Executives: Darlene Deptula Hicks - CFO John McDonough - President and

CEO
Analysts: Steve Brozak - WBB Securities Yi Chen - H.C. Wainwright Max Masucci - Canaccord Genuity Carolina Ibanez-Ventoso - Janney Montgomery Scott Kai Wang - Leerink

Partners
Operator: Greetings, and welcome to the T2 Biosystems' Third Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Darlene Deptula Hicks, Chief Financial Officer for T2 Biosystems. Please go ahead. Darlene

Deptula Hicks: Thank you and good afternoon everyone. I am Darlene Deptula Hicks, the Chief Financial Officer of T2 Biosystems, and welcome to our third quarter 2017 financial results conference call. With me today is John McDonough, President and CEO.

Before we get started, I'd like to remind everyone that comments made today by management will include forward-looking statements. Those include any statements which do not relate to matters of historical facts. Forward-looking statements are based on estimates and assumptions as of today and are subject to risks and uncertainties that may cause the actual results to differ materially from those expressed or implied by those statements, including the risks and uncertainties described in T2's Annual Report on Form 10-K which was filed with the SEC on March 15, 2017. The company undertakes no obligation to publicly update or revise any forward-looking statements except as required by law. With that, I'd like to turn the call over to President and CEO, John McDonough, for his opening comments.

John?

John McDonough: Thank you, Darlene. Good evening everyone, and welcome to our third quarter 2017 earnings call. Let me begin with a brief agenda for today's call. I'll begin my prepared remarks with a high level summary of our financial results for the third quarter of 2017, a review of the key drivers that contributed to our performance during the quarter, and also provide an update on recent business highlights. I'll then turn the call over to Darlene who'll discuss our quarterly financial results in detail and review our financial guidance for the fourth quarter of 2017.

Following Darlene's review of our financial guidance, I'll share some closing remarks before we open the call up for questions. Our operating progress in the third quarter was one of the best we've had as we completed the T2Bacteria Panel FDA filing for market clearance, closed an exciting collaboration with the CDC around Candida auris superbug detection, closed a partnership with pharmaceutical company, Cidara, for the use of T2Candida in their antifungal clinical trial, and closed the $20 million equity financing. Having said that, let's start with our financial results. During the third quarter, we reported total revenue of $1.1 million, and product revenue of $739,000, which grew 27.4% on a year-over-year basis, and was slightly ahead of revenue in the second quarter of 2017. The third quarter product revenue was negatively impacted by instrument orders received in September that could not be shipped in order to be recorded as revenue in the quarter.

Additionally, we saw some delays in orders from customers located in the Texas area that may have been the result of weather. I'm happy to report that those orders did close in October. We expect to realize this revenue in the fourth quarter, and expect fourth quarter product revenue to be in the range of $1 million to $1.2 million, and expect a quarter-over-quarter growth rate of 36% to 53% [ph]. We continue to measure our progress using metrics that we've highlighted on past calls, including the growth in the number of high-risk patients at customer facilities under contract. We consider this metric to be important as it represents the number of patients that could be tested with T2Candida and T2Bacteria if all high-risk patients were tested at the time patients present with symptoms of infection.

During the third quarter, we increased the number of high-risk patients at hospitals under contract by approximately 58,000 patients, ahead of the 40,000 high-risk patient target we set on our last earnings call. The estimate 58,000 high-risk patients are a result of closing seven new hospital contracts in the third quarter, all of which were international accounts. We also closed three additional contracts for the use of the T2Bacteria Research Use Only, our RUO product, in the United States. As of September 30, we now estimate that we have 56 contracts in place covering 144 hospitals that provide access to an estimated 473,000 high-risk patients that could be screened with T2Candida and T2Bacteria which both run on the T2Dx instrument. We're very excited about the clinical and market developments related to the T2Bacteria Panel.

