Q3 2020 NanoString Technologies Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Nanostring third quarter 2020 operating results conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you would need to press star one or telephone. Please note. This call is being recorded if your core any further assistance. Please press star zero.
I will now hand, the conference over to Mr., Doug Farrell, Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you operator, and thanks for joining us today on the call today is Brad Gray, our president and CEO as well as Tom Bailey our CFO.
Earlier today, we released our financial results for the third quarter fiscal year 2020.
During this call we may make statements airport looking including statements about financial projections.
Because the COVID-19 pandemic.
Just again future collaborations future business growth trends and related factors.
Aspects for expanding and penetrating our addressable markets, our strategic focus and objectives and the development status and anticipated success of recent planned product offerings.
Forward looking statements are subject to risks and uncertainties many of which are beyond our control.
Putting the risks and uncertainties described in Iraqi filings.
Our results may differ materially from those projected we undertake no obligation to update these forward looking statements.
Later in this call Tom will be reviewing our financial results consistent with our most recent earnings release, we are prepared as a supplement to our results. According to gap selected non-GAAP or adjusted measures that we believe make it easier to interpret that compare for national results SAP.
This afternoon's press release includes details regarding the definitions and calculations of these non-GAAP measures reconciliation of non-GAAP measures to the nearest comparable GAAP measure as well as a discussion.
Limitations rationale for using these measures throughout this call all financial measures would be GAAP unless otherwise noted.
To aid analysts and investors in building their models, we have posted exhibits under the financial information tab of our Investor Relations home page that include a presentation of our non-GAAP or adjusted measures other selected financial data for each quarter and for the.
The full year 2019.
Later this month, we participating into virtual health care conference rooms that as people Health care Conference and credit Suisse and it is.
And as you may have seen in our press release today, we're excited to announce our virtual Investor day event, which will be held Tuesday December 1st.
To provide updates as the product road map commercial initiatives and the development of spatial biology market.
I look forward to having a chance to speak with many of you there with that let me turn the call over to Brad. Thanks, Doug Good afternoon, and thank you for joining us today.
Spring is a leader in spatial biology, and we are addressing a large and growing okay with you.
Potential across discovery translation and clinical diagnostics, we have tremendous momentum as evidenced by the strong orders for our Geo mix DSP instruments, increasing demand for humans consumable sales and a rapidly expanding funnel of sales opportunities during the third quarter, we generated over 20% pro forma run.
Turning to gross despite ongoing pandemic related headwinds we preannounced. These third quarter results on October six.
Yes, we completed a $230 million equity financing it gives us the resources to fund our current growth initiatives as well as to make future investments to help extend our leadership in spatial genomics.
We have never been in a stronger position or more excited about our growth prospects.
During the call today I will give you more specifics on our Q3 operational results and update you on progress towards our strategic objectives for the year. I'll, then hand off to Tom You review the details of our financial results and outlook for the balance of 2020.
During the third quarter, we maintained commercial momentum in spatial genomics generating new orders for more than 25 Geo mix instruments exceeding the guidance we provided during our August call. The.
The leading indicators of future Geo mix demand is positive across the board, including a doubling in the volume of projects over the prior year, a steady stream of Geo mix publications and a torrid pace of lead generation through virtual conferences and events at the end of Q3, we had more than 150, Cuba.
A little Geo mix.
It was more than 120 instruments shipped about 100 installed at about 90 genome excites train.
The rates of genomics instrument shipments installations and training all improved in Q3 as labs increased research activity levels compared with the second quarter.
We're seeing geo mix consumable utilization ramp up as we install systems and training sites and we reported $1.4 billion Angiomax consumable sales in Q3 more than double the prior quarter.
Our core encounter business had been recovering nicely from him the pandemic driven slowdown growing sequentially by more than 50% compared to Q2 in Canada revenue was down less than 5% on a pro forma basis compared to the prior year versus the roughly 30% year on year dip we experienced during the second quarter.
And kind of demand improved as research activity increased over the lows of Q2.
Our sales team estimates the globally about 25% of our customer labs are fully open while the remaining 75% are operating at reduced capacity.
Laboratories have not increased their activity levels meaningfully meaningfully since August and we expect most labs to continue operating at reduced capacity through the end of the year.
We have not seen rising COVID-19 infection rates in the U.S. and Europe lead to a slowdown in research activities, but we're monitoring the situation closely and factoring that dynamic into a cautious Q4 outlook.
Now I'd like to provide an update on our four strategic objectives that we laid out at the beginning of the year.
Our first strategic objective is to accelerate the adoption of genomics DSP and translational research work encounter some prefer readout modality.
