Q4 2020 NanoString Technologies Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the and inner strength fourth quarter 2020 operating results.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Please be advised today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your Speaker today, Doug Farrell VP of Investor Relations. Thank you and please go ahead.
Thank you operator, and good afternoon, everyone on the call today with me is Brad Gray, our president and CEO and Tom Bailey, Our CFO Earl.
Earlier this afternoon and released our financial results for the fourth quarter and fiscal year 2020.
During this call we may make statements that are forward looking including statements about financial projections and the impact of the COVID-19, pandemic future business growth trends and related factors prospects for expanding and penetrating our addressable markets, our strategic focus and objectives and the development status and anticipated success of <unk>.
Recent and planned product offerings.
We're looking statements are subject to risks and uncertainties many of which are beyond our control, including the risks and uncertainties are described in our SEC filings and our results may differ materially from those projected and we undertake no obligation to update these forward looking statements.
Later on the call Tim will be discussing our financial results in 'twenty and 'twenty one guidance.
Connection with this guidance, we've made modification to our earnings release and guidance approach that we believe will make it easier to interpret and compare our financial results. We have prepared as a supplement to GAAP financial measures selected non-GAAP adjusted measures the cash.
And of which is described in detail on our press release.
Throughout this call all financial measures will be GAAP, unless otherwise noted you can also find a reconciliation of GAAP to non-GAAP measures as well as the description limitations and rationale for using these metrics and our press release.
To aid analysts and investors and building their models, we have posted exhibits on the financials tab on our Investor Relations homepage and include a presentation of our non-GAAP or adjusted measures and other selected financial data for each quarter and for the full year 2020 and 2019.
I would like to remind everyone that we'll be participating and the Cowen Healthcare conference. Later this week, we look forward to having the opportunity to speak with many of you. There now I would like to turn the call over to Brad.
Thanks, Doug Good afternoon, everyone and thank you for joining us today.
Only the beginning of March and already 2021 is shaping up to be a banner year, Fernando strength and spatial biology business.
And this year began with the journal nature naming specially resolved transfer telmex, the 'twenty and 'twenty method and the year signaling the revolutionary impact of spatial biology and.
In February we hosted our annual spatial genomics summit, which highlighted the explosion of innovation in this field and serves as a perfect venue to launch our new genomics whole transcriptome Atlas.
Researchers from Bristol Myers, the Fred Hutch Cancer Center, the Harvard Medical School and the senior Welcome Institute.
Just how spatial biology can improve our understanding of drug mechanism of action response and resistance to immunotherapy.
Potentially enabling significant advances and personalized medicine.
Panelists also highlighted the need for a portfolio of spatial technologies that extend for multi cellular analysis down low single cell and even sub cellular applications.
Genomics DSP users from five leading research institutions demonstrated the power of couple and genomics DSP to Illumina Mgs readout share.
Sharing data from some of the first projects using our cancer transcriptome Atlas and whole transcriptome Atlas assays and while our CSO Joe Beach on previewed our spatial molecular imaging.
Our summit drew more than 2000 registrants from over 90 countries, highlighting the growing interest and spatial biology.
This morning, we kicked off the 'twenty and 'twenty, one and advances in genome biology, and technology conference on <unk> for which we are this year a gold sponsor.
Over the next few days net of string and our collaborators will highlight and impressive body of spatial biology research, including three oral presentations and more than 20 posters on the genomics DSP and our spatial on molecular imager.
I'm proud to tell you that net of free has the most abstracts accepted for HPT and any participating company by a substantial margin and more than five times as many as any other spatial biology providers, a testament to our innovation.
Prospective customers and members of the investment community and find a replay of the spatial genomics summit on our website and details from the Hebt presentations and abstracts are available through a hyperlink included and the <unk> press release that we issued this morning.
I'd now like to take a step back and provide an overview of our strong 2020 performance before outlining our strategic objectives for the year ahead. I'll, then turn the call over to Tom to review, our operating results for the fourth quarter and to provide our financial outlook for 'twenty and 'twenty one.
2020 was a year of major accomplishments Fernando strength, we successfully achieved all four of the strategic objectives, we set for the year, which is remarkable given the operating backdrop of a pandemic.
We submit the genomics position on the platform of choice among translational researchers while entering the discovery segment of spatial biology by launching the genomics and GFS readout.
We generated approximately 90, new genomics instrument worse, achieving our original pre pandemic quarter guidance and bringing total cumulative genomics orders to over a 180 systems.
We also pivoted, our Highland and seed program into spatial biology by announcing our new space will molecular imaging platform and December.
We entered the year with a portfolio with spatial products that spans the continuum of customer needs from this position of strength, we will focus on three strategic objectives for the year.
Our first objective is to extend genomics dsp's leadership and the spatial biology with the launch of the whole transcriptome Atlas.
And we began developing genomics we targeted what we then estimated to be a 1 billion dollar translational market using our encounter analysis system as the readout.
Our leadership position and translational research is built on genomics robust performance and <unk> samples and our ability to analyze both RNA and protein and a fully automated and instrument that provides a simple workflow consistent performance and high throughput.
The encounter readout offers a streamlined workflow well suited to meet the needs of customers running spatial protein analysis, we're targeted RNA panels that are below 100 plex.
Of the 42 reviewed studies published to date and all but one has used and kind of readout for their research.
As we look to 'twenty and 'twenty, one and beyond we believe that a majority of future genomics growth will be driven by customers leveraging alumina and GFS readout.
The launch of Ngls readout last year doubled our estimate of genomics addressable market to $2 billion and research by tapping into demand for high Plex RNA assays.
By Q4, Joe Mist systems intended for Ngls readout already accounted for 40% of new DSP instrument orders.
