Earnings Call Transcript - LAB Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Fluidigm Second Quarter 2021 Financial Results Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr. Peter DeNardo, Investor Relations. Sir?

Peter DeNardo, Investor Relations

Thank you, May, and good afternoon, everyone. Welcome to Fluidigm's second quarter 2021 earnings conference call. At the close of market today, Fluidigm released its financial results for the quarter ended June 30, 2021. During this call, we will review our results and provide commentary on our financial and operational performance, market trends, and strategic initiatives. Presenting for Fluidigm today will be Chris Linthwaite, our President and CEO; and Vikram Jog, our CFO. During the call and subsequent Q&A session, we will make forward-looking statements about events and circumstances that have not yet occurred, including plans and projections for our business, future financial results and market trends and opportunities. Examples include statements about expected financial performance, including guidance relating to revenues, net loss, business-line performance, margins, and cash burn; as well as statements about market trends, the impact of COVID-19, product releases, and customer demand, collaborations and partnerships, market and revenue growth expectations, and Fluidigm's strategic plans. These statements are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from current expectations. Information on these risks and uncertainties and other information affecting our business and operating results is contained in our Annual Report on Form 10-K for the year ended December 31, 2020, as well as our other filings with the SEC. The forward-looking statements on this call are based on information currently available to us, and Fluidigm disclaims any obligation to update these forward-looking statements except as may be required by law. During the call, we will also present some financial information on a non-GAAP basis. Non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under US GAAP. We encourage you to carefully consider our results under GAAP as well as our supplemental non-GAAP information and the reconciliation between these presentations. Reconciliations between GAAP and non-GAAP operating expenses are presented in the table accompanying our earnings release, which can be found in the Investor Relations section of our website. At the conclusion of our prepared remarks, we will take questions from those participating by phone. And then time permitting, we'll take some questions from our online webcast participants who can submit the questions by clicking the ask a question button in the webcast player. I will now turn the call over to Chris, our President and CEO.

