A little early. I'm Catherine Schulte. I cover life sciences and diagnostics here at Baird. Thanks, Doug. Very excited to have NanoString here with us today. From the company, we have CEO Brad Gray, CFO Tom Bailey, and then Doug Farrell from IR is in the audience as well. So, Brad, Tom, thanks so much for joining. Thanks for having us, Catherine. Maybe to start off, you put out an update yesterday. Maybe just walk us through the key points from that. Sure. Thank you. You know, we wanted to take this opportunity this week at conferences in New York to engage investors directly on three topics that have been of specific interest. The first are our updated business trends, that which remain strong, despite a highly competitive environment in the field of spatial biology. The second is litigation, where we are embroiled with several different lawsuits with 10x Genomics. And what we wanted to do there was bound the overall exposure of our business so people could understand, you know, the risks that we face, and to provide an update on our confidence in our cases going forward. Third was to provide an update on the refinancing of our convertible debt, which has become an overhang on the stock, but which we're confident that we can move forward with refinancing, along with capital partners who understand the fundamental and intrinsic value of our business, as underpinned by the profitable cash flows from our nCounter business. And maybe on the litigation front, just UPC decision, and maybe we can save Doug some time next week when September 19 rolls around, and we get a decision there. Maybe just talk about, hey, if the ruling comes not in your favor, what are next steps? How should we think about that? I know you reaffirmed 2023, regardless of that outcome, but maybe talk us through what next steps would be. That's right. So just for people who are new to the story, the UPC is the new Unified Patent Court in Europe. It covers, for the first time, a single patent court that covers 17 different countries. Our litigation was actually the first ever set of hearings on preliminary injunction in that new court. There was a 2-day hearing last week on one patent, there'll be a one-day hearing next week on another. We're very pleased with how last week's hearings went. You know, the panel of judges focused on the issues that are critical—we think are critical to the case, specifically the validity of the claims, the interpretation of those claims, and the balance of harms that would be imposed under an injunction. The judge has said that, you know, they will render a decision next Tuesday, which is the time of our second hearing, and it remains to be seen what the outcome will be. You know, from a sense of the total overall scale of the exposure in those markets, while 17 countries sounds like a lot, in terms of our business, it's actually a very small piece. So only 7% of our current CosMx instrument backlog is attributable, so 11 out of 150 systems are attributable to those markets today, and only 10% of our cumulative CosMx orders. So, while, you know, we're confident in our case, in the event there is a negative outcome next week, you know, our business will continue to grow. It's not a life or death situation for NanoString. It would be really sad for the scientists in those 17 countries to lose access to innovative products, and we will fight no matter what happens next week. But our fiscal year 2023 outlook would remain intact, and, you know, we would continue our progress in spatial biology. What would the appeal process look like in that jurisdiction? Yeah, there is an appeals process that no one's yet exercised. It's a court in Luxembourg. You know, I believe the filing of an appeal is required to be relatively quick. I think we're not quite clear how long an appeal would take. Got it. And if we kind of compare and contrast this with what happened in Germany, and I think the German courts didn't look at validity, only looked at infringement, didn't have technical experts. This has some technical experts, looks at validity and infringement. So I guess, should we use this as a read-through to what might happen in the U.S. and other jurisdictions, or what would be some differences there? Yeah. I would caution you not to use this brand-new court as a read-through to the U.S. jurisdictions. While it does look at invalidity and infringement at the same time, there are a number of factors at play in the U.S. that are still quite different. One is the U.S. is a jury trial and not a panel of judges. Two is, in the U.S., we have a series of counterclaims that will also be part of that same trial, including those that are related to antitrust types of behaviors on the part of Harvard and 10x Genomics, who have an ill-gotten monopoly that they're trying to enforce through the patents in question. We also have separate intellectual property counterclaims that are proceeding through the courts and will come to trial next December. And we have an unclean hands defense, which means that, you know, in the event that the court decides that these patent rights that 