Welcome to the T2 Biosystems First Quarter 2019 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Zack Kubow of W2O Group. Please go ahead..

Thank you, Operator, and good afternoon, everyone. Thanks for joining us for the T2 Biosystems first quarter 2019 financial results conference call. On the call to discuss the results and operational highlights for the quarter ended March 31, 2019 are President and CEO, John McDonough; and Chief Financial Officer, John Sprague.

The executive team will open the call with some prepared remarks, followed by a question-and-answer period. I would like to remind everyone that comments made by management today and answers to questions 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 actual results to differ materially from those expressed or implied by those statements, including the risks and uncertainties described in T2 Biosystems' Annual Report on Form 10-K filed with the SEC on March 14, 2019 and other filings the Company makes with the SEC from time to time.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. With that, I'd like to turn the call over to President and CEO, John McDonough.

John?.

Thank you, Zach. Good afternoon, everyone, and thank you for joining us as we discuss the progress, results, and outlook following the first quarter of 2019. Q1 was a milestone quarter, as our first customers in the United States went live and are testing patients with the T2Bacteria Panel.

We are seeing patients benefiting from earlier detection of infections that could have been life-threatening. We will see more hospitals utilizing the T2Bacteria Panel this quarter and are pleased with the early volume of patients being tested at the hospitals that have gone live.

In Q1, we delivered revenue and new contracts that exceeded our guidance. This was in part driven by our efforts to focus our sales and marketing team on attracting new customers that are motivated to quickly adopt the T2Bacteria panel and working with these customers to efficiently navigate the validation and start-up phase.

This is the first full period in which we employ these new targeting method, as I will describe again in a few moments. And we saw continued progress demonstrated by more activity at the beginning of the sales funnel, followed by a faster sales cycle with many potential customers.

We also continued to advance our new product initiatives during the quarter, which have the potential to expand the utility of the T2Dx instrument for the management of patients suspected of sepsis related bloodstream infections, Lyme disease and other infectious diseases.

I will provide an update on our commercial and pipeline activities in more detail, but will begin with a high level review of the financial results and commercial metrics for the quarter.

After my remarks, our CFO, John Sprague, will provide a detailed review of our first quarter financial results and our 2019 financial guidance, including our expectations for the second quarter.

In the first quarter, we continued to drive adoption of the T2Bacteria Panel and grow our T2Candida Panel business, delivering results so we are ahead of our expectations. Total revenues were $1.8 million, exceeding guidance of $1.3 million to $1.5 million. Product revenue was $1.3 million, up 30% year-over-year.

This reflects growth in testing volume for the T2Candida Panel and T2Bacteria Panel utilization from customers that completed their 3 to 6 month validation and start-up phase and began commercial testing late in the quarter.

As more customers that entered contracts in the second half of 2018 come online during or after the second quarter, we expect T2Bacteria Panel volume and recurring revenue to ramp up.

Capital sales were stable in Q1 as many new customers continued to select the reagent rental model which is minimal upfront customer cost and therefore minimal upfront revenue for T2 Biosystems, but stronger margins on recurring sales.

We continue to expect that the reagent rental program will constitute the majority of new customer arrangements in the United States going forward.

The other key metric for our business in 2019 is the number of new contracts secured for T2Dx instrument placement, which represents a future driver of ongoing recurring testing revenue from T2Bacteria and T2Candida Panel utilization.

In the first quarter, we secured 11 new contracts, which is ahead of our guidance of 8 to 10 contracts and against the typical Q1 hospital adoption headwind. As of March 31, 2019, we had 97 instruments placed or contracted to be placed worldwide.

Overall, our revenue and new contract performance in the first quarter keeps us on track to achieve our 2019 goals for revenue growth and new instrument contracts.

Turning to an update on the T2Bacteria Panel launch, we continue to see several positive indicators in the field as we work to raise awareness of the T2Bacteria Panel, expand and execute against our new customer pipeline and ultimately get new systems to begin commercial testing of patients as soon as possible.

Most importantly, we are beginning to see the impact of T2Bacteria on patients as hospitals go live and begin testing patients. For example, at one hospital, a patient entered the emergency department with signs and symptoms of infection. A T2 was run on the patient, but they were sent home as other diagnostics came back negative.

