Accelerate Diagnostics (AXDX) Q2 2019 Earnings Call Transcript

Accelerate Diagnostics (AXDX -4.45%)
Q2 2019 Earnings Call
Aug 08, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Accelerate Diagnostics Q2 2019 earnings conference call. [Operator instructions] And also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Laura Pierson.

Ma'am, you may begin.

Laura Pierson -- Investors Relations

Before we begin, it is important to share that information presented during this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include projections, statements about our future and those that are not historical facts. All forward-looking statements that are made during this conference call are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. These are discussed in greater detail in our annual report on Form 10-K for the year ended December 31, 2018, and other reports we file with the SEC.

It is my pleasure to now introduce the company's president and CEO, Larry Mehren.

Larry Mehren -- President and Chief Executive Officer

Thank you, Laura. Good afternoon, and welcome to our second-quarter 2019 earnings call. Our results for the quarter were mixed. Our 55 net new placements were up over 90% year over year, but came in below our expectations due primarily to timing issues in EMEA, which I will discuss in further detail later in the call.

Nevertheless, our 130 placements year to date and strong late-stage funnel keep us squarely on pace to achieve our annual target of 300 to 400 placements. And while every placement is important, the addition of certain key reference customers can create a force multiplier impact. At the very top of this high-profile customer list is Mayo Clinic Rochester, and we couldn't be more enthusiastic to now have them as a customer. Revenue was lower than expected for the quarter due to lower capital equipment sales, while consumable revenue grew by 30% sequentially and over 125% on an annualized basis.

We remain on track to realize a significant step up in consumable revenue in the back half of the year as an ever-increasing number of our commercially contracted instruments go clinically live. We also continue to make progress against our longer-range strategic initiatives to launch our next test kit for the Pheno for respiratory samples in our geographic expansion into China. And finally, this afternoon, we announced the addition of Jack Phillips to our executive leadership team. Jack is a veteran in the diagnostic space, serving most recently as president and CEO of Roche Diagnostics North America.

He brings a tremendous amount of experience and commercial acumen to our company, and we are thrilled to have him on board and expect that he will harness our current momentum and help take our growth to the next level. There is much to discuss, and I'm eager to break down these many developments in greater detail later in the call. But first, Steve will review our second quarter financial results. I will then review our progress against our three key focus areas for 2019, discuss Jack's addition to our team and conclude with the Q&A session.

Steve?

Steve Reichling -- Chief Financial Officer, Secretary and Chief Accounting Officer

Thank you, Larry, and good afternoon, everyone. Net sales were $1.8 million in the second quarter and $3.6 million year to date, compared with $1.7 million and $2.5 million for the same period in 2018. This represents year-over-year growth of 7% for the quarter and 43% year to date. It's important to note that the majority of our second quarter 2019 revenue and all of our year-to-date growth has been the result of higher consumable sales, driven by a sequential increase in the number of live customers.

Predictably, 2019 instrument revenue has declined due to the shift toward reagent rental deals that were not available through the second quarter of 2018, and this we have discussed in prior quarters. To put this in further context, our instrument revenue was down by more than 50% year over year, while consumable sales grew well north of 125% over the same period. Cost of goods sold were $907,000 in the second quarter and $1.8 million year to date, resulting in gross margins of 50% and 49%, respectively. This compares to cost of goods sold of $717,000 and $1.2 million or gross margins of 58% and 51%, respectively, from the same periods in 2018.

This decrease was the result of one-time inventory timing benefits in the prior year, which did not repeat in the current year. After normalizing for the effect of pre-FDA instrument inventory previously written off to R&D, our gross margin improved by 300 basis points year to date due to higher consumable production levels. Selling, general and administrative expenses were $12.8 million for the second quarter and $25.6 million year to date. This compares to $15.3 million and $29.7 million from the same period in 2018.

The decrease in spend is largely attributable to lower stock-based compensation expense as most of their costs have remained consistent with prior year. Research and development costs were $6.1 million for the second quarter and $13.1 million year to date. This compares to $6.1 million and $12.8 million for the same period in 2018. We expected the spend to remain relatively flat on a year-over-year basis as our R&D programs remained consistent year over year and the small step up in expenses attributable to our respiratory trial won't begin until Q3.

