand our addressable markets.

We had planned to file for EUA submission of our COVID flu and respiratory panel and initiate CT/NG trials later this year. In the near term, our development time lines have been extended by delays in the launching of our COVID-19 test and manufacturing scale.

To build capacity to work on multiple programs to currently, aggressive investment in R&D leadership and personnel remains a top priority for the company. Doug will provide additional detail on our development progress to date and next steps momentarily.

Our work in the past quarter has increased our enthusiasm and confidence in the accuracy and broad applicability of the Talis One system as we continue to build the foundation to advance our pipeline. I will now turn the call over to Doug, who will walk you through an update on our manufacturing and development.

Following that, Roger will provide second quarter financials and details on our outlook.

Doug?.

Thank you, Brian. I’m excited to be taking on this new role at such a pivotal time for Talis as we await response from the FDA regarding authorization of our initial Talis One test for COVID-19.

First, a brief update on manufacturing, where we are focused on ensuring quality and reliability of the production processes to meet the anticipated demand for our tests. We have invested in automated cartridge manufacturing lines with the capacity to scale and lower cost over time.

During the second quarter, we modified and improved the first set of automated lines that were supplied earlier this year. At this time, we have completed installation and are in the final stages of validation. These lines have been used to produce thousands of cartridges.

We are making final adjustments and expect to have the cartridges from these lines for commercial launch upon receiving our EUA.

While we are pleased with this progress, we have decided to take a phased approach similar to our commercial launch for implementing the second and third sets of automation lines in order to ensure that our first line provides customers with exceptional product quality and to align production with sales.

We will prepare and deploy additional lines as needed. With respect to our instrument production capabilities, we have enough materials on hand and are in the final stages of optimizing our manufacturing process so that we can produce instruments at scale.

In summary, we have made meaningful progress on the production of both instruments and cartridges to meet the demand for the Talis One COVID test once authorized and launched. Turning now to R&D. As Brian mentioned, menu expansion beyond COVID-19 has been extended due to the delays in launching our COVID-19 test and manufacturing scale-up activities.

But at the same time, our team continues to develop our tests for COVID flu and CT/NG. During the second quarter, we began to confirm performance of both tests, original designs on the current version of the Talis One system. Once confirmed, we plan to proceed to finalizing design and enter verification and validation phases for these products.

When this work is completed, we will be in a better position to provide accurate time lines. In closing, we are building the foundation to support both the manufacturing ramp and the development of our pipeline, and we are looking forward to providing you with updated information on our next quarterly call. I’ll now turn it over to Roger..

Thanks, Doug. As expected, we did not recognize revenue from our RADx contract in the second quarter. In accordance with our recently amended contract, the remaining milestone revenue is now $4 million and is expected to be recognized in conjunction with the anticipated commercial launch of the Talis One COVID-19 test.

Now turning to our second quarter financial results. Operating expenses rose to $65 million as we invested an incremental $47 million in research and development and $7 million in SG&A as compared with the second quarter of 2020.

This step up in R&D expense was largely driven by non-recurring investments, including automation of our consumable manufacturing lines and our initial Talis One inventory, both of which we expense in advance of FDA authorization. Additionally, we have invested in expanding our employee base.

The increase in SG&A was driven primarily by the build-out of our commercial team and the addition of public company expenses. Turning to cash. As of June 30, 2021, our cash and cash equivalents were $314 million. In addition to $35 million in restricted cash that we feel more than adequately meets our need for near-term liquidity.

Looking ahead, as Brian mentioned, we are very encouraged by the data we submitted to the FDA and excited about our prospects for commercialization.

It’s difficult to predict how much product revenue we will recognize this year, given the uncertainty around the timing of the EUA, our controlled launch, manufacturing scale up and the variability of COVID testing market. As a result, we expect to see our first meaningful revenue ramp in 2022.

We hope to provide further color on our outlook once we’re through anticipated authorization, have experienced with our manufacturing and commercial ramp up and as we progress into the market with Talis One. With that, I’ll turn the call back over to Brian..

Thank you, Roger. We are proud of the significant progress that we made towards obtaining FDA authorization for our Talis One COVID-19 test, preparing to execute our commercial launch strategy and in building manufacturing capacity to meet commercial demand.