Last week, we announced the launch of the genomics whole transcriptome Atlas where W. T. A our first universal assay and discipline.
Any field and biological research.
With our WGNA researchers can perform true hypothesis free experiments and virtually every aspect of human biology, and will no longer be required to pre select the genes they wanted to analyze.
They will allow this will allow genomics threep scientists and field that go well beyond the oncology immunology and neurology and typified genomics early adopters expanding the research markets served by genomics to an estimated $3 billion.
At the price of 1007 hundred $50 per sample WTS is of great value, providing roughly 200 and times the biological content of our encounter RNA assays and less than 40 times the cost.
We plan to begin shipping the human whole transcriptome Atlas. This month, followed by a mouse version of W. E T a and the second quarter.
These products are expected to strength in genomics instrument and consumable revenue, particularly during the second half of this year.
The leading indicators of demand for WCS and are very strong customers have expressed enthusiasm for wth ever since we began offering and through our technology access program during Q4.
Human Wpa accounted for 40% of our Q4 top projects and al has already grown to 60% of tap projects Warner So.
And so far this quarter.
We are also beginning to CW Ta published and papers and presented at major meetings, which should further increase customer interest.
Researchers from the broad Institute recently published the first peer reviewed study that uses both our cancer transcriptome Atlas and whole transcriptome Atlas products and the journal nature Medicine.
There will be a dozen WCS abstracts presented at H B T. This week with both human and now research spent spanning applications and breast cancer immuno oncology, all simers disease knockout models and COVID-19.
Several studies demonstrate the strong synergy between the genomics whole transcriptome Atlas and more traditional single cell RNA seek.
For instance, researchers at Ut southwestern use genomic GWG as a study in bladder cancer specialty localize and sell clusters previously bound using single cell RNA seek and identifying and how the location of cells within tissues influenced the expression patterns of otherwise similar cells.
Overall, we're delighted with our genomics and momentum and the early interest and the whole transcriptome assay.
Our second strategic objective for 2021 is to advance the development of our spatial molecular imaging and to seed the market for its anticipated commercial launch next year.
Genomics is the market leading platform for experiments and require high plex heightened throughput multi cell spatial profiling.
We have identified a separate market need for and imaging platform that measures biology, and even higher resolution as highlighted in our analyst and Investor day presentation from this past December.
Our spatial molecular imaging or <unk> for short.
And is designed to enable customers to perform imaging down to the single cell and even sub cellular level, which opens up important new applications, such as cell typing and sell mapping.
This platform is currently at the prototype stage and the balance of our development program is focused on building and optimizing the commercial instrument the software and user interface ahead of a planned launch and the second half of 'twenty and 'twenty two.
We believe <unk> will set the bar for performance and spatial imaging.
<unk> has already demonstrated and market, leading 1000, plex gene expression and challenging <unk> samples.
<unk> is derived from our heightened and seat program. It is enabled by a robust and scalable chemistry and benefits from our significant investment and many years of research and.
The lack of amplification keeps approach small and price offering exceptional sensitivities that allows the accurate detection of genes and high plex down to a very low copy number.
And that somebody will be a single instrument solutions handle sample prep and imaging and the same box and analyzes both RNA and proteins.
There are a total of seven <unk> posters that would be presented and Hebt. This week, adding detail beyond the information share during our December analyst and Investor day.
One study validates semi performance on S&P samples from five different tissue types, demonstrating market, leading capabilities, including high sensitivity concordance with RNA seek and sub cellular resolution and three dimensions.
Another study demonstrates the amazing discovery and sell tightening applications that are possible with 1000, and flex imaging, which can identify both individual cell types and neighborhoods and cells and interact with each other.
Two studies being presented by our first external collaborators illustrate some of the likely applications for us on the line.
One study and one study researchers from the Fred Hutch Cancer Center used <unk> to measure more than 1000 transcripts and the kidney cancer biopsy at single cell resolution confirming observations. They had previously made using single cell RNA seek and TCR sequencing and not being notes observation spatially.
And a second study researchers from the Dana Farber cancer Center used <unk> to perform high throughput crisper screens and enabling them to screened hundreds of thousands of cells and each run with a single cell resolution.
As we bring somebody on a market we intend to follow the same playbook that we use successfully during the genomics launch. This morning, we announced the opening of our technology access program for <unk>, which will allow researchers to send samples to Seattle for processing on our prototype systems.
The technology access program or tap was a key element of our successful genomics as it drove early peer reviewed publications and provided customer input into our product development process.
We're beginning to take tap orders today and expect to begin delivering results and Q2.
We believe that the multi cell capability of genomics and our single cell resolution of SMIC are perfect complements and provide a comprehensive portfolio that covers the continuum of spatial research applications.
By expanding into the imaging segment, we believe that we will double the size of spatial mark.
Batesville research markets, we serve from $3 billion to $6 billion.
We look forward to updating you on the development of the SMA platform over the year ahead.
Our third objective and to return our encounter business to pre COVID-19 growth levels.
Demand for our and counter systems remain robust and 2020 and despite the challenging operating environment.
Pandemic impact peaked during Q2 and our encounter business recover throughout the balance of the year.
During Q4, we generated double digit sequential growth for both encounter instruments and consumables.
By year and the pace of encountered on instrument sales have returned to pre pandemic levels, resulting in a and installed base of more than 950 systems and increase of about 13% over the prior year.
And we sold about 110 systems in 2020 down only slightly from the approximately 125 systems sold in 2019.
And as these additional and counter systems come online and will generate consumable revenue, which is the primary growth driver for our encounter business.
The pandemic has had a more pronounced impact on encountered consumables as institutions reduced their lab activities to keep researchers safe.
