Genmark Diagnostics Inc
Q4 2019 Earnings Call Transcript

Published: 3 Mar 2020

[Operator:]

Ladies and gentlemen thank you for standing by. And welcome to GenMark Diagnostics Fourth Quarter 2019 Earnings conference call. At this time, all participants lines are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions]I would now like to turn the meeting over to Leigh Salvo Investor Relations for today's conference call.

[Leigh Salvo:]

Thank you, Demetrius 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 statements about our expectations beliefs plan objectives assumptions or future events or performance are forward-looking statements. For example, statements concerning our 2019 financial and operational guidance the development regulatory clearance commercialization and features of new product plans and objectives of management and market trends are all forward-looking statements. We believe these statements are based on reasonable assumptions.However, these statements are not guarantees of performance and involve known and unknown risks and uncertainties that may cause the actual results to be materially different from any future results expressed or implied by such statements. Important factors that could cause actual results to differ materially from those in these forward-looking statements are detailed in GenMark's filings with the SEC. GenMark assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances occurring after this call or to reflect the occurrence of unanticipated events.I'd now like to turn the conference call over to Scott Mendel Interim President and CEO of GenMark. Scott?

[Scott Mendel:]

Thank you, Leigh. Good afternoon, everyone. And thank you all for joining us. Before I begin, I'd like to say it's an honor to be entrusted with leading GenMark Diagnostics. As a longtime member of this organization, I have a deep understanding of our core capabilities and the attractive opportunity in front of us, both of which make me excited to lead this talented and dedicated teams. With the launch of ePlex in 2017 GenMark has become a leader in multiplexed molecular diagnostic testing. I am confident the significant and expanding clinical value of the ePlex systems offers the healthcare providers will serve as a cornerstone for GenMark's sustained long-term growth. On behalf of our employees and myself, I would like to thank Hany Massarany for his nine years of leading our company and the role he played in the development and launch of ePlex, that has positioned us to capitalize on this very exciting syndromic molecular testing market.Before we dive into our recent company performance, I would like to address a topic that is front and center in the news, on our minds and impacting our lives in many ways. The emergence of COVID 19 is a developing global healthcare emergency. Today we announced our recent development and initial research use only shipment of ePlex test kits designed for the SARS coronavirus 2 detection. While not on our scheduled roadmap, we quickly assembled a team and in less than one month they designed, manufactured and shipped initial test to customers for validation of our test design. It's a clear demonstration of our team's ability to execute and the ability to adapt the ePlex to meet the specific market need. We believe launching a test for this rapidly emerging virus was an imperative for our customers and their patients. Beginning last week, an RUO version of this test was shipped to our distributor in Hong Kong as well as the several key sites in the US that have access to clinical samples. We plan to use information from these customers to support our submission of an Emergency Use Authorization or EUA to allow hospitals to adopt this test for clinical use, and of course we will continue to monitor this virus and potentially leverage these development efforts into a future version of our existing RP Panel.Moving on to our business performance, I'd like to briefly look back at 2019 and recap our progress and achievements that have positioned us favorably for the year ahead. Last year we had three primary goals, the first was expand our menu through launch of blood culture identification panels. The second was to drive strong revenue growth through increasing placement and adoption of ePlex, and the third one is to drive gross margin improvement. I am proud to say that, our teams delivered on all three of these goals. In 2019, we successfully launched our ePlex BCID panels, which helped to drive strong revenue growth.Total 2019 revenue was $88 million, representing growth of 24% over 2018. ePlex revenue grew by 59%, driven by an installed base of 527 analyzers as of yearend. We were also successful in our other main objective of expanding gross margins toward a long-term goal of 60% plus. Gross margin for full year 2019 was 32.5%, up from 27.5% in 2018, driven entirely by improvement in ePlex gross margins. Starting the fourth quarter performance, total revenue increased to $27.2 million, representing growth of 40% compared to the prior year period. This strong performance was fueled by ePlex growth of 58% compared to the fourth quarter of 2018. Demand for our respiratory pathogen panel was inline with our expectations for a moderate flu season. Our commercial team placed a total 48 ePlex analyzers in the quarter, primarily driven by interest in our BCID panels. However, our installed base increased by a net 38 due to the reassignment of 10 previously placed analyzers. The majority of these reassigned units were from one US-based customer that did not implement ePlex as originally planned. It is important to note that these analyzers had not begun the implementation process and therefore they had never generated revenues.We will continue our commitment to quality placements that will generate a recurring revenue stream, which is an important component of our business model. Our US commercial team is contributing to win in both. It's continuing to win in both greenfield and competitive accounts. Similar to prior quarters approximately 70% of placements in the fourth quarter were within labs that previously had a competitive platform. And again BCID was the primary driver of about 80% of our placements.Moving onto our fourth quarter gross margin progress, which is a critical step to achieving cash flow positivity and improving