Maybe that's why I haven't gone.
Yeah. Hi, I'm Kyle Mixon, welcome to the Canaccord Genuity Global Growth Conference. I cover life science tools and diagnostics for CG. Pleased to present this fireside chat with T2 Biosystems. The company offers a rapid detection method for sepsis. We'll learn more about that today. With the company, we have John Sperzel, CEO. Thanks, John, for joining us today.
Great to be with you, Kyle.
Awesome. So maybe first, can you walk through T2's mission in sepsis testing and what kind of unmet need that poses in the hospital, you know, system in the country?
Sure. Our objective is to allow clinicians to get their patients on targeted antimicrobial, that is antibiotic or antifungal therapy, faster. We know that for every hour of delayed targeted treatment, the risk of death goes up by up to 8%. And in terms of the impact of sepsis, it's the number one problem for hospitals. The data is pretty overwhelming. It's the number one cost of hospitalization in the U.S., costs our healthcare system about $62 billion annually. It's the number one cause of death in U.S. hospitals, causing the death of about 350,000 people in the United States each year. That would rank it number three on the CDC causes of death list, behind cardiovascular disease and cancer, and it's the number one cause of rehospitalization within 30 days.
About 19% of sepsis survivors are back in the hospital within 30 days, and about 40% are back in the hospital within 90 days. So we look at that as, you know, the current standard of care is failing patients, payers, and providers.
Right. And that's exactly it, like, the, you know, there is a current standard of care. There's many ways to detect sepsis using different, you know, unique analyzers, I guess, but your method, the T2Dx system, the, you know, magnetic resonance technology is also unique. Can you just walk through why that's different from other approaches out there, and why, you know, you think that provides you an advantage?
So we have strong intellectual property protection on our detection method, which is magnetic resonance. We also have strong IP on the way we handle the sample and we process the sample. The combination of those two allows us to detect these pathogens directly in blood, without the need to wait for a positive blood culture. If we compare that to all competitive systems that are FDA cleared, they all require a positive blood culture as a clinical specimen. So, I think this is a really important point to underscore. When our competitors use cute marketing terms like, "direct from isolate" or, "direct from culture," they have to wait days for a positive blood culture. If there's no positive blood culture, their products don't provide any clinical utility. So, if blood culture provides a false negative result due to its poor sensitivity, limited clinical utility of those culture-dependent diagnostics.
And as I mentioned in our recent earnings call, Becton Dickinson, who has about 50% market share in the United States hospitals with their automated blood culture system, has a product supply issue with their BD BACTEC blood culture bottles. So, that means 50% of US hospitals, because these are closed systems, have limited supply of blood culture bottles, and both CDC and FDA have communicated, they've sent out health alerts advising clinicians to prioritize who gets a blood culture. Now, in my words, that's rationing, and in a patient experience, that means some patients are not going to get a blood culture, they're not going to have a diagnostic unless they use a culture-independent diagnostic in those hospitals, and they're gonna rely entirely on empiric, broad-spectrum antimicrobials, which we know from data is only correct about 30%-60% of the time.
So it's really dangerous for patients. We think opening the guideline to include culture-independent diagnostics is gonna be really important as we go forward, and we're gonna push for that.
Okay. Maybe moving on to some of the products. So T2Bacteria, T2Candida, are some of the most important panels for you, for the company. And you were mentioning how it's such a, you know, a lot of dollars are spent in sepsis, like, you know, I guess, costs in the U.S. each year. So maybe talk about the penetration rates for those two tests, those two panels, and the kind of runway that you have to, you know, accelerate growth and, like, obviously drive revenue, too.
We're very early in the commercialization of our products. Our installed base of instruments is about 200. It's evenly distributed between the United States and international markets, mostly in Western Europe. There are little more than 6,000 hospitals in the U.S. That's a single digit % of the total number of hospitals globally. Again, we're very early in the commercialization. We're seeing growth in our T2Bacteria and T2Resistance panels, which is excellent, because that's where the big market is in sepsis, is both in bacterial detection and in antibiotic susceptibility.
Okay. And then on the kinda global footprint, the, you know, ex-US, kind of like business for you, talk about what's been driving that, the distributor model that you, that you kind of have, and some of the partners that you've announced in the past few years, and how, you know, the success that you've had there placing boxes and then also driving, you know, consumables revenue as well.
