Akoya Biosciences Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 7, 2023

There are 10 speakers on the call.

Operator

Good

Speaker 1

day, and welcome to the Okoye Biosciences Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this call is being recorded. I would like to turn the call over to Priyam Shah, Head of Investor Relations at Acoya Biosciences, you may begin.

Speaker 2

Thank you, operator, and thank you to everyone who's joining us today on this call. I'm Priyam Shah, Head of Investor Relations at Aquoia Biosciences. On the call today, we have Brian McKelligan, Chief Executive Officer and Johnny Eck, Chief Financial Officer. Earlier today, Acoya released financial results for the Q2 ended June 30, 2023. A copy of the press release is available on the company's website.

Speaker 2

Before we begin, I'd like to remind you that management will make statements during this call that include forward looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward looking statements. Actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. For a list and description of the risks and uncertainties associated with the Coas business, please refer to the risks identified in our filings With the U. S.

Speaker 2

Securities and Exchange Commission, including in the Risk Factors section of our annual report on Form 10 ks For the year ended December 31, 2022, filed on March 6, 2023, and subsequent filings With the SEC, including our quarterly report on Form 10 Q for the Q2 ended June 30, 2023, Filed today, August 7, 2023. We urge you to consider these factors and you should be aware that these statements are considered estimates only and are not guarantees of future performance. This conference call contains time sensitive information and is accurate only as of the live broadcast today, August 7, 2023. Pacoia disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise. This audio portion of this call will be archived in the Investors section of our website later today under the heading Events.

Speaker 2

Pacoia plans to participate in several upcoming investor conferences this quarter, including the Canaccord Genuity Growth Conference, UBS MedTech Tools and Genomics Summit and the Morgan Stanley Healthcare Conference. Details can be found under Events on our Investors section of our website. And with that, I will now turn the call over to Brian.

Operator

Thank you, Priam, and good afternoon or evening to everyone. We appreciate you joining us today. On today's call, I'll provide an overview of our performance for the Q2, discuss our business progress and review our new product introductions. Johnny will then provide a more detailed look at our financials, Business trends and outlook. Aquia had a very strong Q2 of 2023, Highlighted by record revenue of $23,500,000 a 31% growth over the prior year And record system placements of 72 in the quarter.

Operator

Our cumulative install base is now 1064 spatial biology instruments, The largest in the industry. Aquia's stable growth and leadership in spatial biology is a byproduct of delivering a best in class portfolio of products and services that span the full continuum of market opportunities from early discovery to translational to the emerging spatial clinical market. We provide complete end to end spatial solutions, purpose built to serve the unique needs of each of these customer types and market segments. With over 1,000 publications to date And more than 80% of these in the last two and a half years, the transformative power of Coias solutions has been validated by our customers. As noted in our 1,000 publications press release this morning, our current phenoCyclar platform is driving profound advancements in the discovering markets, highlighted by recent nature publications from the Human Biomolecular Atlas Program or HUD MAP And the human breathless cell atlas initiative.

Operator

We also continue to see robust growth in the translational markets with growing momentum Within our biopharma and CRO partners as they leverage the PhenoImager HT platform to address their growing biomarker needs, especially In oncology and immunotherapy applications, owning the full biomarker journey Using Aquoia's continuum of solutions, first for biomarker discovery studies with the PhenoCycle fusion, then validation In the translational setting and ultimately clinical applications on the Pheno Imager HT is a key value driver for Aquia's continued long term sustained growth. As discussed on the prior call, we're making targeted investments in our business to drive strong revenue growth, while streamlining our cost structure as we move the business towards profitability. Our stated strategy during and following our IPO in April of 2021 was to make the necessary investments To rapidly develop and deploy an industry leading portfolio of solutions, while in parallel, Expand our organization and commercial channels to have the scale and expertise to drive successful product launches and secure a market leading position. The successful launch of the Fusion instrument in 2022 was central to this strategy as it solidified our full instrument portfolio. We were also focused on enhancing and improving our PhenoImager HT platforms and the organization's readiness To serve the large spatial biology clinical market.

Operator

Our progress here included for the HT system meeting Clinical platform requirements for system robustness and reproducibility, meeting regulatory quality standards, Deploying our platform in a CLIA environment, including establishing a CLIA lab at our Marlboro headquarters and Securing our first companion diagnostic deal. From beginning of 2021 through the end of 2022, We succeeded in achieving all of our internal strategic objectives, while also consistently beating external financial performance expectations during this first phase of our multi year strategy. The second phase of our strategy initiated at the beginning of this year targets improving operational leverage while continuing to deliver sustained top line growth with a focus on system placement expansion and especially Driving increased reagent revenue. With the best in class instrument portfolio now in place And over 1,000 boxes in the field, we are focusing our R and D and operational initiatives on delivering workflow improvements And reagent solutions to our customers enabling a broad suite of applications and higher system utilization and as a result increased instrument pull through. Since the start of 2023, Aquia initiated efforts to expand our range of menu not only with new content, But also with ready made panels for both the PhenoCyclar Fusion for HiFlex Discovery and the Pheno Imager HT for high throughput translational study.

