Talis Biomedical Corporation (TLIS) Q4 2021 Earnings Call Transcript

Talis Biomedical Corporation (TLIS 2.11%)
Q4 2021 Earnings Call
Mar 15, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by, and welcome to the Talis Biomedical fourth quarter 2021 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to Emily Faucette, senior vice president, corporate communications and investor relations. Please go ahead.

Emily Faucette -- Senior Vice President, Corporate Communications and Investor Relations

Good afternoon and thank you for participating in Talis' fourth year -- fourth quarter and year-end conference call. Joining me today are Rob Kelly, our chief executive officer, and Roger Moody, our chief financial officer. Earlier today, the company released financial results and the business update for the quarter and full year ended December 31, 2021. A copy of that press release can be accessed on the investors' page of our website at talisbio.com.

Before we get started, I would like to remind you that management will make remarks during this call that are forward-looking statements 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 Talis issued today. For a more complete list and description, please see the company's filings with the SEC, including the risk factors section of the company's 10-K filed with the SEC on March 15, 2022, and in its other filings.

Except as required by law, Talis disclaims any intention or obligation to update or revise any financial projections or 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, March 15, 2022. With that, I would like to turn the call over to Rob.

Rob Kelley -- Chief Executive Officer

Thanks, Emily. Good afternoon, everyone, and thank you for joining us. It's an honor to participate in my first earnings call as CEO of Talis after assuming the role back in December. For those of you who are not familiar with my background, prior to serving as the company's chief commercial officer, I spent 25 years in various commercial and operational leadership roles at life science and diagnostic companies including Genalyte, Illumina, Siemens, and Biosite.

Given the delays Talis has been experiencing, I have spent the past three months diving into specific areas of our business to better understand the issues we are facing. I want to take this opportunity to walk you through my initial assessment with as much transparency as possible based upon the information we have today. And more importantly, I will outline the changes we are implementing immediately that we believe will set Talis up for long-term success. Let me begin with where we stand today.

Upon receiving our EUA in November, we decided to take a phased launch approach for rolling out the Talis One system with the goal of initiating a limited rollout to prospective customers beginning in the first quarter of 2022. Unfortunately, we have not yet started our phased launch of Talis One due to challenges with manufacturing at scale. Specifically, while we continue to see high performance in the Talis One platform, the yield and consistency of our current manufacturing process is not yet sufficient to support commercialization. That said, we strongly believe in the performance of the Talis One system and are steadfast in our belief that it is a valuable and viable asset.

One of the reasons we believe so strongly is our scientists continually monitor the impact of COVID-19 variants that are on the rise. Over the past several months, we have evaluated the notable variants circulating, as well as samples with broad range of viral load. In doing so, the Talis One COVID-19 test system continues to perform as expected with respect to sensitivity and specificity, and accurately identifies variants, including Delta and Omicron. When we spoke with you back in November, we were beginning to evaluate the performance of cartridges coming off our high-yield lines.

Over these past few months, the rate of invalid or failed tests remains higher than what we believe is acceptable. With respect to instrument manufacturing, our current process is not yet optimized to produce a minimum monthly yield to support a commercial launch. At this time, it appears the delay in manufacturing ramp-up is a combination of our manufacturing process and challenges with our suppliers. We have informed the FDA of these delays and continue to plan to launch the Talis One COVID-19 test system under our EUA once we can manufacture reliably at scale.

Both based on the level of information we have today, we are not providing a timeline for commercial launch. Further, with the most recent guidance on EUAs, we are now preparing to pursue a 510(k) regulatory pathway for our second planned assay, which is a COVID flu respiratory panel. This shift will result in a longer path to market. We have not changed our objective to broaden the Talis One test menu to address additional unmet needs at the point of care.

Development of our chlamydia and gonorrhea assay continues, but this timeline is also impacted by delays in manufacturing scale up. But we are not satisfied with the current level of uncertainty and delays, we have a plan to address these challenges and to deploy our capital in the most effective manner to position Talis for future success. With the information that we have today and guidance from our Board, we have engaged external consulting firms to advise us on assessing product design for both cartridges and instruments to manufacture at scale. Evaluating our manufacturing processes and partners, and determining appropriate next steps, which could include production modifications.