So typically, what we do in international markets is we sell through a country or territory exclusive distributor. In some cases, we have a single distributor that would cover multiple countries. In the case of Spain and Portugal, we have a single, I would call it a major diagnostic player in the Werfen Group. They're a multi-billion dollar diagnostic company. They represent our products in Spain and Portugal. In other markets, like Italy, we have a very strong, seasoned distributor there, DID. We have a distributor, Biomedica, that covers many Eastern European countries. So, we're expanding our international distribution footprint. We're selling in about 45 countries internationally, and we're expanding in Europe, Middle East, Asia-Pacific, and Latin America.
What's the region of the world that, you know, is the biggest, I guess, like, you know, nascent or under-penetrated area for sepsis testing?
... I think just by population alone, the Asia-Pacific region represents a significant market potential for us.
Right.
It's a little bit tricky because you have China and India, where price is extremely important in those markets. But there are private hospitals, they are willing to pay for quality tests, and they do understand and recognize the value of rapid detection and targeted treatment.
In the APAC region, in China, I guess specifically, is there any like, you know, efforts to bring that all kind of like to, like, domestic and not use foreign vendors like the T2?
I think we'll partner in the China market. I think we'll partner in the India market, just as we are in most international markets.
Okay, so I think you have a pipeline of products. One panel, T2Lyme, I think it's gonna launch pretty soon, but like, you know, maybe in the third quarter here. What's that market opportunity like, and how does that sort of complement what you already have with candida, bacteria, and resistance?
Well, if we think about Lyme disease, it's a significant issue across the United States. Lyme disease, or the causative agent of Lyme disease, Borrelia burgdorferi, is in all 50 states. The seasonality, which I think has historically been in the minds of most people, is leveling out. I mean, we're about to enter, in September, the second wave of Lyme season in Massachusetts, where we are today. So, we see Lyme as a full season opportunity. It's not just in the Northeast, it's across the entire United States. We are going to partner with a laboratory. We mentioned recently on our earnings call that we signed a non-binding letter of intent with Eco Laboratory in Acton, Massachusetts.
We're advancing the negotiations on that contract, and we do expect to launch our Lyme test during the third quarter as a lab-developed test, third quarter of 2024.
Okay, and then I guess on that note, you also want to submit in the fourth quarter of this year the T2Resistance Panel for FDA approval. So, why is that an important... Like, maybe, I mean, first talk about why approval is so important for this, like, you know, type of testing, and also what that, You know, you're selling that test in Europe, it's doing relatively well. Like, you can talk about why, how it's gonna add some value in the US as-
Sure. So T2Resistance, or antibiotic resistance, or susceptibility, as it's often called, is a very important part of the clinical decision process when a patient has a bacterial infection. So identifying the pathogen is the first step, but making sure that there isn't an antibiotic-resistant gene is the second important step. So we view the T2Resistance Panel as the most important product in our pipeline. Now we're talking about the US version, I'll come back to the international markets. Because it will, it will provide the full picture for patients with a bacterial infection as well as resistance, and we expect that it will drive significant adoption of the T2Bacteria Panel because one plus one, and it'll drive adoption of our entire system.
We have a number of hospitals that we've spoken to that are essentially waiting to adopt our platform for the T2Resistance Panel to be available in the United States. We do plan to submit that to the FDA in the fourth quarter of this year. We already have FDA Breakthrough Device Designation, so that product will get a prioritized review by the agency. Just to compare a couple of recent submissions that we made to the FDA, where we bat 1,000 with the FDA on submissions and clearances. Our last two submissions, one was adding Acinetobacter baumannii to our T2Bacteria Panel. We did not have breakthrough device on that product. It took about 100 calendar days.
The second product that we recently got FDA clearance for was the multi-target bioterrorism panel, where we also did not have Breakthrough Device Designation, and that got cleared in about 100 calendar days. We expect things to go smoothly with the T2Resistance Panel. We are selling it under CE Mark in Europe. It's being paired successfully with the T2Bacteria Panel, and we are seeing an uptick in demand. I think it's important to note we got the CE Mark for that product in 2019, and so some people might say: "Why haven't you sold more?" I think just a little bit of memory lane, we got that product cleared in late 2019. A few months later, we were in the midst of a COVID pandemic, where the world was shut down and changing protocols in hospitals was not happening.