Our consumable pull through per instrument dropped to a COVID-19 low of about 50% utilization and Q2 before improving to roughly 90% of typical pull through and the fourth quarter.
Today, most labs remain and are partially open state with a reduced pace of activity.
We expect this to result in modest COVID-19 related headwinds per encounter consumables through the first half of the year with improvement and the second half following more widespread vaccinations.
Throughout 2000, 22020, we continued to diversify our installed base beyond oncology, adding new panels that helped drive and counter adoption to new areas, such as immunology, neurology and infectious disease, which collectively accounted for about half of our new instrument placements and.
And 2021, we expect to continue to expand our menu of panels and to field outside of oncology for instance, we plan to expand with and infectious disease research by outing.
Mouse host response panel that will complement the human version of this panel launched last year.
We will also introduce new panels for cellular therapy, and regenerative medicine, both areas of significant investment by the NIH and Biopharma companies.
Overall, we see continued growth for our and counter business in 'twenty and 'twenty, one as our installed base grows linearly and consumable pull through normalizes.
That I would like to turn the call over to Tom to review the details of our operating results.
Thanks, Brad and thanks, all for joining us today for.
For the fourth quarter of 2020 product and service revenue was $35 $7 million, representing pro forma year over year growth of 9% and sequential growth of 19%.
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 period pursuant to the terms of the Variscite transaction. We now recognize about one third of the previous Prosigna revenue over the same units sold.
Q4, genomics revenue was $12 2 million up 44% as compared to Q4 and 19 $9 3 million was derived from approximately 40 instruments shipped and $2 8 million was derived from consumable sales.
Q4, and kind of instrument revenue was $6 million are returned to approximately flat and counter instrument revenue year over year.
Throughout the pandemic and counter consumables revenue has been most impacted by lower lab activity and this continued to be the case and Q4, while lab activity improved in Q3 and Q4, a total recovery to pre pandemic activity levels has yet to occur in particular, given the surge and COVID-19 infections and Lockdowns and late <unk>.
And bird into January.
Q4, and counter consumables revenue was $13 8 million, 11% lower on a pro forma basis as compared to Q4, and 19 and sequential growth of 12% as compared to Q3.
Our Q4 and counter consumable sales imply annualized pull through of about $60000 per system up from about 55000, and Q3 and recovery and to about 90% of our pre pandemic and counter pull through expectation of approximately 65000 per system per year.
Service revenue derived from both and counter NGL mix related service was about $3 8 million for the quarter were 29% year over year growth driven primarily by increasing genomics DSP tap projects and increased service contract revenue.
Our growing instrument installed basis.
Turning now to margins and expenses I will provide results on a non-GAAP or adjusted basis, which removes the impact of stock based compensation depreciation and certain onetime items. Please refer to our press release as well as the exhibits we've posted to our Investor relations webpage for detailed information on how our non-GAAP or adjusted.
And measures are prepared.
Q4, adjusted gross margin on product and service revenue was 54% or about 400 basis points lower than Q4 last year. Most of the change was driven by increased instrument revenue as a percentage of our total sales mix due to the acceleration of genomic sales, coupled with lower COVID-19 impacted and counter consumable sales.
And the impact of the Werra site transaction, whereby we realize a lower asps on <unk>.
Signet sales than in previous periods.
We reduced operating expenses compared to the quarter a year ago, primarily as a result of expenses, we eliminated due to the <unk> transaction.
Adjusted R&D expense was $12 3 million a decrease of 20% year over year with various site transaction related savings being partially offset by investments, we are making and our various spatial biology products and initiatives adjusted SG&A expense was $19 million a decrease of 14% year over.
For year the.
For Q4 SG&A expense decline was also driven by Werra site related savings as well as savings realized from pandemic related reductions and travel and trade show activities.
Savings were partially offset by investments made and our spatial biology related commercial initiatives, including investments and our service and customer support group and at certain digital marketing initiatives. Adjusted EBITDA loss was $11 8 million and improvement of 35% as compared to the prior year.
Turning now to full year 2020 performance, although we suspended our full year 2020 guidance on April six due to uncertainty related to the pandemic. Our genomics results landed at the upper end of our pre pandemic guidance range and counter and particular consumables revenue was more materially impacted by reduced lab activity.
For the full year 2020 product and service revenue was $111 4 million representing year over year growth of 14% on a pro forma basis and.
Adjusted gross margin was 55% in line with the upper end of our pre pandemic guidance range.
And in 'twenty adjusted R&D expense was $53 4 million, representing a year over year reduction of 11% and adjusted SG&A expense was $75 2 million representing year over year reduction of 9% cash used in operating activities and for capital expenditures was approximately $89 1 million we.
Exited the quarter with over $440 million of cash cash equivalents and short term investments.
Transitioning from 2020 results to our 2021 outlook, we expect 2021 products and service revenue of $140 million to $150 million, representing annual growth of 26% to 35%.
For genomics, we expect revenue of $45 million to $50 million or annual growth of 29% to 43%. We expect about two thirds of genomics revenue to derive from instrument sales and about one third from consumables, having caught up on genomics instrument deliveries. During 2020, we expect genomics instrument bookings and <unk>.
<unk> to be approximately equal and 2021 with instrument bookings growing at about 40% to 50% year over year.
For genomics consumables, we are raising our pull through guidance and expect genomics pull through to now average between $85000 and $95000 on an annualized basis with pull through expected to ramp over the course of the year as Ngf's enabled instruments are installed and are wth panels are introduced across that customer base.
For genomics, we expect to see a seasonal revenue pattern that is weighted to the second half of the year due to the expected impact of the launch of <unk> on consumables revenue and of the significant investments and our commercial and customer support organizations, we have been making and are continuing to make and the first half of 2021.