Our leading translational research remains large and accounts for the vast majority of the 150 plus you don't see a few orders weve taken through September Thirtyth.
15 of our 25, plus Geo mix DSD system orders in Q3 were from translational researchers planning to use the encounter based readout.
And tower based read out is well suited to the needs of researchers who are focused on running targeted protein panels offering a simpler work flow and low cost per sample we.
We recently expanded our market, leading menu infringing content launching three new protein modules readout using and count.
This brings the total portfolio geometries protein assays to over 300 validated antibodies.
We continue to see strong demand for genomics encounter bundles, demonstrating that we are penetrating the translational market deal on our pro sports installed base of encounter systems.
Our translational customers continue to publish at an impressive rate and since our August call. There have been six new Geo mix papers for a total of 29 cumulative she'll next publications.
The body of peer reviewed genomics data is growing on pay similar to the early days of single cell genomics and we believe this is helping fuel demand.
In September we announced the formation of the Gentleman's translational leadership network that is focused on pioneering the application of spatial biology, and large translational research studies, developing and sharing standardize practices to facilitate collaboration between groups researchers across the globe.
Next week, we'll be participating in the association for molecular pathology Congress, where we are hosting a workshop focused on the diagnostic potential geo mix well the clinical market is not expected to make a meaningful revenue contribution over the next year. It does provide an exciting long term growth opportunity for spatial biology.
We believe will arise naturally out of our success and translational research.
Our second strategic objective is to expand the adoption of Geo mix into discovery research leveraging the platform. Its next generation sequencing readout capabilities.
Interest in skilled mix amongst discovery researchers is being driven by the unique capabilities of the system, which includes full automation compatibility with formalin fixed paraffin embedded samples and the ability to profile both already in proteins using the massive installed base of next generation Sequencers.
In August we launched the first Ngs based consumables for genomics DSP, the cancer Transcriptome Atlas for CJ, which profiles more than 1800 ornate and spatial context.
In the third quarter about 10 of our genomics DSP orders came from researchers who plan to make ngs their planar readout for genomics.
At Discovery research are interested Ngs has increased we are expanding opportunities for prospective customers to test drive geo mix using their own samples beginning with our technology access program or tap.
During the third quarter more than half of the record 75, plus half projects or used ngs as the readout instead.
In September we expanded our top program to include our whole transcriptome mass say, we're WCS, which is helping to build the commercial demand and momentum ahead of WCS commercial launch next year.
Yes, I say allows researchers to profile every gene in the human transcriptome in an unbiased manner, providing a powerful discovery tool that can be used to probe any aspect of spatial biology and human tissue.
To complement our internal talent, we formed an external service network called the Geo mix Premier access sites, consisting of eight laboratories around the world that will provide customers with easy access to run their own samples, allowing them to use that data to write grants and budget request to purchase their own.
On the genomic system.
Finally, as we announced this morning, we have expanded our ngs readout capabilities to include our industry, leading portfolio approaching panels customers using our cancer Transcriptome Atlas will now be able to add complimentary protein content, including more than 50 protein targets that are focused on immuno oncology.
Applications with the addition of protein capability to our already offerings the ability to analyze markers in virtually any tissue type. We now offer the most versatile and diverse portfolio of content for discovery research and the emerging field of spatial biology.
Our third strategic objective is to maintain the momentum of our encounter business by expanding our installed base, while maintaining consumable pull through.
The third quarter, we generated healthy instrument demand and grew our installed base to approximately 915 encounter systems, an increase of 12% compared to a year ago.
Well about 20% of our encounters instrument sales were driven by Geo mix bundles.
The majority of placements were motivated by traditional gene expression in the field of oncology immunology and neuroscience.
Immunology as an era of area of particularly strong interest driven in part by new encounter panels. For example, we're seeing strong interest in our new host response panel that allows scientists to study the immune system response, the Sars koby to or any other pathogen.
This kennel panel can be used in combination with our COVID-19 genes by gap, which has been ordered by more than 75 customers to date.
Encounter gene expression studies of COVID-19, now had been published in both New England Journal of Medicine, and science reaffirming the unique position of encounter to generate keep translational results on hard to analyze FSP samples.
Our fourth strategic objective for 2020 is to select the key applications for our high potency platform.
As we mentioned in August our team has been exploring potential applications for this unique sequencing chemistry while.
Well for the time being these remain confidential we plan to provide an update on the direction of this program and our overall product development pipeline at the virtual Investor day that we'll be hosting on Tuesday December 1st.
We'll provide details shortly after the call.
Now I would like to turn the call over to Tom to review the details of our operating results for the third quarter.
