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New T2 Biosystems CEO Plans to Shrink Costs, Sharpen Sales Strategy

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NEW YORK – T2 Biosystems turned in subpar fourth quarter and full year revenues, missing estimates despite its unique advantages and head starts in the rapid molecular diagnostics space. With a CEO transition completed six weeks ago, however, the firm has now announced plans to cut costs and focus on targeting sales of its sepsis tests in new ways to improve margins.

John Sperzel assumed the role of president and CEO at T2 Bio in early January, migrating from his position as Chembio Diagnostics Systems' CEO and taking over for former president and CEO John McDonough.

T2 makes the only direct-from-blood sepsis assays for bacterial and fungal pathogens that are cleared by the US Food and Drug Administration.

"Alternative pathogen detection systems — such as those offered by Accelerate Diagnostics, BioFire Diagnostics, Cepheid, GenMark Diagnostics, and Luminex — first require positive blood culture, which can take one to five days," Sperzel noted in a call to recap the earnings

The unique turnaround-time advantage is buttressed by a number of other recent milestones, including the first ever New Technology Add-on Payment (NTAP) for a diagnostic that will reduce the cost of a test by approximately 65 percent for patients whose care is covered by a sepsis diagnosis-related group (DRG).

Still, to date, the firm "has not succeeded in two important areas," Sperzel said in the call, namely cost reduction and sales execution.

"Under my leadership, we are immediately addressing these historical weaknesses," he said.

Cost reduction strategies

Sperzel highlighted that the firm's 2019 product revenues were up 11 percent year-over-year at $5.3 million. Total revenue, meanwhile, was down 21 percent to $8.3 million, with research revenue dropping 47 percent, to $3.0 million, in 2019.

Meanwhile, the firm's operating expenses in 2019 were $43.6 million, an increase of 8 percent over 2018. It also had a cost of product revenue of $16.8 million.

"These figures to not reflect the size and scope of our current business and must be reduced, " Sperzel emphasized. "We plan to be bold in reducing our cost structure and believe T2 Biosystems will be a stronger company as a result."

Specifically, Sperzel plans to reduce cost of goods and operating expenses. "We're going to look at every dollar spent," he said, including to support its real estate footprint. "We're sitting in several buildings today and there is certainly an opportunity for us to consolidate that," he said.

T2 Bio will also explore partnerships as a way to reduce operating costs and fuel commercial growth, including seeking strategic commercial partners for distribution internationally.

Commercial execution strategies

Sperzel brought on Tony Pare as chief commercial officer last month, a position that was previously subsumed under the CEO's role.

"I wanted someone leading our commercial effort who wakes up every day and thinks about one thing, and that is commercial execution and success," Sperzel said.

Under Pare's leadership, the firm plans to focus 80 percent of its direct commercial resources on the US market.

It will also change its hospital targeting to focus on departments with patients at high risk for bacterial and fungal infections, like the oncology, transplant, and intensive care units.

And, T2 Bio will shift its focus to increasing test utilization, rather than on the absolute number of instruments it places, Sperzel said.

Since the T2Dx instrument and assays are direct-from-blood molecular tests, they impinge on sepsis patient workflows in a different way than end users may be accustomed to. Thus, "We will expand our messaging within the hospital to place greater emphasis on clinicians, as they are essential to integrate T2 testing into sepsis protocols," Sperzel said.

T2's CFO John Sprague added on the call that this means T2 regional account managers will be visiting hospitals to identify key members of sepsis committees and primary decision makers. "In some cases, it is infectious disease clinicians or PharmD's, [and] the laboratory director obviously has a big role to play," Sprague said.

The firm expects that its new strategy will lead to quicker adoption of testing, which Sprague explained means that individuals who need to be involved in ordering the test are on board with the program.

"When it comes to post-culture tests, many times it is the laboratory director that makes a decision on which post-culture test that is utilized, whereas we touch upon the clinicians and really we need to be in a position to have the clinicians request the T2 test in order for it to be run," Sprague said.

"We have some good cases ... where T2 is now in use because the clinician population has been educated," he also said. "Once we have it in routine use and it becomes part of that sepsis protocol, then it becomes a lot more automatic, and adoption ramps," Sprague said.

