NanoString Technologies, Inc. (NASDAQ:NSTG) Q3 2023 Earnings Call Transcript

NanoString Technologies, Inc. (NASDAQ:NSTG) Q3 2023 Earnings Call Transcript November 6, 2023

NanoString Technologies, Inc. misses on earnings expectations. Reported EPS is $-0.78 EPS, expectations were $-0.53.

Operator: Good afternoon. My name is Krista and I’ll be your conference operator today. At this time, I would like to welcome everyone to the NanoString Third Quarter Operating Results. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the conference over to Doug Farrell, Investor Relations. Doug, you may begin.

Doug Farrell: Thank you, operator. Joining me on the call today is Brad Gray, our President and CEO, as well as our CFO, Tom Bailey. Earlier today, we released our financial results for the third quarter ended September 30, 2023. During this call, we may make statements that are forward-looking, including statements about financial and operating projections, future business growth, trends and related factors, expectations regarding future operating results, future cash flows, current and future instrument orders, as well as our manufacturing capacity, prospects for expanding and penetrating our addressable markets, our strategic focus and objectives and the development status and anticipated success of reaching product offerings and as well as investor expectations regarding the impact of our convertible note exchange and the impact of macroeconomic factors.

Forward-looking statements, are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially, from those projected and we undertake no obligation, to update these forward-looking statements. Later in the call, Tom will be discussing our Q3 financial results and guidance for the balance of 2023. We have prepared as a supplement to GAAP financial measures, selected non-GAAP adjusted measures, the calculation of which are described in detail in our press release. Throughout the call, all financial measures will be GAAP unless otherwise noted. You can also find reconciliations of GAAP to non-GAAP measures, as well as the description, limitations and rationale for using such measures in this afternoon’s press release.

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 non-GAAP or adjusted measures and other select and financial data. I’d also like to remind everyone that, next week we’ll be participating in the Stifel Healthcare Conference in New York, as well as the Jefferies Healthcare Conference in London. We look forward, to having the opportunity to speak with many of you there. Now I’d like to turn the call over to Brad.

Brad Gray: Good afternoon and thank you for joining us today. The past several months have been incredibly productive for NanoString. I’m happy to have this opportunity, to expand on the strong operating results that, we preannounced on October 10 and to update you on some key developments in more recent weeks. Our Q3 revenue of more than $48 million, was a record high and an increase of more than 60% over the prior year. We reduced our cash burn by about 50% sequentially in the third quarter and the reorganization that we announced last month, is expected to reduce our operating expenses, by more than $15 million annually. With our solid revenue growth and leaner operating model, we believe we are putting the company on track, to become profitable in 2025.

Just as importantly, we worked with the major holders of our convertible debt to exchange approximately $216 million of our convertible notes for new senior secured notes, with an extended maturity till September of 2026. This pushes the maturity to a point in time in, which we expect to be profitable, which we believe will give us a broader menu of options to retire the debt, while also removing a near-term financial overhang that, may have kept some investors on the sidelines. We have also strengthened our leadership team. In August, we welcomed Todd Garland as our Chief Commercial Officer. Todd joins us with 25 years of experience in life sciences, spanning the full spectrum from discovery to clinical markets. Todd has been traveling in the field extensively for a couple of months now and has impressed with the passion and the talent of our commercial team.

He has some great ideas on how to continue to improve our performance and I have the utmost confidence that Todd will drive the effectiveness of our commercial organization and our future growth. I’d now like to provide an update, on our progress towards our strategic objectives for the year. Our first objective for 2023, is to increase our penetration of the spatial biology market. During the third quarter, spatial biology demand was healthy across both instruments and consumables. We exited Q3 with an installed base of more than 500 spatial biology systems, an increase of more than 50% over the prior year. Our CosMx Spatial Molecular Imager remains the primary growth driver of the business, accounting for most of our spatial instrument orders, as the single cell resolution of the platform attracts discovery researchers, who are expanding from droplet-based single-cell research into spatial biology.

Demand is especially strong from new to NanoString customers, who accounted for more than 90% of CosMx’s orders during the third quarter. Academic and government-funded researchers, continue to account for about 65% of new CosMx orders with biopharma companies and the CROs who serve them, growing to account for about 35% of new orders in the third quarter. While ongoing litigation slowed the pace of orders in Europe, strong demand in North America drove overall CosMx’s momentum. Despite what we believe are our competitors’ efforts to misuse preliminary court rulings to create anxiety for customers and eliminate competition, we have successfully defended our sizable CosMx instrument order book to filling or retaining approximately 95% of cumulative orders.