Operator

These biomarker panels are part of the Pheno Code reagent brand and included our discovery panels For the PhenoCycle Fuzion and the Signature panels for the Pheno Imager HT. The Discovery panels have a rolling launch throughout 2023 and are designed in a modular fashion of 10 to 20 markers, Providing our customers the ability to easily combine a handful of these modules into a large HiFlex panel, while also including the ability to add additional La Coia catalog antibodies or their own antibodies of interest. The signature panels for the HT are designed to enable fast and scalable assay development and deployment For large immuno oncology translational biomarker studies, resulting in accelerated utilization and an increased ASP per sample. Along with the launch of these high value reagent panels, We are also making additional workflow improvements on the systems and instruments to simplify the user experience and further accelerate data processing and analysis. The Fusion 2.0 instrument hardware and software field upgrade was initiated as of the 2nd quarter.

Operator

This upgrade includes a multi slide carrier, enabling parallel processing of tissue samples with improved and faster fluidics, It's effectively doubled the system throughput of the PhenoCyclo infusion to 20 or more samples per week. The upgrade also includes the necessary hardware and software components to support RNA enablement. Field upgrades started with our first customers in June and we expect a significant percentage of our Pheno cycler fusion customers to upgrade by year end. On the Pheno Imager HT, we are also streamlining our informatic workflow and post processing. In July, we introduced improvements to the HT that moves post processing and tissue analysis workflow directly onto the HT For on instrument and real time compute, this results in a several fold reduction in both image processing and turnaround time, delivering meaningful capacity increase, reduction in hands on time and workflow simplification.

Operator

Now as a reminder, Aquio's platform leveraged on instrument image processing and file compression that reduces file sizes from terabytes to gigabytes, delivering the data in a single standardized format. This standardization and the large scale market adoption of our platforms has catalyzed 3rd party development of next generation Spatial biology analysis solutions to support our customers. To date, we have partnered with leading software providers including Enable Medicine, VisioPharm, Indicollabs, PathAI and Oracle Bio providing our customers with a range of desktop, Cloud, commercial and open source solutions, allowing us to serve the full compendium of customer needs and requirements. We expect and intend for this trend to continue, while we focus our internal investments upstream. Coupled to the software partner network, our expanding content menu and workflow improvements will accelerate system utilization, Reduce time from sample to answer and drive increased instrument pull through.

Operator

We continue to make great progress in the downstream translation on clinical markets. At industry conferences like AACR and SITC, where the focus is on clinical relevance and patient impact, Spatial technology and multiplex tissue analysis are seeing a rapidly growing presence and are central To emerging clinical biomarker efforts, particularly in immuno oncology. ACOI has led these efforts by delivering a clinic ready program, Driving adoption through our CLIA lab and CRO partners and forming transformative partnerships with true thought leaders including Agilent, AstraZeneca, AcroVon and more. We continue to expand this ecosystem. For example, Our clinical, market development and commercial team are leveraging the HT workflow improvements and best practices from our advanced biopharma solutions CLIA Lab or ABS To build a rapidly growing qualified CRO service provider network.

Operator

This CRO network Amplify ZICOIA's presence and impact in the translational and clinical trial markets and like ABS Helps advance our companion diagnostic pipeline and opportunity. On the operational side of the business, We are rapidly refining and reworking our product supply chain and manufacturing processes to drive continuous improvements in our inventory management and overall margins, which we expect to approach 60% as we exit 2023. On the expense side, We completed a minor reduction in force across the company in the Q2 to optimize our teams after a period of rapid growth in 2021 2022 and to better align organizations and processes to achieve profitability. We further solidified our balance sheet in the 2nd quarter, Completing our follow on offering with the $50,000,000 in gross proceeds. To review, We're focused on the following initiatives throughout the remainder of 2023.

Operator

1st, continue to deliver new applications and drive further workflow and speed improvements to increase the reagent pull through on the phenoCyclar fusing for the discovery market And the Pheno Imaging HD for the translation on clinical markets. 2nd, continue to build and Expand the ecosystem with biopharma, medical centers, CROs and diagnostic leaders to drive adoption of the Pheno Imager HT in the translational and clinical research markets to support our companion diagnostic goals. 3rd, Drive operational efficiencies and execute targeted investments to achieve cash flow positivity in 2025. Now with that, I'll turn the call over to Johnny to discuss our financial results. Johnny?