10x's and Harvard are asserting were ill-gotten, you know, you basically can't enforce patents that you got by doing untoward things. So there's a lot of dynamics just in terms of the outcome of the case. In addition, the U.S. has a much higher standard, even than the UPC, with respect to imposing an injunction. An injunction is a relatively uncommon remedy in patent cases in the U.S., and that's because in addition to the relative harms to the parties, the U.S. courts take into account the harm to the public good. You know, and removing a scientific instrument from the market, especially one as powerful as CosMx... and especially in the context of the inventor himself, of the patents in question, having been on the record in his NIH grants that non-exclusive licensing was best for science, we think that all of those facts lower the injunction risk in the U.S. incrementally to a even lower place than it is in the UPC. So I would not, regardless of the outcome next week, I would not read it through the U.S. courts. The U.S. courts have a lot of very important differences. Is there any precedent out there? You talked about the NIH grants talking about non-exclusivity. Have you seen any precedents out there of legally enforcing those? Not in the fields of medical devices or NIH grants. The legal precedents that we're relying on come from more from the tech and the telecommunications industry in terms of attempts to establish standards that are later, you know, kind of bait and switched on. So, this is a new concept in the field of NIH grants, but it's a very different set of facts than any I've encountered in my career. I've never seen an NIH grant applicant so explicitly promise and commit to non-exclusive licensing for the good of science, and then later reverse that with exclusive licensing that personally enriched himself and his university. Yeah. The materials you put out yesterday, you talked about still receiving, you know, numerous CosMx orders- Mm. - since the German decision. Any comment on kind of the pace of those orders? How do they compare to the Q2, and did you see any slowdown after that? Yeah, no, the pace of CosMx interest remains incredibly high. It was the fastest pace of order accumulation in the first eight weeks of any quarter since launch. So it's good momentum, especially when you consider it's the summer months. And you know, most of that demand is coming from regions of the world where the noise level around ongoing litigation in Europe is low. So a lot of demand coming from North America and from the APAC regions. Okay. And then you've talked about, you know, I think your backlog exiting the Q2 was around $35 million. You're gonna work through some of that in the back half. Just any way to quantify how we should be thinking about backlog heading into 2024? No, we aren't kind of setting a target for that publicly at this stage, but it's quite material. So at the $35 million plus backlog at midyear, what we've said is, you know, that alone is sufficient for us to meet our second half revenue targets on CosMx, meaning every incremental order that we accumulate in the third and Q4 could either contribute to, you know, a beat in revenue in this year or help carry backlog into 2024 and keep up this nice pattern we have of predictable revenue that we've established in 2023. Yeah. Maybe if we could, you know, shift to the spatial side of your business and kind of fundamentals there. You know, how would you view the health of the Spatial Biology market? This is an environment where some other instrumentation names, albeit more replacement cycle-driven names, have seen some pressure on capital equipment. I guess, you have continued to see robust uptake. You know, how are your customers feeling regarding funding and all of that? Well, spatial biology is one of these revolutions that happens in science every few years, that provides new insights and new data types that scientists are all racing each other to get access to. So major academic centers are racing to build new spatial biology labs or to expand existing single-cell genomics labs to also include spatial biology. And, you know, if even in, in situations where capital is, is not as freely available, it gets prioritized to these new areas 'cause people are racing to be the first to discover a new phenomenon. So we feel really good about the environment. We're fortunate that about 70% of our business is NIH-type funded, government-funded academic research, not just in the U.S., but globally. Those are pretty stable, you know, funding environments. And then the 30% of biopharma is at least half big pharma, where again, the funding environments are relatively stable. So we are not worried about the capital environments hurting our customers' ability to acquire instruments. Yeah. I know China's a fairly smaller portion of your business, but what kind of trends are you seeing there, and what are your expectations for the back half? Yeah, NanoString is relatively new in China, so to speak. We've only had our own team on the ground for, you know, a couple of years now, much of