Genmark Diagnostics Inc
Q3 2018 Earnings Call Transcript

Published: 30 Oct 2018

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to today's conference call to discuss GenMark Diagnostics' Third Quarter 2018 Financial Results. My name is Chris, and I'll be your operator on this call. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions]. Please note that this call is being recorded today, Monday, October 29, 2018, at 1

[Johnny Ek:]

Thanks, Chris, 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. For example, statements concerning our 2018 financial guidance, the development, regulatory clearance, commercialization and features of new products, 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, which 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 will now turn the conference call over to Mr. Hany Massarany, President and CEO of GenMark. Hany?

[Hany Massarany:]

Thank you, Johnny. Good afternoon, and thank you all for joining us. Joining me on the call today is our CFO, Scott Mendel. We’re very pleased with our third quarter results which once again reflect continued strong execution across key aspects of our business. Total revenue in the third quarter grew 36% year-over-year to $15.8 million. Again, our top-line performance was largely driven by the solid pace of ePlex system adoption and continued high demand for our respiratory pathogen test cartridges. Fueled by the proven processing capacity of ePlex and its ability to optimize workflow, in Q3, we expanded our installed base by 45 additional analyzers and closed out the quarter with 312 ePlex placements in the US and international markets. Like recent quarters, the majority of Q3 placements were in the US, which continues to be the largest market for our testing platforms and panels. As a reminder, the strategic objectives we established for growth in 2018 were based on driving ePlex market adoption and test menu expansion as well as improving manufacturing cost and yield efficiencies. We have made great progress delivering on these objectives so far this year and over the next few minutes I'd like to share some of our recent accomplishments. Starting with ePlex market adoption, I am pleased to report that the benefits of ePlex workflow continued to resonate very strongly with our customers. This was a major contributor of our strong placements in the third quarter, particularly towards the latter part of the quarter as customers began to gear up for the flu season. We were also pleased to achieve a meaningful number of placements in the quarter driven by the anticipated launch of our Blood Culture ID Panels in the US market. This is especially encouraging as it underscores the advantages of our approach to BCID testing compared with currently available panels. In Q3, we also continued to see strong placements of our ePlex NP platform which as a reminder is a three cartridge analyzer that can process up to 12 patient samples per shift with the same core ePlex functionality. In Europe, the NP configuration is proving to be especially effective at helping us gain access to lower volume hospitals and decentralized test sites in less populated geographies. Expanding our direct sales force and distributor network is another key 2018 objective to drive market adoption of our ePlex system. In line with this we’re continuing to add top-tier sales talent in the US and expect to achieve our goal of reaching a sales force size in the mid 30s by year-end. Outside of the US progress towards improving our commercial processes in Europe is ongoing, including shortening the ePlex sales cycle and repositioning underutilized ePlex analyzers to maximize the annuity of our installed base in Europe. We’ve also made good progress expanding our distribution network to broaden our geographic reach globally, including underpenetrated regions outside of Europe. And I'm confident that we are establishing the right foundation for future growth outside the US but continue to expect domestic placements and annuities to be the primary drivers of revenue growth. Turning to our ePlex menu. I would like to start by making a few comments on the recent Palmetto and CGS Local Coverage Determinations or LCDs on respiratory panel testing. These two Medicare Administrative Contractors or MACs determined that respiratory panels of three to five pathogens will be reimbursed in specific clinical situations but larger multiplex panels such as our ePlex RP Panel will not be covered at previous levels. At this stage, these LCDs will only apply to Medicare and Medicaid patients who are built on an outpatient service within the nine states covered by these two MACs and will not have an impact on patients outside of these state, patients who are treated on an inpatient service or patients who have insurance other than Medicare and Medicaid. It is likely, however, that the remaining MACs and possibly some private payers with adopt a similar policy at some time in the future, and we would continue to monitor and address this situation as appropriate. While we’re disappointed with these final coverage positions, they are largely consistent with the initial draft policies, so not entirely unexpected, we are now working with our customers to fully understand the potential impact of these LCDs and develop alternative strategies to enable continued patient access to the benefits of our multiplex technology. It’s important to note that the majority of our respiratory test volume is driven by inpatient testing. And while it’s difficult to accurately estimate, we expect that about 5% or less of our total revenue may be impacted if similar LCDs are adopted broadly. Now on to other test panels, and as we’ve previously, expanding our ePlex menu remains a top priority for our company. And I’m delighted with the significant progress that we've made so far in relation to bringing our three novel Blood Culture ID panels to the US market. During the third quarter was submitted to the FDA two new BCID Panels, Gram-Negative and Fungal Pathogen, which together with the Gram-Positive Panel previously submitted to the FDA in June of this year, complete our family of ePlex Blood Culture ID Panels for the diagnosis and disease management of bloodstream infections that can lead to sepsis. We are confident in many significant market opportunities for these panels in the US based on several factors including