We believe this work will form our path forward in bringing the Talis One system to market and will provide critical information to develop better informed timelines for our product road map. While this assessment is underway, we have established a strategic plan focused on the following key areas. One, demonstrating our ability to manufacture the Talis One instrument and cartridges at scale. Two, initiating a phased launch for Talis One COVID-19 under our EUA.

Three, concentrating assay development to prepare for 2023 clinical milestones. And four, preserving cash to carry us through 2024. To align resources with this strategic direction and extend our cash runway, we have undertaken an approximately 25% reduction in force and are implementing additional cost reduction measures. Roger will provide more detail on the impact of these actions shortly.

We are also making changes to our leadership team. Doug Liu will be stepping down as chief operating officer and is transitioning his manufacturing and R&D responsibilities over the next several weeks. With these changes, we focus on clear objectives, a strong financial position, and commitment to preserve capital. We believe we are on a path to deliver the long-term value and potential of the Talis One system.

Finally, I want to emphasize that our long-term goals have not changed. We are fully committed to fulfilling our mission to advance health equity and outcomes by delivering accurate infectious disease testing in the moment of need at the point of care. I'll now turn the call over to Roger to walk through our fourth quarter and year-end financials. I will then return with closing remarks.

Roger Moody -- Chief Financial Officer

Thanks, Rob. Manufacturing scale-up expenses were the largest drivers of full year 2021 spending. We are reducing this investment substantially as we shift from building our manufacturing infrastructure to validation and optimization. Additionally, we are reducing our commercial investments while the Talis One launch is delayed.

With these changes and our current outlook, we plan to extend our current cash runway through 2024. Now, I'll turn to fourth quarter and full year financials. We recognized $8 million in grant revenue in 2021, compared to $11 million in 2020. Grant revenue in both years was driven primarily by the RADx contract with the NIH, that is now completed.

Research and development spending for full year 2021 was $158 million, compared to $89 million in 2020, and was driven primarily by investments in manufacturing scale up. The $158 million in 2021 R&D spending includes $70 million in manufacturing scale up, $22 million in instrument inventory, and $12 million in cartridge inventory, leaving approximately $54 million in recurring expenses. Our investment in manufacturing scale-up was largely completed in 2021, as we transitioned to validation and optimization. The inventory amounts were expensed due to the timing of the Talis One commercial launch.

Selling, general and administrative expenses were $42 million in 2021, compared to $13 million in 2020. Commercial expenses increased $15 million, driven by the build-out of our sales and marketing teams. General and administrative expenses increased by $14 million, driven by increased payroll, stock compensation, facilities, and public company expenses. Today, we announced a reduction in force and are implementing further spending reductions.

The cost of these reductions will be taken as a charge this quarter in the amount of $1 million. The annualized savings moving forward include $10 million in compensation expenses, and $26 million in other expenses. Cash and cash equivalents as of December 31, 2021, were $233 million. Our objective is to ensure that our current cash reserves are sufficient for operations through the end of 2024.

This could change as we gain more clarity on the timing and trajectory of our Talis One launch. Finally, we began to distribute third-party COVID-19 antigen tests earlier this year. While we may, from time to time, pursue other near-term revenue-generating opportunities like this, we do not expect significant revenue contribution in 2022. I will now turn the call back over to Rob for closing remarks.

Rob Kelley -- Chief Executive Officer

Thank you, Roger. In closing, I would like to share my personal thoughts with you. Talis has designed a product intended to not just deliver a rapid result but deliver multiple results in less than 30 minutes for some of the most challenging pathogens in infectious disease. This requires a system that is complex and harder to manufacture at scale.

While ambitious in our original plan for rapidly scaling to high throughput, I believe we are now on a reasonable path to bring the Talis One system to market. As we work to overcome manufacturing challenges, I believe it is a matter of when, not if, this occurs and remain confident that Talis will be well positioned to address the growing and large unmet need in point-of-care molecular testing. Together with our board and management team, we are committed to resolving our current issues quickly and with transparency, establishing future timelines with confidence, operating more efficiently to control our cash, and doing things differently when appropriate, as evidenced by the changes and actions we are taking today. Finally, I want to recognize our Board for their unwavering support and guidance, our shareholders for the patience and trust they have put into our company, and most importantly, our employees for their relentless dedication, contributions, and belief in furthering our mission.

