Nautilus Biotechnology, Inc. Q3 FY2022 Earnings Call

Thank you. Earlier today, Nautilus released its financial results for the quarter ended September 30, 2022. If you haven't received this news release or if you'd like to be added to the company's distribution list, please send an e-mail to investorrelations@nautilus.bio. Joining me today from Nautilus are Sujal Patel, Co-Founder and CEO; Parag Mallick, Co-Founder and Chief Scientist; and Anna Mowry, Chief Financial Officer. Before we begin, I would like to remind you that management will make statements today during this call that are forward looking within the meaning of the federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section titled Forward-Looking Statements in the press release of Nautilus issued today. Except as required by law, Nautilus disclaims any intention or obligation to update or revise any financial or product pipeline projections or other forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast, November 1, 2022. With that, I'll turn the call over to Sujal.

Thanks, Alex. Good morning, and thank you to everyone for joining us today. On this call, we'll share our results for the third quarter of 2022 and provide some insight on the expected value of our platform, our progress towards commercialization, and a quick observation on the market landscape. But first, I want to thank our growing teams in the Bay Area and Seattle for their focus on short-term development milestones and longer-term commercialization goals. Their efforts continue to yield results that get us ever closer to our ultimate purpose of improving the lives and health of people around the world. Our entire team is fully aligned and committed to realizing this important objective. I'm very excited about the emerging opportunity I see for proteomics, and I'm pleased with the progress we're making as a business. We envision powerful research uses for our platform and continue to receive enthusiastic feedback from researchers around the world with whom we've engaged. They consistently tell us their desire to explore the proteome more deeply and their frustration with what's available today. They recognize the inherent limitations of both traditional analysis methods and of emerging affinity-based and peptide sequencing methods. They also understand how important single-molecule intact protein analysis and the resulting sensitivity and dynamic range that our platform is designed to deliver will be to their explorations of the proteome. We and they foresee a day when an ability to explore the entire proteome more thoroughly will yield fundamental advances in basic biological research, enabling researchers to make a substantial and long-desired impact on the efficiency and cost-effectiveness of therapeutic development. Similarly, we believe the next generation of diagnostics will be driven by our ability to measure a patient's proteome with the comprehensiveness that's accessible today in genomics. By designing technologies that measure how our proteins are functioning at any point in time, for example, in healthy versus disease states, physicians, researchers, and epidemiologists will be able to monitor populations for a wide range of conditions and open the gates to methods of precision medicine long dreamed of. Imagine if we could spot a potential viral invader traveling through our bodies and watch ourselves interact, change, and shift during times of health and sickness. Through proteomic tests that measure a patient's current state against a previously measured baseline, approaches to personalized and predictive medicine for cancer, heart disease, Alzheimer's disease, and other common illnesses could be made possible. When richer proteomic data begins to drive deeper research insights, we will see a significant increase in patient well-being and health. And as I said earlier, at the end of the day, that's why Nautilus exists in the first place. Before I turn the call over to Parag for an update on our development progress, I want to briefly share that, in my view, we are in the very early stages of the journey to fully maximize the potential of the proteome to impact human health. It's the decades it took for the genomics market to mature, is any indication, there remains much value to be created in the market that will feature multiple complementary participants. In Nautilus, we remain heads down methodically innovating what we believe will be a game-changing platform that will make a meaningful difference for researchers and patients alike in the years and decades to come. With that said, I'll now turn the call over to Parag for an update on our development progress in Q3.

Thanks, Sujal. We continue to make progress against our core scientific and engineering goals in Q3. Our major focus has been increasing experimental scale while continuing to advance the quality and customer readiness of our consumables. The significant effort being put in today to develop a strong suite of analytical methods and processes is critical to ensuring a good customer experience in the future. The leadership of our new vice president of Reagent & Platform Development, Ken Kuhn, in particular, has substantially accelerated the development of our reagent consumables. This push in reagent scale and quality has been tremendously valuable in supporting our ability to routinely perform experiments involving many dozens of cyclable and reagents. Experiments of this scale enable us to demonstrate the instantiation of our prism methodology. Concurrent with scaling our experimental capacity and consumable commercial readiness, we continue to make progress on advancing our commercial instruments, with a particular focus on integrating the hardware and software components of the platform. We are committed to making a system that is robust and easy to use from the perspective of both the instrument UI and the software UI. We expect to provide additional deeper detail on the instrument, its componentry, assembly, and quality assurance initiatives as we report to you in future quarters. Additionally, we continue to successfully transition to a manufacturing posture across all elements of the platform as we build towards full commercial availability. In that regard, I want to specifically thank our SVP of Operations, Mary Godwin, who has built a team of experienced and effective professionals who are leading the charge in ensuring that our systems and consumables are manufactured at scale, in the highest-quality, most reliable and cost-effective way possible. I know I speak for Sujal when I thank Mary and her team for their outstanding efforts. In Q3, we continued to reach out to the broader proteomics community, with the objective of sharing the scientific underpinnings of our platform. In addition to serving as a clear demonstration of our cultural commitment to transparency and openness, the conversations frequently led to suggestions of exciting and creative applications of our platform that we have not previously envisioned. One such recent conversation with a well-known proteomics KOL in both the U.S. and Europe began with a reflection that COVID has spurred increased interest among the biomedical community on the immune system and the dynamics of immune responses. That observation led to a suggestion that the Nautilus platform might be particularly valuable in setting immune system activation and surveillance. These and similar anecdotes reinforce my belief that the Nautilus platform is going to spur tremendous creativity and innovation in the broader proteomics community. With that, I'll turn the call back to Sujal.

