Matt Clawson - IR, Pure Communications John McDonough - President and CEO Marc Jones - Chief Financial Officer Dr. Tom Lowery - Chief Scientific Officer.

Isaac Ro - Goldman Sachs Bryan Kipp - Janney Capital Markets Scott Wang - Morgan Stanley Carmen Augustine - Leerink Partners.

Greetings and welcome to the T2 Biosystems’ 2014 Fourth Quarter and Year-end Financial Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Matt Clawson of Pure Communications. Thank you, Mr. Clawson. You may begin..

Thank you, Operator. Good afternoon everyone and thanks for joining us for T2 Biosystems’ 2014 fourth quarter and year end results call.

On the call this afternoon to discuss results and operational milestones for the fourth quarter and full year ended December 31, 2014, are President and CEO, John McDonough; Chief Financial Officer, Marc Jones; and Dr. Tom Lowery, Chief Scientific Officer.

John and Marc will begin the call with some prepared remarks followed by a question-and-answer period. I’d like to remind everyone that comments made by management in response to questions today will include forward-looking statements.

Those include statements related to T2 Biosystems’ future financial and operating results and plans for developing and marketing new products.

Forward-looking statements are based on estimates and assumptions as of today and are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied by those statements including the risks and uncertainties described in T2 Biosystems’ filings with the SEC, the Risk Factors section and the registration statement on Form S1 as well as other risks and uncertainties detailed in subsequent SEC filings.

The company undertakes no obligation to publicly update or revise any forward-looking statements unless as required by law. With that, I’d like to turn the call over to CEO, John McDonough for his opening comments. Good afternoon John..

Thank you, Matt. Good afternoon everyone. Thank you for taking the time to join us for our call today. 2014 was a transformative year at T2 Biosystems. And the fourth quarter activity indicated strong momentum as we entered 2015.

As a reminder, our first commercial products were T2Dx instrument and the T2Candida Diagnostic Panel were cleared by the FDA in September and commercial activities commenced shortly thereafter. While we expect the sales process and sales cycle to take 6 to 12 months to complete initially, our selling thesis for hospitals is straightforward.

T2Candida identifies the clinically relevant species of Candida, a fungal pathogen known to cause sepsis. Candida infections have the highest mortality rate of all of the sepsis pathogens, averaging 40%.

Published literature has demonstrated that the initiation of targeted therapy to infected patients within 12 hours can reduced the mortality rate to 11% and save approximately $30,000 per patient driven by a reduction of the length of stay in the hospital and the intensive care unit.

T2Candida runs on the T2Dx instruments, a fully automated instrument that processes blood sample and provides results from three to five hours.

We know of no other system either on the market or in clinical trials that can pass through these pathogens in blood and achieve clinically relevant results without culturing the sample, a process that can take days in most cases.

We’re also not aware of any technology available that could achieve the clinically relevant sensitivity that would be required to avoid the need for blood culture. Following the FDA clearance, which we understand that occurred in record time, marketing activities ramped and our commercial team was activated.

We grew the direct sales team to seven professionals in November. We expect to add three or more additional sales representatives to the team over the next 60 to 90 days. As word of the technology is spreading, we believe that we are attracting some of the best sales professionals in the industry.

We plan to grow the sales force to approximately 15 by the end of 2015. The sales team is targeting the top 450 hospitals in the United States in terms of volume of high-risk patient. The top 450 hospitals represent about one-third of the estimated $1.3 billion T2 market, Candida market opportunity in the United States.

As of today, we are engaged at some level with approximately 25% of the hospitals on the target list. And we've been encouraged with the response and progress coming from those initial interactions. As we indicated during the IPO, our goal is to make placements in 30 or so of these high-volume hospitals by the end of this year.

Our plan is to work very closely with our initial customers, providing comprehensive support and implementing the platform while we learn how to best streamline the adoption and integration process within each hospital.

It is notable that our discussions with the initial customer targets have been met with enthusiasm and a strong stated desire among many accounts to be among the first to implement T2Candida.

