Nautilus Biotechnology, Inc. (NASDAQ:NAUT) Q2 2022 Earnings Conference Call August 2, 2022 8:30 AM ET
Company Participants
Sujal Patel – Founder and Chief Executive Officer
Anna Mowry – Chief Financial Officer
Parag Mallick – Founder and Chief Scientist
Conference Call Participants
Stephanie Yan – Cowen and Company, LLC
Tejas Savant – Morgan Stanley
David Delahunt – Goldman Sachs
Operator
Thank you for standing by, and welcome to the Nautilus Biotechnology Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded.
And now I would like to introduce your host for today’s program, [Alex Carr], Investor Relations. Please go ahead.
Unidentified Company Representative
Thank you. Earlier today, Nautilus released financial results for the quarter ended June 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 email to investorrelations@nautilus.bio. Joining me today from Nautilus are Sujal Patel, Co-Founder and CEO and Anna Mowry, Chief Financial Officer; Co-Founder and Chief Scientist, Parag Mallick will be available during Q&A.
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 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 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, August 2, 2022.
With that, I’ll turn the call over to Sujal.
Sujal Patel
Thanks, Alex. Good morning, and thank you to everyone for joining us today. On this call, we will share our results for the second quarter of 2022, provide some insight as to how we are tightly managing the business in response to macroeconomic challenges and update you on the revised timing of our commercial launch and revenue expectations. But first, I want to thank our teams in the Bay Area and Seattle for their continued solid progress against our key scientific and business objectives. I look forward to the day where their work is in the hands of researchers who will leverage our platform to explore important biological questions, once thought unanswerable and to reveal insights, once thought unknowable.
June 9th was the one-year anniversary of Nautilus entering the public markets on NASDAQ. It has been a year of learning of progress and of rapid adaptation. The enthusiasm that mark the sector and the markets in general a year-ago has shifted dramatically as macroeconomic and other challenges had swept across the landscape. What hasn’t changed though is the enthusiasm we hear from researchers about our platform’s potential for boundless exploration of the proteome, enabling them to advance basic science research, to build new diagnostics and of course, can make a substantial impact on drug development.
They recognized the inherent limitations of both traditional methods and of emerging affinity-based and peptide sequencing methods. And they understand how important impact protein analysis and our platform in particular will be to their explorations of the proteome and its role as a critical driver of innovative, impactful biological research.
We continue to make solid progress against our scientific goals in Q2 and substantially mature development processes for our consumables. In particular, we have been focused on methods to significantly increase production, scale and quality while decreasing production costs. Part of these efforts has additionally been to develop a corpus of assays for characterizing consumable composition and function as part of improving our consumable specifications.
As you know, these steps are critical for ensuring a successful transition to a manufacturing operation, capable of fully supporting our commercialization objective. Additionally, we have made excellent progress on our commercial instrument ensuring that we are not just integrating components, but concurrently developing robust processes for instrument assembly, integration and testing. Since the instrument is effectively the hub of our platform, these efforts require close collaboration between our systems integration, platform integration, software and engineering teams.
To accelerate the pace of these efforts and to increase the effectiveness of our cross-functional team, since our last call, we’ve expanded our senior leadership team with a specific focus on leaders who will help us mature and harden our development efforts leading into commercialization. Eric Spence, VP of Instrument Engineering joined us midway through Q2 and has spent nearly 30 years at Genapsys, Agilent, Illumina and Affymetrix, twice previously working for our SVP of Product Development, Subra Sankar.
Ken Kuhn, VP of Reagent and Process Development started just yesterday. Ken spent 21 years at Illumina and Encodia prior to joining Nautilus. He steeped in product and process development experience, and we expect him to be a strong leader, given his prior work experience with several members of our senior leadership team. The addition of Eric and Ken, and earlier this year of Sheri Wilcox, a SomaLogic veteran as our VP of Affinity Reagent Development establishes the core of our R&D leadership team.
We are excited that Nautilus’ culture, mission and product value proposition has attracted some of the best and brightest minds in the space. They and others believe as we do that when you look across the landscape of our sector cohorts, Nautilus is a unique company on a path to revolutionize biomedical research by unlocking the full potential of the proteome.
In addition to what we consider distinct advantages in terms of our platforms core value proposition with current economic conditions and the fallout being created for less well funded companies, we are seeing high-quality, more experienced candidates, inquiring about opportunities at Nautilus. They see what we are doing and want to play a role in helping revolutionize biomedical research. We plan to take full advantage of this opportunity to increase the strength and experience of our team across the board.