The T2 turned positive in a few hours for an E. coli infection and the patient was immediately brought back and properly treated. A blood culture confirmed the infection at 24 hours later. Another cancer patient was antibiotic for 5 days after which they ran a T2Bacteria test.

T2Bacteria was positive in 4 hours and the antibiotics were changed as the patient was resistant to vancomycin.

Patient stories like this where therapy has changed for the benefit of patients and hospital economics in part allowed us in Q1 to continue to secure new customer wins with hospitals, including some with 30 to 90 day sales cycle in line with our experience during the first 6 months of the launch.

We also were successful in broadening our outreach in order to attract more hospitals with a similar profile, institutions with strong stewardship efforts focused on improving sepsis management and related patient care and therefore are more likely to have a similar rapid adoption pathway.

This builds on our original targeting, which focused on hospital size and projected patient volume. In addition, we were pleased that our team was able to close contracts with customers that had a more traditional 6 to 12 month sales cycle.

As I just mentioned, we are excited to report that, during the first quarter, the first of the new T2Bacteria Panel accounts signed in the second half of 2018 began commercial testing following the 3 to 6 month validation and start-up phase, which is required by the government.

We are pleased that we are seeing the validation periods stay in this range due to methods that we have put in place as it is not uncommon for this period to extend to 6 to 12 months with other laboratory diagnostic products. The volume of testing of patients at hospitals going live is in line or even slightly ahead of our expectation.

We are supporting our customers through the transition to live testing of patients utilizing our team of medical science liaison. The early feedback that this team has been collecting from the field has been positive. In general, the early utilization protocols at these hospitals has been aligned with our expectation.

Hospitals are starting testing with specific group of patients suspected of sepsis with plans to expand to a broad group of patients in their protocol as they gain experience with the test.

On the marketing front, we have several activities and campaigns planned for 2019 to support the momentum of the T2Bacteria Panel launch and expand awareness of the benefits of the T2Direct Diagnostics platform.

Highlighting the T2Bacteria Panel clinical data is one of the key components of our strategy along with enabling customers to publish and present new data from their institution. We continue to expect the result of the T2Bacteria Panel pivotal FDA clinical trial to be published in a peer-reviewed medical journal soon.

In fact, it is currently accepted by a top tier journal and is scheduled for publication. As soon as the embargo has been lifted, we expect to announce the publication. For many physicians and healthcare providers, the publication of this data in a peer-reviewed journal is an important validator of our technology.

In April, we hosted an integrated symposium attended by an estimated 350 to 450 people highlighting key clinical data about the T2Bacteria and T2Candida panels at the European Congress of Clinical Microbiology and Infectious Diseases, or ECCMID, in Amsterdam.

The symposium included a panel of 4 speakers and I want to share a couple of short quotes to give you a sense of how T2Bacteria is being accepted by our key opinion leaders. One speaker stated that in 3 clinical trials, T2Candida and T2Bacteria have demonstrated exceptional, remarkable, and consistent results.

Another speaker also advised, if you get a discrepant result with T2 and blood culture, treat on the T2 result. With these comments and their full presentation, these physicians underscored one of the beauties of T2 tests. There was no interference of antimicrobial drugs like blood culture, resulting in more detected patients by T2.

In addition, several case studies were reviewed, demonstrating how T2Direct Diagnostics are getting patients a more rapid therapy for infections with Candida, bacteria and resistant pathogens.

In total, there were clinical presentations from 7 leading clinicians and users highlighting the most recent scientific data on the T2Bacteria and T2Candida panels. Our trade show booth traffic was heavy and interest in our products was high.

We also had a strong presence at several US and European customer meetings in February and March leading into ECCMID, providing multiple opportunities to highlight T2Direct Diagnostics and our emerging T2Bacteria Panel data set.

Looking forward, we expect to have a robust presence at the American Society for Microbiology, or ASM Microbe Annual Meeting in June.

This is expected to include live presentation, in-booth physician presentations and evening customer VIP reception and other events and marketing initiatives that will enable us to engage with customers and highlight the T2Bacteria and T2Candida panels.

Turning to our new product pipeline, we have several opportunities to expand our market opportunity and leverage our core technology.

