Akoya Biosciences Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 13, 2024

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Aquoia Biosciences First Quarter 2024 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 Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker, Priyam Shah, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

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 Aequa Biosciences. On the call today, we have Brian McKeligan, Chief Executive Officer and Johnny Ek, Chief Financial Officer. Earlier today, Aequare released financial results for the Q1 ended March 31, 2024. A copy of the press release is available on the company's website.

Speaker 1

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 1

Securities and Exchange Commission, including in the Risk Factors section of our annual report on Form 10 ks for the year ended December 31, 2023, filed on March 5, 2024 and 10 Q filed today May 13, 2024. We urge you to consider these factors and you should be aware that these statements are considered estimates only and are not a guarantee of future performance. We'll be referring to non GAAP measures on this call, including non GAAP adjusted gross profit, non GAAP adjusted gross margin, non GAAP operating expense and non GAAP loss from operations. OCOI defines non GAAP adjusted gross profit as gross profit margin adjusted for certain excesses and obsolete inventory charges. Pacoia defines non GAAP adjusted gross margin as non GAAP adjusted gross profit divided by total revenue.

Speaker 1

Ocoya defines non GAAP operating expense as operating expense adjusted for impairment and restructuring charges. Lastly, Ocoya defines non GAAP loss from operations adjusted for certain excess and obsolete inventory charges, impairment and restructuring charges. These non GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliation to the most directly comparable GAAP financial measures are provided in the table in the press release. This conference call contains time sensitive information and is accurate only as of the live broadcast today, May 13, 2024.

Speaker 1

McCoy 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. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events. And with that, I will now turn the call over to Brian.

Speaker 2

Thank you, Prem, and good afternoon or evening to everyone. We appreciate you joining us today. During today's conference call, I will begin by giving a broad overview of our performance in the Q1, review our business advancements and highlight a few of our recent partnerships. Following that, Johnny will go deeper into our financials, key trends and provide an outlook for the future of the business. While we made meaningful progress advancing both our operational and clinical objectives, our Q1 results fell short of expectations.

Speaker 2

We achieved $18,400,000 in total revenue, driven primarily by strong sales of reagents and a growing lab services business. Reagent revenue totaled $7,000,000 a 23% increase from the prior year, bolstered by our industry leading install base of 1213 instruments as of the Q1 2024. The annualized pull through is now $53,000 on the PhenoCyclare Fusion and $40,000 on the Pheno Imager HT. With approximately 2 thirds of our PhenoCyclers now paired with the Fusion and with strong incentives in place for the remaining units to upgrade, we are strategically aligning our application breadth and workflow development efforts to capitalize on the phenocycler fusion system pull through. The continued increase in pull through can largely be attributed to our enhanced system capabilities realized with our PhenoCycler Fusion and HT 2.0 releases and our customers' desire for high plex panels.

Speaker 2

Additionally, services revenue reached $6,200,000 a 5% growth from the prior year. We placed 30 instruments in the Q1 contributing $4,900,000 in instrument revenue. Despite the strength in reagents and services, the revenue shortfall was primarily driven by weakness in instrument placements in the quarter. 3 main factors contributed to our revenue underperformance. First, systemic pressure on capital expenditures persisted throughout the quarter.

Speaker 2

The key drivers include elongation of sales cycles, increased scrutiny on and reassessments of incremental capital purchases, delays in labs expanding their capacity, NIH budget uncertainty and inflationary pressures. We expect this downward pressure to ease as we progress through 2024. 2nd, as previously announced, we recently completed the launch of our new manufacturing center of excellence in Marlborough, Massachusetts. The primary focus of this facility is the manufacturing of our molecular barcode and antibody catalog and accompanying reagents. This facility is now fully operational and poised to meet the growing demands for our reagents, supporting our goal to drive increased margins and expand the available applications on our platforms.

Speaker 2

Our transition away from 3rd party outsourced suppliers to internally manufactured material temporarily impacted reagent fulfillment times and delayed instrument purchases. This was most acutely felt in reference driven opportunities, core labs and CROs. With these ramp up activities now complete, we believe we have resolved our product availability challenges. We took this strategic step aiming to ensure reagent quality and availability for the foreseeable future and are excited to provide an enhanced customer experience while also realizing cost reduction benefits throughout the year positively impacting our gross margin. 3rd, certain pharmaceutical partner lab services revenue recognition was deferred to the second half of twenty twenty four due to a shift in clinical trial milestone timelines.

Speaker 2

We are well on track to complete these milestones this year, but the revenue recognition is now deferred to the second half of twenty twenty four. With this shift in clinical trial service revenue to the second half, resolution of our temporary reagent availability issues through our new manufacturing center of excellence and growing optimism for improvement in the macro environment in the latter part of the year, we are confident that our foundational initiatives will lead us back to solid top line growth and achievement of our profitability objectives. Our Q1 results also highlight several important initiatives that we have implemented aimed at enhancing our core financial fundamentals. Let me briefly walk through these. Turning to our margins and expense reductions in the quarter, we completed a $2,000,000 inventory write off from discontinued legacy instruments.

Speaker 2

These instruments were earlier versions of the Pheno Imager HT that were part of historical instrument portfolio we acquired with the phenoptics division from PerkinElmer now Reviti in 2018. For the Q1 of 2024 reported gross margin was 46%. When excluding this write off, our non GAAP adjusted gross margin was 57%. This compares to our GAAP and non GAAP adjusted gross margin of 57% in the prior year period. Taking this step now will help simplify our inventory management and clean up our balance sheet going forward.