I now like to turn my attention to several factors that have led us to adjust the commercialization schedule that we are now working towards. First, our internal affinity reagent development pipeline is proceeding well. Data we shared both on our last call and at conferences over the past several months has demonstrated that our internal teams are able to generate probes that are extremely strong binders across a range of epitope targets. Notably, these studies suggest that one of our probe development strategy is likely to be more effective than our other strategies at producing a diverse catalog of high-quality affinity reagent probes. Accordingly, these results suggest that focusing most of our efforts on this particular strategy will give us a higher confidence, more efficient path to commercialization albeit a slightly slower one.
Second, in addition, we have previously thought to augment our internal probe development efforts with external partnerships. Many of those partnerships have not yielded the volume or quality of probes received from our own internal efforts. So again, we expect to put resources where they will yield the results we want in the most capital efficient manner.
Finally, scaling back our operating expenses has meant making hard decisions about which development activities to prioritize and which to deprioritize. Based on the delays inherent in these and related factors, we now plan to launch our proteome analysis platform, instruments and reagents by mid-2024. We remain singularly focused on driving our scientific and development efforts forward in the most efficient and predictable way as possible. We are not currently focused on creating short-term revenue opportunities. By making the choice to focus intently 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.
Based on this updated timeline, we are postponing our previously scheduled Analyst and Investor Day, which we had originally planned for this September. We want our first Analyst Day to be marked by presenting the type and volume of data that will clearly demonstrate our strong value proposition. We believe we will be better able to do that at a later date and we will advise when a new date has been selected.
When I look back at the years since we became a public company, I’m grateful for the progress we’ve made and energized by the work that’s still lies ahead. But as I look through the future and at the short-term macroeconomic and investment climate in which we exist, I’m reminded that early stage companies, even those with world changing ideas will struggle to succeed in the long run unless they evolve and adapt in the short run. And it’s with that in mind that we have quickly and effectively adapted to the current environment.
We have evolved our management of the business from the move fast that end cost mindset of the recent past to a relentless focus on spend. That focus will enable us to manage our cash in a way that will give us the maximum opportunity to build, launch and commercialize what we believe will be a game changing proteomic analysis platform. Whether it’s our decision to focus and internalize much of our probe development efforts, or as you’ll hear in just a moment from Anna, the ways in which we are managing the overall business in the most cost efficient way possible. Myself and our entire management team are committed to ensuring that we strike the right balance of extending our runway, while investing in future innovation and commercialization capabilities.
With that, I’ll hand the call over to Anna.
Anna Mowry
Thanks, Sujal. Before going into additional details on our future spending plans and cash runway projections, I will start my comments by sharing our financial results for the quarter. Total operating expenses for the second quarter of 2022 were $15.5 million compared to $10.7 million in the second quarter of last year. Overall, that growth in spending was primarily a result of an increase in headcount and related costs to support ongoing development of our products as well as building our general and administrative capabilities.
Research and development expenses for the second quarter of 2022 were $8.9 million compared to $6.4 million in the second quarter of last year. That increase was primarily driven by growth in personnel costs and increases in services, supporting the continued development of our platform. General and administrative expenses for the second quarter of 2022 were $6.6 million compared to $4.3 million in the second quarter of last year. That increase was the result of growth in personnel, insurance and facilities costs.
Overall, net loss for the second quarter of 2022 was $14.7 million compared to $10.7 million in the second quarter of last year. While total operating expenses are higher versus the prior year, we saw a sequential decline quarter-over-quarter with expenses coming in approximately $500,000, less than the $16.0 million in operating expenses we reported in Q1 of this year.
In fact, this is the second consecutive quarter of declining spend with peak spending occurring in Q4 of 2021 at $16.8 million. At the same time, our headcount has grown modestly over the past two quarters. The reduced overall spending on a per person basis despite high levels of inflation demonstrates our focus on managing costs and championing efficient operations in this challenging macroeconomic environment.
Previously, we communicated that expenses would increase approximately 75% year-over-year. We now expect that increase to be closer to 40% year-over-year effectively reducing our spending forecast by almost $18 million for the year. While we do expect second half expenses to increase over first half levels as a result of continued hiring and from scaling our development pipelines, we are confident that these increases will be measured and additive to our progress towards commercialization.
As Sujal mentioned earlier, we remain focused on deliberately managing every dollar spent and choosing what not to do is part of the equation. Consolidating our efforts and probe development creates a higher confidence path, but also more efficient one. While our prior plan had us ramping our commercial infrastructure well ahead of commercial launch, we are now more carefully gating that growth against technical and commercial milestones closer to platform launch.
Deferring significant commercial investments until closer to launch is more and more example of how we are making prudent decisions that ensure good stewardship of our capital. Given the changes to our timeline and limited commercial investments in the near-term, we now anticipate meaningful early access engagements and associated revenues to begin at the start of 2024. Revenue tied to the platform launch is expected to begin in mid-2024.
