Q3 2023 Nautilus Biotechnology Inc Earnings Call

Participants

Anna Mowry; CFO & Treasurer; Nautilus Biotechnology, Inc.

Parag Mallick; Co-Founder, Chief Scientist & Director; Nautilus Biotechnology, Inc.

Sujal M. Patel; Co-Founder, CEO, President, Secretary & Director; Nautilus Biotechnology, Inc.

Daniel Gregory Brennan; MD and Senior Tools & Diagnostics Analyst; TD Cowen, Research Division

Unidentified Analyst

Yuko Oku; Research Associate; Morgan Stanley, Research Division

Carrie Mendivil; Principal; Gilmartin Group LLC

Presentation

Operator

Thank you for standing by, and welcome to the Nautilus Third Quarter 2023 Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Carrie Mendivil, Investor Relations. Please go ahead.

Carrie Mendivil

Thank you. Earlier today, Nautilus released financial results for the quarter ended September 30, 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 investor relations at 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'd like to remind you that management will make statements during this call that are forward-looking 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 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, October 31, 2023.
With that, I'll turn the call over to Sujal.

Sujal M. Patel

Thanks, Kerry. Good morning, and thank you for joining us today. On this call, we'll share our financial results for the third quarter and provide a brief update on recent activities. I'm excited by the progress we made in Q3 against our scientific and development goals and in the ways we're preparing the various elements of our platform for commercial launch. That continued progress is the direct result of the great work being done by Nautilites across all parts of the business, especially, but not limited to, our R&D organization.
I'm pleased to report that as of mid-September, our 100-plus person R&D organization now reports entirely into Subra Sankar, our SVP of Product Development. He's been with us for almost 3 years. Though it's only been a little over a month since we've made the change, we've already begun to see the productivity and efficiency gains we'd envisioned. Subra has held many senior roles over the last 2 decades, notably at Solexa and Illumina, where he led instrument and consumable development efforts for next-generation sequencers and related products. Based on his extensive and successful product development experience, it has been our plan from the beginning to unite these efforts under Subra.
With our product development efforts reaching the integration, verification and scale-up stage, our needs match Subra's experience, making now the right time to [adapt] the change. Unifying R&D under Subra has the additional benefit of enabling Parag to significantly expand his outward-facing activities with the scientific and customer communities while also maintaining deep involvement in both broad strategic issues and day-to-day scientific activities.
Joining Subra's team just yesterday, we're excited to welcome Dr. Martin Huber as our VP of Biochemistry and flow cell development. For the past 13 years, Martin was a Co-founder, CTO, and ultimately, CEO of Quantapore, a company devoted to pioneering massively paralleled direct single-molecule DNA and protein analytical tools. Prior to that, he held senior scientist positions at Ion Torrent and Nanosphere. His deep expertise in chemistry and nano engineering will not only broaden our team's skill set, but also increase the depth of our R&D leadership bench.
With an increasing focus on proteomics by the scientific community, moves by major life sciences companies to expand their proteomics related offerings and massive international investments in the study of proteins. It's clear to me that the foundation has been laid for the proteomic era of biology and medicine to take root and flourish. While the near-term opportunities that will emerge are exciting areas of focus for us, we believe that easy-to-use high-throughput discovery platforms that match the scale of the proteo like Nautilus, hold the opportunity to revolutionize more than just proteomics. We believe that the potential exists to fundamentally improve the way all biological research is conducted, improvements that could manifest significant advances to human health for millions across the world.
In advance of making our platform available next year, we continue to broadly share through white papers, scientific posters and presentations, one-on-one briefings, webinars and a range of other methods insight into how our platform works and its potential benefits. This type of transparency continues to build meaningful trust and early credibility with our potential buying audiences and underscores our philosophy of being a committed and contributing member of the broader proteomics community.
One recent event, the HOPA World Congress in mid-September in Busan, South Korea provided a great opportunity to continue to educate KOLs and others about our platform and the ways in which we believe it will change what is possible in proteomics research. For more on that and an update on our R&D progress, I'll now turn the call over to Parag.