[Scott Mendel:]

Thank you, Hany. As previously mentioned, our third quarter 2018 revenue was $15.8 million, up 36% versus the third quarter 2017; with the US continuing to account for the vast majority of our sales. The average annuity for ePlex placement was $88,000 in the third quarter, primarily driven by typical respiratory panel ordering patterns, as we expand menu anticipating unit replacement to be less variable from quarter-to-quarter. We continue to expect the average revenue per ePlex placement to be in the top of our guidance range of $100,000 to $120,000 per year with the potential to increase in future years as our test menu expands. Third quarter gross profit was $5.6 million or 36% of revenue versus $4.2 million in the third quarter of 2017 or 36% of revenue. When compared to second quarter 2018, gross margin improved by 6 percentage points, driven by both our manufacturing improvement initiatives and a higher mix of XT-8 product sales versus the prior quarter. We are pleased to see results of our focused efforts in this area. However, we do not expect the sequential increase in overall gross margins in the fourth quarter due to anticipated mix shift to higher ePlex product sales relative to XT-8. We’re continuing to make progress on ePlex gross margin improvement and remain confident in our ability to drive margin accretion over the longer term. Until ePlex gross margins are more in line with XT-8, product mix will continue to be an important factor affecting the overall company gross margin. Total operating expenses were $16.2 million for the quarter, a decrease of $2.7 million compared to third quarter of 2017. This decrease was largely due to reduced ePlex development expenses. Our net loss per share for the third quarter was $0.20 compared to $0.28 in the third quarter 2017. Moving on to the balance sheet, we ended the quarter with $42.7 million in cash and investments. We used $12.6 million of cash in the quarter, which was a sequential increase of $2.4 million compared to the prior quarter. The cash usage increase was driven by an increase in accounts receivables due to the timing of orders and revenues and an increase in inventory in advance of the flu season, which was partially offset by the increase in gross profit. We were also successful in completing a debt restructuring that extended the interest-only period on our debt until January 1, 2020 and can currently extend to the final maturity date until January 1, 2021. This will give us greater financial flexibility as we continue to grow the business. We remain committed to reducing cash usage as we grow our revenue and improve margins, partially offset by continued investment in our commercial and R&D efforts as well as manufacturing capacity. Overall, our cash usage will be significantly reduced relative to the prior year and in line with our expectations. Turning to guidance for the full year 2018, we continue to expect total revenue to be in guidance range of $68 million to $72 million. Based on early indications, however, we are expecting a light 2018, 2019 flu season, which could impact our Q4 revenues. Therefore, we now anticipate revenues will be closer to the midpoint of our guidance and gross margins for the year to be in the range of 28% to 30%. Importantly, we are making progress in improving ePlex consumable gross margins, and this remains a top priority for us. And finally, we are refining our expected 2018 global ePlex placements to be in the range of 150 to 160 net new analyzers. In closing, GenMark continues to execute on the strategy we laid out for 2018, including driving ePlex placements, menu expansion and cost efficiencies. At the same time, we have been successful in laying the foundation for continued growth by expanding our US sales organization, as well as improving our sales execution outside the US. While we are expecting a lighter flu season this year, we remain confident that the strength of our respiratory panel combined with the anticipated launch of our BCID Panel in 2019 position us well for future revenue growth, gross margin improvement and shareholder value. We will now open the call to questions.

[Operator:]

Thank you. [Operator Instructions]. And our first question comes from Brian Weinstein with William Blair. Your line is now open.

[Unidentified Analyst:]

Hi, guys. Good afternoon, this is actually Andrew on for Brian. I wanted to first start with some questions on menu and Hany your commentary there was helpful. Maybe you could provide a little bit more color though on the alternative strategy that you're working through with BCID and the GI Panel, just a little bit more color there? Thanks.

[Hany Massarany:]

Alright. Thanks, Andrew. No alternative strategy for BCID, we’ve completed of course development of clinical studies and submission of all three panels to FDA, and we’re now working with FDA through the review and clearance process which we expect to sort of happen for one or more of the panels starting late this year and into early next year. We are working now to prepare the market and our organization for a successful launch in the US, including placing systems for early access, under sort of a strategic early access program. We’ve placed systems in US labs who are now working ahead of launch to evaluate, research uses on the configuration of these panels to prepare for when the panels are available post FDA clearance for routine clinical use. So that’s as far as BCID is concerned. Now for GI, we had said before that we actually already designed a panel, a very uniquely differentiated panel with broad inclusivity across multiple pathogens and we are now taking the opportunity to consider how we might configure this panel for maximum clinical utility as well as taking into account various factors as we always do in terms of market dynamics, some of the competitive activities that we’re seeing out there, but also recent sort of changes in reimbursement. It is our focus to ensure that we have syndromic panels that provide the maximum benefits to patients. We’ve technology that’s obviously very powerful and provides a lot of ability to sort of configure both in terms of panel content and software functionality that will give us a lot of options in terms of how best to bring to market the best panels while taking into account all of these factors.