Looking ahead, we believe Talis is well positioned to lead the shift from Central Labs to point of care, beginning with our COVID-19 test. Success in serving this and other large markets in the future will require the combination of accuracy, speed, ease of use, menu extensibility and low cost.

With Talis One’s unique confluence of these five critical capabilities, the team we have in place and the manufacturing capabilities we are building, we are confident in our ability to meet the needs of the multibillion-dollar respiratory sexual health and women’s health point-of-care testing markets that we plan to serve.

I will now turn it over to the operator to open it up for questions..

[Operator Instructions] Your first question comes from the line of Tycho Peterson from JPMorgan. Your line is open..

Hi, guys. This is Casey on for Tycho. So can you just clarify the comments around the EUA submission.

So I guess it was submitted at the end of July because you wanted to include Delta variant data? Is that why it was submitted a little later than expected? And just the question that we’ve gotten a lot is, why was there no 8-K filed for the EUA submission? Can you just talk a little bit about your strategy here?.

Sure. So thank you for the question. So the EUA submission was primarily delayed because during our enrollment in the second quarter, the prevalence rate of COVID in the population was lower, and it just took us longer to enroll the population we needed for our study, and it delayed the submission date.

The variant work, we were actually very pleased to be able to get that work into the submission and – but that was not the reason for the delay. And to clarify on the Delta variant specifically, we – at the time we did the initial variant study with RADx, we did not have Delta included. It was not available to us for that study.

Subsequently, we obtained clinical samples in a small internal study, we did detect Delta variant. For the 8-K filing, we did not consider it material to file an 8-K. What that material to lag, I should say..

Got you. As we think about the women’s health rollout, it sounds like now it’s being pushed out more towards maybe 2023 or so. Cepheid just came out with a rapid sort of CT/NG test before year-end here.

Is there any concern that you may be too late to market here? Or how should we think about competitive dynamics on the women’s health side?.

That’s a terrific question.

So first, I just want to say that the centralized lab markets for these tests are served by multiple very large companies, for example, if you were to look at chlamydia and gonorrhea, tremendous companies like Hologic, Danaher with Cepheid, Roche, major companies, Becton Dickinson, have chlamydia and gonorrhea test that go into the centralized lab market.

We do not and never anticipated that we will be alone in the decentralized testing market or the point-of-care market. That would be unrealistic.

However, we feel the confluence of the time to result, the quality of our program – product the ease of use, our ability to produce scale and the connectivity we have embedded in each Talis One instrument, which has a value modem and allows for cloud connectivity, collectively create a product offering that will be very attractive in the market, and we’re excited to launch those products once authorized..

Got you. And then last one for me, and then I’ll hop back in the queue. You talked a little bit about the phased approach rollout here.

Can you talk a little bit about sort of the customers you’re targeting in 4Q with that phased rollout for the COVID test? And then as things sort of ramp in the beginning of next year, can you just talk a little bit about customer mix? Has your plans changed at all regarding who you’re targeting here with this phased rollout? Thank you..

So thank you for the question. So I’ll start with the phased approach, which is to say that we’re really, first of all, focusing on an exceptional customer experience. So we don’t want to push a ton of product out into the market in one fell swoop.

And then if some small thing arises, we want to be able to react and make sure that everything exceeds customers’ expectations. And then we’ll ramp up, and we just think that’s best for the business in the long term as customer loyalty is critical to us.

And in terms of customer mix, we actually have a fairly wide range of customers that have expressed interest in the product. And we have an enterprise sales team, we have a number of enterprise accounts that are potentially interested. We have a direct sales team.

There’s a lot of interest in the physician office segments, urgent care and markets of that nature. As to the exact mix, we’re just – we’re not in a position to guide specifically at this time, but we’re excited about the enthusiasm..

Your next question comes from the line of Derik De Bruin from Bank of America. Your line is open..

Good afternoon. Can you give us some sort of indication on operating expenses and cash burn for the second half? Obviously, significant step up.

How should we think about the next couple of quarters?.

Sure. So I’ll take the question, Derik. So the first half in the first and second quarter, our OpEx was somewhere around $65 million. And a large portion of that was non-recurring expenses, as I mentioned. It was somewhere in the – more than half of it was non-recurring, about $38 million in the second quarter of the $65 million.