Parag Mallick

Thanks, Sujal. As Sujal mentioned, HUPO was a terrific event for us again this year and provided a very effective vehicle for us to update attendees on platform progress and to encourage the community to reimagine what's possible in proteomics. At our booth, we conducted a well-attended fireside chat with Professor Bernd Wollscheid of ETH Zürich. Bernd did a great job of articulating some of the biggest challenges facing proteomics researchers today, mainly that the field needs to agree on standard workflows to most consistently and effectively generate biologically meaningful data and that integrated workflows are necessary to make proteomics easier who suggested that what we need is a "red easy button" for proteomics.
We also hosted a lunch and seminar, during which Dr. Birgit Schilling from the Buck Institute for Research on Aging, discussed how her Post Docs Joanna Bons and Jordan Burton, winners of the Nautilus First Access challenge plan to use our platform to study kidney injury. Their long-standing work has demonstrated dramatic changes to the proteome upon kidney injury. Now doctor Bons, Burton and Schilling are planning to use the Nautilus platform to get a new view into the proteome that they believe will be hugely complementary to their existing mass spectrometry-based workflows. We're excited to work with them on this and other research initiatives.
In conversations throughout HUPO and as we presented our scientific posters, we found that the community was most interested in hearing about our single molecule library preparation process, the relationship between the number of intact protein molecules measured in the effective dynamic range of the platform, the development and extensive characterization of our affinity reagents, the stability of the platform that enables it to perform a large number of measurement cycles and the rigorous approach we have developed to estimate false discovery rate to increase confidence in single molecule protein identification.
I also always enjoy hearing of the diverse applications that the research community envisions for our platform. This time at HUPO, we heard new applications ranging from understanding protein shedding into cerebral spinal fluid when looking at neurodegenerative diseases to examining the dynamism of subcellular proteome and how they are impacted by disease and diverse therapeutics.
As we prepare to bring to market a platform design to comprehensively quantify the proteome, we continue to make good progress across a number of important fronts, all of which I have reported on in detail during recent calls, including Nano fabricated chips for a single molecule protein deposition, nanoparticles for a fixing protein to those chips, affinity reagents in their labels for probing a fixed proteins, assay buffers and parameters, and instruments capable of reliably and routinely performing a series of single molecule binding measurements and machine learning-based software for determining protein identities and quantities from those measurements.
A critically important area that I'd like to more fully update you on is the work we're doing to engage with external development and manufacturing partners to scale the platform to meet both anticipated commercial demand and cost targets. On the instrument front, we are actively engaged with our selected contract manufacturer on the design transfer. We expect this to be fully completed in this quarter with the initial externally built instruments validated in the early part of next year. In terms of the flow cell, we have completed development of the end-to-end process from nano fabrication to surface chemistry to flow cell assembly and we'll be further validating that process this quarter.
The nano fabrication processes have been locked at our selected vendor and are production ready. We are actively working with our downstream suppliers on surface chemistry and flow cell processes and expect to have those vendors qualified by the end of this year. We continue to utilize a combination of internal and external production resources to manufacture our reagents. We're in the process of scaling up production processes to meet anticipated early access production volumes and have great confidence in our ability to support our current and upcoming production needs with our existing production processes.
Overall, I'm very pleased with the development progress we made in Q3 and have made throughout the year. Our internal teams continue to increase the scale and robustness of the platform as we ready the platform for launch next year. With that, I'll hand the call back to Sujal.

Sujal M. Patel

Thanks, Parag, and I completely agree. I, too, am very pleased with the progress Nautilus has made this year as we continue our drive towards commercial readiness. We accelerated our development activities on a number of key fronts and remain confident that Nautilus' core value proposition and our anticipated V1 launch specs will deliver important and distinct advantages to the market. Based on that, we continue to target next year for the launch of our platform. With that, I'll hand the call over to Anna for a look at our Q3 2023 financials. Anna?

