T2 Biosystems Q2 2023 Earnings Call Transcript

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August 7, 2023

There are 5 speakers on the call.

Operator

Greetings. Welcome to T2 Biosystems Inc. 2nd Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note, this conference is being recorded. I will now turn the conference over to your host, Tripp Taylor, Investor Relations at T2 Biosystems. You may begin.

Speaker 1

Thank you, operator. I'd like to remind everyone that comments made by management today and answers to questions will include forward looking statements. Those include statements related to T2Bios and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these statements, Including the risks and uncertainties described in T2 Biosystems' annual report on Form 10 ks filed with the SEC on March 31, 2023, and other filings the company makes with the SEC from time to time. The company undertakes no obligation to publicly update or revise any forward looking statements, except as required by law. With that, I would like to turn the call over to Chairman and CEO, John Sperzel.

Speaker 1

John?

Speaker 2

Thank you all for joining our Q2 2023 earnings and business update call. Today, I'll start by discussing our performance, including the key achievements we have made across our 3 corporate priorities. I'll then turn the call over to John Sprague, our Chief Financial Officer, We will review our Q2 financial results and our outlook for 2023 before I provide closing remarks and we open the call for questions and answers. The T2 Biosystems team has recently achieved a number of key milestones. During the Q2, we received record quarterly sepsis test panel orders.

Speaker 2

We received the 2nd largest sepsis driven T2Dx Instrument order in company history. We filed a 510 submission with the FDA for the T2 BioThreat panel. We applied for FDA breakthrough device designation for a Candida auris diagnostic test and we breakthrough device designation from the FDA last month. We established a clinical collaboration on the T2Bacteria Panel With Vanderbilt University Medical Center, we strengthened our balance sheet by raising capital and by converting a portion of the CRG debt to equity. We believe that each of these milestones represents important progress toward driving increased adoption and utilization of our sepsis products, Expanding our market opportunity and providing flexibility to pursue our growth and development initiatives.

Speaker 2

Our recent accomplishments contribute toward advancing our mission to fundamentally change the way medicine is practiced through transformative Culture independent diagnostics that improve the lives of patients around the world. When it comes to sepsis, our main area of focus, We believe drastic changes are needed. There are an estimated 11,000,000 sepsis related deaths worldwide each year, More than all cancers combined, sepsis is the number one cost of U. S. Hospitalization, Costing our healthcare system an estimated $62,000,000,000 annually.

Speaker 2

Sepsis is the number one cause of death in U. S. Hospitals, Causing the death of 270,000 Americans annually and 80,000 more die each year in hospice. And sepsis is the number one cause of 30 day rehospitalization in the U. S, causing 19% of sepsis survivors to be rehospitalized within 30 days and 40% to be rehospitalized within 90 days.

Speaker 2

Current treatment methods are failing patients, Payers and Providers. As a reminder, T2 Biosystems has the only FDA cleared products able to detect sepsis causing pathogens Directly from blood in just 3 to 5 hours. We believe our products have a significant competitive time to result advantage As our competitors continue to rely on positive blood culture results that can take 1 to 5 days and longer for fungal infections, resulting in delayed targeted antimicrobial therapy. Data shows that the risk of death can increase by up to 8% for each hour of delayed targeted antimicrobial therapy. As we advance our mission, we're focused on 3 corporate priorities: Accelerating our sales, enhancing our operations and advancing our pipeline.

Speaker 2

We'll discuss each of these priorities in more detail. Starting with our first priority, accelerating our sales. During the second quarter, We achieved total revenue of $2,000,000 comprised entirely of product revenue. And notably, We received record quarterly sepsis test panel order volume. Sepsis test panel revenue was $1,300,000 representing an increase of 7% compared to the prior year period, despite ending the quarter with a $350,000 back order.

Speaker 2

Had we been able to clear the back order as of June 30, sales of our sepsis test panels would have increased by 36% compared to the prior year period. In addition to our record quarterly sepsis test panel orders, we contracts for 11 T2Dx instruments during the Q2, of which 4 were in the U. S. And 7 were outside the U. S.