Chris Linthwaite, President and CEO

Thank you, Peter, and good afternoon. In the second quarter, our base business top-line revenue continued to rebound from 2020 levels with notable growth in mass cytometry services and non-COVID related microfluidics products. We advanced several key innovative initiatives including the launch of our fourth-generation, industry-leading CyTOF platform and made strides in our partnerships and the overall R&D pipeline. We completed significant milestones under our NIH, RADx contract as well as our DARPA, Mount Sinai program. We did experience headwinds with a rapid deceleration in our COVID testing revenues, which we believe is consistent with macro trends in the United States as vaccination levels have increased and testing of the population has decreased. Earlier this year, we outlined our five-year growth plan that we call Vision 2025. Our 2021 corporate objectives are tied to this plan, which is organized into three pillars of growth: innovation, beachheads, and partnerships. During Q2, we made progress in each of these categories as we advance towards our objective to power the next generation of health care decision-making. We believe we remain on track to achieve the 2021 objectives in this plan and I will provide more detail on that in a few minutes. Now briefly shifting to market dynamics for the period. Globally speaking, we see an uneven recovery continuing across the various geographies we serve as individual countries navigate successive waves of outbreaks. We estimate that lab operations remain below pre-COVID activity levels with some marginal improvement over Q1 and with the slowest improvement in Japan among the major markets we serve. We are closely monitoring the delta variant, which introduces further uncertainty as well as the status of regional travel restrictions and supply chain challenges, which continue to create moderate operational headwinds. However, on balance, based upon what we know today, we are optimistic about the second half of the year particularly for our base business as we see improving demand signals. As we'll discuss later, we have increased our full-year base business revenue guidance and reduced our outlook for COVID testing revenue while maintaining our prior period full-year guidance range. Shifting gears, I will provide an overview of key business highlights during the quarter and add perspective on how these recent achievements support our five-year strategy. As I mentioned, our strategic vision calls for execution of three distinct growth drivers: innovation, beachheads, and partnerships. I will break them down in the context of each franchise. Let me start with mass cytometry and general market conditions for this product family. Broadly speaking, we see a steady recovery in our mass cytometry business and this includes solid demand across suspension and imaging applications. Though many labs are still operating below pre-COVID levels, customer anecdotes suggest there are significant project backlogs that foreshadow increased activity. These customers anticipate higher demand for our consumables to support their work. In fact, over the last few months, we have seen momentum forming with new purchase orders and new monthly sales records established for our mass cytometry consumables. These encouraging signs, plus our new product releases, underpin our growth expectations for the balance of full year 2021. Turning to innovation, starting with our suspension business. In May, we launched the fourth-generation CyTOF instrument with CyTOF XT. The launch at the end of May was a 100% digital effort, including virtual training for field service engineers, which was a first for us. We are very pleased with the market reaction as well as our execution of this plan, given the ongoing macro-environmental constraints. The event boosted awareness and demand for suspension mass cytometry analyzers and created several hundred potential needs, exceeding our registration and attendance goals and supporting what we believe will be a strong opportunity for the new system in the second half of 2021 and beyond. Internally, we are working to scale up our CyTOF XT manufacturing capacity to accommodate market interest. We anticipate more unit deliveries in Q4, versus Q3. For those of you who did not attend our launch events, or May investor events, the CyTOF XT product addresses user requests for greater automation of sample loading, higher system uptime, an automated approach to cleaning periodic sample clogging, a built-in chiller to reduce noise, and a more compact system footprint that requires less room modification. With these improved capabilities, most customers can deploy two XTs in the space allocated for one of our prior generation Helios systems. The new system is also available at a lower instrument price and with lower ownership costs over a projected five-to-seven-year operational cycle. We also offer attractive trade-in, trade-up, and leasing options. I'm pleased to report that during the first eight weeks of commercial launch, we've sold seven of these new instruments, including three systems for revenue in Q2. These deliveries were to accounts that primarily or exclusively perform clinical and translational research. Among the seven total orders year-to-date, one CRO customer ordered two XTs to accommodate increasing biopharma demand, representing our first two system order. New customers accounted for two of these orders. We are pleased with these early market signals, as we seek to expand our penetration of translational research as well as provide upgrades to our growing installed base. In the years ahead, we expect that the fourth generation unit placements will contribute to the growth in our Instruments revenue with sales to a mix of existing and new customers. These placements will enable further growth in our recurring revenue streams of consumables and services, given the higher potential for this platform. In mass cytometry imaging, we are seeing similar market dynamics. Customers have reported backlogs of studies that again foretell increasing future consumables demand. While we are signaling a new imaging system release in 2022, our current generation, the Hyperion product remains the gold standard for single-cell resolution, high-plex protein imaging of tissue. We are carefully monitoring changes in customer buying behaviors, as we release updates on our development timelines for the next-generation platform. We know the market is increasingly competitive, but we believe our solution remains best positioned to serve clinical and translational research market needs. We believe our planned second-generation platform will put us in a strong position to maintain our imaging market leadership. Lastly, in Q3, we will deliver enhancements to our award-winning Maxpar Direct Immune Profiling Assay, or MDIPA, introducing additional antibody content for immuno-oncology and vaccine studies. In addition, we are planning to introduce a pilot antibody conjugation program that we call Maxpar-On-Demand, which features pre-curated combinations of isotopes and antibodies. Our MDIPA product has achieved notable adoption milestones, including more than 400 orders and $5 million in revenue since launch. Transitioning from innovation to beachheads, as we outlined in our mass cytometry