which was during the pandemic. So we're still building, in building mode. It's about 5% or less of our revenue today, and it's growing very well, partly because spatial biology is very popular in Asia and a hot new area, and because we have a more capable team on the ground than we ever have in the past. So I'd say the trends are good for us, but that might not reflect, you know, the broader market. And then for CosMx, you know, you raised the list price to $350,000. Remind us when that rolled out, and what was the customer reaction to that list price increase? Yeah, so we launched CosMx at a $295,000 list price, which was the same as the GeoMx system. The demand was so substantial, and our need to scale up manufacturing was so steep that we went ahead and raised the list price to $350,000. We did it on the first of January. That was really and customers hardly blinked. I mean, I think the one thing we had to do was, of course, honor some of the quotes at lower prices that we had issued previously, but barring that, the market will absolutely bear the $350,000. Now, none of that has showed up in our ASPs yet, though, because the way that we're managing our backlog is, generally speaking, on a first in, first out basis. The instruments that we're shipping and revenue recognizing now are those that were, you know, in the early stages of the launch with a lower list price. ... And then from a pull-through perspective, I know it's still early days, but how is that tracking relative to your expectations? And if you compare it to the launch of GeoMx and the ramp and pull-through there, any learnings from the GeoMx launch that you can apply to CosMx? Yeah, the early CosMx demand has been very strong. You can see that in our pull-through numbers, which have gone up for spatial from about the $75K that GeoMx was doing to the $85K that we reported in the last, in the most recent quarter. Some of that is the accretion from those initial wave of CosMx consumable orders. We also have telemetry on our systems through the AtoMx- Mm-hmm ... platform, which is our cloud-based informatics suite, and we can see a high level of utilization. People are—It's like a shiny new toy. People are playing with it very quickly after receiving it. Now, in terms of long-term modeling of consumable pull-through, we would still guide people to model $75K. It'll take a year or maybe even more of repeat ordering patterns for us to establish what the real long-term utilization rate of CosMx is. But I'd say overall, there's probably more upside to the $75K previous estimates than there is downside. If we shift to GeoMx, other platform in your spatial portfolio, I guess, how are the funnel dynamics for GeoMx, especially now that you're shipping CosMx to customers? Yeah, GeoMx is a workhorse system that's capable of running 40 samples a week with the whole transcriptome spatially analyzed or as well as proteomics. During the time that CosMx came out, because of its single-cell resolution capabilities, you know, CosMx kinda stole the limelight, and GeoMx fell into the shadows. And so the funnel hasn't built on GeoMx in the past year, the way it had previously. That being said, this morning, we made a very important and exciting product announcement for GeoMx, one that we think is a total breakthrough in the field of spatial proteomics. We are launching a panel that we call our GeoMx IPA or Immuno-Oncology Protein Atlas. It's the most comprehensive spatial proteomics offering ever. It has the entire library of Abcam's immuno-oncology IHC antibodies, about 570 antibodies in one reaction. So it's 10 times more powerful than what, you know, we've offered historically. And what it really allows researchers to do is scan virtually the entire universe of known IHC markers to see if there are potential predictive biomarkers. You know, what we hope to do with proteomic markers, IHC markers, is kind of what Foundation Medicine did for gene sequencing: offer a single test that pharma companies or academic medical centers can use to scan the entire universe of what might be a biomarker all in a single test, and then apply that over and over and over again as a standard for biomarker hunting. So, yeah, there's really nothing like this on the market from any competitor, genomic or proteomic, and we believe it will strongly revitalize the funnel dynamics for GeoMx and the interest in new instruments, as well as be something that we can sell right into our existing installed base of accounts. Is there any change to how you're kind of positioning GeoMx versus CosMx? Have you had any success bundling the two together, and is it still your thought that these two are complementary and a lab that would want CosMx should have GeoMx long term as well? Yeah, it's, it's always been our contention that labs need one high-throughput, whole transcriptome or high-plex system like GeoMx, and one high-resolution but lower throughput imaging system like CosMx. I think with the launch of the GeoMx IPA, the differentiation between the platforms is more compelling than ever. You know, the ability to look at the whole