Bionano Genomics, Inc. Q3 FY2022 Earnings Call

Good day, and welcome to the Bionano Genomics Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Amy Conrad from Investor Relations. Please go ahead, ma'am.

Thank you, Cynthia, and good afternoon, everyone. Welcome to the Bionano Genomics third quarter 2022 financial results conference call. Leading the call today is Dr. Erik Holmlin, CEO of Bionano. He is joined by Chris Stewart, CFO of Bionano. After the market closed today, Bionano issued a press release announcing its financial results for the third quarter of 2022. A copy of the release can be found on the Investor Relations page of the company's website. I would like to remind everyone that certain statements made during this conference call may be forward-looking, including statements about Bionano’s revenue outlook, strategic and commercialization plans, anticipated benefits or improvements to Bionano's products, including the Sapphire system and MX clinical software, anticipated milestones for 2022, including progress on Elevate and each pillar of Elevate, the advantages of the PACCAR system over current technologies, and expectations regarding study results and anticipated benefits of these studies and their ability to drive adoption of OGM. Such forward-looking statements are based upon current expectations, and there can be no assurances that the results contemplated in these statements will be realized. Actual results may differ materially from such statements due to a number of factors and risks, some of which are identified in Bionano's press release and Biomed reports filed with the SEC. These forward-looking statements are based on information available to Bionano today, and the company assumes no obligation to update statements as circumstances change. In addition, to supplement Bionano's financial results reported in accordance with U.S. generally accepted accounting principles or GAAP, the company is reporting non-GAAP operating expense. This non-GAAP financial measure is not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read in conjunction with the company's consolidated financial statements prepared in accordance with GAAP, which has no standardized meaning prescribed by GAAP and is not prepared under any comprehensive set of accounting rules or principles. A description of non-GAAP operating expense and reconciliation of non-GAAP operating expense to GAAP operating expense are included at the end of the company's earnings release issued earlier today, which has been posted on the IR page of the company's website. An audio recording and webcast replay for today's conference call will also be made available online on the company's IR page. With that, I will turn the call over to Erik. Erik?

Thank you, Amy, and thank you, everyone, for joining the call today. We had another outstanding quarter in the third quarter of 2022, and Chris and I are excited to share key results and an overview of the quarter, as well as to update you on our growth strategy, Elevate. We also want to discuss the market areas where we see the highest potential for the adoption of optical genome mapping. Now, turning to our third quarter results. Total revenue was $7.2 million for the quarter, marking another record for the company and a 55% increase compared to the third quarter of 2021. We experienced revenue growth across APAC, Europe, the Middle East, Africa, and the Americas compared to the same time last year, and we are very pleased with this progress. We sold 3,975 flow cells in the quarter, a record for any quarter in the company's history, representing a 17% sequential increase over the second quarter of this year and comparable to the 3,969 flow cells sold a year ago in 2021. We analyzed 369 samples in our laboratories, showing 19% growth over the third quarter of 2021. We ended the quarter with an installed base of 2,017 Sapphire systems, a 54% increase from the 1,417 systems installed at the end of the third quarter of 2021, and an 11% sequential increase over the second quarter of this year. Significant progress was also seen in Bionano Laboratories, which launched this quarter. Bionano Labs is a new organization that merges our optical genome mapping data services with clinical testing services previously known as Lineage. We launched the first optical genome-based mapping laboratory-developed test from Bionano Labs and received CLIA certification for the San Diego lab. This certification is critical as it allows Bionano Laboratories to provide services to customers looking to integrate optical genome mapping into clinical routines and for research applications involving hospitals, pharmaceutical companies, and other entities requiring a more robust regulatory framework for their projects. Now, I'd like to turn the call over to Chris to provide a deeper dive into the financials for the quarter. After Chris's remarks, I will discuss updates on the five strategic pillars in our growth strategy and the market potential we foresee for optical genome mapping in key areas, including cytogenomics discovery research and an exciting new area called cell bioprocessing QC. Chris?