In July, we were pleased to report that we had achieved the CE Mark for T2Bacteria, enabling the commercial launch of T2Bacteria in Europe and other countries that accept the CE Mark. In September, we announced that we submitted our 510(k) application to the FDA requesting market clearance of the T2Bacteria Panel. The submission includes a filing with compelling data that demonstrates overall sensitivity of 95.8%, and overall specificity of 98.1%. This compares favorably to the reported 50% to 65% sensitivity of blood culture, and therefore the sensitivity of any diagnostic product that is dependant on a positive blood culture. Most importantly, the pivotal study of over 1,400 prospective patients run at 11 different institutions across the United States identified 102 patients with known infection.

Of those, T2Bacteria detected 98 of the infections, while the blood culture which was drawn concurrently with the T2Bacteria blood draw detected only 39 patients. Additionally, the average time for results for the T2Bacteria Panel was 5.4 hours, compared to 71.7 hours for blood-culture-based species identification. The T2Bacteria Panel was designed to identify approximately 90% of all gram negative infections coming in through the emergency department, and approximately 70% or more community-acquired infections presenting MBED [ph]. We continue to plan for FDA clearance by year-end. To date, we've had informal communications from the same FDA reviewer who reviewed T2Candida, and we expect to hear a formal response from the FDA soon.

We're enthusiastic about the commercial interest in the T2Bacteria Panel as evidenced by the seven U.S. hospitals now under contract to use the T2Bacteria RUO panel. At IDWeek, in October, there was a presentation by one of our RUO customers who is the director of clinical microbiology and molecular diagnostics at Hennepin County Medical Center, in Minneapolis. The presentation highlighted the potential benefits of T2Bacteria, including testing in the emergency department, where the T2Bacteria Panel was shown to cover 85% to 91% of infections presenting in the ED at Hennepin County. The presentation also reiterated the potential for significant reductions in patient mortality, length of stay, and hospital readmissions.

T2Bacteria remains a very important product and key driver of future growth for our company. We believe the availability of T2Bacteria along with T2Candida and the T2Dx instrument represents a game-changer in the market, and will be the first comprehensive rapid diagnostic sepsis solution, that combined with the standard of care may enable approximately 95% of all patents who have a sepsis pathogen infection to be treated with the right targeted therapy as quickly as six hours after blood is drawn. We continue to see from our commercial activities that the emergency department could be a strong feature [ph] to drive initial adoption of the platform within hospitals. In addition to providing a rapid diagnostic result that can enable the timely admission of patients with deadly infections, there is a strong reimbursement structure in place that provides almost $290 of reimbursement for patients not admitted to the hospital. From T2's perspective, being able to offer the T2Bacteria Panel alongside of our already FDA cleared T2Candida Panel which both run off T2Dx instrument enables us to more than double the market potential for our product.

From the patient and healthcare perspective, adding T2Bacteria offers the health system millions of dollars of potential economic value, and the ability to impact lives by allowing a faster and a more targeted therapeutic approach to treating patients. A key focus of our remains utilizing the increasing number of customer success stories to broaden and enhance the awareness of the T2Sepsis Solution. In October, we completed a successful IDWeek conference which featured seven poster and panel presentations on our T2Sepsis Solution. In addition to the presentation from the Hennepin County Medical Center regarding their use of T2Bacteria RUO product, there was an exciting presentation from the chief of infectious diseases of the VA Pittsburg Healthcare System. He presented results of a 14 multi-center trial that evaluated 152 patients with Candida infection.

This study demonstrated T2Candida sensitivity of approximately 90%, including patients with candidemia that were missed by blood culture, and specifically patients with candidemia who are being treated with antifungal drugs that can be missed by blood culture. Also in October, the Henry Ford Health System published a study in the Journal of Antimicrobial Stewardship assessing the rapid diagnostic quality of the T2Candida Panel. In the study, patients tested with the T2Candida Panel were treated in a median time of five hours, a more than eight fold reduction as compared to that based on blood culture with delayed appropriate therapy by a median of 44 hours. This speed advantage demonstrates that T2Candida is a valuable clinical tool to aid Antifungal Stewardship's goal to delivery timely antifungal therapy for infected patients. Although the study was not powered to evaluate reduction in patient mortality rate, the authors did note that appropriately treating patients within 24 hours of the onset of disease is proven to reduce mortality rates from 41% to below 16%.