Overall, we expect roughly 40% of genomics revenue to be recorded and the first half of the year and about 60% and the second half.
For our historical and counter business, which also includes all service on tap revenue, we expect 95 to 100 million or about 24% to 31% year over year growth and.
And 2021, we expect and counter instrument revenue to return to pre pandemic levels were approximately flat as compared to 2019.
Our guidance also assumes and counter consumable pull through of approximately 60000 to $65000 per installed system on average for the full year. Our guidance assumes the pandemic will continue to impact lab activity were significantly and the first half of the year.
We are experiencing and counter expecting and counter pull through to normalize and the second half of 2021 and as a result, we could see a seasonal revenue pattern that is modestly more weighted to the second half of 2021 as compared to the first half.
We expect adjusted gross margin to be and the range of 55% to 57% and 2021 consistent with 2020 as our revenue and 2021 will continue to be instrument and heavy given the growth of genomics. We have also added facility and overhead expenses as we scale up our consumable manufacturing capacity in anticipation.
And of the WTO launch.
Transitioning to operating expenses and 2021, we expect to post approximately 15% increase and total adjusted operating expenses year over year, reflecting investments and our spatial biology products and market opportunity.
For adjusted Research and development expenses, we expect to record approximately $58 million to $63 million or about a 9% to 18% increase compared to 2020, and reflecting continued investments and genomics consumables and software as well as and development efforts for our recently unveiled semi product candidates.
For adjusted selling general and administrative expenses, we expect to record $87 million to $92 million or about 16% to 22% increase as compared to 2020, and reflecting significant investments to expand our commercial reach and customer support efforts for genomics and semi including and about 100, new commercial <unk>.
<unk>, we expect to add during the course of the year.
Adjusted EBITDA loss is expected to be about 65 to 70 million approximately flat as compared to 2020, reflecting the balance of our expected revenue growth and the long term investments, we are making and our spatial biology initiatives.
For the first quarter, we expect product and service revenue of approximately $28 million to $31 million. Our Q1 range includes about $8 million to $9 million and genomics revenue and encounter and service revenue of about 20% to $22 million.
Our genomics range balances our expectation of continued significant instrument order growth and about a one to one book to bill pattern for instrument revenue.
Our guidance ranges are also indicative of lab of lab capacity and activity continuing to be below 100% and Q1, which we expect will impact and counter consumables, both significantly and a typical seasonal sequential seasonal patterns whereby revenue is usually lower in Q1 as compared to Q4 now.
Now I will turn the call back over to Brad for our closing comments.
Okay.
Thanks, Tom <unk> has the market, leading product portfolio and the hottest feel and life Science research spatial biology, our leadership is on display as we speak at the <unk> meeting where breakthrough science is being presented using our genomics DSP and our spatial molecular imager, our strong balance sheet supports targeted <unk>.
Vestments to capture the estimated $12 billion spatial biology.
Tim.
With continued growth and genomics DSP instrument bookings and increased expectation for the consumable pull through generated by each genomic system 2021 is poised to be a year of outstanding growth.
Before opening the call for questions I'd like to correct. One line on the statement from our previous prepared remarks I had.
To clarify Wpa is a great value at $1750, providing roughly 200 times the biological content of our genomics RNA assays for encounter readout at less than four times the cost.
With that correction I'd like to open up the line for your questions.
Ladies and gentlemen to ask a question and you will need to press star one on your telephone to withdraw your question price per pound or warehouses.
Please standby and while we compile the Q&A roster.
Yes.
Our first question comes from Tycho Peterson with Jpmorgan. Your line is open.
Hey, thanks.
Robert I'll start with the SME and to the back.
Half of the year from the launch there.
Can you just talk to you know have you locked on the prototypes are is there any kind of technical hurdles that still need to overcome and then with the tap program. What's the earliest you think we could start to see some publications.
And then also when you do launch how do you think about the selling cycle between SME and genomics.
And since that customers may be evaluated.
Thanks, Tycho so.
And clarity the spatial molecular imager instruments will launch in the second half of 2022, not the second half of the current year and.
That technology access program is open today, we are beginning to take orders and accumulate interesting studies that we think showcase the power of the space on molecular imager.
We have 10 and prototype instruments here at <unk> and nano strength.
And.
And various stages of preparedness to receive samples really as we think about the product development efforts.
<unk> is on fully engineering, those instruments to be robust and the hands of our customers, making them easy to use with.
And with Great software and great user interfaces that can make our customer successful and thats really the lion's share of the work that'll be taking place between now and the launch and the second half of 2022.
In terms of when we'll begin to see publications on SME into mine.
Hope would be that the types of studies that were showcasing and hebt. This week and that will be doing with other technology access program customers and 2021 will yield publications beginning in 2022, so that those begin to come out around the same time that we begin selling our instruments that was a similar.
And our dynamic to what we had with genomics and it served us extremely well and <unk>.
On the sales cycle.
I think.
And is expected to be attached piece of capital equipment and a similar price range to what genomics is we.
We think we will be selling it to precisely the same customers.
The core lab facilities that serve both translational and discovery research and our market research efforts really indicate that those core labs are going on what both capabilities, they're going to want the genomics digital spatial profiler for its high throughput automation and its ability to profile a whole transcriptome.
And the control over the regions of interest and focus of the assays that it provides and they will complement that with the high resolution.
Modestly.
Modestly lower plex.
That spatial imager and will provide so we really believe it will be the same set of customers and of course, we'll be we'll probably be going to the existing genomics customers who've already experienced the power of spatial biology <unk> during that product launch.
And then are you able to say on what's embedded in guidance for GAAP revenues. This year and then separately you mentioned hiring 100 sales reps.
Curious, how you think about the scale up there.