Speaker 3

Thanks, Brian. As Brian highlighted, total revenue for the Q2 of 2023 was $23,500,000 a 31% growth Over the Q2 of 2022, our robust year over year growth reflects a strong portfolio with diversified revenue across multiple geographies, Customer Segments, Products and Services. Product revenue, including instruments, reagents and software, Totaled $17,100,000 for the 2nd quarter, representing 20% growth over the prior year period. Instrument revenue was $11,300,000 for the 2nd quarter, representing 19% growth over the prior year period. We had another strong quarter with 72 total instruments sold, of which 27 were phenocyclers and 45 were from the PhenoImager portfolio.

Speaker 3

We ended the Q2 of 2023 with a total installed base of 10 64 instruments, which includes 300 phenocyclers and 764 pheno imagers. A total of 181 Fusion Instruments have shipped since the full commercial launch at the start of 2022, And we now have a total installed base of 159 for the combined PhenoCycler Fusion system sold either directly as a combined system or as an upgrade to standalone phenocycler instruments that previously utilized 3rd party microscopes. Approximately 1.5 years into the Fusion launch, the majority of PhenoCyclers are being sold in combination with the Fusion, And we expect this combination to drive increased reagent pull through with new content and even faster workflows. Reagent revenue was $5,800,000 for the 2nd quarter, representing a 29% growth over the prior year period. In the first half of twenty twenty three, we are seeing encouraging results of our emphasis on driving reagent growth.

Speaker 3

The annualized second quarter reagent pull through has now increased to the mid $30,000 range for both The PhenoCycler and HT as more pheno cyclers paired with Fusion are up and running and as we see Increasing utility of HT among biopharma and CROs, which are also our target customers For the recently launched PhenoCodes Signature Panel, this is compared to an annualized pull through per instrument in 2022 In the low $30,000 range for both the PhenoCycler and the Pheno Imager HT. Given the ongoing dynamics across our end users, a growing installed base and our new product launches designed to realize pull through expansion, We anticipate annual reagent revenue growth to be in this range for the next several years. Service and other revenue totaled $6,400,000 The Q2, an increase of 73% over the prior year period. Services have been a substantial growth segment for us over the past several quarters As our installed base and warranty revenue expand and as our lab services are driving more and higher scale studies, Gross profit was $12,100,000 in the 2nd quarter, representing 17.2% year on year growth And gross margin was 51.5%. COGS totaled $11,400,000 for the quarter, including a non routine $2,000,000 charge related to the expiration of materials purchased in prior periods to help mitigate In the first half of twenty twenty three, We have made great strides to strengthen our operation planning and supply chain with improved systems and operational leadership as we plan for reagents to become a bigger part of our revenue mix.

Speaker 3

We will continue to scale and optimize operations and leverage our manufacturing investments To drive the expansion of our gross margins toward the 60% range in the second half of twenty twenty three, Operating expenses for the quarter totaled $31,400,000 as compared to $29,700,000 in the first Our continued efforts to leverage our cost structure to drive the business towards profitability are underway as we work to flatten our operating spend throughout 2023 and into 2024. As Brian mentioned, in the Q2, we reduced our workforce across certain areas of the organization, Which will moderate spend in non essential areas and help ensure that a more substantial portion of expected revenue growth falls to our bottom line. Included in our 2nd quarter expenses was $2,000,000 in severance and other charges with $1,100,000 of this in cash, which stems from the expense reduction effort. Excluding these charges, operating expenses decreased from Q1 to Q2. Aquia has developed world class products, a robust operating infrastructure and has streamlined commercial execution to drive top line growth.

Speaker 3

Our plan for 2023 is to focus on focus our targeted investment in areas that will generate the highest returns as we work towards Operating cash flow positivity in 2025. We ended the quarter with approximately $93,300,000 of cash and cash equivalents, which includes net proceeds from an equity raise in the 2nd quarter and have approximately $11,300,000 in additional available debt capacity. We expect to maintain robust top line growth throughout 2023 with incremental increases to gross margin, resulting in reduced cash burn as we recognize operating leverage and continue to flatten our offense. Common shares outstanding and fully diluted shares, including the impact of outstanding options and unvested restricted stock awards Our 48,800,000 shares as of June 30, 2023. To summarize, We had another record quarter with $23,500,000 in revenue, a 31% growth over the prior year.