T2Candida was the only diagnostic method presented in this study with the speed and accuracy necessary to enable therapeutic decisions that might achieve this reduction in mortality. Before turning the call over to Darlene for a complete review of our quarterly financial performance, I'd also like to provide a brief update on our pipeline and commercialization efforts. In September, we announced a partnership with the Centers for Disease Control and Prevention, the CDC, regarding a new effort that will use the T2Dx instrument in an investigational use only T2Caidida auris Panel as a means of rapidly detecting the superbug Candida auris in hospitals around the country. Candida auris is a multi-drug resistant pathogen recognized by the CDC as a key health threat because of its difficulty to identify, and its growing resistance to all three major classes of antifungal drugs. Unlike most other species of Candida, Candida auris can quickly spread in a hospital, making rapid identification and hospital environmental surveillance a critical component of containing these outbreaks.

Existing laboratory methods to detect Candida auris, including culture, suffer from prolonged detection time, 17 days at the CDC, and low accuracy, which exacerbates the challenge in the fight to contain the superbug. The T2Candida auris diagnostic panel has average time to result of approximately four hours. Instruments are installed at the CDC, and work is currently underway to validate the T2 method which is expected to take about 90 days. We're also conducting a study in Europe on a test that has demonstrated its ability to detect Candida auris directly in patient blood. In September, we initiated a partnership with Cidara, a West Coast biotech company to use the T2Dx instrument along with the T2Candida Panel to accelerate patient enrollments in its clinical trials evaluating the company's lead antifungal compound, CD101.

So, their approach following the observation at clinical site using the T2 panel is demonstrated for rapid development in their Phase 2 trials. Under the terms of relationship, we replaced T2Dx instruments at clinical trials to choose to participate in the program and Cidara will provide reimbursement coverage for sites with T2 Candida Test that are used to bring patients for enrolment. This relationship highlights both the new ways certain healthcare organizations are leveraging our product and how we are looking to maximize the market awareness of our product and commercial footprint. We have also successfully included our preclinical study for our T2Iron Diagnostic Panel, and we will be meeting with the FDA soon to outline a clinical trial protocol that we expect to commence in the spring of next year. Lastly, the T2 negative resistance panel development efforts through a partnership with Allergan also remains on track, and we plan to deliver initial product to Allergan late next year.

Now, let me turn the call over to Darlene to review our third quarter results in greater detail. Darlene?
Darlene

Deptula Hicks: Thank you, John, and good afternoon again everyone. Total company revenue was in line with our guidance for the third quarter while product revenue was slightly behind guidance primarily due to orders received late in the quarter that could not be shipped by quarter-end and research revenue exceeded guidance. Product revenues for the third quarter 2017 of $739,000 increased by 159,000 or 27.4% on year-over-year basis and was slightly ahead of revenue reported for the second quarter 2017; product revenue for the first nine months in 2017 of $2.1 million increased by $937,000 or 80.2% on a year-over-year basis. The increase in product revenue is primarily driven by increased sales of T2Candida was open from a combination of increased usage at customer site and new customers going live and testing patients as well as sales of T2Dx Instrument.

Research revenue for the third quarter 2017 of $369,000 exceeded our guidance of less than $100,000. Research revenue in the third quarter and nine months period has declined year-over-year as it is expected, due primarily to decline in revenue recognized under our co development agreement with Canon Life Sciences which was offset by an increase in revenue recognize under a co development agreement with Allergan. Continuing down the P&L, total operating expenses excluding cost of product revenue for the third quarter of 2017 increased by $304,000 to $11.4 million from a $11.1 million in the prior year corresponding quarter. This increase in operating expense year-over-year was primarily driven by a $685 million increase in research and development expenses offset by a $376,000 reduction in SG&A expenses. Probably more importantly operating expense is sequentially were down in total by $1.4 million for the third quarter over the second quarter of 2017 with the $1.2 million reduction in R&D expense and a $200,000 reduction in SG&A expense.

