Nautilus Biotechnology, Inc. Q1 FY2023 Earnings Call

Thank you. Earlier today, Nautilus released financial results for the quarter ended March 31, 2023. 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; and Anna Mowry, Chief Financial Officer. Nautilus Co-Founder and Chief Scientist, Parag Mallick, will be joining us for Q&A. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of 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 entitled '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 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, May 2, 2023. With that, I'll turn the call over to Sujal.

Thanks, Carrie. Good morning and thank you to everyone for joining us today. On this call, we'll share our results for the first quarter and provide an update on recent activities. Since our call in February, we've made steady progress towards many of our key scientific and engineering objectives. That progress is the result of the outstanding work being done by our talented and dedicated teams in San Carlos, Seattle and San Diego. Every member of the Nautilus team understands that our long-term goal is to provide ubiquitous access to the proteome to every lab, researcher, and clinician around the world. We continue to see this as our long-term purpose while recognizing the many intermediate benefits that will accrue to biological research and healthcare as we move towards that ultimate goal. We continue to believe the reach and impact of Nautilus' innovation will be very significant. Recent estimates are that the current annual proteomics market is approximately $27 billion and growing at a 15% CAGR. While this near-term opportunity is an immediate and exciting area for us to focus, we believe that easy-to-use high-throughput platforms that match the scale of the proteome like Nautilus represent a type of long-term catalyst that holds the potential to expand this market beyond what is currently envisioned. We've designed a Nautilus Proteome Analysis Platform to, among other things, dramatically accelerate target identification and drug development. Using it, we expect researchers will ultimately be able to quantify proteomes for any samples they wish. Armed with that fundamentally new insight, our platform aims to make it easier for those researchers to discover how disease processes impact our bodies and to create drugs that target the molecular underpinnings of each disease. We continue to see a broad array of potential users for our platform, from researchers in biopharma and academic institutions to clinical practitioners, we believe our instrument will fit the needs of a wide range of proteomics users. Among these groups, the common thread will be the need to dig deeper and more quickly into proteins and proteoforms of interest. We believe that Nautilus will enable them to develop more effective therapies to build more precise diagnostics, and eventually to pick the best therapy for a particular patient. Over the past year, progress has been made in development activities surrounding each of the core components of the platform, including the core reagents, sample preparation methodologies, affinity reagent probes, chips, flow cells, the instrument and software. These activities include hardening our standard operating procedures and improving the scale, quality and performance, while also working to define clear specifications for each component of our platform. Additionally, progress has been made in advancing our integrated assay towards our product targets. In Q1, we made specific progress on several fronts, including advances in our reagent development, qualification and manufacturing pipelines. This effort not only directly supports our ability to routinely perform experiments involving many dozens of cycles and reagents, but also moved us closer to meeting our product specifications. Improving the stability, reproducibility and performance of our integrated assay across an increasing number of cycles and reagents, as we push towards larger scale experiments. And finally, advances in our commercial instruments with a focus on integrating the hardware and software components of the platform. We also made good progress on actively identifying, developing and qualifying multiple sources, both internal and external, for key reagent production and instrument assembly capabilities as we build towards and prepare for full commercial availability. And building on the near doubling of our patent portfolio in 2022, we added 5 new patent applications in Q1, and were granted 4 new U.S. patents, raising our total to 12 granted U.S. patents. Our IP strategy will remain global and reach as we seek protection in the U.S. and in foreign markets where we expect to commercialize our platform. On our last call, we shared our excitement for our First Access Challenge, a contest designed to enable researchers from a broad spectrum of disciplines to uncover new biological insights and explore new areas of the proteome at massive scale. The response from researchers across the globe to the First Access Challenge was incredibly rewarding. It unlocks the type of creativity we hope to see when we offered them the chance to apply Nautilus' novel platform to ask and answer important biological questions. Research groups from a dozen countries across North America, Europe and Asia submitted grant-like applications to participate. In reviewing the submissions, it was clear that each of them understands how important single-molecule intact protein analysis and the resulting sensitivity and dynamic range that our platform is designed to deliver can be to their explorations of the proteome. The