NSTG (2020 - Q4)

Ladies and gentlemen, thank you for standing by. And welcome to the NanoString Fourth Quarter 2020 Operating Results. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, this conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Doug Farrell, VP of Investor Relations. Thank you. And please go ahead. Douglas

Thank you, operator, and good afternoon, everyone. On the call today with me is Brad Gray, our President and CEO; and Tom Bailey, our CFO. Earlier this afternoon, we released our financial results for the fourth quarter and fiscal year 2020. During this call, we may make statements that are forward-looking, including statements about financial projections, the impact of the COVID-19 pandemic, future business growth, trends and related factors, prospects for expanding and penetrating our addressable markets, our strategic focus and objectives, and the development status and anticipated success of recent and planned product offerings. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, including risks and uncertainties that are described in our SEC filings. Our results may differ materially from those projected, and we undertake no obligation to update these forward-looking statements. Later in this call, Tom will be reviewing our financial results and 2021 guidance. In connection with this guidance, we've made modification to our earnings release and guidance approach that we believe will make it easier to interpret and compare our financial results. We have prepared as a supplement to GAAP financial measures, selected non-GAAP adjusted measures, the calculation of which is described in detail in our press release. Throughout this call, all financial measures will be GAAP, unless otherwise noted. You can also find a reconciliation of GAAP to non-GAAP measures, as well as the description, limitations and rationale for using these metrics in our press release. To aid analysts and investors in building our models, we have posted exhibits under the financial tab in our Investor Relations homepage that include a presentation of our non-GAAP or adjusted measures, and other selected financial data for each quarter and for the full year 2020 and 2019. I'd like to remind everyone that we'll be participating in the Cowen Healthcare Conference later this week, we look forward to having the opportunity to speak with many of you there. Now, I'd like to turn the call over to Brad.

