NSPH

Nanosphere, Inc. (NSPH)

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Nanosphere, Inc. (NSPH)

Q4 2008 Earnings Call

February 26, 2009 5:00 pm ET

Executives

William Moffitt – President & Chief Executive Officer

Roger Moody – Vice President of Finance, Treasurer & Chief Financial Officer

Michael McGarrity – Vice President of Sales and Marketing & Chief Marketing Officer

Analysts

William Quirk – Piper Jaffray

Catherine Hu – Credit Suisse

Bruce Cranna – Leerink Swann

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2008 Nanosphere Incorporated earnings conference call. My name is [Keisha] and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

Before the call begins Nanosphere will like to state that certain statements made during this conference call, which are not based on historical facts, maybe deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties there are important factors that could cause actual results, events, or developments to differ materially from those expressed or implied by these forward-looking statements.

Such factors include those described from time-to-time in Nanosphere's filings with the United States Securities & Exchange Commission including without limitation of risk described in Nanosphere's most recent quarterly report on Form 10-Q on file with the SEC. Please note that Nanosphere undertakes no duty to update this information.

I would now like to turn the call over to Mr. Bill Moffitt, Chief Executive Officer. Please proceed.

William Moffitt

Thank you, [Keisha]. Good afternoon everyone and thank you for joining us for Nanosphere's investor conference call covering the fourth quarter and full year of 2008. In a few moments, I will turn the call over to Roger Moody, Chief Financial Officer of the company, who will review the results we released this afternoon and then Mike McGarrity, Chief Marketing Officer and I will update you on our progress in new product development, plans for product launches, and how we envision these products driving our business.

There is one key message this afternoon 2008 was our first full year of commercial operations and I believe it is fair to say we were disappointed with our results on some fronts, while highly encouraged on other fronts. We are encouraged by the progress we made in new product development programs, and believe that those efforts have positioned us to become a leader in this market. We now have four new products in the FDA for review and we have initiated clinical trials for our cardiac troponin I assay.

Looking back at 2008, there is no question that the controversy that surrounds the use of warfarin metabolism testing to guide therapy as evidenced by the resistance on the part of some payers to reimburse the test has had an impact on volume and system placements. We are disappointed that this test did not drive greater market adoption of our Verigene platform. We are however encouraged by the growing public attention focused on the value of warfarin metabolism as evidenced by the number of articles in major publications.

The Centres for Medicare and Medicaid services undertook a review of data and public opinion surrounding reimbursement and we would expect a final resolution later this year. If they are finding support broad reimbursement, we believe there will be an increase in demand and we are prepared to respond. The value proposition of the Verigene system namely its ease-of-use and on-demand testing capabilities was validated by the acceptance of our hyper-coagulation panel with individual customer utilization somewhat exceeding our expectations.

We have developed a platform that meets market needs. We are now expanding the test menu to make it the system of choice and increase penetration. During 2008, we made significant progress in development programs aimed at expanding the test menu and functionality of the Verigene system, which we believe will drive increased market penetration. After Roger recaps the fourth quarter and full year results, Mike, and I will review our new product introductions for 2009 and how we see those impacting our growth. Now let me turn the call over to Roger Moody. Roger?

Roger Moody

Thank you, Bill. This afternoon I will review Nanosphere's fourth quarter and full year 2008 financial results, which are accompanied by today's news release and 10-K filing with the SEC, both of which are posted on our website, which is www.nanosphere.us. We added nine customers in the fourth quarter bringing our year-end installed base to 50 customers. Overall, cartridge utilization fell short of expectation due to softness in the warfarin metabolism testing market.

However, utilization for customer for the hyper-coag test exceeded our expectation. We anticipate overall utilization to increase after we receive FDA clearances and validate customers for our cystic fibrosis and HFE assays as well as Verigene SP. We expect the respiratory panel will begin to drive utilization in the 2009 and '10 flu season given that we are approaching the end of this flu season. Product revenue in the fourth quarter of 2008 was $313,000, which was up 517% over the prior year and 49% sequentially.

Revenue mix shifted from 9% product sales and 91% grants and contract revenue in 2007 to 75% product sales and 25% grants and contract revenue in 2008. Cost of product sales were $600,000 in the fourth quarter and $1.5 million for the full year. Operating expenses for the fourth quarter of 2008 were $9.1 million, compared to $8.9 million in the fourth quarter of 2007. Full year operating expenses were $37.3 million, compared to $34.9 million in 2007. This increase was primarily driven by investments in research and development as well as manufacturing development and scale up.

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