Our net loss was $20.8 million for the second quarter of 2019 and $42.3 million year to date, resulting in a net loss per share of $0.38 and $0.78, respectively. This net loss contained $2.8 million for the quarter and $6.3 million year to date in noncash stock-based compensation expense. Net cash used was $13 million for the quarter. The company ended the quarter with cash and investments of $137.8 million.

We believe our current cash position is sufficient to execute against our strategic initiatives and continue to expect 2019 net cash burn to be similar to or just below our 2018 net cash burn. I'll now hand it back to Larry to review our key commercial results and development updates in greater detail. Larry?

Larry Mehren -- President and Chief Executive Officer

Thank you, Steve. As discussed on prior calls, we have three principal areas of focus for 2019: one, market penetration; two, rapid customer go-lives; and three, new market expansions. Turning first to market penetration, U.S. placements were consistent with our expectations, but shortfalls in EMEA resulted in a lower-than-anticipated global placement number.

Our 55 net new additions bring our year-to-date placement total to 130, compared to our annual target of 300 to 400 placements. Given the strength of our late-stage sales model, the growing level of predictability in our U.S. forecast and typical seasonality that shifts the largest number of placements toward the fourth quarter of the year, we anticipate sizable placement growth in the second half of 2019, keeping us on pace to achieve our annual global placement target. In the U.S., we placed 39 net new instruments during the quarter, which, despite being a decrease from the prior two quarters, was consistent with our expectations.

This decrease was a result of two factors. First, over the first two quarters of the year, we built up a large bottleneck of potential customers under two GPO contracts that were executed prior to the introduction of the reagent rental program. After working diligently with these GPO partners, the necessary contract addendum were put in place in July. Potential customers who purchased through these GPOs now have the reagent rental contracts in their hands, and we anticipate closing multiple deals in Q3 and even more in Q4.

Second, many hospitals operate on a June fiscal calendar. As a result, several customers in the late stages of our sales funnel have been delaying purchase until their budgets reset for the next fiscal year. These Q2 purchasing delays are common, anticipated and further position us to have a solid Q3 ahead of the seasonally strong Q4. Importantly, our second quarter U.S.

placements continue to span all key market segments and contained a healthy mix of evaluation site conversions and sites contracting without an evaluation. New instrument contracts signed during the second quarter include academic medical centers, VA hospitals, regional community medical centers and several large integrated health networks. And as mentioned earlier, we signed the No. 1 ranked hospital in the U.S., Mayo Clinic Rochester.

The addition of Mayo is a significant development for several reasons. First, Mayo is among the most, if not, the most influential hospital in the United States, and thus will have a positive impact on moving customers through the sales process and attracting new prospects into the sales funnel. Second, up until this moment, Mayo has never adopted AST automation such as VITEK and has always preferred to use a manual reference method called agar dilution for its superior accuracy. This site's adoption is a meaningful step forward in establishing Pheno as the new standard of care for susceptibility testing.

Lastly, Mayo was the leading site in the ARLG study, providing 400 of the 500 patients enrolled. While the results are embargoed until the official release at IDWeek in October, we now know that the data must have been compelling enough for Mayo to acquire and commit to running Pheno as its new clinical standard. In addition to the Mayo Rochester signing, we also negotiated a master agreement, which should accelerate the sales and contracting process for other Mayo sites. Now turning to our international business.

In EMEA, we added 16 net new instruments during the second quarter. This fell short of our expectations for the geography and accounted for our lower-than-expected placement number and revenue for the quarter. The shortfall in EMEA was the result of multiinstrument capital deals in two separate geographies that we had anticipated would close during the second quarter but instead shifted to the back half of the year. While disappointing, we would largely chalk this up to the challenges and typical lumpiness associated with both distributor sales and multiinstrument capital equipment sales, and are confident based on our ongoing discussions with both our distribution partners and our customers that these forecasted deals will indeed close in the back half of the year.