Thanks, Doug. Good afternoon, everyone and thank you for joining us today. It's only the beginning of March and already 2021 is shaping up to be a banner year for NanoString's spatial biology business. This year began with the Journal Nature naming spatially resolved transcriptomics the 2020 method of the year, signaling the revolutionary impact of spatial biology. In February, we hosted our Third Annual Spatial Genomic Summit, which highlighted the explosive innovation in this field, and serves as a perfect venue to launch our new GeoMx Whole Transcriptome Atlas. Researcher [Technical Difficulty] The Harvard Medical School and The Sanger Wellcome Institute discussed how spatial biology can improve our understanding of drug mechanism of action, response resistance to immunotherapy, and potentially enabling significant advances in personalized medicine. Panelists also highlighted the need for a portfolio of spatial technologies that extend for multicellular analysis down to single cell and even sub cellular applications. GeoMx DSP users from five leading research institutions demonstrated the power of coupling genomics DSP to Illumina NGS readout, sharing data from some of the first projects using our Cancer Transcriptome Atlas, and Whole Transcriptome Atlas assays, while our CSO, Joe Beecham, previewed our spatial molecular imager. Our summit drew more than 2,000 registrants from over 90 countries, highlighting the growing interest in spatial biology. This morning, we kicked off the 2021 Advances in Genome Biology and Technology Conference, or AGBT, for which we are this year's gold sponsor. Over the next few days NanoString and our collaborators will highlight an impressive body of spatial biology research, including three oral presentations, and more than 20 posters on the GeoMx DSP and our spatial molecular imager. I'm proud to tell you that NanoString has the most abstracts accepted for AGBT of any participating company by a substantial margin, and more than five times as many as any other spatial biology providers, a testament to our innovation. Prospective customers and members of the investment community can find the replay of the spatial genomic summit on our website, and details from the AGBT presentations and abstracts are available through a hyperlink included in the AGBT press release that we issued this morning. I'd now like to take a step back and provide an overview of our strong 2020 performance before outlining our strategic objectives for the year ahead. I'll then turn the call over to Tom to review our operating results for the fourth quarter, and to provide our financial outlook for 2021. 2020 was a year of major accomplishments for NanoString. We successfully achieved all four of the strategic objectives we set for the year, which is remarkable given the operating backdrop of a pandemic. We submit the GeoMx position as the platform of choice among translational researchers, while entering the discovery segment of spatial biology by launching the GeoMx NGS readout. We generated approximately 19 new GeoMx instrument orders, achieving our original pre-pandemic quarter guidance, and bringing total cumulative GeoMx orders to over 180 systems. We also pivoted our highland seat program into spatial biology by announcing our new spatial molecular imager platform in December. We entered the year with a portfolio with spatial products that spans the continuum of customer needs. From this position of strength we will focus on three strategic objectives for the year. Our first objective is to extend GeoMx DSPs leadership into spatial biology with the launch of the Whole Transcriptome Atlas. When we began developing GeoMx, we targeted what we then estimated to be a $1 billion translational market using our nCounter analysis system as the readout. Our leadership position in translational research is built on GeoMx robust performance in FFPE samples, our ability to analyze both RNA and protein, and a fully automated instrument that provides a simple workflow, consistent performance and high-throughput. The nCounter readout offers a streamlined workflow well suited to meet the needs of customers running spatial protein analysis, or targeted RNA panels that are below 100 plex. Of the 40 peer reviewed studies published today, all but one [ph] has used nCounter readout for their research. As we look to 2021 and beyond, we believe that a majority of future GeoMx growth will be driven by customers leveraging Illumina NGS readout. The launch of NGS readout last year doubled our estimated GeoMx addressable market to $2 billion in research by tapping into demand for high plex RNA assays. By Q4, GeoMx systems intended for NGS readout already accounted for 40% of new DSP instrument orders. Last week, we announced the launch of the GeoMx Whole Transcriptome Atlas, or WTA, our first universal essay that is applicable to any field of biological research. With our WTA, researchers can perform true hypothesis-free experiments in virtually every aspect of human biology, and will no longer be required to pre-select the genes they want to analyze. It will allow -- this will allow GeoMx to reach scientists and fields that go well beyond the oncology, immunology and neurology, that typified of GeoMx early adopters. Expanding the research market served by GeoMx to an estimated $3 billion. At the price of $1,750 per sample, WTA has a great value providing roughly 200 times the biological content of our nCounter RNA assays at less than 40 times the cost. We plan to begin shipping the Human Whole Transcriptome Atlas this month, followed by a mouse version of WTA in the second quarter. These products are expected to strengthen GeoMx instrument and consumable revenue, particularly during the second half of this year. The leading indicators of demand for WTA are very strong, customers have expressed enthusiasm for WTA ever since we began offering it through our technology access program during Q4. Human WTA accounted for 40% of our Q4 TAP projects, and/or have already grown to 60% of TAP projects, or so far this quarter. We're also beginning to see WTA published in papers and presented at major meetings, which should further increase customer interest. Researchers from the Broad Institute recently published the first peer reviewed study that you used both, our Cancer Transcriptome Atlas, and Whole Transcriptome Atlas products in the Journal Nature of Medicine. There will be a dozen WTA abstracts presented at AGBT this week with both, human and mouse research spanning applications in breast cancer, immuno-oncology, Alzheimer's disease, knockout models and COVID-19. Several studies demonstrate the strong synergy between the GeoMx Whole Transcriptome Atlas, and more traditional single-cell RNA-seq. For instance, researchers at UT Southwestern use GeoMx WTA to study bladder cancer, spatially localized and cell clusters previously found using single-cell RNA-seq, and identifying how the location of cells within tissues influenced the expression patterns of otherwise similar cells. Overall, we're delighted with our GeoMx momentum, and the early interest in the whole transcriptome assay. Our second strategic objective for 2021 is to advance the development of our spatial molecular imager, and to see the market for it's anticipated commercial launch next year. GeoMx is the market leading platform for experiments require high-plex high-throughput, multi-cell spatial profiling. We have identified a separate market need for an imaging platform that measures biology at even higher resolution, as highlighted in our Analyst and Investor Day presentation from this past December. Our spatial molecular imager, or SMI for short, is designed to enable customers to perform imaging down to the single cell and even sub-cellular level, which opens up important new applications such as cell typing and cell mapping. This platform is currently at the prototype stage, and the balance of our development program is focused on building and optimizing the commercial instrument, the software and user interface ahead of a planned launch in the second half of 2022. We believe SMI will set the bar for performance in spatial imaging. SMI has already demonstrated market-leading 1000 plex gene expression in challenging FFPE samples. The SMI has derived from our [indiscernible] program; it is enabled by a robust and scalable chemistry that benefits from a significant investment and many years of research. The lack of amplification keeps the probe small and bright, offering exceptional sensitivity that allows the accurate detection of genes at high-plex down to a very low copy number. SMI will be a single instrument solution that handles sample prep and imaging in the same box, and analyzes both RNA and proteins. There are a total of seven SMI posters that would be presented at AGBT this week, adding detail beyond the information shared during our December Analyst and Investor Day. One study validates SMI performance on FFPE samples from five different tissue types, demonstrating market-leading capabilities including high-sensitivity, in accordance with RNA-seq, and sub-cellular resolution in three dimensions. Another study demonstrates the amazing discovery in cell typing applications that are possible with 1000 plex imaging, which can identify both individual cell types and neighborhoods and cells that interact with each other. Two studies being presented by our first external collaborators, illustrates some of the likely applications for SMI. One study -- in one study, researchers from the Fred Hutch Cancer Center use SMI to measure more than 1000 transcripts and a kidney cancer biopsy at single cell resolution, confirming observations they had previously made using single-cell RNA- seq and PCR-sequencing, and mapping those observations spatially. In a second study, researchers from the Dana Farber Cancer Center use SMI to perform high-throughput CRISPR screens, enabling them to screen hundreds of thousands of cells in each run with a single-cell resolution. As we bring SMI to market, we intend to follow the same playbook that we used successfully during the GeoMx launch. This morning, we announced the opening of our technology access program for SMI, which will allow researchers to send samples to Seattle for processing on our prototype systems. The Technology Access Program or TAP was a key element of our success with GeoMx as it drove early peer reviewed publications and provided customer input into our product development process. We're beginning to take TAP orders today and expect to begin delivering results in Q2. We believe that the multi-cell capability of GeoMx and a single-cell resolution of SMI are perfect complements and provide a comprehensive portfolio that covers the continuum of spatial research applications. By expanding into the imaging segment, we believe that we will double the size of the spatial research markets we serve from $3 billion to $6 billion. We look forward to updating you on the development of the SMI platform over the year ahead. Our third objective is to return our nCounter business to pre-COVID growth levels. Demand for our nCounter systems remain robust in 2020 despite a challenging operating environment. The pandemic impact peaked during Q2, and our nCounter business recovered throughout the balance of the year. During Q4, we generated double-digit sequential growth for both nCounter instruments and consumables. By year-end, the pace of nCounter instruments sales had returned to pre-pandemic levels, resulting in an installed base of more than 950 systems, an increase of about 13% over the prior year. We sold about 110 systems in 2020, down only slightly from the approximately 125 systems sold in 2019. As these additional nCounter systems come online, it will generate consumable revenue, which is the primary growth driver for our nCounter business. The pandemic has had a more pronounced impact on nCounter consumables as institutions reduced their lab activities to keep researchers safe. Our consumable pull-through per instrument dropped to COVID low of about 50% utilization in Q2 before improving to roughly 90% of typical pull-through in the fourth quarter. Today, most labs remain in a partially open state with a reduced pace of activity. We expect this to result in modest COVID-related headwinds for nCounter consumables to the first half of the year, with improvement in the second half following more widespread vaccinations. Throughout 2020, we continued to diversify our installed base beyond oncology, adding new panels that help drive nCounter adoption to new areas such as immunology, neurology, and infectious disease, which collectively accounted for about half of our new instrument placements. In 2021, we expect to continue to expand our menu of panels into fields outside of oncology. For instance, we plan to expand within infectious disease research by outing a mouse host response panel that will complement the human version of this panel launched last year. We will also introduce new panels for cellular therapy and regenerative medicine, both areas of significant investment by the NIH and biopharma companies. Overall, we see continued growth for our nCounter business in 2021 as our installed base grows linearly, and consumable pull-through normalizes. With that, I'd like to turn the call over to Tom to review the details of our operating results.