transcriptome and the 570 proteins, in fact, on the same slide, if you want, at high throughput, is a capability we think many labs will want, and it's not a capability we expect anybody to offer on an imager anytime soon. Any change in your thoughts on GeoMx pull-through? You know, how is Whole Transcriptome Atlas ramping? Will IPA do to that as well? Well, you know, our I think our GeoMx pull-through guide, long-term guidance remains in that same sort of $75K pull-through that we've had, though I'll say GeoMx IPA has the potential to increase that number. Today, interestingly, about 50% of the samples actually run on GeoMx are protein. Now, the price point of our 50-plex protein assays is quite a bit lower than our whole transcriptome, and so, protein revenue on the GeoMx system remains the minority of the consumables. But IPA could. The GeoMx IPA could change that. GeoMx IPA is priced at $3,500 a slide, which is actually an incredibly low value, high value, low price for protein content. It's only $6 an antibody. But that will be double the price of the Whole Transcriptome Atlas on a per-sample basis. Mm-hmm. So if our protein users were to shift over and at some frequency replace their 50-plex IHCs that are, you know, $500-$750 with something that's, you know, up to five times that price, then pull-through could increase. So it's too early to guide that, but I think, again, it's an upward... It leads to an upward bias on potential pull-through in GeoMx in the future. Yeah. And any update on AtoMx utilization since launch or customer feedback there, and how do you think that, you know, positions you competitively? So just for folks' benefit, AtoMx is the trade name for our spatial informatics platform. It's a cloud-based solution that takes data off our spatial systems, specifically CosMx to start, ports it to the cloud, applies the compute power and the cheap storage of the cloud, and lets users dial in and look at it from multiple sites. And this is critical because the data sets, the data files created by our spatial systems are tremendous in size, 'cause they contain every single RNA and the XYZ coordinate of it, so up to a terabyte per sample. So there's really no way, practically, to be emailing files like this around. So we think we were, you know, we've really solved a problem for our customers. Now, AtoMx utilization is basically 100% on CosMx. It actually doesn't work without AtoMx. So, you know, we're seeing, of course, tremendous uptake. What I love about it is the telemetry. We can really watch customer success as it's happening in real time. If there's issues, we can identify those and proactively call people if we see data that's suspect. I'd say feedback's been positive to date. On the core nCounter business, you saw a nice bounce back in the Q2. I think that's been, you know, modestly above your expectations coming into the year. I guess, what are you seeing there in terms of consumables utilization or just demand for that core nCounter portfolio? Yeah, you know, the nCounter is the little engine that could, right? It's the—it's a platform that's been out for 15 years. It's beloved by the users of that platform. There are 1,100+ systems out there, each pulling about $45,000 per system per year in annual consumables. And it's incredibly productive, so 1,000 papers a year still come out on that system. This year, we made... or late last year, I should say, we made a couple of changes that have helped us on consumables this year. First, we put a new consumable sales leader in place, and she's doing a great job of focusing the team on nCounter consumables. Then we went back and retrained a lot of our consumable sales reps, many of whom had joined NanoString in what I'll call the spatial biology era. So they knew our spatial biology products better than they knew the historical nCounter. But we retrained them, refocused them on those core panels, and that's benefited us. You know, consumable revenue for nCounter was up 8% year-on-year in Q3, and overall revenue from a 15-year-old platform was only down 1%. And when that's a, you know, 30%+ EBITDA margin product line, that's a really big contribution to covering our costs, paying our sales force, paying for our sales force, and, you know, potentially providing credit-worthy cash flows to refinance our convertible debt. Yeah. You kind of mentioned that might be a good pivot into profitability, but sticking with core nCounter and the 30%+ EBITDA margins that you kind of talked about for the first time yesterday, how should we think about those moving forward from here? Are there incremental investments on the commercial side that you need to make, and what kind of maintenance R&D is required for that platform? Well, nCounter needs very little in the way of maintenance R&D. We don't have a new instrument version planned. We don't have a lot of need to expand menu, so R&D is as close to zero as it can get on that platform. Our sales effort needs to continue, but you know, the fraction of any given rep's time that is dedicated to nCounter will candidly go down every year as the spatial