Speaker 2

To drive further cost controls and efficiency, we completed a facility consolidation into our new manufacturing center of excellence in Marlboro in addition to a 15% reduction in force in the Q1. This resulted in an impairment charge and restructuring expense totaling $4,400,000 Reported operating expenses were $30,000,000 in the Q1 of 2024, while non GAAP operating expenses were $25,600,000 with these impairment and restructuring charges excluded. In the Q1 of 2023, our GAAP and non GAAP operating expenses were 29,700,000 dollars Excluding the $4,400,000 impairment and restructuring charges, we had a 14% decrease in our operating expenses on a non GAAP basis compared to the prior year period. In summary, by effectively addressing the primary drivers behind our revenue shortfall and simultaneously implementing targeted strategies to enhance operational efficiency and improve profitability. We believe we have the ability to return to solid top line growth and are committed to meeting our goal of achieving operating cash flow breakeven by the end of the year.

Speaker 2

I would now like to pivot to provide an update on our advancing companion diagnostic partnership with Acromon Therapeutics and review 2 exciting recently announced new partnerships with Shanghai KR Pharm Tech and NaraCare. First, an update on Akervon. On April 24, at their virtual corporate R and D event, Akeravon presented initial positive Phase 2b clinical data for their therapeutic agent ACR-three sixty eight in patients positive for the ACR-three sixty eight OncoSignature assay in ovarian and endometrial cancer. This assay is run on Aquio's PhenoImager HT platform out of our CLIA lab in Marlborough, Massachusetts. More specifically, initial prospective validation of Acrobon's ACR-three sixty eight Onco Signature Assay demonstrated its ability to identify ovarian and endometrial patients sensitive to ACR-three sixty eight monotherapy and the ongoing clinical trial with 50% confirmed objective response rate in aqua signature positive patients versus 0% in the aqua signature negative patients at a p value of 0.0038.

Speaker 2

This statistically significant prospective validation of the patient selection approach via the ACR368 Onco Signature assay demonstrates the ability to effectively identify cancer patients whose tumors are likely to respond to ACR-three sixty eight monotherapy treatment. Building on the significant progress, including fast track designation for the ACR-three sixty eight therapy for ovarian and endometrial indications, along with breakthrough device designation for the ACR368 Onco Signature assay in ovarian cancer, we and our dedicated companion diagnostic team are excited to continue advancing this exclusive partnership with Acrebon to bring a precision diagnostic to the market with the potential to address significant unmet treatment needs against a broad range of tumors in over 200,000 patients with limited treatment options diagnosed in the U. S. And Europe. Alcoa also recently announced a partnership with Shanghai KR Pharmtech and the pre market approval from China's National Medical Products Administration also known as NMPA for the KR HT5 instrument.

Speaker 2

Aquia co developed KR HT5 with KR PharmTek utilizing the PhenoImager HT as its foundation. And this platform will serve as the core technology to deliver next generation pathology solutions and multiplex biomarker workflows within hospital settings across China. The NMPA approval has a Class II designation and KR Pharm Tech along with the Coia will be working with a network of key opinion leaders in China to establish clinical validation and secure Class III approval for specific assays. KeyoPharmtech is an experienced clinical partner that we believe has the scientific, strategic and regulatory capabilities to usher Aquia's technology into entirely new and significant clinical markets. Finally, last Thursday, we announced our partnership with NaraCare, a developer of laboratory tests for individualized survival protection of melanoma patients with offices in Germany and the United States.

Speaker 2

We have entered into an exclusive agreement to enable personalized therapy selection for early stage melanoma patients. The aim is to leverage the Pheno Imager HT, our CLIA lab and NaraCare's immuno test and its best in class clinical data to focus on increasing access to life saving therapies for early stage melanoma patients. Melanoma is the leading cause of skin cancer related deaths with over 235,000 new diagnoses globally every year. Recent approvals of immune and targeted therapies have greatly expanded the available treatment options for adjuvant therapy, but primarily for late stage disease. The challenge is that a significant number of early stage melanoma patients remain at high risk of relapse and mortality without access to such therapies.

Speaker 2

As the majority of melanoma patients are diagnosed with early stage disease, there is a critical unmet need to identify those at risk patients to potentially enable earlier access to life saving therapeutic agents. NiroCare's immunoPRINT assay has demonstrated robust clinical performance in identifying early stage melanoma patients at risk at high risk of relapse through multiple independent prospective and retrospective clinical studies. The data demonstrates that the immunoPRINT high risk patient group is ideally suited to potentially benefit from therapeutic options that would usually only be administered in later stages. Pacoia and NERIKOR will focus on developing partnerships with leading biopharmaceutical companies to enable patient stratification and therapy selection in early stage melanoma patients, preferentially for those treatments already approved in late stage melanoma. In closing, historically, Aquoia has demonstrated consistent above plan performance since our IPO in April 2021.

Speaker 2

And we are confident that we have addressed the underlying issues driving this quarter's performance. The market opportunity for spatial biology to emerge as the primary methodology for tissue analysis from discovery to clinical is unequivocal and the momentum in the market awareness continues to grow exponentially. As evidenced by our industry leading installed base, we believe Aquoia has the systems, new operational efficiencies and capabilities and scalability to meet the growing demand for spatial biology from discovery to the clinic. We also believe that Aquia will drive considerable shareholder value with our newly enhanced and efficient manufacturing capabilities, best in class product portfolio, strong commercial team and accelerating realization of the significant clinical opportunities in a substantial total addressable market. We thank you for your time and support.

Speaker 2

And with that, I will now turn the call over to Johnny to discuss our financial results. Johnny?