So we're full stop on the commercialization of that product now, and we have big expectations for it.
Got it. And then I think you want to expand the indication for T2Bacteria and T2Candida to pediatric testing. How does that increase your market opportunity, you know, I guess in the US, but, like, it sounds like an underappreciated aspect of sepsis testing, so walk through that.
So we submitted to the FDA for a pediatric claim for our T2Candida Panel. You know, think of that as an expansion of the claim that we already have for adults. Candidiasis disproportionately affects children. This is a significant healthcare concern for children. Invasive candidiasis can cause children to be in a hospital, I think, on average, about 21 days longer, costs more than $90,000 more per episode. So this is a serious clinical, and it's a serious financial impact to US hospitals. So getting that pediatric claim, you know, will allow clinicians to get their pediatric patients on targeted treatment faster, improve outcomes. From our perspective, in addition to the patient aspect, it's gonna open about 200... There are more than 200 children's hospitals in the United States that we are not able to actively market to today.
Once we have that pediatric claim for T2Candida, we'll begin to actively market to those accounts... and, as soon as we get the FDA 510(k) clearance for T2Candida, we're gonna make the same submission for T2Bacteria.
Gotcha. Okay, that's helpful. Now, moving to the second quarter results that you announced in late July, I guess just on instruments, you placed, I think, I think 2 boxes. So that was, you know, softer than what we had expected, but I think that you did have, like, a pretty big bulk order of, like, 6 or so early in the third quarter in July. So what happened in the second quarter? What's going on macro-wise that's affecting things? And maybe you'll talk about the third quarter kind of outlook for just, I guess, placements and instrument revenue.
We don't think that was driven by any macro factors. We think it was just timing, that instruments that we anticipated being closed in the second quarter slipped into the third quarter. That's why we sold 6 in July. They were all international instruments. They'll generate about $400,000 in revenue, which will fall into Q3. We expect a strong second half. In instruments, the pipeline is, the sales funnel is really strong.
Okay, and you also announced on your earnings conference call that you have a multi-billion dollar healthcare company, US healthcare company, that you're gonna help you guys, like, distribute products. Just maybe like provide more detail on that. When can we find more information on that one? 'Cause that's kind of vague at the moment.
So I would say that, you know, we're a small diagnostic company, and it's important to understand that our objective in identifying and landing a commercial partner, for the US is to strengthen our commercial operations and, and to accelerate our sales. I would tell you that having been on the side of very large diagnostic companies and, and also on the side of small diagnostic companies, typically, it's not the small company that slows down the negotiation process. We're turning around documents very quickly on our side, and, and we're moving that as quickly as we can. We're hopeful to have that done during the third quarter.
Got it. And then in terms of, like, the outlook from third quarter and beyond, I know you have the six placements that you, I guess, already, you know, completed. Why are you confident that you—like, you maintained the guidance range, I guess, right? And so why, why are you confident there's like, you know, like a, like, like a refill of revenue, I suppose, in some of these, like, you know, later months in the year, especially during, like, the, you know, December timeframe, which maybe is seasonally, like, better or worse for T2?
When we set the guidance going into 2024, we expected about 40% or so of the business to be in the first half, 60% or so in the second half, each quarter within the first half and the second half growing upon the prior quarter, and that's the way the business has evolved historically. It's driven by a model of instruments and tests, a razor-razor blade model. We're tracking on that through the first half of the year. We expect the second half to be strong based on the instruments that we've installed, based on the way we are expanding testing within our existing accounts, which actually is our number one commercial priority. Increasing our installed base of instruments is our number two commercial priority. We expect a strong second half.
We reiterated our guidance, as you said, and at the same time, we also said that any sales for T2Lyme Panel, which we're gonna launch as an LDT this quarter, are incremental to our guidance.
Okay. Over the years, like, you know, increasing utilization or, like, the pull-through per instrument has been pretty important for you guys, especially in the U.S., like legacy installed base. So, I mean, what are you doing? What efforts can you do to accelerate that, you know, pull-through? Can you? I feel like, you know, is the sales team, like, compensated or incentivized to kind of like, you know, push that, I guess, like, can you utilize more, you know, consumables?