biology grows. So, you know, on a fully burden basis, we'd expect that margin to go up as overheads are shared with larger and larger amounts of spatial revenue every year. For core encounter, I think in the past you've talked about maybe that would modestly decline each year. Is that still your expectation for the midterm outlook? I think that is the probably realistic expectation. I'd say that, you know, the upside case is that it's basically flat, where we succeed as we have so far this year in keeping it flat. But, you know, a realistic case would be, you know, single-digit declines, as you'd expect on a maturing platform. How should we think about the level at which just the core nCounter business reached adjusted EBITDA profitability? And is there any read-through to, you know, the spatial biology side of the business? Tom? Yeah, I think that there is. I think that, yeah, there's a bit of a difference in that nCounter was the company... was the whole company before spatial biology was launched. But I think actually maybe a better analogy, because, would be to look at GeoMx individually. So, you know, Brad has made some comments over the past couple of days that next year we'd see GeoMx transitioning into profitability. That's kind of in year three of real shipments. And so if you kind of went back and looked at the trajectory of nCounter and pulled out the investments in R&D that remained in the future, that probably is a pretty consistent lens through which to look at this and a pretty consistent lens through which people, I think, think about harvesting investments in big platform launches like this. So I think it's next year for GeoMx, and then we've talked about overall cash flow break even in the company at between $200 million and $300 million of revenue. And so when you think about the pacing of the CosMx launch, it kind of all fits together in that sort of a puzzle, a kind of 3-year march on a product line by product line basis to what would be, you know, typical EBITDA margins for companies in our space. How should we think about the gross margin ramp within that, maybe starting in 2024, and then where they should shake out long-term? Sure. I think in 2024, our gross margins have been suppressed this year because, mainly because of mix. It's been a very heavy instrument year due to the launch of CosMx. As we get into 2024, there are a few factors that will start to lift that gross margin back up. One is the consumables that will start to get sold into the systems that we're installing. Second is the manufacturing efficiencies as we build more CosMx get better, and so those- ... production costs start to decrease as volume increases, and then we have the higher ASPs that Brad talked about. So I think it's a combination of mix and overhead absorption, 'cause we do make consumables ourselves in our own facilities, and they're higher margin. Better instrument efficiencies and better instrument pricing should give us a nice step-up in gross margin headed into 2024 as compared to this year. What about R&D? You talked about not much maintenance R&D needed for nCounter. You're clearly still innovating on GeoMx with the product launch- Mm-hmm. you had today. How should we think about the level of investment needed for GeoMx, and then, you know, what are some of the key R&D priorities for CosMx? Yeah, I'd say, you know, GeoMx R&D investment is ramping down. You know, this push into ultra-high plex protein is probably the primary investment, and then there's software upgrades that come along with that. But the lion's share of our R&D investment today is actually in CosMx, and with CosMx, we're pushing one particular axis of performance as far and as fast as we can, and that's plex. So in an instrument like this, plex refers to the number of different targets or genes that you can look at at once, and it's the number one thing that we find scientists value. Scientists have tremendous FOMO. They're as worried about the genes that aren't in their panel as they are concerned with the genes that are, and they're fearful that they'll miss something if they don't have a gene in. So the more genes we can give them, the more confident they'll be. And our goal, we obviously we started at, at 1,000-plex RNA for CosMx, and that's 2 to 2.5 times what our competition offers today. We're moving to 6,000-plex in the Q1 of next year, which will be, you know, 12 times what our competitors are offering today. And that we've made no secret of the fact that we would love to push all the way to 20,000-plex, which is the whole transcriptome. That'd be every gene. And we don't know yet if it's possible, but if it can be done, we think we'll be the ones to do it. So those are the types of, you know, R&D investments that we're making today. In addition to sort of stabilizing the platform post-launch, making some incremental, kind of feature additions and bug fixes on AtoMx, those are the areas of investment. But the big, heavy investment in instrument development and initial launch is behind us, and that's gonna be part of the picture of how we drive operating leverage