Speaker 3

Thanks, Brian. As Brian highlighted, total revenue for the Q1 of 2024 was $18,400,000 a 14% decline compared to the prior year period. Product revenue, including instruments, reagents and software, totaled $12,100,000 for the Q1. Total instrument revenue was $4,900,000 and our industry leading installed base now totals 1213 instruments, including 354 pheno cyclers and 859 pheno imagers. We delivered $7,000,000 in reagent revenue in the Q1, reflecting a 23% increase from the prior year period.

Speaker 3

The annualized reagent pull through continues to climb across our instrument portfolio, of which the PhenoCycler Fusion and the Pheno Imager HT are the primary contributors. The PhenoCycler Fusion, the combination of PhenoCycler and eFusion now totals 215 in the field and as of the Q1 has an average annualized pull through of $53,000 per combined instrument pair. The Pheno Imager HT, of which there are now 359 in the field as of the Q1 has an average annualized pull through of $40,000 per instrument. Going forward, we expect the majority of PhenoCyclers to be paired with a fusion in the field and we have discontinued the Mantra and Vector line under the PhenoImager portfolio. Based on these dynamics, we will focus only on reporting pull through metrics for the PhenoCycler Fusion and the Pheno Imaging HT moving forward.

Speaker 3

We will continue to maintain service support for those legacy those existing legacy systems in the field, but we'll focus instrument sales efforts only on the PhenoCycler, Fusion and HT. Services and other revenue totaled $6,200,000 for the Q1, an increase of 5% over the prior year period. Services have been a growth segment for us as our instrument warranty and field service revenue have rapidly expanded coupled to our large installed base, in addition to our lab services business driving higher value studies through new and existing biopharma partnerships. As Brian noted, a portion of contracted pharma partner service revenue shifted from the Q1 and is expected to be recognized in the second half of the year. Gross margin was 40 percent in the Q1 of 2024, while non GAAP adjusted gross margin was 57% compared to 57% GAAP and non GAAP gross margin in the prior year period.

Speaker 3

The discontinuation of the Mantra and Vectra line drove a non cash inventory write down of $2,000,000 which impacted our cost of goods in the Q1. As we drive increases in our reagent revenue mix, execute on our identified operations, optimization efforts for reagents and leverage the capacity of our recent manufacturing investments, we expect to further propel the expansion of our gross margin through 2024 and beyond in the range of a couple of 100 basis points annually. Operating expenses were $30,000,000 in the Q1 of 2024, while non GAAP operating expenses were $25,600,000 compared to $29,700,000 GAAP and non GAAP operating expenses in the prior year period, a decrease of 14% on a non GAAP basis. As Brian noted, we took actions in the Q1 to reduce operating expenses in pursuit of our goal of achieving operating cash flow breakeven as we exit 2024. This included the consolidation of our manufacturing, quality and R and D operations into our manufacturing center of excellence in Marlborough.

Speaker 3

As a result, we recorded an impairment charge of $3,000,000 related to the facility exiting activities. In addition, we recorded a $1,400,000 restructuring charge resulting from a 15% headcount reduction completed in January of this year. This charge is also excluded in our non GAAP operating expenses. Through these and similar ongoing strategic efforts, we expect to further streamline our operating costs for the balance of this year and focus our balance sheet investments on delivering improvements in gross margins, supporting our goal to achieve operating cash flow breakeven as we exit 2024. We ended the quarter with approximately $61,600,000 of cash, cash equivalents and marketable securities.

Speaker 3

Common shares outstanding and fully diluted shares including the impact of outstanding options and unvested restricted stock awards are $49,300,000 as of March 31, 2024. In summary, Aquia has implemented important business and operational changes to enhance efficiency, drive gross margin improvement and achieve cost advantages. We have also proactively addressed the drivers of our revenue shortfall in the Q1. As such, we anticipate a measured recovery to sustained growth throughout 2024 and beyond, and we continue to focus on our very important goal of operating cash flow breakeven as we exit 2024. At this time, Aquia is updating its revenue outlook for the full year 2024, while maintaining its commitment to achieving operating cash flow breakeven by year end.

Speaker 3

The company now expects full year 2024 revenue to be in the range of $1,000,000 to $112,000,000 Back to you, Brian.

Speaker 2

Thank you, Johnny. We look forward to executing our strategic objectives and partnerships throughout the remainder of the year as we drive the business forward. We are thankful for the hard work of our fellow dedicated Aquinas as well as for the continued support from our customers and shareholders. Aquoia remains 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 clinical markets. We thank you all for your time and support.

Speaker 2

At this point, we'll open up the call for questions. Operator?

Operator

And our first question will be coming from, excuse me, Jacob Karenbuhl of Stephens. Your line is open. Our next question will be coming from Kyle Mixon of Canaccord. Your line is open.

Speaker 4

Hey guys, thanks for the questions.

Speaker 2

Hey Kyle.

Speaker 4

Good chat. Hey, so first some questions about the financial side. I wanted to ask if you could quantify or at least qualitatively help us think about the biopharma revenue that was shifted to the second half of the year. And I think it's important to understand that in the context of this 25% year over year growth for the second half that's basically remaining in place it seems. But I assume that the Q2 outlook is not terribly impacted by maybe near term 2.

Speaker 4

So it sounds like there's a lot of one timers in the Q1. Maybe you can kind of parse that out. But just wanted to understand what's shifting and how we should sort of think about like run rate growth and how that accelerates towards end of the year?

Speaker 2

Yes. So maybe a lot to unpack there. So first on the CDX revenue shift, I think as we noted on the call, it was really a byproduct of a slight shift in the clinical trial partner milestones, resulting in a shift in the revenue recognition into the second half. And the impact of that was sort of low single digits in terms of millions shifting into the second half. So that's basically the contribution of that.