Thanks, Brad, and thanks all for joining us today. For the fourth quarter of 2020 product and service revenue was $35.7 million, representing pro forma year-over-year of 9% and sequential growth of 19%. Recall that our pro forma measures reflect the December 2019 transaction with Veracyte as if that transaction occurred at the beginning of the conservative period. Pursuant to the terms of the Veracyte transaction, we now recognize about one-third of the previous per signal [ph] revenue over the same units sold. Q4 GeoMx revenue was $12.2 million, up 44% as compared to Q4 2019. $9.3 million was derived from approximately 40 instruments shipped, and $2.8 million was derived from consumable sales. Q4 nCounter instrument revenue was $6 million, return to approximately flat nCounter instrument revenue year-over-year. Throughout the pandemic, nCounter consumables revenue has been most impacted by lower lab activity and this continued to be the case in Q4. While lab activity improved in Q3 and Q4, a total recovery to pre-pandemic activity levels has yet to occur, in particular given the surge in COVID infections and lockdowns in late December into January. Q4 nCounter consumables revenue was $13.8 million, 11% lower on a pro forma basis as compared to Q4 2019, and sequential growth of 12% as compared to Q3. Our Q4 nCounter consumable sales imply annualized pull-through of about $60,000 per system, up from about $55,000 in Q3, and recovering to about 90% of our pre-pandemic nCounter, pull-through expectation of approximately $65,000 per system per year. Service revenue derived from both, nCounter and GeoMx related service was about $3.8 million for the quarter, or 29% year-over-year growth, driven primarily by increasing GeoMx DSP TAP projects, and increased service contract revenue due to our growing instrument installed basis. Turning now to margins and expenses. I'll provide results on a non-GAAP or adjusted basis which remove the impact of stock-based compensation, depreciation and certain one-time items. Please refer to our press release as well as the exhibits we have posted to our Investor Relations webpage for detailed information on how our non-GAAP or adjusted measures are prepared. Q4 adjusted gross margin on product and service revenue was 54% or about 400 basis points lower than Q4 last year. Most of the change was driven by increased instrument revenue as a percentage of our total sales mix due to the acceleration of GeoMx sales coupled with lower COVID impacted nCounter consumable sales, and the impact of the Veracyte transaction whereby we realize a lower ASP [indiscernible] sales than in previous periods. We reduced operating expenses compared to the quarter a year ago, primarily as a result of expenses we eliminated due to the Veracyte transaction. Adjusted R&D expense was $12.3 million, a decrease of 20% year-over-year, with Veracyte transaction related savings being partially offset by investments we are making in our various spatial biology products and initiatives. Adjusted SG&A expense was $19 million, a decrease of 14% year-over-year. The Q4 SG&A expense decline was also driven by Veracyte-related savings, as well as savings realized from pandemic-related reductions in travel and trade show activities. These savings were partially offset by investments made in our spatial biology related commercial initiatives, including investments in our service and customer support group, and in certain digital marketing initiatives. Adjusted EBITDA loss was $11.8 million, an improvement of 35% as compared to the prior year. Turning now to full year 2020 performance; although we suspended our full year 2020 guidance on April 6 due to uncertainty related to the pandemic, our GeoMx results landed at the upper end of our pre-pandemic guidance range. nCounter, in particular, consumables revenue was more materially impacted by reduced lab activity. For the full year 2020, product and service revenue was $111.4 million, representing year-over-year growth of 14% on a pro forma basis. Adjusted gross margin was 55%, in line with the upper end of our pre-pandemic guidance range. 2020 adjusted R&D expense was $53.4 million, representing a year-over-year reduction of 11% and adjusted SG&A expense was $75.2 million representing year-over-year reduction of 9%. Cash used in operating activities and for capital expenditures was approximately $89.1 million. We exited the quarter with over $440 million of cash, cash equivalents and short-term investments. Transitioning from 2020 results to our 2021 outlook, we expect 2021 products and service revenue of $140 million to $150 million, representing annual growth of 26% to 35%. For GeoMx, we expect revenue of $45 million to 50 million or annual growth of 29% to 43%. We expect about two-thirds of GeoMx revenue to derive from instruments sales, and about one-third from consumables. Having caught up on GeoMx instrument deliveries during 2020, we expect GeoMx instrument bookings and shipments to be approximately equal in 2021 with instrument bookings growing at about 40% to 50% year-over-year. For GeoMx consumables, we are raising our pull-through guidance and expect GeoMx pull-through to now average between $85,000 and $95,000 on an annualized basis, with pull-through expected to ramp over the course of the year, as NGS-enabled instruments are installed at our WTA panels are introduced across that customer base. For GeoMx, we expect to see a seasonal revenue pattern that is weighted to the second half of the year to the expected impact of the launch of WTA on consumables revenue and of the significant investments in our commercial and customer support organizations we've been making, and are continuing to make in the first half of 2021. Overall, we expect roughly 40% of GeoMx revenue to be recorded in the first half of the year, and about 60% in the second half. For our historical nCounter business, which also includes all of service and TAP revenue, we expect $95 million to $100 million or about 24% to 31% year-over-year growth. In 2021, we expect nCounter instrument revenue to return to about pre-pandemic levels, or approximately flat as compared to 2019. Our guidance also assumes nCounter consumable pull-through of approximately $60,000 to $65,000 per installed system on average for the full year. Our guidance assumes the pandemic will continue to impact lab activity more significantly in the first half of the year. We are experiencing nCounter -- expecting nCounter pull-through to normalize in the second half of 2021; and as a result, we could see a seasonal revenue pattern that is modestly more weighted to the second half of 2021 as compared to the first half. We expect adjusted gross margin to be in the range of 55% to 57% in 2021, consistent with 2020, as our revenue in 2021 will continue to be instrument heavy, given the growth of GeoMx. We have also added facility in overhead expenses as we scale up our consumable manufacturing capacity in anticipation of the WTA launch. Transitioning to operating expenses; in 2021 we expect to post approximately 15% increase in total adjusted operating expenses year-over-year, reflecting investments in our spatial biology products and market opportunity. For adjusted research and development expenses, we expect to record approximately $58 million to $63 million, or about 9% to 18% increase compared to 2020, and reflecting continued investments in GeoMx consumables and software, as well as in development efforts for recently unveiled SMI product candidates. For adjusted selling, general and administrative expenses, we expect to record $87 million to $92 million, or about a 16% to 22% increase as compared to 2020 and reflecting significant investments to expand our commercial reach and customer support efforts for GeoMx and SMI, including about 100 new commercial employees we expect to add during the course of the year. Adjusted EBITDA loss is expected to be about $65 million to $70 million, approximately flat as compared to 2020 reflecting the balance of our expected revenue growth, and the long-term investments we are making in our spatial biology initiatives. For the first quarter, we expect product and service revenue of approximately $28 million to $31 million. Our Q1 range includes about $8 million to $9 million in GeoMx revenue, and nCounter and service revenue of about $20 million to $22 million. Our GeoMx range balances our expectation of continued significant instrument order growth, and about a one-to-one book-to-bill pattern for instrument revenue. Our guidance ranges are also indicative of lab capacity and activity continuing to be below 100% in Q1, which we expect will impact nCounter consumables most significantly, and have typical season -- sequential seasonal patterns whereby revenue is usually lower in Q1 as compared to Q4. Now, I'll turn the call back over to Brad for our closing comments.