The $680,000 increase in R&D expense quarter over prior year quarter is primarily due to the cost associated with T2Bacteria clinical trials, increased non-cash depreciation and expense, lab-related and engineering expenses outside services and travel. Research and development expense includes $330,000 and $295,000 of non-cash stock based compensation expense. Sequentially R&D expenses decreased by $1.2 million primarily due to the completion of our T2 bacteria clinical trial in Q2 this year and reduce pay roll and related expenses. The $376,000 decrease in SG&A expenses quarter over prior year quarter is primarily due to a reduce pay roll and related expenses in decreased travel expense offset by increase through the cost. SG&A costs include $778,000 and $872,000 of non-cash stock based compensation expense.

Sequentially SG&A expenses decreased by $200,000 primarily due to the timing of marketing related spending. The net loss attributable to common shareholders to the third quarter of 2017 is $14.1 million or $0.45 per basic and diluted share to pay to a net loss of $12.8 million or $0.51 per basic and diluted share in the same period prior year. The weighted average shares used to compute earnings per share were 31.4 million and 25 million even shares for the third quarter of '17 and '16 respectively. Now turning to the balance sheet, at September 30, 2017, we had cash and cash equivalents of $53.9 million, which includes the net proceeds of $18.8 million raised from our recent financing concluded on September 15. We also continue to reduce our cash burn each quarter sequentially this year.

Management projects that existing cash together with the additional remaining liquidity on the company's term loan should provide a cash runway into the first half of 2019. Let me now turn to review 2017 guidance. We expect Q4 2017 total revenue to be in the range of $1.1 million to $1.2 million, with product revenue in the range of $1 million to $1.2 million, and research revenue to be approximately $100,000. We also project operating expenses excluding the cost of product revenue to be in the range of $11.4 million to $11.8 million for the quarter, of which approximately $1.9 million is projected to non-cash expenses which primarily reflects stock-based compensation and depreciation expense. The weighted average shares outstanding for the nine months ending September 30, 2017, 30.9 million, and could be impacted in Q4 by stock option exercises if any.

With that, I'll now turn the call back to John for closing remarks.

John McDonough: Thank you, Darlene. In summary, we're pleased with our operational progress through the first nine months of the year, and in particular the significant accomplishments realized in the third quarter. I'd like to thank everyone on the T2Biosystems' team for their hard work and their focus on our mission of improving the lives of patients around the world. Together we shared many significant milestones, especially in the last 90 days.

We are squarely focused on driving the commercial adoption of our product, and driving revenue growth through adoption of our platform, and testing of patients with our game-changing product, which includes T2Candida today, and T2Bacteria available in Europe now for clinical use and being reviewed by the FDA for market clearance in the United States. We believe the market clearance of T2Bacteria will accelerate the adoption of the T2Sepsis Solution and bring significant value to patients and hospital economics. Thank you for your participation in today's call, and for your continued interest in T2Biosystems. That concludes our prepared remarks for this evening. Operator, we'll now open the call for questions.

Operator: Thank you. Now we'll be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Steve Brozak from WBB Securities. Please proceed with your question.

Steve Brozak: Hi.

Congratulations on this quarter. But there was one item that you mentioned that, John, in particular that you mentioned about how you were using the T2 platform in the emergency room. And that's pretty striking because you're going from something buried within the hospital, where obviously there's a need, but you're moving it to the front of the hospital. Can you tell us as much as you can about that, because that's actually something that's completely different than we've looked at in the past, and it's a different way of going out there and understanding and modeling T2? And I have one follow-up after that please.

John McDonough: Yes, you bet, Steve.

Thanks for the question. So in addition to the 6.75 million symptomatic patients who are inpatients in hospital, there's another 2 million, sometimes estimated 3 million patients that are presenting in the emergency department. And about 50 percent of all sepsis cases are actually community-acquired, and are presenting for the first time in the ED. Now those cases are almost always bacterial infections, not Candida or fungal infections. So as we've reported in the past, we've never expected, and it's rare that the T2Candida test would be run in the emergency department.

But we have a really compelling value proposition in the ED, and many of our research-use-only customers are in fact running studies specifically focused on the emergency department. The challenge in the ED is when a patient presents. Of course, the rapid question is do I admit the patient or do I not admit the patient. If they have a sepsis pathogen then you could be admitted. And there is no diagnostic I think to guide that decision process.