investor event in May, we believe we are underpenetrated in a number of attractive market segments where we see opportunities for growth. In particular, we are working to increase our exposure to customers who will influence the tools used for future health care decision-making, including the CROs that serve these organizations. We are pleased to announce a new collaboration agreement with the imaging CRO in the biotech focusing on advancing CRO capabilities and drug development utilizing our Hyperion system. ImaBiotech focuses on the oncology and neurosciences markets and has more than 200 customers, most of which are in the pharma sector. ImaBiotech purchased a system to serve increasing customer interest in high-plex high-resolution imaging. We hope biopharma customers explore contract service engagements with leading CROs such as ImaBiotech, to accelerate their drug discovery and development objectives. In addition, on the suspension side of our business, we added a specialized vaccine CRO to our community to serve the surging needs of this important health care segment. Another CRO partner ordered a system to support their geographic expansion. In conclusion, we believe that the path to increased biopharma adoption of our suspension and imaging platforms will be influenced by our growing network of CRO beachheads. Our focus on beachheads is yielding results both, in terms of our CRO networks and more broadly, the increasing number of total users executing clinical and translational studies. In Q2, our mass cytometry technology was incorporated in seven new clinical trials bringing the total to 162. Our technology has been featured in nearly 1,600 publications with more than 115 of them related to Hyperion, our imaging platform. Let me turn to partnerships. In addition to the ImaBiotech agreement, we announced a co-marketing agreement with Ultivue, a leader in advancing precision medicine solutions. Our marketing efforts are focused on expanding the portfolio of biomarker discovery and drug development tools for tissue analysis, available to researchers. Our technologies are complementary, and each company will market these capabilities, increasing awareness of new approaches to serve this fast-growing field. Via our Therapeutic Insights Services business, we plan to offer customers access to these combined technologies. As a side note, we completed 12 projects for biopharma accounts during the latest reporting period. We also recently established a collaboration focused on data management and more automated analysis of images. We signed a co-development agreement with Visiopharm to enable customers to upload our images into their software package and automate the reading and analysis of imaging mass cytometry. Switching now to our microfluidics business. Our base microfluidics business has been steadily recovering and delivering renewed revenue growth. We are seeing new account opportunities beyond COVID-related testing and are executing on our growth formula of innovation, beachheads, and partners. As mentioned in my opening comments, COVID-related testing revenue did decline faster than we expected in Q2, and we missed our performance targets in that area. The overall uncertainty regarding vaccine efficacy and future testing demand presents forecasting challenges. However, Vision 2025 is not predicated on success in COVID testing. Rather our strategy has been to invest in the foundational elements of a durable diagnostic strategy, leveraging the COVID revenue generated and the large investments from agencies such as the NIH and Department of Defense. We are pleased with our progress on these foundational elements, including the approaching end of our manufacturing facility upgrade, funded by the NIH RADx contract. Over the last year, we have tripled our capacity with new, state-of-the-art manufacturing lines, installing more than 110 new pieces of equipment on a demanding schedule which will support growth for years to come. Other benefits of our COVID response included a new Biomark platform, a novel chip configuration, well-suited for a broad range of diagnostic applications. Turning now to innovation in this franchise. We achieved significant internal milestones with respect to development and launch of the next-generation Biomark platform we introduced during our May call. In addition, we are fast approaching a milestone to submit our new sample-to-answer IFC for FDA review, a chip that can be adapted to numerous applications. As a reminder, the next-gen Biomark platform integrates our Juno and Biomark HD instruments into a single system, one-sixth the size of the two current instruments, with an advanced easy-to-use interface that will hybridize our novel approach to PCR with a large touchscreen user interface. In fact, the new instrument will ultimately encompass 100% of the features of our Juno and Biomark HD platforms combined, at a lower total ownership cost, offering tremendous value. We intend to market these capabilities to diagnostic industry participants, with the goal to recruit go-to-market partners who share our vision of simplifying complex workflows and reducing the cost structure of testing. Though we have begun to demo these new platforms on the new proprietary microfluidics chips, our associated revenue expectations for the balance of 2021 are modest, with the vast majority of our projected revenue coming from existing base business improvements and our existing OEM relationships. We will share more details as we approach the new Biomark launch and we are entertaining early developer interest now. Innovation can come in many forms. One area I'd like to highlight is our service business innovation. Our service team continues to execute in the face of a challenging operating environment. In Q2, we delivered a new quarterly service revenue record, service innovation as part of our multi-year commitment to driving sustained revenue growth and meeting new customer needs. We launched our Fluidigm PRO service brand during the first half of the year, offering enhanced service lines. We are driving a pipeline of service line extensions and new capabilities to enhance the value of our growing installed base. Now let me turn to partnerships in our microfluidics franchise. In Q3, we anticipate transitioning from the development phase of our contract with Olink Proteomics to the commercialization and scale-up phase. We are grateful for the opportunity to serve this exciting market and important partner. We are excited by the prospects of our partner to penetrate new markets and advance the field of proteomics in the years ahead. In Q2, our partnership achieved a major milestone, as Olink launched its signature Q100 product, which is a designated benchtop system for protein biomarker analysis. Q100 is conceptually an end market application-specific derivative of our next-gen Biomark. We look forward to learning more about early market response to their launch events in the weeks ahead. In summary, we are pleased with the continued execution against our Vision 2025 strategy and the steadily growing improvement in our base business and the early response to our new product introductions in both the mass cytometry and microfluidics business. I'll now turn the call over to Vikram for a detailed discussion of our second quarter financial results.