CosMx has now been used to generate approximately 20 peer reviewed publications and 25 preprints across multiple applications. Our AtoMx Spatial Informatics Platform provides telemetry that allows us to monitor customer success and we can see that researchers have collectively created more than 1,000 studies across more than 100 customer sites. We are continuing to enhance our AtoMx platforms, features, functionality and usability by listening to customers and implementing a series of software upgrades and we are excited about AtoMx’s continued evolution. One of the biggest advantages of CosMx over competing spatial imagers, comes from Hi-Plex, which we are convinced is the single most important product attribute for imagers. Scientists have a huge fear of missing out that drives them to seek the broadest content panels available.

We have seen time and again that as we add plex, customer demand goes up. This is the same characteristic we saw in the next-generation sequencing market as they move from focus panels to whole genome sequencing. Our competitors, are offering targeted RNA panels of just a few hundred plex. The CosMx 1,000-plex RNA assay that, we offer today provides twice the plex of competing assays. And our CosMx assay road map is designed to push plex to the limit. In September, we released our first public 6,000-plex data set, which was generated from human brain tissue. The data set nicely demonstrates, the value of maximizing plex as confidence was able to detect over 3,000 unique genes in the sample, with an average of over 500 unique genes in each individual cell.

We remain on track to begin shipping our 6,000 plex RNA assay kits, during the first quarter of 2024 and will provide customers a sneak peak of this new assay, when we begin offering it, via our technology access program service later this quarter. Plex is not the only advantage of CosMx, relative to competitors. CosMx also provides highly accurate cell segmentation, which allows the instrument to find the boundaries, between cells and properly assign the RNA, or protein molecule detected to correct cell. A failure to properly segment cells in a tissue, calls this molecule to be assigned to the wrong cells, making the data generated useless, or even worse misleading. Next week, we’ll be highlighting the CosMx’s road map at the Annual Meeting of the Society for Neuroscience, where our scientists and customers, will present more than 20 studies, showcasing our spatial platforms.

Some studies will include the new 6,000 plex RNA data sets, generated on human brain samples, while other studies will demonstrate the power of using, both our new 1,000 plex mouse RNA panel and our 64 plex CosMx mouse neuroscience protein panel on the same slide. While GeoMx continues to account for a minority of our new spatial system orders, it drives most of our spatial consumable revenue. Our installed base of GeoMx systems remains highly productive, generating more than 320 peer reviewed publications to-date. This body of research nearly doubled in the last 12 months, showcasing many exciting applications for spatial biology. And the investors may not appreciate the importance of proteomic applications in driving GeoMx utilization. Protein applications account for about half of the GeoMx sample volume and half of its peer reviewed papers.

Protein applications have remained a focus for our GeoMx road map. In September, we announced a groundbreaking new assay for GeoMx called the IO Proteome Atlas or IPA. While many spatial biology systems provide protein applications of modest plex, the GeoMx IPA represent something completely new. At 570 plex, the IPA covers virtually every target in oncology and immunology for, which an [IFC] antibody has ever been developed. IPA offers more than five times, the spatial protein content of any competing platform and its comprehensive coverage, makes it ideal for screening clinical trial samples, for new drug targets and biomarkers. The unveiling of IPA, has already resulted in a surge of new interest in GeoMx. Last week, we highlighted the GeoMx IPA during the Society for Immunotherapy of Cancer, or SITC Conference as two early access customers presented data that, they had generated with the new assay.

Researchers from the Mayo Clinic demonstrated, how the IPA provides a simple way, to explore the long tail of potential protein biomarkers, discovering targets in breast cancer tissue that, would have been missed in smaller panels. Researchers from Mass General Hospital combined the GeoMx IPA with the RNA Whole Transcriptome Atlas in to a single multiomic assay that, was more effective than RNA seat at finding patterns that predict drug response in pancreatic cancer. Customer feedback on these presentations was extremely positive with many customers and all of the enormous increase in protein plex that we delivered, calling it a game changer. Many are looking forward to giving the IPA, a try after we begin shipping the IPA, to customers later this quarter.

Our second objective, is to deliver predictable revenue growth. So far this year, we have beat our revenue guidance in every corner. In Q3, we exceeded the upper end of our revenue guidance, by about $1 million as we successfully scaled up instrument manufacturing and continue, to work through our substantial CosMx backlog. The team is working hard in the fourth quarter, to install as many CosMx systems as possible, but we still expect to carry a backlog into 2024. We’ve also seen improvement in nCounter instrument sales throughout the year and we’re implementing initiatives, to keep this foundational business a steady contributor. In an effort, to ensure investor expectations remain in line with our revenue outlook during the fourth quarter, we’re today narrowing our guidance range.