Our conservative approach to spending has resulted in a significant portion of cash raised still remaining on our balance sheet. We ended the quarter with $335 million in cash, cash equivalent and investments, $8 million more than the $327 million net of fees we raised almost 14 months ago. We remain well capitalized for continued investment in key personnel and initiatives intended to complete the development of our product, build-out our commercial teams and launch our platform.
Looking ahead, we 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 insights.
With that, I’ll turn it back to Sujal.
Sujal Patel
Thanks, Anna. Let me reiterate an important point from Anna’s report. Our Q2 OpEx was sequentially lower than both Q1 of this year and Q4 of last year. While that trend won’t continue going forward, our ability to quickly throttle back spending reflects the type of strategic actions we have taken and we will continue to take to adjust to the current environment.
As someone who is the CEO of a public company that successfully navigated similar circumstances in the recession of 2008, 2009, I know from experience what it will take to not only manage through times like these, but to emerge from them stronger than before. We will tightly manage every dollar of spend ensuring that we achieve the right balance of investment and financial conservatism that extends our cash well into 2025.
My team and I are committed to executing this plan relentlessly and for however long it takes. To paraphrase an old saying the strongest companies go through the hottest fire, and I’m confident that Nautilus will emerge from this time as one of the most transformational leaders in our space.
With that, I’ll turn the call back to the operator. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from the line of Max Masucci from Cowen. Your question, please.
Stephanie Yan
Hi. This is Stephanie on for Max. Thanks for taking my questions. Sujal, so you noticed that some of your efforts with external partners have not yielded the same volume of probes as from the efforts of your internal team. Could you provide some more specifics around the consolidation of these efforts? Has the team decided to terminate agreements with all your reagent partners?
Sujal Patel
Hey. It’s nice to hear from you Stephanie. Thanks for the question. So with respect to our affinity reagent development, kind of as background just to kind of get everyone caught back up on the strategy that we initiated last year, we have multiple affinity reagent pipelines internally that include different types of binders like aptamers and antibodies. And we find external partnerships in an effort to accelerate our affinity reagent development pipeline, and we find multiple different external partnerships focused on different types of binders with different types of strategies.
And what we said on the call was that, internally one particular strategy has certainly significantly outperformed the others with respect to being able to produce binders that have a significant diversity in terms of the epitopes they reach, which is necessary for our approach and it’s capable of producing probes that have very strong affinity.
With our external partnerships, there have been some successes, but largely, we did not get the volume or quality of probes that we expected from many of the strategies that we have externally going on. And with that, when we struck these deals last year, we knew that some strategies were going to work well and some weren’t. Frankly, we’ve underperformed even those expectations. But with that in mind, we struck all of these deals with the ability to adjust and terminate these contracts to help us take those investment dollars and redirect them back internally and in some cases, return them back to dollars that we’re not going to spend.
Stephanie Yan
Got it. Understood. Thanks for that. Additionally, could you touch – I know you briefly mentioned this with the push out of the commercial investments. So could you more specifically touch on the major cost saving initiatives or decisions that allow for the extension of your cash runway through 2025? You mentioned that you were prioritizing certain initiatives and be prioritizing others. Could you just provide some more color on those?
Anna Mowry
Stephanie, I’m happy to do that. As you might expect, we’re very happy with the progress we’ve made in bringing down spending both in the first half where we saw two consecutive quarters of declines as well as when we brought down our forecast for the year from 75% year-over-year growth and OpEx down to 40% year-over-year growth. That’s really a result of two aspects to managing cost spending. First off, it’s important to control new investments and so managing growth is a priority of ours, and we’ve done that through managing the pace of hiring as well as limiting new structural spend. And then in terms of managing growth, but also bringing things down that really comes down to finding efficiencies in our operations, improving yields and reallocating resources within the business, so that we’re working with what we have as opposed to adding new investments every single time.
So those are the types of activities that we’re taking on to manage our spending and that will continue it forever. But that’s what’s really driving our bring down of the forecast as well as one of the main things we’re doing looking forward is that we’re gating new investments based off of scientific milestones, and that just ensures that we’re not spending ahead of where the business is at and that’s what really allowed us to extend our cash runway well into 2025.
Sujal Patel
One last thing I would add there, Stephanie, is that, I mentioned this a little bit in my prepared remarks, but one of the things that we’ve spent significant effort on in the first half of the year was really working through our reagent process development and manufacturing capabilities, working on improving those processes, scaling them up, focusing on yields and qualities so that we can bring the cost of reagents, which is a significant cost item for us down. And that is something that has gone well this year. And now with the addition of Ken Kuhn, we expect that work to continue as we move through the second half.
Stephanie Yan
Got it. Understood. Thanks so much for the color. Appreciate taking the questions.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Tejas Savant from Morgan Stanley. Your question, please.