applications cover a wide variety of research areas including oncology, neuroscience, kidney disease and inflammation across human tissues, cell lysates, blood, serum and cerebrospinal fluid. They also included some of the top research laboratories and pioneers in our field, which is an encouraging indication that the broader proteomic community is excited about what we are building and understands the potential of our platform. The winners announced at the U.S. HUPO Conference in early March and whose samples will be run as part of our Early Access program, represent a diverse set of investigators spanning a wide range of exciting areas of the study across aging, inflammatory disorders and cancer. Doctors Joanna Bons and Jordan Burton, postdoctoral research scientists in the Schilling Lab at the Buck Institute for Research on Aging, will use our platform to investigate total proteome remodeling in acute kidney injuries of ischemic-reperfusion injury and cisplatin-induced AKI to identify potential biomarkers or therapeutic targets. Dr. Samuel Payne, Associate Professor at Brigham Young University will apply our platform to analyze a 3-dimensional lung alveolar organoid model to better understand the systems biology of organoids and potential applications to the pathology of human diseases. And Dr. Nicholas Graham, Associate Professor at the University of Southern California will use Nautilus' platform to identify protein biomarkers of sensitivity to arginine deprivation-induced cancer cell death, aiming to enable a deeper understanding of metabolic vulnerabilities in glioma, a type of aggressive primary brain tumor. We've always envisioned our platform as one of great interest to researchers across the spectrum, from small undergraduate institutions to large pharmaceutical companies. The participants in our First Access Challenge, along with existing collaborations with Genentech, Amgen, MD Anderson and TGen, are reflective of the broad set of use cases, our collaborators, partners and future customers envision for our platform. I'm pleased that we've been successful in building a balanced portfolio of relationships that reinforce our stated goal of democratizing access to high-value proteomic data. A moment ago, I mentioned that the U.S. Human Proteome Organization conducted their annual conference in early March. Nautilus had a focused and effective presence at the event designed to both educate the community about the underpinnings of our technology, and to encourage that community to reimagine what's possible in proteomics. From our fill-to-capacity hour-long lunch seminar to our poster and podium presentations, Nautilus scientists led by Parag shared insights on topics such as the theoretical foundations of our protein identification by Short-epitope Mapping methodology, commonly referred to as PrISM. Data demonstrating the beginning-to-end instantiation of PrISM, spanning from sample preparation to multi-cycle measurement to the machine learning analysis that enables the translation of those measurements into the identification of model proteins. Additionally, we introduced the rigorous strategies that we've built and are now routinely employing for estimating false discovery rates and for investigating the robustness of protein identifications. This unusual transparency among new entrants in our market was very well received by the community and underscored our commitment to building long-term trust and scientific credibility. Parag and all the Nautilites in attendance engaged in conversations with researchers, many of whom are current mass spec users excited to know more about the potential of our platform to complement their existing workflows and address their unmet needs. We see the positive attention our presence at HUPA received as a good sign for things to come with this critically important and influential buying audience. Based on what we heard at HUPA and from many other conversations in Q1, I believe more than ever that the Nautilus platform is going to spur tremendous creativity and innovation in the broader proteomics community. We're excited to get our platform into the hands of researchers and see the type of impact their work can have on biology and healthcare. As I mentioned on our last call, in 2023, we will continue to make steady progress in addressing key scientific and business milestones leading to the planned launch of our platform, instruments, reagents and software in mid-2024. A critically important part of that effort is the disciplined and efficient way in which we have, and we will continue to manage our resources to maximize Nautilus' cash runway through the planned launch and well into 2025. We're successfully balancing financial and operational efficiency with appropriate levels of investment in key areas that will enable us to drive our scientific progress forward. One area in which we are investing, without overextending is in hiring. We're excited that Nautilus' culture, mission and product value proposition continue to attract the attention of some of the best and brightest scientific minds in the proteomic space. They and others understand, as we do, that when you look across the landscape of our sector, Nautilus is a unique company on a path to revolutionize biomedical research by unlocking the full potential of the proteome. They see what we are doing and want to participate in revolutionizing biomedical research. We will continue to take full advantage of this valuable and timely opportunity to increase the strength and experience of our team across the board. For a look at our Q1 financials, let me hand the call over to Anna.