Thanks, Erik. The third quarter of 2022 was another outstanding quarter for Bionano. As Erik mentioned, we recorded significant year-over-year revenue growth and continued growth in the installed base of our Sapphire systems. We believe the building excitement in the market about the capabilities of our products is driving the revenue momentum we are seeing. Revenue in the third quarter of 2022 was $7.2 million, representing an increase of 55% over the third quarter of 2021 and our highest quarterly revenue to date. We came in just above our previous guidance range of $6.7 million to $7.1 million, mainly due to stronger-than-expected sales of NX clinical software. Gross margins for the third quarter came in at 25%, in line with the third quarter of 2021 and a 3% improvement over the 22% we saw in the second quarter of 2022 due to improvements in chip production yields and the favorable product mix in the quarter. We are making good progress on improving yields, and we expect to see continued gross margin improvements in the coming quarters. Q3 2022 GAAP operating expense was $34 million compared to $21.8 million in the third quarter of the prior year. Q3 2022 non-GAAP operating expense was $26.4 million compared to $18.7 million in Q3 of 2021 and roughly flat to the $26.3 million in Q2 2022. Q3 2022 non-GAAP operating expense includes $6.1 million in stock-based compensation, $1.4 million in amortization of intangibles, and $100,000 of transaction-related expenses. The year-over-year increase in OpEx was primarily due to increased headcount and related spending. Our capitalization remained strong with $180.2 million in cash, cash equivalents, and available-for-sale securities as of September 30, 2022. That includes $22.5 million in net proceeds raised through the sale of 6.6 million shares in Q3 2022 under our ATM facility. Looking forward, we expect revenues in the fourth quarter to be in the range of $7.5 million to $8 million, which would imply full-year revenue in the range of $27.1 million to $27.6 million. This number is slightly above the top end of our prior full-year guidance range of $24 million to $27 million. Before I turn it back over to Erik, I want to quickly mention that we plan to hold our first Strategy Day this coming February. More information will be forthcoming in the near future. With that, I'll turn it back to Erik.