Speaker 3

Aquia's total installed base is now at 1064 instruments, the largest installed base in the spatial biology industry. We continued the rapid expansion of our installed base while driving meaningful reagent revenue growth and pull through increases. We have implemented critical organizational changes to improve efficiencies, drive gross margin improvement and cost advantages to help recognize operating leverage while maintaining robust top line growth. And finally, with an industry leading volume of publications featuring Aquoia's platforms Now over 1,000, we remain very confident in our ability to deliver growth continued growth in 2023. Currently, we are reiterating our revenue guidance range of $95,000,000 to $98,000,000 for 2023 as we continue to see tailwinds for our business and the spatial biology market.

Speaker 3

Now, I'll turn it back over to Brian for a few closing remarks. Brian?

Operator

Thank you, Johnny. We're pleased to report a strong quarter, announced multiple exciting and new developments across the portfolio and we'll look to execute on them throughout the year as we drive the business to near term positive cash flow. We're thankful for the hard work of our fellow dedicated Aquoyans as well as the support of our customers and shareholders. Aquia remains very well positioned for growth and we're excited about the opportunities that lie ahead as we deliver new space of solutions From the discovery to the clinical market. And at this point, we'll open the call for questions.

Operator

Operator?

Speaker 1

Thank you. Our first question comes from Kyle Mikeson with Canaccord Genuity. Kyle, your line is open.

Speaker 4

Hey, thanks guys. Thanks for the questions. Congrats on the quarter.

Operator

Thanks, Doug.

Speaker 4

So first I yes, no problem. I first just want to ask some stuff about Fusion. I mean, first of all, great instruments kind of strength here. What's the, attach rate right now, fusion to PhenoCycler? And then How would you kind of characterize the pull through for the PhenoCycler fusion combined instruments?

Speaker 4

And then from this point going forward, every fusion kind of bundle was going to be 2.0,

Speaker 2

right? Thanks.

Operator

So yes, let me answer those in serial. So the fusion attach rate is still well over 80%. It is way more common than not that when we sell a cycler dose with the fusion. And while we're not calling out the pull through on the phenoCyclar fusion as a standalone relative to the phenoCyclar, the 3rd party, If you just look at, Kyle, our top 15 to 20 that are maybe fivefold above that mid $30,000 range, they're all PCF customers. So Consistent with what we're expecting, the PhenoCycle Fusion pull through is elevated well above those using the PhenoCycle with 3rd party scopes, which is why As we look at that total install base of cyclers, it's about 300, little more than half of those are attached to Fusion, Huge opportunities going forward to continue to upgrade.

Operator

And as far as the 2.0, that's cutting into manufacturing over time. So we Probably still do them as a field upgrade through the second half and then probably cut those into manufacturing more towards the tail end of the year, Focusing on those field upgrades right away. So a little bit of a hybrid.

Speaker 4

Yes, that was really helpful. Thanks, Brian. And on the service and other revenue was higher than our model, not by time, but it was pretty strong. What's driving that? What kind of projects?

Speaker 4

Is it mainly the HT Key worker or is there any fusion work being done

Operator

as well? Yes. John, if you can just remember kind of what's rolled into that services line. It certainly includes both our lab services as well as warranty. So we don't really yet carve that out.

Operator

So it's really a combination of both. Growing installed base, which means higher warranty revenue, especially when you have continued strong instrument performance. But it's also the services across the board, Which includes our CLIA lab services at ABS and the ongoing partnership with Acrovon in terms of both of the latter of both continue to advance with And the larger scale projects with our biopharma customers through our CLIA lab and the continued advancement of the Acrovant CDX.

Speaker 4

Okay. All right. Great. I thought Johnny was going to chime in. So maybe last question on, really like the company's success outside immuno oncology.

Speaker 4

I was curious if any of your more recent publications are kind of like veering outside the borders of IO and if IO is going to remain Like the main clinical use case for Spatial or do you think our target therapies like the Zaccarat therapy, because you always like the is that could be like a wildcard kind of an important Aspect come forward as well.

Operator

Yes, it's a really good question. I think what we answer Kyle is we take a look at the market segments where our products go. And in the case of the discovery segment with phenociclar, A lot of publications outside of immuno oncology, oncology more generally, including areas like inflammatory disease and dermatological diseases. On the HT translation on the clinical side is still largely dominated by IO. That said, it's worth noting that AcroVon's leadership in the new therapeutic is Targeted DNA Damage Repair.

Operator

So that's not in IO. But I would say that Kyle, for the near term, there's still so much headroom In the sort of oncology IO space in the translational clinical market, I expect we're still there for some time as we look at the advancement of that pipeline.

Speaker 4

All right. Awesome. Thanks, Brian. Thanks, guys.

Operator

Thanks, Kyle.