Thanks, Sujal. Total operating expenses for the first quarter of 2023 were $18.1 million, up $2.1 million compared to the first quarter of 2022, and $1.8 million above last quarter. This increase is largely driven by an uptick in the pace of hiring as we continue to invest in the development of our platform. Research and development expenses for the first quarter of 2023 were $10.9 million, compared to $9.7 million in the first quarter of 2022. General and administrative expenses were $7.2 million in the first quarter of 2023, compared to $6.4 million in the first quarter of 2022. Overall, net loss for the first quarter of 2023 was $15.0 million, compared to $15.8 million in the first quarter of 2022. Now, turning to our 2023 guidance. On our last call, we stated that we expect our overall operating expenses to be up approximately 40% from 2022 levels, ahead of a more meaningful ramp in 2024, along with our commercial launch. As we've consistently said, we are continuing to invest in the business but in a conservative intentional manner. That will continue over the remaining quarters of 2023. Finally, turning to our balance sheet. We ended the quarter with approximately $302 million in cash, cash equivalents and investments, compared to $314 million at the end of last year. While we expect that our cash burn will 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'll turn it back to Sujal.

Thanks, Anna. We're excited about what lies ahead for Nautilus and the difference our platform aims to make in biological science and healthcare. Our mission to positively impact the health and lives of people around the world remains our guiding light. I'm grateful to our investors, our strategic partners, our research collaborators and our team for joining us on this journey to transform proteomics and empower the scientific community in ways never before thought possible. We continue to make solid and steady progress and look forward to updating all of you along the way as we move towards commercialization of our platform and beyond. With that, I'll turn the call back to the operator.

Hi, this is Yuko on for Tejas. Thank you, Sujal, for providing color around the winning projects for the First Access Challenge. How do you anticipate each of these projects will specifically highlight and demonstrate the differentiated capabilities in the Nautilus platform?

Yes. Maybe I'll actually pass that question over to Parag, who has got a lot of detail on our First Access Challenge.

Yuko, it's a great question. I think, when we were looking at the projects, we were very excited by the range of questions being asked across different medical domains. We are also excited by the different types of materials being studied. So as Sujal mentioned, one of the projects is using a really unique and interesting organoid model and that particular project really helps demonstrate both the diversity of types of materials that we'll be able to work with, the sensitivity of the platform as well as the dynamic range to look at important questions. One of the other areas that we're excited about is the incorporation of multiple different types of data together with Nautilus, bringing the proteomics component to other multi-omic multi-data studies. And so, when one looks at the study, for instance, from Nick Graham's lab, looking very specifically at metabolism, it's a really interesting opportunity to bring together proteomics and metabolomics data. Some of the other key aspects of the platform that we're seeing stretched are really the breadth and scale to be able to look more deeply, more widely, and more reproducibly; those are really key aspects that all of the projects are going to leverage.

Great. That was really helpful color. And then as a separate follow-up, I wanted to follow up with a high-level question. The clinical market is clearly a very large opportunity for proteomics. Where do you think that current biology is in supporting multi-analyte proteomics? And do you think the clinical market is receptive to that kind of thinking? Or do you think that more education will be needed to get folks fully onboard? And finally, what attributes of the Next-Gen Proteomics platform do you think are the most important in driving that penetration?

Yes. Maybe, I'll tackle this one and then see if Parag has any comments to add. This is Sujal. So I think that if you look at the importance of proteomics today across the biomedical research spectrum, talking about translational research leading to those clinical applications, imagine in pharmaceutical development, 90% of our proteo or biomarkers that drugs target are proteins. Even with this massive revolution over the last decade in liquid biopsy, most diagnostics are still protein targeting diagnostics. And so, as we talk to customers or potential customers who are building diagnostics, we hear a tremendous amount of interest in being able to have a much more complete picture of the proteome. And that much more complete picture is not just, 'Hey, I have a technology that can see all of the proteins in the sample, which I can't see today, but also that I have the dynamic range and the sensitivity to dig deeply into samples like blood serum and pick out rare biomarkers that are in those samples in very, very small quantities.' And so, we think that supporting the translational research that builds these diagnostics and gets them into the clinics is really an important part of our strategy and will be a big business driver. Now recall, our strategy is to play in the research-only market for at least the medium-term here. And so, what that means is we will go and sell our platform and consumables to a company developing diagnostics; they'll make a breakthrough, they'll realize that this combination of a genomic marker and these four protein biomarkers is indicative of a therapeutic response, and we'll participate in the discovery, but then let them build a high-throughput assay that goes and takes that test into the clinic, where it gives you good for patients. Now in the longer term, certainly, some of these combinations of biomarkers may become so complicated and we expect it will become so complicated that really you need an instrument like Nautilus' in order to be able to do that analysis. And we would view that as the type of catalyst that would make us invest in the regulatory path to create a clinical offering. But really, that's more of a five to seven years after launch type position.

