T2 Biosystems, Inc. (NASDAQ:TTOO) Q2 2024 Earnings Call Transcript

T2 Biosystems, Inc. (NASDAQ:TTOO) Q2 2024 Earnings Call Transcript July 29, 2024

T2 Biosystems, Inc. beats earnings expectations. Reported EPS is $-0.66, expectations were $-0.97.

Operator: Greetings, and welcome to T2 Biosystems, Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Trip Taylor, Investor Relations at T2. You may begin.

Trip Taylor: Thank you, operator. I’d like to remind everyone that comments made by management today and answers to questions will include forward-looking statements. Those include statements related to T2 Biosystems’ future financial and operating results and plans for developing and marketing new products. Forward-looking statements are based on estimates and assumptions as of today and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these statements, including the risks and uncertainties described in T2 Biosystems’ annual report on Form 10-K filed with the SEC on April 1, 2024, and other filings the company makes with the SEC from time to time. The company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. With that, I would like to turn the call over to Chairman and CEO, John Sperzel. John?

John Sperzel: Thank you all for joining our second quarter 2024 results call. Today, I will start by discussing the July 2024 health alerts issued by multiple US government agencies, informing healthcare providers that Becton Dickinson, or BD, is unable to supply sufficient quantities of blood culture media bottles, which has the potential to favorably impact our sepsis revenue. I will then provide a brief update on our three corporate priorities before turning the call over to John Sprague, our Chief Financial Officer, who will review our financial results. I will then provide closing remarks and open the call for questions and answers. On July 10, 2024, the US Food and Drug Administration, or FDA, issued an alert to inform healthcare providers of interruptions in the supply of BD BACTEC blood culture media bottles because of recent supplier issues and added blood culture media bottles to the medical device shortages list.

According to the FDA alert, “The disruption in supply of this device is expected to impact patient diagnosis, follow-up patient management and antimicrobial stewardship efforts.” On July 23, 2024, the US Centers for Disease Control and Prevention, or CDC, issued a health alert network to inform healthcare providers, laboratory professionals, healthcare facility administrators, and state, tribal, local and territorial health departments of a critical shortage of BD BACTEC blood culture media bottles. The CDC alert included a link informing that the BD BACTEC blood culture media bottles had an estimated shortage duration through Q4 2024. This is very important as the current guidelines for treating patients with a bloodstream infection or sepsis referred to as the SEP-1 bundle, specify a collection of blood cultures before the initiation of empirical treatment with broad spectrum antibiotics or antifungals.

As such, blood culture is one of the most widely used diagnostic tests in US hospitals with an estimated 58 million tests run each year. According to the CDC, most blood cultures in the United States are performed using continuous monitoring blood culture systems and the BD continuous-monitoring blood culture system is used in about half of all US laboratories and is only compatible with BD BACTEC blood culture media bottles. T2 Biosystems is focused on sepsis. And I will remind everyone that sepsis continues to exact an enormous human and economic tool. Sepsis is the leading cause of death in US hospitals and claims the lives of approximately 350,000 Americans annually. Sepsis also represents the leading cost of hospitalization in the US, bussing our healthcare system an estimated $62 billion annually.

Lastly, sepsis is the leading cause of 30-day hospital readmission in the United States, with 19% of sepsis survivors rehospitalized within 30 days and 40% within 90 days. On previous earnings calls, I have described the limitations of relying on blood culture as a clinical specimen for patients at risk of sepsis, including poor sensitivity that is false negative results or missed infections, and slow time to result, that is one to five days. Despite these shortcomings, blood culture remains as the standard of care for patients at risk of sepsis. And except for T2 Biosystems sepsis products, all other FDA cleared products authorized for pathogen detection or antibiotic resistance testing require a positive blood culture as the clinical specimen.

These blood culture dependent diagnostic products, which include virtually all of our competitors provide little to no clinical value if blood culture yields a false negative result due to poor sensitivity or if blood culture is not available due to supplier issues. The blood culture supply interruption underscores the risk of creating guidelines based on a single diagnostic technology, that is blood culture. We believe this is the perfect time to lobby for changes to the guidelines to include diagnostic products that are able to detect sepsis-causing pathogens and antibiotic resistance genes directly from blood and independent of blood culture. As a reminder, T2 Biosystems developed and is commercializing the only FDA cleared diagnostics able to detect sepsis-causing pathogens directly from whole blood without the need to wait days for a positive blood culture.