Thanks, Tom. NanoString has the market leading product portfolio in the hottest field of life science research, spatial biology. Our leadership is on display as we speak; at the AGBT meeting, where breakthrough science is being presented using our GeoMx DSP and our spatial molecular imager. Our strong balance sheet supports targeted investments to capture the estimated $12 billion spatial biology TAM with continued growth and GeoMx DSP instrument bookings and increased expectation for the consumable pull-through generated by each GeoMx system. 2021 is poised to be a year of outstanding growth. Before opening the call for questions, I'd like to correct one minor misstatement from our previous prepare remarks. I had to clarify, WTA is a great value at $1,750 providing roughly 200 times the biological content of our GeoMx RNA [Technical Difficulty] four times the cost. With that correction, I'd like to open up the line for your questions.

[Operator Instructions] Our first question comes from Tycho Peterson with JPMorgan. Your line is open.

Hey, thanks. Brad, I'll start with the SMI. Just -- to the back half of the year for the launch there; I guess, can you just talk to -- have you locked down the prototype? Is there any kind of technical hurdles that you still need to overcome? And then, with the TAP program, what's the earliest you think we could start to see some publications? And then, also when you do launch, how do you think about the selling cycle between SMI-GeoMx in the sense that customers may be evaluating both?

Thanks, Tycho. So for point of clarity, the spatial molecular imager instruments will launch in the second half of 2022, not the second half of the current year.

Correct.

The Technology Access Program is open today, we're beginning to take orders and accumulate interesting studies that we think showcase the power of the spatial molecular imager. We have 10 prototype instruments here at NanoString; they are in various stages of preparedness to receive samples. Really, as we think about the product development efforts, the focus is on fully engineering those instruments to be robust in the hands of our customers; making them easy to use, with great software and great user interfaces that can make our customers successful, and that's really the lion's share of the work that will be taking place between now and the launch in the second half of 2022. In terms of when we'll begin to see publications on SMI? You know, my hope would be that the types of studies that we're showcasing at AGBT this week, and that we'll be doing with other Technology Access Program customers in 2021 will yield publications beginning in 2022 so that those begin to come out around the same time that we begin selling our instruments; that was a similar dynamic to what we had with GeoMx and it served us extremely well. In terms of the sales cycle, I think it's -- SMI is expected to be a TAP piece of capital equipment at a similar price range to what GeoMx is. We think we'll be selling it to precisely the same customers, the core lab facilities that serve both translational and discovery research. Our market research efforts really indicate that those core labs are going to want both capabilities, they're going to want the genomics digital spatial profiler for it's high-throughput automation, it's ability to profile a whole transcriptome and the control over the regions of interest, and focus of the assays that it provides, it will complement that with the high resolution -- modestly lower plaques that spatial imager will provide. So we really believe it'll be the same set of customers, and of course, will be -- we'll probably be going to the existing GeoMx customers who've already experienced the power spatial biology first, during that product launch.

