Genmark Diagnostics Inc
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the GenMark Diagnostics Fourth Quarter and Full Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Leigh Salvo. Thank you. Please go ahead.

[Leigh Salvo:]

Thank you, Peter. And thank you all very much for joining us today. Before we begin, I would like to inform you that certain statements made by GenMark during the course of this call may constitute forward-looking statements. Any statement about our expectations, beliefs, plans, objectives, assumptions, or future events, or performance are forward looking statements.

[Scott Mendel:]

Thank you, Lee. Good afternoon, everyone. Thank you all for joining us for our fourth quarter and full year 2020 conference call. I'm joined on the call today by Johnny Ek, our CFO. 2020 was truly a transformational year for GenMark, both financially and operationally. In line with our pre announcement, total revenue for 2020 grew 95% year-over-year to $172 million. Our top line acceleration was a key driver in achieving cash flow positivity for the first time in GenMark's history, generating approximately $6 million positive cash flow from operations. This is an exciting milestone for our team and we are committed to further margin improvements on top of continued top line growth. Operationally, it's hard to believe that one year ago the COVID-19 pandemic was just beginning and GenMark was among the first to provide molecular tests designed to detect SARS-CoV-2. Well not our -- on our scheduled roadmap, we quickly assembled a team and in less than one month, they designed, manufactured and shipped tests to customers for validation of our test design. And those teams continued to deliver throughout one of the most challenging years that any of us have ever experienced. Despite overwhelming demand for that single target test, we kept our eye on our syndromic approach to diagnosing infectious diseases and creating enduring revenue streams. We quickly shifted development to the ePlex RP2 panel, which simultaneously identifies 21 pathogens including SARS-CoV-2 and provides a more streamlined workflow than our original RP panel.

[Johnny Ek:]

Thank you, Scott. Total Revenue in the fourth quarter was $50.1 million, an increase of 84% versus 2019. ePlex revenue for the quarter was $45.4 million, an increase of 138% over the fourth quarter of 2019. In the fourth quarter of 2020, our commercial team plays 70 net new ePlex analyzers, taking our total ePlex placements to 792 as of December 31, 2020.

[Operator:]

And for your first question, we have Doug Schenkel with Cowen. Your line is open.

[Chris Shibutani:]

Hey, thanks. This is Chris on for Doug today. Thanks for taking my questions. Maybe just starting with flu, so as clearly been very light flu season in US, it doesn't seem like this has impacted utilization or demand for your RP2 panel based on your prepared remarks, but just wants to confirm that's the case? And then maybe more broadly, what is the 2021 consumables guidance as seen for contributions from BCID?

[Scott Mendel:]

Sure, so Chris, this is Scott. I'll start off and Johnny you can add-in anything that I might miss. So on your first question, it was related to the impact of flu or what's going on with flu circulation currently on our demand? And as I stated in the prepared remarks, you're right, we're not seeing any impact on our demand at this time. In fact, demand for our RP2 panel continues to outpace our capacity. And we've been dealing with open orders throughout the entire quarter. So that's great news for us from a demand perspective. As it relates to BCID adoption and the driver in this year, it certainly is driving a significant amount of other growth in our revenue, along with adding additional customers from an RF perspective. But we do believe ePlex needs to be a very key contributor to our growth in 2021, as well as beyond that. And that has to do with the large market opportunity. And the low penetration rates in diagnosing bloodstream infections with molecular solutions. And our product is very well positioned to address that market opportunity based upon ePlex’s workflow, but also upon the inclusivity that BCID panels have relative to competition.

[Chris Shibutani:]

Got it? Thanks. And maybe in terms of just the placement guidance in 2021, I was hoping you could give us an update on your customers environment in terms of, are they able to evaluate new systems, place orders, whereas you know, if you need the COVID-19 environment to improve a bit more before you Salesforce? Can you know target customers again?

