Greetings. Welcome to the T2 Biosystems Fourth Quarter 2019 Results Conference 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 Philip Taylor, Investor Relations for T2 Biosystems. Thank you, Mr. Taylor. You may begin..

Thank you, operator. Thanks for joining us for the T2 Biosystems fourth quarter and full year 2019 financial results conference call. 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 these statements, including the risks and uncertainties described in T2 Biosystems' Annual Report on Form 10-K filed with the SEC, 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 Sperzel.

John?.

Accelerating our sales; improving our operations; and advancing our pipeline. Starting with our first priority, accelerating our sales. We're making significant changes in our commercial game plan to improve sales execution.

In January, we appointed industry veteran Tony Pare as Chief Commercial Officer, and he leads all commercial functions, one team with one mission to accelerate sales. Under Tony's leadership, we will focus 80% of our direct commercial resources on the U.S. market.

We will change our hospital targeting to focus on departments with high-risk patients like oncology, transplants, and intensive care. We will focus more on adoption of our technology and increasing the utilization of our tests as these are better metrics for our business and less on the absolute number of the incidents we place in a given quarter.

We will expand our messaging within the hospital to place greater emphasis on clinicians as they’re essential to integrate T2 testing into sepsis protocols, which will drive adoption and increase test utilization. We will continue to expand access to hospital accounts through group purchasing organization agreements in U.S. market.

As previously mentioned, we gained access to nearly 4,000 U.S. hospitals through a breakthrough technology contract with Premier during 2019. To further expand access and contracted pricing in the U.S. hospitals, we're in discussions with other group purchasing organizations and anticipate adding new contracts in 2020.

Previous commercial plans and sales incentive plans were focused on the instrument placements, resulting in an installed base of T2Dx instruments with low test utilization. At the end of 2019, our worldwide active in installed base of T2Dx instruments was 91 units, of which 40 were in United States market.

The test utilization among the active T2Dx instrument installed base in the U.S. market was approximately $50,000 annually, which we aim to increase to approximately $100,000 by the end of 2020. Our top customers have achieved annual test utilization exceeding $200,000 per instrument, which is our long-term target.

To support this test utilization target, we have aligned our U.S. sales strategy and sales incentive plans to emphasize adoption and test utilization. Outside the U.S., we will maintain a small team to support a network of commercial distribution partners.

We believe there are opportunities to strengthen our international business by partnering with one or more strategic commercial distributors. We're in discussion with several potential partners and anticipate entering into the first such agreement during the first half of 2020.

Given my commercial experience, I will be personally involved in our sales and marketing effort and expect to support our sales team in targeting and closing key partnerships. Moving to our second priority, improving our operations.

To achieve short and long-term success, our cost structure must reflect not only our aspirations, but must also be grounded in today's reality. We must make smart investments in the areas that best support our strategy, while applying greater discipline to reduce spending in how we manage expenses in all other areas.

In 2019, T2 Biosystems occurred annual operating expenses of $43.6 million, and cost of product revenue of $16.8 million. These figures do not reflect the size and scope of our current business, and must be reduced.

We will aggressively attack our cost structure, including operating expenses and cost of product revenue, and we anticipate significant change during 2020. We plan to be bold in reducing our cost structure and believe T2 Biosystems will be a stronger company as a result. Moving on to our third priority, advancing our pipeline.

Early, I mentioned our intent to build on our technological superiority.

In 2020, we're focused on advancing programs funded by the $69 million milestone-based government contract awarded in September 2019, including the next generation instrument and expanded panel and a novel biothreat panel, while also maintaining focus on expanding our current portfolio offering with T2Resistance Panel.

Our T2Resistance Panel, which detects 13 antibiotic resistance genes in gram-positive and gram-negative pathogens, recently received CE Mark and is available in the U.S. as a research-only test.

Multiple sites are currently conducting studies on T2Resistance, and we're in dialogue with the Food and Drug Administration regarding the design of a pivotal study to secure FDA approval.