Yes, the top revenue is embedded in our guidance and the tap revenue from SMIC is really modest. This is not meant to be a revenue driver for us and 2021 and.
Really it's designed to showcase the power of the instrument.
So I'm guessing, it's maybe $1 million and guidance, but probably not a lot more than that.
And.
In terms of I'm sorry, your second question Tycho remind mentioned the hiring hiring 100 sales reps.
Yes, yes.
We are now facing a tam opportunity that vastly exceeds.
That which we had either within counter alone or either even with genomics with the encounter readout alone. So we are scaling up the.
Instrument sales force in particular to take advantage of the huge opportunity that we have to place first genomics instruments and laser and <unk>.
Our sales force does not bifurcated between discovery and translational there Theyre generalists reps.
Who are capable of addressing both of those market segments.
And we will be hiring most of them and our first and our direct markets of North America, and Europe, and then I expect we'll be expanding to go direct and some markets, where we're not direct.
And today and Asia late this year or early next year.
Okay, and then last one on genomics.
On split previously on readout had been I think 60 per cent and Counterparties and Ngls, where do you see that and going this year and then as we think about whole transcriptome can you just talk about what are the early interest is is it mainly oncology.
What are you seeing there.
Yeah. So I think that if we look at where our funnel is today our funnel of people who are considering purchasing of genomics instrument. It's split about 50 50 across people, who plan to use encounter and Ngls readout and that's up substantially from from what we even showed you I think that our.
December Investor Day, where it was still a minority of the funnel are represented by Ngls readout and so I believe this year will be at at least 50% or more genomic systems sold for Ngls readout.
And.
In terms of where the whole transcriptome Atlas interest is coming from.
It's a long tail of different applications oncology remains the number one application because many of the customers that we know best are interested in oncology, but other areas of high demand include infectious disease, specifically a lot of COVID-19 research.
Rare diseases of the tissue like rare kidney or skin disorders.
And of course, neurology, which is an area of high spatial interest, but where we did not have.
Targeted NGF panel built but I expect that will continue to broaden and theres a very long tail of esoteric uses below that top three or four.
And we look forward to getting to know and researchers have and engage with encounter and and answering in the past.
Using the whole transcriptome Atlas.
Okay. Thank you.
Our next question is from Douglas Schenkel with Cowen Your line is open.
Hey, good afternoon, guys. Thank you for taking our questions just starting on guidance.
As I kind of think through that.
And then toggle essentially where things could go a different way and your guidance construct.
One of the things that jumped out at me as you you indicated that you expect gross margin to remain close to 2020 levels.
Do you expect on a year to be capital, having essentially you expect the mix to be.
Tilted towards capital.
And through the pandemic instrument placements were pretty strong. So I'm just wondering if part of what Youre thinking is that you want to be mindful of the risks associated with COVID-19 uncertainty and by extension that uncertainty means youre not exactly sure what lab activity is going to look like or.
Over the course of the year.
But you know that instrument demand is going to remain strong like it was in 2019 and.
That's kind of the logic behind your guidance does that mean that if.
If things do return to normal a bit more quickly than one might expect that there would probably be both consumable and margin upside relative so where youre starting on targets for 2021.
And thanks for the question Doug.
I think we are guiding a small expansion and gross margin relative to 2020 levels.
And that is I think reflective of a modest increased and consumable mix in 2021 by compared to 2020 right. So.
We do expect encounter consumables to begin to.
Achieved there sort of normal per instrument run rates and the back half of the year, though admittedly, we think there will be a tempering of consumable expectations and the first half relative to normal run rates and as Tom said, our genomics instrument net our revenue mix rather overall is two thirds instrument.
And one third consumables, which is clearly a lot more instrument heavy than our historical encounter mix has been.
I don't think we're signaling any kind of.
Concern about overall consumable demand I think its substantially there, but just given how many genomics instruments, we're placing and the mix is going to remain and rich for instruments relative to encounter historical mix and so one other comment comment I did make and my prepared remarks, Doug.
<unk> gross margin as well as we are investing and capacity to ramp up for the WTO launch, we have been and will be throughout the year.
So we factored that into our gross margin range with that said, if we if things recovered more quickly there could potentially be some upside to that range absolutely.
Okay. Yes, that's helpful. That's kind of what I was getting at I mean, it wasn't met as a sign that you guys weren't we're being overly conservative it's just more.
Running through the numbers it does seem like youre, assuming some improvement, but not fully baking and a return to normal which I would guess and it's probably the prudent thing to do as we're sitting here at the beginning of March so that color is helpful.
At your Analyst day, you highlighted how genomics is well positioned for adoption and <unk>.
Both translational and discovery and research as well as for clinical purposes down the line.
Could you envision a scenario, where you might actively seek partners to help develop.
More clinical focused products.
And I keep that and I think of that just because I think there is an opportunity clearly not just in translational research, but down the line in the clinic, but I also recognize that you did you didn't move away from some of your clinical ambitions with.
And the divestiture of clinical asset assets associated with them counter so I'm just trying to think about longer term how to reconcile these things.
Yes, we are.
Absolutely agree with you Doug that Theres a huge.
Diagnostic opportunity for genomics over time, and it reminder, overall of our $12 billion spatial biology, Tam 6 billion and total is research and an estimated $6 billion was and diagnostics.
We haven't made a commitment one way or another about how we'll choose to address that $6 billion diagnostic Tam today, we're really focused on simply enabling early lab developed test organizations, mostly academic medical centers like Mayo Medical labs, and Oregon Health.
And science University, with whom we have formal partnerships or genomics LDC development and really over time, we could go one of several ways, we could simply enable LD Ts.
For the foreseeable future and.
Allow the innovators out there to build diagnostics on our platform really sort of serving as the arms dealer, but we could.