As discussed on our year-end call, we are advancing the T2Resistance Panel, which received Breakthrough Device Designation from the FDA for the detection and identification of 13 resistant genes from both gram-positive and gram-negative pathogen.

The infections affected by the T2Resistance Panel are life threatening, can lead to sepsis and result in high mortality rate. Similar to our other tests, results with the T2Resistance Panel will be available within 3 to 5 hours versus several days, direct from blood and blood culture independent.

We remain on track with our development activities and continue to anticipate making the T2Resistance Panel available as a research use only product in the United States and to receive a CE Mark, enabling a market launch in Europe before the end of this year.

In fact, as a stepping stone to completing the T2Resistance Panel, we have launched a subset of the panel called the T2Carba Resistance Panel as a research use only product and 3 separate hospitals have been testing this new panel.

Results from this resistance panel were enthusiastically presented at ECCMID showing that our T2Direct Diagnostics enables resistance marker information without the need for a positive blood culture, providing results one to 3 days earlier than blood culture dependent method.

This clinical data from customers and customer enthusiasm for this panel, underscores the value we're providing direct from blood results for pathogen identification and also resistance marker detection.

In addition to the T2Resistance Panel, we also continued to advance our CARB-X partnership program to expand our panels to include additional bacterial species and resistant markers including ESBL and gram-positive resistant markers.

We are ahead of schedule in our CARB-X program and appreciate the productive collaboration with CARB-X and its funding agency. Outside of the detection of blood stream infections, we developed the T2Lyme Panel, which is being investigated in a pivotal FDA study that started in 2018.

The 2019 season began in March and our trial sites are currently enrolling patients in the study. Assuming it is successful and that we can secure regulatory approval, we expect to be positioned to offer a new tool to diagnose Lyme disease in an approximately $700 million market.

In addition to these opportunities, our R&D team continues to work on expanding our testing menu for future and existing applications, and we look forward to sharing additional updates on our pipeline as appropriate. With that, let me turn the call over to John Sprague, who will review our first quarter 2019 financial results in greater detail.

John?.

Thank you, John. First quarter 2019 total revenues were $1.8 million compared to last year's first quarter revenues of $2.3 million, 20% above the high end of guidance.

Product revenues, primarily T2Candida Panel and T2Dx instrument sales were $1.3 million, 30% higher than last year's first quarter product revenues of $1 million and were driven by growing T2Candida Panel and T2Dx instrument sales.

T2Bacteria Panel sales continued to ramp after our July 2018 launch as hospitals completed their 3 to 6 month new diagnostic validation protocols. Research and grant contribution revenues were $500,000 compared to $1.3 million in last year's first quarter.

Costs and expenses, excluding cost of product revenue, were $11 million compared to $10.5 million in last year's first quarter and were at the midpoint of guidance.

Total costs and expenses include depreciation and non-cash stock compensation of $2.6 million in the first quarter compared to $2 million in last year's first quarter and increased primarily due to the vesting of performance-based RSUs. Operating margins were a loss of $13.6 million compared to a loss of $11.4 million in last year's first quarter.

Net interest expense and other income was $1.6 million compared to $1.5 million in last year's quarter. Our net loss was $15.1 million, $0.34 per share compared to a net loss in last year's first quarter of $0.9 million, $0.36 per share. Weighted average shares outstanding were 44.3 million compared to 36 million in last year's first quarter.

Our cash and cash equivalents were $37.2 million at March 31, 2019. We believe our cash and financing sources are sufficient through the first half of 2020. 2019 outlook. The following forward-looking statements reflect estimates based on information as of May 2, 2019 and are subject to uncertainty.

For the full year 2019, we are reiterating our financial guidance and providing second quarter guidance as follows. Overall, we expect total revenue to double in 2019 with product revenue expected to grow over 100%. For the second quarter of 2019, we expect total revenues in the range of $1.8 million to $2.1 million.

Second quarter product revenue is expected in the range of $1.5 million to $1.8 million. We expect revenue to continue to ramp over the course of the year, reflecting continued adoption of T2Bacteria and T2Candida Panel test sales and expanding T2Dx instrument reagent rentals and sales in US and internationally.

For new contracts, we expect, in 2019, closed contracts with the placement of 70 to 80 instruments, roughly double the number in 2018. This includes 12 to 14 contracts expected in the second quarter. As you consider product revenue growth, please keep in mind the following guidelines that we have outlined on prior calls.