Vikram Jog, CFO

Thanks, Chris, and good afternoon, everyone. Before turning to our second quarter financial results, I would like to note that we have posted updated supplemental financial information in addition to our investor presentation on our website. Let me begin with a review of our financial and geographic highlights for the second quarter of 2021 and then provide some updates to our 2021 guidance. We demonstrated continued top line recovery in our base business from a difficult year ago period, and we project this recovery to continue across both mass cytometry and microfluidics, supported by new product introductions. Our revenue from COVID-19 testing continued to decline and came in at $2.3 million for Q2, down sequentially from $6.5 million in Q1 and below our expectations of $3 million to $4 million as testing volumes declined both overall and for our commercial lab customers. Year-over-year COVID testing revenues were flat for the quarter. We are continuing to monitor the COVID testing landscape in view of the recent uptake in infections and the impact of the Delta variant. I note that we recently released an RUO COVID variant testing panel. But for now, we have provided updated guidance for testing revenues that does not incorporate any potential effect of that panel. Total revenue for the second quarter was $31 million, an increase of 19% compared to $26.1 million for Q2 2020. Changes in foreign exchange rates contributed two percentage points to the year-over-year growth. Base product and service revenue, which excludes COVID-19 testing was $26.9 million or 33% over the year-ago period. We now expect our full-year 2021 base product and service revenue to grow between 20% and 22% year-over-year. Moving on now to the performance of each of our franchises. Mass cytometry product and service revenue of $16.6 million for the second quarter was up 33% over the prior year quarter and up 19% sequentially. Year-over-year growth was balanced across all product categories, while sequential growth was driven by recovery in instrument revenues. Base microfluidics products and service revenue, which excludes COVID-19 testing was $10.3 million, up 36% over the prior year quarter and virtually flat quarter-over-quarter. Including COVID-19 testing, microfluidics product and service revenue was $12.6 million, up 26% over the prior year, primarily driven by base business growth. Before moving on to the region, I'd like to take a moment to call out our services business, which achieved a new quarterly revenue record of $6.6 million, up 29% over $5.1 million for the second quarter of 2020. Global service revenue has been incrementally increasing every quarter since Q1 2020, illustrating the value of our technology to customers. About 70% of this revenue is related to maintenance contracts, which provide us visibility into recurring revenue. Looking at the second quarter revenue compared to the prior year period from a regional perspective, the Americas revenue grew 16% to $16.1 million, including $1.8 million of other revenue. Product and service revenue increased 38%, driven primarily by higher consumables and slightly higher instrument sales. EMEA revenue grew 41% to $9.2 million driven by improved mass cytometry and microfluidic instrument sales and increased consumables. Changes in foreign exchange rates contributed nine percentage points to the year-over-year growth. Asia Pacific revenue grew 2% to $5.7 million. This geography experienced challenges due to a slowdown in Japan, changes in spending priorities, and continued delays in issuing tax extension certificates in China. Currently, we have $2.2 million in instrument shippable backlog awaiting release of such certificates, and this number may increase through the second half of this year as we take more orders. As noted earlier, we reported other revenue of $1.8 million during the quarter, including $900,000 of development revenue from our proteomics OEM supply and development agreement. Total revenue recognized under this agreement since its inception in March 2020 is $11.1 million. The development phase of this agreement is nearing completion and is expected to be completed in Q3 2021. Moving now to our operating performance. GAAP net loss for the second quarter of 2021 was $17.1 million compared to $13 million for the second quarter of 2020. Non-GAAP net loss of $9.3 million increased from $5.2 million in the second quarter of 2020. The increased net loss in Q2 2021 versus the prior year period was driven by higher operating expenses and lower development and grant revenue, partially offset by higher product and service revenue. The remainder of my comments on operations we will focus on non-GAAP measures. Please note that the reconciliation tables between our GAAP and non-GAAP measures are provided at the end of our earnings press release that was issued earlier today. Non-GAAP product and service margin was 