Harper with either service or IBD kit organizations to commercialize genomics or we can easily restart that effort ourselves and certainly our corporate DNA kind of retains the program and let's call it for how to startup and IBD.
Both development and commercial organization, if the if the opportunity warrants and so I think it's a little early for us to declare what we really want to see what the nature of that diagnostic opportunity is and and we'll remain flexible on how we pursue it.
Okay and last one Brad you.
And you've closed the year with over $400 million and cash and equivalents.
Traditionally most of your capital has gone to investing in growth organically.
As you think about the year ahead, and how well you are positioned with your existing technologies, but also with your balance sheet.
Are you more open than maybe you have them in the past to making external investments that could augment your positioning.
Yes, we are absolutely more open and capable today than we have been in the past to think about bringing technologies or companies and didn't add on stream that could bolster our portfolio.
We have and enviable organic innovation engine here and between the genomics whole transcriptome assay and the space on molecular imager I think we have one of the most exciting roadmap surround that being said, we don't believe that we have a corner on the market for innovation and this field and there are a lot of exciting things happening and spatial by.
Allergy and elsewhere that we keep a close eye on and certainly today with the strength of our balance sheet and the market leading nature of both brand and the size and shape of our channel we could be.
Very natural owner or acquire or partner for other technologies. So I think we are more capable of that and more interested than we have and in the past.
But we will continue to remain targeted and thoughtful and anything we do and the future.
Alright, Thanks, a lot I appreciate the time.
Thank you.
Our next question is from Daniel areas with Stifel. Your line is open.
Hey, guys. Thanks for the questions Brad on the discovery assays, how do you think the mix for whole transcriptome and cancer transcriptome assays evolves over the course of the year and I know, it's early but if you had to take a stab what kind of split could you envision there if we fast forward to this time next year.
And those are good questions, Dan I think the.
Our cancer Transcriptome Atlas, which was our first mgs enabled genomics product has the benefit that it appeals directly to our existing genomics install base. When you think about the first 180 systems that we have take the orders for the vast majority are cancer researchers. So I believe we will continue to.
Sell that assay directly into our existing installed base.
And a very good clip.
The whole transcriptome assay will certainly appeal to our existing installed base to a certain extent too, but what the real excitement of the WTS and allows us to appeal beyond the field and cancer.
No.
First order impact of the whole transcriptome Atlas is to sell more instruments.
Rather than more consumable kits.
And I think as a result, you know.
It will take time before the whole transcriptome Atlas Eclipse and <unk> Cta in terms of which of the which are the assays is more popular and by time I need several quarters.
By this time next year.
I think we'll probably be entering a period with a whole transcriptome Atlas is the more and more of a dominant.
Assay or the larger assay and I hope, that's because we've begun to have and installed base and areas of science for beyond cancer.
Okay. That's very helpful for the model, let me ask another one that might also be helpful for the model on whole transcriptome.
Obviously, the number of samples that are run per year is an important.
Element or variable there I know, it's early as well because we're seven days into the launch but are you able to give some guide post to work with their if nothing else on the context of the 150 samples per year assumption that you had for the translational assays.
Yes, as you said, it's very early days about in terms of determining the number of samples that in GFS enabled genomics systems will process on an annual basis today, we formally increased our consumable guidance from the previous 75 to $80000 per system per year.
<unk>, 85% to 95% and I'd say that is derived predominantly from a view that Ngls systems will pull.
More samples per year that we had previously estimated as youll recall in the past. We had described that encounter enabled genomics systems with process about 150 samples per year and $500 per sample and we estimated that Ngls enabled systems might do.
Approximately half the number of samples per year at about twice the value per year.
I think our Q3 and Q4 experiences with Cta showed that the number of samples that early cta customers seem to be running was higher than that $75 per year, and thats really what drives up the relative the increase that.
Tom described and our overall expectations, but it's still quite early days and my hope is that over time, we'll learn that theres very enthusiastic adoption of these.
Genomics, plus and GFS assays and debt.
We will be raising that guidance and the future, but we're going to need several quarters before we have real customer behavior before we can provide and update there.
Okay Super Thanks, so much.
Our next question is from Dan Brennan with UBS. Your line is open.
Great guys. Thanks, Thanks for taking the question I guess first wanted to just kind of thinking through the Geo mix outlook for 2021 can you just remind us what was the backlog exiting the year.
And when you talked about 40 to 50 was on order growth kind of what was the total number of orders.
You had in 2020.
Yes, so Dan I'll take that it's Tom So we've got about as you recall right around 90 orders for the full year and.
And we reported that our installed base at the end of the year was about 130, but that we shipped 160 instruments. So that means we've got 30 instruments that are waiting to be installed and then when you look at the total number of orders versus the total number shipped we have about 20.
That are still waiting to be shipped <unk> orders that were and backlog headed into this year and our expectation would be that throughout the year. We've maintained about that backlog. So that's where you get the commentary on the 40% to 50% order growth.
Lining up with the revenue number and split that.
Commented on and guidance.
Got it and then and then any more like a qualitative Brad you typically will discuss and leaves and things like that.
And you can put that on the model, but just wondering.
Qualitatively any other color you would suggest about what the funnel looks like for 2021.
Yes, well the lead generation pace has remained incredibly high through the events that we held with our spatial genomics summit, which hedged 2000, plus registrants last week.
And I was dialed into the Hebt gold sponsor.
Workshop that we held and had over 600 people on it earlier today I think we're getting a very high level of engagement and therefore lead generation coming out of a whole transcriptome Atlas launch.
Being said, it's a six to nine months sales cycle. So that those types of leads that are just going into the funnel now we're going to take nine months.
And to mature into purchase orders and so I think we're going to see strengthening.