And so what really happens today is if you have highly probable sepsis cases they'll admit, but that's a small percentage. And then there's a very large number that go into an observation unit where they're watched for as much as 48 hours. They're not admitted, and they're in this holding pattern while they try to figure out if the patient is septic or not. So in those cases our panel, as reported by Hennepin County, covers about 85% to 91% of all of the sepsis cases presenting in the ED. And for those patients that would test positive we have a rapid result, within a three to five-hour window that would -- on a positive lead to rapid admission, and more importantly getting the patient on the right targeted therapy, which a broad-spectrum antibiotic probably would not be.

So they're being admitted in a way that they should recover more quickly and more likely. For patients who do not get admitted to the hospital, there's a very strong CPT code reimbursement in place. So for any patient not admitted to the hospital that's tested with T2Bacteria, there's about a $290 reimbursement that would go to the hospital and the lab, and that's for a test that's likely to be priced -- we haven't announced final pricing, but it would likely be priced at under $200 a test, so very strong, no-risk value proposition in terms of economics, super high value in terms of the patient, and really sort of a secondary and big benefit to the hospital. But if you admit the patient they're likely to spend a lot fewer days in the hospital, in the ICU, which provides incremental economic return. So we're really excited about it, and we're seeing a very positive response from the hospital as present this then to them in this non-commercial phase of our discussions with customers.

Steve Brozak: Again, it's completely different. So I would very much appreciate any future thoughts on how you look to describe it. In looking at the bacterial panel, I understand it's a research-only panel. Can you give us any kind of information, even if it's anecdotal, as to how the different systems are looking at the research panel, and how it compares to the reception that you got for the fungal detection panels? And I'll jump back in the queue. Thank you.

John McDonough: Yes, you bet. So essentially hospitals that are using it in this research-use-only mode, they're running various studies. Sometimes they're doing verification studies and validation studies. Other studies, as I mentioned, are being run in the emergency department. One of the big differences that we're seeing, we weren't able to run a research-use-only program with the T2Candida Panel because at that phase of our development instruments weren't ready to be placed in the research-use-only mode while we were waiting for FDA clearance.

But because T2Bacteria runs on the same instrument we're in a strong position to be able to offer this research-use-only mode, which gives us early insight, will lead to some early presentations and publications. We've already seen that with Hennepin County. And also give us a head start in the commercialization effort because these customers are likely to move forward with adoption and to adopt more quickly. The performance characteristics of T2Bacteria clinically are proving to be equal to or slightly better than T2Candida while we're in this mode. And I will say we're seeing the whole emergency department opportunity, of course, is completely new and different, that didn't apply to T2Candida at all.

And I would also say that we're seeing initial market feedback of a high interest in screening patients on the front-end with T2Bacteria, where with T2Candida there's more of a waiting until you would get empirically that a patient might have a fungal patient which limits the testing volume for us in that mode. But as you move with the T2Bacteria Panel to screening it should lead to much, much higher volumes of testing of patients within hospital facilities.

Steve Brozak: Great. Again, congrats, and obviously look forward to the further detail. Thank you again.

John McDonough: Thank you, Steve.

Operator: Thank you. Our next question is coming from Yi Chen from H.C. Wainwright. Please proceed with your question.

Yi Chen: Thank you for taking my question. Could you give us an update regarding the launch of the T2Bacteria in Europe? And in your prepared remarks you mentioned that the T2Candida Panel currently covers 144 hospitals in U.S., so how many hospitals in Europe are currently being covered by T2Candida. Thank you.

John McDonough: Yes, you bet. Good question.

So I'll take the second question first. So internationally -- and I will answer it internationally, we have 17 hospitals now that are either adopting or now under contract with instruments being installed and verification going on. Those 17 hospitals are all T2Candida customers. Of those 17, there are seven hospital facilities under contract for T2Bacteria including six of the seven that were closed in the third quarter call. And of those seven that are under contract for T2Bacteria, one is leading with T2Bacteria; meaning they're implementing that first, and the other six are beginning with the implementation of T2Candida, with the plan to then implement T2Bacteria secondarily.