It typically takes new instruments an average of 3 to 6 months to go live and patient testing commences as hospitals are required to validate any new diagnostic tests and instruments.

During this period, the Company typically receives nominal revenue unless the instrument has been purchased by the hospital, which in the United States occurs about 15% of the time. International distributors typically purchase instruments at a 30% discount off of list price of $100,000 per instrument.

We expect a continuation of average sales prices of $150 per test for the T2Bacteria Panel and $200 per test for the T2Candida Panel. International distributors typically receive about a 30% discount per test panel.

We estimate that a single T2Dx Instrument is capable of running 3,000 tests per year, but expect average utilization to be in the 1,000 or 2,000 test range after testing ramps up over time.

Therefore, we expect each T2Dx instrument to generate an average of about $300,000 in annual revenue from the combination of T2Bacteria and T2Candida panel testing when hospitals fully ramp up testing of patients.

We continue to expect quarterly operating expenses to be in a $10.5 million to $11.5 million range in 2019 and total cost and expenses will include non-cash depreciation and stock compensation of approximately $3 million per quarter. Non-cash stock compensation expenses may be impacted by the timing of performance-based RSU vesting.

We estimate that we will achieve cash flow breakeven between 65 and $75 million in annual revenue. We expect our gross margins to be approximately 45% to 50% at these revenue levels. Our weighted average shares outstanding of 34.3 million may be impacted by stock option exercises. Thank you, and back to John McDonough for closing remarks..

Thank you very much, John. In summary, we are off to a good start to 2019 with solid results for product revenue and new system contracts in the quarter. Our sales pipeline is strong and growing. More T2Bacteria customers are starting to come online and the early utilization and feedback has been encouraging.

Moving forward, our commercial team will remain laser focused on executing our strategy to continue building momentum, securing new T2Dx instrument contracts and driving utilization. On the development front, we are moving closer to important milestones for our new panels, providing incremental growth opportunities for the Company.

Thank you for your participation in today's call and for your continued interest in T2 Biosystems. That concludes our prepared remarks for this evening. Operator, we'll now open the call for questions..

[Operator Instructions]. Our first question comes from Jordan Abrams of Cantor Fitzgerald..

On this call, then also the last call, you highlighted the trend of seeing hospitals with active stewardship programs having a shorter sales cycle and therefore focusing your sales force to target these customers earlier on.

Can you just comment on this trend and what you're seeing now and then how you see it going forward?.

Yes, absolutely. Essentially, by law, all hospitals over the last couple of years are required to have stewardship committees. Many hospitals have it in place much, much longer than that.

Those that are more developed tend to have physicians, clinicians, even lab directors involve day to day on managing patients, literally managing the patients who are suspected of sepsis, who are not responding to broad spectrum antibiotics.

And remember this, the standard of care here is that all patients are put on broad spectrum antibiotics because blood culture results are taking one to 6 days to give a result and blood culture -- a single blood culture will miss about half of the infection.

So the standard of care of these broad spectrum antibiotics when the patients are responding after 24 hours, you change the therapy.

In many of these stewardship committees who are -- we only have the charter of better patient care, getting patients on the right drugs, but also reducing drugs that aren't needed because that's what's causing resistance in superbugs. Some of them are progressed to the point where they are literally managing the patients.

Remember, all patients who are suspected of sepsis are put our broad spectrum antibiotics, about 20% really need it. So there's an 80% over-use and of the 20% who are put on drug, 50% of the time it's the wrong drug.

And so when we hit a stewardship committee where people are so closely involved with patient management, boy, do they understand our story.

They understand that getting a rapid result for these major ESKAPE pathogens, which are typically not covered and are the most lethal to the patient to have a huge impact and therefore they move very quickly to adopt.

So as a secondary benefit, that -- one of these -- in my case, I spoke to a lab director who was a part of this daily patient management effort and he was literally revealing somewhere between 100 and 200 patient cases a day with a team of people and he sees the benefit and part of our product is reducing his workload, because if he can get patients on the right targeted drug, the ones who are responding, he doesn't have to worry about it..

Great, thanks. And then you also mentioned that some hospitals are starting with a specific group of patients. Can you just elaborate on the types of patients that these hospitals are starting with initially and then maybe who they are also leaving out initially? Thanks..