Speaker 1

Thank you. Our next question comes from Lucas Baranowski with UBS. Your line is

Speaker 5

Hi, guys. This is Lucas on for John Sollerbier here at UBS. In the past, you've talked about how the majority of PhenoCycler Fusion customers aren't yet at full ramp In terms of utilization, I guess, is that still the case today? And do you anticipate that changing in the coming quarter or 2?

Operator

Yes. I think when we talk about full capacity, I just think it's rare, generally speaking, for any life sciences Tool system to operate at full capacity. That said, what we do feel like John is, we do feel like with some of these field upgrades, With the improvement on, we'll call it, the bookends, more and more panels upfront, and then the improved software partners, we do feel like, Lucas, that median is going to begin to shift to a larger and larger pull through a number. I suspect hitting full capacity It's more of an idealized, but again, having a higher percentage of your customers running this at a frequency that gets your pull through From the mid-30s now, we continue to grow at a similar rate over the next couple of years is what we expect.

Speaker 5

That's very helpful. And then I guess that kind of leads into my other question. The 2.0 upgrade clearly has started now. Is there any commentary you can provide on how that's going both In terms of how things are going on your end of it and also what you're hearing from customers? Thanks.

Operator

Yes. I think, Lucas, it's still pretty early. As I noted in the commentary, it was really in June where we started doing those field upgrades. But there's 2 things we look for. Number 1 is just a simple robustness of the upgrade in terms of you install it and it works out of the box.

Operator

That's going And the second thing you look for is, is it having the realized utilization ramp where people are now prepping A lot more samples per week because they can churn multiples per day. I think this is still a little bit too early, Lucas, for that. But given the former, The robustness, we're pretty optimistic that our ability to realize those benefits and accelerate those upgrades is we're optimistic about that To second half and into twenty twenty four.

Speaker 5

Great commentary, guys. That's all I had.

Operator

Thank you, Lucas. Thanks.

Speaker 1

Thank you. Our next question comes from Rachel Battenstall with JPMorgan Chase. Your line is open.

Speaker 6

Great. Hi, you guys. Thanks for taking the questions and good afternoon. So first up, I just want to talk about some of the performance by geography. China, I believe, Roughly 15% of total CoRevenues.

Speaker 6

We've heard of a lot of weakness from other peers on the instrumentation and tools players from Sector in the region. So can you kind of walk us through how did China play out? What was growth this quarter? How were orders trending? And then are you seeing any impact From some of the recent government stimulus programs.

Operator

So great question. While we don't call out China specifically, it is APAC is about 25% of our total. Generally speaking, it's probably a little bit less than that now and China is the majority of that. And we did see a material impact on the capital purchases Through APAC negatively, obviously, because of the pullback of some of these interest free loans, for example, that were happening in China. So It did negatively impact our APAC capital purchases.

Operator

That said, we've got a really nimble and talented team in Asia Pacific and We're able to realize some growth and benefit in APAC regions outside of China. So while we did feel the pain, it wasn't yet to a scale We're materially impacted our top line and our performance for the quarter.

Speaker 6

Great. Thank you for that color. And then just on the gross margin performance, it looks like gross margin stepped down a bit sequentially. Can you just kind of walk us through some of the drivers there? Obviously, some Solid placements this quarter.

Speaker 6

And then just on gross margins heading into next year, you guys have talked about the 200 basis points of expansion in tax for this year. How should we think about that translating to NACCCCS as this becomes more and more of a rate of consumable focused business? Thank you.

Operator

Yes. It's a great question, Rachel. And maybe We'll allow Johnny the money man to talk a little bit about margins and some of the unique dynamics in this quarter.

Speaker 3

Yes. Thanks, Brian. It really was unique this quarter. Our standard margin as we sell through product really hasn't changed for on the downside. We really continue to What we saw this quarter was sort of a non routine item where we had some expiring or expired inventory that we took the charge for In Q2, and this inventory was purchased a year to 2 years ago, sort of at the tail end of the global supply chain lockup.

Speaker 3

And as we were in the middle of a high adoption mode launching new products and really that sort of that inventory came to sort expire in Q1 and Q2 and so we took that charge in Q2 and cleaned that up. But to answer the second half of your question, We expect and as Brian mentioned and I mentioned on the call, we expect sort of to exit into end of 2023 in that 60% range And then we'll see the expansion as we've mentioned of a couple of 100 basis points into 2024. As and certainly as reagents Make up a larger portion of our revenue as it continues to shift, we should expect that margin expansion related to that shift. In addition to the internal operational improvements and efficiencies that we are working on.

Speaker 6

Great. That's it for me. Thank you.

Operator

Thanks, Rachel.

Speaker 1

Thank you. Our next question comes from Mark Massaro with BTIG. G, your line is open.