And then, are you able to say of what's headed in guidance for cap revenues this year? And then, separately, you mentioned hiring 100 sales reps; I'm just curious how you think about the scale of depth?

Yes, the tap revenue is embedded in our guidance. And the TAP revenue from SMIs is really modest. You know, this is not meant to be a revenue driver for us in 2021, it really is designed to showcase the power of the instrument; so I'm guessing it's -- maybe a million dollars in guidance, but probably not a lot more than that. In terms of -- I'm sorry, your second question Tycho; remind me?

You mentioned the hiring of 100 sales reps.

Yes, yes. The -- we are now facing a TAM opportunity that vastly exceeds that which we had either with nCounter alone or either even with GeoMx with the nCounter readout alone. So we are scaling up the instrument sales force in particular to take advantage of the huge opportunity that we have to place first GeoMx instruments and later SMI. Our sales force is not bifurcated between discovery and translational, they are -- they're generalist reps who are capable of addressing both of those market segments. And we'll be hiring most of them in our -- first in our direct markets of North America and Europe, and I expect we'll be expanding to go direct in some markets where we're not direct today, in Asia, late this year, early next year.

Okay. And then last one on GeoMx, you know, your split previously on readout had been I think 60% nCounter, 40% NGS. Where do you see that going this year? And then, as we think about whole transcriptome; can you just talk about where the yearly interest is? Is it mainly oncology? Is immuno or infectious disease? Where are you seeing the early interest?

Yes. So I think that if we look at where our funnel is today, our funnel of people who are considering purchasing a GeoMx instrument, it's split about 50-50 across people who plan to use nCounter and NGS readout. And that's up substantially from what we even showed you, I think, at our December Investor Day, where we're still a minority of the funnel represented by NGS readout. And so I believe this year we'll be at least 50% or more GeoMx systems sold for NGS readout. And in terms of where the Whole Transcriptome Atlas interest is coming from, you know, it's a long tail of different applications. Oncology remains the number one application because many of the customers that we know best are interested in oncology. But other areas of high demand include infectious disease, specifically a lot of COVID-19 research, or rare diseases of the tissue like rare kidney or skin disorders. And of course, neurology, which is an area of high spatial interest, but where we did not have a targeted NGS panel built. But I expect that will continue to broaden, there's a very long tail of esoteric uses below that top three or four. And we look forward to getting to know researchers have engaged with nCounter in answering in the past, using the whole transcript analysis.

Okay, thank you.

Our next question is from Douglas Schenkel with Cowen. Your line is open.

Hey, good afternoon, guys. Thank you for taking our questions, just starting on guidance. You know, as I kind of think through the toggle, you know, essentially where things could go a different way, in your guidance construct. One of the things that jumped out at me, you indicated that you expect gross margin to remain close to 2020 levels, because you expect the year to be capital heavy, essentially you expect the mix to be tilted towards capital. And through the pandemic instrument, placements were pretty strong. So I'm just wondering if part of what you're thinking is that you want to be mindful of the risk associated with COVID-19 uncertainty. And by extension, you know that uncertainty means you're not exactly sure what lab activity is going to look like, over the course of the year. But you know that instrument demand is going to remain strong, like it was in 2019. And if that's kind of the logic behind your guidance, does that mean that if, things do return to normal a bit more quickly than one might expect that there would probably be both consumable and margin upside relative to where you're starting targets for 2021?

Now, thanks for the question, Doug. You know, I think we are guiding a small expansion in gross margin relative to 2020 levels. And that is, I think, reflective of a modest increase in consumable mix in 2021 by compared to 2020. So we do expect nCounter consumables to begin to achieve their sort of normal per instrument run rates in the back half of the year, though, admittedly, we think there will be a tempering of consumer expectations in the first half relative to normal run rates. And as Tom said, Our GeoMx instrument net, our revenue mix rather overall is two thirds instrument, one third consumables, which is clearly a lot more instrument heavy than our nCounter mix has been. So I don't think we're signaling any kind of concern about overall consumable demand. I think it's substantially there. But just given how many genomics instruments we're placing, the mix is going to remain enrich for instruments relative to nCounter historical mix.

So one other comment I did make, in my prepared remarks, respecting gross margin as well as. We are investing in capacity to ramp up for the WTA once we have been and will be throughout the year. So we factored that into our gross margin range. With that said, if we have things recovered more quickly, there could potentially be some upside to that range absolutely.

Okay. That's helpful. That's kind of what I was getting at. I mean, it wasn't meant as a sign that you guys were being overly conservative. It's just more running through the numbers, it does seem like you're assuming some improvement, but not fully baking in a return to normal, which I would guess is probably the prudent thing to do as we're sitting here at the beginning of March. So that that color is helpful. At your Analyst Day, you highlighted how GeoMx is well positioned for adoption, in both translational and discovery research, as well as for clinical purposes down the line. Could you envision a scenario where you might actively seek partners to help develop more clinical focused products? You know, and I keep that and I think of that just because I think there is an opportunity. Clearly not just in translational research but down the line in the clinic. But I also, recognize that you did move away from some of your clinical ambitions with the divestiture of clinical assets associated with them counter. So I'm just trying to think about longer term, how to reconcile these things?