And that more has to do with the timing of when those sales cycles started, and the phases of where those products were in their development cycle.

Yi Chen: Okay. Thank you.

John McDonough: You bet.

Operator: Thank you.

Our next question today is coming from Mark Massaro, Canaccord Genuity. Please proceed with your question.

Max Masucci: Hi, Max Masucci on for Mark. So you indicated the potential launch of T2Bacteria by year-end pending FDA approval. Congratulations on the early results.

Can you speak to your expectations on how quickly you think you could be signing contracts post approval? And also, any early feedback from RUO customers would be great.

John McDonough: You bet. Thanks Max. So believe if we get through FDA clearance by the end of the year we would expect to see some customers on the contract in the first quarter. So we think it could be a relatively rapid timeframe to get those initial contracts.

The feedback from the research-use-only customers to date is all very positive. Some are just under contract, so we either have good news from the accounts that are using it or no news because they haven't started using it yet because we're still installing instruments. But not aware of any situation where the validation programs or the studies being run aren't achieving the expectations of all those research use customers.

Max Masucci: Great. Thank you.

One more, can you provide some additional color on the source of traction in product revenues in the string sets [ph] implied in the 36% to 63% growth outlined in the Q4 guide. I'm just trying to get a sense for timing and the mix between instruments and consumables.

John McDonough: Yes, you bet. So as you look to the fourth quarter, I would guide it to a $1 million to $1.2 million in product revenue. Some of that growth is expected to be from instrument sales.

And a healthy growth rate is expected, in the order of 20% in growth in consumable sales, which would virtually all be T2Candida cartridges. But the international model is a little bit different than what it is in the U.S.. Internationally, when an instrument is placed there's a distributor involved, and that distributor purchases the instrument from T2, and then they're either placing it or selling it to a customer. In the U.S., typically the instrument is being placed under a reagent rental program. So when there's higher instrument sales it's typically going to be following the closing of contracts outside the U.S.

where instruments are being sold in almost, and at this point in time in fact, all of the accounts that are adoption in Europe and outside of Europe.

Max Masucci: Great. One more if I can, on T2Lyme, on your T2 call you said that you expect to complete the preclinical study by the end of 2017, and to initiate the FDA trial in 2018. How are we tracking against the original timeline?

John McDonough: Yes, we're right on the original timeline. We've completed -- in fact, completed the preclinical study for T2Lyme successfully.

We now have that data in hand. Expect to be having a meeting with the FDA in roughly the next four to six weeks. And in that discussion with the FDA we will be working with them to design the clinical trial process, the protocol that will be used. And we should be right on track to start the study next spring.

Max Masucci: Great.

Congratulations on the quarter.

John McDonough: You bet. Thank you, Max.

Operator: Thank you. Our next question today is coming from Paul Knight from Janney Montgomery.

Please proceed with your question. Carolina Ibanez-Ventoso: Hi, this is Carolina Ibanez-Ventoso on for Paul Knight. Thank you for taking the question. T2Candida was launched in 2014, and the number of hospital customers has grown considerably since then. Have you seen any changes in the time customers take in completing the internal verification of the technology and going live after signing a commitment?

John McDonough: Yes, that's a great question, Carolina.

No, the time to verify has been pretty consistent. It's averaging typically between three to six months. Sometimes they go a little quicker; sometimes they go a little slower. But on average we're right in that three to six month range. One of the things we did early on, I think a lot of new products sometimes don't provide what I'll call a verification kit or a verification protocol to customers initially.

And they'll start with nine-month time that's been decreased over time. Fortunately, we put a verification program in place that we recommend to all customers, and to my knowledge all customers have used that verification protocol, sometimes they add to it. But they always use the verification protocol. And I think that helps us maintain this three to six month average. Carolina Ibanez-Ventoso: Okay, thank you, that's helpful.

And then on your partnership with Cidara Therapeutics, sorry if I missed this, what is the number of patients that you would be screening to enroll in the clinical trial?