Speaker 7

Hey, guys. Thank you. So, you've now had, I believe, 6 quarters consecutive With services and other revenue exceeding 50%, which is great to see. I'd love to hear maybe a little bit more what's driving that and how sustainable you think it is. On the other hand, your reagent revenue growth rate had lagged your top line revenue growth rate for 5 consecutive quarters.

Speaker 7

I'm curious as to when you think the reagent revenue will start to sort of materially inflect Or do you think that the services and other line will pretty much drive similar levels of growth for some time?

Operator

No, it's a good question, Mark. I suspect and while we don't guide to this level of granularity, I suspect you'll see those trends start to change a little bit. I mean, if you just look back over the last 3 years or so, in 2021, we're doing about $3,500,000 in reagents per quarter. 2022, that's up to $4,500,000 $2023, kind of, we're in the high fives, getting close So we're continuing that step function and I suspect that we'll start to realize more growth there, Mark, as the 2.0 becomes a larger percentage as PhenoCycl infusion becomes dominant over PhenoCycl 3rd party and as a lot of these reagent Offerings that we're beginning to roll out throughout full year begin to have their impact. So I think that's Probably how I would look at that overall, Mark.

Operator

And then on the services side, a lot of that, Mark, it's really a combination of both the growing installed base, but most certainly the realization of the revenue contributions For both the growth of the ABS and the continued productive advancement of our partnership with Acrebon. So hopefully that gives you some color.

Speaker 3

Yes, that's very helpful. So you guys have a

Speaker 7

lot going on with the 2.0 upgrade, the RNA scope. Obviously, you've got the Signature panel. As we think about the panels rolling off, Which of the rolling out, which of the new product launches do you think is most likely to be material In the back half of 'twenty three and which do you think will take more time to kind of become more material in 24 and beyond.

Operator

Yes. I really like how you phrase that. I think, Mark, that I think for me, As we get towards the end of 2023 and into 2024, I really think it's a signature panels on the HT That and again, this is sort of how I look at it. I think those have an opportunity to be material because the way those go, Mark, There's a limited evaluation, then there's a bit of a validation period with our biopharma partners and CROs, And then they get to full implementation at scale. These are being evaluated for larger scale projects.

Operator

So that's the one I look at. That's the product line I look at To have more of a more like a step function impact than something like the 2.0 where you have kind of a gradual roll in over time.

Speaker 7

Okay. Thanks. That's it for me. Thanks, Mark.

Speaker 1

Thank you. Our next question comes from Tejas Savant with Morgan Stanley.

Speaker 8

Hey guys, this is Edmund on for Tejas. Thank you for taking my questions. Hey, Just wanted to touch on the competitive dynamics here. With the proteomics side, with text announcements that acquired Lutifour and Brugger making it harder to push with Salesgate, Are you starting to see them come across them in your customer conversations? And how does this change the competitive dynamic on the protein side?

Operator

Yes. It's a great question, Adam. I think I look at it 2 ways or maybe 3, Adam. I think it's a little bit early On the Lunaford Biotechnic side to look for potential impact, I think as you look at the narratives and the investments coming out of our colleagues at Bruker and Biotechny, I think I look at it as kind of an endorsement of the value of spatial proteomics in the discovery market, which has been a lot of inappropriately so attention paid to spatial I think the narrative and investments coming out of our colleagues at Bruker and Bio Techne, I think, lend even more credence to the power of the spatial proteomics As a true discovery engine. And so we're going to continue our eye towards a road towards multiomic.

Operator

So I think that's how we look at it. A little bit too early for the impact, particularly as it relates to the Lunafore Additional resources being part of Bio Tech.

Speaker 8

Got it. That's super helpful. And then switching to the competitive dynamics on the transcriptomic side, there's a lot going on with the litigation between your peers. But as of now, both of them are now announcing 5 ks and 6 kplex by next year. So I was wondering if you guys have any updates for your internal 1,000 plexRNA chemistry?

Speaker 8

And has this Changed your view on your approach to the transcriptomic side at all?

Operator

Yes. I think as we've been articulating in prior calls and certainly at the last AGPD conference. I think as we look at the market opportunity for us, we feel like for our installed base, for our customers And for our core competency that exists today, for example, we just talked about the proteomics side, we think there's huge opportunity And really in the multiomics space in more of a targeted fashion, we'll go ahead and let our friends at 10x and Anastring Really go after these much higher plexes. Our focus is really, Edmond, on capturing sample velocity experiments per unit time, giving our customers the ability to churn through experiments in the 20 to 30 to 40, 50 samples in a week or 2. So that's why we're focused on the right amount of content for the right question, giving them the answer in a reasonable amount of time versus something that may We have very long protracted time to result in a very expensive per sample.