And what we would expect is that those non-recurring expenses would start to tail off as we get into the second half. In the third quarter, we’re going to complete the large manufacturing scale-up that we’re going through. And we’ve largely incurred the inventory purchases to prepare for launch.

So I would expect it to come down significantly in the third quarter, but even more than in the fourth as we’ve gone past this initial scale up. We will then continue to build inventory, but not at the same rate, and that will be put on our balance sheet as opposed to expense, which we do ahead of the EUA..

Got it. That’s helpful. And so I guess, can you talk a little bit about. I mean, obviously, the COVID landscape is changing very dramatically. There’s a lot of equipment out there.

I mean what gives you confidence that by the time you actually get the product on the market, get Talis One on the market that there’s still going to be some demand for it, just given the fact that the rest of the menu is delayed and certainly from our conversations we – with them, we’ve had with labs.

I mean, looking at menu expansion and looking at that near term versus what’s on the come is certainly a bigger decision on doing this.

So I guess, what’s your confidence that there is going to be a market for Talis One by the time you get it out there?.

So first of all, Derik, I think COVID itself is difficult to predict. But our belief, our crystal ball, if you will, first of all, is that COVID will be endemic for some period of time and perhaps a very long period of time, unfortunately, for our country in the world.

And that over time, testing will increasingly move from centralized to decentralized locations just because getting a result in a more timely manner, it’s self-evident that it’s very helpful in infectious diseases. And that there will also be a movement from – towards quality molecular tests away from other testing.

So what we see is we feel we’ll have a very good segment of this market that will be attractive for some time to come in the future. We certainly see a lot of interest today. And then as we’ve discussed, COVID is really the first step for us. We view ourselves – we started this company not as a COVID company, obviously.

And we’re really excited about how well the platform itself performs, and we’re looking forward to not just the COVID test, but the menu that will come out going forward..

Yes. But I mean, you missed your first EUA, your products are delayed. Basically, what you shared with us on the deal model and everything is dramatically pushed out from where it was.

I mean what gives you comp – I mean what can you say to give us confidence that the longer-term opportunity is there?.

What I’ll say is the – yes, the time lines are later than we’d anticipated in the IPO model. And on the other hand, our results really look terrific. From a company perspective, we’re way ahead on our ability to produce product relative to almost any company our size historically.

And we’re excited about the markets we’re entering, which are still I recognize Cepheid will be entering, they say. And that will – I’m sure we will not be alone in these markets, but the markets we’re entering are very large to global markets, and we think we’ll have an outstanding product that will serve these markets..

[Operator Instructions] Your next question comes from the line of Mark Massaro from BTIG. Your line is open..

Thanks for taking the question. So as I look at the date that you submitted the EUA, it was July 23, you had previously indicated that you would submit by the end of Q2, which is June 30. So that’s essentially a 3-week delay, which, to some extent, it’s small potatoes.

And I’m trying to sort of marry Roger’s commentary about expectations around minimal revenue in 2021. I’m just trying to get a sense because if you’re – essentially, you’re roughly 3 weeks delayed, call it, a month, it still seems to me that you could still get EUA in Q4 and recognize revenue. So I’m just trying to understand.

And maybe this is an elaborate question.

But the additional information that you submitted to the FDA on the Delta variant, do you think that there’s a possibility that, that extra information that the agency would analyze could lead to a longer submission? So what I’m really trying to recognize is, do you think you’re being quite conservative in speaking about minimal revenue in Q4? And so how should we really think about a 3-week delay hitting the P&L?.

So Mark, thank you for the question. A few things there. First of all, we’re saying that the – we are saying that the timing of FDA authorization is unpredictable. And we want to be upfront that we don’t know when authorization will occur.

We can tell you when we submitted, but we can’t tell you what comes out and what the timing looks like on the other side. We are very optimistic about the package we’ve submitted. We’re – and I think that’s as much as I can say. But it’s – our optimism there is very high.

We did submit – and I just want to say we did submit variant data to the FDA on 10 variants that were available to us. At the time we did the study through RADx, which was 10 variants, but that was before we had – we did not, at that time, have access to the COVID variant – to the Delta variant, I’m sorry, of COVID.

So we have done some preliminary – some internal work, a small amount of internal work to look at the Delta variant. We anticipate continuing to monitor it. But the work we did in our own internal study looked good. So we have confidence that we’ll perform well there. And so do I think the submission? I have no reason to believe that.