Yes, typically they are starting with the emergency department, which we've talked about for a while on this call. And if you think about patients presenting in the emergency department, that represents about 50% of all sepsis cases.

There are exceptions, there are some that are starting with ICU based patients and then if as they go into the ED of the emergency department, they -- sometimes they're saying, well, what types of patients. So it may be patients with abdominal injuries entering the emergency department are specific patient cases.

There are some who go straight to testing all patients with suspected in the ED, but usually some step based on some patient population they are seeing at their particular institution..

Okay. And then just one more.

I mean, what you're just describing is similar language that was used in PACCARB presentation where it was -- maybe, should you guys consider a specific algorithm of patients? Can you comment on that or just any thoughts around that?.

Yes, I am going to -- Tom Lowery, who is our Chief Scientific Officer and presented it, I will have him answer this question..

Yes. So discussing those patient testing algorithms is part of our medical science liaison role, it's with each one of the hospitals, and several of those algorithms were discussed at ECCMID and presentations there and there's a lot of discussion on tailoring all those algorithms within the hospital to help them with the roll out of the test..

Our next question comes from Puneet Souda of SVB Leerink..

This is [indiscernible] for Puneet. I was wondering if you could provide any more color around the progress with T2Bacteria in the ED with the ramp there [Technical Difficulty] and what sort of....

I'm sorry, you're breaking up, so we're not quite getting the question..

Can you hear me?.

Yes..

Sorry about that.

I was wondering if you could provide any color around the progress with T2Bacteria in the emergency department and what's been the ramp there and the feedback from the labs?.

Yes, so the -- about 70%, 80% of the accounts are focused on the emergency department. We're getting a very positive reception. We have a number of accounts that have now gone live. They are testing patients. I gave a few examples in the script about how we're impacting patient care.

The volumes that we're seeing, we're early in that process, are in line, they are actually slightly ahead of what we expected. So we're encouraged by that.

And we think we'll have a much more broader set of data on the next call as the accounts that are live start to ramp up and we expect at least as many accounts that went live in Q1 to see a doubling of live accounts by the end of Q2..

And could you add any color around the customer feedback on the menu of T2Bacteria Panel and should we expect panel to broaden over time?.

Yes, the feedback on the breadth of the panel is very positive. I know you know, we identify what is often referred to as the ESKAPE pathogens and those are the most lethal, typically not covered, they are the resistance infections and our entire panel covers about 90% of infections that are not covered by top line antibiotic drugs.

So the reception has been positive as evidenced by the adoption rate and the testing of patients and the impact we're having on patients. In terms of broadening the panel, we definitely intend to do that.

That's part of this CARB-X program, which we've been talking about where we expect that that overall panel will grow to 20 to 30 bacterial pathogens and resistant markers at some point in the future and that development program is actually ahead of schedule.

There is only few times in my career I've been able to say that, but I can say that, in this case..

Our next question comes from Mark Massaro of Canaccord Genuity..

Congratulations on the launch of bacteria. I guess, my first one is on the timing of the publication in the peer review journal for bacteria.

Can you give us a sense, I know you provided some detail, but is this something you think might be weeks away or more like months away?.

Weeks..

Okay, great..

Obviously, we don't control, but based on what we know, we expect to see it very soon..

Okay. And I might have missed it, but did you say a proposal number? I know in prior quarters you talked about proposals..

We did not cite a proposal number. We had mentioned that that was not a number we are going to continue in 2019. But the number I do know was significantly up from the fourth quarter. I can tell you that much..

Okay. I also wanted to ask about the guidance. So the Q2 guidance is below consensus. Consensus was looking for, if you do the math, was looking for about 71% of revenue to come in the back half of the year. Your guidance for Q2 would suggest that the waiting will be even greater, actually 82% in the back half of the year.

So I recognize you may not be prepared to guide Q3, but can you just give us a sense for how much more revenue you think you might have in Q4 than Q3?.

Yes. Thanks for asking that question, Mark, because I think it's an important one.

So the product revenue guidance that we gave for Q2 is pretty much in line with the consensus that was out there and so the difference between that growth from Q2 that is, and I think it's totally consistent for the year, so the difference in the consensus that's out there relative to the guidance is research revenue.