Speaker 2

And on the instrument side, I think similarly to give you some color on that as we looked at the impact of the manufacturing gap and the ability of third parties to provide necessary reagents and the timing of us getting fully operational towards the end of the quarter. The relative impact of that Kyle in terms of instrument placements for example on the PCF, phenotypal fusion was probably around high single digits. So that can kind of give you a sense of the contributors between those 2 in terms of the revenue push. And as we look to the remainder of the year, I think we'll look to kind of sequentially continue to to return to our expected growth that you saw historically for both instruments and reagents.

Speaker 4

Got it. And maybe, if you could talk about why the, Pheno Imager line kind of underperformed at least compared to what we had. And PhenoCycler did much better. Maybe that's obvious because the PCF is just more, maybe you're pushing that a little bit harder. But can you just talk about maybe if there's something in the marketplace that a few new imager HD is not as in demand as it went through us?

Speaker 2

No, I think it's more of a dynamic to focus, our focus on serving those PCF customers through the transitions and the challenges that we had in Q1. So I think you can see a kind of a more balanced commercial focus as we go into the remainder of the year where the focus could be more on external commercial execution rather than supporting our customers through the transition.

Speaker 5

Okay. And then let me

Speaker 4

just ask a quick one for a half off. On the clinical partnerships, you have a few of them now. Yes. Is there any way you could, again, like help us think about or quantify maybe the TAM or the market opportunity or revenue opportunity for these 3 plus partnerships that you have? What could that look like maybe in 2025, 'six, 'seven that sort of timeframe?

Speaker 2

Well, I think there's 2 ways to parse that qualitatively, Kyle. 1 is each of these individually kind of provides different contributions for us in the near term on the top line and longer term in terms of the clinical deliverables. Acrovant as a company, I would encourage you to go listen to their R and D day to get a sense for the pace and veracity of their clinical progress. That opportunity for Coia is largely transitioning from the latter stages of our CDx development work to what is a hopeful continued solid progress of their on their clinical progress as they potentially progress to on market, which will be for Aquila a very significant event. So that dynamic in terms of its impact is very different in that the mid to near term upsides provided their continued success would be a real catalyst for Aquia to have a potential on market clinical test tied to a therapeutic.

Speaker 2

NaraCare is a very different dynamic in that they have identified a patient population that's several 100,000 patients that are diagnosed with early stage melanoma, where that are at high risk of recurrence or mortality and there's no effective way for the current on market therapeutics to be applied to this patient population in need. They essentially have to wait. So the market opportunity with Mericare is leveraging their established clinical data along with them to capitalize off of the growing and intense interest in that panel to serve existing therapeutics that are serving late stage melanoma and initiate clinical studies, so those are going to be transitioned to early stage, a much larger market opportunity. So for COIA, what that means for us is an ability to with clinically validated data and an assay attract existing biopharma that have on market melanoma therapeutics and catalyze large scale companion diagnostics development projects, which are significant in terms of revenue to buttress the existing CDX revenue that we have. Now KR PharmTech, again is powerful in that it represents for us an entirely new not just clinical market, but an entirely new market opportunity within China, which we all know is struggling a bit.

Speaker 2

And for us, what we have now with the Class II approved system is working with them and their KOL network to now establish the clinical validity of Class III assays. And that over time will leverage that KL network to place HT systems in that market to establish that clinical utility. So you can see that all of them individually contribute to the advancement of our clinical opportunity, but in the case of Accuram, much later stage, potentially a commercial test. Narrow Care is really expanding the opportunity we have with biopharma of a clinically validated test to secure new partners expeditiously. And then finally, KR is giving us a headway into the China market again to balance against those headwinds, but give us entirely new clinical market vein to serve.

Speaker 4

Got it. Helpful, Brian. Thanks.

Operator

One moment for our next question. And our next question will be coming from David Westenberg of Piper Sandler. Your line is open, David.

Speaker 6

Hi. Thank you for taking the question. Just could we talk about the reiteration of being cash flow break even this year? Can you remind us where you made some of the cost cuts last year? Can you ensure us that if you are matching kind of cost cuts with the lower guidance that you're not maybe impacting growth?

Speaker 6

And I get maybe some of this is just plan as usual and it just so happens that maybe you're just kind of subtracting out some of what Q1 impact. But just kind of wanted the reminder of kind of why this cash flow breakeven target by the end of the year still seems reasonable in light

Speaker 3

of the lower guide? Thanks.

Speaker 2

It's a great question, Dave. And I think I'll pass to Johnny to give at least some hypothetical scenarios on what Acoya would have to deliver, for example, in Q4 to reach that point as compared to, for example, to prior years. So Johnny, maybe walk through a little bit of that scenario to provide some hypothetical color.

Speaker 3

Sure. Sure. Thanks David. Yes, important to note, this is sort of how we see the exit of the year. And if we plug in a Q4 that looks similar to our normal kind of mid-twenty percent growth rate over the Q4 of last year, that'll give you a number for a revenue that you could use as a hypothetical at 62% margin, let's say, and a hypothetical at 62% margin, let's say.

Speaker 3

And the real driver is the OpEx. Our OpEx was in the $29,000,000 $30,000,000 Q1, but there were $3,500,000 $4,500,000 of kind of one time items that flow through. So truly that run rate in Q1 was sort of in that $25,000,000 OpEx range. So if you take that revenue in Q4 at this gross margin rate that we've sort of highlighted And then you take a call it $25,000,000 in OpEx, remove $5,000,000 of non cash, you get to that breakeven. So it's all of those are scenarios and assumptions that are reasonable based on our average growth rates and our gross margin trajectory and our current run rate of OpEx.