The actual order book.
On the in the back half of the year, but I'm very pleased overall with the level of interest and debt.
And we're garnering.
And when you think about the impact from Covid would last and it will be operating on a full capacity is that on way to quantify like if.
We are at steady state today, and just wondering how much is really big day, and if you will for less than 100% demand outlook.
Yes, I think every quarter, we've given an update to you on the status of labs, According to our own CRM system.
And we provided the last update.
Believe on that.
Round November where we said.
15% of labs, we're fully open and 85% or what we'll call partially open and I had hoped that by now we would have improved but we have it I mean, we're really and a steady state there.
85%, partially open and.
I think the best way to measure what that really means is to look at our encounter consumable pull through which and the fourth quarter was maybe 85% to 90% of what it would have normally been and our fourth quarter, So thats and.
And I think that through the first half of this year. If you look at our our expectations for seasonality on and counter consumables theyre going to continue to see that play through.
And strengthening of course and the second half we believe that as people are vaccinated. They will come back into the lab at full speed and resumed their research at the pace that we're accustomed to.
Got it and then and then Brad.
And so on the competitive front I know turn on.
Hi.
Price on the new chemistry.
How do we think about I know the market is a large room on multiple times and compete and I'm just wondering.
And you think about 2021 and the ramp how are you thinking about the competitive landscape.
And it changed at all and is anything factored into that.
Full spatial biology is obviously a field that's been declared by by leaders like the journal nature.
As you know.
Really the most important kind of a new set of applications and the field life Science research, we have both incumbent and flight connects genomics and many smaller companies who will be introducing products into this field.
And at its infancy, which is where I described spatial biology to day Theres plenty of room for everyone, but net I feel that nano strength through the launch of genomics, which was the first really elegant and complete solution and this field.
Has carved out a leadership position and a great brand and a great set of investor dialogue that will continue to benefit from.
And so in terms of the vizio formalin fixed paraffin embedded product that will be coming from snacks genomic genomics and have not yet begun shipping will we will look forward to seeing more data on that as it comes out I'm sure. It will create a certain amount of customer interest and competitive noise and 2012.
And one but I guess, there's three things to keep in mind about that one is formalin fixed paraffin embedded compatibility is not the only advantage. The genomics has held and translational research. That's me and it's possible. We also benefit from high throughput automation, which increases the reliability of the result.
<unk> and.
And region of interest selection that enables novel experimental design and we will continue to benefit from all of those things.
The second thing to bear in mind is really the busy and approach, which provides a broad landscape picture of tissue.
And is quite different than the genomics approach, which really zooms in on regions of interest and provides all of that profiling exactly where researchers want it and so they're actually complementary products and many leading centers are already using both and the third thing is unlike many other.
Life science tools markets, where youre selling two different instruments.
And that are competing for the same capital dollars and the same bench space.
Yo mix and <unk> compete and quite a different way you know <unk> is provided only as a consumable.
Products.
Whereas genomics is and automated instrument. So it's really a false dichotomy to say that customers are going to adopt one or the other and we really do see customers buying genomics systems for large scale research and then using <unk> on our side for that kind of broad angle and landscape served from time to time and so.
I don't see that changing in 2021, we feel really confident and our translational leadership and expect to maintain it.
And maybe the final one I think Tycho asked and I'm sorry, if you answered it just on M&A or just how do we think about and the balance sheet.
And what do we expect per barrel kind in.
And 2021.
Yes, I think we're obviously not guiding that we're in a hurry to deploy that capital into inorganic growth.
Non of spring has never done an acquisition and our history and we really have neither ever had the need nor.
On the balance sheet to be assertive about it but now is different as I said, the Tycho I think we have a lot of innovation, that's having happening and the field of spatial biology.
<unk> has a great channel and a great brand and a deep deep understanding of what that market needs.
We're not guiding by any stretch that we're intending.
To acquire something this year, but we are seeing clearly that were and are positioned to do it should the need and opportunity arises.
Great. Thanks, Brad.
Our next question is from Catherine Schulte with Baird. Your line is open.
Hey, guys. Thanks for the question.
Alright.
David.
Quarterly Pizza and Matt. Thank you mix all day.
And how should we think about that.
And 2020.
Okay.
And you talked about.
Okay.
Okay.
Yes, I think I think to reiterate some of the main points. Tom made it was 40% to 50% order growth over the course of the year and I think that's probably a number to look at on a quarterly basis as well.
And that and the first overall genomics revenue would be 40% and the first half and 60% and the second half and I say I think a way to think about that is that during the first half of this year I expect to be primarily selling new genomics instruments into to customers who began evaluating their purchase.
Just six months ago win on our offering was centered around the encounter readout for protein and the cancer Transcriptome Atlas, which was of course newly launched at that time and really and the second half of 2021 is when we'll begin to see uptake for this instrument into those who are buying it for the purposes of the whole transcriptome Atlas.
And the areas that and the book beyond oncology and are weighted to simply.
And then.
Specifically as it relates to instruments, Catherine and thinking about that quarterly pacing.
About two thirds of our overall guidance would be instruments and.
Net 40% to 50% order growth would be about right at each quarter and that we would be closer to one to one book to bill, which is a bit of a nuance relative to last year, where we entered with a pretty big backlog of orders. So if you do the math that way, you'll get to a pretty tight range that aligns with what we guided for the full year and would give you a sense for what the quarterly.
And pacing could look like this year.
And then please.
And the commentary around and genomics for 'twenty and 'twenty one.
Back on and take on longer term.
Any.
Thoughts on what percentage.
And count on the box.
Gentlemen, coupled with cash.
Yes.
Okay.
Okay.
Okay.