Thanks, Parag. We remain singularly focused on driving our scientific and development efforts forward in the most efficient, most predictable way as possible. As I mentioned last quarter, we are not currently focused on creating short-term revenue opportunities. By making the choice to focus on development at this time, we believe we are positioning ourselves to ultimately make the maximum possible impact on the marketplace and on biological science. We continue to expect to launch our proteome analysis platform, instrument, consumables, and software in the middle of 2024. At Nautilus, we're focused on building a world-class patent portfolio that aims to protect technologies that we believe are fundamental to our platform and, in many cases, fundamental to advancing the field of proteomics. For example, our patents and patent applications are directed to our platform, assay and protein identification processes and methods; our proprietary probes; our proteome scale protein arrays, including our proprietary chemistry and biochemistry for building those arrays; our sample preparation methods; key components of our instruments and consumables; and novel biometrics and processes for applying proteome-level data to critical research questions. Our IP strategy is global in reach, as we seek protection in the U.S. and in foreign markets where we expect to commercialize our platform. Our current portfolio includes over 40 pending patent families filed in the U.S. and abroad, and this reflects a near doubling over the past year. As we lead the business, my management team and I are acutely aware of the macroeconomic conditions in which we currently exist and remain committed to ensuring that we strike the right balance of extending our runway while investing in future innovation and commercialization capabilities. We are confident in our ability to do so and are actively executing on our plan that extends our cash well into 2025. For more on that, let me hand the call over to Anna for a look at our Q3 financials.

Thanks, Sujal. I will start my comments by sharing our financial results for the quarter. Total operating expenses for the third quarter of 2022 were $15.8 million compared to $14.6 million in the third quarter of last year. Overall, that translates to a growth in spending of approximately 9% year-over-year. Research and development expenses for the third quarter of 2022 were $9.6 million compared to $8.2 million in the third quarter of last year. That increase of approximately 16% was primarily driven by growth in personnel costs supporting the continued development of our platform. General and administrative expenses for the third quarter of 2022 were $6.2 million compared to $6.3 million in the third quarter of last year. That decrease of approximately 1% was a result of increasing our operating efficiency as we enter our second year as a public company. Overall, net loss for the third quarter of 2022 was $14.1 million compared to $14.5 million in the third quarter of last year. To recap, our total operating expenses for this quarter were only modestly higher compared to the same quarter last year as a result of our focus on expense management. At the same time, we've grown our headcount and related personnel costs by approximately 30% on a year-over-year basis. Those headcount additions at all levels of the organization are fueling the next stages of development. We previously communicated that we expected second-half expenses to increase over first-half levels as a result of continued hiring and from scaling our development pipelines. While we still expect spending levels to increase in Q4 and beyond, our total operating expenses for 2022 will be below the levels we previously anticipated. We are confident that these increases will be measured and additive to our progress towards commercialization. It is our view that doing the hard work to maximize every dollar today makes us a better company in the long run and preserves our ability to invest in the commercial expansion to come. We ended the quarter with approximately $324 million in cash, cash equivalents, and investments, which represents a trailing 12 months cash burn of approximately $50 million. While that cash burn will certainly increase going forward, we continue to anticipate our cash runway extending well into 2025. We believe this puts us in a strong position to focus on our scientific progress and to deliver the type of platform that we believe will enable our customers to achieve new levels of proteomic insight. With that, I will turn it back to Sujal.

Thanks, Anna. At Nautilus, we're a team on a mission, a mission to lead a proteomics revolution by providing ubiquitous access to the proteome. We're committed to building a platform that sets a new gold standard for single-molecule protein analysis and in doing so makes a meaningful difference in the health and lives of millions around the world. We're happy to have you along on our journey and look forward to updating you every step along the way. With that, I'll turn the call back to the operator.

Our first question comes from Tejas Savant with Morgan Stanley. Your line is open.