Here is a strong belief that our products can safe lives and there is confirmation that the implementation of our products will drive significant cost savings within these hospitals. Today nine hospitals have completed an economic analysis based on that individual hospital.

And all of those analyses have confirmed it will be a strong return on investment when our product is adopted.

As we gain knowledge through the initial implementations and the programs that result in a fastest and greatest outcomes, we plan to replicate that business model to accelerate the size and scale of our customer phase to drive significant revenue and growth.

It is important to note that on January 13th, the clinical investigators involved in our FDA clinical trial published the data from the study in clinical infectious diseases and tier 1 publication and probably the most read by the Infectious Disease Community in addition to restating the data from our clinical trial that demonstrated 91.1% overall sensitivity and 99.4% overall specificity, the publication cited several patient cases where T2Candida likely detected patients positive for Candida infection that were missed by blood culture.

In one case, described in the paper T2Candida detected a Candida infection that blood culture missed in 12 successive tests. Seven days after the T2Candida result was obtained, the physicians performed an invasive procedure to obtain a tissue culture, which proved that T2Candida result accurately identified a case of intra-abdominal candidiasis.

This paper demonstrates that the value of T2Candida goes beyond our ability to detect in three to five hours what blood culture-based diagnostics take two to six or more days that we can detect infections that could be completely missed by blood culture.

The publication of this data has been extremely helpful and important to the hospitals where speaking with regarding adoption.

I’d say the key takeaways from our first quarter is commercial activity, a strong receptivity in the market probably better than we had anticipated, excellent progress within our target hospital group that delivered thoughtful process of adoption as we anticipated and a great deal of enthusiasm among those hospitals that are currently in the contracting process.

I’ll turn the call over to Marc Jones for quick rundown of the financial results and a summary of our outlook for the key metrics. And I'll wrap up our remarks with some color on our recent strategic announcement and how we view additional opportunities outside of our core business.

Marc?.

Thanks John. As John indicated, we made excellent progress in our fourth quarter in terms of our milestones and infrastructure build. The fourth quarter and full-year results reflected investment of resources commensurate with those efforts where those costs were well in line with anticipated levels.

And we're confident that we've established a disciplined cost conscious culture and will continue to manage to spend well. Through the fourth quarter, we generated revenue primarily from research and development agreements and government grants and have not generated any revenue from that sale of products.

In 2014 fourth quarter and full year, we recorded $119,000 of research revenue for both periods which primarily consisted of revenue related to feasibility studies and collaboration efforts with third parties.

Total operating expenses for the 2014 fourth quarter and full year were $9 million and $30.8 million respectively, compared to $5.7 million and $20 million for the 2013 periods.

The increases in operating expenses were mainly associated with the direcT2 pivotal clinical trial and other regulatory support and activity, research and development activities for additional applications of T2MR, expansion of marketing programs, build-out of the U.S.

commercial infrastructure, and increases in share-based compensation charges and incremental expenses related to being a public company.

The net loss for the 2014 fourth quarter was $9.1 million, or $0.45 loss per share, compared to $8.3 million, after adjustments for accretion of redeemable convertible preferred stock, or a $5.89 loss per share for the 2013 fourth quarter. The increased loss was principally due to the increased operating expenses, which I just covered.

For 2014, the net loss after adjustments for attrition of redeemable convertible preferred stock was $36 million, or $4.15 loss per share, compared to a net loss of $27.5 million, or $19.72 loss per share for 2013.

Loss per share calculations for each of the periods reported were impacted by the overall increase in common shares outstanding resulting from our August 7, 2014 initial public offering.

Specifically for the fourth quarter of 2014, which was the first full quarter that included the conversion of the preferred shares and the issuance of the net common shares in the IPO, we had 20 million weighted average shares outstanding. For the 2014 full year, we had $8.7 million weighted average shares outstanding.

The company’s balance sheet as of December 31, 2014, had total cash and cash equivalents of $73.8 million, which included $19.7 million in proceeds net of deferred financing costs and two draws on the July, 11, 2014 debt facility and approximately $58.1 million in net proceeds from the August 6, 2014 initial public offering.