Overall, these 55 net new additions worldwide bring our year-to-date placement total to 130. Given the strength of our late-stage sales funnel, the growing level of predictability in our U.S. forecast and typical seasonality that shifts the largest number of placements toward the fourth quarter of the year, we anticipate sizable placement growth in the back half of the year that will keep us on pace to achieve our annual global placement target of 300 to 400 placements. Clinical evidence in the form of patient outcomes data remains an important driver of our ability to rapidly increase global market penetration.

This data, now spanning over 100 various posters and publications, have been overwhelmingly positive and demonstrates Pheno's accuracy and ability to drive meaningful clinical interventions. There are a handful of additional studies in process that we believe will round out this body of evidence. The first of these studies to read out will be the ARLG study, the results of which will be presented at the IDWeek Conference in October. This study was funded and directed by the Antibacterial Resistance Leadership Group, under the National Institutes for Health, with the purposes of demonstrating that rapid susceptibility testing could enable a narrow use of antibiotics and in turn preserve antibiotics for future generations.

Accordingly, the primary endpoint of the study is time to antibiotic intervention for gram-negative bacteremia, a foundational outcome, which, if positive, would indicate that Pheno results are trusted, acted upon and lead to significantly faster optimal therapy. In comparison, a study conducted by the same ARLG team on BioFire was not able to demonstrate actionable results for this critical patient population. We expect to achieve the primary endpoint of the study. The study was not powered to look at mortality or length of stay, but this will be evaluated as secondary endpoints.

In this relatively small sampling of patients largely sourced from Mayo's highly complex patient population, this study is less likely to demonstrate statistically meaningful differences for these endpoints. In contrast, for most patients, in particular, those whose infections was the primary reason for hospitalization, we are confident that the data will demonstrate improved economic and clinical outcomes. This belief is supported by data coming out of our early customers, which illustrate the fact that rapid interventions occur and are impactful for most patients. Given that Mayo, which provided the majority of the patients for the study, has run the system clinically, seen the result in outcomes and decided to adopt Pheno as its new standard of care, we feel confident that the outcomes of this study will make a compelling case for Pheno's broad market adoption.

In addition to the ARLG study, we are directing two randomized controlled trials and 1 registry study which are all currently enrolling and are expected to read out over the next three quarters. These studies are specifically powered to evaluate economic outcomes, including randomized control studies focused on ED patients and differential outcomes of rapid AST versus rapid ID interventions. The registry study's early results were the subject of a poster exhibited at the recent American Society for Microbiology meeting. The study at this point was only 20% enrolled, heavily concentrated to Cedars-Sinai and not statistically powered.

Since then, we have added a significant number of patients from two registry participants, the University of Iowa and University of Arkansas, allowing for proper powering. The specific data from the registry is embargoed until the presentation at IDWeek, but I can tell you the data looks great and reflects Cedars-Sinai's experience as a live Pheno customer. In fact, Cedars' lab director, when asked recently about her experience with the Pheno stated, "With such a complicated patient population, we have found a rapid susceptibility information generated by the Accelerate Pheno to be invaluable." We look forward to the results of these trials and expect that the ARLG study, the aforementioned registry study and randomized control studies will all be helpful sales tools to drive further market penetration. Our second focus area driving rapid customer go-lives is aimed at helping customers complete the processes required to begin patient testing.

As a reminder, each commercially contracted instrument require several implementation steps before going clinically live and generating consumable revenue. These steps include installation and verification, connection to the laboratory information system and physician and pharmacist training on the clinical pathways necessary to ensure prompt action based on Pheno results. Our target for the time from contract signature to go-live is four to nine months. Accounts going live in the first half of the year achieved an average time to go live of six months.

This falls squarely within our target range and reflects our ongoing commitment to crisp execution during the go-live process. We continue to see multihospital implementations take longer than this six-month average due to the need to coordinate installations, perform verification testing and create LIS interfaces across multihospital Lab and IT teams. While we continue to make progress on streamlining all components of the go live process, the sheer number of multihospital deals we have been signing will cause our current average to trend higher but remain within our target range. Given this time line and the number of placements over the past three quarters, we expect a meaningful pickup in consumable revenue in the back half of 2019, particularly in the fourth quarter.

Once live, we continue to see an annuity stream in the range of $45,000 to $65,000 per instrument, with U.S. customers at the upper end of the range and EMEA pulling down the overall average. Finally, during the second quarter, we made progress in our third area of focus for 2019, readying and executing the registration trials of our bacterial pneumonia test for the U.S. market and of our current blood product for the Chinese market.