Combination of our FDA cleared T2Dx instrument, T2Bacteria Panel and T2Candida Panel can detect sepsis-causing bacterial and fungal pathogens in three to five hours directly from blood. No other company in the world can make that claim. As part of the communication, both the FDA and CDC have recommended that healthcare providers develop strategies to minimize the use of blood culture media bottles. Our products can be effectively used to minimize the use of blood culture bottles, especially during this critical shortage, and can also provide results for the most common pathogens much faster than blood culture, which can lead to faster targeted antimicrobial treatment. It’s important to note that our expanded T2Bacteria Panel, which now includes the detection of Acinetobacter baumannii, covers approximately 75% of all sepsis-causing bacterial pathogens commonly found in bloodstream infections.

Likewise, our T2Candida Panel covers approximately 90% of Candida species commonly found in bloodstream infections. Now turning to review the significant progress we have made across our three corporate priorities: accelerating our sales, enhancing our operations, and advancing our pipeline. Starting with our first corporate priority, accelerating our sales. The T2 Biosystems team achieved record quarterly and first half sepsis test revenue, representing growth of 27% and 25%, respectively, compared to the prior-year periods. This double-digit sales growth was driven by sales of our T2Bacteria Panel and our T2Resistance Panel. During the second quarter, we executed contracts for two T2Dx instruments in international markets and ended the quarter with a number of opportunities deep in our sales funnel.

As expected, we have already executed contracts for an additional six T2Dx instruments in July of 2024, valued at approximately $400,000. In the US market, our commercial team continues to prioritize increasing sales of our sepsis test panels. We believe the BD blood culture media bottle shortage represents an opportunity for T2 Biosystems to increase adoption of our direct-from-blood or blood culture-independent diagnostics and our team is implementing a plan to proactively contact hospital microbiology departments. Over the last 12 months, we have been exploring a range of strategic alternatives, including US commercial partnerships to accelerate the growth of our business. I’m pleased to inform you that we are in negotiations with a multibillion-dollar healthcare company regarding a potential US commercial partnership for the distribution of our products.

In international markets, we continue to execute on our plan to expand our commercial footprint by entering into territory exclusive distribution agreements to market and sell the T2Dx instrument, the T2Bacteria Panel, the T2Candida Panel, and the T2Resistance Panel. During the second quarter, we entered into new territory exclusive distribution agreements covering Qatar, Hong Kong and Macau. Earlier today, we announced a new territory exclusive distribution agreement covering Malaysia and Indonesia. The execution of these distribution agreements further expands our commercial footprint in the Asia Pacific and Middle East regions, which we believe represents strong growth potential for our blood culture-independent rapid diagnostics. The introduction of the T2Dx instrument and sepsis panels into Hong Kong, Macau, Malaysia, Indonesia and Qatar will allow rapid detection of certain sepsis-causing pathogens and antibiotic resistance genes in hours instead of days, enabling clinicians to potentially achieve faster targeted therapy.

We look forward to building lasting relationships with our newly appointed distributors. Our sepsis products continue to generate data, further validating the value we can deliver to hospital/microbiology labs to improve patient care. In May, T2 Biosystems’ customers presented new clinical data to support the T2Candida Panel at the American Society for Microbiology ASM Microbe 2024 Conference in Atlanta. The first presentation at ASM demonstrated how the use of the T2Candida Panel led to improved patient care for patients suspected of candidemia at Henry Ford Hospital. The findings highlighted the T2Candida Panel results being available over 38 hours faster than beta-D-glucan tests and the detection of over 3 times as many infections as blood culture.