Speaker 3

So, with those, we get to that cash flow breakeven. And to go back to sort of another question you asked on what actions we've taken. So as you know, we took in Q1 an action to reduce headcount and that fully flows through in Q4. And importantly, we avoided cutting revenue generating commercial headcount and manufacturing employees. It's really with a broad based cut that we did in Q1 that really provides the benefit through the year and you'll start to see that OpEx at a run rate that is similar to the non GAAP view of Q1.

Speaker 6

Got it. That's great color. Just in terms of the talk about the opening up of the manufacturing facility and the second order impact on instruments, do you get the sense that all the customers were just kind of temporarily lost rather than lost for good? And then in addition to that, just any more context in terms of what customer attrition might have been on that if you maybe had a sense that some of you lost some customers that were already on, already using your system. But I don't know, any kind of metrics there to ensure us that these are not this is not lost forever.

Speaker 6

This was just a temporary situation. Yes.

Speaker 2

It's a great question and it's a fair question. I think as we look at the bounded horizons of within which that occurred Q4 to Q1, late Q4 and early Q1, We saw continued incremental reagent revenue growth up to $7,000,000 or so. And I think as I noted on the call, this was mostly acutely felt in CROs and Core Labs that have a real strong desire, David, to move to a much higher plexus and routinely running those at 50 or 60 plexus. And so when we alerted them of this temporary gap of the reagent fulfillment and their desire to run 50 to 60 plexes and scale those, those are the kinds of scenarios where there was a bit of a pause. We communicated back to them when things were back in inventory as they are now and sort of began to resurge and recover.

Speaker 2

So those are those that's an example of the kinds of customers that we were dealing with that drove that temporary pause. And a lot of our customers or David are really reference driven opportunities given the size of our installed base. So this isn't really about customer attrition as much as it is about shifting these opportunities into Q2, Q3 and then proving to those customers that we've got the full supply to meet their needs, which we do.

Speaker 6

Appreciate it. Thank you. Thank

Operator

you. One moment for our next question. And our next question will come from Mark Massaro of BTIG. Your line is open, Mark.

Speaker 7

Hey, guys. Thank you for taking the questions. Maybe the first one is just on the revenue pacing throughout the year. I know that obviously any time you have macro issues and inflationary pressures and capital budgets Q1. Q1 is typically your lowest quarter of the year anyway.

Speaker 7

But I just ask for this year, I think your revenue at the midpoint of your lowered guidance would imply that Q1 is 17% of your revenue for the year. Just help me think of how you can get back to sort of your ordinary run rate? And as I think about the year, is this shaping up potentially as a forty-sixty first half, second half? Or do you think it's more like 40five-fifty 5? Maybe just help a little bit with some of the buckets.

Speaker 2

Yes. I think not to get into the details of quarterly guide, but I think directionally as you think about the Q1 miss and sequential recoveries from Q1 to Q2 to Q3 to Q4 as we think about the continued unlocking of the reagent opportunity and recovery on instruments, as we think about the clinical revenue that's been deferred to second half, all of those point to a seasonality that's a little bit more magnified in second half relative to historicals. I think right now we saw the reagent revenues in Q1 at a sort of a 23% year over year growth. I think we'll get back to our historical growth numbers of that 30% to 40%. And I think we'll get and we'll get back to our historical unit sales on the instruments as well.

Speaker 2

So hopefully that gives you enough color. Certainly talk in more detail. But Johnny, I don't know if you have anything to add on that?

Speaker 3

No. Only to remember that the contracted pharma revenue that we have with our partners is still in our full year. It's truly moved from Q1 back. And so important to note, there's a portion of that that shifts back, so that you're not thinking of simply on the instrument reagent run. We've got some additional support in the back half that's driven by that, the shift in those milestones.

Speaker 7

Okay. And that's super helpful. And then the update from Acrovant in April was certainly exciting. I know that you're part of the partnership, but can you just give us a sense for how we should think about timing on a potential CDx and regulatory approval for a companion diagnostic?

Speaker 2

That's a really great question. And I think one that everybody's kind of yearning to know more details about. Again, sort of like I said to Kyle, I would encourage you to listen to their virtual corporate R and D event that was recorded on the 24th and just perhaps sort of suggest that their enthusiasm for the data presented, I think it gives you an indication of their optimism. And I think that's probably the most that I can say with respect to timing because in terms of COIA's communication on timing, markets, forecasts, we sort of take their lead in that regard because it is their drug candidate that leads. That said, it's sort of powerful and significant to hear the progress that they made and the results of the confirmed objective response rates for signature positive versus those that are negative.

Speaker 2

So pretty powerful data set.

Speaker 7

Okay, great. And last one for me. Obviously, anytime you can bring your reagent manufacturing in house, it's typically a good thing. Can you just remind us long term what the margin opportunity or gross margin incremental gross margin opportunity is, even if we think out like 5 years, what type of benefit you might be able to achieve long term? And then I think I heard you guys say that you did resolve the product availability, just confirming that that is on the reagents.

Speaker 2

Yes. So just to yes, so take that in reverse order. Yes, to fully confirm that the product availability gaps that our customer suffered in Q1 are completely resolved and everything is in house and manufactured ready to go. And long term margins, I'll let Johnny speak to that, but we do expect and expect to see really continued high reagent revenue growth. So that coupled to bringing that manufacturing internally, getting improved margins on those is really a key driver for gross margin improvements.