The bacterial pneumonia test will be an important addition for us as these serious pneumonias are costly and often deadly condition. In addition to expanding our available market, this new test will demonstrate the versatility and platform potential of the Pheno and its ability to replace significant portions of the current microbiology lab workflow. On our last quarterly call, we indicated that our preclinical testing generated accurate ID results and AST consistent with the reference, but we're not satisfied with the reportability of the results. We are pleased to report that our team made quick progress in this area and we initiated the final verification study for entry to the U.S.

trial. During verification, we found contamination in vendor-supplied molecular reagent and unexpected results. Accordingly, clinical trial plans are delayed while we replace reagents and put medications in place to prevent future occurrences. Consequently, we will likely restart the verification and if all looks good, initiate the clinical trial this quarter.

This trial start would still put us on track to deliver this next test kit for our Pheno customer base in 2020. Now I will update you on the progress we have made toward obtaining approval and launching Pheno for the Chinese market. First, we continue to reaffirm our belief that China is an important market for Pheno. This quarter, we learned that the Chinese government, in response to one of the world's highest levels of antibiotic resistance, launched a national action plan to contain antimicrobial resistance.

This plan includes mandating hospital stewardship and designates funding for selecting and subsidizing the use of novel diagnostics. Our lead Chinese KOL has significant experience in working with the government and is spearheading the national action plan. He is committed to evaluating Pheno starting later this year and if successful has the potential to seed Pheno at up to 40 hospitals within his network. This is a great opportunity that requires us to trial and obtain approval for Pheno.

Our preparations to initiate this registration trial are progressing well and are tracking consistent with our goal of starting before year end. Achievement of this milestone would position us to begin selling in China in the first half of 2021. In wrapping up the discussion on our progress for the quarter, I would like to publicly welcome Jack Phillips to our executive leadership team. Jack will be joining us as chief operating officer initially focused on global commercial operations.

We know Jack well and he has been on our wish list of top commercially oriented diagnostics leaders for some time. Jack is joining us from Roche Diagnostics, where he served as CEO and as president of the North American Diagnostics business. Jack's commercial track record at Roche and, before that, in his role in growing Ventana from approximately $60 million to $400 million of revenue is second to none. And true to form, when Jack is in, he is all in.

After spending months researching the company and speaking to both current and prospective customers, he, today, committed to the purchase of $1 million of our stock. We couldn't be more pleased to have such an accomplished diagnostics leader joining us to take our commercial execution and, in turn, our success to the next level. In summary, while our second-quarter placement and revenue results were below our expectations, we are encouraged by our commercial and clinical progress during the quarter and are maintaining our outlook for the year. We achieved significant operational milestones that positions us well for the remainder of the year, including the addition of Mayo Clinic to our client portfolio, a sizable back-end loaded sales funnel and the addition of Jack to our leadership team.

These factors, along with our progress in respiratory in China, further our confidence that 2019 will be a highly productive year and further our conviction that Pheno is the new standard of care for sepsis patient management. Before beginning our Q&A, I would like to share a particularly poignant customer story about a seven-year-old kidney transplant recipient at Children's Hospital Los Angeles. Twelve days after his transplant, he contracted an infection and was immediately put on broad-spectrum antibiotics. Urine and blood samples were taken and sent to the lab to be tested.

Fortunately, Children's Hospital L.A. has the Pheno, which indicated the patient's empiric antibiotic therapy would fail and allows for a life-saving antibiotic change. This case exemplifies the benefits of getting patients on the right antibiotic sooner. A boy's life was saved with Pheno and a multi-hundred thousand dollar kidney surgery preserved.

And with that, we would be happy to answer questions from our analysts. Should others on the call have questions not addressed, we will welcome you to send these questions or request for a follow-on meeting to [email protected]. Thank you.

Questions & Answers:

Operator

[Operator instructions] Our first question today comes from Alex Nowak from Craig-Hallum. Please go ahead with your question.