Yeah, we absolutely agree with you Doug, that there's a huge diagnostic opportunity for GeoMx over time. And as a reminder, overall of our $12 billion spatial biology, TAM, 6 billion in total is reserved and an estimated 6 billion was in diagnostics. We haven't made a commitment one way or another about how we'll choose to address that $6 billion diagnostic TAM. Today, we're really focused on simply enabling early lab developed test organizations, you know, mostly academic medical centers, like Mayo medical labs and Oregon Health and Science University with whom we have formal partnerships for GeoMx LVT development. And really over time, we could go one of several ways. We could simply enable LVT's for the foreseeable future, and allow the innovators out there to build diagnostics, on our platform, really sort of serving as the arms dealer; we could partner with either service or IVD kit organizations to commercialize GeoMx. Or we could easily restart that effort ourselves and certainly our corporate DNA kind of retains the program, and let's call it for how to start up an IBD. Both development and commercial organization, does the opportunity warrant. And so I think it's a little early for us to declare, all we really want to see then what the nature of that diagnostic opportunity is, and we will remain flexible and how we pursue it.

Okay. And last one, Brad, you close the year with over $400 million in cash and equivalents. Traditionally, most of your capital has gone to investing in growth organically. As you think about the year ahead, and how well you are positioned with your existing technologies, but also with your balance sheet. Are you more open than maybe you have been in the past to making external investments that could augment your position?

Yes, we are absolutely more open and capable today than we have been in the past to think about bringing technologies or companies into NanoString that can bolster our portfolio. I mean, we have an enviable organic innovation engine here and between the genomics whole Transcriptome Assay and the spatial molecular imager, I think we have one of the most exciting roadmaps around. That being said, we don't believe that we have a corner on the market for innovation in this field. And there are a lot of exciting things happening in spatial biology and elsewhere that we keep a close eye on. And certainly today, with the strength of our balance sheet, and you know, the market leading nature of one brand, and the size and shape of our channel, we could be a very natural owner or acquire or partner for other technologies. So I think we are more capable of that and more interested than we have in the past. But we'll continue to remain targeted and thoughtful and anything we do in the future.

All right, thanks a lot. I appreciate the time.

Our next question is from Daniel Arias with Stifel. Your line is open.

Hey, guys, thanks for the questions. Brad on the Discovery Assays, how do you think the mix for whole Transcriptome and Cancer Transcriptome Assays evolves over the course of the year? And I know it's early, but if you had to take a stab, what kind of split could you envision there if we fast forward to this time next year?

It's a good question, Dan. I think the Cancer Transcriptome Atlas, which was our first NGS enabled GeoMx product has the benefit that it appeals directly to our existing GeoMx installed base. When you think about the first 180 systems that we have taken orders for, the vast majority are cancer researchers. So I believe we will continue to sell that Assay directly into our existing installed base at a very good clip. The whole Transcriptome Assay will certainly appeal to our existing installed base to a certain extent to but what the real excitement of the WTA is, it allows us to appeal beyond the field of cancer. So you know the first order impact of the whole Transcriptome Atlas is to sell more instruments, rather than more consumable kits. And I think as a result, you know, it will take time before the whole Transcriptome Atlas, eclipses CTA, in terms of which of the Assays is more popular by time, I mean, several quarters. By this time next year, I think we'll probably be entering a period where the whole Transcriptome Atlas is, the more the dominant assay or the larger assay. And I hope that's because we've begun to have an installed base in areas of science for beyond cancer.

Yeah, okay, that was very helpful for the model. Let me ask another one that might also be helpful for the model on whole Transcriptome. I mean, obviously, the number of samples that are run per year is an important element or variable there. I know it's early as well, because we're seven days into the launch. But are you able to give some guideposts to work with their if nothing else in the context of the 150 samples per year assumption that you had for the translational assets?

Yes, as you said, it's very early days about in terms of determining the number of samples that NGS enabled GeoMx systems will process from annual basis. You know, today, we formally increased our consumable guidance from the previous $75,000 to $80,000 per system per year to $85,000 to $95,000. And I'd say that is derived predominantly from a view that NGS systems will pull more samples per year than we had previously estimated. As you'll recall, in the past, we had described that nCounter, enabled GeoMx systems would process about 150 samples per year at $500 per sample. And we estimated that NGS enabled systems might do approximately half the number of samples per year at about twice the value per year. I think our Q3 and Q4 experiences with CTA showed that the number of samples that early CTA customers were seem to be running was higher than that $75,000 per year. And that's really what drives up the relative of the increase that Tom described in our overall expectations. But it's still quite early days. And you know, my hope is that over time, we'll learn that there's very enthusiastic adoption of these GeoMx plus and NGS Assays, and that we'll be raising that guidance in the future. But, we're going to need several quarters before we have real customer behavior before we can provide an update there.

Okay, super. Thanks so much.

Our next question is from Dan Brennan with UBS. Your line is open.

Great, guys. Thanks for taking the questions. I guess first one is just trying to think through the GeoMx outlook for 2021. Can you just remind us what was the backlog exiting the year? And when you talked about 40% to 50% order growth, kind of what was the total number of orders that you had in 2020?

Yeah, so Dan, I'll take that it's Tom. So we had about, as you recall, right around 90 orders for the full year. And we reported that our installed base at the end of the year was about 130, but that we shipped 160 instruments. So that means we've got 30 instruments that are waiting to be installed. And then when you look at the total number of orders versus the total number shipped, we have about 20 that are still waiting to be shipped i.e. orders that were in backlog headed into this year. And our expectation would be that throughout the year, we've maintained about that backlog. So that's where you get the commentary on the 40% to 50% or growth, lining up with the revenue numbers and splits that we commented on in guidance.

And then any more like qualitative, you know, bragging, typically we'll discuss number leads or things like that, quite close to put that in the model. But just wondering, qualitatively any other color you would suggest about, you know what the funnel looks like for 2021?