Speaker 2

And maybe Johnny can speak in more color about how we're kind of guiding and quantifying that.

Speaker 3

Yes. And while we don't break out instrument margin and reagent margin, I can say they're really performing with this move in house where we hope they would. So we're seeing good results on margin from instruments and reagents. As you can imagine, in Q1 with revenue lower than we would have wanted, it naturally doesn't cover these new costs that we incurred to set the facility up in that Q1. And so that puts a little bit of pressure on the Q1 margin after you take out the non GAAP item.

Speaker 3

So we're excited and confident about the changes we've made and then bringing that facility in house. It really helps product availability in the long run because we're not looking into the supply chain to ensure we have all of the components. We've got them in house. We control our destiny a lot more, which we really like. So I would say from a long term perspective, again, while we're not we don't guide specifically on these, but we can expect meaningful expansion of margin as reagent revenue becomes a greater portion of total revenue in the 4 to 5 year horizon like you're mentioning.

Speaker 3

So I think we're seeing what we expected to see, which is good on the reagent and instrument margins.

Speaker 1

Okay. Thanks, guys.

Speaker 2

Thanks, Mark.

Operator

One moment for our next question. And our next question will be coming from tathit savant of Morgan Stanley. Your line is open.

Speaker 5

Hey guys, good evening and thanks for the time here. So Brian, maybe to kick things off on the cut to the guide here, I just want to get one thing clear. Is it right to interpret sort of the macro backdrop here being the same or maybe even modestly better versus the Q4 earnings call and then the COE related disruption to instruments and the lab services contract essentially being the detractors of the miss? And if so, can you share any color on just trends in the 1st 6 weeks of the Q2, particularly on those instrument placements you missed out on due to the COE opening, because it sounds like that was the bulk of the instrument shortfall.

Speaker 2

Yes. I would be hesitant, Joss, to say that there was a material change in macro contributions to instruments. I would say that the majority of the impact of the instrument miss as we think about sort of high single digits of phenocycler fusions, The majority of the instrument miss was really driven by that. And then if you add in the total revenue mix, add in as we spoke about in the last question, kind of low single digits in terms of the deferred clinical revenue, then that sort of helps you see kind of the total drivers to the gap. GAAP.

Speaker 2

In terms of Q2, I think as we already spoke and we expect to continue to see kind of the incremental return to kind of the reagents and instruments kind of normalized numbers we expect now that we're through these reagent issues. So I think we'll get to a quarterization that's similar to what we saw historically.

Speaker 5

Got it. That's helpful. Any color you can share on just the macro piece creating any hurdles or incremental friction on the customer end in terms of your field upgrade efforts? Or are those still on track to wrap up by year end? And then, I guess on a related note, any plans to revisit the pricing structure or perhaps considering a reagent rental model, especially as you think about helping customers get over the hump here and maybe even deal with the evolving competition, right, especially with Lunaford being part of making a more aggressive marketing push, etcetera?

Speaker 2

Yes, it's a good question. I think in terms of the macro if your question on the macro with respect to the field upgrades, if that had an impact, the answer is no, it didn't. I think as you think about these field upgrades, you sort of get the sense that you've got a very quick acceleration of those conversions like we saw in Q3 and Q4 with the first 50% plus of those instruments. And then that continues sort of at a pace that becomes asymptotic as you progress through the year. We didn't I don't think we really saw a macro impact specifically on the field upgrades, if that was your question, to confirm.

Speaker 5

Yes, that's right, Brian. And then on the second piece?

Speaker 2

Yes, on the revisiting pricing with respect to the reagent rentals, classically in Life Sciences, reagent rentals are tough and not routine. It's sort of more common in the diagnostic arena where you've got sort of committed instrument revenue as part of a clinical supply agreement. Most of these things are project driven. That said, your comment is fair around the evolving competitive landscape, particularly as we see an increased prevalence of placements of demo systems as a competitive strategy rather than relying on references and publications. So I think that's kind of the dawn of the new age that we've got it.

Speaker 2

We have to respond to what we're seeing in the marketplace of a growing prevalence of placing demo units and using those as placements to drive sales and we're going to have to participate in some of that to be effectively competing.

Speaker 5

Got it. That's fair. And then Brian, on China, you talked about sort of more CapEx pressures there and elongated sales cycles in China in the last quarter. Any color you can share on how trends evolved on the ground over the course of the first quarter here into April perhaps? And then, are you starting to see any sort of inflection maybe only in the far out order funnel, so to speak.

Speaker 5

And I don't think you'll be sort of taking that to the bank for the back half guide by any means,

Speaker 1

but just curious as to whether you're starting

Speaker 5

to see any green shoots there.

Speaker 2

Yes. So with respect to the trends that we're seeing in China, I would say the actual performance, there's no material trend in terms of their year over year change, whether it's from Q4 or full year 2023 or Q1. So it's been fairly consistent. But with respect to your green shoots, we did sort of qualitatively see a pretty reasonable surge in the desire for support for grant applications under the expectation that the stimulus monies will be forthcoming. But I think we all sort of recognize that while that's been announced, there's sort of a bureaucratic step function to align those, distribute those to our market segment and then do and goal those out.

Speaker 2

So I'd say the only call green shoot Tejas, that I think we can point to is really an uptick in the requested support, immediate support for supporting grant applications. So that's a positive. And I'd say, as a side note, while we're not going to quantify it, our partnership with KR over the midterm does provide us another potential avenue outside of the life sciences discovery translational markets for potential sources of revenue and growth in this clinical market with the KAR HT5 that's based on the RHT system approved as a Class 2 device.

Speaker 5

Got it. Thanks, Brian. Appreciate the color.