The updated guidance reflects the impact of the preliminary injunction that, prevents us from delivering CosMx units, to customers in some European countries. A top end of the range, represents healthier year-end spending by our customers, while the bottom end of the range keeps revenue approximately flat from Q3 to Q4 and reflects uncertain macroeconomic factors and the potential elongation, of capital equipment sales cycles. Our third strategic objective is, to demonstrate progress towards cash breakeven. As we shared with many investors during September, our company operates two franchises with very different profitability profiles. Our nCounter business, the leader in the mid-plex gene expression market, already provides an estimated 30-plus percent EBITDA margin, based on its consumable-heavy revenue mix and minimal R&D.

Our spatial biology franchise, is rapidly growing, but not yet profitable based on the instrument heavy revenue mix, and ongoing investments in product innovation. The team remains laser-focused on our path to profitability. During Q3, increased operational discipline helped cut our cash burn – by about 50% sequentially. Early last month, we reorganized our research and development and manufacturing operations, eliminating over 100 physicians. The impact of this expense reduction, is not yet reflected in Street models, which we believe overestimate our operating loss in the coming years. Importantly, despite this reduction in force, we remain in a position, to deliver the product road map that we have described publicly. To conclude my remarks, I’ll provide an update on our ongoing IP litigation.

In September, our competitor 10x Genomics, was granted a preliminary injunction in the new European Unified Patent Court or UPC that, prevents us from selling our RNA detection assays, for CosMx across the 17 European Union countries, based on what is referred to as the 782 patent. We have appealed this decision, to the UPC Court of Appeals in Luxembourg and expect this appeal, will be heard in December. The full UPC proceedings on the merits of 10x claims, are expected to take place in the second half of 2024. On October 10, the UPC ruled in our favor in a second case, related to what is referred to as the 928 patent. The court denied 10x’s request for preliminary injunction and raised questions on both the validity and infringement of this patent.

An issue in this ruling, the UPC considered elements of our arguments that were not addressed by the German court when it evaluated the same 928 patent in May, giving us another path forward in our appeal in Germany next year. Next week, we’ll be in the U.S. District Court in Delaware for another IP lawsuit filed against us by 10x that, alleges that GeoMx infringes patents that they acquired from a company called Prognosis. The trial is expected to begin on November 13th and last for five days. We’re confident in the merits of our arguments that we intend to present and on the lack of infringement as well as the validity of the patents asserted by 10x. We will, of course, update you as soon as we know more about the outcome of this hearing.

Now I’d like Tom to take us through the details of our Q3 operating results.

Tom Bailey: Thanks, Brad and thanks all for joining us today. For the third quarter of 2023, total revenue was $48.1 million, representing 63% year-over-year growth. For our Spatial Biology business, Q3 revenue was $28.9 million, representing growth of more than 200% year-over-year. Spatial biology instrument revenue was $21.1 million, approximately 350% year-over-year growth. We shipped about 90 and installed about 65 spatial instruments during Q3, growing our spatial instrument installed base to approximately 510 instruments. As a reminder for those updating their models, the number of instruments we installed during a quarter can differ, as compared to the number of instruments we ship. Revenue recognition, is based on instruments we ship during the quarter as opposed to installations.

Q3 spatial biology consumables revenue was $7.8 million, representing 70% year-over-year growth, and reflecting typical GeoMx consumables pull-through Q3 seasonality and continued stocking orders of CosMx’s consumables. Q3 nCounter revenue, which includes all service and other revenue was $19.2 million, reflecting the continued stability and durability of the nCounter platform. nCounter instrument revenue was $2.5 million, consumables revenue was $10.5 million and service revenue was $6.2 million. At the end of Q3, our nCounter installed base was approximately 1,140 instruments. Turning to margins and expenses, I’ll provide results on a non-GAAP or adjusted basis, which removes the impact of stock-based compensation, appreciation, amortization and certain other items with no correlation to continuing operations.

Please refer to our press release, as well as the exhibits we have posted to our Investor Relations web page for detailed information on how our non-GAAP or adjusted measures are prepared. Q3 adjusted gross margin was 41%, impacted by revenue mix heavily weighted to spatial instruments, which are currently selling at lower than planned gross margins due primarily to higher unit production costs incurred than expected. For the full year, we now expect gross margins will be in the low to mid-40% range with a higher-than-planned instrument production costs, partially offset in Q4 by the cost benefits of the reorganization announced on October 10. Adjusted R&D expense was $13.4 million, a decrease of 8% year-over-year, with lower personnel-related costs, partially offset by software development and consulting costs.