Yeah, well, the lead generation case has remained incredibly high through the events that we held with our spatial GeoMx summit, which has 2000 plus registrants last week, you know, I was styled into the AGBT gold sponsor workshop that we held that had over 600 people on it earlier today. I think we're getting a very high level of engagement and therefore lead generation coming out of the whole Transcriptome Atlas launch. That being said, you know, it's a six to nine month sales cycle. So those types of leads that are just going into the funnel now, we're going to take nine months to mature into purchase orders. So I think we're going to see strengthening of the actual order book in the back half of the year. But I'm very pleased overall with the level of interest that that we're going to bring.

When you think about the impact from COVID with labs still being operating non at full capacity, there's no way to quantify, like, if we were at, like steady state today, just wondering how much is really baked in, if you will, for the still, you know, less than 100% demand outlook?

Yeah, I think you know, every quarter, we've given an update to you on the status of labs, according to our own CRM system. You know, we provided the last update, I believe, on that around November, where we said 15% of labs were fully open and 85% were what we'll call partially open. And I had hoped that by now, we would have improved, but we haven't I mean, we're really in a steady state there, of 85% partially open. And I think the best way to measure what that really means is to look at our nCounter consumable pull through which in the fourth quarter was maybe 85% to 90%, of what it would have normally been in the fourth quarter. And I think that through the first half of this year, if you look at our expectations, for seasonality on nCounter consumables, we’re going to continue to see that play through. Strengthening, of course, in the second half, we believe that as people are vaccinated, they will come back into the lab at full speed and resume their research at the pace that we're accustomed to.

And then just Brad on, so just on competitive funding 10x as their FFPE price on the new chemistry, just how do we think about I know the market is a large one with multiple players to compete, but I'm just wondering, you know, as you think about 2021 in the ramp, how are you thinking about the competitive landscape. Has it changed it all and then anything factored into that?

Well, spatial biology is obviously a field that's been declared by leaders lightning, the journal nature, as you know, really the most important kind of new set of applications in the field of life science research. We have both incumbents like 10x GeoMx, and many smaller companies who will be introducing products into this field. And at its infancy, which is where I described spatial biology today, there's plenty of room for everyone. But net, I feel that NanoString through the launch of genomics, which was the first really elegant and complete solution in this field, has carved out a leadership position and a great brand and a great set of industrial dialogues that will continue to benefit from. In terms of the Visium [ph] Formalin-fixed Paraffin-embedded product that will be coming from Synnex [ph] Genomics, it has not yet begun shipping. We'll look forward to seeing more data on that as it comes out. I'm sure it will create a certain amount of customer interest and competitive noise in 2021. But I guess there are three things to keep in mind about that. One is, you know, Formalin-fixed Paraffin-embedded compatibility is not the only advantage that GeoMx has held and translational research that's made this possible. We also benefit from high throughput, automation, which increases the reliability of the results and region of interest selection that enables novel experimental design and will continue to benefit from all those things. The second thing to bear in mind is really the Visium [ph] approach, which provides a broad landscape picture of tissue is quite different than the GeoMx approach, which really zooms in on regions of interest and provides all that profiling exactly where researchers want it. And so they're actually complimentary products. And many leading centers are already using both. And the third thing is that unlike many other life science tools, markets where you're selling two different instruments, they're competing for the same capital dollars in the same bench space. GeoMx and Visium [ph] compete in quite a different way. You know, Visium [ph] is provided only as a consumable product, while whereas genomics is an automated instruments, so it's really a false dichotomy, to say that customers are going to adopt one or the other. And we really do see customers buying GeoMx systems for large scale research, and then using Visium [ph] on the side for that kind of broad angle in landscape research from time to time. And so I don't see that changing in 2021. We feel really confident in our translational leadership and expect to maintain it.

The final one. I think Tycho asked, I'm sorry if you answered it. Just on M&A or just how do we think about in the balance sheet that was in great shape. So what do we expect from NanoString in 2021?

Yeah, I think we're obviously not guiding that we're in a hurry to deploy that capital into inorganic growth. You know, NanoString has never done an acquisition in our history and we really have not or ever had the need more, the balance sheet to be assertive about it. But you know, now is different. As I said the title, I think we have a lot of innovation that's happening in the field of spatial biology. You know, NanoString has a great channel and a great brand and a deep, deep understanding of what that market needs. We're not guiding by any stretch that we're intending to acquire something this year. But we are saying clearly that we're in a position to do it should the need and opportunity arise.

Great. Thanks, Brad.

Our next question is from Catherine Schulte with Baird. Your line is open.

Hey, guys, thanks for the question. I guess, first, last year, you gave us kind of a quarterly pacing roadmap for GeoMx orders. How should we think about that quarter order came in 2020 give that [indiscernible] talked about kind of first half verses second half waiting but curious from a quarter perspective?

Yeah, I think to reiterate some of the main points Tom made was 40% to 50% order growth over the course of the year. And I think that's probably a number to look at on a quarterly basis as well. And then in the first overall GeoMx revenue, would be 40% in the first half and 60% in the second half. And I think a way to think about that is during the first half of this year, I expect to be primarily selling new GeoMx instruments into to customers who began evaluating their purchase six months ago, when our offering was centered around the nCounter readout for protein and the Cancer Transcriptome Atlas, which was of course newly launched at that time. And really, in the second half of 2021, is when we'll begin to see uptake for this instrument into those who are buying it for the purposes of the whole Transcriptome Atlas, in areas that look beyond oncology.

A way to simply specifically as relates to instruments, Katherine, I think about that quarterly facing. As we said, about two thirds of our overall guidance would be instruments. And that 40% to 50%, order growth would be about right in each quarter, and that we would be closer to one to one book to bill, which is a bit of a nuance relative to last year where we entered with a pretty big backlog of orders. So if you do the math, that way, you'll get to a pretty tight range that aligns with what we got it for the full year and would give you a sense for what the quarterly pacing could look like, this year.

