NEW YORK – NanoString Technologies on Monday afternoon reiterated its financial guidance for Q2 and full-year 2023, despite an injunction in Germany last week that bars the firm from selling its CosMx Spatial Molecular Imager (CosMx SMI) instrument and reagents for RNA detection in that country. The company also sought to assure customers that a similar ruling in the US is unlikely.
The injunction, issued by the Munich Regional Court, is part of a patent lawsuit brought by 10x Genomics that accuses NanoString of infringing 10x's European Patent No. 2794928B1, which covers in situ detection of analytes.
For the full year, NanoString maintains revenue guidance of $175.0 million to $185.0 million, including $100.0 million to $105.0 million in spatial biology revenue.
In a conference call with investors on Monday afternoon to discuss the German court's decision, NanoString CFO Tom Bailey said that Germany makes up "a very small portion" — roughly 2 percent — of the company's revenues and its CosMx order book, and that the possibility of an injunction in that country was already "contemplated" in its previously provided revenue guidance.
Despite the unfavorable legal outcome in Germany, Bailey said NanoString remains "confident" in the strength of CosMx orders, which have already generated a revenue backlog of more than $40.0 million by the end of the first quarter. The company also considers the possibility of CosMx order cancellations "minimal" and unlikely to impact its full-year 2023 revenues, he added.
From a cost perspective, the ongoing spending on litigation was also already reflected in the company's guidance, Bailey noted, and NanoString expects to end the year with approximately $100.0 million in cash and equivalents.
During the call, NanoString President and CEO Brad Gray elaborated on the implications of the Munich court's ruling to "clear up confusion" among customers and investors.
"I want to highlight that Germany employs a distinct and unusual approach to IP disputes," Gray said, adding that the German court system has two main differences compared to the US and other European jurisdictions.
For one, he said, patent infringement and validity are handled separately. While infringement is evaluated by a regional court, patent validity is adjudicated in a parallel process called a nullity action with the German Federal Patent Court, which typically occurs about a year later, Gray said.
In addition, he claimed that German regional courts often use injunctions as the default remedy in patent infringement cases "without the requirement to consider the impact on competition or the public interest."
"These unique aspects of the German legal system create what is referred to as the injunction gap, in which companies seeking to reduce competition from smaller and more innovative competitors choose to assert IP cases," he argued.
As NanoString is challenging the asserted patent's validity through a parallel nullity action in the German Federal Patent Court, where a hearing is scheduled for May 2024, Gray said that the company sees "a clear path" to invalidate the patent on the basis of multiple instances of prior art.
Meanwhile, Gray assured investors that the company's legal battle with 10x in the US should not result in an injunction of CosMx domestically, claiming that injunctions are "less common" in the US where courts are obligated to consider a variety of factors in deciding whether to issue them.
Specifically, Gray claimed that the ongoing discovery in the US case has yielded "important evidence" about the asserted patent, which was originally granted to Harvard University based on the technology invented by George Church's research group.
"In the grant application [to the US National Institutes of Health], Professor George Church himself stated that exclusive licenses of such patents could be damaging for scientific progress and committed to making the inventions broadly available to the scientific community," Gray said. "Despite these commitments to the NIH, Harvard exclusively licensed patents resulting from the grant to ReadCoor, a company founded by Professor Church and later acquired by 10x Genomics, and subsequently used the patents and lawsuits designed to reduce scientists' access to competitive technologies."
It remains unclear, though, whether the alleged commitment by the Harvard researchers to NIH is legally binding or enforceable. According to Gray, NanoString has filed a motion for bifurcation of the trial, where the company is asking the court to separate out the matter regarding Harvard's commitment to nonexclusive licenses into a separate hearing that would happen in a faster time frame. A hearing for this motion is scheduled for June 2, Gray said.
Opposing NanoString's motion, 10x filed a court brief last week arguing that Church's statements to NIH were "aspirational in nature" and that NanoString "seizes on these statements in its proposed pleading, attempting to contort them into a binding contractual requirement that neither the NIH nor the law would recognize […]."
Meanwhile, Gray emphasized that Church's statements to the NIH are "just one of many parts” of NanoString's legal defense against injunctive relief in the US. "We of course believe we have prior art that will be bound to invalidate the patent claims of the Harvard patent in the US," he said, adding that the company also believes it has sufficient facts to show that it does not infringe the patent claims.
Amidst the heated legal battles, NanoString also accused 10x of fearmongering aimed at its customers and investors while putting out "false and deceptive claims" on the superiority of the 10x Xenium platform over the CosMx.
"Over the past few days, our competitor has stoked fear amongst investors by implying that the Munich decision is portable to other markets around the world," Gray claimed. "This is simply untrue."
He also accused 10x of contacting NanoString customers about canceling their CosMx orders prior to the Munich ruling. Following the German court decision last week, 10x put out a statement offering "special promotions" on Xenium to NanoString customers who have ordered a CosMx prior to May 17.
According to Gray, a NanoString customer can cancel an order prior to delivery of the system, and as of Friday afternoon, the company had not received any order cancellations on CosMx. He also said the company is so far not aware of any customers delaying their decision to order a CosMx system because of the injunction in Germany.
In an email response, 10x Chief Legal Officer Eric Whitaker said that "NanoString and 10x regularly contact all researchers interested in in situ technology as we compete with each other," adding that "10x expects that competition will be fair — without pirating technology used without permission or compensation."
"It's important to continue to ask the hard questions that NanoString didn't answer today," he wrote. "Has NanoString tried to redesign its products in a way that doesn't use 10x Genomics' technology? Why didn't these arguments prevent the outcome in Germany? Does NanoString have any examples of precedents where nonexclusive licenses were a stipulation of [an] NIH grant?" Whitaker added.
Meanwhile, 10x Chief Technology Officer Michael Schnall-Levin also accused NanoString of "aggressively misleading customers about the performance and maturity of its CosMx platform for over a year," claiming in an email statement that "early CosMx customers are reporting a product that isn't ready to be run in their labs, with high failure rates, and required software that isn't broadly available."
In a note commenting on NanoString's Monday call, Kyle Mikson, an analyst at Canaccord Genuity, wrote that he and his colleagues were "encouraged" and "remain positive on NanoString's CosMx system."
"Overall, our enthusiasm for the CosMx spatial imager remains strong, and we think NanoString shares currently offer a compelling entry point," he wrote.
Gray said the US litigation with 10x will play out over the coming months and years ahead. A Markman hearing, where the district court will determine how key terms in the patents will be defined for the jury, is scheduled for December 2023, and a trial for September 2024.
In morning trading on the Nasdaq, NanoString's shares were up almost 5 percent at $6.55.