61.5% for the second quarter and was down from 67.1% in the prior year period and 66.4% in Q1 2021. Reserves for excess COVID-19 testing reagents reduced margin by about three percentage points in Q2. Lower average selling prices of mass cytometry instruments and higher service costs contributed to the remainder of the margin decline. We expect our product and service margin to be negatively impacted in the second half of 2021 as we enter a new product transition cycle and a less favorable product mix. Non-GAAP operating expenses were $29.4 million compared to $24.7 million in the year-ago period and $34.1 million in Q1 2021. The increase versus the year-ago period was driven by higher compensation and benefits costs, the absence of temporary salary reductions and government subsidies in the second quarter of 2020, and higher R&D project and marketing program expenses. The sequential decrease in operating expenses was due to lower variable compensation and benefits costs. Also contributing to the decrease were lower outside services and consulting expenses. Moving on now to cash flow and the balance sheet. Cash and cash equivalents, short-term investments, and restricted cash at the end of the second quarter totaled $31.9 million compared with $50.8 million at March 31, 2021. Operating cash burn was $14.7 million during the quarter, an increase of $1.8 million compared to the first quarter of 2021. The lower customer collections driven by a lower receivable balance at the end of the first quarter of 2021 versus the fourth quarter of 2020 more than offset the impact of employee bonus payments in Q1 2021. Second quarter cash from operations was also impacted by higher inventory purchases and the timing of payables. Accounts receivable days sales outstanding were 46 compared with 45 days at the end of the first quarter of 2021. For the second quarter of 2021, investing cash flow was a negative $4.2 million, including $4 million for equipment purchases for the expansion of our IFC manufacturing facility which is being funded under the NIH RADx program. We have received cumulative proceeds of $30.9 million and incurred expenditures of $23.3 million including $20.1 million of capital expenditures under this program. In 2021 through the end of the second quarter, we collected $5.5 million of proceeds under this contract and incurred $11.6 million of expenditures, $9.9 million of which are related to capital expenditures. We expect our cash burn in the second half of 2021 to be lower compared to the first half of the year. We expect inventory levels to decline through the second half with the commencement of sales of our new mass cytometry instrument platform. In addition, expenditures associated with the RADx program will decline as that program comes to a close in the third quarter. At the end of the second quarter, the borrowing base under our asset-based revolving credit facility was $10.9 million none of which was utilized. On August 2, we extended the maturity date of this facility by one year to August 2, 2023 and obtained a new $10 million term loan facility. The term loan is expected to mature on July 1, 2025 and will carry interest-only payments through August 1, 2023. Please refer to the Form 8-K we filed today for more details on the term loan, as well as the extension of the pre-existing credit facility. In closing, let me provide some color on guidance. Our base business excluding COVID-19 testing performed at the high end of our expectations in the second quarter, and we are incrementally more positive on the full year outlook for the base business. While we are maintaining our full year total revenue guidance, we are revising guidance for our base business and COVID-19 testing revenues and net loss to reflect our revised outlook. Our current expectations call for base product and service revenue excluding COVID-19 of $120 million to $122 million, reflecting a year-over-year growth of 20% to 22%. Total revenue which includes COVID-19 testing and other revenue is approximately $134 million to $140 million. GAAP net loss is projected at $62 million to $65 million and non-GAAP net loss at $29 million to $32 million. For the third quarter of 2021, we expect base product and service revenue excluding COVID-19 testing to be approximately $29 million to $30 million, or 16% to 20% higher than Q3 2020. We expect total revenue, which includes COVID-19 testing and other revenue to be between $29 million and $31 million. Before closing, I will note that historically the fourth quarter has been our strongest revenue quarter in the calendar year and we expect a similar seasonality in 2021. In addition, the timing of new product introductions are expected to make the seasonality more pronounced this year compared to historical trends. As a result, we are maintaining our full year total revenue guidance of $134 million to $140 million. And with that, we'll open the line for questions.