With that, I'd like to open the line for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Tycho Peterson with J.P. Morgan. Your line is open.

Casey Woodring -- J.P. Morgan -- Analyst

Hi, guys. This is Casey on for Tycho. So the manufacturing challenges you noted, are they technical in nature in terms of the instrument or cartridge? Or is it more of a supply chain issue? Can you help us understand what you're facing here and what the remedy will look like?

Roger Moody -- Chief Financial Officer

Yeah. Hi, Casey, thanks for the question. This is Roger. The challenges we're facing, well, first of all, let me start with we haven't any fundamental design issue in the system as of yet through our own reviews, as well as through outside experts, who have taken a look.

There are a variety of issues. They fall into a few different buckets. Manufacturing process is one, quality control is another, and supplier product conformance is the third. Does that help provide a little color?

Casey Woodring -- J.P. Morgan -- Analyst

Yeah. That's helpful. And then, as far as the rollout is concerned, I think you have been targeting five sites in the first phase of launch. So are you effectively pushing the strategy out a few quarters or should we not expect any product revenue here in 2022? And on that note, for the second assay, the combo test, you're pursuing 510(k).

Do you have any confidence that that could potentially receive approval for this year's respiratory season in the back half of the year?

Rob Kelley -- Chief Executive Officer

So at this time, we are not giving any time lines for launch of our products. But the question that you asked may be relevant to the last quarter's discussion around pre-marketing and so we had begun premarketing studies to get feedback from customers. And we actually suspended that because we started to identify that these invalid rates were high enough that they weren't going to be putting our best foot forward with customers. And so, really, we can't provide timelines, because we really need more information on where we stand from a manufacturing perspective.

And right now, the more information we have, the smaller the error bars will be. And so, we're going to be really focused on that in making that happen. But we still really believe strongly in our product. Talis One is extremely high performing, and it's a valuable and viable asset like I mentioned.

And it has -- it continues to show itself very well, whether in clinical studies or variant detection. And just across the board, when we utilize the product, invalid rate is not a challenge. The product really shines in those situations, and we're very supportive, and we believe that we can take this -- we can get this to market.

Casey Woodring -- J.P. Morgan -- Analyst

Got you. Maybe to follow up on some of those comments. So can you maybe talk toward customer willingness to add a new platform for COVID testing now as cases continue to trend downward? How comfortable are you with demand being there for whenever you can get this product to market? And what sort of appetite is there for a new instrument that is absent of menu aside from respiratory testing for the foreseeable future?

Rob Kelley -- Chief Executive Officer

Yeah. It's a great question, and it's one, given that we're feeling a slowing of COVID right now, you would ask yourself if there's still a market. Just as early as yesterday, I reached out to our -- one of our sales operations individuals to understand what the demand is. And it still -- it's just fantastic to me to see that COVID is going down in terms of hospital presentations, but at the same time, we still see demand for our product.

And it really is somewhat shocking when you think of all the products that have been out in the market. But when you start to dig in, it's a little bit more nuanced. There are folks who have only been able to get access to antigen testing and not molecular testing. There are folks who have molecular testing and would like something else, because they can't get cartridges from their current vendors.

And there are many people, who are looking for their first molecular system still, because they just haven't been able to get to the top of the line -- to the front of the line with some of these larger companies. And so, we do expect to see a long tail of opportunities into the foreseeable future as we go from pandemic to endemic even. We believe that potentially the therapeutics that could be coming out could be linked to testing, and that could drive more molecular testing. And honestly, then from there, you asked about the 510(k) potentially for a COVID flu product.

We certainly believe that there will be a market for COVID flu down the road as well. But the places that we're looking to put these instruments are going to be long-term customers for us. And those that are going to be really interested in our extended menu, which is why CT/NG is at the top of the list for us. But also, bacterial vaginosis, other sexual health, and women's health menu items.