We expect R&D expenses to be lower sequentially in the fourth quarter, primarily as a result of the reorganization. Adjusted SG&A expense was $26.7 million, a decrease of 6% year-over-year, reflecting lower personnel costs and lower trade show and other marketing-related expenses. We expect SG&A expenses to be modestly lower in the fourth quarter as a result of the same factors. Q3 adjusted EBITDA loss was $20.2 million. Adjusted EBITDA loss is expected, to decrease by about 50% or more in the fourth quarter, as compared to the third quarter, driven primarily by operating expense savings from the reorganization. Our cash, cash equivalents and short-term investments, were approximately $97 million as of September 30, 2023. Turning to guidance.

For the fourth quarter, we expect revenue to be in the range of $47 million to $52 million, representing about 45% year-over-year growth. This range includes $27 million to $31 million of spatial biology revenue and $20 million to $21 million of nCounter and service revenue. With that Q4 range, we are updating our 2023 annual revenue guidance range to $175 million to $180 million. Our updated annual range includes spatial biology revenue of $96 million to $100 million and nCounter revenue of $79 million to $80 million. Given the lower expected gross margin range and the partially offsetting reduction in Q4 operating expenses, we now expect full year 2023 adjusted EBITDA loss of approximately $80 million to $85 million. Heading into 2024, we expect gross margins to improve driven by increasing consumable sales, as a percentage of our total revenue and improved instrument production costs.

We also expect with the reorganization that operating expenses will be sequentially lower in 2024, as compared to 2023, at least $15 million lower than what Street models currently reflect, which should support significantly improved, profitability profile in 2024 and put us on track, for our first full year profitability expected in 2025. We will offer more details when we provide our annual guidance for 2024 early in the New Year. Finally, I’d like to comment on the exchange we’ve included for our convertible notes, the transaction we consummated with two large holders representing approximately 94% of the total principal amount. The old notes were exchanged for new senior secured notes with amounts due in September 26 are about three years from today.

The new notes bear interest at 6.95% and will occupy a senior secured position in our capital structure. As part of this transaction, we granted $16 million in common stock warrants to the noteholders, replacing about 4.5 million shares potentially issuable under the old convertible notes. During the first year, interest may be paid in kind at our option, saving the company about $15 million of cash expense, as we take further steps to improve profitability in 2024. We want to thank these investors for their strong support of the company. Their enthusiasm for NanoString’s future is aligned with ours and we appreciate their partnership. These new longer-dated notes provide the window needed for us to achieve profitability prior to maturity, which we believe will support improved terms and availability of any new financing required by that time.

Now I’ll turn the call over to Brad for our closing comments.

Brad Gray: Thanks, Tom. In closing, the spatial biology market is experiencing explosive growth and our innovative technologies and compelling road map goes at the forefront of this exciting field. We are running the company in a disciplined manner and have taken a series of steps, to rapidly improve the financial profile of the company, which may have in the past cloud our industrial interest. These steps include consistently exceeding our revenue guidance, substantially reducing our cash burn, adjusting our operating expenses, addressing our convertible debt and seeking to achieve profitability in 2025. With these improvements, we hope investors will take a fresh look at NanoString, as we refocus attention on the strong fundamentals of our business. Now we’d like to open the line for your questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Institution JPMorgan. Please go ahead. Your line is open.

Marta Nazarovets: Hi. This is Marta Nazarovets on for Rachel Vatnsdal from JPMorgan. Thank you for taking the question. I just wanted to ask quickly on the guidance. So far this year, consistently beat the straight on the top line, but you modestly lowered the ’23 guide. If I assume this a little bit during the call, but can you talk for the updated guidance, how much of the guide down is macro-related, versus perhaps related to the injunction in Europe? Thank you.

Brad Gray: Yes. Thank you. I’d say you highlighted the two primary reasons that we took a more cautious, that we narrowed the end of our guidance range towards the more cautious end of our previous full year range. I mean the first fact that’s changed is of course, that we are now enjoying from selling our number one selling products into 17 European countries, which slows down the revenue recognition of CosMx overall. And then second, we have begun to see some elongation in the sales cycles, of our higher-priced equipment. And we’re hearing a number of our peer companies express, some caution as we head into the fourth quarter. I’d say the cautionary notes, include things such as possibility of a government shutdown, and sort of caution that could emerge in this markets, for academic researchers, as well as just more cautious outlooks for biopharma companies.