The evidence further supports the improved clinical outcomes that can be achieved with the T2Candida Panel in the diagnosis and management of candidemia at a large urban academic center. Second presentation at ASM demonstrated clinical outcome data for patients admitted to an ICU at Henry Ford Hospital that utilize the T2Candida Panel compared to a control hospital using only the blood culture standard of care. Analysis revealed that more patients diagnosed with the T2Candida Panel were alive without any events and had a 58.6% probability of achieving a better outcome compared to conventional blood culture testing. There was also less incidence of treatment failures, persisting candidemia and infection confiscations in patients who were diagnosed via the T2Candida Panel compared to conventional testing.

Overall, the presentation highlighted that the use of T2Candida Panel with an antifungal stewardship policy was associated with an overall medical clinical outcome compared to diagnosis with blood culture. Beyond sepsis, we’re also applying our technology to two additional areas, bioterrorism and Lyme disease. We believe these additional applications have the potential to be significant growth catalyst for the company. On the T2Biothreat Panel, we’ve entered into an agreement with Dr. Robin Robinson to serve as a strategic advisor. He’s currently fielding interest in identifying strong potential government targets to procure the T2Biothreat Panel. We believe the panel represents a strong market opportunity and has the important ability to protect our nation from the consequences of deliberate or accidental exposure to biothreats.

We plan to launch our T2Lyme Panel as a laboratory developed test, or LDT, during the third quarter of 2024 through a strategic partnership with ECO Laboratory. We believe there are numerous advantages of launching the T2Lyme Panel in this format, including faster time to market, higher test throughput, and stronger product contribution margins as the LDT format does not require the use of the T2Dx instrument or the costs associated with a cartridge. Internal market research confirms that reference laboratories often charge greater than $250 for two-tiered antibody Lyme tests and greater than $250 for PCR Lyme tests. It’s important to note that sales of the T2Biothreat Panel and T2Lyme Panel are not in our current 2024 revenue guidance, so potential sales during 2024 represent upside to that guidance.

Moving to our second corporate priority, enhancing our operations. We continue to take important steps to transform our balance sheet and improve our cost structure. Over the past 12 months, we have reduced our debt by approximately 80% by converting $40 million of our term loan with entities affiliated with CRG Servicing LLC, or CRG, to common stock. This has significantly strengthened our balance sheet and reduced our annual interest payments by approximately $3.2 million. During the second half of 2024, we plan to further consolidate our real estate space by exiting our facility at 4 Hartwell Avenue in Lexington, Massachusetts, and consolidating those operations into our headquarters at 101 Hartwell Avenue in Lexington, Massachusetts. We expect this move to reduce our facility costs by approximately $1 million annually.

Effective August 1, 2024, we are partnering with ADP TotalSource as our professional employer organization, or PEO, to provide comprehensive and cost-effective HR benefits, including healthcare benefits, workers’ compensation, payroll and tax support and HR guidance. We estimate this change will result in annualized savings of approximately $400,000. Since early 2023, we have reduced our headcount by approximately 30% to 113 employees. At the same time, we have reduced employee-related operating expenses. Finally, during the second quarter, we expanded the use of our Oracle ERP system to improve inventory planning and material management. We believe the Oracle ERP expansion will favorably impact inventory levels, cost of goods sold, and ultimately improve cash flow.

Moving to our third corporate priority, advancing our pipeline. We have three tests in our pipeline, including the US T2Resistance Panel, the T2Lyme Panel and the expanded T2Candida Panel, to include detection of Candida auris. These three tests or test panels have each received FDA breakthrough device designation and each share a critical requirement for rapid detection of the causative pathogen and targeted antimicrobial treatment. The US T2Resistance Panel is a direct-from-blood molecular diagnostic test that runs on the FDA cleared T2Dx instrument and simultaneously detects 13 antibiotic resistance genes in just three to five hours without the need to wait days for a positive blood culture. We believe the T2Resistance Panel will be a significant catalyst to drive broader adoption of our T2Dx instrument and our T2Bacteria Panel.

In March, we issued a press release to announce the results of a new prospective study that was published in the Journal of Clinical Microbiology, highlighting the performance and clinical benefits of the T2Resistance Panel compared to blood culture; and standard microbiology methods, including high accuracy, that is 94.7% sensitivity and 97.4% specificity; rapid turnaround time, that is results available in 4.4 hours compared to 58.3 hours; and clinical impact, that is clinical interventions in 41% of the patients in the study, 24 of 59 patients. We believe this performance data represents the enormous potential of this unique and highly differentiated product to reduce cost, improve patient outcomes, and reduce the threat of antibiotic resistance.