Thanks, Brad and thanks, all for joining us today I'm excited to walk through our results from this quarter, which are strong top to bottom. Despite a challenging operating environment for the third quarter of 2020 and product and service revenue was 30.1 million representing pro forma year over year growth of 22% and sequential growth of 42%.
Recall that our pro forma measures reflect the December 2019 transaction with Vera site as if that transaction occurred at the beginning of the comparative periods pursuant to the terms of the various like transaction. We now recognize about one third of the previous Prosigna revenue over the same unit sold.
As Bret noted genomics demand was strong in Q3.
Well mix revenue recognized was 8.9 billion 7.5 million was derived from approximately 30 instruments shipped and 1.4 million was derived from consumable sales encounter instrument revenue was 5.4 million about 8% lower compared to Q3, 19, but showing a strong recovery with the sequential growth of about.
50% as compared to Q2.
And kind of consumables revenue has been more impacted by lower lab activity. However in Q3, we began seeing substantive recovery.
Three encounter industry, then kind of consumables revenue was 12.3 million, 9% lower on a pro forma basis compared to Q3, 19, but sequential growth of 55% compared to Q2.
Our Q3 and kind of insight into our consumable sales implies annualized pull through was about $55000 per system. It's.
About 90% of our pre pandemic pull through guidance in a substantial improvement over the $37000 annualized pull through we experienced during Q2 sales.
Service revenue derived from both and counter NGL mix related services was about 3.6 million for the quarter, 16% year over year growth and 20% sequential growth driven primarily by increasing Geo mix DSP type projects and increased service contract revenue due to our growing instrument installed basis.
Turning now to margins and expenses I'll be providing results on a non-GAAP or adjusted basis, which removes the impact of stock based compensation depreciation and certain one time items.
Please refer to our press release as well as the exhibits we have posted to our Investor Relations Web page for detailed information on our non-GAAP or adjusted measures, including adjusted EBIT da are prepared.
Q3, adjusted gross margin on product and service revenue was 55% about 600 basis points lower than Q3 last year about half of that change was driven by the lower prosigna pricing, we received for the bears type transaction.
Pro forma for the beer side transaction adjusted gross margin was about 300 basis points lower primarily due to greater instrument revenue as a percentage of our total sales mix with the acceleration of Gelnique sales.
We reduced operating expenses compared to the quarter a year ago. Adjusted R&D expense was 12.7 million a decrease of 16% year over year the.
The decrease was driven primarily was driven primarily by reductions related to the parasite transaction and the conclusion of certain collaboration agreements offset in part by expenses incurred for continued Geo mix product development efforts.
Adjusted EPS Gionee expense was $16.6 million, a decrease of 16% year over year. The Q3 SGT expenses decline was driven primarily by reductions related to the parasite transaction as well as expense savings realized from reductions and travel and trade show activities.
These savings were partially offset by our continued investment in Geo mix related commercial initiatives in particular investments made in our service and customer support group and its certain digital marketing initiatives.
Adjusted EBITDA loss was 12.7 million, an improvement of 33% as compared to the prior year and reflecting the combined impact of our revenue growth and lower operating expenses.
Turning to the balance sheet. We are pleased to have the strongest balance sheet Nanostrings history. After completion of a common stock offering last month, which we upsized due to strong investor demand.
The offering generated net proceeds of about 216 million, including these proceeds and cash and equivalents on hand at the end of Q3, our cash cash equivalents and short term investments balance is currently over 445 million.
Transitioning to guidance for Q4, we currently expect the product and service revenue of about $31 million to $34 million, which assumes lab activity levels that are approximately consistent with Q3.
This range assumes $21 million to $23 million of encounter revenue and $10 million to $11 million of Geotext revenue.
Our encounter guidance represents just over 3% sequential growth from Q3 at the midpoint of the range consistent with last year's Q3 into Q4 and counter sequential growth.
Our Q4 guidance range is wider than we typically provide reflecting current pandemic related recent uncertainty with infection rate setting New records in North America, and new Lockdowns in EMEA.
While our sales funnel remains strong October purchasing activity remained at levels similar to those observed in Q3, we are aware of a few specific examples of purchasing processes slowing down in Europe in recent weeks.
It has been true throughout the pandemic revenue in Q4, maybe negatively impacted as customers are unable to place orders are received shipments due to site closures.
Geotext revenue recognized might also be impacted by the pace of our service and support teams ability to install systems, a train customers, which is dictated by our own safety and operational procedures as well as those of our customers.
Against this backdrop, we are guiding for 25, plus new Geo mix instrument orders during Q4, approximately flat to our strong Q3.