That's really where I think the value of getting our COVID product into the market is going to shine, because we will have long-term customers able to adopt our product via that installed base.

Casey Woodring -- J.P. Morgan -- Analyst

Got you. And if I can just sneak one more last one in. I just wanted to clarify. So you did not give a cash burn number for 2022.

And I think if I heard you correctly, how should we -- I think you said runway through 2024. Just kind of wanted to confirm those numbers. And I was curious around what the reduction in workforce will look like in terms of the sales force versus manufacturing.Thank you.

Roger Moody -- Chief Financial Officer

Yes, I'll take that one, Casey. So you're correct that we are not providing guidance on revenues or cash flows for the year, but we are -- our objective is to preserve our cash to last through 2024. In terms of the reductions in force that we took, they were across all functions of the organization. They were larger in our commercial team.

However, we have left intact functionality across every part of our business.

Operator

Thank you. Our next question comes from Derik De Bruin with Bank of America. Your line is open.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Hi. Good afternoon. Can we talk a little bit about sort of like when do you think you can get to a menu on the sexual health? I mean if you go back and you look at the -- your original plans, it was CT/NG, it was an STD panel. It was bacterial vaginosis, it was HSV.

And you need some sort of critical mass to sort of get there. I mean how long do you think before -- what is a realistic for CT/NG and then for this other one? So just some idea on how we could sort of think about building this out.

Rob Kelley -- Chief Executive Officer

Hey, Derik. I guess I would say, first of all, that we are still continuing development on our women's health and sexual health menu. And while we can't provide any timelines right now, as we mentioned, the challenge of manufacturing scale-up is going to continue to keep us in the dark a little while until we can figure some of this out and put together a time line that we can be confident with.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

OK. And when you think about -- once you -- actually, what's the incremental cost in going from the EUA to a 510(k) route?

Roger Moody -- Chief Financial Officer

I'll take that one, Derik. The incremental cost is not overwhelming. As you know that EUA is a pathway that the FDA created to enable a reduced number of samples to be used to submit. So obviously, the clinical trial cost would increase, and we've factored that into our ongoing burn rate here.

And so, I'm not going to give you a specific amount, but it's not in the, let's call it -- it's not in the high millions of dollars. It's just a larger end of samples that need to be collected through the 510(k) method, and it does take longer to do that as well.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Got it. OK. I think that's it.  Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from Mark Massaro with BTIG. Your line is open.

Mark Massaro -- BTIG -- Analyst

Hey, guys. Thank you for taking the questions. I think I lived through this before with GenMark, who had similar issues with invalid rates and process design, and they were able to get it together and sell for $1.8 billion. So definitely, there is hope.

I guess, can you speak to what the invalid or failed rates are? You indicated they're too high. Are they over 10%? And then can you maybe expand a little bit more about what specifically manufacturing processes and challenges you're dealing with? Just to give us a sense for what some of the challenges that you're facing.

Rob Kelley -- Chief Executive Officer

Sure. I can comment on the invalid rates, and then Roger can talk about the manufacturing processes. But ultimately, if you look at sort of the standard FDA guidance during the EUA period, they mentioned that you had to be below 10% to have a viable product and a preferred test that were under 5% invalid rates. So what we are seeing is above 10%, and that is really what's causing the issue.

I wouldn't say it's significantly above 10%, but it obviously varies given the challenges we're having with manufacturing within a window. But our goal is to get it back down under 10% and in line with what our clinical study invalid rate was for our EUA.

Roger Moody -- Chief Financial Officer

And Mark, this is Roger. I'll chime in on the manufacturing processes. So I'm not going to get into specific issues that we're dealing with, but I'll give you a little bit of a sense for this. We were able to, in manual assembly and production of cartridges, manufacture with just a small number of people.

However, as we expanded to our automated cartridge lines, as we expanded to assembling our instruments over a larger group of people, we realized that there are a number of things that we had to tighten up. So work instructions would be included in that. QC parameters around various parts of the consumable -- automated consumable assembly lines. And so, those are just examples, but I'm not going to get into any one specific, because as I mentioned before, it's not a fundamental design issue that we're facing here.