In general, though, I mean, I think we feel really good about the long-term fundamentals of our marketplace. We feel that we’re very fortunate, to be in the forefront of this ongoing spatial biology revolution. And in any case, our full year revenue growth, is going to be outstanding.

Marta Nazarovets: Thank you. And just a clarification. Are you assuming some sort of modest 4Q budget flush at the midpoint of the guide?

Brad Gray: Yes. One of the differences between the bottom and the top of the guide is at the bottom of the guide, we would expect a more modest budget flush, and at the top of the guide in the middle and top of the guide more – a larger Q4 budget flush.

Marta Nazarovets: Great. Thank you.

Operator: Your next question comes from TD Cowen. Please go ahead. Your line is open.

Kyle Boucher: This is Kyle on for Dan. I just had a quick one on the gross margin profile here exiting ’24. You said in the prepared remarks that we should see some gross margin benefit next year as consumables become a bigger portion of overall revenue. How should we think about that relative to pre-’23 where you were sort of in the low 50s range? Is it possible we could get back to that range in ’24?

Tom Bailey: Yes, I think most of the Street models, Kyle, are in that range and we’ll guide early in the year, and get more explicit commentary. But I think with the consumables mix improving and our production costs improving, that we would hope to track back towards where the company has been historically, which is kind of in that low 50s range, for next year and beyond. That’s a good way to think about 2024 for now.

Kyle Boucher: Got it. Thank you. And then just on the burn and cash needs. How should we be thinking about your cash position as you move closer towards profitability in 2025, would there need to be any rates between now and then? Or are you confident that you can get to that position?

Tom Bailey: So our objective, is still to get to cash breakeven on our existing resources and nothing around that thought process or approach has changed. And you could see both the actions that we’ve taken with the business to reduce costs, we expect will support that. Next year, as we mentioned, we think the Street models in general are about $15 million high relative to where operating expenses will be, before we get started next year. In addition to that, the transaction we just did with the noteholders offers us the opportunity to pick interest next year, which gives us a really great support from the noteholders next year, as we make some additional changes to the business to get ourselves on that path to profitability.

So all of those factors combined together on top, of what Brad mentioned is what we feel is a really robust long-term opportunity for our spatial franchises and the stability of nCounter, we think put us in a really good position, to get where we need to be on our existing cash resources. Our perspective on that is unchanged.

Kyle Boucher: Got it. Thank you.

Operator: Your next question comes from the line of Baird. Please go ahead. Your line is open.

Catherine Schulte: Hi guys. Thanks for the questions. Catherine Schulte here. Brad, you mentioned expecting to carry your CosMx backlog into 2024. What was the CosMx backlog at the end of the third quarter? And what do you expect it to be at the end of next year?

Brad Gray: Catherine. Thank you for the question. We are no longer reporting that quantifying publicly our backlog on CosMx. So I’m not sure I’m in a position, to satisfy you on that. We are – I’ll say in a mode of continuing, to work down the backlog. As you know, we accumulated an enormous backlog of preorders that require some customers, to wait up to a year to receive their CosMx instrument, that’s not a situation that we want to continue. We are steadily working down the backlog to a situation where customers would be able to receive their instrument either during the same quarter that they order the instrument, or the core subsequent. So that’s the trajectory we’re on. We will continue to carry backlog into 2024, but certainly we don’t want it, to be backlog that will require long delays in customer receipts of instruments.

Catherine Schulte: Okay. Got it. And then what kind of top line growth is needed to underwrite your full year profitability in ’25, with the Street revenue outlook get you there? And then just on the OpEx side, I recognize your comments on Street probably being $15 million high. But is most of that leverage is going to come from R&D? Any sort of bridge you could give to the 2025 full year profitability would be appreciated?

Tom Bailey: Sure, Catherine. I think we’ll reserve comment on the revenue side until we guide in 2024, but I think that we’re generally comfortable with where Street models, are right now we can say that, we’ll kind of more explicitly as we get into 2024. On the OpEx side, most of the leverage that, we’re talking about in that $15 million number, is out of a combination of R&D and out of operations, which is where most of the reorganization activity occurred. So thinking about updating your models, if you’re taking OpEx down, I would take most of it out of R&D, and then a little bit of it supports that, better gross margin number, but just comes out of the operation side of the business, which gets reported our of cost of goods sold.

Brad Gray: Yes and then maybe just to build on Tom’s answer, Catherine. We’ve always said that between $200 million and $300 million in revenue, was where we thought a business of our type, should be breaking even. And I think Street models on 2025, are just about the midpoint, of that range right now. So, I think it’s consistent with our past commentary.

