Accelerate Diagnostics, Inc. (NASDAQ:AXDX) Q4 2022 Earnings Call Transcript

Accelerate Diagnostics, Inc. (NASDAQ:AXDX) Q4 2022 Earnings Call Transcript March 29, 2023

Operator: Good afternoon, and welcome to the Accelerate Diagnostics Fourth Quarter 2022 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Laura Pierson. Please go ahead.

Laura Pierson: Before we begin, it is important to share that information presented during this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include projections, statements about our future and those that are not historical facts. All forward-looking statements that are made during this conference call are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. These are discussed in greater detail in our annual report on Form 10-K for the year ended December 31, 2022, and other reports we file with the SEC. It is my pleasure to now introduce the company’s President and CEO, Jack Phillips.

Jack Phillips: Thank you, Laura. Good afternoon, everyone, and welcome to our fourth quarter earnings call. Today’s call will focus on our fourth quarter and full year results. I will also provide an update on three important strategic priorities; one, building financial strength. This includes restructuring our current debt obligation and reducing our cash burn while improving our operational efficiency; number two, growing market share through our Becton Dickinson partnership; and number three, delivering on innovation by advancing our next-generation susceptibility platform. Before providing additional detail on each of these areas, I would like to hand it over to our outgoing Chief Financial Officer, Steve Reichling to review our fourth quarter financial results. Steve?

Steve Reichling: Thank you, Jack, and good afternoon, everyone. Net sales were $3 million for the quarter and $12.8 million year-to-date. This compares to $3.3 million and $11.8 million for the same period in the prior year. This represents a decline of 9% as compared to the fourth quarter of 2021, while full year revenues grew by 8% year-over-year. This fourth quarter 2022 decline was due to fluctuations in the timing of capital revenue. Meanwhile, recurring revenues continued to grow sequentially quarter-over-quarter and over comparable periods from the prior year. As communicated during our last earnings call, we came in just below the low end of our annual guidance of $13 million to $14 million. Cost of goods sold were $2.1 million for the quarter and $9.4 million year-to-date, resulting in gross margins of 28% and 26%, respectively.

This compares to cost of goods sold of $6.7 million and $12.2 million, inclusive of a onetime $4.5 million inventory write-down, making this year-over-year comparison not meaningful. We continue to see headwinds from a gross margin perspective, inflationary pressures on both direct and manufacturing costs, among other contributing factors. Selling, general and administrative expenses, excluding noncash stock-based compensation expense, were $6.8 million for the quarter and $30.7 million for the year. This compares to $8.3 million and $31.6 million for the same period from the prior year. SG&A reductions over these periods were driven by streamlining our spend within sales and marketing within the scope of our BD commercial collaboration. Noncash stock-based compensation expense and SG&A was $2 million in the quarter and $8.5 million year-to-date compared to $3.2 million and $17.6 million for the same periods in the prior year.

Research and development costs, excluding noncash stock-based compensation expense, were $5.7 million for the quarter and $25.5 million year-to-date. This compares to $4.8 million and $17.8 million for the same period in the prior year. These increases were the result of accelerating investment in our next-generation AST platform Wave. Specifically, our recent investment included delivery of approximately 20 development units of the Wave instrument and purchasing of equipment to finalize our consumable manufacturing line. Noncash stock-based compensation expense in R&D were $0.4 million for the quarter and $1.4 million year-to-date. Our net operating loss, excluding noncash stock-based compensation expense was $11.5 million for the quarter and $52.2 million year-to-date.

Our GAAP net operating loss was $14 million for the quarter and $62.8 million for the year, resulting in a net loss of $0.15 and $0.76, respectively. Net cash used was $9.8 million for the quarter and $50.4 million for the year, excluding cash flows from financing. We ended the year with cash and investments of $45.6 million. Before I hand it back to Jack, I wanted to take this moment to thank my hard-working team, our analysts and our investors for these past 10 years. This will be my last earnings call with Accelerate Diagnostics. And I’d like to introduce you to David Patience who will be joining Jack on the rest of this call and to lead accelerate into the future. I have worked closely with David, and he has my complete confidence and I wish he and the company tremendous success.

I will now hand it back to Jack to review our fourth quarter results and 2023 priorities in greater detail. Over to you, Jack.

