Joseph Driscoll - CFO Kevin Hrusovsky - President, CEO & Chairman Tycho Peterson - JP Morgan Puneet Souda - Leerink Partners

Good day ladies and gentlemen, and welcome to the Quanterix Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions] I'd now like to introduce your host for today's conference, Mr. Joe Driscoll, CFO. Sir, Please go ahead.

Thank you. And welcome to the Quanterix Corporation Q4 and full year 2017 earnings conference call. I'm Joe Driscoll, CFO of Quanterix and joining me on the call today is Kevin Hrusovsky, our CEO, President and Chairman. Before we begin, I would like to remind you that today's call will contain forward-looking statements that are based on management's beliefs and assumptions and on information available as of the date of this call. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks and uncertainties that we face are described in our most recent filings with the Securities and Exchange Commission. This call will also include certain financial measures that were not prepared in accordance with U.S. GAAP. Information required by the SEC pursuant to Regulation G including reconciliation of the non-GAAP financial measures to the comparable GAAP financial measures can be found in our earnings release issued previously today which is on our website at www.quanterix.com. With that, I will turn the call over to Kevin.

Thanks, Joe. We're going to go through our agenda today. I'm going to start off by going through the 2017 highlights, then Joe will go through the financial results for Q4, as well as 2017 and then he is going to turn it back to me and I'd like to provide a 2018 update and open it up for Q&A. To start off from highlights for Q4 as well as 2017, we were able to launch the SR-X Benchtop ahead of schedule and we were able to deliver 16 different bookings for that instrument in Q4, primarily in December. So we're pretty excited that we were ahead of schedules as much as two quarters launching this product. We also in 2017 had our Second Annual Powering Precision Health Summit that we were the lead sponsor off, and that had over 6000 attendees with some of them biggest alumineries in oncology, neurology and infectious disease attending. We also expanded our operations in Asia, particularly working through our China distributorships. We now have over 190 third-party peer reviewed publications supporting and validating our technology, we think it's very important to continue driving the scientific validation from third-parties around what our technology can achieve and that continues at a very rapid pace. There is also 23 to Top 25 pharma/biotech now are utilizing our technology and very interestingly, we have over 20 placements now in CROs, many of them have an LDT capabilities, that right was granted to us at the end of 2016 when we renegotiated the BMRAU [ph] contract, so it's a very rapid uptake in that category which is very exciting. That has led to over 500 -- in fact, I think we are estimating now over 700 Phase 1, 2, 3 trials, these are drug trials utilizing our technology…

Thanks, Kevin. Revenue in Q4 of 2017 was $6.6 million compared to $6.7 million in Q4 of 2016. The prior year number included a onetime collaboration revenue item of $1.8 million, excluding this item revenue growth in Q4 '17 was 35%. Product revenue grew from $3.2 million to $4.1 million, the main driver being the increase in consumables revenue. Note that we also achieved 15% sequential growth from Q3 to Q4 of 2017. As Kevin noted, we launched the SR-X in Q4 and generated 16 orders of which 5 were delivered in Q4 of '17. Revenue for full year 2017 was $22.9 million which again is at the high end of the range we previously provided. This equals 30% growth over 2016 and excluding the onetime collaboration item in 2016 revenue growth was 45% for full year 2017. Several category showed strong growth in 2017 including consumables which increased due to the increase in the installed base plus increased use of the instruments by many of your customers. Pharma services grew almost 60% and is becoming an increasingly important part of our overall revenue as large pharma customers continue to outsource elements of their sample testing. And warranty and other increased almost 50% due to the increase in extended warranty revenue as more instruments are installed in the field. Gross margin percentage in Q4 was approximately 44%, prior year Q4 was 54%, if you exclude the gross profit from the onetime collaboration item in 2016, adjusted gross margin was 44% in Q4 '16. For full year 2017, gross margin was also 44%, consistent with 2016. Excluding the onetime license fee from 2016, full year gross margin improved 360 basis points due to improved revenue mix. We have a significant opportunity for gross margin expansion in 2018 and beyond as we…