Anna Mowry

Thanks, Sujal. Total operating expenses for the third quarter of 2023 were $19.1 million, up $3.3 million compared to the third quarter of 2022 and $0.1 million above last quarter. This modest increase in operating expenses year-over-year was driven primarily by an increase in head count to support the ongoing development of our products. Research and development expenses in the third quarter of 2023 were $12.0 million compared to $9.6 million in the prior year period. General and administrative expenses were $7.1 million in the third quarter of 2023 compared to $6.2 million in the prior year period.
Overall, net loss for the third quarter of 2023 was $15.9 million compared to $14.1 million in the prior year period.
Turning to our balance sheet. We ended the quarter with approximately $276 million in cash, cash equivalents and investments compared to $287 million at the end of last quarter. Since the beginning of the year, we have burned approximately $38 million of cash. We continue to be focused on disciplined cost management while strategically investing in the business, to ensure that we have maximum operational flexibility ahead of our commercial launch. Over the past year, we have hired additional leadership time, particularly in R&D, increase the throughput of our development and production pipelines and taking on new facilities. Even while making this important progress, we continue to improve on our operational efficiency. You may recall that last quarter, we reduced our 2023 annual expense forecast to growth of 30% year-over-year. With our team's continued laser focus, we have further improved our efficiency and now expect our 2023 operating expenses to increase by slightly more than 20% compared to 2022.
Importantly, we continue to expect to enter 2024 with a lower burn rate and a strong cash balance, extending our cash runway into 2026. Our expectations on runway include the initial build-out of our commercial organization and takes into account a range of 2024 product launch date scenarios. With our robust balance sheet and disciplined management of capital, we remain confident that we are strongly positioned to execute on our goal of launching a transformational platform in proteomics. With that, I'll hand it back to Sujal.

Sujal M. Patel

Thanks, Anna. Needless to say, I'm very pleased with our continued focus on running this business as efficiently as possible while investing in the area is critical to bringing our platform to market. I want to take a moment to thank Anna for her diligent stewardship of our finances and the rest of our senior leadership team for their continued commitment to managing our resources in a way that maximizes Nautilus' cash runway through the planned launch next year and into 2026. Our continued and frequent conversations with proteomics KOLs and other potential customers makes one thing very clear. Now is a great time to be pioneering the platform capable of establishing a new gold standard in the measurement of proteins and proteoform.
The world of biological research is hungry for a breakthrough and we fully intend to be the company that supplies it. We continue to make good progress against our goals and look forward to updating you along the way as we continue towards commercialization of our platform next year and beyond. With that, I'll turn the call back to the operator.

Question and Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Tejas Savant from Morgan Stanley.

Yuko Oku

This is Yuko on for Tejas. I saw some posters from Nautilus at ASHG. Could you give us a brief overview of the data that you'll be presenting? And what we should be looking out for?

Sujal M. Patel

Let me add. This is Sujal. Let me -- I'll pass this over to Parag to go and answer. The question was the volume was really low, but I think the question is really around what to expect to at ASHG?

Parag Mallick

Absolutely. It's a great question. Our goal with ASHG is to continue to educate the market and to introduce the community to our platform. The specific data that we're going to share will involve both the fundamentals of the platform, and this is a slightly newer community focused on the genetics community. We'll also discuss proteomics in the context of multiomic as well as aspects of how the affinity reagents are developed and characterized, how we accomplish our single molecule array and substantial data around platform stability particularly across very large cycle runs and we'll also discuss our computational analysis infrastructure for identifying protein and characterizing false discovery rates as part of that.

Yuko Oku

Great. And then just a separate follow-up question. OpEx was starting lower now slightly more than 20% year-over-year growth versus 30% guided last quarter. Could you frame how you're thinking about spend in '24 as we head closer to that target launch date in '24?

Anna Mowry

Let me make a couple of comments on that. The team has just, as Sujal mentioned, been very diligent in how they're solving problems by being innovative and creative and often figuring out solutions at lower cost, which is what's really driving our reduced OpEx forecast for 2023. I don't have any specific comments for 2024, but what I can tell you is that we will continue to be very tight with how we manage our spend, we will continue to invest in our development teams, but we'll do so in a very targeted way. And I would think that growth there would temper a bit as we start to make room for hiring a handful of folks on the commercial side and the staff that supports them. I'll be able to give more color on that at our call at the start of the year.

Operator

And our next question comes from the line of Daniel Brennan from Cowen.

Daniel Gregory Brennan

Maybe the first one, just to level set things, like is there any change at all to thinking about the key aspects of kind of the launch, early access still by year-end, some data placements in Q2 and then still targeting a mid '24 launch?