In addition to the cash on the balance sheet, we are able to draw an additional $10 million from our debt facilities through June 30, 2015. Before I turn the call back to John for his final comments, I’d like to reiterate the outlook John laid out in our Q3 call.

We anticipate the ramp of placements this year will be weighted to the second half of the year, as our sales force is small and our selling efforts couldn’t commence until we received FDA clearance. We expect that 60% of more of the initial 30 contracts will likely occur in the second half of 2014.

When we closed the contract with the hospital, we anticipate that it will take three to six months to install and verify the performance of the T2Dx instrument. This is completely consistent with the timeframes realized by other diagnostic platforms when they are initially installed.

We anticipate that it could take an additional 6 to 12 months for a customer to ramp the testing of the high-risk patients, as they most likely will start by testing a segment of the high-risk patient population.

And we estimate the average annual revenue for hospital could be as much as a $1 million among the top order of the 58 hospital accounts, if they were to test all of their high-risk patients.

As you model our expenses going forward, we anticipate total Q1 operating expenses to grow in a range of 30% over Q4, largely resulting from the ongoing impact of commercialization investments we’ve made in the fourth quarter of 2014.

The calendar timing of certain R&D and marketing program expenses in Q1 2015 and incremental expenses related to the development collaboration with Canon. We anticipate approximately $850,000 in non-cash expense is primarily depreciation and stock-compensation during that period. We expect only marginal growth and expenses from Q2 to Q4 2015.

Additionally, through our partnership with Canon and other research development projects, we expect to book over $200,000 in partner revenue in Q1. With that, I will turn it back over to John..

Great. Thanks, Marc. Before we turn it over for Q&A, I’d like to spend a few moments discussing our recently announced strategic news. As you may have seen earlier this month, we announced that we entered into a multi-year strategic agreement with Canon U.S. Life Sciences.

We will be jointly developing a diagnostic test panel that can rapidly detect Lime disease. If you are not aware, Lime disease is a bacterial infection that is spread by ticks and is typically caused by three different bacteria species. If left untreated, Lyme disease can cause chronic joint inflammation, neurological disorders and cognitive defects.

The CDC estimates that more than 350,000 people are affected by Lyme disease each year, but the number of diagnosed case is less than a tenth of that due to underreporting and poor diagnostic protocol and tests. Importantly, about 3.4 million tests are once for Lyme disease each year.

Those tests include serology, PCR and blood culture, which have low sensitivity and take approximately two to three weeks to revive results. Canon and T2 Biosystems see significant opportunity to apply T2MR in much the same way we are with our sepsis products.

By detecting the specific bacterial species directly in whole blood in 3 to 5 hours, the limits of detection as low as one colony forming unit per mL, there is the potential to significantly impact the health and well-being of patients by enabling targeted species specific therapy earlier, which may also take significant costs out of the healthcare system.

Reimbursement structures are already in place and we estimate that there is market opportunity of roughly $700 million in the United States. The deal with Canon provided $2 million upfront in additional milestone payments that could total $8.5 million.

We will retain exclusive worldwide commercialization rights of any products developed out of the collaboration and if commercialized, we will pay Canon royalty payments. We expect to commence this project shortly and are hopeful that we can enter an FDA clinical trial in less than three years. Canon is a world-class company.

It is very keen on additional life science programs. So, we will continue to explore ways to work together on other programs. In addition to Canon, we continue to see a growing level of interest from third-parties who are interested in working with us to develop new applications based on the T2MR platform.

We will continue to be highly selective in this process, but see collaborations as one way to pursue the many application opportunities for T2MR, without having to do it all ourselves. We will continue to report on these opportunities as they move from feasibility and research to full-scale development projects when appropriate.

Shifting to our internal pipeline, we continue to make progress on the development of our next two products, T2Bacteria, focused on detecting bacterial targets associated with sepsis and T2HemoStat, an instrument in diagnostic panel that will deliver rapid critical hemostasis measurements, initially targeting the screening of trauma patients.