It's a series of different things that need to be refined in order to scale -- to manufacture at scale.

Emily Faucette -- Senior Vice President, Corporate Communications and Investor Relations

Hey, Mark, it's Emily. If I can just jump on the invalid rates. When we spoke to you guys last November, we had talked about this very deliberate, methodical approach for a phased launch rollout, so that we could really give customers the most exceptional experience with our product in a regimented way. And so, I think our ability to conduct premarketing studies and to get this into the hands of a few customers and identify this issue is exactly the reason why we are taking this approach.

And so, during this time, while not only learning a little bit about the invalid rates, we also had the opportunity to learn about how the customers view our product. And they really do like working with it. It's very simple. So we're getting really valuable feedback that we are applying as we move forward.

But as you can imagine, with our goal to deliver the highest quality product with the best customer experience. As soon as we saw these invalid rates, we thought it was the most prudent thing to take a step back and address them, and this exactly allows us to do that and to ultimately offer the best customer experience as we think about providing a platform for the long term over multiple infectious disease areas.

Mark Massaro -- BTIG -- Analyst

OK. And then, my follow-on question, I guess, is a three-parter. What is the size of the sales force after the staffing reductions? The second part is you indicated Doug Liu is leaving the firm -- or excuse me, is it leaving the position? Is it safe to say he's leaving the firm? And are you conducting a search for a new COO? And then the last part is, what is the rationale for asking your salespeople to distribute third-party antigen tests?

Rob Kelley -- Chief Executive Officer

Sure. Let me start with your first question. The size of the sales force. So our commercial team, in general, has taken a significant reduction, which includes marketing, product, customer service, customer support, technical support and enterprise sales and territory sales.

Of the group that is focused on sales, I believe we have more than a handful, but somewhere in that range. And so, maybe linking that to the third question that you asked on distribution. So we had obviously had a much larger team in place and leveraging their numbers and capabilities to sell antigen testing was a great idea at the time. I think it was very helpful for the team to get something in their hands and get out and sell.

But most importantly, we were focused on customers that would be our end users. So we were staying engaged, staying relevant, talking about the Talis One, and that's the reason that we chose that bucket. And often times, people were looking to have antigen testing and a molecular confirmation testing. And of course, wish we could have our system out there in time.

So going forward, we'll be following the same strategy really. We look for things that we could put in our bag that we keep us relevant while we're continuing to talk to customers about the future Talis One and not just for COVID, but for its extended menu and women's health, most importantly. And then, your third question about Doug. So Doug is a great guy, and we wish him the best wherever he goes next.

He and I were always very much in alignment on things. And one of that is the core technology of Talis One. We believe very strongly that it's the right technology and it's capable of doing some great things, as you can see from the data that we've shared in the past. But the challenge of manufacturing at scale as well is something that Doug and I believe we can overcome.

We do not think that there is some fundamental design issue with the product. And so, we're very optimistic that that's going to happen. With that said, he and I did talk, and we determined that it was probably the right time for him to transition out of the organization. And one of the things that is great about Doug is he built an amazing team under him while he was here.

And the team covers all aspects of R&D and manufacturing. So from supply chain, manufacturing, operations, assay, software, engineering, all of these individuals are extremely strong. And unless we -- something -- we come across something that makes us think we're going to need to backfill Doug, we think we have the right team in place, and we think we can achieve the goals that we had set out to do in our strategic plan, which is get to manufacturing at scale and allow us to launch under EUA in short term. And so, that is our goal right now.

Mark Massaro -- BTIG -- Analyst

OK. Thank you.

Operator

Thank you. And at this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Rob Kelley for closing comments.

Rob Kelley -- Chief Executive Officer

Thank you for joining us all today. And thank you for your time and interest in Talis. Have a great day.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Emily Faucette -- Senior Vice President, Corporate Communications and Investor Relations

Rob Kelley -- Chief Executive Officer

Roger Moody -- Chief Financial Officer

Casey Woodring -- J.P. Morgan -- Analyst

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Mark Massaro -- BTIG -- Analyst

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