Jack Phillips: Thanks, Steve. I will quickly cover our fourth quarter results and turn my commentary to our company priorities. In the fourth quarter, the U.S. contracted three new Pheno instruments and brought another five instruments live. We ended the quarter with a revenue-generating installed base of 325 Pheno instruments and a backlog of 69 Pheno instruments, pending implementation. While our fourth quarter commercial results did not meet our expectations. As mentioned on the last call, we restructured our commercial team late last year and turned our focus to setting BD up for success. We remain encouraged given the strong momentum being built with our BD commercial partnership. Now I would like to provide an update on three important strategic priorities financial strength, market share growth through our Becton Dickinson partnership and delivering on innovation by advancing Wave.

Starting with financial strength, I want to provide an update on our debt restructuring. As you may know, our 2.5% convertible senior notes matured and became due and payable on March 15 of this year. On March 9, we entered into a forbearance agreement with the notes trustee and an ad hoc group of holders of approximately 85% of the outstanding notes, which became effective on March 13. Pursuant to the forbearance agreement, the holders agreed and directed the trustee to forbear the — from exercising their rights and revenues under the indenture in connection with certain events of default under the indenture until March 29. We continue to work with the holders of the notes and other key stakeholders and have agreed to an extension of the forbearance period to facilitate those continued discussions.

Moving to our next priority, growing market share with Pheno and Arc through our Becton Dickinson partnership. As a reminder, last quarter, we announced the formation of an exclusive global commercial partnership with Becton Dickinson. BD is the global leader in microbiology with thousands of customers spanning most countries globally. Nearly every clinical microbiology lab in the world uses at least one of BD’s products. Much of the quarter was spent taking the necessary time to train the BD commercial organizations. Activities included training on the clinical value of rapid positive blood culture susceptibility with our proven body of evidence and combining our sales processes into a single joint sales process. Together, we successfully launched the only end-to-end complete microbiology workflow for combating bloodstream infections with our combined BD and AXDX product portfolios.

This end-to-end product offering from specimen collection to growth and detection of positive blood culture samples and finally, through identification and susceptibility testing enables faster reporting of targeted antimicrobial therapies to pharmacists and physicians. This exciting value proposition is truly unique within clinical microbiology and the rationale for bringing our portfolios together to combat the sepsis burden and growing antimicrobial resistance. There are three principal drivers for us joining forces with BD. First, to significantly improve our commercial reach, both in the U.S. and abroad; second, to improve our selling effectiveness by combining our offerings with BD’s portfolio; and lastly, to collaborate on future innovation.

In the U.S., we launched our commercial partnership in January of this year, after spending the fourth quarter aligning our sales and marketing teams to ensure we improve both our commercial reach and selling effectiveness. Since launch, our sales activity has dramatically increased, which is an encouraging indication of our commercial reach is strengthening. Specifically, we saw a 400% increase in new opportunities thus far in Q1 versus our sales funnel from the fourth quarter of 2022. We have a joint target of bringing significant new Pheno opportunities into our sales funnel this year, and we are tracking ahead of plan thus far. Improving our sales effectiveness is our second focus. Our joint sales process highlights key roles and responsibilities between the BD territory managers and our Pheno specialists to drive meaningful funnel progression, winning more accounts and faster clinical implementations.

Our joint marketing, sales and contracting processes are focused on delivering improved deal economics by offering strong synergies across our highly customized bloodstream infection workflow solutions. For example, we have an active program, which allows customers to renew existing BD systems and as a part of the renewal customers can evaluate and implement Pheno for rapid susceptibility. We anticipate many of our current and new opportunities will close in the second half of 2023, and early ’24, driving meaningful market share growth. In summary, we are quite enthusiastic from the early progress in the U.S. to date, but there’s still work to be done. In EMEA, we launched our commercial partnership this month. EMEA is a more complex healthcare system — delivery system requiring country-by-country logistical and market access considerations.

For example, we are adapting our commercial playbook to serve tender-driven markets such as Italy and the U.K., which differ from capital acquisition markets such as Germany and the Nordic countries. This led to a slight delay in launching abroad, but we are encouraged by the team’s enthusiasm and progress in the early days. We are commercializing both Arc and Pheno in EMEA, thus bringing in even more cost-effective and automated workflow solution to combat bloodstream infections. An Italian evaluation site will be presenting an Arc abstract during the upcoming ASM in June, and the author will be publishing a full study readout in a local European journal. We will be leveraging this peer-reviewed publication for our selling efforts in EMEA in the future.