and path to profitability going forward. Maybe on the balance sheet side, you talked at the beginning about working to refinance your convert. Can you just go into a little more detail on that and kind of your level of confidence in that process? Yeah. So back in the August earnings call, we talked about a multi-pronged approach to refinancing our outstanding convertible debt. One axis is, of course, to talk to the bondholders, and those bonds are held, you know, 90% by two different parties. And, you know, we're engaged constructively with them. We're also talking to other capital providers, those who provide structured finance, similar to a loan that we had from CRG, back before we actually had our convertible debt in the 2018 timeframe. You know, these are term loans with some amount of warrant coverage or other equity features that provide security for the capital they lend, plus some limited participation on the upside of the company as well. These are sophisticated investors who look through the fluctuating market value of NanoString at the fundamental intrinsic value of our product lines and do a sum-of-the-parts analysis. As we showed in some of the slides we released yesterday, even basic math of that type can show that at 1x revenue, NanoString is trading at one-fourth of the median EV that its peers would at the same revenue level, and that we're basically getting, depending on how you want to think about it, either no credit for the spatial business or no credit for nCounter. And so, we feel that, you know, we have really great dialogues going, and we expect to, you know, move those forward as fast as we can. It's the number one thing that Tom gets out of bed thinking about- Yes. And, well, we're eager to put the overhang that exists on the stock behind us and think we'll be successful in doing so in due course. The only other comment I would add is that I think that the folks that we're talking to are interested the most in the businesses that I'm, as the CFO, the most interested in, which is the nCounter business first, and then GeoMx, and then CosMx. It's kind of the reverse order, I think, of where a lot of the equity dialogue has been. So I think that when thinking about the business from the ground up in a fundamental way, you can easily get to intrinsic values that are quite a bit in excess of what the company's enterprise value is today, and that's why we're confident in both the business opportunity going forward and our ability also to address the balance sheet. Yeah. All right. Got a couple of minutes left, and we've got three kind of rapid-fire questions that I'm gonna throw at you, Brad. Been asking every company these same three. So as you think about the next 12-18 months, what do you view as the two biggest opportunities for your company? Yeah, I think, outlook, opportunity one is for us to remove a financing overhang that is a distraction for our shareholders and which has suppressed our equity value. And I think there'll... potential re-rating of, of the stock, you know, would subsequent, come subsequent to that. Look, and number two is making sure that we emerge as number one market share leader in spatial biology. And I think there'll be, there'll be two or three companies that are important players in spatial, but the difference between being number one and number two is very important, and I think in this period of kind of establishing which platforms are market leading, you know, we're right in the middle of that, and we're working hard on it. On the flip side, next 12-18 months, two biggest challenges for the company. I think that, you know, the, you know, being number one in spatial biology is a big challenge, right? We have a very capable competitor who's at larger scale than us, in 10x Genomics. They've taken the battleground not just to the product markets, but to the courts. So it's a very competitive environment, and, you know, I think there's no, there's no-- that's obviously very visible. You know, and I think, number two is, probably just, you know, managing our shareholders through, a noisy environment, one that involves litigation, one that involves changes in our capital structure. You know, what we did yesterday with issuing the 8-K and what we've been doing here in New York this week is designed to help calm the nerves, bound the risks, communicate what we can, without disclosing, too much about our confidence level in, managing through these issues. All right, and then last one: What's something that investors and/or analysts don't ask you about very often, but you wish that they would? I think the nCounter business. You know, if I were to say something- Yeah. Yeah. You know, the nCounter business has been lost in the shuffle of... in the spotlight of spatial biology, but if you looked at the way our stock trades, you'd think it wasn't there at all. It's a very valuable asset, and something that provides tremendous brand, tremendous customer access, and tremendous cash flows to the company. Yeah. All right. Great. Well, Brad, Tom, thanks so much for joining us. Thank you. Thanks, everyone.