Speaker 2

There continues to be a significant commercial opportunity for our products in international markets, reflected by continued sales of our T2Dx instruments and our sepsis test panels to our international distribution partners. Our 2nd quarter results Included our 2nd largest sepsis driven instrument sale in the company's history to satisfy a new contract that one of our European distributors won to supply our sepsis products to hospitals in Poland. The initial term of the contract is for 3 years and includes 7 T2Dx instruments as well as orders for our sepsis test panels, including the T2Bacteria Panel, The T2Candida Panel and the T2Resistance Panel. The contract has the potential for 9 additional T2Dx instruments To be sold and deployed to hospitals in Poland, which may occur during the second half of twenty twenty three and the potential to extend the contract for an additional 2 years. Poland has a population of over 40,000,000 people, making it one of the most populous member states in the European Union And more than 1200 hospitals, a study of severe sepsis in ICU patients in Poland We found mortality rates between 46% 54% and the length of stay in the ICU ranging from 8 days to 13 days.

Speaker 2

We believe our product's ability to rapidly detect sepsis causing pathogens And antibiotic resistance genes can enable clinicians to achieve faster targeted antimicrobial therapy, reduce length of stay in the ICU and improve patient outcomes. Our discussion with our European distributors affirm our belief that there is a significant opportunity To deploy more of our products into an increasing number of hospitals in Poland and throughout Europe. Increased adoption and utilization of our sepsis products are being driven by a number of factors, including our efforts to increase awareness of their clinical and economic value. Our commercial, medical affairs and service teams are closely aligned, educating current and potential customers on identifying use cases, expanding testing criteria and implementing testing in hospital sepsis protocols. During the Q2, we announced a clinical collaboration with Vanderbilt University Medical Center to implement and evaluate Our FDA cleared T2Dx instrument and T2Bacteria Panel in a clinical setting and to conduct a prospective study.

Speaker 2

Vanderbilt will assess the capability of the T2Bacteria Panel to improve clinical interventions and antibiotic usage for patients with a bloodstream infection. We believe this collaboration provides an opportunity to generate additional data to further demonstrate the value of the T2Bacteria Panel in one of the top academic medical centers in the United States. We anticipate additional findings from the Vanderbilt Data is continually being published and presented by key opinion leaders around the world as was on display at the recent European Society of Clinical Microbiology and At the American Society of Microbiology Conference in June, Laboratory leaders from Butler Hospital, part of the newly formed Independence Health System, share their experience with the T2Bacteria Panel. Their data demonstrates that the T2Bacteria Panel detects key infections in their patient population within 3 to 5 hours, As well as broad coverage, having identified positive patients for each of the T2Bacteria Panel targets. The team at Butler has developed a protocol to trigger the use of the T2Bacteria Panel and presented case studies Showing that the T2Bacteria Panel allowed for targeted therapy as much as 37 hours faster Moving to our second priority, enhancing our operations.

Speaker 2

We've taken a number of important steps to enhance our operations, including our cost structure, balance sheet, supply chain and manufacturing. We believe these steps are essential for our long term success, including our NASDAQ listing. In May, we implemented a strategic restructuring program, which included a reduction of the company's workforce by nearly 30%, which now stands at 100 employees and has resulted in a significant reduction of our operating costs. As part of the restructuring program, We converted $10,000,000 or approximately 20 percent of our CRG debt into equity, which strengthens our balance sheet. We view the conversion of debt to equity as a show of strong support from CRG.

Speaker 2

Finally, we announced our intent to explore strategic options, including acquisition, merger, reverse merger, other business combination, sale of assets or licensing, which we continue to explore Despite a significant improvement in our balance sheet since early May. On our Q1 earnings call, we discussed raw material issues that had limited our ability to sufficient volume of sepsis test panels to meet customer demand. As a reminder, this was identified during routine internal In process inspection, so product that was shipped to customers or distributors was not affected. While we cleared the majority of the back order that existed at the end of the first We ended the 2nd quarter with a back order of approximately $350,000 We've made significant changes that we expect to address And resolve the backlog, including the hiring of a new Vice President of Operations, improvements to the controls around our manufacturing capabilities, The advanced purchase of new critical raw materials and the engagement of a consultant with significant experience manufacturing our products. We continue to have strong demand for our sepsis test panels from hospitals around the globe, and we expect to resolve the back order to meet the current and future customer and distributor demand for our products.

Speaker 2

Finally, I'd like to provide an update on our NASDAQ compliance plans. The NASDAQ stock market has rules that require all companies listed on the NASDAQ Capital Market to maintain a $1 minimum bid price and to maintain a minimum value of listed securities of at least $35,000,000 On July 6, 2023, We participated in an appeal hearing with the NASDAQ in which we presented our plans to regain compliance with both the $1 minimum bid price and the $35,000,000 minimum value of listed securities. And we requested additional time to regain compliance with those requirements. We're pleased to report that the NASDAQ has provided T2 Biosystems with a formal response approving our appeal and granting an extension to regain compliance Until November 20, 2023, and we are executing on the plans that we presented to the NASDAQ. Moving to our 3rd priority, advancing our pipeline.