profitability. Our goal is to achieve 60% gross margins from ePlex just as we have with our legacy SGA platform. We are steadily improving ePlex gross margins and have plans in place to achieve our gross margin target in the next two to three years. Initiatives to drive direct material and direct labor efficiencies saw continued traction and improvement in the fourth quarter. We achieved record manufacturing output for the quarter, which helps drive strong overhead absorption.Manufacturing yields have also been a key component in gross margin improvement, contributing to both direct labor and direct neutral efficiencies. We finished the quarter with gross margin of 33.5% and total year gross margin of 32.5%, which was at the top end of our increased guidance range. We are very pleased with that progress and in 2020 we expect to further improve manufacturing yield, leverage our production capacity and deliver additional direct material cost improvements through both supply chain initiatives and reducing scrap during the manufacturing process.Looking ahead into 2020 our three main priorities are, one strong revenue growth. Two making significant steps towards cash flow positivity through growth, continued gross margin improvement and operating efficiencies. And three menu and technology advancement.I'll start with our priority to drive strong revenue growth. Our 2020 revenue guidance can be broken down into three main categories. Recurring revenue from our existing customers, revenue from ePlex analyzers already placed and in the process of implementation and additional placements expected in 2020. We expect the majority of our 2020 revenue to be driven by the recurring revenue of our ePlex systems already in routine use.In addition, completing implementations of existing placements not yet in clinical use will be a key contributor along with new placements to the extent they are implemented within the year. I would like to spend additional discussing these last two categories of revenue starting with completing the implementation of already placed ePlex analyzers.Since the launch of BCID in the middle of 2019, we have learned that the implementation process for these panels requires focused efforts from our team and a variety of constituents within the hospital, because the majority of placements now include BCID the timeframe for implementation has been trending longer than our initial three to six month expectation.With additional experience and focus, we are confident that we can improve the implementation process. To put into perspective why we are highlighting implementation timeframes our current funnel of customer implementation is expected to generate approximately $15 million in annualized revenue when they are all in routine clinical use. Completing these implementations as quickly as possible will increase how much of that annualized revenue we could realize in 2020. So what are we doing about this? We've implemented detailed steps to streamline the process. We are measuring and incenting our teams to successfully complete these implementations and we are adding additional specialists to help expedite the most challenging steps, frequently encountered during the process. New placements are also expected to drive revenue growth to the extent they can be implemented within the year and begin generating revenue.In 2020, we expect our US commercial teams to drive placement inline with 2019 results with our BCID panels driving many of those opportunities. Outside the US we will continue to expand, but likely not at 2019 levels, which reflected the broad global expansion to establishing distributors in Europe, the Middle East, Latin America and Asia. We have established our 2020 placement guidance range, reflecting continued strength in the US market and a measured approach to international expansion.Regarding our second priority, we expect continued progress on improving ePlex gross margin in 2020. Our teams are already implementing improvements to drive direct material and direct labor reductions and we should experience continued overhead absorption improvement through increasing production volumes. As part of our focus on improving margins and driving the cash flow positivity, we will also closely monitor analyzer pool through. This is an important area of focus outside of the US where placements have been generating much less revenue annuity than in the US. In fact, the average of US placement is nearly 6 times that of placement outside the US. As a result, we are carefully reviewing country-by-country performance including evaluating existing placements on their ability to drive adequate revenue per placement as well as margins inline with our long-term goals. This evaluation is an important factor in our 2020 placements and revenue guidance ranges that Johnny will discuss shortly.In 2019, we expanded our international footprint to more than 30 countries and in 2020, we will be laser-focused on maximizing return on that investment and allocating our time and resources to those areas that can drive both revenue growth and margin expansion. Turning to our third priority of menu and technology advancements, our GI panel development is the primary area of focus. Our team is in the optimization phase of development, which include adjusting both assay and key manufacturing process parameters to obtain the best performance across all targets on the panel. Our goal is to begin clinical trials in late 2020, which should result in regulatory submission in the first half of 2021. In addition, we have additional development teams working on future technology advancements to support the longer-term pipeline of new products as well as the software team developing enhancements and new features for our ePlex platform, which have been a key feature of ePlex's competitive advantage.To conclude, as hospitals continue to transition to near-patient, multiplex molecular testing, ePlex has established a strong value proposition. Through our experienced commercial team, armed with a best-in-class system, improving margins and continued menu and technology advancement, we are well-positioned to drive revenue growth and profitability improvement.I'd now like to turn the call over to Johnny for a review of our financial results for the fourth quarter and guidance for the full year 2020.