Thanks, Joe. I wanted to provide a little bit of perspective around 2018. I'm on Slide 10 now from my deck and what you will see there on the left hand side are the numbers of instruments publications and markers, key here is the rapid ascent of our biomarkers in publications, this is a key piece of our equation. We find that this third-party validation of our technology really leads to a lot of new interest in the technology and so we're committed to continue to drive this. On the middle you can see our growth over the last 3 years and that ramp up basically has gone from nothing at '14 to around $23 million. On the right side, I wanted to show the milestones that we're projecting for 2018, first being the launch of the SR-X which is done. We also want to complete these HD-1 upgrades that we've been working on and were about 50% complete, we're excited about that. Expanding the menu by 30 plus assays, we think is key and we're going to continue to drive that assay expansion. Also expand into pharma services with CLIA lab and with the acquisition it was a key advance that we garnered from that acquisition was to get a CLIA lab. It wasn't the primary reason for the acquisition but it was a real good side benefit. The primary reason was the technology of planar printing which is a complement to the bead technology that we have and longer term we believe that the planar technology will lead to a much more efficient point of care solution which we think is a big piece of the long-term journey that we're on is to create a point of care solution and form factor. We also are working hard to…

[Operator Instructions] Our first question comes from the line of Sung [ph] with BTIG. Your line is now open, please go ahead.

I was wondering on Aushon Biosystems; I'm sorry if I missed it but is this largely a service oriented business? It sounds like it's still pretty small but I was wondering if they have an installed base of systems and if there might be overlap in terms of the customer base?

Basically, they had narrowed their focus over the last 18 months to one customer they really were trying to win a major deal at a Top 3 referenced lab for a specific cancer diagnostic test. And so their focus commercially was not that much of an overlap and they did have a clear services facility which they utilized minimally for the purposes of trying to support their initiative with this reference lab but we don't really see a lot of overlap or installed base that's productive in a significant way. So we consider most of what we picked up for the short-term from a revenue perspective to be immaterial but we do think that the technology and the clear facilities as we implement some more of our own metrics technology using beads, we do think that a lot of this can be utilized in 2018 to further advance what we already are planning to do, which we had intended to get clear, probably more alike around further fourth quarter. So having it now does allow some level of acceleration. The downside would be a little bit more operating expense and a little bit of fixed cost expense associated with the acquisition but in the long run it's a lot of the people that we brought into the company from Aushon, we plan to hire this year anyway; so in a way it was just the way to accelerate our HR strategy.

And then just a follow-up; I'm not sure if I missed this as well but did you guys disclose what the HD-1 placement was for the quarter?

No, we didn't. And one other things that we're probably going to be trying to educate the investors to going forward is that the number of dollars that we are selling instruments, we think it's ultimately going to be a really good metrics because we believe that we're going to be able to translate into consumables about one-third of the instrument dollars but what you're going to find is we've got a lot of accessories that we're going to be selling with SR-X. We also have different types of instruments that sometimes only help our customers support greater throughput. So the best metric that we think we're going to have moving forward will be the dollars of instrument sales, one-third of them on average, 6 months after that revenue gets implemented we believe we'll have a fur [ph] to that annually and high margin consumables, we think that's a pretty good way to model it moving forward.

Our next question comes from the line of Tycho Peterson with JPMorgan. Your line is now open, please go ahead.

Kevin on HD-1 you talked about 50% of the upgrades complete, you remind us was that in tails and then I didn't see HD-X on the milestones or the roadmap for this year so I'm just curious where that's been?

The HD-1 is basically software and there was a few hardware items that we're also implementing, the HD Acts, we remain committed to try to drive this out by year end but we don't really want to bring a lot of focus through the HD-X just for proposes of managing our product line and the evolution in the way we've implemented with our sales force etcetera. But what I would say there is that we're continuing to evolve the HD-XS concepts and approach, they HD-1 itself however with these upgrades is their very productive unit and we think that it would continue to be very productive, long into next year as well. So we know that many customers will buy in HD-1 and feel very good about that. Even though the HD-X will bring some additional advantages, we'll make sure we can get that for the HD-1 customers who are some kind of an upgrade path or some kind of a trade-in opportunity.

On SR-X, can you talk a little bit about the funnel; how many of these are new to Quanterix users versus HD-1 users adding capacity? And I guess how do you think about mix -- where do you think you are from a customer mix on academic as we go forward in the year?

I want to start when we started this 1.5 year ago or 2 years ago, we probably would have thought that close to 90% of this would have been academia and Asia, and/or maybe certain parts of eastern bloc but what we've found thus far is probably about a third or finding a way into pharma and biotech which we see that as a positive because they're not utilizing it the way academia and international is, they are using it as an assay development protocol and opportunity. So we see that being positive, and we see them also being intrigued and interested with the nucleic acid capability. Some of the pharma guys do have a lot of nucleic acid positions in molecular, and so they do like the fact that the SR-X does in fact provide that nucleic acid capability. I mean going forward, I would predict that 75% to 80% will be in academia/international and I would predict that 20% will probably find it's way in the pharma.