So we're expecting a bigger ramp of research revenue in the second half of 2019 and we're pretty confident about that. We will likely see that start to ramp in the third quarter, but it's difficult. Research revenue is tied to contracts closing and doing the work, et cetera.

So we remain very confident that the research revenue is going to be there, it's just not in Q2 and we haven't provided any guidance on research revenue other than a number for the year. And I think it's just kind of flat lined in some of the models that were out there.

But the product revenue number for Q2, I believe you will see is pretty consistent with what consensus is..

Okay. And if you do over a 100% of revenue in products this year, that should get you in the $10 million range or higher, so just making sure I'm with you on the research revenue.

That would suggest research revenue of up to $11 million for the full year?.

That very well could be the case or maybe the product revenue is a little bit higher than the TAM. But, yes, the research revenue would be a pretty big number in the second half of the year..

Okay.

And can you just remind us which collaborators, whether it's CARB-X, just walk us through what should the collaborators do you think will trigger the biggest source of revenue in that bucket?.

Yes, I mean, some of it is CARB-X for sure, but we expect new research contract to drive the majority of that..

Okay. I also wanted to ask on the sales force. Want to say you had 15 or so people direct in the field.

Can you just give us a sense on whether or not you're comfortable with that level throughout this year or do you see opportunities to potentially add to your number?.

We probably will not in any material way add to that number, one or 2, maybe, but there are other channels we're looking at where we could add one or 2 people. And we're just not prepared to talk about that yet..

[Operator Instructions]. Our next question comes from Steve Brozak of WBB Securities..

I've got two and then I'll just hop back in the queue. The first one, a couple of weeks back or maybe it was even a month now, the New York Times had a front-page piece talking about Candida auris and how it has pretty much become a ubiquitous pathogen.

And I remember going back that you had collaborated with CDC under detection system directly on this pathogen.

Can you give us any kind of color about that? And then I've got another question in terms of your model?.

So, yes, we have a research use only Candida auris product, and you're exactly -- your memory is good, Steve, that was developed in a collaboration with the CDC, and was validated by the CDC and even published by the CDC. High sensitivity, direct from sample, and that product is then ready [indiscernible] should hospitals need it.

We've had interest and potential usage here in the US that tends to be more of a crisis type of thing that if a hospital got hit with it, they're going to need it and they are going to be really happy that they have the T2Dx in place as a customer to be able to use it.

And we also see an even higher interest level in that product in Europe where Candida auris has been a bigger issue and even have customers that are planning to adopt in the very near future..

And just to follow-up on that. How do -- again, obviously everyone is aware of the sensitivity specificity, more importantly, the turnaround time.

But how does that compare, because from what I understand, this bug is particularly difficult to culture and frankly treating it is another problem, but even just basic culture, how does that compare to that? And then I'll ask about on your model..

I'll let Tom Lowery take that one..

Yes. So the time for this culture for Candida auris and the CDC paper is a 14-day process, and then our system is 3.5 hours to get to the result, sensitivity, equivalent, fewer better than culture, and in fact the sensitivity of our Candida auris Panel is 100x more sensitive than any PCR based tests out there. So there's a lot of enthusiasm.

I talked to several hospitals about using the test, not just in blood, but also for surveillance swap. That's what it is validated for in that publication where they basically survey the patients.

Today [indiscernible] where they are swapping other patient in the ICU once a week, and then they have to wait at least to get the results back about whether the patient is colonized with Candida auris.

And so our test provides an opportunity to get them same day results to make decisions about isolating patients and then decontaminate which represents a significant value opportunity for hospitals..

Now, going back to your model, because obviously you -- with the fungal pathogen detection system, you were solidly in the hospital. Now you're in the front of the hospital looking at the emergency rooms.

And just for purposes of edification, can you go over the differences in terms of reimbursement, the CPT difference with the DRG and how important that is as far as how you've looked at it for the purposes of each of these hospitals and how they recognized revenue, as much detail as you can go into it? Because obviously this is now a situation where the placements become even more critical and focusing on that..

So for all in-patients in a hospital, they are covered under DRG code, which for sepsis there are multiple different codes depending upon how the patient and the type of infection, but it's generally a $35,000 or thereabout lump sum reimbursement that covers I'd like to stay in the hospital, the ICU, all your diagnostics, all your drugs, it's just one lump sum that goes to the hospital.

