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NanoString Q3 Revenues in Line With Preannouncement; Shares Drop on Merck CDx Setback

NEW YORK (GenomeWeb) – NanoString Technologies reported after the close of the market today that its third quarter revenues were up 13 percent year over year to $27.0 million from $23.9 million in Q3 2016.

In a preliminary report last month, the company estimated that it would end up with between $25.9 million and $26.9 million in total revenues for the third quarter of 2017, including product and service revenue of approximately $16.9 million.

The firm confirmed that it took in $16.9 million in products and service revenue during the quarter, a 12 percent decline from Q3 2016 and a significant shortfall from its initial guidance of $19.5 million to $21.5 million.

Though the results were largely in line with the preannouncement, shares of NanoString tumbled in Friday trade after the firm announced a setback in its companion diagnostic collaboration with Merck.

NanoString President and CEO Brad Gray had attributed the discrepancy to softness in the company's instrument and consumable sales over the quarter when the firm reported its preliminary estimates. In line with that, the company reported only $10.7 million in consumables revenue, which represents a seven percent year-over-year drop.

Gray said in a call discussing the firm's earnings that NanoString's academic and government business was the primary source for weakness in both instruments and consumables.

On the instrument side, Gray cited reduced and delayed sales of its Sprint instrument— a lower-cost, lower-complexity system designed for individual researchers. However, he said that NanoString believes it can turn this around with a maturing of its newly realigned sales force, as well as continued development of new consumables, both in and beyond oncology, that will appeal to Sprint customers.

He also cited market dynamics, like the falling cost of RNA sequencing, as impacting business. Certain types of research where an nCounter custom panel would have offered significant savings in the past are now cost-competitive using sequencing.

However, Gray said, this evolution is one that NanoString has "anticipated and prepared for." He said the firm has several strategies in mind, including adjusting discount policies to make its custom offerings more attractive and increasing its focus on high-volume applications where competitive advantages are still pronounced.

Excluding the firm's Prosigna breast cancer assay, consumables revenue was $9.0 million for the third quarter of 2017, 12 percent lower than the same quarter last year. According to the firm, this was primarily due to a reduction in the consumable pull-through from NanoString's installed base of systems.  

Instrument revenue fell even more dramatically — more than 30 percent — to $4.4 million from $6.9 million in the prior year's quarter. As of September 20, 2017, the company had increased its installed base to approximately 570 nCounter analyzers from about 450 a year ago.

Revenue for the Prosigna IVD kit, meanwhile, was up nearly 50 percent at $1.7 million for the quarter.

Although Gray said that NanoString's biopharma business remains strong relative to some of the shortcomings of its sales to academic customers, the firm announced a disappointing development in its companion diagnostic collaboration with Merck, in which the two companies had been evaluating a test using NanoString's tumor inflammation signature to predict response to Keytruda (pembrolizumab.)

Gray said that Merck notified NanoString of its decision to no longer support development and commercialization of the CDx in late October. "This is obviously disappointing to our team, but we do not believe that this represents the end of our work with Merck or our development of TIF as a diagnostic," Gray said.

While products and services lagged, the firm' collaboration revenue continued an upward trend year-over-year, reaching $10.1 million compared to $4.8 in Q3 2016.

NanoString's R&D expenses were up 30 percent to $11.4 million from $8.7 million in the same quarter last year, reflecting increased pharma collaboration costs and investments in new products and technologies like the company's Digital Spatial Profiling and Hyb & Seq technologies. 

The company's Q3 SG&A costs rose 18 percent to $18.4 million for the third quarter of 2017 compared to $15.6 million in the year-ago quarter.

NanoString's net loss for the quarter was $11.4 million, or $0.45 per share, compared to $10.1 million, or $0.51 per share, for the third quarter of 2016. Analysts, on average, had anticipated a loss per share of $.57.

The firm finished the quarter with $28.8 million in cash and cash equivalents, and $61.1 million in short-term investments.

In light of the shortfall in Q3 sales relative to initial expectations, executives revised the company's financial outlook for FY 2017 to total revenue between $109 million and $112 million from earlier expectations of $114 million and $118 million. This includes product and service revenue in the range of $68 million to $71 million compared to $81 million to $85 million in previous estimates.

NanoString also said it expects a lower loss per share for 2017 than it did before — estimating a range of $1.86 to $1.99 compared to $2.03 to $2.20 as initially predicted.

In early Friday trade on the Nasdaq, shares of NanoString were down about 20 percent at $7.76.