[Scott Mendel:]

Yes, so from a customer perspective, it varies by region of the country and really state by state. But we do see more of the customers opening up to on-site visits from our commercial teams. And so that is certainly ongoing. And we believe that that trend will continue. In spite of that, the virtual visits using Zoom and other methods has really been an enabler for us to continue to drive growth from a commercial perspective. So we really haven't felt a negative impact from the lockdown and not being able to see as many customers. So that's on the actual commercial side. On the application specialist side, so on site, those are the folks that are going on site to do implementations, training and any servicing, they've continued to be able to visit sites on a regular basis, even throughout the entire pandemic. So that really has not affected us at all. So yes, we think we're in pretty good shape from a placement perspective, the funnel is strong for the year. We do believe the interest in BCID is continuing to accelerate and increase and will be a key driver of placements, not just the revenue growth, but also the placement growth for this year.

[Chris Shibutani:]

Okay, great. Thanks for taking my questions.

[Scott Mendel:]

Welcome.

[Operator:]

And your next question comes from the line of Tycho Peterson with JPMorgan. Your line is open. Mr. Tycho Peterson, your line is open. Please check if your line is on mute.

[Scott Mendel:]

Peter, why don’t we move to the next question please?

[Operator:]

And for your next question, we have Brian Weinsteinwith William Blair. Your line is open. Mr. Brian Weinsteinwith, your line is open. And we are moving to the next question, Max Masucci with Canaccord Genuity. Your line is open.

[Stephanie Yan:]

Hi, this is Stephanie Yan for Max Masucci. Thanks for taking the questions. Can you provide a bit more detail around how we should be thinking about the pacing of instrument placements in 2021 and the assumptions that you've embedded for recovery out of the pandemic? Also, given that the pandemic is a global issue, and different areas of the world global cover at different speeds? Should we be thinking about the US versus international split and any differently?

[Johnny Ek:]

Thank you, Stephanie. This is Johnny. Maybe I'll start with the placement cadence and then maybe Scott can help with international commercial question. From a placement perspective, as I mentioned in my prepared remarks, we expect to return to that pre pandemic level and the pacing will be similar. We don't expect a significant difference in pacing, even in 2020. Our pacing was still relatively steady through the year. There's demand for our systems and replacing those -- and we expect to see that kind of throughout 2021. as well.

[Scott Mendel:]

Yes, and this is Scott, no change really to the mix between OUS and US. OUS continues to present it an amazing opportunity, just like in the US. But I don't see a big shift just because of what's going on country by country. Nothing that we're forecasting are that our teams are telling us to be aware of. So I don't really see like that'll be a difference from what we've experienced in the past. And just to add to Johnny's comment on pacing of placements, typically, what you see is Q3 being the strongest as people prepare for flu season. Now I've spent a little bit thrown off because of the pandemic. And as Johnny said, last year, it was pretty evenly paid throughout the year because of the pandemic. We still have strong placement funnels for first quarter. So I think that'll continue to be relatively strong. And then as I mentioned, because we're pivoting towards focusing on BCID adoption in Q2, and Q3 as we believe we'll have a window of opportunity when COVID is kind of a bit more in control. I think that will drive the placements in Q2 and Q3. So for different reasons, it'll be kind of evenly paced throughout the year than what it was last year. Last year was COVID driven. This year is us driving in from an execution perspective, specifically going after those BCID placement in the middle parts of the year where we have that window of opportunity, because typically flu and COVID should be a little bit more on control.

[Stephanie Yan:]

Got it? Thank you for that color. Another the question I had was, so there have been different supply and demand trends for ensuring placements and test consumables sold into the hospital setting versus those sold to larger centralized labs or to point-of-care setting. If we think about the setting, the healthcare professional as a traditional patient, as tested using your solution, how should we be thinking about how these supply and demand trends will play out for your company and your market segment in particular?

[Scott Mendel:]