There's a linear relationship between what we're asking our sales reps to do and how we're compensating them in variable pay. So, you know, this is not a military command and control organization, so what we ask them to do, we pay them to do. 70% of their effort and 70% of their compensation is on expanding test utilization, and 30% is on expanding the installed base of instruments. So that's why we're seeing incremental growth in our testing, and that's what we expect going forward.
How about the cost structure, the, I mean, the, I guess, the cost of goods sold of the, I mean, mainly, like, the instruments probably, but also some of the panels and kits. How is that? You know, what can you-- what efforts are you making to, like, reduce that and kind of get gross margin positive soon?
Well, I think you saw in our Q2 results, our cost of product sales had improved by over 40%. That means we reduced the cost of product sales. So, so that's obviously a huge step in the right direction in terms of reducing our internal costs. I would tell you that we don't get pushback from customers on the cost of our test panels. On the instrument, we sell them to distributors in international markets. The majority of the instruments that we get into customers' hands in the US microbiology labs are placed or reagent rented, but price is not the major obstacle that we have from a commercial perspective. It's really about awareness.
Once we convert an account from a blood culture-based model entirely to a blood culture-based model complemented by T2 to identify these really bad acting pathogens quickly and get the patient on targeted treatment, it's a very, very sticky business. We don't lose customers.
So you, I mean, maybe talk about the earlier cohorts of T2Dx, T2Dx users. You know, how are, how are those, like, kind of margins trending and just given, like, you were the recurring revenue is probably higher as well.
So the contribution margins on our tests are in the 70%-80% range. We still have negative overall product gross margins because we're not fully absorbed, so as we scale the business, as we increase the revenue and we increase the volume of tests, we'll fully absorb the overhead in our facilities, and I think we'll start to see some of those contribution margins flow through.
Okay. Is there any, like, spending plans in the next couple of years on, like, sales force, or do you wanna kind of lean into that distributor model, and you have this big company kind of joining you pretty soon, too? Or how are you gonna be spending?
Internationally, we have the right team to manage our distribution network. We might expand it by a person or two as we expand into other regions, more broadly. In the U.S., we've actually adjusted or reduced our sales team to fit into a structure where we have a large commercial partner, which is the plan that we're executing right now.
Got it, and then, you know, in the past, you had a relatively important agreement with BARDA, contributed a lot of revenue for the company over a couple years. That's ended, I guess. Are there other, like, global consortiums or, like, projects or programs that you kind of like foresee or expect or even, like, know about that could contribute, you know, some revenue dollars pretty soon?
There are two areas where we are focused right now in terms of pursuing non-dilutive product development funding. One is for Candida auris. Candida auris is a fungal multi-drug resistant superbug. It's got a mortality rate of up to 60%. We plan to add that to our FDA-cleared T2Candida Panel. Right now, our Candida panel with six target or five targets covers about 90% of Candida infections. Adding Candida auris will pick up a major pathogen, but also increase our coverage to about 95% of Candida species. So that's one area we're looking for funding. The other area we're looking for non-dilutive funding is in Lyme disease. Right now, our focus is Borrelia burgdorferi.
That's the causative agent or bacterial pathogen that causes Lyme disease, but we can expand that product to more broadly detect other tick-borne diseases, and that's something that we're also pursuing funding for.
Okay. Something unrelated is kind of like the EHR in the hospital and how that's kind of connected to the sepsis patient or, like, a patient in general, 'cause a lot of this is about monitoring and that sort of thing. So, I know that some vendors in the past, Cerner, Epic, maybe others, are, like, kind of focusing a little bit on this area, like sepsis monitoring or just at least maintaining, like managing it, basically. So are there... We talked about this over the years, I feel like. Is there any, like, efforts or thoughts there to maybe, like, integrate into that kind of a system to just accelerate and, like, streamline the whole, like, workflow?
Absolutely. So there are a couple things that are happening upstream from what our products do. What we do is we detect sepsis-causing pathogens directly in blood, and we detect antibiotic resistance directly in blood. I talked about how that compares to competitive products. Oftentimes, people get confused that there are other products that might compete with us, such as products like that identify a host immune response, and these are early warning biomarkers that may be indicative of a sepsis infection. They don't detect the pathogen, they don't detect antibiotic resistance, but they can be really good early warning signals to flag a patient to say, "This patient needs to be tested with T2Bacteria." And there are some of our hospitals are already pairing those products together.