Sujal M. Patel

Yes, Dan, thanks for the question. This is Sujal. So what I would say is that there are no changes to our plan. But I don't I think that you're -- what you just highlighted is quite exactly what we said on the last earnings call, in the Q2 call, and it's the same now for Q3 calls. So what we've said is that we continue to target the -- roughly the middle of next year, middle of 2024 for the launch of our platform that means launching our product has instrumented consumables from software. And really, that's the inflection point where any meaningful revenue begins. The early access period is a period of approximately 3 or 4 months ahead of that launch. And so that we don't anticipate that we'll be doing any early access in 2023.
And so as we head into 2024, you should look for us to make an announcement around our early access program availability, we'll start signing up with customers samples that we can analyze and then about 3 or 4 months before the launch roughly will begin analyzing those samples. And as a reminder, the goal of this early access period is really not -- I mean, that's we will charge some modest amount of money to customers, but much more importantly, it's about generating interest in the platform so that we can get preorders for the instrument or get grant proposals submitted and as well it's for marketing value so that we can get papers and publications with our potential customers, with our collaborators and use that as a stepping stone to then go after the next set of customers.

Daniel Gregory Brennan

Got it. That makes sense. I know last quarter as well, you discussed maybe making some small adjustments on the specs just to remain on track with [dynamic green] and kind of protein coverage, I believe, kind of where do you stand today? Are those adjustments still intact? Were there any other changes made just in terms of the targeted kind of commercial specs by the middle of '24?

Sujal M. Patel

Yes, that's a good question. As a reminder, so on our Q2 call, we said that we would pragmatically take the steps adjusting a few of the initial product specifications for our launch so that we could preserve our time to market, and we still believe those specifications are not just competitive in the marketplace, but they're market-leading. In Q3, we didn't change any of those specifications. Obviously, as we continue to move through verification, validation phase in our scaling of our reagents. There are lots of moving parts. But in general, the specifications and the areas where we were considering launching at slightly below our initial specifications, our full specifications and then ramping up to full specifications over time [that consumable face], those changes are really intact here as we head into the end of the year.

Daniel Gregory Brennan

Got it. And then in terms of papers, like what could we -- obviously, you'll be at ASHG with some more -- it looks like more like kind of a tech awareness, understanding really education for the customers down there. What can we -- can you just remind us what can we expect from papers kind of before the early access kicks in?

Parag Mallick

I'll take that one. This is Parag. I think what you can anticipate in general, from our paper publication strategy is that it will follow really 3 phases. The timing of publications, I won't speak to. But generally, you should think about our publications as falling into 3 categories. The first are really technology, foundational manuscripts. So for instance, things like our nanoparticle conjugation publication prior, we'll also have some similar sorts of publications around the PrISM algorithm and approach as well as our nanoparticle deposition approach. And then there'll be a next series of papers that really speak to demonstrations of platform capabilities. And then the third area that we anticipate publications are really publications with our partners examining biological questions using the platform.

Daniel Gregory Brennan

Great. Maybe a final one just on Thermo Olink, obviously, that, I think you kind of alluded to kind of the excitement and proteomics and some of the explosive growth that's happening. Just kind of thoughts on -- just the competitive environment. I know you've positioned your technology is really kind of super differentiated, but just wondering how you think about, again, in the wake of like the largest tools company buying Olink, just how do you think about that, either validating or from a competitive standpoint? Just any color on that.

Sujal M. Patel

Yes, Dan, I think that the announcement that Thermo Fisher is going to acquire Olink, I think, tremendously validates the proteomics space and as well really validates that new approaches are important in the proteomics world. If you kind of look at the acquisition, it's really taking what I would say is, so far, the most successful new proteomics entrants in putting in hand of the market leader in Thermo Fisher. And so I think that there's a couple of things that are exciting for my standpoint.
One is that it's clearly a admission from Thermo Fisher that other approaches besides the current gold standard of mass spectrometry are important to the customer base. And I think that the price point achieved in today's market climate, I think, is really indicative of the fact that proteomics is incredibly important to the scientific community who's looking to unlock the next generation of discoveries to accelerate drug development and really deliver and precision and personalized medicine. So from that standpoint, I think it's really great. One of the things that you -- that you were alluding to is sort of how this might change the competitiveness in the marketplace being someone who's been around startups for a couple of decades, I will comment that in my experience when a large company buys a young nimble entrant like an Olink, technologies don't get more competitive.
They become broader in the marketplace, but innovation slows. And so from my standpoint, it's pretty exciting for the marketplace as well because I think that Olink is a company that's executed is the best set of the new proteomics entrants and out of those that are focused more on the discovery end of the spectrum like not less like some of the other peptide sequencing approaches or other sample prep approaches.
Our view, when we look at the technology that we're building, the value proposition, the moat because of the complex nature of what we've developed and as well the specifications of our intended product for next year, I think that we've got a complete winner on our hands. And that's why we're focused on being heads down and going in, getting all the development completed and getting to [swing out] the door.