Catherine Schulte: Okay. Great. Thank you.

Operator: Your next question comes from the line of Stifel. Please go ahead. Your line is open.

Evan Stampler: Hi guys. This is Evan on for Dan. Thanks for the question. Kind of want to dig a little bit deeper into the previous question. I mean, I think that, the backlog is something that people, are going to be pretty focused on. I understand maybe your peers aren’t giving, too much visibility to that, but I think people are – especially with the guide down here, I think people are – I guess, you’re a little bit in a bit of a little bit different situation. And so, is there any kind of commentary that, you can give that to give people comfort, as to how next year is going to shape up and like how you’re going to exit the year. I felt like – lot of the commentary you given previously, was we have this big backlog, we’re probably going to exit the year with – I think you said something similar to kind of where you were.

So if you really – if you’re starting to draw that down, I think they were going to start to get a little concern as to maybe how the outlook is into next year. So anything you can give there would be really helpful?

Brad Gray: Thanks for the question, Evan. I think Tom in answering question just a moment ago without guiding 2024. Said that we were comfortable with where the current street models are. So hopefully that, could provide some reassurance. Most companies – carry massive amounts of backlog around while we have been. And continue grow well without it. Certainly that backlog, is a good thing in the mind of investors in terms, of providing predictability and revenue. But it’s a bad thing in terms, of the customer experience, because it provides long delays between when people want, to get their hands on a piece of technology, to get their science and when they – and when they actually can. So, we want to always keep those things in balance.

So sorry, to disappoint if we’re not going to be overly quantitative on backlog, most companies choose not to be. And we’ll provide commentary, I think, about sort of the market potential here and the ongoing growth and orders, which I think as you can see, both across NanoString’s reported results and that of our primary competitor, this is a market of extraordinary growth. I mean I think we’re seeing a kind of pace of total instrument placement that has hardly been seen in any product category, in the history of our industry. I think you’re seeing two companies simultaneously reporting greater than 200% year-on-year growth in revenue. So NanoString is neck-and-neck with our competitor and fighting for market leadership here. And I think that kind of leadership in a market of very strong secular growth is the primary thing that customers should be looking at to gain confidence on our outlook.

Evan Stampler: Got it. So, I mean if you not want to give any commentary, about the backlog, is there any you guys can say about orders in the quarter and how that kind of was up sequentially or year-over-year comparison, maybe that would be helpful in terms of framing where things are versus last quarter?

Brad Gray: Evan, again, I’m going to disappoint you here, we’re no longer and haven’t been reporting order trends, in quite some time on our spatial biology business. Other than to say, we felt really good about the order trend, it was robust and we’re pleased, with how things are going.

Evan Stampler: All right. And yes, I guess I’ll say I appreciate the help guys.

Brad Gray: Thanks.

Operator: Your next question comes from the line of Canaccord Genuity. Please go ahead. Your line is open.

Alexander Vukasin: Hi. This is Alex Vukasin on for Kyle Mikson. Thanks for the call guys. One quick question. Just to kind of dive into the recent legal proceedings. I was just curious if those have had a meaningful impact on content placements and on the order book over the past quarter? Thanks.

Brad Gray: I think your question was at the most recent UPC proceedings had an impact on the order book or the demand over the last quarter? So the answer is yes and no. Yes, within the European countries, of course, are being enjoined from selling our CosMx instrument for RNA assays, has slowed down the pace of new orders, coming out of Europe for CosMx. And we’ve experienced a handful of order cancellations from customers, who had not yet received their CosMx instrument, for RNA and of course, now could not do so. So that has had an impact. But I’m pleased to say that, that impact has not spilled over into other markets. As I mentioned in my prepared remarks, while instrument orders slowed down in Europe, the robustness of the North American markets, continue to drive the overall momentum, of our spatial biology franchise.

Alexander Vukasin: Great. Thank you. And one, I just wanted to kind of build off the last question there. So just curious on how you intend to grow placements in ’24. I guess just given like micro headwinds or whatnot, like there are some initiatives that have been coming into play in the near future, or some marketing efforts, anything of that sort? Thanks.

Brad Gray: Well, as I said and maybe the answer to an earlier question, we’re seeing a market that in spatial biology that has extraordinarily – extraordinary secular growth. I mean we’re in a major adoption cycle of a new form of science. And these kind of new revolutions that, are often declared nature of method of a year, they play out over a seven to 10-year time frame. So, we’re right in the steep part of the curve of the adoption cycle here. So, I think the secular growth of spatial biology, will be the most important driver of continued momentum in 2024. Of course, on top of that, we have a very exciting series of product launches and a road map to support them that we should keep customers interested in our technology at the forefront.