[Johnny Ek:]

Thank you, Scott. I'll now provide additional details on our fourth quarter and highlights on the 2019 full year financials. As previously mentioned, fourth quarter 2019 revenue was $27.2 million up 40% versus the fourth quarter of 2018 with year over year ePlex revenue growth of 58%. Revenue for the full year 2019 grew 24% to $88 million with ePlex revenue growing 59% to over $60 million. Sale to US customers continued to account for the vast majority of our revenue.The average annuity for ePlex placement in the fourth quarter was $140,000,which represented an increase of 6% over the fourth quarter of 2018. The average annuity for the full year 2019 was $132,000 for ePlex business. Fourth quarter gross profit was $9.1 million for 33.5% of revenue versus $5.3 million, or 27.2% of revenue in the fourth quarter of 2018, which highlights the meaningful ePlex margin expansion in the last several quarters. At the same time that the composition of our revenue continues to shift to higher ePlex product sales relative to FDA.Gross Margin for the full year 2019 increased by 500 basis points to 32.5% of revenue. This improvement in ePlex gross margin is a result of execution on our plans to drive down the costs of direct materials and labor while leveraging the pipeline of manufacturing improvement initiatives we have identified.Total operating expenses were $17.8 million for the quarter, representing an increase of $1.9 million compared to the fourth quarter of 2018. Total operating expenses for 2019 were $70.4 million. The increase over prior year is the result of our focus on the validation and go live with the systems placed for BCID use, in addition to menu expansion and ongoing technology development.Our net loss per share for the fourth quarter of 2019 was $0.17, compared to $0.21 in the fourth quarter of 2018. From a balance sheet perspective, we ended the quarter with $53.5 million in cash and investments. We used approximately $9.3 million of cash in operations during the fourth quarter of 2019 versus $3.6 million in 2018, driven primarily by changes in working capital, specifically, a $4.9 million increase in accounts receivable as a result of significant revenue growth over the prior year, and an increase in cash use to build inventory of $2.5 million. With DSO of 36 days, DSI of 69 days and DPO of 42 days we will quickly convert those components of working capital into cash.Additionally, we achieved a certain predetermined milestones under our existing credit facility in the fourth quarter,which added $20 million to our balance sheet, along with $10.1 million provided through the sale of shares under our ATM. These two financing events meaningfully strengthened our balance sheet, and along with our expected reduction in operating cash usage, give us confidence in our path towards cash flow positivity.Turning to guidance for the full year 2020. We expect another year of strong ePlex revenue growth and continued margin expansion, which, coupled with our deliberate approach to operating expense management should result in a reduction in operating cash usage of almost 50% versus prior year. We expect total revenue to be in the range of $100 million to $110 million dollars representing year over year of 19% at the midpoint with expected ePlex revenue growth in the mid 30% range.As Scott noted earlier, we are focusing our efforts on ePlex analyzer placements that will ensure improved utilization and strong recurring revenue streams. As a result, we anticipate placements in 2020 to range from 130 to 160 analyzers, reflecting continued strong US placements and a more measured approach internationally, with average annuity per ePlex analyzer between $130,000 and $135,000. We anticipate 2020 gross margins to be in the range of 36% to 39% and operating expenses between $65 million and $70 million. We expect cash usage to be in the range of $16 million to $20 million. This concludes our prepared remarks. So at this time Scott and I would like to open the call for your questions.

[Operator:]

[Operator Instructions]. And our first question comes from the line of Brian Weinstein with William Blair. You may proceed.

[Brian Weinstein:]

Hey, guys. Thanks for taking the questions. I'll do the obligatory COVID 19 thing. I'm not so convinced it is large testing opportunities, most are, but can you talk about specifically this is a single Plex test. Is this is not being added into your broader panel, and can you talk about, so that's a question, but also can you talk about pricing here, how you're selling this about your manufacturing capabilities around ramping up? Should you need to do that? And can you just confirm what your installed base is and areas where there is a higher degree of testing like China and Korea and anywhere else? Thanks.