Regarding expenses, we expect gross margins and operating expenses to be about consistent with what we recorded in Q3 now.
Now I'll turn the call back over to Brad for closing comments, Thanks, Tom Nanostring as our early leader in spatial biology, a rapidly developing field that will revolutionize biology, we generated tremendous momentum with our initial geo mix offerings among translational researchers and we're now leveraging mgs read out to rapidly.
And the capabilities of this platform to appeal to an even broader.
Set of researchers following our recent financing we believe we have the capital needed to both grow the sustainability and to invest in strategic growth opportunities. We look forward to our upcoming Investor day, who will share additional details on how we plan to put this capital to work organically within our innovative pipeline helping to further extend.
Our leadership and spatial biology with that I'd like to open up the line for your questions.
And at this time, if you would like.
Ask a question press Star <unk> the number one on your telephone keypad and Thats star for but the number one.
And our first question comes from Dan areas with Stifel.
That being guys. Thanks for the questions. Brad can you just kind of expand on the comment that Tom made a few minutes ago. Just in terms of lab access for installation and for training on your instruments. We've we've kind of gotten some varying comments from the different academically focused companies. So I'm just curious what your.
During two shaping up like if you look at us versus Europe, and the ability to get in there and and concept people up.
Thanks for your question, Dan, It's a very dynamic situation.
I'd say beginning in the last few weeks, especially as infection rates increased in Europe, we started to see some travel restrictions and complications begin to reemerge in Europe.
The we don't have service and support personnel for instance in every single country in Europe, we have people that have to cross borders to do installations, and trainings and preventative maintenance type work. So when we have quarantine procedures become mandated in places like Europe for comfort for Nanostring to.
Becomes complicating.
Becomes hard to send the service engineer from one country to another and then have to take that person out of the field or for 714 days of the quarantine post installation. So those are the kinds of complications that we're dealing with it is largely in Europe at this time and you know I.
I think we are.
Our guidance range of $10 million to $11 million for Geo mix basically assumes at the top end of that range that we continue to be able to install our and recognize revenue for genomic systems in a reasonably and disruptive manner over the next say eight weeks and the low end of that range really.
Why's that things get more complicated we're not in a position to.
We recognize revenue quite at the pace you had hoped.
<unk> land activity itself in terms of utilization of consumables has not slowed down we have not we.
October activity was consistent with Q3 it remain a.
It remains stable.
But we are watching closely are indicators to see if some of the same lockdown procedures that you are beginning to hear about in Europe keep people working from home rather than in the lab and whether that that plays through in consumables to be clear we have not seen that today, but we are cautious as we look at the rising infection rates.
Okay very helpful and then maybe on the encounter side.
Imagine a lot of the folks that are doing gene expression work on the instrument also have if you consider so what are you finding at this point are the factors that have lab labs running the encounter rather than doing an ornate experiment.
Yes said another way where are you winning and where are you seeing people choose other approaches and then maybe along those lines on the pull through that you are seeing with the encounter.
Obviously this year a bunch of factors playing into the growth equation with very exciting Kobe, but any reason why holding steady with double digit consumables growth wouldn't still be in the picture. If we just sort of think about normalized trends or what are the longer period of time.
Great.
Encounter has has always served the need of a set of researchers who value a very simple work flow a very high level of throughput and specific content. It's too soon to the biology of their interest. So for instance cancer is a feel were nanostring has.
As always had a distinct capability within counter based on the S&P compatibility the ability of process 48, or if you really dry that 96 samples today and on the basis of our very popular pancancer panels, we replicated that success in the field of immunology in neurology and really that's.
Where you see most of the encounter uptake that despite the fact that arent a sequencing has grown less expensive overtime. It really hasn't gotten much simpler to either use from a work flow perspective or from a data analysis perspective, and our customers really want to have independence from their core lab to be able to run that the encounter system.
Sales and analyze their data themselves to be highly productive. So that's really why encounter continues to have demand.
On the order of call it 20 to depending on the depend tick dynamic it was sort of 20 to 30, new instruments per quarter, and we see that continuing.
We don't see that slowing down and that in the next year or two.
In terms of the consumable demand that the encounter business is a razor razorblade model every year, we try to place about 122 systems X pandemic.
Growing our installed base at a low double digit rates and then translating that into a low double digit consumable revenue growth. So our I said during my prepared remarks for instance that our installed base is up 12% year on year at constant pull through you'd expect that to translate into consumable sales up about 12%.
So I think you're thinking about the model the right way, Dan I think you know.
There is no reason to believe we're going to see a slowdown at encounter instrument placement that can drive approximately 10% order of magnitude considerable growth in our model going forward.