The most important of those is the launch of our CosMx 6000 plex RNA assay, which will put our technology at 12 to 15 times higher plex than the competition. There’s already tremendous customer interest in that and that will, become available for shipment in the first quarter. And then on the GeoMx side, the recently launched GeoMx IO Proteome Atlas, which is five times higher plex than the other protein panels offered by other companies is driving a resurgence, and interest in that platform. So, I think the secular interest in spatial biology, combined with our specific and compelling product offerings, should be the key drivers of growth in 2024 on the instrument side. And then, I guess, maybe finally, we placed a tremendous number of CosMx instruments during 2023 that, will just be becoming active and utilizing consumables in 2024.

And so, we expect to see that – we expect that to drive spatial consumable growth, which has the benefit of also expanding our gross margins, in the way that Tom alluded, to in his prepared remarks. So I think those are the three big catalysts, the CosMx 6000, the GeoMx IPA and the activation and consumer utilization of our rapidly growing spatial biology installed base.

Alexander Vukasin: Great. Thank you. That’s very helpful.

Operator: [Operator Instructions] Your next question comes from the line of UBS. Please go ahead. Your line is open.

Unidentified Analyst : You have [Christian] on for John. I guess starting off on the CosMx in Europe. I know you guys previously put out some, I guess, you could say workarounds in terms of having customers kind of shift their samples to CROs in jurisdictions not affected, by the injection. I was just wondering if you can give any update and maybe, even if you can maybe possibly like quantify, how well that’s working, the customer reception to that, how it’s been, et cetera?

Brad Gray: Yes, so we obviously want science in Europe to continue to benefit from our market-leading CosMx Spatial Molecular Imager. We think it would be a tragedy for European science, if they were constrained to work on the less flexible offerings of our competitors. So, we’re working as flexibly as we can with those groups, to help them get access to our technology by shipping samples to either CROs or to NanoString located, so those samples can be processed where there’s no injunctions. And I had said we’ve had modest success on that. I think a number of our customers are still in the process, of figuring out how best to do that. And our customers have been very supportive of the company. And I’d say, overall, the scientific community, is rooting for NanoString, to succeed in our litigation and to maintain choice in the marketplace.

I don’t think I can really be too quantitative about that. I think overall, it’s fair to say whatever commerce results, from those types of activities, is going to be a modest part of our overall mix. The primary driver of our growth, will be the continued sale of our technologies, into those major markets that are not enjoined. And just as a reminder, I think we issued this kind of important fact, at the time of the UPC injunction. The nations – the 17 countries that are part of that UPC jurisdiction only account, for about 10% or less of our overall CosMx demand and backlog. So it’s – while it’s obviously a headwind, it’s not one that should overall change, the overall shape of the market.

Unidentified Analyst : Yes. Thanks for that. That’s makes a lot sense. And then switching gears, I know China isn’t the most material geography for your revenue mix. But can you give us some color on what you have been seeing over there? And then also just on – it looks like just throughout time, you guys have been changing the mix in terms of the CosMx from primarily academic, it’s still primarily academic, but biopharma and biopharma CROs are becoming a bigger mix of that pie. Is that a – is the primary driver, of that actually like more CROs, buying instruments, demand from that side? Or are you seeing anything on the academic, where sales cycles have been slowing and then maybe purchasing, hasn’t been up to previous levels, if that makes sense?

Brad Gray: Yes, let me take the biopharma slide and then I’m going to ask Tom to take the China piece. On the biopharma front, yes, we are pleased to see an increase in interest in the CosMx system from the biopharma community. I’d say overall, the translational research and biopharma communities have been slower adopters of non-spatial single cell technologies, but yes, I believe we’re starting to see that tick up and single cell spatial technologies are ticking up right alongside it. CROs are, I think, a very great avenue for biopharma companies to access technologies that, they’re not 100% sure they want to scale internally yet, especially smaller, more cash-constrained biopharma companies, who would be reluctant to spend $300,000 on a piece of capital equipment. So CROs have been a really great avenue for us to bring spatial biology, to those segments of the market. Tom, maybe you can take the question on China trend?