[Scott Mendel:]

Sure, Brian. So, this test as you said is a single target test. Speed was our primary objective and so that's why we chose that path. As I mentioned in the prepared remarks, we would obviously consider rolling this into our broader RP Panel, if this virus continues and is seasonal. From a manufacturing perspective, we have been ramping up our manufacturing capacity all throughout 2019 and even prior to that, and we feel that, we have the appropriate capacity to handle the potential increase in volumes. It's important to note Brian that, when you think about a single panel tasks, it would be most likely and based upon feedback from our customers that, they would run the RP Panel first because it contains 20 plus pathogens and then reflex to the single target test if the patient comes up negative.Now, if there is an outbreak in a specific region, potentially they could run both tests simultaneously, but our expectation is it would be a reflex test and therefore we agree with you. While it's an important health concern and we're really pleased to have developed it, we don't think it's at this time going to drive a tremendous amount of volumes and certainly not in the first quarter, which there's only one month left in. As far as how our customers are distributed, as you know ePlex has gained a lot of traction in some of the largest labs in the US and so obviously that's where a lot of our concentration is. And that's who we've been speaking to quite a bit to understand their needs. And then we also to a much more limited on a much more limited basis have some distributor relationships in Asia, but nothing material. I think I answered all the questions that you had, there was a whole bunch of them in there, there's not.

[Brian Weinstein:]

I appreciate all that. The only one you didn't hit was pricing? And maybe you can answer that as part of the second question here. So when we look at the guidance range for 2020 is a little bit lower than what was originally commented on. Is that due to the BCID kind of kind of extended timeframes for go live, which we've obviously heard from others that are involved in that area of diagnostics. So that's the question there. And then I can you just go back through and go through some more specific examples of how specifically you're improving that timeframe to go live on what your expectations are.

[Scott Mendel:]

Sure. So with respect to pricing on the COVID 19, we are just in the initial phases of launch would anticipated something in the range of what RP panel pricing is at this time. Again, we felt like it was the right thing to do for our customers and for patients. As you mentioned in your original question, more for that than it is for driving additional revenue upside. As it relates to the guidance range. So the guidance range that we provided today takes into consideration our experience thus far this year, all the way through February which is proving to be a moderate flu season from our volumes, and then also takes into consideration a more measured approach outside the US.You mentioned BCID timeframes or timelines and what we're doing to improve it, it is an important area of opportunity for us, because it will drive a lot of revenue growth in the US. But we think we've got that dialed in appropriately at this time. Our teams and our resources that we're putting on that is to ensure that we over time, get back to that six month timeframe of implementation. But the guidance range is really reflective of a moderate flu season today and a more measured approach outside the US.

[Brian Weinstein:]

Okay, great. Thank you guys so much.

[Operator:]

And our next question comes from Tycho Peterson with JPMorgan, you may proceed.

[Tycho Peterson:]

Hey, thanks. Can you actually elaborate on the international changes you're making? I mean, you did mention making taking a more measured approach that balances additional placements with stronger leverage of geographic expansion last year. So what exactly are you doing different in the international markets? And it sounds like that's the bulk of the guidance change for your comments a minute ago.

[Scott Mendel:]

Sure, Tycho, that's exactly right. That is a bulk of the guidance change from earlier this year, and what we are doing as we're looking at country by country where we've established these relationships, and understanding what the potential is for those placements to drive revenue growth, and importantly, that are in line with where we want to go from a gross margin perspective. So as I talked about in my prepared remarks, we obviously have placements in Europe that are not earning anywhere near what they what the counterparts in the US do that's to be somewhat expected, but not at that level. So the main focus is, where these units that are not earning a strong annuity, making sure that the economics make sense for us and then making sure that we allocate our resources in time for the ones that are the most likely to generate that nice strong revenue, as well as strong margins.Again, last year, we had significant expansion. We planted a lot of flags, we expanded to more than 30 countries, which I think is remarkable, and now it's up to us to generate return on that investment, and not to change on the guidance ranges, both on placements as well as on revenue.

[Tycho Peterson:]

And on pull-through, 130 to 135 is still quite a bit below what we'd been modeling at about 143, is that a function of the lighter flu season and then phasing out some of these lower pull through systems internationally? I'm just curious why the annuity guidance is below expectations.

[Johnny Ek:]

Hello. This is Johnny. Really that, pull through for the year as Scott mentioned, if you look at the expected placements for the year and then driving utilization of those placements externally, that is really what's contributing to that sort of mid 30 range for the annuity for the full year.