Speaker 2

Our new product development priorities target sepsis, bioterrorism and Lyme disease, which represent areas of significant unmet medical need in which rapid detection can lead to faster targeted antimicrobial treatment and improve patient outcomes. Near term, we're prioritizing test menu expansion on our FDA cleared T2Dx instrument. Longer term, we're developing a next generation instrument and comprehensive sepsis test panel. We are developing 5 new products intended to expand the test menu on our T2Dx instrument, including the T2 BioThreat panel, The T2Resistance Panel, the T2Lyme Panel, a Candida auris test and the addition of an Acinetobacter baumannier Test to our existing FDA cleared T2Bacteria Panel. Each new test panel or test represents a differentiated solution to rapidly identify harmful pathogens and potentially allow clinicians to achieve faster targeted antimicrobial therapy.

Speaker 2

We believe expanding the test menu with these 5 new products will increase both instrument adoption and test utilization. The T2 BioThreat panel is a direct from blood molecular diagnostic test designed to run on the FDA cleared T2Dx instrument And simultaneously detect 6 bio threat pathogens identified as threats by the U. S. Centers For Disease Control and Prevention or CDC, Including organisms that cause anthrax, tularemia, Glanders, plague and typhus. If not treated promptly, infections with these bio threat pathogens can result in mortality rates of 40% to 90%.

Speaker 2

The T2 BioThreat panel is able to detect these BioThreat pathogens within 4 hours directly from blood and rapidly provide clinicians with the needed information to appropriately treat infected patients. We believe the T2 BioThreat panel Demonstrates very high sensitivity and specificity for a direct from blood multi target bio threat product and is the only such product Developed by a U. S. Owned company, which we think will be an important factor in the discussions with U. S.

Speaker 2

Government entities regarding purchases of the T2 BioThreat Panel. We filed an FDA submission for 510 clearance for the T2 Bio panel in early May 2023. We are actively engaged with the FDA on the submission and we anticipate a positive outcome. The T2Resistance Panel is a direct from blood molecular diagnostic test designed to run on the FDA cleared T2Dx instrument And simultaneously detect 13 antibiotic resistance genes known to cause antibiotic resistant infections which is marketed and sold in Europe under CE Mark detects resistance genes that may confer resistance to common antimicrobials Such as carbapenems, methicillin and vancomycin. We've advanced the U.

Speaker 2

S. Clinical trial, including completing patient enrollment And we plan to file an FDA submission for 510 clearance after completing additional internal testing, including stability testing. As a reminder, the T2Resistance Panel was granted breakthrough device designation by the FDA, which provides for a prioritized review process upon submission and has received funding under our contract with BARDA. The Candida auris test is a direct from blood molecular diagnostic test designed to run on the FDA cleared T2Dx instrument And detect candida auris species in just 3 to 5 hours without the need to wait days for a positive blood culture. Candida auris is a multi drug resistant fungal pathogen that has a mortality rate of up to 60% and is recognized as a serious global health threat by the CDC and the World Health Organization.

Speaker 2

Candida auris is difficult to identify with standard laboratory methods, which can lead to inappropriate treatment. CDC estimates the costs associated with U. S. Fungal diseases in general are as high as $48,000,000,000 annually and has called on public health professionals to help lower the burden of fungal disease by continuing to raise awareness of the life threatening benefits Sorry, life saving benefits of early detection and proper treatment. As a reminder, We currently market and sell the T2Candida Panel, the only FDA cleared diagnostic test able to detect sepsis causing fungal pathogens directly from blood in just 3 to 5 hours without the need to wait days for a positive blood culture.

Speaker 2

The T2Candida Panel runs on the FDA cleared T2Dx instrument and simultaneously detects 5 Candida species, including Candida albicans, Candida tropicalis, Candida peroxoliosis, Candida crucii And candidaLabrata. Rapid detection of these pathogens as well as candida auris is essential to getting infected patients on targeted antifungal therapy and improving patient outcomes. I'm pleased to report that we recently received FDA breakthrough device designation for the Candida auris test, which provides greater and more frequent access to the FDA and may accelerate our path to FDA clearance. The Acinetobacter baumannier test is a direct from blood molecular diagnostic test designed to run on the FDA cleared T2Dx instrument and detect Acinetobacter baumannae in just 3 to 5 hours without the need to wait days for a positive blood culture. We plan to add the Acinetobacter baumannae test to our FDA cleared T2Bacteria Panel to expand our pathogen detection capabilities.