And T2Candida and T2Bacteria plays really well in that DRG code, because the data and there are many, many sources of this and we have multiple data points with T2Candida, and now starting to emerge T2Bacteria.

When you detect the patient, you get them on the right drug earlier, they are typically spending 4 to 7 fewer days in a hospital, they are spending typically 3 to 6 fewer days in the ICU.

This -- negative test results allows for the de-escalation of drug, so the drug savings and it all typically nets out to about $20,000 to $25,000 in savings for the hospital, and that all drops to the bottom line of the hospital, also the test that costs $150. In the ED you have the same dynamic.

If a patient is positive, they go straight into the hospital. They are now under a DRG code, but the economic savings are even greater in terms of reduction in length of stay and drugs, because you have put them on the right drug at the moment that they are entering a hospital.

The second benefit, which is what I think you're referring to is, if a patient is tested in their negative in the emergency department and they are sent home. There is another roughly $215 of reimbursement that the hospital gets for a test that costs $150.

So it's an added benefit, that additional $215 is not available for in-patients but is available for emergency department patients who are not admitted to the hospital..

No, you just -- you have just described exactly what I'm looking at here in the value proposition for these hospitals and obviously the systems have decided to take this up. So again, congrats on the kickoff, looking forward obviously to the continued growth. And again, thanks for taking the call, gentlemen..

Our next question comes from Paul Knight with Janney..

Hi, guys, this is actually Casey on for Paul. I was wondering if you guys had any updates on how T2Lyme is coming. I know on the last call, it was mentioned that enrollment ramps up in the spring and summer seasons. Do you think we could possibly see an FDA submission by the end of this year? Thanks..

Yes, great question, Casey. So enrollment has just commenced.

The sick season is upon us, it's not out of the question that we could see a filing by the end of 2019, but it's certainly not something that we can tell at the moment, because they will probably be dependent on enrollment rate and then pulling all the data together, which will take some time as well..

Our next question comes from Yi Chen of H.C. Wainwright..

I just have a question on some of the bacteria contracts that you guys talking about.

It seems like at the end of the first quarter, you were really getting a nice volume ramp up from the 3 to 6 month validation tests and I was wondering how many more we might see in the second quarter and then how the 6 to 12 month sales cycle will also dovetail in with those to maybe provide even higher volume going into later in the year?.

Yes. No, great question, Yi. So, our expectation in Q2 is that, look at another 12 to 14 contracts in instrument placements. We expect to have a number of new accounts come online in testing patients which will build on that recurring revenue stream.

We actually expect the number of accounts in the US that are testing patients with T2Bacteria by the end of the second quarter to be about double the volume we were at, at the end of the first quarter. So, it's progressing nicely. We've already had a couple of accounts go live this quarter already, meaning, in the second quarter.

So things are looking very positive and the results from the field are very encouraging..

And it seems like you have made a lot of really good progress on some of these larger hospital systems.

I'm wondering if you can break down maybe in a percentage basis or round numbers in terms of how many of these larger hospital systems were part of these ramp up in the first quarter and how many might continue going into later [Technical Difficulty]..

Yes, I would say that the typical hospital that we're closing and it's a mix. But they're typically hospitals with somewhere between 300 and 600 beds, so they are on certainly the larger size. In some cases we're getting into the much bigger systems and even some of the academic centers, but it's widespread.

The bigger differentiator is what we talked about earlier, do they have an active stewardship committee and that is somewhat random across whether it's a big hospital or a smaller one. We're typically not focused on less than 300-bed hospitals. But if they come to us, we certainly talk to them and could be in sales cycles with them as well..

And then just a final housekeeping question. You had mentioned previously that you anticipate the bacterial panels to cover about 75% to 85% of the revenue.

Just wondering if that's still your guidance going forward and that's versus the Candida Panel?.

Yes. We have no change to that guidance and at this point, we feel very much on track with that..

Our next question comes from Soumit Roy of JonesTrading..

Congrats for -- on the progress, especially against the first quarter headwinds.

Just a quick touch -- touching back on the T2Lyme program, is it still -- like what's the size of the enrollment? Is it still 300 patient you are thinking and where are we in this process and the data, should we expect third quarter or very close to any filing, to get a sense of where we are?.