Tom Bailey: On China, it’s less than 10% of our revenue. It’s consistent with what it was last quarter. And I would be, I think, remiss we would be to draw any macro trends from our sales in China. We’ve got a relatively new sales effort there. It’s just I would say — we’re just too small portion of our revenue, and our overall business and the dollar, as a whole for us to draw any macro trends from it. But it doesn’t – if you just look at it in and of itself, it does – it hasn’t been – our sales have been pretty consistent, as a percentage of the total in China over the last several periods.

Operator: Your next question comes from the line of Morgan Stanley. Please go ahead. Your line is open.

Unidentified Analyst : Good evening, guys. This is [Edmonds]. Just wanted to ask you quickly, Brad, how has the CosMx ASP been trending lately? Was this a meaningful driver, of the lower gross margins in third quarter? And how should we be thinking about the CosMx ASP in ’24, given that on the last call, you noted ASPs have been improving, but you’re still continuing some of your discounting tactics?

Brad Gray: I’m going to let Tom answer that question, Edmond.

Tom Bailey: Yes, thanks Edmond for the question. Yes, our ASPs were up a bit in Q3 over Q2, so we’re up just over $230 million on ASP. It’s a little bit less than we had originally expected and I wouldn’t say that’s necessarily, due to any sort of overall broad pricing pressure, that’s just how the shipments that shook out during the quarter. It is a little bit lower than, what was originally planned. We would still continue to expect those to rise in coming quarters, as there have been rising list prices across all of the competitors in this marketplace, as well as the continued popularity, of these products puts us in a position, where pricing isn’t really the key driver for these instrument. So, I think as we get into next year, it probably should go up, but if I were modeling based on ASP alone, I think you could use $230 million, as a good number where we were in Q3, for your models for next year.

Unidentified Analyst : Hi. Got it. Super helpful. And then on switching gears a little bit to looking at your CosMx panel, I was wondering if you guys could provide some color on the mix of health or how your users are deciding which panels to use? I know you guys have the 1000 panel, you guys have a human IO 100 plex panel and a mouse panel. I guess I’m trying to figure out with the upcoming 6000 panel next year, what are your expectations for 1000 panel usage?

Brad Gray: Yes, what we’ve seen every time, Edmond, that we provide a new panel of higher plex is that it does tend to cannibalize, the lower plex panels. And that’s consistent with my prepared remarks, where I characterize scientists as having a huge foam, or fear of missing out. Scientists are paranoid that if they don’t include a gene in their panel, they’ll somehow miss the most important insight. And as a result, more plex is generally better. So just to take the couple of panel that you mentioned, when we initially developed a 100 plex IO panel, we thought there would be great demand, for that on the system, it could run a lot faster than the 1000 plex, and it’s more cost effective. There’s been virtually zero demand for that panel.

The 1000 plex human panel today is by far our most popular panel followed by, I’m sure what will be good demand for the mouse panel as it’s coming to market. Human accounts for the majority of the type of science that most of our customers do because they’re focused on human translational biology, so that’s most of it. But I would expect that as we bring the 6000 plex to market, we may very well see a rapid transition towards that higher plex panel, even at a price premium, because customers are interested in making sure they’re not missing important biology.

Unidentified Analyst : All right. Super helpful. And then, Brad, it’s good to hear a strong early feedback for your immuno-oncology Proteome Atlas for the GeoMx. What are your contribution expectations for this in ’24? And how should we be thinking about, I guess, GeoMx consumable revenue growth in the upcoming year?

Brad Gray: Yes, it’s a really good question, Edmond. I think we’re going to hold off on providing quantitative feedback on that until we do our 2024 guide. But I will say, protein is a very popular application for GeoMx. Historically, it’s been half of our samples, but much less than half of the revenue, because the average unit price of a protein panel at 50 plex, is less than the average unit price of our Whole Transcriptome Atlas. That will change with the IO Proteome Atlas. It’s priced at a premium to our Whole Transcriptome Atlas, because there’s really nothing like it in the world. And so, I think that bodes well for the potential pull-through on our existing installed base and I’m excited about the early resurgence and interest, in acquiring GeoMx instruments that, has resulted from this new capability. But it’s a little too early to quantify that. We’ll provide an update, on our February call in more detail.

Unidentified Analyst : Got it. Thank you for the time today.

Brad Gray: Thank you.

Operator: We have no further questions in our queue at this time. I will now turn the call over to Doug Farrell for closing remarks.

Doug Farrell: Thanks again for joining us today. If you did miss any portion of the call, a replay should be posted in about two hours from now. Domestic callers, please use 800-770-2030, international callers please dial 647-362-9199. The conference ID is 72369. Thanks again. That concludes our call.

Operator: This concludes today’s conference call. Thank you for your participation and you may now disconnect.