Speaker 2

The addition of Acinetobacter Balmonier will increase the detection capabilities of the T2Bacteria Panel to approximately 75% Of all sepsis causing bacterial infections commonly found in blood culture, Acinetobacter baumannii can cause bloodstream infections, Especially in critically ill patients, which reign from benign transit bacteremia to septic shock and has been reported to have a crude ICU Mortality rate of 34% to 43%. Acinetobacter infections rarely occur outside of healthcare settings in the United States and can disproportionately impact those with weakened immune systems, chronic lung disease or diabetes. Acinetobacter can be resistant to many antibiotics, including carbapenems, highlighting the importance of rapid detection and targeted antimicrobial treatment. We believe that we have sufficient data to file an FDA submission for 510 clearance and we plan to file that during the second half of twenty twenty three. The T2 line panel is a direct from blood molecular diagnostic test designed to run on the FDA cleared T2Dx instrument And detect Borrelia burgdorferi, the bacteria that is the major cause of Lyme disease in the U.

Speaker 2

S. The T2Lyme Panel is intended to test individuals with signs and symptoms of Lyme disease and aid in the diagnosis of early Lyme disease. And we believe it will provide a significant advantage over the currently recommended serological testing that requires the presence of antibodies, which can take the body 4 to 6 weeks to create post infection. In 2022, our T2Lyme panel was named a winner in the Lyme Innovation Accelerator or LymeX, a partnership between the U. S.

Speaker 2

Department of Health and Human Services and the Stephen and Alexander Cohen Foundation, The largest public private partnership for Lyme disease that plans to award up to a total of $9,000,000 to future award winners. We also received FDA breakthrough device designation for the T2 line panel, which allows for a prioritized review process upon submission to the FDA. We have completed the early assay development for the T2Lyme Panel and we established a preliminary level of detection of 2 CFU per ml. We plan to initiate commercialization of the T2Lyme Panel as a laboratory developed test and subsequently commence a U. S.

Speaker 2

Clinical trial to support submission for 510 clearance. Looking ahead at longer term products, We're developing a next generation instrument and a comprehensive sepsis test panel. The next generation instrument is designed to increase the number of detections The comprehensive sepsis test panel is a direct from blood test panel Designed to detect greater than 95% of all bloodstream infections caused by bacterial and Candida species And antibiotic resistance genes identified as threats by the CDC in a single test with a time to result of approximately 3 hours. The next generation instrument and comprehensive sepsis test panel have been funded under our contract with BARDA. With that, I'll now turn it over to John Sprague to provide a detailed update of our Q2 financial results and our updated financial outlook for 2023.

Speaker 2

John?

Speaker 3

Thank you, John. 2nd quarter 2023 revenues were $2,000,000 a 67% decrease compared to the prior year period, driven by a $3,400,000 reduction in BARDA research contribution revenues and lower COVID-nineteen test sales. Sepsis test panel sales were $1,300,000 a 7% increase compared to the Q2 of 2022. 2nd quarter 2023 cost of product revenues were $4,900,000 a 4% decrease compared to the prior year period driven by lower COVID-nineteen test sales. Research and development expenses were $3,900,000 A 52% decrease compared to the prior year period driven by decreased BARDA contract activities.

Speaker 3

Selling, general and administrative expenses were $6,300,000 a 20% decrease compared to the prior year period driven by decreased medical affairs spending. In May 2023, we initiated a workforce reduction of nearly 30% across production, Research and selling, general and administrative groups that will reduce our future expenses. The 2nd quarter 2023 net loss was $6,300,000 $0.08 per share compared to a Q2 2022 net loss of $18,000,000 $5.10 per share. Cash and cash equivalents were $16,100,000 as of June 30, 2023. In the Q2, we raised $18,500,000 net through the ATM facility and we have raised an additional $10,900,000 net through in the Q3.

Speaker 3

In June 2023, CRG converted $10,000,000 approximately 20 percent of its outstanding debt to common and preferred stock, strengthening our balance sheet and improving our cash flows. The preferred stock will convert common stock in the Q3 of 2023 subject to shareholder approval. We now believe the U. S. Launch The T2Resistance panel will occur in 2024 and we expect total 2023 sepsis and related product revenues of $9,500,000 to $10,500,000 representing growth of 13% to 25% compared to 2022.