Operator

So we're more focused in the multi omic Kind of mid plex range, Edmund, in this higher plex, thousands and thousands of transcripts.

Speaker 8

Great answer. Thank you.

Operator

Thanks, Edmund.

Speaker 1

Thank you. Our next question comes from Tim Chiang with Capital One. Your line is open.

Speaker 9

Hi, thanks. Brian, I know you've provided Three initiatives for the remainder of the year. Could you just talk a little bit about what you see the pushes and pulls are in the second half of the year to Getting more biopharma, medical centers CRO customers, 1. And then, I had a follow-up question for Johnny on the gross margins.

Operator

Yes. That's a good question, Tim. As we think about what do we need to do to catalyze penetration in the biopharma side, Whether it's for the PhenoCycle or Fusion of the AHT, I think it's what we talked about in terms of our pillar number 1 on system utilization and pull through. It's about investing in that full workflow, Tim. So it's technician friendly.

Operator

Sample modules and panels ready out of the box, A very simple streamlined workflow on both the femocyclotheosis with the 2,0 and the HT with the onboard compute To get through that sample in a technician easy friendly manner and then to come out the other side with a compressed data file And a number of options available to you in terms of analysis through 3rd party. I think that core strategy on a simple End to end ready to go. That's what our biopharma customers look for versus sort of investing in technologies and having to have some skin in the game on tech debt. So I think we're there and that's sort of number 1. And I think number 2, as we look around having higher utilization downstream, I think what we're doing with our CRO partners in the CRO network, really enabling them with best practices like we have internally.

Operator

And that's what we've done with our CRO network is really gotten them to best practices. So When our biopharma partners are looking to outsource projects, they have a number of options available to them, including those that they've historically worked with. So I think that's how I would focus on the biopharma penetration side, Tim.

Speaker 9

No, that's good color, Brian. And then Johnny, I don't know if this is the right way to look at it, but if I would have stripped out that, I guess, obsolete inventory and taken out the $2,000,000 Charge, your gross margins probably would have been what around 60%?

Speaker 5

Yes. Yes, you're exactly right. Is

Speaker 9

that right?

Speaker 5

Yes, you're exactly right.

Speaker 3

And that's the right way to look at it. While there's always an element of inventory obsolescence or expiry that you'll have to be tracking, this was It's pretty unique in nature, just the timing of when it was purchased and the nature of the world of the time from a supply chain perspective. And then to Sort of the what now to make sure that we are driving that margin and we're fully leveraging our ERP, resource planning, including Operation dating, excess inventory tracking, all those things you would expect really we've strengthened the operational leadership With folks who have strong operations, experience, strong management of inventory, And so like you said, excluding this charge, we're at that 60% range, which is why we sort of said in the back half of the year, we think that's the range where we should be. Mix of revenue, as you'd imagine, moves margin a little bit up or down depending on instruments, reagents or service. So that's always a factor that if we can predict our revenue well, Then we have a real good view of margin.

Speaker 3

While we don't break out margin specifically by product line, certainly those impact that margin, which is why we push for What we're going to do from a reagent perspective that will drive as we grow reagents, we will drive net margin up.

Speaker 9

Got it. Okay. That's very helpful. Thank you, guys.

Operator

Thanks, Tim.

Speaker 1

Thank you. Our next question comes from David Westenberg with Piper Sandler. Your line is open.

Speaker 5

Hi. Thank you for taking my question. So you have launched a lot of products on the years In the last couple of years, I would think would drive a pretty significant utilization. So as we look at The content you've launched, is there any specific ones you want to highlight that have been good contributors To reagent growth versus ones that were a little less than you expected?

Operator

I don't think there's anything That's a good question, David. I don't think there's anything I would call out yet. Mostly because if you look back, David, over the last 2 years, While there was a good bolus of additional content on the PhenoCycler in 2022 and that did contribute topline, a lot of what we've rolled out In 2022, which would impact 2023 pull through, was really on the platform side. And I think as you look at full year 2023, I think the balance between Our signature panels for the EHT and then some of the discovery panels is where we'll start to see that impact. And I think consistent with Mark Massaro's question, We really think the step function for the signature panels is something that we might realize more explicitly than I would call The gradual rolling of what we're going to see for the full through on the phenocyclic infusion as we get more 2Os, as we get more Fusen versus third party And as those discovery panels roll out.

Speaker 5

Got you. So I mean, is there any way to kind of framework the Adoption of that is major revenue contributors. So I mean, are they dabbling in them at First and then bigger and bigger experiments as we go on. And I get that this is You have 6 months or so worth of data here. I'm just kind of thinking about how reagents They're going to grow over the next couple of years and I think that would be helpful.