And the last one on menu expansion, you talked about over 30 assets; are there any that really kind of potentially standout from your perspective and given [indiscernible] you can see neurology focus, how do we think about that mix going forward?

Two things stand out for me; one is the whole concept of multiplex and I should say here that Aushon does have an assay menu of over 200 and nearly 250 assays. We have about 80 off-the-shelf and so the difference between the 250 and the 80, interestingly it might sounds like it's like 170 but what you will find is that there is a lot of overall between what we have and what they have in the 80. And so part of what we're doing is reconciling the antibodies are being sourced from different locations, we're trying to get to a common platform across the planar and the bead technology from an antibody supply perspective. But what they did do pretty productively was multiplex. And so we know multiplex taking existing single plex's and putting them into a panel creates a lot of economic benefit as well as sample preservation benefit for our customers. They can get a lot more answers from a lot less sample and NGA has lot more answers for lot less money sold. If I we're to say what's the major focus for 2018, it would be multiplex and we've launched the 4-plex, the 6-plex I think you'll see it coming out; I would predict early Q2 is already some early indications of that technology, it's a 6-plex for oncology. So I think that the second wave of opportunity is going to be oncology. There was a lot of sited times that we can measure and there is a lot of interest to understand on these immunotherapies, what is it that triggers the cytokine storm and how is that when someone takes a CAR-T drug that they sometimes have major deleterious effects versus positive. So we really want to further advance our ability to provide a complete answer with cytokines. So I think you will see a lot of plexing as well as oncology usage and autoimmune usage for the plexes in oncology. But in neurology; the 4-plex is hot, it's got NFL Cal, UCHL-1 and GFAB, those last two markers are the markers that just got approved by the FDA for the first brain health test which is a rollout for CAT Scan, there is a belief that it can have a significant impact on ruling out the need for CAT Scan by telling the doctor that that patient likely does not have brain bleeding and by providing the expense in the radiation exposure for CAT Scan is not worthwhile, so having those two markers in our 4-plex further enhances the interest that we've seeing from customers. So I think -- we'll continue to provide those as single plexes as well as a panel. So those would be the three major priorities for the year would be multiplex, oncology, and then rationalization with us Aushon, 250 assays that they have.

Our next question comes from the line of Puneet Souda with Leerink Partners. Your lone is now open, Please go ahead.

Maybe could you tell us a little bit about the customers that are coming to you for sensitivity versus the customers that think off neurology assays and are coming forward for both, HD-1 and SR-X?

Interestingly, I would say Puneet that the whole area of neurology requires sensitivity. There are some assays you can run in cerebral spinal fluid where you do have sufficient and abundance of markers but that market is very narrow and very small. So I would say in the neurology in general, it requires our sensitivity, so we're getting at kind of as a major thrust. In the area of oncology when may some of the abundant markers are just as informative as a lower pundit market that requires sensitive, there is where I think we see the opportunity for delusion of the sample and breadth matrix effects and elimination of metrics effect; so the signal-noise-ratio is much purer and much more precise. So some of the panels that I think you're going to see us running in 2018, we'll have some abundant markets with some owner abundant. So customers will immediately want to have the panel because of the low abundance although thee it with our sensitivity but they're going to learn about the quality benefits of having the high abundance markers in that panel as they start to use dilution to eliminate matrix effects and we think that's a great way for us to start driving into some level of share gain in this landscape, most of what we've been doing is pretty much disruption that nobody could do it. We think now panels and getting the economics down coupled in with some abundant markers, we opened up the opportunities by also gaining some share in that -- we think an attractive segment. Particularly if you look at workflows, being what you're optimizing around and so if someone is looking at oncology and they really want to understand how the immune system is being affected; we think that there is a workflow there that we're going to try to drive panels through that that makes a lot of sense for the customer.

And just touching briefly on the neurology part; I mean our sense is that dementia research is increasing at a rate of $400 million a year and NIH funding for 2018. So just give us a view, I know you're excited about oncology but the effect that you've already created in neurology, what sort of expectations do you have for SR-X box moving into some of those labs throughout the year?