Speaker 3

We expect second half sepsis and related product revenue to be skewed to the 4th quarter. We anticipate no revenue from BARDA during half of twenty twenty three. Thank you and back to John Sperzel for closing remarks.

Speaker 2

Thank you, John. We achieved key milestones across our 3 corporate priorities during the Q2 of 2023. Commercially, We received record quarterly sepsis test panel orders and received the 2nd largest sepsis driven T2Dx instrument order in company history. Operationally, we significantly improved our cost structure and strengthened our balance sheet, implemented a plan to eliminate the product back order, And we are executing a plan to regain compliance with the NASDAQ listing requirements. Scientifically, we advanced a number of new product initiatives that have all received FDA breakthrough device designation, including the T2Resistance Panel, the T2Lyme Panel and the Candida auris test.

Speaker 2

We view this as recognition from one of the most stringent regulatory agencies in the world That our products have a unique ability to positively impact healthcare. We believe that applying our patented technology to these three areas, Sepsis, bioterrorism and Lyme disease, which represent multibillion dollar market opportunities, presents a significant opportunity to create shareholder value. I'd like to turn the call back to the operator to open the line for questions.

Operator

First question today is coming from Ben Haynor from AGP. Ben, your line is live.

Speaker 4

Good afternoon, gentlemen. Thanks for taking the questions. First off for me, On the Vanderbilt collaboration, did I hear you correctly that they already have a protocol established for that study? And then It sounds like maybe they already have, David, if I heard that, if I caught that right, you mentioned 37 hours faster. Is that Correct.

Speaker 2

Ben, there is a protocol for the Vanderbilt study. The 37 hour Faster than blood culture based method was based on a study at Butler Hospital. So those were 2 separate things, both of them very favorable and positive.

Speaker 4

Yes. Okay. And is there I know It's always hard to gauge when data might be published or a study might be published on this. But do you have a sense of How quickly things should come out of that collaboration?

Speaker 2

On Vanderbilt, not yet. We're obviously pretty excited about it. And once we have a line of sight, we'll share that.

Speaker 4

Okay. And then obviously the clinical data library continues to build. Is there anything that you see out there as really validating that could wind up in the clinical data library? Or Is there anything I guess another way of asking, is there anything that you feel like is missing that would really push potential customers over the edge To adopt the T2 system?

Speaker 2

The 3 common denominators that we see in clinical studies that we participate in or done independently by investigators are faster time to pathogen detection, faster time to targeted therapy And reduced length of stay in the hospital or ICU. We saw that in a peer reviewed journal where Meta analysis we've done in 14 independent studies and the results were very consistent with our clinical trial and all the studies that we've seen out in the field.

Speaker 4

Okay. Got it. And then on the gross margin, I know you've had Some issues there with raw material availability and other things. What can that look like as you get Some of these things figured out on a marginal basis. What does the gross marginal gross margin look like As you get this figured out?

Speaker 2

John Sprague, can you take that?

Speaker 3

Yes. So Ben, our contribution margins That's sales less direct labor and direct materials are in the 70% to 80% range for these tests. And our overhead, as we've recently reduced with the restructuring in May, will be Steady going forward. We haven't disclosed at that level of granularity, but I think if you strip out the material challenges we had in the Q1, you're going to see the margins Quickly turning to positive in the future.

Speaker 4

Okay, got it. And then last thing for me, you mentioned the preferred converting to common, I think in the current quarter. Do you run into any share count limitations on that front? Or how does that occur?

Speaker 2

So when we look at the debt that CRG held prior to the convert, It was approximately $50,000,000 Approximately $10,000,000 was converted into equity. A portion of that was in common stock. A portion of that is in preferred stock. The preferred will convert to common subject to stockholder approval at the stockholder meeting on September 12.

Speaker 4

Okay. And then that presumably would take place post reverse split or at the same time, If a reverse split is approved, all the caveats necessary.

Speaker 2

That's all subject to stockholder approval.

Speaker 4

Okay. Got it. Well, thanks for taking the questions guys. That's it for me.

Speaker 2

Thank you, Ben.

Speaker 4

Thank you, Ben.

Operator

Thank you. And there were no other questions from the lines at this time. I would now like to hand the call back to John Sperzel for closing remarks.

Speaker 2

Thank you all very much for joining our Q2 2023 earnings call. We look forward to updating you as we progress with the business. Have a great night.

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