We continue to see strong market demand for Arc in the U.S. and are eager to bring our commercial learnings to the U.S. with Arc after FDA approval. The U.S. market is eager to gain access to an automated cost-effective sample preparation solution for positive blood cultures. As discussed on our prior calls, we continue to pursue Arc as a Class II 510(k) device with the FDA and remain in active dialogue with them. We will not have a forecasted launch date in the U.S. until we begin clinical trials, which is expected in Q2. Lastly, with our BD partnership, we will begin to collaborate on future product developments. The first area of focus is streamlining our upfront workflow for Wave for positive blood cultures and isolated colony samples. In summary, our work with BD is off to a good start.

We have launched in both the U.S. and EMEA with strong customer engagement and focus from our joint commercial organizations. Now turning my comments to our third strategic priority, delivering innovation with our next-generation platform, Wave. We continue to make very good progress with our Wave development program. As discussed previously, we have taken delivery of over 20 alpha instruments, which are up and running in our core laboratory. This is very exciting and has significantly sped up our development efforts. As a reminder, the Wave platform will be able to provide rapid susceptibility test results for both positive blood culture and isolated colony samples on a single system with significantly improved platform economics over Pheno.

Our customers have confirmed a consolidated susceptibility approach will have a superior advantage over traditional isolate-based platforms on the market today. For Accelerate, Wave significantly expands our revenue and wallet share per customer while restating our platform economics. Our target is to have our preclinical data readout complete by the end of the year and start clinical trials shortly thereafter. In summary, we will be looking to update the market with further details on our three strategic priorities; building financial strength; growing market share with Becton Dickinson; and delivering on innovation by advancing Wave. On a personal note, I wanted to take the opportunity to thank and recognize Steve Reichling for his years of service as our CFO.

I look forward to continuing to work with Steve in an advisory capacity. Moving forward, I have great confidence in David Patience as our new CFO, and look forward to everyone getting to know David as he takes over for Steve. I would now be happy to answer questions from our analysts. Should others on the call have questions not addressed, we would welcome you to send these questions or request for a follow-up meeting to investors@axdx.com. Thank you.

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Q&A Session

Operator: Our first question is from Alex Nowak with Craig-Hallum. Please go ahead.

Alex Nowak: Okay. Good afternoon, everyone. And good luck to Steve with his future projects and welcome David. The first, I guess, a couple of questions here is really around the BD partnership. I mean — how should we be trying to think about tracking the success of the launch of Pheno so far? We’re not giving sales guidance right now. I mean is it fair to say it’s limited visibility — I mean how should we be thinking about it? Because when we take the 400% comment, you did 19 placements in 2022, 400%, that gets to 80 systems. I mean do you think you could place eight systems in the second half of this year?

Jack Phillips: Alex, it’s good to hear from you, and this is Jack and David is in the room with me as well. So great first question. So as we said in the commentary, the BD partnership is going very well in the U.S. We’re off to a later start in EMEA based on just the complications of doing business in EMEA with the multiple countries. We are looking at providing more actionable guidance as we go throughout the year. We’re not providing it right now, Alex, just because, again, we just went live in January — live, meaning that we literally have BD sales reps about 50-plus of them selling in the U.S. that we just literally trained at the end of Q4. We were at their sales meeting. It was a really great meeting. We also had a lot of extensive follow-up training with them.

And we’re off and running. And the first two, three, almost three months — three months now of the new year, I mean, we’re very excited about the activity around reach and access. We’re making a lot more sales calls about funnel improvement and progression. We’re adding more accounts to the funnel, but we’re also progressing a number of deals, thanks to this BD partnership. But it is going to take — as I said, it’s going to take some time to really start getting these deals through the funnel. We restructured our sales force back in August and significantly downsized our sales force. So really, we were left in that transition period of training BD, getting them up to speed and so forth. We — again, as we go through the year in the next couple of months, we look to provide more specific guidance.

We believe, again, the greater growth in new account closes, we’ll see, we’ll be in the — in the second half of the year. We’re very optimistic about that for Pheno. And then obviously, with Arc, we’ve got to get on market from an FDA approval standpoint before we can significantly start marketing Arc in the U.S.

Alex Nowak: Okay. That all makes sense. And can you remind us again on BD? I mean, are they really a funnel driver at the end of the day and it’s still up to accelerate in your sales team to close this deal once you get those inbound inquiries? Or how is the handoff between BD and the Accelerate teams go and ultimately have a compensation work between the sales teams?

Jack Phillips: Yes. Let me — I’ll turn it over to David to answer that. Obviously taken over the rein from Steve as the CFO, but prior to David stepping into his role, he’s literally — his life has been focused on a successful integration with BD. So he’s been very much down into the weeds on all of these topics. And again, good question from you as is basically, how does the sales process work, David, and I’ll let you go ahead and respond.