We feel that the data – that data looked very positive, and we would hope that the agency would be encouraged by it..

Okay. And then I also wanted to ask about maybe a clarification around – you’re in the final stages of validating the first set of automated cartridge production lines. I think I heard you guys say that you do think you’ll be ready to go, ready to commercialize product upon receipt of the EUA.

So I guess, do you have a sense for what your – how many cartridges you could manufacture? Let’s just call it, October, November, December.

What that number looks like? And what else needs to be done just to make sure you’re ready to go?.

Thank you for the question. So I was very excited to have Doug, as our Chief Operating Officer, leading that function of the company, and I’ll ask Doug to respond..

So thanks, Brian. We are, as mentioned earlier, we have invested in three sets of lines. The first one has been installed, and we’re in the final steps of validation.

We haven’t completed them yet, but our objective and our belief is that we will be able to meet this, that we will be able to have those lines ready to go and producing product to meet demand upon receipt of the EUA. So in terms of further ramp-up beyond that, we have invested in additional production lines, and they are essentially built.

We haven’t installed them yet, but the facilities to receive them exist. And so if demand warrants it, which we’ll be monitoring, we’ll be moving forward with additional capacity on an ongoing basis..

Okay.

Just curious, by chance, did you also file for the CLIA waiver? Or do you expect to file that upon receipt of the EUA?.

Do you want me to take that, Brian or – so sorry..

Sure. Doug, if you’d like to, you can feel free or I can take that, if you prefer..

Please..

Okay. So we are technically, it’s EUA for point-of-care settings. It’s what we filed for. Which is slightly different in an EUA environment, but we are – that’s the application we submitted is for a point-of-care platform..

Okay.

Is it your intention to file for the CLIA waiver at some point in the future?.

That’s the CLIA waiver, officially. My understanding, and I’m not – is that the CLIA waiver, officially, is for 510(k) products as just a term of art, if you will. But we are filing for an EUA, which can be used in point-of-care settings like physician offices, et cetera.

And our studies were done with untrained users, similar to what you would do with a point – in a 510(k) environment for a CLIA waived type of platform..

Okay. That’s helpful. And then maybe a last question for me. If I have this right, I think we were expecting you to submit your chlamydia test to the agency in the first half of 2022. I think all of us on the line could use some help to try to figure out what the delay looks like.

I mean does this look like a 6-month delay? Could it be a year? Obviously, you’re ramping additional lines. So just any help could help us, especially as we think about numbers and such..

Doug, why don’t I let you provide some color on that?.

Sure. So in terms of the – we focused on finalizing the COVID product in that so around manufacturing and also around just doing the clinical work and that resulted in some delay to CT/NG, as an example you’re talking about.

So as mentioned previously, we’re confirming performance and are expecting to finalize feasibility soon and entering into the development phase. So when we get those results, we’ll be able to better provide details on time lines, and we would look to do that at the next quarterly call..

Okay. Thanks, guy. I’ll hop back in the queue..

[Operator Instructions] There are no further questions at this time. I would now like to turn the conference back to – we have a follow-up question from Mr. Mark Massaro..

Thanks. I’m curious how you’re thinking about the flu COVID combination. At least, last year, there was a very light flu season.

So can you just walk me through what you’re hearing or how you’re preparing to launch a flu COVID panel, recognizing that there were very few flu samples to be had in the last flu season?.

So I think – it’s a great question, Mark. So the flu – we don’t believe that flu has gone away as a disease. It will be back, in our belief. It would be great if it’s permanently suppressed, but unlikely. And if you think about the use case, somebody shows up at a clinician’s office, they have a running nose or they’re at a school.

They have some symptom, which could be COVID or it could be flu. A differential diagnosis would be of great value in many point of care settings. And so this product would be useful in the symptomatic portion of the COVID flu market.

And one could see for actually a period of time, and this is more speculation on my part, my own crystal ball, if you will, that rather than testing for flu alone, that market will actually transition largely to flu COVID combination testing over time until if and when COVID no longer become pandemic in the population..

Great. Thanks so much. That’s helpful..

There are no further questions at this time. I would now like to turn the conference back to Mr. Brian Coe..

So I’ll just end by saying thank you for your time and interest in Talis, and we look forward to speaking with you again soon..

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, and have a wonderful day. You may all disconnect..