We're excited about the next generation instrument and comprehensive panels designed to cover greater than 99% of all blood-borne bacterial infections including pan gram-positive and pan gram-negative results for greater than 250 species, in addition to all blood-borne antibiotic resistance threats identified by the Centers for Disease Control and Prevention.

This would be another transformative development in the management of sepsis with the potential to replace most blood cultures performed for species identification and susceptibility results. Going beyond sepsis, but also under the government contract, we're developing a novel biothreat panel.

This is expected to be the first ever ultra-high sensitivity direct from blood panel for the detection of multiple biothreat patents and toxin genes. Now, I'll turn it over to John Sprague for an update on the fourth quarter financial results and additional details on our 2020 guidance..

We expect full year 2020 total revenues of $14 million to $17 million, including product revenues of $8 million to $10 million, and research and contribution grant revenues of $6 million to $7 million. We expect approximately 40% of revenue to be in the first half of the year and remaining 60% in the second half of the year.

We expect to close 30 T2Dx instrument placement contracts in 2020, aligning with our focus on driving test utilization in the current installed base along with new strategic customer placements. Thank you. And back to John Sperzel for closing remarks.

John?.

accelerating our sales; improving our operations; and advancing our pipeline. We look forward to providing updates on our progress towards these throughout the year. We'll now open it up to questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Paul Knight with Janney Montgomery Scott..

Hi, guys. This is Mike Gokay on for Paul.

On the NTAP approval, correct me if I'm wrong, but the Add-On Payments is only for patients admitted to the ICU? And then if so, how does this funnel down to the emergency room and driving testing volume there? Is there -- is that just another validation in technology to kind of market to the stewardship committees?.

So, this is Tony Pare, the Chief Commercial Officer. The NTAP payment applies to any of the sepsis DRG. And so, they apply for that payment when they utilize the test. It may or may not flow down to the laboratory but it does keep the hospital whole in terms of our test..

And then, on the line, any timing update on the selection of a commercialization partner, and are you still on track to launch that in the spring sometime?.

No update on the actual selection of the commercialization partner, but we anticipate that -- as John indicated that we will have somebody lined up in the first half of the year..

Perfect. Thanks, guys. .

We’re talking about the international business, just to be clear..

Our next question comes from the line of Puneet Souda with SVB Leerink. .

Hi, guys. This is Scott Mafale on for Puneet. So John, welcome aboard. Great to have you. I think, it's -- I think you touched on it in your prepared remarks that we kind of agree that can commercial execution has lagged here, despite T2 having a very powerful technology and FDA approval of all the products.

So, what are the near-term steps that you see to kind of line up the commercial sales force with the promise of the technology?.

The first thing we did was appoint Tony as Chief Commercial Officer. It was a position that was frankly lacking in the Company. Previously, all of the commercial functions reported to the CEO. And where that can work in some instances, CEO has many responsibilities throughout the day, week and month.

And I wanted someone leading our commercial effort who wakes up every day and thinks about one thing, and that is commercial execution and success. And Tony is very experienced commercial executive. So, the first thing we did was appoint Tony.

The second thing that he did was sit with the team and lay out a plan on how we're going to drive adoption and utilization. As I mentioned in the opening remarks, we're going to focus less on the absolute number of instruments that we place. It's simply not the best metric to measure our success at this point in time.

Over time, it would become more important, but we need to demonstrate that we have a larger number of the accounts that are fully adopted to system and are utilizing it on a regular basis. We have a number that are, but it's not a big enough number, and Tony and his team are going to drive that and focus on that..

Got it. And I want to touch on the key priorities for you for clinical studies in 2020. We were just wondering, as a national clinical study highlighting the kind of the outcomes of T2’s products would help drive more adoption in the market..

So, Tom Lowery is here with me, our Chief Scientific Officer. I'm just going to have him talk about the studies that we have so far and what plans are..

Yes. As we've spoken about last year on our calls, we have several interventional studies going on, some it are multi-center, some of it are single center, both here in the U.S. and abroad, particularly for T2Bacteria. And so, these studies are going to carry on.