Hello, this is Yugal on the call for Tejas. Thank you for taking our questions. Amidst the challenging macro, could you elaborate on the action plan to ensure supply chain readiness targeting commercial launch in mid-2024? And then on inflation, are you seeing rising costs of key inputs for your systems?

Yes, why don't I take these since it's a mix of financials and business here? Good morning Yugal, this is Sujal. So the first part of your question really relates to supply chain. As you're acutely aware, looking at companies throughout your coverage universe, supply chain issues are just part of how you have to deal with in operating businesses today, and for us, those have implications both on the hardware side of things with respect to parts that go into our instrument, and in addition to that, it has an impact on our experimental throughput because of the lead times and supply constraints of various reagents and inputs into our experiments. What I'd say is we've got a really mature team who has seen supply constraints and operated through various markets in the past. On the hardware side of things, we have supplies of the major long-lead-time parts where we're having issues. We're managing supply issues day-to-day, and on the reagent side of things, we're doing the same. We're planning ahead, moving to get things ordered earlier, and we're mitigating as we can. On the inflation side of things, certainly we are seeing the impact of inflation across a wide range of supplies that we use. I would say there isn't any material impact that's unmanageable, but it's certainly for us a watch list item both in terms of things that we procure and the impact it has on our workforce and the changing dynamics of our workforce.

Got it, that was super helpful. And then just a separate follow-up, during the opening remarks, you mentioned the platform's value and generating population-level proteomic data. How much sample volume will be required per run? And would this technology be suited for use with biobank samples?

I'll take that one. This is Parag Mallick. To answer your question: We are anticipating on the low end of high nanogram to low microgram quantities of protein required in the platform, which makes it readily amenable to biobank samples.

Okay, thank you so much.

One moment for our next question, our next question comes from Max Masucci with Cowen. Your line is open.

Hi, good morning, thanks for taking the questions. So just a bigger picture question and also understanding that timing is still fluid, but just as we turn our sights to 2023, are there any milestones or checkpoints that we should be keeping on our radar? How should we be thinking about, I guess, the balance of product development updates versus data readouts and whatnot throughout the year?

Good morning, Max, and maybe this is Sujal. I'll take this question here. When you think about 2023, to frame that in context, we have previously indicated that we intend to fully launch our platform and begin moving our business model largely to selling instruments, consumables, and software in the middle of 2024. We're on track to launch the product in the middle of 2024. With that, 2023, plus those two quarters of 2024, a total of six quarters, what you should be looking for is us to be submitting for publication papers that describe more of our decoding approach and the quantity of proteins that we're able to decode, how we're able to decode proteins, leveraging the unique method that we use. You should be looking for us to disclose more about our pricing, show off our instrumentation, and as we start moving through that year and we start getting deeper into the year, really the launch of the early access program, which enables customers to try out our platform as a service before we are ready for that full commercial launch. As you look at 2023, there are a number of major meetings and shows where we have opportunities to showcase our technology and our science with papers and posters and talks. Those are the sorts of milestones that I think you should look for in 2023 that are indicative that we're on track for that middle of 2024 launch.

That's great. And Sujal, I think you participated in a panel at a station proteomics conference recently. So I know we're still really in early days here, but just sort of at a high level, it would be great to hear how you're thinking about the opportunity to complement the Nautilus platform alongside spatial and vice versa?

Yes, it's a great question, Max. We think a lot about this. When I talk to customers, they describe a range of biological insight that they would like to get from proteomic analysis platforms of the future. First and foremost, the question that they want to answer is what proteins are in my sample and in what quantities, and they want to do that with exquisite sensitivity and dynamic range because there are many protein molecules inside of a cell, inside of blood serum. Comprehensive measurement requires sensitivity and a huge dynamic range, and that is the hallmark of our platform's design. After you've answered that first question, customers have an increasing range of questions. What splice forms were those proteins? How are those proteins modified? Those modifications are important to understanding the function of those proteins inside of a cell. After you understand the modifications, customers want to know which cell did those proteins come from. Can you do single-cell proteomics? After that, the next question is spatial. For us, on this particular line of inquiry, there's a long roadmap of innovation that continually drives customers' understanding of biology deeper. We think that creates a huge long-term opportunity for us.

Great. And just on a similar note, I guess I could ask the question a bit differently, more about sort of how you view the complementary insights that your platform could unlock alongside NGS-based platforms, particularly given some of the recent announcements from Illumina. And just if you think about those two opportunities, should we view that as a growth opportunity that's still a bit further down the road or are there any collaborations that you'd be interested in pursuing, whether it's in NGS or spatial?