Sure. So I'll address that. This is Scott again. I think it's important and you've highlighted it in your questioning that everyone understand there's differences in types of testing platforms and their position for different use cases and to address different patient populations. When you think of within molecular, we certainly saw an increase in point of care and at home testing, and that will certainly ebb and flow as the COVID cases change and levels change of COVID incidents. So will -- you all keep an eye on that? That's not the market we're in, of course. We're in the hospital setting. So in the hospital setting you have, us from a syndromic perspective. And we think we're relatively well insulated from the big ebbs and flows within COVID testing, because we're treating the most critically ill patients that are presenting at the hospital. And so there's a decent level of insulation from the day to day trends or day to day testing staff that we might read about or see on the news, because of where our products as the syndromic panel is positioned. Again, you're using our panels, because you want to know as much information as early as possible to really enable better patient outcomes. And so, that's why we're a bit more insulated than some of those other types of solutions that are testing for COVID only, either in the hospital space or COVID only at the point-of-care. Likewise, from a capacity perspective, you saw the largest increase in capacity, really in the kind of kit based and the highest throughput test market, which again is not ours, that's where you saw the most increasing capacity. And I think that's gotten itself ahead of demand. And so that's likely where you'll see a little bit of pressure on, on fully utilizing all that capacity increase that has been built up, again, in a kit based and automated high throughput test platforms. Within the syndromic space, we didn't enjoy that same level of increasing capacity. Yes, we increase capacity, so did some of our competitors, but nowhere near the magnitude that you saw on those other spaces, both POC, point-of-care, as well as the automated high throughput type testing market. So, again, we think we're relatively insulated from the demand side, and our subset of the market did not experience the same significant increase in manufacturing capacity that you saw on the other areas.

[Stephanie Yan:]

Got it? Thank you.

[Operator:]

And your next question comes from the line of Brian Weinstein with William Blair. Your line is open.

[Griffin Soriano:]

Hi, guys. This is Griffin on for Brian. Sorry about that. Not sure what happened there? Not sure if this was asked while I was gone. But can you give us a sense of demand is stranded early here in 2021. Hospitalization sounds so much off the recent highs. And then more importantly, where you think the demand goes and 21? I know it's a crystal ball question. But what's your current thinking on where demand for syndromic molecular testing goes? Thank you.

[Scott Mendel:]

Johnny?

[Johnny Ek:]

Yes. Sure. Thanks, Griffin. So this is Scott again. So we did mentioned and try to give a little color and context of what we're seeing early in 2021, I our prepared remarks, but specifically, we're continuing to see very strong demand for our RP2 panel, which is a syndromic panel. In fact, it continues to outpace our ability to supply. You've had a consistent book of open orders throughout the entire quarter. And that continues to persist. So that's good news from a demand perspective. As we move into -- you're right, it's a crystal ball, I'll tell you the crystal ball, I'm looking at, our business together is looking at, and how we're planning around it. Our crystal ball basically is telling us to prepare for Q2 and Q3 to be a time where because of vaccination being more widespread, as well as just development of herd immunity. We do think Q2 and Q3 will be a bit lighter from a volume of testing perspective. But what we are prepared to do is drive BCID adoption during that window. So that'll help us continue to drive revenue expansion. In addition, we have significantly expanded our installed base that are using RP2. So while RP2 where the volumes of testing might not be as high in the next couple quarters Q2, Q3, because we've expanded our install base so much, still applying a normal level of testing plus that BCID adoption allows us to have a path to being relatively in line at the height of the pandemic, which is Q2 and Q3 last year. So we think we're well positioned. And that's because of our portfolio with syndromic test we have many different panels that we can sell. We have an expanded installed base. And we're really going after that was critically ill patients that are -- that are presenting at the hospital. So that's kind of how we see the summer, two quarters Q2, Q3 shaping up. And then as we look into Q4, again, our crystal ball says, there's still the COVID-19 circulating. And because you're likely to see some return to normalcy, you'll probably see a decent amount of flu pathogen circulating at the same time as COVID-19. Plus, it will be important to be able to do surveillance. Those three things all combined together build a perfect business case for using syndromic panels as you head into the fall and winter of 2021. And that's what we're -- that's what we're planning for, that's what we're thinking will likely play out. Again, that's our crystal ball here in GenMark, but it is based on our experience in the syndromic testing market over the last 10 years.

[Griffin Soriano:]

All right. Appreciate that. Apologies for this -- asking answer, there's clearly a lot there. Just one more on capacity here you’ve talked about fixed line being more R&D focused to satisfy internal demand. Should we expect the -- the pace of R&D to hit a bit of an inflection point with more fuel to that engine with this line? Are you still planning on one to two new panels a year on a go forward basis?