I actually feel like neurology is going to get a major boost [ph] of interest and opportunity from us because last week I was in Orlando, there were 3 former FDA Commissioners at Mona Lake Summit. There were 4 previous U.S. Surgeon Generals there as well as soon Sanjay Gupta and Dr. Roz [ph], a lot of medical -- it was an invite-only small summit and I got a chance to prescribe for them the role that biomarkers can play in neurology and there was so much interest from all of them around sleep disorders and the role that sleep disorders might be playing in the overall acceleration of Alzheimer's, MS, Parkinson's and just overall mental health. We have all these iPhone's, we have all these electrical technology now that's -- is affecting sleep and those implications are something that we already have a couple of placements and then why Élan Gavan [ph] and some of the leaders in the whole field of the Blood Brain Barrier have been showing through sleep disorder studies that the proteins are clearing during dreaming and the ability for us to position our technologies being really the only way to see the role of sleep and the brain biomarkers that can be viewed non-invasively in blood, it's a tremendous opportunity. So a lot of this is, how do we create awareness? I'm flying out I believe on Sunday night or Monday morning through the fortune brain storming health session and again, all the leaders in the world will be there and I meet Rudy Times [ph], a lot of the folks working on Alzheimer's and inflammation will be there; and I think again, we're going to try to help everyone see that dementia and a lot of the deleterious effects of Alzheimer's, a lot…

I do have a last question on marketing; good to see an ad there. Our diligence was giving us a view that folks were not aware of the technology though sensitivity peaked their interest for sure. So maybe could you give us the sales force expectations for the year? And what is going to be the change in marketing strategy? I know initially you've driven with a lot of PPA to efforts, any change in marketing in terms of driving through -- more through publications or through oncology conferences and another conferences? Give us a view in terms of marketing wise, what you here for 2018?

Very good question and I still think that marketing and awareness is probably the thing that keeps me up the most at night and I think you're going to see us continue to try to bolster our marketing efforts. You mentioned seeing an advertisement, we will be at all the neurological meetings this year, we also doubled down on a really key resource on Darius Jermaine [ph], who is -- he is confident advisors on many of the boards out there in neurology landscape and he has pretty much dedicated himself to working with our field, travelling around the world to further ignite that opportunity. All of the folks that have Alzheimer pipelines in the drug industry, they all have already been driving down, utilizing these biomarkers for more objective assessments of efficacy and safety, as well as patient stratification recruitment. But I think we got to migrate now more into as you point out the academia world in the NIH budgets for dementia assessments and just brain health in general; if you look at all of the mental illness issues we have in the country with gun, a lot of this stuff that's occurred recently with mass murders with guns, as well as the opioid crisis, we're trying to find ways to even see linkages between concussions and homelessness and self-medication through some of the top neurologists in the world and I'm trying to further advance possibilities of getting on national TV to further educate that these biomarkers are a way that we can start getting objective assessments of co-morbidity which has been a big issue, like it's the issue that a person is self-medicated with opioids that leads them to falling and having a concussion or being homeless or how is this all going to relate; and I think the more national attention we can bring to our technology, the faster we can actually eliminate a lot of pain and sufferings. So Powering Precision Health will attract a lot of that and we're going to continue with it but we will be at all the neurological shows with our sales force. The thing that we probably have added this year that we didn't have last year was we are trying to train them, there is an installed base of 14,000 instruments already out there, many of them doing immunoassays and molecular testing that we think are great targets for our sensitivity and we want to make sure we educate anyone in academia that was some of these other platforms to what we can do with the sensitivity. Most of the time it seems disease earlier less invasively but many times it's just simply using delusion strategies to clean up the sample and improve the quality of results by eliminating matrix effect. So I do think our sales force is being trained to also position competitively our technology which historically -- that probably wasn't their focus.

[Operator Instructions] We do have a question from the line of Doug Shanko [ph] with Cowen. Your line is now open.

Starting on guidance; I don't believe you provided full year guidance, you may have commented on how you felt about expectations embedded in senses, I'm just not sure. So could you just clarify if you're not hiding, is it through that you're at least comfortable with consensus revenue expectations what makes it today for 2018?

So if I answer the question of whether we're comfortable with consensus revenues in a way Doug is kind of like guiding; so I don't want to make a comment on that but I would say that we are very encouraged that most of our analysts have come in incredibly tight on their predictions of what we're going to do for 2018 and we think that the fact that there is not a lot of standard deviation is a very positive thing, that means that we're probably doing a pretty good job in communicating and education around that. So I want to commend you for being one of the analysts that's in that consensus number. We are not guiding officially, we feel it's early stage, we are a company that is growing very rapidly and we feel very comfortable and confident in our ability to continue our growth but we really feel smart in anyone's best interest rate now to guide. And again, a lot of our long-term prospect is really not based on the revenue of today and even of tomorrow, a lot of this is -- our ability to truly capture the imagination of what -- a Fit Bit on steroids could look like someday by really getting to a place where we can do health screens and precision understanding of the technology. So we do think there is a pretty important aspirational opportunity but the same time we're very committed to continue to grow, we've got a management team that's highly experienced in these types of instruments, and particularly in research markets where there is no regulatory reimbursement risk, we feel very confident that we're going to continue our strong trajectory of growth but we aren't going to actually provide specific guidance.