Thank you, Chris. Our growth strategy, named Elevate, is structured around five main pillars: to enhance commercial traction and validation of optical genome mapping with Sapphire; to provide exceptional products for our customers; to facilitate reimbursement for OGM-based tests and influence medical practices to integrate optical genome mapping into medical society guidelines; to improve our products to support higher market adoption and entry into new markets; and finally, to position software as a critical component of our solutions. Recently, we've introduced a sixth pillar, which emphasizes achieving all of this in a scalable manner to align with our growth environment. We have observed strong momentum in the adoption and validation of OGM over the last quarter. At the recent ASHG Conference, the first dedicated scientific session on genome mapping technologies showcased researchers from across the globe emphasizing optical genome mapping's potential to transform molecular and cytogenetic research. Bionano also hosted its inaugural scientific meet-the-user event, gathering over 50 researchers eager to understand how optical genome mapping could integrate into their labs and potential applications. These attendees traveled to San Diego from various parts of the world to visit Bionano Laboratories, which now exemplifies excellence in optical genome mapping, where they witnessed demonstrations of the Bionano Sapphire system and its workflow, along with our NX clinical software. We have continued our collaboration with Hamilton to launch an automated sample preparation solution. As part of this initiative, we are developing new chemistries for the first walkaway automation for ultra-high molecular weight DNA extraction with the Hamilton Longstreg Vantage system. This system can potentially double throughput and enhance confidence in sample yields and DNA quality, simplifying the large-scale adoption of optical genome mapping. We were thrilled to announce alongside Hamilton at ASHG that this platform will be available commercially in early 2023. Regarding reimbursement progress, our plans for a Category 1 CPT code reapplication are advancing as anticipated. We have seen notable strides in the field for sites with laboratory-developed tests (LDTs) based on optical genome mapping that have applied for proprietary laboratory analysis (PLA) codes, which now have established pricing. The 2022 gap fill recommendations from CMS for constitutional genetic testing with OGM include reimbursements of $1,263.53 for two PLA codes and $6,739.33 for another. The first two codes pertain to OGM and whole genome analysis for constitutional genetic diseases, while the second is for combining optical genome mapping with next-generation sequencing. We are pleased that reimbursement for optical genome mapping is becoming a reality, and we see it listed on the clinical diagnostic laboratory fee schedule, marking significant progress for us. The clinical studies we are conducting continue to form the core evidence supporting OGM's role in transforming medical practices through updated medical guidelines. We are on target to achieve our previously set milestones for this year, and we are making strides with a new version of our NX clinical software that will incorporate optical genome mapping data with other data types. Lastly, we are on course to deploy a pre-commercial version of the next-generation mapping instrument before the year's end. This quarter, Sahil Shams, our Chief Informatics Officer since BioDiscovery's acquisition, transitioned out of day-to-day activities to become CIO Emeritus, serving as a consultant for software development. Over 25 years, Sahil has established himself and his team as global leaders in genome analysis, with their products like NX Clinical recognized globally for offering powerful solutions in visualizing, interpreting, and reporting genome variation. Bionano will work to finalize the addition of structural variation and create a transformative tool for genome analysis. To conclude, I want to discuss the market opportunities for optical genome mapping, estimated at around $8 billion across cytogenomics discovery research, quality control for cell bioprocessing, and several other applications. We estimate that there are about 6,000 cytogenetic labs globally analyzing around 4.2 million samples annually. Additionally, there are approximately 15,000 sequencers installed worldwide. By incorporating Sapphire and OGM into the cytogenetic workflow and enhancing sequencing with optical genome mapping, we see a market potential of about $4 billion. In genetics and molecular pathology, optical genome mapping is increasingly supported by emerging reimbursement and numerous studies validating its use as a substitute for traditional methods like karyotyping, fluorescence in situ hybridization, or chromosomal microarray, as well as a complement to next-generation sequencing. We believe its capacity to detect structural variations is crucial for cancer and genetic disease applications. This quarter, several studies confirmed OGM's effectiveness in solid tumor and hematologic malignancy applications, indicating that optical genome mapping workflows could meaningfully influence crucial patient management information like prognostic scoring and treatment recommendations in conditions such as leukemias, lymphomas, and myelodysplastic syndrome. We believe that optical genome mapping could provide cancer researchers with deeper insights into cancer causation, potentially leading to innovative diagnoses and treatments. Support for these views has emerged through four peer-reviewed studies from institutions like MD Anderson Cancer Center and Avesta University, validating OGM's capability to see both traditional findings and additional pathogenic variants in diseases like MDS and acute myeloid leukemia. Identifying these previously undetected variants may enhance prognosis and offer better insights into the genomic structure of hematologic malignancies and tumors, improving classification, risk assessment, and therapy selection. In genetic diseases, we are witnessing increasing validation for OGM. Two recent studies from researchers in China indicate progress. One study demonstrated optical genome mapping's ability to identify balanced chromosomal rearrangements missed by traditional techniques in subjects with recurrent pregnancy loss. Another study evaluated OGM's effectiveness for investigating abnormal non-invasive prenatal testing, suggesting its use as a follow-up test for both positive and ambiguous NIPT results. These instances highlight the powerful role of optical genome mapping in genetic diseases. Moreover, we recently saw the first study to assess OGM for specific repeat expansion disorders, where researchers successfully used OGM to replace the gold standard southern blot method for sizing these repeat expansions, which impact roughly 1 in 3,000 individuals. OGM also shows great promise in discovery research, an area with immense potential because structural variations are biologically and clinically significant. Historically, there has been no tool capable of detecting structural variations with the comprehensive sensitivity provided by optical genome mapping. With such a tool, we believe OGM could establish a new gold standard for detecting structural variations of 500 base pairs and larger in genomic analysis. I want to address a burgeoning and unique area of opportunity for optical genome mapping known as cell bioprocessing quality control. This methodology involves evaluating intended and unintended gene modifications in cells used for therapeutic applications like immune cell therapy and stem cell therapy. Two studies this quarter showcased OGM's utility in evolving induced pluripotent stem cell lines, one with applications for autologous cell therapy and the other for allogeneic cell therapy. One study demonstrated OGM's capability to detect structural variations unnoticed by traditional methods, which is vital since these off-target events can compromise the genomic integrity of therapeutic cells and lead to suboptimal safety and performance. The other study employed optical genome mapping in a quality control workflow to assess iPSC quality and genomic integrity in allogeneic therapies, aiming to minimize the risk of immune rejection when donor cells are introduced to recipients. We are excited by the support for OGM as a novel method in this field, and we believe this validation enables Bionano to extend its reach beyond research and clinical diagnostics into drug development and cell therapy applications. To wrap up, I want to express our enthusiasm for our ongoing growth in 2022. We are committed to achieving all our outlined Elevate milestones and look forward to sharing our progress during the Q4 call. As Chris mentioned, we are particularly excited about our forthcoming Strategy Day in February 2023, and we will provide more details about that soon. With that, we are ready to take questions.

We will take our first question from Jeffrey Cohen with Ladenburg Thalmann.

Erik and Chris, how are you? So a few questions first. Firstly, on the services and other number, which was strong for the quarter, very strong. Should I assume that that includes some money from the San Diego Clear lab?

Yes. That number does include all of our services, which, yes, includes revenue from the San Diego lab, which is continuing to process samples as we have for the last several years now.

Got it. Okay. And then, Erik, talk a little bit about Hamilton and Vantage and the launch of this new product line. I understand that you'll be supporting them as far as the units and all the reagent kits. Could you talk about perhaps the size of that market as they see it or you see it and some of the competitive advantages that the system has out there in the marketplace?