[Tycho Peterson:]

And then can you quantify what flu did contribute in this quarter?

[Scott Mendel:]

So, not specifically. We are not going to talk about the current quarter revenue quite yet. I would just say, it's felt very moderate to us, and inline with those expectations for a moderate flu season. Now, Tycho, back to the earlier question, what impact COVID 19 might have on general testing volumes? We don't know yet. That's going to be something we have to monitor closely, but for right now it has felt like and the volumes that we've experienced have been consistent with a moderate flu season for us.

[Tycho Peterson:]

Okay. Thank you.

[Operator:]

And our next question comes from Mike Matson with Needham. You may proceed.

[Mike Matson:]

Yeah. The coronavirus test being kind of a reflex test, so I can understand why that the impact of that directly would be sort of small. So what about, do you expect to see more demand for your regular respiratory panel as a result of your testing? Potential coronavirus patients before they even get the reflex test, I guess.

[Scott Mendel:]

Yeah, Mike. So that is definitely a possibility and we will know more as the situation unfolds. It's really early in the life cycle there of this virus, and we're just starting to understand what it's like here in the US which is where the majority of our customers are. Like I said, I think it would, like you said, potentially drive additional testing volumes. I think the caveat to that is, if they, if the patient or if citizens go to hospital yes. Because remember we're testing mainly in the hospital environment versus if they are getting additional testing at doctor's offices that may not have an impact for GenMark and in our product. But, certainly something we'll monitor and we'll know about as the situation unfolds. It's pretty early on.

[Mike Matson:]

Okay, thanks. And then just with regard to the international markets why do you think that adoption or utilization has been so much lower in those markets versus the US. Is it just a cost issue? Is the price too high for those markets or is there something else that's really eliminating their adoption of the panel testing?

[Scott Mendel:]

Yeah, good question. I do think it's an exciting market for us over the long term. What my comments are meant to convey is that, we're taking a much more measured approach to it. We know the US is the main market and it will be, but we also know that it's important to have a global presence. And so, I don't mean to communicate that it's not an opportunity for us longer-term. We got to address it in a much more measured fashion. In general, we would expect outside the US volumes to be lower than in the US just based on testing volumes and adoption of new technologies like multi plex molecular. So we don't think it would ever be the same volume per unit that it is in the United States. But having said that, we have some work to do to make sure that the systems that were placed in the prior years are being fully utilized. So I would tell you that they are not I think there's more than half of them are being utilized in a fashion that we would expect. But there's a large percent that we need to go and evaluate and see what we can do to generate stronger revenue pool through on those units.

[Mike Matson:]

Okay, thanks. Finally, on any departure just wondering if you do provide any additional color on that, if not I understand. Thanks. That's all I have.

[Scott Mendel:]

Yeah, I'll kind of reiterate what we talked about in earlier in February. That it's it was an agreement with the board and Hany that it was time for a transition and, and as the company enters the next phase of its life cycle and we're just balancing strong revenue growth and an eye towards positivity, it seemed like a natural time to make a transition.

[Mike Matson:]

Thank you.

[Operator:]

And our next question comes from Sung Ji Nam with BTIG. You may proceed.

[Sung Ji Nam:]

Thanks for taking questions. First of all, congratulations on your progress with the GI panel and also for providing the timeline for that. Scott would you be -- and to the extent possible, could you talk about what's the differentiating factor might be for your products versus what's already out there. And you may be able to comment on kind of the panel size and what you're looking at and things like that.

[Scott Mendel:]

Sure, so we have not yet disclosed panel size, but I would tell you that it's designed is to include virus, viruses, bacteria and parasites. And we designed the task to address what we understand to be the most pressing market needs. So from a coverage perspective, we think it's appropriately sized. We'll share more details as we progress down the timeline. But we're not disclosing the exact makeup of the panel for competitive purposes. The advantage will be the same as it is for the rest of the ePlex panel. It'll be a panel that gives rapid and actionable results but also takes advantage of the streamlined workflow that has proven to be a big competitive advantage for ePlex. So it'll be a panel that we believe hits the needs of the market. And then leverage is the workflow that is so popular and valued by our customers that ePlex brings to market

[Sung Ji Nam:]

Great, thank you. And then just one more question on the coronavirus. Sorry if I missed it, but what's kind of the timeline? Or how long would it take for the customers, existing ePlex customers to validate the ROU channel test for COVID 19. And then did you also talk about the timing for the EUA approval? And also with that, do you think that could happen within during this? I guess, flu season? Current flu season, thank you.