Yes, sure. I'll let Dr. Tom Lowery answer that..

Yes. So those are numbers that we're working it on our hands in terms of patients -- individual patients from our trials and I'm not going to commit to timing as to when we are going to share that data. Lyme analysis or the Lyme clinical trial data is very important because you have to determine what true infections do to the patient.

So it takes some time to adjudicate all the patient records and so forth. So I'm not going to comment on when we will be releasing that data..

And this is -- could you comment like how many centers you have or--?.

Sorry, go ahead..

No, because on the ClinicalTrials.gov, it's just one center listed, so trying to understand how many you have?.

So we have a couple of centers that we are actively enrolling. We've also sourced samples from a bunch of other centers that aren't listed on ClinicalTrials.gov. So we're actually, in terms of individual unique patient samples, we're very close to what our target is. And so we just got to continue getting more patients in this Lyme season.

And then as I mentioned, the key thing here is how the data gets annualized and we'd see how that all works out once we unblind the data. So, that's why we're not committing to a time when we share that data. That's not as simple as a blood stream infection type of stuff..

And to explain that a little bit more, we are -- Lyme disease, 90% of Lyme cases go undetected and so this adjudication process that Tom's referring to is very tricky to prove a positive as a true positive and negative as a true negative when the other diagnostics we are comparing to are so weak.

And so we are working with the FDA on that, but we know that -- as we certainly know that going into the trial. But that's the tricky part of this study is really trying to come up with critical ways to determine the true state of the patient..

Just, I mean, I will add color to that just to help you appreciate that there's indications that we are pursuing, there is 2 different types of indications and one involves patients that had a rash and another indication that's in our protocol and patients that do not have a rash -- do not have a EM rash and that's actually a very high value patient to be able to report results on.

Those are the ones that you're not sure what is causing their ailment and having the test, like a T2Lyme test, to identify those patients without rashes would be very valuable. However, pursuing that indication also adds complexity to the clinical interpretation and the clinical reference for all of these patients truly infected.

So we have both of those arms and we've collected already these samples in both of those arms from both the sites that I listed, but also from other studies. And so, yes, that's just the dimension here. It's not as simple as you have a positive blood culture in every one of these patients..

Yes, and just to add to that. It's estimated about only 25% of patients will have a rash and 75% will not..

Our next question is a follow-up from Mark Massaro of Canaccord Genuity..

So, John, I appreciated the example you cited about the cancer patient that was resistant to vancomycin and the therapy was changed. I think that examples like that can be pretty powerful, but I'm also curious as far as how you expect to sort of evangelize these messages.

So can you just speak to any initiatives that you're planning marketing-wise, sales-wise that can help sort of spread the news about the clinical utility of the test and how we can drive value?.

Yes. We think that's critical to hitting that tipping point, Mark, is gaining those publications, the data, stories, the anecdotes, that's a major part of our initiative from a marketing standpoint. We certainly use the shows, we talked about ECCMID, we got ASM coming up.

I will actually be at another important conference next week called MAD-ID which is focused on Pharm Ds and working hospitals, we will have a major presence there and we're telling, our medical science liaison team are out there telling these stories.

Most importantly, we have customers and key opinion leaders that are out there telling those stories, and we're working with a number of institutions even as they go through some of these early validation phases to help them take the data that that they're coming up with and publish it and print it and get it out there.

Really driving adoption is all about convincing people that this really works and the publication of the FDA clinical trial data, which we hope is going to be really soon and believe will be really soon, will be a major validation point as well.

But those validation points, those anecdotes are really important and really at the heart of our marketing effort..

Okay. And then obviously your platform can be used in areas certainly beyond infectious disease. In the past, you've certainly had success with partnerships. Can you just give me a sense on whether or not you're still having dialog with other parties and what you're doing internally to try to drive demand for additional use cases..

Yes. So we have a Head of Corporate Development, who role is squarely focused on that initiative. We have a good pipeline, some of those initiatives are going broader in the field of sepsis diagnostics.

Some go outside of sepsis diagnostics and some of that activity should correlate with some of the growth we expect to see in research revenue later this year..

This concludes today's question-and-answer session as well as today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..