Yes. Sure, happy to. So a couple of things. As you know, Hamilton is one of the few global leaders in workflow automation. For them to create this program and invest in it, I think, is really a significant validation of the emergence of optical genome mapping as a mainstream technique throughout genomics. I don't think that they would put the resources behind this project if they didn't see the potential. And so we're excited about that. If you think about the market size for ultra-high molecular weight DNA isolation, which this robot is expressly developed for, we talked about these 6,000 cytogenetic labs worldwide. We've talked about 15,000 sequencers worldwide. So I've got to believe that Hamilton views the potential of putting automation into many of those labs as we view the potential for putting sapphires in all of those labs. Not every lab is going to need automation, but it certainly simplifies the workflow and makes it more consistent and robust. What we see in labs is a consistent ramp-up in throughput, especially in Europe, where they've been going through a phase of validation and beginning to build a menu of applications. Automation at this time makes a lot of sense. If you ask me if I think every site is going to want to have automation, I think there will be sites that continue to process samples manually, but the opportunity is very significant. Otherwise, Hamilton wouldn't be investing in it.

Got it. And then secondly for us, congratulations on the news with CMS, right? This is the gap fill final recommendations. Has that gone into effect? Or when does that go into effect for the two codes you outlined?

There are three of them, two in constitutional genetic disorders. I think they're all in constitutional, but two of them are for OGM alone, and then one is for the combination of optical genome mapping and sequencing. They are in effect now, and I think that's in the last week or so. You've got to keep in mind, and this is important for everybody to be clear about, these are what we call proprietary laboratory analysis codes, and they are unique to the lab that has developed the LDT and applied for the code. Having CMS go through the process to study, analyze, and discuss at the panel level and go through a gap fill process to price these codes means that the next steps for other labs following the same path will be more straightforward. I think we're finally in a period where we can say that there is reimbursement for OGM. Early days, but it exists.

Fantastic. I know you've been working on that for a number of years. So that does it for us.

Thank you, Jeff.

We will take our next question from Francois Bridgeville with Oppenheimer.

Congratulations again on the CMS and reimbursement progress, and the fact that OGM is now more recognized. I'm curious about how changes in practices will impact the reimbursement. Is reimbursement the primary factor for significant growth in revenue, or is it more about a mix of publications and increased validation? Is this really one of the key drivers?

Well, I think you really do need to think in terms of a combination or multifactorial process of demand creation through illustration of utility that's validated in the publications, combined with pulling down barriers to adoption, such as reimbursement. All of these things are ongoing in parallel, but they accelerate continuously. We're at the Association for Molecular Pathology meeting, AMP in Phoenix, and we were talking about the number of human genomes that have been analyzed and published. It's a little over 1,000 at this point. Last year, it was 300. These things accelerate as we're moving through time and pushing forward on all of these different fronts. That's what really drives revenue growth. You mentioned hockey stick; I'll just say revenue growth. I know that down the road, you're going to expect us to continue that growth. So when we see this initial reimbursement, that's going to pull some folks in who are on the sidelines. When we see this automation, we'll see some people come in from the sidelines who are waiting for the automation. They will do work in published papers, which will in turn drive some additional folks in from the sidelines, and we hope, or we believe we will see things like private payers coming on board. It really is multifactorial, but I can tell you that the process is accelerating on all fronts.

Okay, that's very helpful. Can you discuss whether you observe any seasonality in the business, or does it remain consistent during the summer months compared to others? Additionally, could you provide some insights on the publications mentioned in the press release? Are there any particular research papers that stand out as more significant, or are they all equally important?

I'll start by answering the seasonality question and then let Erik weigh in on publications. We have seen over the past several years that typically, we're stronger in the second half of the year as companies are getting their arms around their budget. In Q4, they are typically spending their budgets before they lose it. Seasonality is a little bit slower in Q1, among other things, due to Chinese New Year and then people returning back to work after the holidays. Yes, that's what we've seen: typically seasonal strength in the second half of the year, a little bit seasonally weaker in the first half of the year.

We've seen a number of significant publications that have come out certainly in the third quarter. I think one of the most impactful ones was the paper from Dr. Rashmi Kanagal-Shamanna from MD Anderson Cancer Center, which we discussed during our last call. I don't want to seem like I'm diminishing the impact of the others, but I think it's reasonable to extend that publication's significance. Optical genome mapping really dramatically impacts the patient management workflow in myelodysplastic syndrome. There are other aspects of that publication, which go into depth about the relationship between new findings that optical genome mapping revealed and existing clinical trials for treatment. When you begin to connect all the dots in that paper, you realize that it's a seminal work that highlights both the impact of optical genome mapping and the importance of driving these new methods forward. Of course, we're doing this here in Bionano Genomics because we have an incredible platform, and we know we can build a great company behind it. But we must remain focused on the importance of innovation in health care because, at the end of the day, this changes people's lives and assists them in their most desperate times. So I think that's the most significant paper that was published this quarter.

There are no further questions at this time. Dr. Holmlin, I will turn the conference back to you for any additional or closing remarks.

Okay, Cynthia. I want to thank everybody for joining the call, and we look forward to updating you on the fourth-quarter call after the first of the year. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.