Improved time-to-appropriate-therapy is the primary endpoint that the firm is driving in its account set-up evaluations, he said, and it will "drive [that] even harder in the future."

Previous commercial and sales incentive plans were focused on instrument placements, with not enough attention to test utilization, "resulting in an installed base of T2Dx instruments with low test utilization," Sperzel said. The firm had 91 installed T2Dx instruments active at the end of 2019, with 40 in the US.

Sprague said the firm expects to sign 30 T2Dx instrument placement contracts in 2020, aligning with the new focus on driving test utilization on the current installed base. By comparison, T2 Bio had placed 10 instruments in the recently completed quarter and 45 total in 2019.

Currently, the average test usage in dollar amount is about $50,000 per installed T2Dx instrument in the US, but Sperzel said the sales team will be striving for an average of $100,000 per instrument this year, with an ultimate goal of $200,000 per instrument, which is the utilization the level of current top customers.

"In the past, we've been trying to sell to more than 5,000 hospitals in the US market — we're going to have a much more focused effort in terms of targeting, [and] we're going to involve the clinician in the sales process," Sperzel said. "If we are in the microbiology lab — which is an important part of the sales process — we are too far downstream," he added. "We need to impact the decision at the point of care, when the clinician is standing in front of the patient."

Sperzel said that Pare and his team will be focused on targeting the right accounts, and going to the right places, and the compensation plans and strategies will be centered on test adoption and utilization. "Given my commercial experience, I will be personally involved in our sales and marketing effort, and expect to support our sales team in targeting and closing key partnerships," Sperzel said.

Other aims and insights

In his first week as CEO, Sperzel said he met with as many employees as possible and what he found was "talented, passionate people, who are ready to fight and ready to win," he said. "The team understands that we must do things differently, and they are committed to change."

Sperzel added that T2 is "building a game plan" around priorities of improving operations, accelerating sales, but also advancing its pipeline.

The firm will focus on sepsis. "That does not mean that we're not going to do anything else, but if we're going to say that we're going to be focused, we have to be focused," Sperzel said.

To whit, T2 had been developing a Lyme disease panel, as previously reported. The company is now working with external labs to select a partner to commercialize the Lyme test in the near term as a lab-developed test, according to Tom Lowery, the firm's chief science officer. This doesn't preclude FDA clearance in the future, he added.

Lowery also noted on the call that the firm has several interventional multicenter and single-center studies ongoing in the US and abroad. These are primarily for the T2 Bacteria panel, in patients at high risk of sepsis, such as those in the intensive care unit. The preliminary data was used to support the NTAP, Lowery said, and much of it will be shared at the upcoming European Congress of Clinical Microbiology and Infectious Diseases.

The firm will also continue to develop a next-generation instrument as stipulated under its recent contract with Biomedical Advanced Research and Development Authority, as well as a biothreat panel.

Sperzel also noted on the call that he is personally motivated to focus on sepsis because of a health scare he experienced in 2017. He was diagnosed with a rare condition and spent two months in a cardiac surgical intensive care unit, ultimately receiving a heart transplant.

"While in the hospital, I became infected with Pseudomonas aeruginosa, a multidrug-resistant bacterial infection that can lead to sepsis, and death if not treated appropriately," Sperzel said. He recovered, but the statistics on sepsis mortality are "staggering," he noted.

"Patients deserve better," Sperzel said. He also referred to the study in The Lancet last month that concluded sepsis is significantly more prevalent and lethal than previously thought, with 11 million deaths each year globally. In the US, sepsis represents nearly $41 billion in healthcare costs and is the most common cause of in-hospital mortality, with about 207,000 deaths each year.  

"I believe we have an opportunity to change the paradigm in the treatment of sepsis," Sperzel, shifting from empiric, probability-based therapy to rapid, targeted therapy, and reducing unnecessary rounds of exposure to broad-spectrum antibiotics.

The firm's T2 Resistance panel recently received CE mark, multiple sites are conducting studies, and the firm is in dialogue with the FDA regarding study design leading to regulatory clearance.

Puneet Souda at SVBLeerink, an investment firm that covers T2 Bio, said in a note to investors that in the end the proof will be in the pudding, and a string of well-executed quarters are needed to turn around opinions. He rated T2 Biosystems' shares Outperform with a 12-month price target of $5 per share.

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