So we've had discussions with many companies about whether there's an opportunity to co-market or co-sell products together to put that package together for customers. But from an AI perspective, I think the AI systems can have a similar important role in flagging patients that could be at risk of sepsis. So the Epic system, I know people have debated whether it's you know, sensitive or specific enough, but I think it's on the right path in saying, "This is a patient based on certain diagnostic tests or certain patient symptoms that may be at risk of sepsis," and that, again, could flag a patient to be tested with T2. So those are all areas we could explore partnerships with, and we're having discussions with those firms.
I guess, like, in the company's opinion, is there enough kind of investment and focus on, like, sepsis testing right now in the world, really? Or there should be more of a push?
So I think that every hospital in the world has concerns about their patients being at risk of sepsis, and infections, and antibiotic resistance, and antibiotic stewardship, so this is top of mind. I think that the guidelines are very old. They're based on very old technology. There's a comfort in not changing. However, you know, one issue that I mentioned before, which is the BD blood culture bottle shortage, you know, this really sort of puts a spotlight on building a guideline around a single diagnostic technology that is essentially a duopoly. Two companies control the blood culture bottle market. You know, one is a French company, one's a US company that's having supply challenges.
You know, that is not an ideal guideline, and I think opening up that guideline to include other FDA-cleared diagnostic technologies that don't rely on blood culture is a way to not only put a spotlight on the problems associated with sepsis, but put a spotlight on other solutions that can help deal with antibiotic resistance and getting patients on targeted therapy faster.
It's not, like, a reimbursement issue. I think it's, like, a procedural code, basically, right? That's not a problem.
So in the US, sepsis is covered for patients that are admitted to the hospital under the DRG payment system, which is about $30,000 per patient. Waiting days for a blood culture in an intensive care unit or another unit in the hospital, you know, gets through that DRG system very, very quickly. So we can get patients on targeted therapy. There are many studies that have shown we can get patients out of the ICU or out of the hospital up to five days faster. You know, not only does that save antibiotics, gets the patient on targeted therapy faster, but also saves money by getting them out of the hospital sooner.
Okay, and then quickly on, like, just going back to pipeline, you did once have, like, a next-generation instrument that was going to be... That was in development at least, that was put on hold. Is there, like, a reason to maybe, like, you know, refocus those efforts, like, back onto that one day? Or do you think, like, the current, you know, reagents and kits are, you know, good enough for the current and chemistry is good enough for the current model, I guess?
So we think that the platform that we have is the platform that we are gonna continue to invest in going forward. We're not investing further in that next-generation platform. Our current T2Bacteria Panel covers 75% of bacterial-driven bloodstream infections. Those are the targets that generally escape broad-spectrum or empiric therapy. They're the ones that lead to the worst outcomes and the longest patient stays. And from a T2Candida perspective, we're covering 90% of the Candida species, soon to be 95%. We think that's sufficient, and we think there's an enormous market with those products.
Okay. Moving on to '25, 2025. You know, it's been a kind of lumpy-ish years with revenue and with some of the cost structure and stuff and some of the, you know, workforce reductions and things over the years. Product revenue now is on, like, a nice trajectory, you know, no more research revenue, I guess. What are some catalysts and kind of highlights for '25 that, you know, investors should monitor, including some of these, like, you know, tests that could add some base detail in next year?
Yeah, I think, Kyle, I'd probably focus on the back half of 2024 because it's going to be rich with catalysts. Assuming we deliver on our expectations, we're going to launch the T2Lyme Panel in the third quarter. We're gonna submit the T2Resistance Panel, which, as I mentioned, is a significant growth catalyst for us. In the fourth quarter of this year, we expect to sign a commercial partnership for the US. We expect continued double-digit growth in our core sepsis business. So we have significant catalysts from a revenue-generating standpoint, and on the cost side, I outlined a number of cost savings initiatives that we have already made or that we are making going into the second half of the year. So we think we're gonna have a strong second half of the year, and it's gonna set us up really well-