We expect this to be a catalyst for greater adoption of the T2Resistance Panels in countries where we currently market under a CE mark. We also believe the international experience with the direct-from-blood or culture-independent detection of antibiotic resistance genes is an important precursor to our launch in the US market. Due to our priority to provide products for our existing customers, our internal verification and validation studies were slightly delayed. As a result, we now plan to submit a 510(k) premarket notification to the US Food and Drug Administration, or FDA, during the fourth quarter of 2024, and we expect to receive a prioritized FDA review due to its breakthrough device designation. The T2Lyme Panel is a direct-from-blood molecular diagnostic test designed for the early detection of Borrelia burgdorferi, the bacterium that causes Lyme disease in the United States.

Lyme disease is the leading vector borne disease in America with an estimated 3.4 million tests performed each year. The current diagnostic product is a two-tiered antibody test algorithm that relies on the presence of antibodies and can only be used accurately four to eight weeks after infection. If left untreated, the bacteria may spread throughout the body and become much harder to eradicate and treat effectively. Although early symptoms of Lyme disease are similar to the flu, Borrelia burgdorferi infections can lead to chronic debilitating disease. To address this critical unmet need, we’ve developed an extremely sensitive diagnostic test for the detection of early Lyme disease, with an analytical sensitivity that is in line with our FDA-cleared sepsis tests.

We’ve recently completed clinical studies required to launch the T2Lyme Panel as a lab-developed test. We believe our test will detect Lyme disease within the first 30 days post infection compared to antibody tests that can take 30 to 60 days post infection. As I mentioned earlier on the call, we plan on launching the T2Lyme Panel as an LDT in the third quarter of 2024 through a strategic partnership with ECO Laboratory. Our ultimate objective is to provide early Lyme disease results to major US reference laboratories. We believe we can utilize their retail networks to collect patient samples, which would potentially allow us to provide testing to Lyme patients across the country. These samples would then be sent to our LDT laboratory partner to perform the T2Lyme Panel in their lab.

Again, it’s important to note that T2Lyme Panel sales are not in our current 2024 guidance. So, any potential sales during 2024 represent upside to that guidance. The expanded T2Candida Panel, which will include the detection of Candida auris, is a direct-from-blood molecular diagnostic test designed to detect Candida species in just three to five hours without the need to wait days for a positive blood culture. We believe the addition of Candida auris test will strengthen the value proposition of our T2Candida Panel and lead to increased adoption. Candida auris is a multi-drug resistant fungal pathogen that has a mortality rate of up to 60% and is recognized as a serious global health threat by the CDC and the World Health Organization. The CDC estimates the costs associated with US fungal diseases are as high as $48 billion annually and has called on public health professionals to help lower the burden of fungal disease by continuing to raise awareness of the life-saving benefits of early detection and proper treatment.

A 2022 Journal of Clinical Microbiology study conducted at the Bambino Gesù Hospital in Rome, Italy, found that pediatric patients suspected of fungal bloodstream infections that were tested with the T2Candida Panel received species identification results 121.8 hours faster, compared to blood culture-based diagnostics. Finally, we’re also pursuing expanded claims for our FDA-cleared T2Candida Panel and T2Bacteria Panel to include pediatric testing. In December 2023, we submitted a 510(k) premarket notification to the FDA to expand the use of the T2Candida Panel to include pediatric testing. And we expect to submit a 510(k) premarket notification to the FDA to expand the use of the T2Bacteria Panel to include pediatric testing during 2024. With that, I’ll now turn the call over to John Sprague to provide a detailed update on our [first] (ph) quarter financial results.

John Sprague: Thank you, John. Second quarter 2024 revenues were $2 million, all from sepsis product sales. Sepsis test panel sales increased 27% compared to the prior-year period and increased 12% compared to the first quarter of 2024, led by increased sepsis test sales, offset by lower international instrument sales. Second quarter 2024 cost of product revenues were $2.7 million, a 45% increase — decrease, excuse me, compared to the prior-year period, driven by increased sepsis test sales and lower international instrument sales. Research and development expenses were $3.4 million, a 13% decrease compared to the prior-year period, driven by decreased clinical trial activities. Selling, general and administrative expenses were $5.5 million, a 13% decrease compared to the prior-year period, driven by decreased headcount spending.