Daniel Gregory Brennan

Great. And obviously, also the standard biotools and the SomaLogic deals. So there was certainly a lot of strategic moves within the quarter, but thanks for the feedback and congrats for the quarter.

Operator

(Operator Instructions) And our next question comes from the line of Matt Sykes from Goldman Sachs.

Unidentified Analyst

This is (inaudible) for Matt. The first one, what are your thoughts on feedback we've gotten from other companies on pharma CapEx spend? And how do you feel about your price as we move towards launch?

Sujal M. Patel

Yes. So thanks for the question. So in terms of pharma CapEx spend, I think that -- I will answer this question. I know that you are likely getting a lot of color from the large caps that have already reported and in particular, CapEx spend appears to be a little bit lumpier internationally. But from our perspective, because we are a very small company that's just about to introduce a product, really, what's more important is what does pharma want to spend their money on. And in conversations with many, many customers in the pharmaceutical space as well as in the diagnostics space. What we've heard is that there is still substantial budget in '24 that is available for technologies that are going to make a dent in drug development and biomarker discovery that help in specific areas.
And so from our standpoint, I don't really see an impact to our business with the capital environment that's out there. The second half of your question was really related to price point. And the answer on that front is I feel very good about the price point. And I feel good about it, both from a market perspective and from a direct feedback from our potential customers' perspective. On the market side, 2023 saw the continued increase of the price of the top end mass spectrometers which is the gold standard in proteomic today with the release of Thermo Fisher's Orbitrap Astral, which pushes the price point even closer to $2 million for the initial field sites for the instrument.
So we feel very good about our price point where our initial deal size, which includes instruments, service and support [rep install], some consumables to get going. That whole package will be roughly $1 million, and we'll talk more about that pricing as we get closer to launch. And I feel good about that price point relative to the other products in the marketplace. From a customer feedback perspective, we continue to discuss pricing of the instrument and samples with our customers, and we feel like we're hitting a really good sweet spot where the price of the instrument is appropriately high to warrant -- which is warranted by the specifications of the product, how many proteins, what is the dynamic rate sensitivity, and then in addition to that, on the consumable side, we've gotten good feedback from customers that the specifications that price point, it makes a lot of sense based on the specification of this system.

Unidentified Analyst

Okay. Great. That's super helpful. And then just one more for me. Could you talk through what you're looking for when you're working with external manufacturers to prevent future supply chain risks in general, how that process is going and if there's been any bumps along the way?

Sujal M. Patel

Yes. So I'm happy to talk about supply chain a little bit. And I totally understand the question because there have been a number of bumps with other DX and tools companies. The supply chain is something that we pay a lot of attention to by supply chain organizations and manufacturing organizations run by Mary Godwin, who I have worked with now for gosh, something more than 15 years, and she has 4 decades experience doing this. In terms of what our strategies are, first and foremost, our strategies are to make sure that the design of the system is resilient that it has -- balance is a QC is making sure that we have the ability to use multiple suppliers wherever we can. We've got very good relationships with all of the key suppliers within our system.
On the electronic side, meaning the instrumentation side, we use a well-known California-based contract manufacturer to do the build of those instruments even at this early stage of our light, our contract manufacturer is doing the builds for our internal use. And so that's something that bodes really well for us to be able to fully transfer all of those builds to that contract manufacturer and start scaling for next year.
And then on the reagent side, if you think about our reagent kits and our consumable kits, they have a number of components. One is a flow cell, which is essentially an assembly of fuse class and silicon chip and our partners on the flow cell and chip are really partners that we work very, very closely with on what the procedure is to build that assembly, what the QCs are. We're comfortable with both of the key suppliers that are responsible for those 2 components. The next is really the bulk reagents, which are not all that complicated. There are things like buffers and our plastics and those sorts of things. And that's an area where we've built a robust supply chain. And then the third is really antibodies and really our probes.
And those are something that we paid a lot of attention to building a robust supply chain. So we have multiple external vendors, which do antibody manufacturing for us. We do some of that internally as well. And then we have a reagent manufacturing group inside of our organization, which is responsible or taking the antibodies, turning them into our full consumable kit then going in and getting them -- marrying up with the instruments so that we can run analysis.

Operator

This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.