Operator, Operator

Your first question is from the line of Sung Ji Nam with BTIG. Your line is now open.

Sung Ji Nam, Analyst

Taking the question. Maybe starting out with the CyTOF XT. Great to see that there are seven orders there. You talked about two new customers your customers that are new to the CyTOF technology. I'm just curious have they used the platform through outsourcing before, or is this the first time they're adopting? And kind of curious what motivated them to adopt the system? And then also on the biopharma the pharma customers. Just curious, kind of as you look at the CyTOF XT platform do you think that more pharma customers would adopt the system outright rather than outsourcing to CROs going forward?

Chris Linthwaite, President and CEO

Okay. I have several questions which I'll address one by one. It's great to hear your voice again, Sung Ji. We're definitely excited about launching the XT. I want to clarify something I mentioned in the prepared statement. We have six customers and seven systems. I think that was clear, but we mixed up the terms orders and systems. I want to ensure that's understood. One third of those customers were new to the technology. In response to your follow-up question on the motivations behind that, I'm not familiar with each account in detail. However, generally speaking, they were motivated by commercial needs, whether it was the opportunity for a CRO to secure more business or the demand and interest from their customers to incorporate these into their studies. Regarding the new customers, I'm not sure if they had previous experience with the technology through other means, but I can provide you with that information later. It’s a noted question, though I don't have all the details right now. What was the final part again? I've forgotten.

Sung Ji Nam, Analyst

The pharma customers adopting the platform.

Chris Linthwaite, President and CEO

Yes, the outlook for the pharmaceutical sector is diverse, as it involves various groups within the industry. Historically, around two-thirds of activities are outsourced, while one-third is handled in-house. This trend is driven by the need for speed and the uncertainty of project specifics, prompting companies to contract externally for quick projects. I believe we have a strong presence, being involved with nine of the top ten pharmaceutical companies in at least one area of their operations, indicating significant additional market opportunities. We partially outlined this during the Investor Day event. There is considerable potential for growth in additional systems, and I do not think these approaches are mutually exclusive. Contract research organizations (CROs) are likely to address a lot of the initial demand, especially when pharmaceutical companies require immediate project execution or short-term needs. The process of implementing a platform, developing expertise, and creating schematics can take time, so companies may initially rely heavily on CROs before bringing some capacity in-house to meet their core needs, while still using CROs for additional capacity as required. This is my perspective, and we’ll see how it evolves, but it aligns with the traditional model.

Sung Ji Nam, Analyst

Got you. That's very helpful. And then for the next-gen imaging system that you're going to launch next year. Is that going to be similar? Is it on a module that you attach to an existing CyTOF system? And then just kind of if you can talk about that. But just trying to get a sense of what that launch could look like as far as the existing platforms and how customers might adopt that going forward?

Chris Linthwaite, President and CEO

Yes. We're clearly going to be really excited about sharing all the details, the operational and capability details of the next-generation platform. You can imagine a lot of the experiences and inputs that we've had that informed our XT development, focus areas will be reflected also in the imaging platform rollout or improvements. I think one of the trickiest things is we're kind of unique in the imaging space and to discuss this level of nuance is that the XT as a detection platform is an analyzer. We're the unique platform that enables both imaging as well as suspension-based analysis. At this moment in time on the imaging side, we offer a Hyperion, as our first-generation state-of-the-art platform of which the detector engine is a CyTOF or as a Helios platform, or the third generation detector. And then on the suspension side we're offering both the XT now and then we offer the third-generation system both in the market. Over time, you might imagine that the laser ablation module, or imaging modules that will be introduced with the next-generation platform will be made into the XT platform for the next-generation platform. So does that clarify?