These are across the variety of patient populations, particularly those that we find as priority patient populations for T2Bacteria utilization and the ICU patients that are at high risk of bacterial infections. So, we’re excited about the early data that has come out.

Actually, a lot of that data is what we used with CMS and our NTAP discussions last year and it continues to build. There will be quite a bit of data to share at ECCMID this upcoming year in April. And we’ll be showing more performance with T2Bacteria in interventional manner; it’s very compelling..

Got it. Very helpful. And then just one last one for me. In your guidance, you talked about driving overall utilization from a $100,000 to $200,000 by the end of 2020.

I was just curious, like, what are the driving factors behind that? Is there an inside sales rep, investments that you are going to put into marketing investments, what are the driving factors for that utilization growth? Thank you..

This is John Sperzel. Just to maybe clarify, what we said was the average utilization in our active installed base in the U.S. today is about $50,000, and our goal is to drive that to a $100,000 by year end. And the key drivers of that are the focus of our sales effort. In the past, we've been selling to more than 5,000 hospitals, trying to in the U.S.

market. We're going to have a much more focused effort in terms of targeting. We're going to evolve the clinicians in the sales process. That's the most important part. If we're in the microbiology lab, which is an important part of the sales process, we’re too far downstream.

We need to impact the decision at the point-of-care when the clinician is standing in front of the patient. And so, Tony and his team are going to be focused on targeting the right accounts, they're going to be focused on going to the right places.

And we identified a few where patients are more susceptible, call them high-risk patients, oncology, transplant, ICU sort of generally. And the compensation plans, the strategy are all driven around test adoption and test utilization. That's why you saw in the guide, a lower number of instruments that we might have guided to historically.

That's because we're going to focus on adoption and utilization..

Our next question comes from the line of Ben Haynor with Alliance Global. Please proceed with your question..

Maybe this is for Tony.

But, just thinking about the 30 account goal for this year, what do you envision in terms of a new account looking like in the U.S.? Is this something that both T2Canada and T2Bacteria, is it a certain specialty, what seems like the area that you'll be able to drive adoption and utilization on the new account front?.

Yes. So, the focus is on those high-risk patient populations and then specifically on the hospitals that serve them, right? So, there are a number of hospitals that serve the oncology patient populations and transplant patient populations, but many hospitals, almost all hospitals have an ICU as well. And the ICU will be a focus for those 30 hospitals.

We will target the largest of those hospitals that have ICUs. Obviously, these are ones that have 500 or more beds to place those particular instruments.

But what it is very important is laying out the game plan with those accounts when we are in front of the sepsis committees, in front of the decision makers, identifying the folks that are involved in the decision-making process and laying out a plan that gets them to routine usage.

And in terms of Bacteria versus Canada, those patient populations that I just described are in the ICU in at risk of bacterial infections that will be a primary target for us, but they're also targets for fungal infections as well, especially if you have those that have implants, the central lines and so forth..

And then, just maybe on the cadence of the grant contribution revenue for 2020 that you envisioned. Are there any things that we should think about in terms of tracking for the first half of the year versus the second half or quarter-to-quarter? Any color you could provide there would be helpful..

We look at that, the grant contribution revenue to be linear quarter-by-quarter..

Our next question comes from the line of Steve Brozak with WBB Securities. Please proceed with your question..

Around the adoption and utilization focus that you've got, it seems like there's two specific streamlining events that you're looking at. The first one has to deal with specifically the decision makers that are around and focused on adoption of the product.

Can you give us some insight into that? Because I'm kind of curious, it seems like you in the past have had to get too many decision makers in there.

What are you bringing that down to? And the other one involves the decision, the streamlining on clinician decision?.

Yes. So, the decision makers unfortunately are different at different hospitals. So, the key task that the regional account managers have when they visit a hospital is really identify who's on the sepsis committees and who are the folks that can be champions, as well our primary decision makers in that particular hospital.

In some cases, it's the infectious disease clinicians, it is the Pharm Ds. The laboratory director obviously has a big role to play. But I don't want to say there is a single game plan for every hospital.