I don't think Katherine were and are positioned to provide long term guidance or target ranges, but I would say nothing has really changed about our view on.
And on those topics since we'd probably last discuss them.
This year as I said early on I would expect about half of our new genomics systems to go into encountered readout and to be used for encounter readout.
Which would mean something on the order.
60 to 65, new systems for encounter readout.
We're selling into a 950 and counter instrument installed base. So.
It's.
And it's making progress in terms of penetrating but it's by no means saturating.
And that encountered readout at that stage and then within Ges.
We have an enormous opportunity there I think the best analogy to look at continues to be the chromium system, which is very successfully penetrated the alumina and installed base and.
And certainly with the whole transcriptome assay, we think ever.
Every single chromium system is addressable with the genomics and would be a very natural companion for.
Spatial biology.
Alright, and then last.
And for me, if we think about that.
Launch.
And mark kind of an indicator of interest.
Our revenue generator.
Okay.
And Tom Thanks.
Hi, Jeff.
Graham.
And should we be thinking about it.
Ladies and gentlemen.
And gentlemen.
And then can you just talk to how you price and Matt.
On on that standpoint.
Yes.
Yes, yes, I think we're going to have.
And our our tap program for semi this year is going to be highly targeted at key opinion, leading scientists, who we think are doing interesting things with that technology that could yield.
Peer reviewed papers have a certain impact and so it's in a sense a quality.
Game, not a quantity game for us this year. If we finished the year with say 20 really good projects.
Ordered and initiated.
That could yield I don't know 10 peer reviewed papers next year that would be great.
And that to me would be a fine definition of success.
Okay great.
Our next question comes from the line on patients so far with Morgan Stanley. Your line is open.
Hey, guys. Good evening, so Brad maybe I'll start with <unk>.
The tap program, you've already launched here a little bit earlier than some of US me and anticipated. So is there a scenario, where we could see you start beta access and the fourth quarter rather than the first half of next year.
And would that also mean, our commercial launch perhaps in the middle of next year versus towards the backend or sort of too early to sort of make that call just yet.
Thanks for the question.
Wanted to use the opportunity of the Hebt meeting to begin to.
Engaged with the top genomics researchers and the world and really with our first two customer datasets coming out. This week. It was a perfect opportunity to begin to talk to key opinion leaders about what they would do with this platform and therefore initiate the tap launch it does not signal and acceleration and our previous.
As previously communicated timelines for the <unk> launch.
And we want to get that early user feedback and incorporate it into the product development effort incorporated into <unk>.
And in particular on the software and the user interface.
That will be critical before we could ever place systems and our customer labs. So don't let's not get ahead of ourselves and pull that launch timeline forward, Yes, I think what we've communicated in December remains the overall timeline.
Got it fair enough.
And then on on <unk>, one of the sort of more intriguing longer term takeaways from the <unk> session was obviously around the need for better data tools and more open data sharing across customers.
Do you have any plans to help capitalize that is obviously one of the two important and sort of players and spatial at the moment beyond just your alumina on Dragon partnership.
Yes, we do though we're not ready to talk about them much just yet agents.
We have and I've said this many times more people and software within our R&D organization today than we even do and engineering and molecular biology, it's the single largest group and our overall product development organization, there's clearly many opportunities and even needs for.
To help our customers do things like store their imaging and genomic data and the cloud share it across multiple users.
Gain access to the.
And the compute capacity to do the processing of the mgs data back into the graphics that enable genomics analysis, we have.
And the works there, but nothing to announce yet today stay tuned over the course of the year ahead.
Got it and.
And then 111 final one for Tom on margin Tom.
Tom I mean, I know you mentioned sort of your margin expectations for this year because of the investments you're making around the WTO and kind of service offering plus instrument.
Instrument mix, but over what timeframe do you expect margins to recover to that high 60, and 70% ish range I mean, you've obviously got the semi launch coming up next year, as well, which might sort of push out bad recovery a little bit. So should we think about 65% to 70 as Morris.
23, plus event at this stage and then any color on that SG&A cadence given the hundred commercial reps that you are adding over here should we assume thats more front end loaded and just snap lines over the course of the year.
Sure. So on margin stages, I would think longer term for that kind of margin expansion and I think that youre thinking about it the right way in terms of having another.
Instrument launch coming at the back end of 'twenty, two probably while at the same time the instrument mix for genomics continues to be fairly heavy so even though we've got some some bumped.
Bumped up pull through guidance and we feel bullish about where consumables are going I think thats still a longer term.
Process for margin expansion, coupled and particularly when you think about the capacity investments, we'll be making over time and we'll comment further in future quarters as we get visibility on what that might look like long term and as pull through dials and with respect to the SG&A I would expect that to be the expense to be more middle to back half.
Of the year. It just takes time to hire that number of people and then you don't pay them, obviously for the full year. They don't have activity for the full year on.
Our intent is to get those folks hired as quickly as we possibly can we're recruiting for a number of those positions as we speak but I think that.
The expense ramp.
On the over on 100 folks, who we expect to add would be more back half versus first half taking into account. The usual seasonal pattern. We have with SG&A are usually the first quarter is a little bit heavier for various reasons.
So hopefully that answers your question if you've got other.
Other clarifications, let us know.
Got it perfect. Thanks, so much guys.
Yes.
Ladies and.
This concludes the Q&A session and I will turn the call back over to Doug Farrell for any closing remarks.
Thanks, very much for joining us today, if you did miss any portion of the call will be a replay available on the next few hours you can access that replay by dialing 800, 580, 580 367 International callers. Please dial four one and 6621 <unk> to the conference I'd for bolt on.
The same that is 3093 307 once again, thanks for your time.
This concludes today's conference call and you may now disconnect.
Okay.
[music].
And.
[music].
And.