I'll take that, thanks, Max. This is Parag. I think what we've heard for many years is that people are interested in how biology works. There are many levels of regulation that drive that from the genomic to the transcriptome, proteomic, and metabolomic. One of our key theses is to make it as easy as possible for our customers to be able to integrate all of that information to get the most complete view of the biology. I'll point out that it's not entirely clear that the genome, transcriptome, and proteome should correlate—the time dynamics are very different. The dynamic ranges are also different. There’s a tremendous amount of interesting and important biology between the layers. We're really excited to be able to support those studies to find where the key points intersect, whether at the transition from the transcriptome to the proteome or in proteome degradation or movement from different parts of the cell.

Okay, great. Well, I appreciate all the color. I know it's a bit of an abstract question, so thanks.

Thanks, Max.

One moment for our next question, our next question comes from Matt Sykes from Goldman Sachs. Your line is open.

Hi guys, this is Dave on for Matt. So it sounds like you have been growing the team effectively, making progress, and being effective at doing that in a reasonable cost structure. Could you tell us more about what you're seeing in the labor market for the areas you're hiring for?

Dave, I'll take that one. Yes, we've been able to make some really great hires, as you can see in some of the senior leadership additions we've brought on with Win and Sherry earlier in the year and Eric and Ken more recently. As I said in the call, we've grown our headcount 30% year-over-year, and that talent is really additive to what we've been able to do as a business. And to your point, we've done that while not increasing our costs very much. The way we've done that is by bringing down the costs of our non-personnel-related spending. I'd like to just take a second to reiterate some of the points made earlier on inflation and what we've been able to do with our headcount. We've managed to bring down our non-personnel-related spending by repurposing headcount and also reducing the costs of our raw materials, increasing our production yields, and developing cheaper experimental methods. All these initiatives have created room for us to grow the team while also transforming how we operate as a business without significantly growing the overall costs of operations on a quarterly basis.

And Dave, let me take the other half of your question. You asked about the labor market specifically. What I would say is that we've seen a little bit of loosening in how tight the market is. We’re seeing some opportunities with larger companies that are reducing staff. But I'd say more importantly, as we continue to advance our science and present at conferences, there's more of an inflow of great, high-quality, super experienced talent coming our way. They’re coming to us telling us that they want to work at Nautilus and they see the future potential of what we're doing, and I'd say that’s the even bigger impact.

That's fantastic. And in terms of publications or events we could look forward to, anything in particular you could call out on the horizon?

Yes, so the two biggest events and meetings for us that are coming up that I would put on your radar: in December is the World HUPO Meeting, HUPO stands for the Human Proteome Organization. At that meeting, we will have a number of posters and several opportunities to showcase our science. Additionally, our collaborator from MD Anderson will be joining us at World HUPO in December. Just six months after that is the U.S. version of HUPO in March. I think that's another great opportunity for us to continue to highlight the improvements in our science, the maturity of our platform, and to talk about our path to decoding the proteome. Those are the two events I’d put on your radar.

Fantastic, thanks, guys.

One moment for our next question, our next question comes from Brandon Couillard with Jefferies. Your line is open.

Hi, this is Matt on for Brandon. Thanks for taking the question. You noted the progress you're making on advancing the commercial instrument and the transition over to a manufacturing posture, but also some of the enthusiastic feedback you're getting from potential customers? So Sujal, I'd just be curious to think about how you're balancing the two of those as you look to lock in the blueprint of the instrument to move forward to commercialization in 2024, both incorporating some of their thoughtful feedback while also advancing to that manufacturing posture?

Yes, that's a good question. I think the balance for us is fairly simple. Customer feedback continues to inform how we develop the science and the assay, helping us prioritize areas of biological insights that are important to our customers. It also assists in identifying the most interesting and timely applications for our technology that are likely to become the first killer applications when we get to market fully in 2024. At this point, the instrument capabilities and requirements are well-settled. The final instrument we'll be shipping in the middle of 2024 is moving through various levels of development, qualification, and certification, and this process does not involve much customer input; it's a well-understood process and it’s progressing nicely.

Super, thanks. And then another topic that's come up a lot is the balance of investment in development but also expense management. I'd be curious, as we look out to 2023 and beyond, are there competitive forces that would make you actually want to accelerate investments in any areas where you see potential opportunity?

Yes, Matt, I'd be a fool to say 'never', because never is never the case. But that being said, I will tell you I was the CEO of a public company during the last recession, the financial crisis; we hunkered down, refined our operating expenses, and transformed our business, coming out much stronger. That's our posture here as we head into what is undoubtedly going to be a recession. While I won’t say there won’t be any opportunity for us to accelerate, we are approaching this very tightly, but not so much that we're constricting development; instead, we're being very intelligent and rigorous about operating expenses, improving yields, and quality of our reagents. The benefits of that will be felt far beyond the recession and the end of the recession in our commercialization.

Great, thank you.

I'm not showing any further questions at this time. And this also does conclude today's conference. You may now disconnect and have a wonderful day.