[Scott Mendel:]

Yes. So the -- the intent of increasing that capacity probably above what we might need for commercial -- again, it's a good safety net commercial, but the intent is exactly that, Griffin, it is that we are ramping up our investment in R&D. We want to launch and start development of two additional panels in addition to working on RP2 and GI, so we would actually have four going on at the same time. And the reason we're doing that is to your point we want to try to accelerate our menu development. So it does take a little bit of time to start getting out those couple per year. But we are making those investments in capacity as well as R&D resources this year to set ourselves up for that acceleration of menu advancement.

[Griffin Soriano:]

Great. Thank you.

[Scott Mendel:]

You're welcome.

[Operator:]

And your next question comes from the line of Tycho Peterson with JPMorgan.

[Tycho Peterson:]

Hi, guys. Sorry, about earlier. So maybe my first question is in terms of the placement guide for 2021, what should we expect in terms of capital sale percentage? And then, you previously mentioned that you were able to keep pricing stable and even realize the price increases as you move to a larger percentage of capitals sale. Do you expect this to continue in 2021 assuming that there's still a larger capital percentage versus historically?

[Scott Mendel:]

Yes. So what we're planning for and in the guidance, both not -- both the placement guidance, but also the revenue guidance, is we're planning for a little bit more return to normal from a capital/reagent rental ratio. Like you said, last year was extraordinary. We were probably in the 80% to 90% with capital sales. We think that'll snap back to something more in, call it, 50-50 range, something like that is what we're planning for. There is still capital available. And there's certainly a lot of placement opportunity. What we are seeing is, it's just taking a little bit longer. The sense of urgency to rush capital through isn't the same as it was at the height of the pandemic last year. But the good news is that capital still available. And from our planning purposes, we did allow for a little bit more balanced capital reagent mix than it was in last year's pandemic, high the pandemic.

[Tycho Peterson:]

Got it? And then, maybe just going back to the comments you made earlier, as far as demand into 2Q and 3Q being coming down a bit for COVID. Is there any upside in those quarters based on a normalized hospital environment that will still have COVID testing protocols, as elective procedures returned? Are those tests going to be run on ePlex? And, is there any sort of upside to volume staying steady in 2Q and 3Q?

[Scott Mendel:]

Yes. I mean, you can certainly build a case. And it's plausible, that would say, you might still have strong demand in Q2, Q3. From our planning purposes and for guidance setting, we thought that that might be a bit aggressive based on what we're seeing. Again, it's a volatile environment. As you know, we're doing our best to give you reasonable understanding of how we're thinking about it. But, yes, it could be off a little bit depending on what's happening in other parts, right. Like you said, you could have folks going in for elective surgeries and other factors, beyond just the circulation of COVID. But of course, we would not plan on something like that happening.

[Tycho Peterson:]

Okay. Thank you.

[Operator:]

And your next question comes from the line of Sung Ji Nam with BTIG. Your line is open.

[Sung Ji Nam:]

Hi. Thanks for taking the questions. Scott and Johnny, could you talk about -- you talked about the GI panel development and the timeline for commencing clinical studies in the second half of the year. Just kind of curious, how contingent is that on the environment kind of coming back to normal? I'm just kind of curious if you guys have identified the site, currently. Is this something that you can kind of turn on once things kind of get back to more normalcy? Just curious about that. And kind of related to that, as far as the potential transition from EUA to IDD submissions, has FDA provided any color in terms of how they're thinking about that, or is it something that we have to wait and see.

[Scott Mendel:]

Sure. Thanks, Sung Ji. Good questions. I'll start on the GI one. The timeline risk, the biggest challenge that we have faced is the availability of manufacturing capacity and having a steady stream of that. We really hamstrung that team last year. They've hung in there got a lot of work on bench, and we believe as we get past the end of first quarter, for two reasons. Number one, we think some of the volumes will come down as far as respiratory testing, but more importantly, having additional manufacturing capacity, we believe will start freeing up quite a bit of line time for that assay development team to really rock 'n' roll, and we're expecting them to do great things. So that's part of the timeline, risks that we've endured over the last 12 to 15 months, we believe we're getting that beyond that, because the capacity and just COVID getting more under control. As it relates to clinical studies and being prepared for clinical studies, analytical and clinical studies, we certainly are, while we've been waiting a little bit for line time for these folks to complete their development efforts and lock of designs, they've been working in the background doing as much activities and administrative work as possible to derisk the next phase of development or getting GI completed. The one area that we can't necessarily control is GI sample collection, et cetera. We are doing our best and have gone out to more sites than we typically would because we were seeing less samples being available than we would normally expect. And that's just really around human behavior during the pandemic, with everything being locked down from restaurants, to cruise ships, et cetera. The access to GI samples is less than it would typically be and so the way that you overcome that is you add more clinical sites to try to have more sites collecting samples for you, so you can derisk that part of it.