Speaker 2

Thank you.

Operator

One moment for our next question. Our next question will come from Subbu Nimbai of your line is open.

Speaker 8

Thank you, guys. This is Subbu Nambi from Guggenheim. Guys, thank you for taking my question. Recognizing that you do not provide quarterly guidance, you missed consensus by €6,000,000 to €7,000,000 And this seems more than a transitory issue given how much you cut through a full year guidance. That said, first, we think about pre announcing.

Speaker 8

I ask so we can understand your practices moving forward. 2nd, does the fact that you didn't manage expectations down indicate that the end of the quarter is where you came up short of your target? And 3rd, how should we get comfortable that you lowered guidance enough?

Speaker 2

Yes. So the so if you look at our intra quarter revenue trends, you are correct that it's extremely back loaded. And it was even more so in Q4 and Q1. And so as we looked at those changes in funnel velocity and funnel conversion, finally realized in December and then through the first three quarters of the year. We recognized then the shortfall and decided to take the energy and time to make sure that as we look forward to the rest of the year that we accounted for in our guide those changing dynamics that we talked about with Tejas with respect to the macro environment, but more specifically, how we think our recovery on the reagents and instrument delayed instrument purchases will be realized throughout the rest of the year.

Speaker 2

So that's the process that we went through to manage expectations. And while I understand your desire and question around preannounce, we wanted to make sure that we couple that preannouncement with a really informed decision making process on how we look at the guide for the rest of the year given that as Mason was asking, given that it's going to account for a little bit more of a second half weighting. So let me pause there and see if Johnny would like to add anything more on the process of our financial assessment and coming up with the guide. And I do want to make sure, Subha, that I addressed all of the sub components of your question that

Speaker 5

I got them all.

Speaker 3

Yes. I would just maybe clarify a little bit. You made a point, Brian, that the last month of the quarter is generally more heavily loaded, certainly instruments, right? We generally have a view of reagents through the quarter. They're much more follow normal ordering pattern.

Speaker 3

It's as you can imagine, capital equipment and instruments naturally fall to the last month when you're closing the deal. And so with that, that sort of speaks to Brian's prior point. And I think, again, not to continue to go back to this point, but there was a meaningful enough amount of the revenue that was related to the CDX point. I want to make sure that as we do that analysis and think of what the Q1 sort of miss was in total, that there's a recollection that what was missed in Q1 is truly moving to the back half. And so that allows you to better understand what the revenue miss was from an instrument perspective.

Speaker 8

But guys, the macro environment, none of us have a crystal ball that it's going to improve. So that is where I am a little worried that the lowering of the guidance is equal to what you missed in Q1 more or less. So then how do we know it recovers in the second half? And I know everyone tried to ask this question 2, 3 different ways, but I haven't heard anything that I felt, okay, this makes sense. Or maybe we can catch up on offline?

Speaker 2

Yes. So I think we've effectively as we look at the contributors to the Q1 miss and we quantify those PhenoCyclers that were delayed due to those purchases as we quantify the shift in the CDX revenue in the second half and bring our guide down. Those were the metrics that we determined to say we've got some fundamental contribution of the macro to the guide. But overall, the point is, Subbu, that our we believe that we've embedded initially in our full year guide some contributions to the macro that continued in Q1. But the overwhelming contributions in terms of base dollars to the Q1 miss, the $6,000,000 you call that sort of low single digits of that was the CDX shift and we can account for nearly the majority of the remainder in instrument purchases that were shifted.

Speaker 8

Got it. Thank you, guys.

Operator

One moment for our next question. Our next question will be coming from Rachel Berenstol of JPMorgan.

Speaker 9

Perfect. Good afternoon. Thanks for taking the question you guys. So first up, I just wanted to ask on academics. You touched on budgets a bit.

Speaker 9

So I was wondering if you could unpack that for us a little bit more. Walk us through the conversations you're having with your academic and government customers. And then what is assumed in guidance from a budget outflow standpoint across the U. S. And Europe as well?

Speaker 2

Well, the assumption of the budget outflow in academia is essentially in line with the flat NIH budget that was put in place and then the EU horizons flat this year and a cut next year. So that's the assumption in the revenue guide with respect to the overall funding within those market segments. And then how we contemplate the impact of that funding on our funnel velocity, on our conversion rates, that's a byproduct of the detailed analysis of pipeline, funnel growth, opportunity expansion and how we look at those conversion rates that then determine what we believe to be our Q2, Q3 and Q4 instrument revenue given these changing dynamics. Knowing that we have now exited the acute Q1 challenges from the reagent side that caused some of those instrument purchases to be delayed.

Speaker 9

Great. And then just as my follow-up, from a geographic standpoint, can you tell us how performance trended by region in the quarter? Are there any regions where you're feeling better or worse in terms of the back half ramp? And then you mentioned some of the volatility in China as well. I Just wondering, could you clarify for us, given how China has performed the last 12 months, how much is your China revenue in terms of the COIA's base at this point?

Speaker 9

Thank you.

Speaker 2

Yes. So China is historically so in this last quarter, APAC was about 18% 18% of the total and that was sort of consistent with full year 2023. You can think China is sort of 60% to 70% of that. So that is the China contribution. In terms of the regional performance within the quarter, APAC was the most challenged and North American and EMEA were fairly similar in sort of the high single digits, low single digits year over year challenge.

Operator

Okay. And one moment for our next question. Our next question will come from Mason Carico of Stephens. Your line is open, Mason.

Speaker 10

Hey, guys. Thanks for taking the question. Sorry about the issues earlier. A lot has been asked. I'll keep it to 1.