John McDonough: Yes. So we don't know how many patients would get enrolled with the T2Candida product. What we do know is that Cidara is running that trial at about a hundred different hospitals around the country. We know that they are highly recommending the hospitals to use T2Candida for enrollment, and this being Phase III trial. In Phase II of their study hospitals were allowed to use T2Candida that was a part of the FDA protocol Cidara had put in place.

But they weren't recommending the usage. And what they saw in Phase II is that the sites that used T2Candida were enrolling more patients faster, which for them of course is a big expense or an accelerator of a trial is always a good thing. And hence they've put this program in place with us to be more aggressive. They want their sites using T2Candida, but they can't force it. They provide -- basically pay for the T2 cartridges for the sites that will adopt and use T2Candida.

But those sites also have to agree to bring in the T2Dx instrument in order to be a part of the program. So we think we'll see some acceleration in hospital adoption through that program but it's too early. We really don't know what rate to expect, and what percentage of those 100 possible hospitals would adopt. But we're excited to be working with them, and they know we provide real value, so hopefully it'll be a healthy number of that 100. Carolina Ibanez-Ventoso: Okay, good.

And then one final question if I may. The R&D expenses were down in the quarter. Should we expect R&D be at the same level in the fourth quarter, and how should we think about operating expenses in 2018?

John McDonough: I'll let Darlene take that. Darlene

Deptula Hicks: Sure. Yes, no we're seeing the right trend here in a quarter-over-quarter reduction in operating expenses.

We project for next quarter, fourth quarter; they'll be in the range of $11.4 million to $11.8 million. That trend should sort of hold into the early part of next year. R&D expenses, I would expect, will go up a bit when we start the clinical trial for Lyme, so that will be a timing issue when that starts. I will say that that trial will likely not quite be as expensive as the Bacteria trials due primarily to fewer patients we believe will be required for that trial. And then that should sort of stay flat to come down a bit the remainder of the year.

Carolina Ibanez-Ventoso: Okay. Thanks a lot. Darlene

Deptula Hicks: Thank you.

Operator: Thank you. Your next question today is coming from Puneet Souda from Leerink Partners.

Please proceed with your question.

Kai Wang: Hi, this is Kai Wang calling in for Puneet. I wanted to ask about -- give us a little bit of color on your sales force operations business given that you expect market clearance where…

John McDonough: Yes, absolutely. So the total size of the sales force today is approaching 20 people. We had sales training going on as we speak in the room right behind me.

We will grow that sales team probably by about another three to six people between now and the end of the first quarter of next year. We're really excited where the training is focused today. It's a bit different than what we had been doing six months ago. Our approach to market is now much more focused on selling a success solution for hospitals as opposed to a Candida success solution in hospital. And so, the training is equally balanced between our focus on T2Bacteria, adoption of the emergency department setting along with the traditional training around T2Candida, and the total value proposition of being able to put hospitals in a position where they could up to 95% of their patients for the right targeted therapy within the first six hours of presentation in the hospitals.

Kai Wang: Okay, thanks, very helpful. Also wanted to get more color on your partnership with T2; with that partnership do you expect broader thoughts of the EBITDA?

John McDonough: Yes. So, the -- I think the question here, you're fading a little bit, it's on the partnership with the CDC, is that correct?

Kai Wang: Correct.

John McDonough: Yes, so the -- we're really, really excited about this one and there are many possibilities for this one to grow. So to back up a little bit, the CDC partnership is focused on superbug detection initially targeting Candida RF, which is an emerging superbug that hit pretty hard in the Europe, and has entered the U.S.

and is growing at a pretty rapid rate. So, prior to T2, the CDC has a very large lab at [indiscernible] Atlanta, that every time a hospital detects the Candida or its patients, because of the resistance of this bug to traditional drug, and because it is highly contagious, meaning, if you are in a hospital in your setting, there is a very high risk of that spreading to other patients who are on the hospital. The CDC sends a SWAT team down to the hospital, they may come back with samples of which they like and pretty significant lab, I visited a couple of months to go myself, it takes the CDC about 17 days using very advanced culturing approaches to actually get a result. And it's very labor-intensive, and at this point they're running hundreds of samples per week in this lab. So the initiative here we now installed T2Dx instruments, they are going through and developing the protocol of how they will both validate in one of those samples on the T2Dx instruments.