Great, that was super helpful. And one more. Could you also provide a progress update towards the internal development of the multi-affinity probes with commercialization expected in mid-'24?

Yes. Parag, do you want to take this one?

Sure. I think we've been making really fantastic progress. As we noted in previous calls, we've built a very substantial team and program around multi-affinity probe development. A key aspect of that was increasing the scale by which we could make them and increasing the quality. We've also been working with outsourcing partners in that area for producing the multi-affinity probes as well to further accelerate our pipeline. So we're really pleased with the progress of those efforts and the team that has done just a remarkable job of building a great pipeline.

Please stand by for our next question. The next question comes from Daniel Brennan with Cowen.

Could you provide more details on the Early Access program? Specifically, what is the expected number of customers that we should anticipate joining? Additionally, from your current perspective, what are the main deliverables that need to be completed before the Early Access launch? I'm sure there are numerous tasks in progress, but are there a few critical improvements that must be addressed to ensure a timely launch?

Yes. This is Sujal, and I'll take this question. Dan, welcome to your first Nautilus earnings call. The Early Access program is the initial opportunity for customers to test our technology. It’s a service we will offer before the commercial launch of our instrument. We anticipate these will be structured engagements, possibly involving 12 to 48 samples. The first customers in the Early Access program will include our existing collaborations and the winners of our First Access Challenge. This represents a small group of potential customers, and while I don't have a specific number, you can expect around a dozen to be our initial focus as we roll out the Early Access program. This initiative isn't just about generating some revenue and assessing performance; it is crucial for demonstrating the capability of this innovative platform to the scientific community and for driving preorders through a significantly enhanced data center compared to others available. Those are the primary objectives of the program. We have only stated previously that we expect to launch our commercial platform in mid-2024 and have not given any updates regarding the start of the Early Access program. However, once we successfully identify a meaningful number of proteins with single-molecule sensitivity and can repeat this reliably with strong cohesion of variants, that will signal the start of the Early Access program. We will definitely keep investors informed about this, and we encourage them to look for announcements related to the scientific community, as this will likely be a key indicator of our progress into 2024 and beyond.

Got it, great. And then maybe the second one, just when you do ultimately launch in 2024, have you shared like the scale of that launch, presumably, it's going to be pretty gated, given the uniqueness of the platform and you're working with a lot of different factors to kind of get this commercial product up and running. I'm just kind of wondering when that starts, I can see what consensus numbers are roughly like $20 million in '24, call it, high-70s in '25. Just wondering, if you could give any color about the type of kind of pace of that full commercial launch?

Yes, that’s a good question, Daniel. We haven't provided any specific guidance regarding the revenue run rate or the anticipated launch rate. Additionally, we haven't given any insights on the consensus estimates you've mentioned. What I can say is that we invest significant time analyzing the launches of new companies in the pure proteomics field, as well as examining the broader diagnostics and tools sector. Our strategy focuses on accelerating our revenue run rate. First, we have an Early Access program ahead of our commercial launch, which aims to showcase the unique and valuable data produced by our platform to the scientific community. Many recent launches by other companies in the diagnostics and tools space lack such robust programs. For instance, a couple of examples had only one paper's worth of data or none at all available before launch. We believe our Early Access program is crucial for accelerating revenue once we move to commercialization. Secondly, our instrument deal is approximately $1 million, meaning it requires fewer salespeople and shorter sales cycles to start generating meaningful revenue. Moreover, unlike many other platforms, we already have a budget pool to target, specifically focused on the proteomic solutions that customers currently possess. Through discussions with hundreds of potential customers, we are confident that the specifications of our offering are highly desirable and distinctly different from existing products in the market. Thus, we believe this product-market fit will contribute to a successful launch once we complete the platform's development.

Maybe Sujal, just to start on your comments in the prepared remarks about looking for additional suppliers on the reagent and instrument assembly capabilities. Could you just give a little bit more color on kind of where you stand with the supplier base? And how comfortable you are in terms of the potential risk there in terms of sole supplier versus multi-suppliers or dual suppliers?