[,:]

From an EUA perspective, the FDA hasn't said anything that is eminent. We think it'll probably be out there for sometime. But that doesn't mean we shouldn't plan, right, that we've been around as a multiplex molecular provider for a long time. We have good relationships with the FDA, of course. But we also know it takes time. And so we want to be in front of this, we want to have our panel ready to go, we would ideally like to get that completed very soon. And then be ready to have all the data and get all the studies done during the next flu season, so that we're not caught flat footed, that's called preparedness. And that's what you'd expect us to do. And that's what we're planning to do.

[Sung Ji Nam:]

Got you. That's super helpful. And then just on the ePlex annuity, thank you so much for the color there. As we look at kind of 2022 and beyond. Obviously, we're going to see some benefits from COVID-related testing in 2021. But from -- not necessarily asking for guidance here. But as we think about potential ePlex annuity in 2022, could we assume that there will be still another step down somewhere -- where you're guiding to 2021? I'm just curious if you're -- if you are able to -- if you should be able to offset with your efforts around BCID in terms of the annuity growth year-over-year from 2021 to 2022?

[Johnny Ek:]

Yes. Thanks, Sung Ji. This is Johnny. So we modelled our annuity at really sort of our pre-pandemic, annuity level for 2021 and we think that's really where it is kind of going forward. And I think you hit it correctly, that that will have BCID will continue to support that annuity. We saw increase in ASP through the year for our -- on our contracts, which are contracted for the next few years. So we believe that that range that we sort of provided from a from a guidance perspective this year, sort of carrying in next year, it's our normal annuity range, we believe is appropriate for the near-term.

[Sung Ji Nam:]

Okay. Got you. And then lastly on SGA. I know you guys haven't talked about that in a long time. It's very small part of your business now. Have you guys reached kind of a steady state at this point? Or do you anticipate further declines from where you are? And kind of would you be able to break out what that was for 2020?

[Scott Mendel:]

Yes, so we think it has hit it sort of steady state, we have some fixed customers that it's pretty predictable. And it's in that 15 million to 20 million is sort of what we've shared, we continue to share. And that's where that that business is maintained. We don't foresee changes there.

[Sung Ji Nam:]

Got you. Thank you very much.

[Operator:]

And your next question comes from the line of Mike Matson with Needham. Your line is open.

[Mike Matson:]

Hi, thanks for taking my questions. I guess, I wanted to ask one on the gross margin and the targets for the year. So what are the kind of key items that you need to accomplish to deliver on this target to get to that 50% rate exceeding the year? Has this thing largely been completed? Now, it's just a matter of, you know, volume, or are there additional projects that needed to be addressed?

[Scott Mendel:]

Yes, thanks, Mike. There's a handful of items that we have been working on. I highlighted one in prepared remarks that we executed on in Q4 and we will see the benefit of that through 2021. But that's one of a handful and they target direct labor efficiencies, they target the direct materials, in addition will absolutely see the benefit of volume. So all of those things are efforts that we put effort in each of those, we have a list and a focused, laser focused list of things we're working on, we've executed some, we will continue to execute through the year. And that's why we see that exit at 50% will take us a year to execute on all of those.

[Mike Matson:]

Okay, I understand. And then I just wanted to ask one on the international business. I know there's seems like it's been more focused on the US with the comments. But I know there's been some challenges there in the past, but maybe just give us a quick update on where things stand there.