The second quarter 2024 net loss was $9.2 million, $0.66 per share compared to the prior year’s second quarter net loss of $6.3 million, $7.84 per share. Cash and cash equivalents were $4.2 million as of June 30, 2024, and we raised $7.3 million in net proceeds from a private placement stock sale in the quarter. The CRG debt conversion reduced our debt by almost 80% and interest expense by almost 70% compared to a year ago. In 2024, we continue to expect total sepsis and related products revenues to grow between 49% 64% to $10 million to $11 million over 2023, and this target excludes any potential sales from our T2Biothreat or T2Lyme panels. Thank you, and back to John Sperzel for closing remarks.

John Sperzel: We are highly encouraged by the progress made in the second quarter of 2024, including record sepsis test sales, significantly improving our balance sheet, materially improving our cost of product revenue and reducing our operating expenses. Moving forward, we’re excited by the potential to accelerate the growth of our sepsis business in the United States and internationally. We’re also excited by the potential near-term catalysts, including the opportunity created by the BD blood culture media bottle shortage, the US commercial launch of our T2Lyme Panel for the detection of early Lyme disease planned for the third quarter of 2024 and the potential to establish a US commercial partnership for the distribution of our products with a multibillion-dollar healthcare company.

Our pipeline is also rich with potential catalysts that have already received FDA breakthrough device designation, including the US T2Resistance Panel, which we plan to submit to the FDA for 510(k) clearance during the fourth quarter of 2024 and the expanded T2Candida Panel to include the detection of Candida auris. With that, I’d like to turn the call back over to the operator to open the line for questions. Operator?

Operator: Thank you. [Operator Instructions] The first question is coming from Kyle Mikson from Canaccord. Kyle, your line is live.

Q&A Session

Kyle Mikson: Hey, guys. Thanks for the questions. So, just wanted to talk the second half of the year outlook, what you’re expecting there. So, whatever you’re seeing internationally in terms of like just the pipeline of deals and orders and when you could place those instruments and also utilization internationally, like could anything ramp up maybe like towards year-end or something? And obviously, you have guidance for full year, but how should we think about third quarter and fourth quarter, as we kind of go ahead here? And obviously, like there’s revenue as a component of that as well as margin. So, if you could just maybe parse those out and help us think about that, that would be great.

John Sperzel: Sure, Kyle. So, on the last call, I mentioned that the company was at an inflection point. And I continue to believe that, and I also believe that the progress that we made during the second quarter reflects that. To get to your questions, in terms of our guidance, if you look at the guidance that we have given and reiterated both at the beginning of the year and at the end of the first and now at the end of the second quarter, we expected somewhere between $10 million and $11 million of product revenue, which is in the range of mid-40% to mid-50% growth year-over-year. And it was weighted approximately 40% in the first half of the year and 60% in the back half of the year. And we continue to believe that, that is the appropriate mix first half versus second half.

So, we expect a very good second half of 2024, given all of that that I said. In terms of our international business, it continues to be strong. We continue to expand our distribution network in international markets. We added a number of countries during the second quarter. We expect to add additional territory exclusive distribution agreements in the second half of 2024. When it comes to instruments, we had two instruments in the second quarter, which admittedly was lighter than we expected. We had a number that we’re close to the goal line at the end of June, which essentially rolled over into July. And I referenced in the prepared remarks, we already have six instruments sold in international markets, which will generate about $400,000 in Q3.

As far as utilization is concerned, it’s much more difficult to track utilization in international markets, because we’re selling through distributors and it’s a little more difficult to parse out what product might be in the pipeline and what product is in customers’ hands and what product has been used, and it’s much easier to track that in the United States. In the United States utilization continues to increase and we continue to believe that all of our US customers and customers that we have in the future would get to approximately $200,000 of annualized sepsis test revenue.