These development efforts are on track with the timelines we discussed during the IPO, with T2Bacteria on track to enter an FDA pivotal trial in the second half of this year and T2HemoStat now on track to enter an FDA pivotal trial in the first half of 2015.

We estimate that our total addressable market including T2Candida, T2Bacteria, T2HemoStat in our T2 line is over $3.7 billion. That concludes our update on the period. But I want to leave you with this thought. There is a clear and urgent need for fast and accurate sepsis diagnostic panels. That was demonstrated by the FDA’s efficient clearance process.

The new data included in the publication in Clinical Infectious Diseases and is now pouring out with a positive reaction and interest we are receiving in the marketplace.

We are pleased with the results from the early stages of our commercial launch of T2Dx and T2Candida and are working diligently with the medical community to deliver our diagnostic panels to hospitals, physicians and patients and we are very encouraged with their initial response. With that, I'll turn the call over to the operator for questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Isaac Ro with Goldman Sachs. Please go ahead with your question..

Hi. Good afternoon guys. Thank you.

Want to start off with question regarding the selling cycle for the technology, just curious, if you have an update for us in terms of what you learned regarding the time it takes to close, the types of decision makers that you are meeting with? And just in general if you had any surprises regarding where the early interest is showing up, whether it’d be the high end hospitals that you referenced or some of the small, the mid size, any of big surprises along any of those metrics?.

Yeah. Hi Isaac. How are you doing? We really have not had any surprises in the selling cycle. Te initial accounts are all within the top 450 hospitals as anticipated. As I mentioned, we are now actively engaged surprisingly with about a quarter of all of those accounts. We’re actively engaged in the sales pipeline.

All indications are supporting the thesis that you are looking at 6 to 12 months sale cycle. The decision makers in the processes is following what we expected. We start our discussions typically with through infectious diseases, sometimes through critical care transplant but almost always infectious diseases.

We then go to microbiology lab director, sometimes that order gets reversed but it’s not typical. And virtually every time we get actively engaged in these accounts that are moving forward, some faster than others, of course. We’ve gone through a number of the economic analysis that are needed to support proposals and closes.

We’re then most excited about that because it’s confirmed based on the real data coming out of those hospitals that there is a very, very strong return on investment based on their own data and beliefs through the adoption of our technology. So we feel as good as you can if it stays in the process for where we are at.

And then -- and again I just confirmed that the cycle is moving as we expected that the number of accounts in the pipeline is greater than we expected..

Great.

And just a follow-up on pricing for Candida, you guys have offered a range in the past and talked a little bit about the differences between range of rental versus outright sale? And so just curious given all those things, how you’re -- an update on how you are thinking about ASPs for Candida?.

Yeah. No change there in our mind that’s really a good news. We are seeing strong confirmation that pricing, again our one price is north of 250 with volume commitments. We go lower than that. We have not seen any surprises on pricing and the economic models that are supporting the pricing that we are fulfilling..

Okay. Great. Thanks so much. Stay warm up there..

Yeah, we are trying..

Thank you. Our next question comes from the line of Bryan Kipp with Janney Capital Markets. Please go ahead with your question..

Thank guys for taking the questions. John, I guess to start here, yeah, I mean you’ve cited all the positives, 25% of the top 450. You are having ongoing conversations where are the push backs, if any. I think you said microbiology sometimes will nix it but I know there is a lot of structure and a lot of approvals you get.

Are you seeing any other areas potentially or hurdles that you didn’t expect initially?.

No Bryan, we really haven’t seen any hurdles that are different than what we expected. I mean, I would say conforming what we expected sometimes going through the economic model can take time.

In fact, if you look at the 6 month to 12 month sales cycle, it’s probably -- if the accounts are on the shorter end of that, it’s going to be because they get through that element of the process in a few weeks as opposed to a few months.

And the issue there is simply one of getting access to the data within a hospital for how many positive patients that are staying here and what antifungal drugs they are using, on what percentage of their patients and not surprisingly many hospitals just don’t have ready access to that information.