Will Fafinski -- Craig-Hallum Capital Group -- Analyst

Good afternoon, everyone. This is actually Will Fafinski on for Alex today. I guess I'll start off with the Mayo-UCLA trial is coming up here in a couple of months. I believe a lot of investors' eyes are watching that.

Now I don't believe you've seen the data yet, but can you help just set the benchmark for what we should be looking for? Appreciate the commentary on Mayo coming on board here and what that likely indicates, but should we expect to see a length of stay and mortality reduction? Or is it time to optimal therapy really the best metric to watch here?

Larry Mehren -- President and Chief Executive Officer

You're welcome. The metric that the study was powered to prove was time to optimal therapy. We do not know what the other end points will end up being, but we do know that they're not powered to statistically show a difference.

Will Fafinski -- Craig-Hallum Capital Group -- Analyst

Got it. Understood. And then on placements here, you placed --looking back to Q4, you placed 133 systems. So it's been about eight months for all those systems in use.

How many of them are live today and generating consumable revenue in Q3?

Steve Reichling -- Chief Financial Officer, Secretary and Chief Accounting Officer

We have a good portion of them live. What we are seeing, though, is that many of the Q4 placements were multihospital deals. And accordingly, those are, on average, longer to go live due to the complexity of those implementations. They're hard-won deals, so it's fantastic to have them and we expect them to go live in the back half of the year here imminently.

Will Fafinski -- Craig-Hallum Capital Group -- Analyst

Got it. That's all I had. Thank you, guys.

Operator

Our next question comes from Bill Quirk from Piper Jaffray. Please go ahead with your question.

Bill Quirk -- Piper Jaffray -- Analyst

Great. Thanks. Good afternoon, everybody. Let's see here.

So I guess first off, Larry, can you elaborate, I guess, a little bit on the Mayo relationship? Obviously, great to see them come in as referenced customer not only the reputation that they have in the space but obviously the important role that they're playing in the ongoing study with UCLA.

Larry Mehren -- President and Chief Executive Officer

What is our relationship with Mayo, Bill, is that what you're asking?

Bill Quirk -- Piper Jaffray -- Analyst

What I'm trying to figure out, Larry, is other than simply being a customer, have they agreed to take on any sort of reference lab model or just reference customer relationship at all?

Larry Mehren -- President and Chief Executive Officer

Bill, they're going to be a great customer of ours. We're excited to have them. I don't know that they're different than any other customer. They've run the system clinically.

They liked what they saw and they've chosen to adopt. I imagine that our sales people will use Mayo as a reference because they're a great reference and I think it will be helpful to us. But we don't have any formalized relationship with them as a reference customer, if that's what you're asking.

Bill Quirk -- Piper Jaffray -- Analyst

OK. No. That's very clear. And then Steve, can you give us a little bit of color with respect to the actual instrument versus consumable number in the quarter? And if not, kind of at what point would you anticipate getting to the level where you'd start to disclose those metrics?

Steve Reichling -- Chief Financial Officer, Secretary and Chief Accounting Officer

Yes. Sure thing, Bill. I guess the thing I would say is that for the third quarter in a row, the vast majority of our quarterly revenue and all of the growth was from consumable revenue. And of course with the shift to reagent rental that's predicted.

That was even more the case in Q2, as we saw a lighter -- forecasted revenue from EMEA. Now to the second part of your question, we certainly recognize that this is an important disclosure on a go-forward basis and intend to start providing this in the future. We haven't determined that date but tentatively in 2020.

Bill Quirk -- Piper Jaffray -- Analyst

OK. Got it. And then just last couple of questions from me here is, anything actionable with respect to some of the new rules the U.S government is rolling out with respect to antimicrobial reduction? And then lastly just kind of staying on the government side of things for a moment, we did notice that Q2 was successful in gaining an extra add-on payment. I know you too are pursuing that.

I guess what's the latest update in that respect?

Larry Mehren -- President and Chief Executive Officer

Yes. You bet. So Bill, we are excited that the government is recognizing the importance of antimicrobial resistance. There's been a tremendous effort on a large team's part over the course of a number of years to achieve that.

They're beginning by providing additional assistance to drug manufacturers, and we believe that it will ultimately also flow to those who are doing next-generation diagnostics, such as ourselves. So we think the trend is positive and expect some movements over the course of the next quarters, which would be great. Secondly, we do and are still going to apply for the NTAP program. CMS has not announced when those next round of applications are due.