Sung Ji Nam, Analyst

Yes, that's very helpful. Lastly, maybe one for Vikram. As we consider your guidance, you mentioned the fourth quarter and its seasonal fluctuations. There will be a significant sequential ramp-up, and new products are contributing to that. Are you including contributions from the next-generation sample-to-answer microfluidics platform that you're launching in your assumptions, or what are the underlying assumptions?

Vikram Jog, CFO

Hi, Sung Ji. Yes, good to hear from you. The major drivers for the Q4 revenue cadence is the mass cytometry product launch, the CyTOF XT specifically also consumables increasing relative to the first half. And then the OEM business in microfluidics, I would say, those are the major drivers for the Q4 revenue ramp.

Sung Ji Nam, Analyst

Okay. Great. Thanks so much.

Vikram Jog, CFO

Sure.

Chris Linthwaite, President and CEO

Thank you.

Operator, Operator

No further phone questions, I am going to turn the call back over to Mr. Chris Linthwaite.

Chris Linthwaite, President and CEO

Thank you. We have received several questions from the online chat. Please give us a moment to process them, and we will return to you in the order they were received. One of the first questions is about the initial launch of the CyTOF XT compared to our expectations, and how the new pricing and enhanced features have influenced the sales funnel and cycle in relation to our Investor Day presentation. We are very happy with the initial response. The sales team is eager to promote and sell the product. We believe that the pricing and positioning of the Helios system as an entry-level product, along with the upsell potential to the XT, which is our latest fourth-generation platform, is very advantageous. This aligns with our goal to be part of every sales opportunity and to showcase the unique features and advantages of both systems while considering the specific needs of the customer. Consequently, we see this as increasing our chances of success. The response has also been very promising, and while it’s a bit challenging to separate this from the impact of COVID over the past year, we have noticed an uptick in our sales funnel compared to 2020. The XT launch has definitely generated new leads and opportunities, as mentioned in my earlier comments. We've received an excellent response from our target market segments in both clinical and translational areas. We have also priced our product to highlight its accessibility and lower total cost of ownership, strengthening our competitive position in the market. Regarding the mix of initial XT orders, Sung Ji provided a solid overview. I would reiterate that out of the six orders, two were from new customers. One notable order is from a European contract research organization focused on vaccine development, which excites us. There are also additional orders from existing customers looking to expand their sample processing capacity. This sets up favorably for the early adopter phase. As for the impact of the XT on our overall sales funnel, it is still too early to draw definitive conclusions. However, given we conducted very limited pre-marketing activities prior to the second-quarter launch, we are encouraged by the three systems delivered during this period and the orders received shortly after we announced the next-generation system. Potential customers may have been seeking capacity expansion and saw this as a good opportunity to adopt the fourth-generation platform. We also received a question about the compatibility of the Hyperion imaging platform with the XT platform. To clarify, these systems are separate; the Hyperion is not compatible with the XT but is compatible with the CyTOF and Helios platforms. We were also asked about the performance of the Olink partnership relative to our initial expectations, specifically regarding how much of the double-digit growth projected in our microfluidics business can be attributed to this partnership versus the next-generation Biomark platform. As Vikram mentioned, we currently have minimal revenue designated for the next-generation Biomark or the sample-to-answer solution, as this will primarily be determined by our seating and partnership strategy for future applications. We're pleased with how the Olink partnership has performed. Reflecting on the models we developed a few years ago when we started this collaboration, the progress during the initial phase has surpassed our expectations. We appreciate the strengthening relationship with Olink and are excited that they are on schedule with their project timelines, particularly regarding the anticipated launch of their signature 100 product. We look forward to their public announcements regarding the adoption of that initial system. It’s worth noting that we have a significant consumables revenue stream associated with this, so our focus will not just be on the sales of signature units but also on the consumable revenue that will follow. This contributes to our positive outlook for growth in our microfluidics consumables business. Another question related to the Delta variant of COVID-19, specifically whether it creates new revenue opportunities for us. In our prepared comments, we indicated our cautious outlook on COVID testing, as the situation remains uncertain due to varying vaccination rates and national policies affecting testing. The Delta variant could indeed have a notable impact, and our technology uniquely enables mass-scale variant detection alongside standard COVID testing. Next-generation sequencing methods have limitations, such as lower processing capacity and longer turnaround times. Our testing technology may allow for simultaneous detection and identification of variants. Should there be governmental interest in such initiatives, it could significantly benefit our business, but we cannot make forecasts at this time. Thus, we have taken a conservative approach by not anticipating any impact from the Delta variant on our testing or detection methodologies. This reflects the capabilities of our technology to handle multiple sample types and variants at once. Allow me a moment to address a few more incoming questions, including a follow-up regarding the consumable streams from Olink, examining the quantitative versus qualitative aspects.