So it’s a bit of a where is well, they were trying to find that information. But every time we’ve gone through we’ve been able to hope to get through that, get the data and demonstrate a really strong ROI..

All right.

I guess a follow-up in the continued side, do you think that are state that you think you’d penetrate about 30 accounts or 30-instrument placements by the year-end but I am thinking in context, if you are having ongoing conversations typical six month to twelve month conversion cycle with 25% of the top 450 that in conjunction with nine hospitals have already performed economic analyses that have been positive.

Why aren’t you taking that up or why are you still kind of in that same range despite the better than expected start I guess?.

Yeah. I think until we get on a couple of calls and talk about the number of contracts we closed, it will be a little premature to increase the target. So number one, we are pretty data driven here at T2 and the ultimate data is in close contracts. And we can confirm the 6 to 12 month sales cycles with enough data points.

So we can extrapolate what that would mean for the future. So that will be number one, and then number two we’d be really excited at 30, 30 is a great number. That would mean we are penetrating 8% of the top 450 hospitals within the first year that would be a really strong number for us to deliver on. We remain very confident in that number.

When we have data to take it up, we’ll do that but it’s way too premature to do that..

Okay. That’s fair. And last one for me is just on the Canon announcement.

Were those extended talks, was that kind of month -- two month conversion cycle, I am just thinking in context because it’s just unique nature of the deal or it seems like if they are a risk to you guys just up for a milestone pace for the R&D and from there you get commercialization right.

So any color there as well as --- ongoing talks with Canon amongst those. I think you did discuss that early, but any additional color would be helpful? Thanks again..

Yeah, yes sure. So we’ve been on discussions with Cannon for some time. I don’t exactly know when it started, but it probably in the 9 to 12 month range, certainly not due to six months even.

And the discussions, like any relationship that you build over time, I know from their standpoint they are really excited about the T2 detection technology and the impact that it can have on the marketplace. They have an interest at being a player on the diagnostic business.

And it certainly took some time for us to be able to identify the right application to get started with. And we think this is a terrific first step hopefully in what we’ll be an ongoing and maybe in the future expanded relationship that’s going on..

Appreciate again guys. Have a great day..

You bet..

Thank you. Our next question comes from the line of David Lewis with Morgan Stanley. Please go ahead with your question..

Hi guys. This is actually Scott Wang in for David. Just a couple of quick ones for me. You mentioned targeting 30 or so, there is high-volume hospitals by the end of the year. Can you give us a bit more flavor from how you see the ramp going.

I mean will it be more reagent rental or sales in the beginning? And in your early discussions with these hospitals, can you speak to whether there's any interest for multiple box placements at the same institution?.

Yeah. Great question, Scott. So we expect -- and I stated that at the outset that there would be about an 80-20 regent rentals to capital equipment purchase split. And the early indications would suggest that, that’s still a good number.

If anything maybe quietly picking towards capital being a little bit more than 20 but I would stick with the 80-20 assumption for the time being again until we have some closed accounts that might suggest that goes in a different direction. Absolutely we are seeing interest in multiple instruments.

They are truly going to come down for the volume of test being run in a hospital site there. They have in interest in having some redundancy and interest in being able to handle search capacity.

But I think we’re on the road show, we had given some guidance on that, Marc, maybe you want to add to that in terms of what to expect in terms of number of instruments per account..

Yeah. We would expect certainly one instrument at the average hospital would be fine. We expect to place more than one instrument in each of these sites.

We’ve assumed around two instruments per site and that will ensure that an area where there is a surge that hospitals have the capacity to run those tests so they can get those clinical results back as soon as possible..

Got it. And then just a quick follow-up. You mentioned that you were looking to pretty much almost double your existing sales force this year from 7 to 15 reps.

Can you give us some idea of how long that on-boarding process takes, when you expect the new rep to start, kind of contributing?.

Yes. So the way we modeled that one Scott is there is usually a three-month period just to get up to speed. We have a very detailed and aggressive sales school that last almost two weeks, so we do some crash course training.