We expect that they'll probably do sometime in October or November and then the approval would occur a couple of quarters after that.

Bill Quirk -- Piper Jaffray -- Analyst

Gotcha, guys. Thank you.

Larry Mehren -- President and Chief Executive Officer

You're welcome, Bill.

Operator

Our next question comes from Tycho Peterson from JP Morgan. Please go ahead with your question.

Unknown speaker

Good afternoon. This is Julia on for Tycho. So maybe starting with your outlook for placement in the back half of the year and we appreciate that you expect a significant uptick. But just wondering if you could give more color on the relative cadence in 3Q and 4Q? And then in terms of the drivers, how much of the uptick is supposed to come from the GPO contracts that you talked about versus broader adoption across the Mayo Clinic network versus broader market adoption post study readout?

Larry Mehren -- President and Chief Executive Officer

Yes. You bet. So we just got finished doing an exhaustive review, sitting down with every single salesperson and going over account by account. And I think the back half of our year looks great.

I would expect the next couple quarters, Q3 and Q4, to look really solid and for us to end up with placements within our range. That's my expectation. And I would probably expect the quarters to roll out as they did last year. I think we'll have a very solid third quarter, and I think we'll have a jumbo fourth quarter.

In terms of whether the change in those GPO contracts will help that, for sure they will. Our -- we're finding, in our business, is that the majority of microbiology labs are choosing now to purchase on reagent rental contracts. And so not having that available to literally thousands of hospitals, I think, probably impeded us a bit. Having those now on those large GPOs, particularly the compliant GPOs, is really going to give us another added tool to ensure that the back half of the year is as we have suggested.

And for all those reasons, that's why we reaffirmed our guidance that we'll end up where we said, between 300 or 400 placements.

Unknown speaker

OK. Got it. And then for the quarter, how many of those were converted from your eval program versus greenfield customers? And could you remind us how many still remain on your eval program?

Steve Reichling -- Chief Financial Officer, Secretary and Chief Accounting Officer

Yes. We continue to see a really healthy mix of both those converting from evals and those skipping evals altogether. I think the mix for this quarter was more than to those skipping the eval. That's a good sign, because the eval process elongated the overall sales process.

And I think now there's enough evidence that we can largely skip those. But the evals, we continue to run through those and we expect to continue to exhaust that entire funnel. We're not seeing, really, anybody come out of that.

Unknown speaker

Got it. And then lastly in terms of utilization. I know you're maybe not ready to break out a specific revenue number, but I think -- according to our model, I think current utilization still came lower than we modeled. Just wondering is it because the length of time it takes for customers to go live? Or is it because -- are you guys seeing any changes in underlying sort of customer utilization, either because of your customer mix or because of other factors?

Steve Reichling -- Chief Financial Officer, Secretary and Chief Accounting Officer

Yes. Good question. As we've discussed, our expectation is to have an annuity in the range of 45,000 to 65,000 per instrument. And that's what we're seeing currently.

But given the small base, quarter-on-quarter, you can see some differences impacted by mix. And what I mean by that is, on average, the -- when EMEA customers go live, they have a relatively lower annuity. And then you have a little bit of a phenomenon with those that go live faster or typically those that are independent and smaller hospitals, so they are relatively smaller annuity. We expect that coming out of the year when the large integrated health network hospitals go live that the annuity will come back toward the middle of the range.

Unknown speaker

Got it.

Operator

[Operator instructions] Our next question comes from Brian Weinstein from William Blair. Please go ahead with your question.

Brian Weinstein -- William Blair and Company -- Analyst

Good afternoon. Thanks for taking the questions, guys. I have a couple. So on the multiinstrument capital deals in the two geographies that shifted to the back half of the year, can you just go over -- you're confident, you said you are very confident on getting them.

But can you kind of talk through what's driving that confidence? And then also how big were those? Did I miss you say potentially what those -- what you were expecting them to contribute in the quarter?

Larry Mehren -- President and Chief Executive Officer

Yes. Sure. So North America, Brian, came in, in line with our expectations. The miss was largely EMEA.