Speaker 10

Could you talk a little bit about the growth you've seen in your CRO service network? And then broadly, are you seeing any dynamic where customers are increasingly deciding to outsource their samples or their work to CROs instead of purchasing another instrument themselves given the upfront capital costs?

Speaker 2

Yes. To your last question first, our CRO our network of CRO providers, the 20 or so, those are increasingly our highest users, whether they're on the HDs or the PCFs or both. So I do think you see a growing trend or consistent growing trend of outsourcing. And this is particularly true when we have groups, whether they're an academic group or a biopharma group that are working to build large high plex panels of 50 to 60 plus plex and then deploy those as a routine commercial offering. And I would say that is a CRO or that is a core lab.

Speaker 2

And so when we speak to the dynamics, Mason, of our customer base, where they want to do a 50 or 60 plus and have that as a standard offering, Now with our ability to deliver that and fully commit to delivering that, that was just to take some liberties with your question, that sort of dynamic of wanting a routine 50 to 60 plus offering to make broadly available, solving for that problem, which we had throughout the 1st part of the Q1 is really fundamental to not just recovering our reagent growth, but enabling reference driven instrument opportunities that were kicked forward because of the issues. So that is an absolute dynamic. In our own internal lab services, we try our best to not directly compete with our CRO partners and really focus primarily on those large significant late stage opportunities that have a good probability of turning into a clinical trial assay and an ongoing clinical study. And so with that and I think Narrow Care is a great example of a catalyst that's going to drive those. And you look at our Q4 lab services revenue and it's a bit of an asterisk, but you look at our Q1 with a slight deferral, you can see that that momentum is continuing to build.

Speaker 10

Got it. That's helpful. Thank you.

Operator

And one moment for our next question. And our last question will be coming from Timothy Chiang of Capital One. Timothy, your line is open.

Speaker 11

Hi, thanks. Johnny, you gave a little bit of guidance for the Q4. And obviously, it's sort of back of the envelope, assuming 20% growth over the Q4 last year on the top one. I mean, do you expect growth to occur in the second quarter or is it more much more heavily weighted to the back half of this year?

Speaker 3

Yes, I would thanks, Tim. I would look at sort of a progression up to that growth rate into Q4. So we don't expect again, without giving direct guidance on each quarter, we don't expect Q2 to be a roaring quarter and then be at that level all the way through the year. We expect sort of a sequential through the year to get back, as Brian sort of highlighted, I think, in his prepared remarks, progressing back towards the growth rate that we have seen historically.

Speaker 11

In reagent revenue, I mean, that's obviously one of the more important high margin businesses that you guys have. How quickly do you think that will recover? I mean, you had growth even in the Q1, but how quickly do you think you can get to 25%, 30% growth again?

Speaker 3

Yes. I think that reagent is probably where we have the cleanest and most visibility right now because we have the facility fully running, able to supply customers all the reagents they need. And so as you can imagine, in Q1, we were bringing that live and we still had a good quarter of reagents in Q1. So through the rest of the year, we expect to be able to get back to that normalized reagent growth rate relatively quickly.

Speaker 11

And 60% gross margins is still achievable sometime in the back half of this year?

Speaker 3

Yes. As I think I mentioned early on, our sort of standard margin for instruments and reagents are both very strong and we feel support that margin growth. It's a matter of making sure that our total revenue and we have some of the CDX revenue, which can be at nice margins that we ensure we have that base to cover fixed cost of that new facility in Q1 that we incur. But we're comfortable with kind of how we see the full year from a gross margin perspective, basically initiatives that we've already started and starting to see the fruit from.

Speaker 11

Okay, great. Thanks.

Operator

And I'm showing no further questions. I would now like to turn the call back to Brian for closing remarks.

Speaker 2

Yes, look, thank you all for your questions and your time. I know that we covered a lot of ground and it was a very unique and challenging quarter for Acoria given our historical consistent execution. But I think we firmly believe that we have proactively addressed the core drivers of the top line Mist, particularly those driven by the instruments on our temporary manufacturing transition. And so with that and the clinical revenue push to second half of the year, we really feel like we've got ourselves on track to recover and see our continuous sequential improvements in our top line performance as well as our margin performance. And I think countering that in mid to longer term, the 3 partnerships we've talked about really are showing really high value clinical market opportunity.

Speaker 2

And we feel like these current emerging opportunities, which are really late stage program, provide us the ability to deliver either long term clinical value coupled with the recovery on the core business side. So with that, we thank you for your time and look forward to following up.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Q1 revenue of $18.4 million fell short of expectations as instrument placements lagged, though reagent sales rose 23% to $7.0 million and services revenue grew 5% to $6.2 million.
  • Macro headwinds—including elongated sales cycles, tighter capital budgets, NIH funding uncertainty and inflation—weighed on instrument demand, but management expects these pressures to ease in the second half of 2024.
  • The new Marlborough manufacturing center of excellence is now fully operational, and while the transition briefly disrupted reagent fulfillment and instrument orders, it will bolster product availability, reduce costs and drive margin expansion.
  • Cost reduction initiatives in Q1 included a $2 million inventory write-off, $4.4 million of impairment and restructuring charges, and a 15% workforce reduction, yielding a non-GAAP gross margin of 57% and a 14% year-over-year decrease in operating expenses.
  • Aquoia advanced three key partnerships: a companion diagnostic collaboration with Akeravon showing positive Phase 2b OncoSignature data on its PhenoImager HT; NMPA Class II approval in China with Shanghai KR PharmTech for the KR HT5 system; and an exclusive early-stage melanoma immunoPRINT assay agreement with NaraCare.
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