Kyle Mikson: Okay. Thanks for all that. And the partnership with the, I think it was like multibillion-dollar healthcare company, what are the like the financial implications of that and when could that kind of come through? Like I’m just — for example, if that’s a distributor, could that increase, I guess, like placements and stuff? Or does that really not have to do with consumable utilization? Or is it something where maybe it’s like a partnership that will actually boost pull-through basically or something? I’m just trying to think about how that’s going to affect the model in years going forward.

John Sperzel: So, our objective with a US commercial partner, first of all, is to find the right one, the one that has presence across US hospitals, that has a physical presence in the locations within the hospital and has scale. Because one of the things that we lack as a small diagnostic company, particularly in the United States is commercial scale. And so, we have been working to address that. And we feel confident about the partner that we are negotiating that with. Obviously, confident enough that we would mention it on this call. As far as details about that potential agreement, Kyle, I can’t get into that yet. But most certainly, once we have finalized that, that would be something that we would share with the market.

Kyle Mikson: Okay. And some of the studies that — yeah, sorry, go ahead.

John Sperzel: I said we’re certainly excited about it.

Kyle Mikson: Okay. And then some of the studies that, I guess, were sort of — it sounds like a little delayed, maybe some of the submissions were a little delayed. Is there any risk those get further delayed? And how important was that timing of that? If you look — if you kind think about how the milestone to shape up for you going forward, or was timing kind of like not the most important thing this year?

John Sperzel: Were you talking about T2Resistance, Kyle?

Kyle Mikson: Yeah. It also sounded like some of the clinical studies maybe were a little bit either delayed or sort of like slower than expected, but I’ll let you kind of take that.

John Sperzel: Sure. So, let me just take the couple of things in our pipeline. T2Lyme, those studies on track, on time and they’re completed. The T2Resistance studies were delayed for one reason and that was that we had a manufacturing issue that we had discussed with the market in the back half of 2023, which we have resolved, but that delay forced us to prioritize where we shipped the product that we actually made, again, for T2Resistance. And we made the, I’d say, obvious decision to supply our current customers in Europe and not to supply ourselves so we could get those clinical studies done. So — or sorry, the internal verification validation studies. So, the field clinical studies for T2Resistance are completed. What’s left are internal verification validation, and we have resumed those. It did unfortunately push our planned submission to FDA from Q3 of this year to Q4 of this year.

Kyle Mikson: Okay. Got it. All right, that makes sense. And then, I was just kind of looking at the P&L and SG&A, it remains pretty relatively low compared to like prior-year levels and recent levels. Are you thinking about, I guess, increasing sales force anytime soon or not?

John Sperzel: Absolutely not. In fact, we have reduced our sales force, particularly in the United States, not internationally. But we reduced it in the United States because we expected to have a US commercial partner. And what we have as our US sales team are people that we believe can effectively work with the partners that we’re engaged with. So, we haven’t done it by happenstance. It’s part of a planned strategy.

Kyle Mikson: Okay. And then, just a final question about the balance sheet. Is there anything you could kind of share regarding like moves that you’ll maybe make in the second half of the year here just to kind of like shore up the balance sheet and just make sure you have enough entering ’25? You made some moves recently, but the cash position, maybe it’s not totally ideal. So maybe just like a little bit of like a preview, I guess, of anything to put in the model for us?

John Sperzel: Kyle, what I could say about that, we obviously filed an S-3, we put an ATM in place. We obviously want to have the tools available in these markets. We also want to be smart about when we strengthen our balance sheet. We have a whole bunch of catalysts in front of us that I described partly in this Q&A, but also in the prepared remarks that we think are going to be excellent vehicles for us to strengthen our balance sheet around.

Kyle Mikson: Perfect. I’ll leave it there. Thanks, guys. Appreciate it.

John Sperzel: Thank you, Kyle.

John Sprague: Thank you, Kyle.

Operator: Thank you. There were no other questions in the queue at this time. I would now like to hand the call back to John Sperzel for closing remarks.

John Sperzel: I would like to say thank you all very much for joining our Q2 2024 earnings call and we look forward to updating you as we progress through the back half of 2024. Have a great day.

Operator: Thank you. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.