And we had turnover in Germany, where we had planned on several capital deals and then a large distributor deal that, while we could have closed that sooner, we held out for better pricing. If both of those would happen, we would have been in good shape. The miss was 20-plus placements for us that shifted to the back half of the year and multiple hundreds of thousands of dollars of revenue. So that's the scale of it.

I've personally gone and evaluated those with the salesperson, and I'm quite confident that we'll get both the German deal and the distributor deal. But frankly, the back half of the year for us in North America and in Europe looks really, really good. So we're enthusiastic and confident that we'll be in good shape.

Brian Weinstein -- William Blair and Company -- Analyst

So as you're building up to this 300 to 400 target for the year and reaffirming that, do you still have opportunities that get you to the high end of the range? What would that take in terms of are there some large IDNs that you have to close? Or is it just execution on a bunch of kind of one-offs that get you to the high end of the range? And do you feel that you're angling more to the high end or to the low end?

Larry Mehren -- President and Chief Executive Officer

Yes. So there are a number of IDNs that we have in our funnel that are in the late stages, close to closing. And in that regard, they do trend toward the higher end. I think the good news, from my perspective, is that I expect for us to end the year with between 600 and 700 instruments.

And those 600 to 700 instruments have a very solid annuity profile associated with them. When those all go live, we'll end the year with something like $30 million to $35 million of run rate revenue. I feel very good about that. And our business is about those three things, Brian.

It's about getting placements. It's about getting those placements live and ensuring that the annuity from those placements is solid. And for us right now, that looks pretty good.

Brian Weinstein -- William Blair and Company -- Analyst

Great. And then congratulations on bringing Jack in. That's a tremendous addition to the team. Can you be a little bit more specific on what his role will be? You talked about commercial operations, but can you talk to us about some of the specific things that he'll be looking at, areas that he's looking to begin to? And I don't think he's on the call today, so just what you heard -- kind of what drove him to make this move?

Larry Mehren -- President and Chief Executive Officer

Yes. I contacted Jack seven months ago or eight months ago to make the pitch to join us. And it kicked off this exhaustive process where Jack reviewed all of the available data on our system, our clinical studies, spoke to current and prospective customers, dinners with the Boards of Directors, reached out to analysts, members of our team. He even dove so deep, he enlisted the help of a notable hedge fund to assess our technology and the market opportunity and our company.

And he walked away impressed and realized that this is a company that was right at the beginning of an inflection point and a company where he can learn a lot and add a ton of value. And that the area where he's going to add the most value right away is in commercial operation, an area that he's best in class in. So you can expect him to dive into both our U.S. and North American operations.

In North America, I think he's going to build on the momentum that we already have, continue to improve it. I think he's already noted a few things that he thinks we can do more effectively, further, his relationships at the highest levels of these major hospital chains can be very, very helpful to us. And then in Europe, same thing. So it's about blocking and tackling and building on the momentum that we already have and he's going to be great at that, and so we expect that to help us further have a great year.

Brian Weinstein -- William Blair and Company -- Analyst

Great. OK. Thank you, guys. I appreciate you both.

Operator

And ladies and gentlemen, at this time, I'm showing no additional questions. We'll conclude today's question-and-answer session. I'd like to turn the conference call back over to Larry Mehren for any closing remarks.

Larry Mehren -- President and Chief Executive Officer

Yes. So a mixed quarter for sure, but I couldn't be more encouraged. Our business at its core is about great people. And having Jack come on board, I believe, will take our commercial efforts to the next level.

Thought leaders like Mayo Clinic are buying and our funnel looks great. I expect a very good year. So thanks to our dedicated team, who every day are making it happen, our customers who are becoming our best salespeople. Thanks to our board who knows that we will be the standard of care.

And to our patient shareholders, thank you. We are on our way.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Laura Pierson -- Investors Relations

Larry Mehren -- President and Chief Executive Officer

Steve Reichling -- Chief Financial Officer, Secretary and Chief Accounting Officer

Will Fafinski -- Craig-Hallum Capital Group -- Analyst

Bill Quirk -- Piper Jaffray -- Analyst

Unknown speaker

Brian Weinstein -- William Blair and Company -- Analyst

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