Okay I appreciate it thanks Brent.
And our next question comes from Doug Schenkel with Cowen.
Hey, good afternoon, guys and thank you for.
Taking my question.
This might be.
This might be kind of a similar question to what Dan just ask though I just like my brain may not be working mathematically quite as quickly as dances Tonight.
But I I was I was wondering on N. counter consumable pull through you rebounded back to levels last seen in Q1 and Q3 I'm. Just wondering if you could say a little bit more about pacing by month, whether you think there was any stocking activity and just given all you talked about in your prepared remarks on just kind of the changes in lab activity are uncertain.
This is the lack of change and lab activity over the course of the quarter.
Do you think that this is kind of the new normal for a while meeting the 55000 annualized per encounter do you think that's what we should be modeling moving forward.
Yeah.
Yeah. Thanks for the question Doug did the pacing over let me go all the way back to Q2 to tell you what we saw a little bit about the pacing over the last couple of quarters. So you'll remember in the depths of the COVID-19 walk down we saw just abysmal demand and lab activity happening during the months of April and May.
Hey during Q2, we saw a substantial increase in June and so you know we exited Q2 and are at a pretty decent run rate of consumables much better than the average of Q2 overall the June run rate was much better than the overall quarterly average we saw that continue to improve.
In July and August as well.
Lapse moved into really out of you know out of a situation where some last were close we have virtually no labs that are totally close at this stage. Most labs operate in this partially open scenario really since the end of August where maybe the staffing is not quite as high as it normally would be.
In terms of the number of actual people in the lab and therefore that the amount of research activity is not as high as it would be but it's a lot more than zero so really since.
Since the end of August we havent seen that change much we've seen about the same level of lab activity and the same level of therefore consumable order pacing I think this is good as they were going to be in at least through the end of Q4.
Labs are figuring out how to get as much work done as possible spreading people out physically in their labs spreading people over multiple shifts maybe into the weekends, but I don't think that we will see us get all the way back to pre pre pandemic pull through and till 2020.
One so our Q4 guidance I think a good way to think about it is you applying that $55000 per system per year consumable pull through on our on our modestly larger sequential.
Install base on a sequential basis, and that's totally consistent with Toms guidance.
Got it and just just to be real clear on that and now that was super helpful. Brad.
But the good thing is there was no stocking or catch up dynamic in Q3, so just to kind of call. It doesn't day okay.
Okay. No I don't we don't believe we saw any stocking dynamic our yes, our our consumables are sort of that you've got to know what experiment you're going to do before you know what panel to order or what caused that the order. So we very rarely see stocking dynamics that was not what was an account for the sharp rebound in Q3.
Okay. All right that's great and then I know, we kind of ask some form of this every quarter.
But you know.
Recognizing it seems like it's really really early days for spatial profiling in the sense that theres a lot of interest, but you and your competitors are just getting going.
So that that's great you know I I do want to ask if you've seen any changes in competitive dynamics amongst.
The competitors that you've noticed you know as as activity has picked up and then you know to the extent there is any change if you could talk about whether theres things that you could point to whether its application or end market and then kind of kind of the last part of that.
You know, it's the real core Kinex combination changing the tone of discussions at all with key customers.
Yeah, So I'd say in the last quarter, there really has been no material change in competitive dynamics.
Nanostring continues to be incredibly strong where we have been strong with geo mix, which is in the translational markets. We feel very secure in our leadership, we really do not encounter head to head competition in that market. When we watch at the latest scientific meetings to see if theres any kind of sea change.
In the representation of Geo mix relative to other spatial profiling platforms, we don't see anybody catching up with US for instance, this morning, the society of immunotherapy and cancer Abstracts published we were glad to see that Jim its appears to have three times as many abstracts as the competition.
And we feel really great about our momentum with genomic showing up in immuno oncology translational research so really no change in the competitive dynamic.
You know that.
Acquisition by 10 economics of re core has also I'd say not meaningfully changed the dialogue, we're having with our customers. That's a product that you know we will look forward to seeing what's next plans to do with it and when it will be coming to market.
I think it sits in a category of imaging based products that I think will be interesting over time that will probably not be commercially impactful for another couple of years.
And and certainly it's not top of mind for the customers right now, we're buying angiomax and when it does become top of mind I'd say that imaging based product category is complimentary to profiling.
The imaging based category provides high resolution at the single cell or sub cellular level.
Its plex is going to likely be not quite the whole transcriptome, but hundreds or.
Potentially thousands of genes overtime, and it's going to be much lower throughput, it's going to occupy a accompanied littering place to where the profilers sit which tend to be higher throughput higher plex, all the way up to whole transcriptome and lower resolution so I'd.