Got it. And appreciate the commentary around GeoMx for 2021. But if we step back and take a longer term view and give up any updated thoughts on what percent of nCounter boxes could have a GeoMx coupled with it over the next couple of years and similar way, what kind of penetration you could see in sequencing-only labs over the next two to three years?

I don't think capital, we're in a position to provide long term guidance, or target ranges. But I would say nothing has really changed about our view on those topics, since we probably last discuss them. You know, this year, as I said earlier, I would expect about half of our new GeoMx systems to go into nCounter readout to be used for nCounter readout, which would mean something on the order of 60 to 65 new systems for nCounter read out. We're selling into a 950 nCounter instrument installed base. So, you know, making progress in terms of penetrating, but it's by no means saturating that nCounter readout at that stage. And then within GS, we have an enormous opportunity there. I think the best analogy to look at continues to be the chromium system, which has very successfully penetrated the Illumina installed base. And certainly with the Whole Transcriptome Assay, we think every single Chromium system is addressable with a GeoMx and would be a very natural companion for spatial biology.

All right. And then last one for me, if you think about that SMI [ph] launch more of kind of an indicator of interest rather than a revenue generator, what would you consider a success in terms of the number of customers and projects that come through that program? Should we be thinking about a similar lamp as to what you saw with GeoMx initially? And then can you just talk to how you're pricing that program on a per-sample or per project basis?

Yes. I think we're going to have our half program for SMI this year. It's going to be highly targeted at key opinion leading scientists who we think are doing interesting things with that technology that could yield peer reviewed papers of a certain impact. And so it's in a sense of quality game, not a quantity game for us this year. If we finish the year with say, 20 really good projects ordered and initiated that could yield, I don't know, 10 to review papers next year, that would be great. And that to me, would be a fine definition of success.

All right. Great. Thank you.

Your next question comes from line of Tejas Savant with Morgan Stanley. Your line is open.

Hey, guys, good evening. So Brad, maybe I'll start with SMI. The TAP program you've already launched, you're a little bit earlier than some of us may have anticipated. So is there a scenario where we could see you start beta access in the fourth quarter rather than the first half of next year? And would that also mean a commercial launch perhaps in the middle of next year versus towards the backend? Or too early to sort of make that call just yet?

Tejas, thanks for the question. We wanted to use the opportunity of the AGBT meeting to begin to engage with the top genomic researchers in the world. And really, with our first two customer data sets coming out this week, it was a perfect opportunity to begin to talk to key opinion leaders about what they would do with this platform and therefor initiate the TAP launch. It does not signal an acceleration in a previously communicated timelines for the SMI launch. You know what we want to get that early user feedback and incorporate it into the product development effort incorporated into, in particular, the software and the user interface that will be critical before we could ever play systems in a customer lab. So don't -- let's not get ahead of ourselves and pull that launch timeline forward. I think what we communicated in December remains the overall timeline.

Got it. Fair enough. And then on, on GeoMx, one of the -- sort of more intriguing longer term takeaways from the pre-AGBT session was obviously around the need for better data tools and more open data sharing across customers. Do you have any plans to help capitalize that as obviously, you know, one of the two important sort of players in spatial at the moment beyond just your Illumina Dragon partnership?

Yes, we do, though, we're not ready to talk about them much just yet Tejas. We have -- and I've said this many times, more people in software within our R&D organization today than we even do in engineering and molecular biology, it's the single largest group in our overall product development organization. There's clearly many opportunities and even needs for us to help our customers do things like, store their imaging and GeoMx data in the cloud, share it across multiple users, gain access to the compute capacity to do the processing of the NGS data back into the graphics that enable GeoMx analysis. We have a lot in the works there but nothing to announce yet today; stay tuned over the course of the year ahead.

Got it. And then one final one for Tom on margins. Tom, I mean -- I know you mentioned sort of your margin expectations for this year because of the investments you're making around the WTA kind of service offering plus instrument mix. But overall what timeframe do you expect sort of margins to recover to that high 60% to 70%-ish range? I mean, you've obviously got the SMI launch coming up next year as well, which might sort of push out that recovery a little bit. So should we think about 65% to 70% is more of 23-plus event at this stage? And then, any color on that as SG&A cadence given the 100 commercial reps that you're adding over here? Or should we assume that's more front-end loaded and just flat lines over the course of the year?

Sure. On margins Tejas, I would think longer term for that kind of margin expansion, and I think that you're thinking about it the right way in terms of having another instrument launch coming at the back end of '22. Probably while at the same time the instrument mix for GeoMx continues to be fairly heavy. So even though we've got some bumped up pull-through guidance, and we feel bullish about where consumables are going, I think that's still a longer term process for margin expansion, coupled in particularly, when you think about the capacity investments we'll be making overtime. And then we'll comment further in future quarters as we get visibility on what that might look like long-term and as pull-through dials in. With respect to the SG&A, I would expect that to be -- that the expense to be more middle to back half of the year, it just takes time to hire that number of people. And then, you don't pay them obviously for the full year, they don't have activity for the full year. But our intent is to get those folks hired as quickly as we possibly can, we're recruiting for a number of those positions as we speak but I think that the expense ramp on the over on the 100 folks that we expect to add would be more back half versus first half, taking into account the usual seasonal pattern we have with SG&A or usually the first quarter is a little bit heavier for various reasons. So, hopefully that answers your question. If you've got other clarifications, let us know.

Got it. Perfect. Thanks so much, guys.

Ladies and gentlemen, this concludes the Q&A session. I'll now turn the call back over to Doug Farrell for any closing remarks.

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