Yes, that's a good question, Matt, and a nice comparison this morning. Let me break this down into two parts: first on the instrument side and then the consumable side, which will be divided into chip and flow cell, and the actual reagent. On the instrument side, we have partnered with a well-established and large manufacturer who will serve as our contract manufacturer, aiding us in the actual instrument builds and providing significant scale capability. We have a strong relationship with this partner and feel confident about their manufacturing capabilities and quality. Regarding the instrument, as mentioned in previous earnings calls, there are not many sole-source issues. There are a few components that might not be rare but would take time to qualify as replacements, so we maintain some stock. However, these components are not significant financially as all our revenue streams have high gross margins. From this perspective, we are comfortable with our strategy and do not have much additional supplier work in place. Now, looking at consumables, specifically the chip and flow cell segment, we have selected our suppliers and made good progress in establishing quality metrics and scaling up. We're making changes to our assemblies as we finalize them, but everything looks positive there. As for reagents, we mentioned in our prepared remarks that we continue to work with suppliers to scale up. Many of these reagents, like the bulk reagents in our instrument kit, are standard and easy to obtain. This allows us to have multiple partners to outsource the creation of those reagents; some partnerships are already in place, and we’re adding others. There is minimal risk in this area. On the other hand, creating our antibody is different. We have an internal manufacturing organization capable of building antibodies and already have more than one external partner who can produce them. However, we need to scale these partners up to manufacturing levels, adhering to manufacturing SOPs and quality standards while also considering new partners. I hope this gives you a clearer picture of our current standing in these areas. Our goal for consumables is to develop a strong strategy akin to our approach for instruments, chips, and flow cells.

Got it. That's really helpful color. And then just as you think about customer exposure when we get closer to launch, just given the sort of the depth and breadth of the technology, it would seem it would lend itself to sort of unbiased maybe academic-type work. But I know you have obviously a partnership with Genentech and others, and you've talked a little bit about the biopharma opportunity and clinical opportunity. But could you just maybe help us understand a little bit sort of early adopters? Do you think that, that will, similar to other types of tools companies, that they have started out to start in the academic arena and then expand outward more towards biopharma translational and clinical? Do you think, do you expect that cadence to be kind of similar to what others have done in the past?

So, I've touched on this a little bit in the past. And I think that there are a few lessons to be learned from history here in terms of where new entrants start. I think that if you look at the companies that start in academic and research, and nonprofit types of research organizations, they fall into two camps usually. If you take a lesson from the NGS world, when Illumina brought the GA, and GA II and GA IIx to market in '07, '08, the early customers were all academic and nonprofit research. The genomics market really didn't exist. Nobody knew what to deal with a complete human genome. And so those applications started in academic research, and they were slow to move up to biopharma. And if you think about, well, when does that happen in today's world? In today's world, companies that start academic and research are those that usually have point solutions for a small improvement somewhere in the workflow, as opposed to a platform that's a fundamental game changer for the customer. In the conversations we've had with biopharma, the type of dynamic range and sensitivity, combined with complete coverage of the proteome provides a game-changing data set. And with that, we see a ton of interest from biopharma predominantly with academic and research as kind of the supporting market. And so, I think that our sales will be pretty consistent across both of those areas pretty quickly after we launch. And so, I don't think we'll have that pronounced effect towards all academic and research and then we have to expand them from there.

Got it. And just one more for Anna. Just, I know you provided before about the OpEx increase '23 over '22. If I could ask you to maybe think about as we get closer to launch. Is a lot of that increase in OpEx this year in preparation for launch? And so, sort of the OpEx increase that we might see in '24 is either similar or maybe even more modest given that you're probably doing some upfront spending to prepare for that? I'm just trying to get a sense for that cash runway that you say that’s well into 2025, but just sort of on a post-launch basis, how the balance sheet would look like in order for you to kind of take advantage of sort of the early traction that you might have in '24 and having the cash available to do that?

Matt, thank you for your questions. We remain highly focused on development. This year, most of our expenses are directed towards research and development activities. Toward the end of the year, we will engage in some targeted market development efforts. However, our commercial growth is expected to be more evident in our operating expenses as we move into 2024. We ended this quarter with a cash balance of $302 million, and last quarter we used $12 million. We have a strong financial runway, which leads us to believe we have sufficient funds extending into 2025, especially as we prepare for commercialization. This suggests that expense growth in 2024 will be significant and likely comparable to or higher than what we experienced in 2023.

I show no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.