I'd say.
It remains for us to see how the imaging category develops over time, but right now that the competitive dynamic is just as it was when we talked to you in August with Nanostring, feeling very secure and his leadership and translational and it's as we talked about in the prepared remarks a lot of.
Movement towards discovery.
And then sorry last one Brad enough that was great. Thank you for all that on whole transcriptome outlet.
I think the planned launch for 2021 I apologize if I missed this in your.
Prepared remarks, but at least in my notes I.
I'm in early access in a global site.
Is the is there any plan to expand this be before the the full commercial launch next year.
So Doug if I heard your question properly you are asking about the whole transcriptome Atlas available.
Availability as a service so to be clear the transcript on that let's right now is available only through our technology access program.
So we have a lot of interest in it people who were sitting there samples to us here in Seattle and were running the whole transcriptome outlets and then shipping results back to them.
The Geo mix priority site program is for people interested in everything but the whole transcriptome Alistair was a cancer transcriptome Atlas the encounter based read outs the protein readouts those will be done by the eight global sites. We've added we havent yet enabled those to hold the whole transcriptome Atlas.
And we really don't plan to ahead of the launch will probably just keep that product run out of Seattle until its global availability as an assay that we can ship to customers.
Okay got it thank you again.
Sure Ben.
And our next question comes from Tyco Peterson with JP Morgan.
Hey, Good afternoon, Hi, Brad you previously talked about capacity to install 25 systems a quarter on GL makes you get 35. This quarter. So can you maybe just talk to us.
What's led to the step up in installation capacity and then where do you think that can go.
Yes. Thanks for the question Tyco, we've been investing and hiring additional support engine and field service engineers in anticipation of growing demand for an order flow from Geo mix. So for the last I'd say for Q2 and Q3, our ability to recognize revenue on geology.
Mix has been more limited by our customers ability to accept the systems and invite our people and to install and trade than it has been our own capacity.
In terms of manpower to do that really that with Kobe 19 at all the employee health and safety precautions around that it's been less about our manpower and more about lab access.
We are at a state now where I think we are we are prepared to install geo mix systems at whatever pace as required you know to to more or less than match order flow and revenue recognition. So by at least by the end of the fourth quarter, we will have kind of caught.
It up and worked through most of our backlog that we had accumulated.
During 2019, we will exit the our guidance implicit in our guidance is we'll exit the year with about 20 genomic systems in backlog. So think of that as you know puts us on a pace to basically install systems at the same pace that we accept orders next year.
So I don't think about that as a meaningful constrains anymore. We've we've made the hiring.
So to reduce that constrain or eliminate rather.
And then maybe you could provide us with some updated thoughts on the Ngs read out scale up you talked about 10 orders this quarter and half.
Algae access orders being tied to Ngs readout, how quickly do you think you can kind of leverage doubled its installed base.
And scale that up.
Well I mean, I see that I would expect next year, you think about 2021 I would expect the majority of our genomics orders to be coming from people, who want to use ngs read out that would be true in 2021 in every year or beyond and Thats simply based on.
The tremendous installed base of alumina systems that are already out there the.
Inc. The expanded capabilities, including the addition of proteins as we announced this morning to the Ngs capability set.
And of course. The addition of the whole transcriptome assay, which will be an incredibly exciting consumable launch next year. So I think demand while demand will remain robust for the eight how to read out.
Most incremental growth will come on the NCS read outside.
And you know I really look forward to seeing what customers are able to do in terms of sample processing in both groups using ngs read out as.
As we've discussed many times in the past the consumable pull through potential of those customers is probably larger and more it Steven more exciting than the entire readout customers. It's too early for us to declare what a number is but I will say we were very pleased with cancer Transcriptome Atlas orders that came in the third quarter was a pretty strong.
Start from some of those first.
Customers. Another interesting phenomenon, we will see that we didnt talk about in our prepared remarks is many of our customers who acquire Geo mix. Initially for encounter readout also have access to a sequence or in the same lap now that weve enabled ngs read out many of those customers are asking us to.
Come and train them on how to take advantage of the Ngs readout, even though they use encounter in some experiments they want to be able to drive the higher flex on ngs readout, and and others and so I think that just it shows a strong demand for the cancer friendship an atlas even in the translational markets where our.
Early installed base was I'm I'm very bullish overall and what the ingest read out is going to do for us, but it's hard for me to be very quantitative about that potential at this time.
Okay. That's helpful. And then last one for me just curious if you can talk to use the proceeds from the recent offering.
I think there was a view when you did the convert back in March that you had when you need it. So I'm just curious if you could talk about what you're going to use the incremental cash margin offer commercial scale up or is there an eye to look externally potentially disconnect.