I guess maybe to push that a little bit further, do you think we're also doing a good job on instrument placements and consumables? We do a verification [ph] for the year.

The thing there I would say, Doug, if I were to give any advice, I would say I'd love to see our analysts begin to start thinking about the dollars of instrumentation converting to a third of it 6 months after installation to consumable revenue and kind of using dollars of instrumentation as opposed to units, mainly because we've got the HD-1 at very different price point than we have the SR-X plus we've got some accessories that we think drives greater throughout through in SR-X. And when you look at it, it's been amazing to us that we feel very confident that a third of it is going to be productively consumable at high margins, no matter what that revenue is. And so we actually think that keeping it at a higher level may in the end benefit everybody. So I don't know if I even know specifically what each of you have for the granularity of HD-1 versus SR-X or even if you're at that level of granularity but I would encourage a very strong look at the total instrument revenue and those projections.

You noted in your prepared remarks that accelerator carried forward significant backlog into 2018; could you quantify that at all? And I guess separately but related there, are you having incremental success with converting accelerator customers into instrument buyers especially subsequent to the launch of SR-X?

The part of the reason why I don't really want to be focused too much on today's business model and revenue; you're going to hear come out here because I do think that the traditional way we've used the accelerator continues to produce instruments, it's a great promotional opportunity that we found the way to make a lot of money added while we're promoting it and at least to instruments being placed. So I don't want to dismiss that that will continue and I feel it will but here is what's really interesting. If you watch Exact Sciences and/or watch Foundation Medicine and their dual pathway to getting both an LDT approval using FDA protocols, coupled them with the ability to negotiate CMS codes with Medicare, simultaneously, those were true in my mind, landstone -- landmark advances by those two companies. It's very intriguing to me that these biomarkers can become companion diagnostics and can become the bridge that we've been looking for as a pathway into some of the diagnostic opportunity. And there are some companies that have been pretty effective at that; even Foundation Medicine probably started off thinking that they were going to be 80% diagnostics, 20% pharma services but they've switched that model upside down in recent quarters; and I do think that we see the accelerator opportunity of having CLIA not just being a feeder in promotional for selling more instruments but an opportunity to really drive into diagnostics with a companion diagnostic in a very productive way with very significant studies. So I do think that there will be a growing proportion of our accelerator revenue that we'll be looking towards crossing over into diagnostics as opposed to being a great feeder for getting more research instruments placed. So that's -- we've got a backlog that's growing here that's very significant and we're trying to focus primarily on neurology where if you look at like rules based medicine and LabCorp and Quest and who else -- Quintiles; these are all companies front each that have our technology and somewhat of a CRO/LDT landscape. I think that many of them have been focused on auto-immune and oncology and so we think neurology is complementary to them and an area that we can really blow open and with a lot of advances, particularly with Andreas we've brought in Dan Sikimato [ph] from PharmAI; 25 years' experience of BMS in GSK and others. He is there travelling the world and everywhere we go we're seeing major opportunities for using our technology as a companion diagnostic either for patient stratification or for efficacy markers. So we don't want to in anyway discount that, we want to go after that. And that's why the Aushon acquisition helps us get to the CLIA sooner. So yes, it's been a productive way to sell instruments but I would start to look at it as being an interesting productive way to cross over.

And I'm not showing any further questions in queue at this time. I'd like to turn the call back to Mr. Hrusovsky for any closing remarks.

Excellent. Thank you very much for taking the time. Our team is very committed to driving value creation but most importantly, we think we have the ability to drive precision health and we think that there is a bigger national opportunity in America and around the world for mental health, as well as oncology health and we're driving at that with a lot of passion and a lot of credibility with a lot of people helping us. And so we encourage any of you to further reach out to your networks, let us know if there is anything we can do to further support the education of what we have here because we do think it's very significant and it's all about the pace of us making people aware of it. So we appreciate all your support and let us know if we can help you with any further questions. Thanks a lot.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.