Operator

Yes. I think there's 2 different generally speaking, 2 different adoption Methodologies for the discovery market versus for The downstream translation market. On the latter side, it is really about a targeted evaluation of 10 to 20 samples on these signature panels It feels like IO. They do that because they have a specific large scale clinical study in mind. So we're at that evaluation kind of validation phase.

Operator

Assuming we get through those, then David, you're talking about a big step function of large orders, Where they want to lock in a large kind of bolus of reads and orders, for a large scale retrospective or prospective clinical study. Those are step functions. And then I'd say on the discovery side, you're really talking about a migration to larger panels As projects wind down and wind back up. So those are the dynamics I would point to. With respect to the latter, I think that will probably average in more, because the PSP panels are such a big bump in the ASP.

Operator

I think we'll realize that top line benefit more acutely than on the Discovery side.

Speaker 5

Got you. And again, that's bring up a good point. I mean, there's 2 different platforms that have 2 different user kind of characteristics. So maybe I'm just going to focus on 1 and then offline, I Maybe talk about the other. So let's just go with the Pheno Amateur.

Speaker 5

What kind of I mean, the customers that are using at the full capacity, I mean, what are kind of the characteristics Of those customers and just in terms of projects or Content or whatnot? No, that would be my last question.

Operator

So if you look at our current highest user HT customers, they're generally made up of 2 customer types. A lot of them are CROs and increasingly so. And that's what gives us a lot of excitement around the Signature panels because a lot of that is in IO and we've removed their need to have to do any panel building because these are already made. So CROs are a significant percentage of it as our academic institutions that are working directly across their institution in biopharma For large scale clinical trials. So those are the 2 largest customer base.

Operator

And I would say, I think probably earlier question, I think from Kyle, a lot of these are on the HT Imager side are really still in the IO Immuno oncology immunotherapy space, which is why the signature panel content is so appropriately designed.

Speaker 5

Got it. Thank you, guys. Great job on the quarter.

Operator

All right. Thanks, David.

Speaker 1

Thank you. And our last question comes from Mason Kariko with Stephens Inc. Your line is open.

Speaker 7

Hey, guys. On the Fusion upgrades, Have you prioritized who gets upgraded first? Is it based on customer location, customer schedule? Are you targeting the highest utilization Accounts first, any color there would be great.

Operator

Yes, we have, I'd say loosely so. It's mostly those that have high utilization and need the additional bandwidth. That is usually the case where they have it or need it. They have scaled or are scaling. Those are really the customers that we're looking at first.

Operator

And that includes people that not only want the higher capacity, but not to get in the weeds, Mason. But the new software upgrade that's going with the hardware also makes it a lot easier for our customers to put multiple tissues on that slide Because we have the largest imageable area in the market and this certainly supports their productivity there as well.

Speaker 7

Got it. That's helpful. And then within your ABS business, how is the pipeline shaping up? Could positive data from Acrovant Study in the back half serve as a catalyst for additional CDx opportunities? And how are you thinking about the pacing there of when we could potentially see The next CDX announcement?

Operator

Yes, it's a great question. Your last one is sort of the money question that I will deflect for now because It's a tough one to answer and one that I probably wouldn't do explicitly. But, yes, Akerbon has announced That's not only a fast track, but they're going to at least to date report your interim results in second half. So that will be really interesting to hear. I think one of the things that we've seen, Mason, as our expertise because of Acrovant, because of our partnership with Agilent and our ongoing success With the number of pharma, what's happened to our projects Mason is we've gone from Exploratory studies that are reasonable size to larger retrospective studies to then even larger Retrospective, prospective or ongoing clinical studies.

Operator

So I think what we're seeing, thankfully Mason, is a migration of project types From exploratory to getting even closer to those clinical trial assays. And in addition to the additional work And leveraging our capacity, it's the nature of those studies that I think we're equally excited about We'll be farther and farther downstream.

Speaker 7

Got it. That's helpful. Thanks guys.

Speaker 1

Thanks. Thank you. There are no further questions. I'd like to turn the call back over to Brian for any closing remarks.

Operator

Listen, nothing additional close on. We appreciate everybody's time, attention to detail. We're certainly excited by our results and look forward Continuing our priorities to drive system utilization to really advance our translational and clinical opportunities, and I think Johnny articulated so well, has really drive that operational excellence on our path to profitability as we deliver on those other two pillars. So Thank you all for your time and your attention, and we look forward to following up conversations and seeing you all again soon.

Speaker 1

Thank you for your participation. This

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Earnings Conference Call
Akoya Biosciences Q2 2023
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