Yes.
Convertible debt financing that we did back in the spring really did provide enough capital for us to become approved to grow into being a breakeven company, which we've always said would occur in $200 million, plus and product and service revenue, but what it didnt provide was incremental strategic capital to make investment.
And what we now feel as an enormous underappreciated spatial biology opportunity. So were we really think of this incremental capital as being put to work in three potential areas. The first is potential is commercial investment.
Capitalizing on on the momentum we have entering the discovery markets for instance by adding additional sales reps there or by finally choosing to go direct in major markets, where we still work through distributors such as in China, and Japan, where we could probably do better. If we went direct on our own. So that's kind of that's category one.
Commercial investment category, two would be pipeline investments, yes, we havent yet revealed everything that we have cooked up here organically and we will talk more about that on December 1st and I think people will be excited by some of the innovation. That's continued to half year happened here in a road map that moves Dion gentlemen.
Yes.
And we're excited to have the capital to fully.
Pursue those options and then of course as the leader in spatial biology, we do track a host of external innovations that are happening in companies large and small and with with the increased capital our balance sheet. We're in a position to pursue those as strategic licenses or acquisition.
Since our partnerships should one of those technology platforms are products resonate strongly with us and to be clear you know and that we were clear about this at the time that we did the financing we're not in a hurry.
To add inorganic growth, but but certainly we want to build on and extend our leadership position here and spatial biology, and we'll do that inorganically, if if the right opportunity arises.
Okay. Thank you.
And our next question comes from Dan Brennan would you be EPS.
Great. Thanks. Thanks for the question guys, maybe Brad just on the kind of the funnel. If you will you talked about a torrid pace.
Paired remarks, any anymore color beyond kind of the number of customers in tapenade publication, but what else would go into that torrid pace that might give us some insight toward kind of the opportunities and look out beyond 2020.
Well, we've we've continued Dan to haven't really great success with our virtual marketing approaches both at major conferences like the recently completed a SH G. Some spatial biology conferences that we've really pulled together on our own like when we held in September and other smaller.
So we've done both by ourselves and more recently in collaboration with Illumina.
Just taking the alumina example, we've now held.
Now 10 events.
Then jointly generating about 1500 marketing qualified leads those events have turned out to be really popular they allow us to talk jointly about the unique capabilities that the geo mix and.
The sequencing light up from Illumina bring and we just we just continue to have an unprecedented flow of new leads.
Into our organization that can be qualified and added to our sales funnel and it grows every single week.
So we're we're just and I think as I said back in the spring time, while the pandemic has certainly slowed down.
Utilization of systems and People's Labs.
Our customers are still looking to the future and spatial biology as on top of a lot of people shopping list when they get back and it's a capability they want to do acquire and apply in the research going forward. So we have really.
A lot of a lot of growth every single week and month in our Geo mix sales levels.
Okay, and then maybe as you look ahead good bye.
Looking 21, and the funding can you just talk a little bit about where where the recent new orders came from by customer type and then as you think about 21 from an academic funding standpoint.
Any any sense about that prioritization or or or not stay so is that something that or any color. You can give us on grants or from a top down basis, how how maybe in a thinking about space or has that potential funding opportunities.
Yeah, I think so in terms of where our orders have been coming from recently, it's been more of the same Dan it's been largely cancer researchers on either the translational side or the discovery side because of course, our first discovery assay for Ngs is a cancer transcriptome Atlas.
It's probably been 60% academic 40% Biopharma NCR Roe.
And.
A good geographic split.
Its representative of what our encounter business looks like.
So in terms of the incremental demand next year I think spatial is going to be.
Good.
More and more attention.
Modality that people want to add to get incremental insights on top of their bolt for their single cell based genomics I.
I think it will be things that editors are going to be our peer reviewers are going to be looking for in papers.
I think the tremendous success that our early customers that had getting high profile publications is going to be inspiring to a new wave of additional.
Customers. So I feel really good about how spatial will be positioned as a 2021 investment area for anybody use.
In biology look I'm also encouraged by our president elect who is.
You know by far the most.
Connected will be the most connected president to the field of cancer that we've ever had right I mean don't forget Joe Biden started lost his sons of cancer started a moon shot program spent a tremendous amount of effort over the last several years on that deal and you know while.
Biological funding and science has always had bipartisan support I think we could be coming up on a really.
A really positive era of investment in public health and science.
In the next several years, so I'm encouraged by that as well.
And then and then maybe just one more I know it's too early to discuss current approved at our German and kind of where that can go to but since you brought up.