Usually, we’re able to go out to a conference shortly thereafter training and take the new team out there and expand on the education process. Usually, three months is what you should expect to kind of get up to speed and you start seeing a little bit of productivity between month three and six and then you’re going full guns after six months.

I’m very pleased with what we’re seeing in terms of the early size of that. The growth in the pipeline literally from when we probably were last on this phone call has grown well over 3x in terms of the number of hospitals that are actively engage in a sales pipeline.

And that’s largely driven by the fact that we added five people in November and so those new folks along with the folks that have come on board in August and have been here for about three weeks when we got FDA clearance are definitely getting engaged in building pipeline a little faster than you would have expected.

Now, again, we need more data in terms of conversion rates and all that sort of stuff to know what this all means but it certainly is very encouraging in all regard..

That’s great, guys. Thanks for taking questions..

You bet..

Thank you. [Operator Instructions] Our next question comes from the line of Dan Leonard with Leerink Partners. Please go ahead with your question..

Hi, everyone. This is Carmen in for Dan. I just have one question.

Has the JAMA article spurred any additional conversations with potential partners? And how do you plan to prioritize the partnership operating discipline forward?.

Yeah. It’s a great question.

So, absolutely between the JAMA publication and the Clinical Infections Diseases publication, we’ve seen a lot of interest coming from other players interested in developing applications in our platform and even within among many of the therapeutic companies, which is a very interesting area where our diagnostics can be a real valuable aid even in running clinical trial.

We’ve got to be really selective. I mean, now working with the therapeutic companies of our products that we have, we are excited about that. We’ve seen another opportunity developing and that’s just a natural expansion of the base business that we are involved. In terms of new applications as a technology, we have to be really selective.

We don’t want to create channel conflict. We don’t want to have application conflict. And so we’ve said no many times. But we’ll say yes in the right situation. Certainly, a Canon like opportunity is perfect. The Lyme disease is on our radar screen but it would have taken awhile for us to get to that one.

And it’s a big opportunity though in one we were able to structure a relationship in a way we’re able to retain all of the commercialization rights that you avoid any distribution conflicts that can arise with these relationships down the road..

Great. Thank you so much..

You bet..

Thank you. Our next question comes from the line of Bryan Kipp with Janney Capital Markets. Please go ahead with your question..

Hey, guys. Quick follow-up on AMA’s, I know we’ve talked about in the past the data supposed to come out potentially publish.

Do you have any color on when that’s going to occur, and is it going to be next quarter or two, just thinking injunction with adoption?.

Yeah. So, we do -- I’m hopeful that we will see a publication of some of the independent economic data that’s being pulled together regarding T2Candida specifically. This year, it’s really hard to predict that. I mean, we’re hopeful we’ll see it here in the first half of the year.

But you are dealing with publications and this is an independent group that’s submitting it and a publication that has to accept it on their timeline and it would be just foolish for us to try to predict when that might occur. But we’re hopeful that 2015 hopefully, here in the first half..

Okay. And Marc, quick one for you in light of the Lyme disease announcement. How do you expect to incur the R&D costs? It’s going to be year or two year kind of turnover from the $2 million upfront. I think in the past, you say it usually cost $1 million to $2 million to create another asset.

So just thinking in terms of what, how we should flow that through our models..

Yeah. So a great question, Bryan. We anticipate in 2015 to kickoff the project here pretty shortly, ramping up R&D activities. And I would expect we’ll see some on the order of $1 million to $1.5 million or so in revenue and I would expect expenses to offset that revenue in 2015. This project as John mentioned, we anticipate to enter a clinical trial.

In the next several years, it will be a project that extends beyond 2015 but that’s kind of how I see the expenses layering in 2015..

Okay. Appreciate it..

Thank you. Ladies and gentlemen, that is all the time we have for questions for today. I would now like to turn the floor back over to management for closing remarks..

Well, thank you all for listening today. We look forward to reporting back on our progress next quarter. And we will sign off here from the North Pole also know as Lexington, Massachusetts. Thank you..

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day..