[Scott Mendel:]

Yeah, good question. So from COVID 19 perspective, as you probably are aware, the FDA has provided additional flexibility for high complexity labs to adopt and LTD tests. And so that is where I think that certain customers will have the opportunity to adopt to our RUO test in a much more quick fashion than others. So as far as how long that takes, it's really dependent, I would assume customer-by-customer and how quickly they can validate our RUO test. I would say that, that's the main area of focus for most customers right now and those that can validate in our RUO test. From an EUA application perspective, our target to have that application completed based upon the information that we're obtaining from customers that are currently using our testing, our design with clinical samples. I would expect that to be submitted in the next week or so, and as far as timing of the review and clearance or granting of an EUA, I'm not positive. I would say, our estimates are somewhere in the one month timeframe, two to four weeks hopefully, and therefore it would be able to address the tail end of this current flu season, and assuming that it's a normal type flu season and that this COVID19 doesn't extend it. But I would assume it would be available towards the end of this flu season.

[Sung Ji Nam:]

Great. Thank you so much.

[Operator:]

And our next question comes from Max Masucci from Canaccord Genuity. You may proceed.

[Max Masucci:]

So, first on the 2020 guidance, you're going one layer deeper. What's included, what's excluded and what are the expectations for the implementation of the ePlex? Is they're already placed and driving utilization there as it relates to that potential $15 million opportunity, you called it out in the prepared remarks. How much is that assumed in the guide, if any?

[Johnny Ek:]

So Max, this is Johnny. If you think about how to build up that revenue, an easier way to do it is, think about what our installed base is, right? 527 ending the year, and then you think of annuity that we've stated last year and this year you kind of come up to a number pretty easily and then you layer in what we've done historically from an XDA perspective sort of in the mid $20 million for the year. You can easily get to a portion that, we need to achieve in this current year from a go live perspective on BCID to kind of get into our guidance range. And we certainly have factored, as Scott mentioned, that opportunity, is up to $15 million if we turned all of these analyzers on and were able to that annualized revenue. And we've assumed a portion of that and then, assumed the appropriate amount of risk and upside to get to our guidance.

[Max Masucci:]

Okay, great. And then just sticking on those specific boxes. So, and the difference between, I guess the gross and the net placement. So, what was the reason why that customer didn't go live with those units and what are you doing to sort of address that going forward?

[Scott Mendel:]

Sure, Max. This is Scott. So from time-to-time it does happen where an implementation doesn't conclude to clinical use, and I would say this is a bit of an anomaly, like I said, the majority of them were from one customer and it really represented a change in management at that client and just the change in priorities and what that manager wanted to do as far as adopting technology. It was definitely an anomaly. It was definitely a large number of units and like I said, really has to do with the change in management.

[Max Masucci:]

All right, great. And then one more if I can, can you just give me a bit more granularity on specific manufacturing improvements as we look forward to this upcoming year?

[Scott Mendel:]

Yeah. I can do that. So, the team is really focused, like I mentioned, on direct material and direct labor savings and the overhead absorption just naturally increases with increasing production volumes. I would say from a direct material perspective, there's a couple handful of the projects that are expected to drive some significant savings and direct material. And they're mainly related to reducing the amount of material used during the manufacturing process, as well as to a little bit lesser extent doing some looking at different vendors that will help reduce the purchase price of those parts.So some very discreet projects, the team is managing them very well. I'm really excited to get those rolled in. And again, we feel really good about those. On the direct labor side, it's really reliant upon our teams identify streamline processes as it relates to as an example, in process quality control points. So there are some automation opportunities and some improvements in some of these quality control techniques that make it much more efficient for our manufacturing team and therefore reduces the amount of direct labor cost per consumable that is produced. So the team's got it just like on the direct material side. The manufacturing teams have a nice funnel opportunities drive to direct labor costs improvements throughout 2020. And then they also have funnels, both teams have funnels beyond 2020. And even into 2021 and even into 2022. So feel good about that Max. I think they've got their hands or their arms around it, got a handle on it, and they're making good progress.

[Max Masucci:]

Great. Thanks for taking the questions.

[Operator:]

Ladies and gentlemen, this concludes our Q&A portion of today's call. I would like to turn the call to Scott Mendel for closing remarks.

[Scott Mendel:]

Thank you all for joining us this afternoon and thanks for your continued support. We look forward to updating you on our progress in the future. And we'll talk to you soon thanks.

[Operator:]

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