[Scott Mendel:]

Sure, so the international continues to kind of be in that same range of percent of revenue because of the growth in the US. So it's kind of in that 10% to 15% of revenue. I will say though, we had a terrific year OUS. The teams did a great job, the expansion within the current regions that we were in during 2021 but also expansion beyond those regions was really well executed by that team. So definitely high growth rates, but just kind of keeping up with the same ratio, US that we've -- that we've experienced before. I think it's, it's an area Mike that can drive quite a bit of growth for us, really as we kind of get into the 2022 and beyond timeframe. I believe that there's a lot of opportunity outside the US that we'll be able to leverage and go after. This year, like I said earlier, really builds on BCID adoption here, a little bit in OUS as well. And then I think as you get beyond 2021, OUS becomes a bit more of an important part of our growth story.

[Mike Matson:]

Okay, got it. Thank you.

[Operator:]

And for your last question, we have Andrew Cooper with Raymond James. Your line is open.

[Andrew Cooper:]

Thanks for the questions, guys. Maybe just first, when we think about kind of through the pandemic, I mean, obviously, you talked about 50% of placements, including BCID. Have any of those had the chance to sort of validate and get running on BCID. And what it -- what it used to look like there, because presumably some of those hospitalized patients on the track, the sepsis, were still showing up. So just curious kind of what the underlying utilization was like for BCID, knowing, you know, you were obviously stressed on capacity, et cetera.

[Scott Mendel:]

Sure, so, you're right, in the quoting of how much, how many placements brought along BCID, which is actually quite compelling. If you think about during the pandemic, you would probably expect that it's to say it was all RP2. But I thought it was important to highlight the fact that even during the pandemic, 50% of those placements bringing along BCID is very encouraging, and really highlights the value -- the high clinical value of our BCID platform and our RP panels. So as far as the implementations, we've done, we have seen strong uptake. We've been thoughtful about it because we couldn't turn everybody on that, wanted to be turned on right away because we were still dealing with excess demand on our RP panels. Of this BCID customers’ that we have turned on usage has been quite strong. And in many cases above what the expectations were. So very encouraging Andrew, that's why we feel good about what we want to do in Q2 and Q3, as far as really driving that BCID adoption. I should also add, one of the key areas that we're investing in besides R&D, is really increasing some of our technical sales capabilities, specifically, specialists that are experienced whether it be within pharmacy or infectious disease to really help drive these implementations. We think that that is a key competitive advantage for us. We piloted that model in the fourth quarter of last year. It went very, very well. And so that's part of our investment in 2021 is investing in more of these specialists that really help get these implementations across the line, help our customers be successful in implementing BCID. And again, that's part of our confidence level and getting these implementations done. We've seen the ones that are live already, they're using the product, like I said at or above the levels that we expected. So we think we're set up for some good success there.

[Andrew Cooper:]

Great. Thanks. And maybe just one more. Just help us think about, sort of, the funnel on placement. Obviously, you did place an elevated number in 2020, likely to the customers who were already lining up or already interested in -- in adding a molecular Syndromic platform. So just how do we think about what that looks like? And what -- what the latest thinking on? Maybe what COVID has done to the view of such a platform more broadly in the market?

[Scott Mendel:]

Yes. Our opinion is that COVID did a lot for diagnostics in general, specifically molecular. And then even in -- within the molecular space, we believe people have really come to understand the different types of molecular solutions and the different use cases. Syndromic clinical value, we believe was certainly highlighted during the pandemic, as far as its ability to very quickly look across many, many different pathogens. And I think the use case was -- was very well-received and in evidence -- the evidence has increased as far as why to use Syndromic panels. So I definitely think that COVID had a positive and lasting impact on molecular in general, but then specifically, the different sub-segments of molecular has been really well understood based on what happened last year.

[Johnny Ek:]

And, I think, the only the comment about the strength of the funnel for placements. We absolutely continue to see a strong demand for those placements and have a solid funnel that allows us to kind of project for the year.

[Andrew Cooper:]

Great. I appreciate it.

[Operator:]

Thank you, speakers. I will now turn it over to Scott Mendel for closing remarks.

[Scott Mendel:]

Thank you for joining us this afternoon. And thank you for your continued support. Our team remains committed to delivering high quality Syndromic molecular test that enable better patient outcomes. We think we're well-positioned to drive continued revenue growth in this large and growing market and I look forward to updating you on our progress in the future. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.