Tejas Savant
Hey guys. Good morning. Sujal, one for you, I mean at a high level, given the macro and market conditions being what they are. What are your thoughts on consolidation in the space? We saw one of your targeted proteomic peers do a small tuck-in recently. Do you see any sort of potential opportunities here in the private market for you guys as you think about your journey here?
Sujal Patel
Yes. Tejas, I think that from a broad perspective, what’s going on out there and what you saw, you’re alluding to the [indiscernible] SomaLogic deal. I think what you are seeing out there is kind of what we expect. We expect to see more sort of small-to-small M&A out there as companies, particularly those with product technologies that are aged and aren’t necessarily prepared for the future. I think we’ll see more of those types of M&A deals to help bolster their portfolios.
From our perspective, we continue to be active in the markets. We do see the entire deal flow. If there’s a small IP buy or something that’s added it to our portfolio to improve the size of our moat, we would consider it, but we have no need or desire to do anything – anything even moderate in size. And we’re really very, very much focused intently on development of our platform and we feel comfortable with where we are from an IP and a technologies perspective.
Tejas Savant
Got it. That’s helpful. And then on your point around sort of external partnerships not yielding the same volume of probes that you had anticipated. I mean, is that something that’s just that because you guys have sort of an inside knowledge of your platform and the way it works that you guys have an advantage there? Or was it sort of something else that led to sort of that disparity in performance?
Sujal Patel
Yes. I think that it’s a good question. The thing that is a little different about what we are doing is first and foremost, our targets are not a typical affinity reagent target [10 or 12], ours are short epitopes that are linear epitopes. And in terms of how you develop probes against that type of target, there are differences. And we have been at it internally with various affinity reagent development pipelines for five years now. And so there is just a lot of knowledge that we have and a lot of processes that we’ve built up over a long period of time.
I think our hope last year was that by hiring various experts in their areas that we would be able to have them ramp up quickly and figure out what would needed to be done with respect to these unique type of targets, but I think that we haven’t seen that happen as quickly. In some cases with partners where we have a deep relationship, we’ve been sharing information with them to help them improve their efforts more quickly in some other cases, as I mentioned, in response to Stephanie’s question, we’re redirecting that spend back to our own internal efforts since scaling those efforts up even more.
Tejas Savant
Got it. And then one quick science one for you. I mean, at ACR, you guys highlighted that short epitope trimer and tetramer binders that have, I think affinity in the Picomolar ranger, which is great to get a strong signal, but I just wanted to ask you whether this higher affinity comes with a trade off of being more challenging to reprobe the sample at all or not really.
Parag Mallick
I’m happy to take that one. Yes, it’s a great question. And this one is no – having a strong binder means that you have flexibility around the concentrations that you use. Also, it doesn’t have any implications on its susceptibility to remove conditions. And we have – because the entire system is closed and the proteins themselves are fixed very firmly to the surface, we have a lot of flexibility over how we wash and can be quite aggressive there.
Tejas Savant
Got it. That’s helpful. Thanks guys.
Sujal Patel
Thanks, Tejas.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Dave Delahunt from Goldman Sachs. Your question, please.
David Delahunt
Hey guys. Any additional details you can provide on levers? You’re able to pull to extend cash runway if needed, maybe any anecdotal examples of how you’re controlling investments and operated more efficiently?
Anna Mowry
Hi, Dave. Yes. I’m happy to speak to that. As we said, we’ve got our cash runway well into 2025. And I would say that we’ve pressure tested those that forecast and understand where we have sensitivities. And I would say that, of course, we always have additional levers that we can pull to manage our cash runway. Those projections are not overly dependent on revenue as the cash contribution from net revenue isn’t super meaningful in the early days just given that cash coming from revenue also is offset by scaling our commercial investments. So I think we feel really comfortable with those cash projections and our focus is really around managing new spending, so that we don’t need to pull additional levers going forward. But of course, we always have the ability to quickly adapt and make changes to the extent that we feel we need to.
David Delahunt
Got it. And any thoughts on how the current financing environment will affect biopharma demand for new research methods?
Sujal Patel
I think that from what we are seeing out there, development budgets in therapeutics and diagnostics and in a wide range of commercial and customers that we would sell to are quite robust. And while the equity markets both public and private have significant turmoil, we’re still seeing robust demand from the customers that we talk to. And I think that if you look at the earnings print so far this season minus those that had significant COVID exposure, I think we’re seeing quite good demand.
I think the other part of that of course is really the forecast with respect to NIH. And that’s harder to predict, particularly when you look at the timeframe of our commercial timelines, but I think we’re still very confident that funding will also be quite robust when you look out over the next three to five years. And so we’re very excited about the type of market that we’re going to be entering into in a couple of years.
David Delahunt
Great. Thanks guys.
Operator
Thank you. 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.
Be the first to comment