That is where we need to spend the time and build that game plan, build that project plan for that particular hospital and build the business case, actually work side by side with your champions and with the folks on the committees to build a business plan to implement the T2 solution within that hospital and get it to routine use..

Okay. That leads me to the next streamlining question because obviously a clinician is compared to standard of care that exists with culture, and now looking at you as standard of care. Can you give us an appreciation for how you're going to be able to get quicker adoption and quicker utilization on that front? And then, I'll hop back in the queue.

Thank you..

Yes. So, quicker adoption means that the folks that are involved or need to be involved in ordering the test are on board with your program, right? So, when it comes to post culture test, many times it’s the laboratory, that director that makes the decision on which post culture test that is utilized, whereas we touch upon the clinicians.

And really, we need to be in the position to have the clinicians request the T2 test in order for it to be run. And we have some good cases, good hospitals, where T2 is now in routine use because the clinician population has been educated.

Once we have it in routine use, once it becomes part of that sepsis protocol, then it becomes a lot more automatic in adoption ramp..

And just a quick a follow-up on that. So, I guess they're getting direct response in terms of better outcomes or quicker decision-making tools. Is that what you're seeing as the benefit, or how do they reinforce that? What's the virtuous reinforcement is provided on that? And again, I'll hope back. Thank you..

Yes. Time to appropriate therapy. So, it's the time by which they -- between the time they take the sample and the time to get the result back and can now apply appropriate therapy. And this is the primary endpoint that we drive when setting up the evaluations through their account, and we'll try even harder in the future..

Our next question comes from the line of Soumit Roy with JonesTrading. Please proceed with your question..

A question on the Lyme Panel. I didn't hear and you mentioned about it. So, is that still in the cards of 2020? Is there -- are we going to see any data from it? If the complexity is around control arm, are you going to compare it with the clinical outcome? So, just your thoughts around that.

The second is if you can provide us some guidance on the cost structure, should we think about trimming -- for 2020 trimming on the cost of goods and SG&A and keep the R&D kind of similar to 2019? Thank you..

Let me start on the cost. I'll make a short comment on Lyme, and then I'll ask Tom Lowery to give us more color on Lyme. As far as cost savings is concerned, as I mentioned in the prepared remarks, our cost structure today doesn't reflect the size and scope of our current business. And we're going to attack that like never before.

We've initiated a plan to reduce the overall cost structure, including both cost of goods and our operating expense. We're going to look at every dollar spent, including reducing our real estate footprint. We're sitting in several buildings today and there is certainly an opportunity for us to consolidate that.

And we're also going to look at partners as a way to control our operating costs and fuel commercial growth. We mentioned, the opportunity for a strategic commercial partner in Europe. And then, I've been here six weeks. We're working on a comprehensive plan, and we'll share with you in the near future.

So, at the moment, we're not providing any other guidance on operating expense. So, as far as line is concerned, one underlying theme that you've probably heard throughout the conversation today is about focus. And we have enormous opportunity in front of us in terms of the identification of sepsis-causing pathogens.

That does not mean we're not going to do anything else. But, if we’re going to say that we're going to be focused, we have to be focused. That said, there is an opportunity to monetize the work that we've done so far with Lyme and not lose a place with the FDA and that's what we're working on.

So, I'll just let Tom to give you a little more color on that..

As we've talked about on our last earnings call, we continue to work with the external laboratories to select a partner to proceed with a pathway to be able to commercialize line in the near term as the LDT. And the good news on that in terms of validation is you certainly don't need to do any kind of outcome type of studies there.

And basically put your trust in the existing channel and lab that already has the commercial access capabilities for line testing. That’s what our near term focus is. This doesn't preclude the longer term opportunity being able to pursue an FDA clearance..

There are no further questions in the queue. I'd like to hand the call back over to Mr. Sperzel for closing remarks..

Thanks for joining us today to review our fourth quarter results. Progress made in 2019 and our plans for 2020. I'd also like to thank the entire team T2 Biosystems teams to for your hard work and continued commitment. We're excited about the future. Look forward to changing the paradigm in the treatment of Sepsis. Thank you..

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