Vikram Jog, CFO

Not at this stage, Chris, if you might be to take that question. It's still early days yet. We've just launched – or Olink has just launched their Q100 signature program, which is a venue instrument. And we still have not had much experience on how that will be utilized. It's fair to say that, our expectations are strong for the future, for the full two, but it's somewhat been mature for us to give an estimate at this stage.

Chris Linthwaite, President and CEO

It feels like a question we should circle back to when we – once we hear Olink commercial we need to understand better their positioning of the end product. And then we can perhaps provide some rules of thumb or ratios to how to think about our consumable streams, including our services contract, which we will have service contracts on these instrument platforms that Fluidigm will be providing. So there'll be multiple probably quantitative things we can provide over time. But I think we just need to see what the final end market positioning is, consumables pricing, and then we can look at the ratio of our products compared to the total pull-through, they model for each of their boxes and communicate to investors. And then we can share some rules of probably a relative range of what service contracts are worth for us. I think, you'll find over time that it will be a disproportionate over time a contribution from those recurring revenue streams versus the value to us on a single instrument placement that we provide. We anticipate over time to get a multiple return – multiple, I think that's very interesting. Okay. Let's see. I think there was a good question in here that relates to the impact of the RADx grant, and how it fits into our long-term vision for the microfluidics business. I think mass cytometry, we've made a pretty strong case, I think. I think the microfluidics is – I got a lot of nuance to it. I think the simplest way to respond to this particular investor's question is the RADx grants the Department of Defense STARPA and ECHO program, they have provided a number of leverage points that serve our kind of overall long-term ambitions in the diagnostics space. To date, we've received more than $40 million of investments from those two entities. What it's enabled us to do in a very short period of time has been to dramatically expand our manufacturing capacity and upgrade our manufacturing capacity to provide three unique manufacturing lines that gives us more manufacturing flexibility and updated equipment, with no long-term obligations on how we would use that outside of the performance period, which ends in the next two months. I think even more important strategically for us. So that basically takes capacity and capacity investment as a concern off the table for us, which is really exciting. The second is the new product development. The funding that has helped enable not only contribute to a portion of our next-generation Biomark platform development. It's also helped us with the sample-to-answer program and given us support for those initial applications that, it may be used for and given us a subsidy for – not a true subsidy, but to give us investment dollars to parlay into this platform the same product, the same configuration can be used for many different applications outside of infectious disease or effective and COVID-based testing or Delta variant testing or any other version. And the final, which is maybe settled incredibly important has been the support with the FDA in our regulatory filings and to give us – to get our technology and to introduce into the FDA in this form factor, which is pretty foundational for what we believe will be a longer-term transition to a more conventional 510(k) approach to regulating these diagnostic tests and diagnostic platforms. So we're again, incredibly grateful for it. It continues to give us a pipeline of new demand or interest that comes from the government. And so we see many different elements of this strategy that will transcend the outbreak of pandemic response itself. Let's see. Excuse just a second. So I think with that, we have approached the end of the time, and I think we've – all of the questions that have been queued up hit upon Teams, we've already covered to date. So with that, I want to thank all of you for attending our Q2 2021 call. Thank you, and have a good day.

Operator, Operator

Thank you, sir. This concludes today's conference call. You may all disconnect.