Some of the screens I guess on some of the Cts customer did the possible just described like maybe what a range of heavy users are kind of using genomics and kind of a pull through or just anything that would give us a flavor about.
But you know the range of outcomes that you're seeing.
If there are too few of those customers to even give you a range, but I will say we had at least one six figure order in terms of cancer Transcriptome Atlas during the third quarter of two all large study that was being initiated by one of our first customers get access and if that's a really good.
The positive side about the scale of biology that people are thinking about with this asset I don't think I would not represent that thats by any means typical but it does represent.
Good enthusiastic early adopter and is encouraging.
Yes.
Great. Thanks, Brad Thanks, guys.
And as a reminder to ask a question that star followed by the number one on your telephone keypad Star one.
And our next question comes from Tasiast phase and with Morgan Stanley.
Hey, guys good evening so.
So Brad just one quick question for you on instrument installs this quarter.
Obviously, you know both encountering Geo Amex look good can.
Can you just help us think through how much of this was a catch up in terms of orders, but shop, you weren't able to ship into Q or or was it just all or you know sort of organic demand and we should think of this as a as a baseline number if you will going forward.
Yes take us I'll.
I'll tell you. The Q3 instrument revenue was not a bunch of backlog shipping that had been accumulated during the second quarter. So we.
We did it did was if your question is did we receive a bunch of orders in Q2 that we fail to shift for a whole host of reasons and then recognize on Q3. The answer is no I'd say backlog entering and exiting the quarter was probably about the same so.
So what you're seeing in Q3 is current demand.
So oh it is the best measure we have of.
What are the current natural run rate for the business is in terms of instruments.
Got it that's helpful. And then just following up on your comment can you share some color Brad on how you think about the clinical opportunity for EQM Max.
Down the road and you know to make it a little bit more specific I mean, even with your launch of the protein assays. This morning, you highlighted sort of a use case in prostate cancer.
At the Hutch and and so clearly I mean do you IMAX would make.
You know a sense for those sorts of applications, but what remains to be done before the platform is ready for clinical prime time, and when that time comes.
Should we expect you to partner with someone like you did for the N. counter or will you go after that segment yourself.
Tejas its very early days in knowing exactly where geo mix will fit in the clinical diagnostic realm or whether we'll choose to go alone or partner.
What we're doing today is really focused on allowing some of our translational customers to do what they do to translate their early protein based assay sales into clinical assets and to build the case for why that would be more useful than traditional methods like immunohistochemistry. The most obvious you.
This case of Geo mix would be to allow a pathologist to run a large number of immunohistochemistry assays that they would normally either run sequentially on different slices or because they were tissue limited we're not running at all.
In a single run all those in a single asset.
And I think that will be the first area that we see our diagnostic users try and I run a.
I'm, making it up in 10 Plex immunohistochemistry assay in the clinic, that's the most obvious thing, but they're also potential for novel assays. Some of the first papers that came out on Geo mix for instance in the field of immuno oncology showed that incremental predictive benefit could come from.
Knowing exactly what cell type certain biomarkers were expressed on so for instance, David rim from Yale showed PDL one expression on macrophages was more predictive than PDL. One expression overall in terms of he responded to certain immunotherapies. So there's a there's a possibility for nobilis.
Sales to come out as well and I expect the next several years as we build our installed base and academic medical centers and biopharmaceutical companies for there to be a whole host of innovation and discovery about diagnostic content and you know we'll start by working with those centers to.
Mr to try to develop rather a.
Laboratory developed test and then well take our strategy from there whether we want to ever have an in vitro diagnostic version of the system.
And what role we would play in that remains to be sales.
Got it that's helpful.
And then apologies if I missed this earlier, but could you just give us a quick update on your informatics collaboration with Illumina is that in early access now or is that still had a few and if it's already out in early access any feedback from customers who are using dragon for special biology.
Yes that that's.
Partnership continues to go well.
I believe it's going to be going into early access in the weeks and months ahead, you know and we'll have more to say on that as we move through Q4. So it's a little too early for me to give you actual customer feedback on that to adjust but in terms of the collaboration between the two companies and are confident this is going.
To help create.
A streamline workflow we continue to feel enthusiastic.
Got it thanks, so much Brad.
Thanks, everybody for joining us today, there should be at a replay will be up on our website in the next couple of hours in the meantime, if you want to dial in for replay. If you missed any part of the call domestic Dialers can dial 800, 585, Athree six seven international callers. Please dial 416.
Six to one or six four to the conference I'd for both the same 5172128 with that thank you very much for your time have a great day.
Hi.
And that does concludes today's conference call. Thank you for your participation you may now disconnect.
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