And keep in mind, these samples are mostly samples coming from the patient's skin because when you have this infection, it's blood-borne, but it sheds on the skin. So, this shows the versatility of our platform where we are actually running skin samples, not just blood samples. And we also have a -- by the way a blood-based Candida oral study going on in Europe. So we can detect it in blood. We can detect it in skin, we even approve it, and we can detect it in environment itself.

But they are building this protocol. It will take about three months to complete the protocol in their estimation, at which point in time they would likely switch over and using the T2Dx platform instead of the culture techniques. And the advantages are clear; we get results in three to five hours as opposed to 17 days. And the reduction of labor is substantial. The ultimate objective of CDC is not to be running all these samples in the lab, they want to push this out to the state who opened, and we have state labs.

We are already in discussions with one and the second one right behind it in terms of potentially moving this platform out to the state level for Candida, or in fact we even have a couple of hospitals that have approached us because they are interested in bringing the test in to run within the hospital. So, the product we have today is investigational use only. It's not an FDA cleared product that can absolutely be used for the purposes of the CDC and the state. And we're looking at ways to perhaps take a product through the FDA at some point in time in the future, but we're really excited about the impact we can have hopefully in curtailing the spread of this terrible disease and there likely will be opportunities not the CDC in the future to expand the menu beyond Candida.

Kai Wang: Okay, great.

Thank you.

Operator: Thank you. We have time for one final question, coming from Matthew Cross from [indiscernible]. Please proceed with your question.

Unidentified Analyst: Hi, guys.

Thanks for taking my question and congrats on the new hospital contracts. I was wondering if you could give us an update on U.S. hospital adoption of T2Candida into success protocols. Have any additional hospital counts officially included the panel? And what pushback if any have you received from these accounts regarding auto ordering?

John McDonough: Yes, you bet. That's a great question, Matt.

So we're starting to see for the first time that the movement towards T2Candida being adopted in test of protocols. We are aware of at least one hospital that has actually begun that already. Most hospitals as they are adopting, they're initially testing patients before they would empirically treat a patient with an antifungal drug, which typically means 48 to 72 hours after patients are symptomatic. And they're typically testing somewhere in the order of that stage of the game, maybe 10% of the total high risk patients population are within the hospital. The logic of doing that is now the course you're about to give patients antifungal drugs that are going to cause that's called in the over a $1000, and most of the patients still need it.

And so, a rapid diagnostic reduces the use of antifungal. And for those that are positive, it gives you the species because it put the patient on the right antifungal drugs. What they all should be doing, and we believe in the future would be doing is screening the patients if you will at time zero and now waiting 48 to 72 hours because that's where you can really have the dramatic impact in both cost and patient mortality. And so, there are about four hospitals moving in that direction, one that's wide moving in that direction, and that's clearly one of our focuses and one of the path towards driving significantly greater product revenue is getting more patients tested at hospitals as they should. T2Bacteria will be very different in this regard, because bacterial infections are treated at time zero and even empirically when they make changes within the first 24 hours.

So, as you think about T2Bacteria, it's a different paradigm where you would think hospitals would be testing somewhere between 30% and 100% of the patients depending upon whether they adopted at time zero, or let's say, time 24 hours.

Unidentified Analyst: Right. Okay, thank you. And you actually answered my follow-up on T2Bacteria as first protocol. So, thanks.

That's it for me.

John McDonough: You bet.

Operator: Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

John McDonough: You bet. We are very excited about the progress operationally made in the third quarter. We are in the middle of the fourth quarter right now. I'm excited about the progress we continue to make and the tremendous hard work that's going on among the team here at T2, and we look forward to reporting back on our fourth quarter results in the February timeframe. So, thank you all for joining this evening.

Operator: Thank you. That does conclude today's teleconference. You may disconnect your lines this time and have a wonderful day. We thank you for your participation today.