[Unidentified Analyst:]

Great. Thanks. And then on the respiratory panel, your commentary on the Palmetto update there. Could you maybe talk about the market reaction to that, are you seeing any slowing down of utilization of these tests? Thanks.

[Hany Massarany:]

Thank you for that. No, we’re not, because the vast majority of the testing done with our panel, both actually ePlex but also XT-8 is on hospitalized patients under hospital DRG as opposed to outpatient. We and the market in general are disappointed with position -- with reimbursement position. We’re not in agreement with it, because we think that there is so much evidence with publications, with case studies that really demonstrate the clinical value, the economic value as well as the quality, the benefit of these panels and that’s why the customers are adopting them, right. Automated sample-to-answer rapid and providing all the relevant information upfront to manage critically ill patients typically hospitalized maybe be immunocompromised. So, we strongly believe in the approach for syndromic panel. We will continue to work with our customers to demonstrate the value in the future as well. In terms of the market reaction, like I said, the societies, the key opinion leaders, customers and suppliers are I would say, not in agreement with the reimbursement position and at the end its up to individual customers and institutions to decide on how to interpret the reimbursement sort of policies and positions, how to code for reimbursement based on the clinical utility in the context of how they interpret the law. And we don’t tend to advise on that but of course it’s up to individual customers to make that decision.

[Operator:]

Our next question comes from Mark Massaro with Canaccord. Your line is now open.

[Mark Massaro:]

Hey, guys. Thank you for taking the question. I guess my first one, Hany, I think you indicated that you estimate that approximately 5% or less of revenue may be impacted by some of these MACs if they adopt similar policies as Palmetto. Can you just -- one, can you help us understand how you came up with that estimate? And then two, related to that, would you suggest that we incorporate this 5% thinking into how we think about 2019? I ask because I know you're not providing guidance for ‘19 but consensus is looking for around 89 million or 25% revenue growth, should we factor that into where the street is today?

[Hany Massarany:]

Alright. So thanks, Mark. And look it is difficult to estimate or calculate the sort of impact. As you know this applies to a percent of a percent, right. So the vast majority of volumes tested with both XT-8 and ePlex for respiratory is for hospitalized patients as opposed to outpatient. And then only a certain percent of the half patient population is actually covered by Medicare. And now we’re talking about something that's coming into effect in November, December timeframe of this year. So the impact is sort of really not significant if you think about 2018. Of course as we go into 2019, time will tell how broadly this will be adopted, we think it will across other MACs. Not sure that we can speak to how private payers may consider this position but also we’re going to drive significant growth with our Blood Culture ID Panels which of course are not at all impacted by reimbursement so this is sort of how we look at it and come to that conclusion that it is not a significant impact for us. And especially as we grow our business with future panels in the US market and globally, I think the impact will be even less. I am not going to comment on the 2019 guidance because Scott is looking at me like you better not say anything about guidance for 2019.

[Mark Massaro:]

Understood, understood. My second question is on the NP configuration. You indicated that you’re gaining nice traction notably in Europe. Can you speak to whether or not the majority of your placements of the 45, were more than half of them NP and can you just help us with how you think that the split of NP versus non-NP will play out over the coming quarters?

[Hany Massarany:]

Right. So we are not sort of planning to report NP versus non-NP but I can tell you the majority is non-NP. So the majority of our placements are still straight up ePlex as opposed to NP and we expect that to continue in the future as well.

[Operator:]

And our next question comes from Doug Schenkel with Cowen. Your line is now open.

[Doug Schenkel:]

Hey. Good afternoon, guys. Starting on gross margin, ePlex gross margin continues to be decently below the corporate average. It sounds like you’re satisfied with the progress you're making in improving that metric. Can you provide a bit more detail on that progress, specifically what milestones can you point to that also on the outside kind of used to feel better about trend and at what point do you expect ePlex to be gross margin accretive relative to the company average?

[Scott Mendel:]

Hi, Doug. It’s Scott. I will take that question. I think what we could point to externally that is visible is, if you look at the revenue split that is disclosed in our 10-Q and then you know that our historical XT-8 margin is down in the mid to high 50% range, you can back in and see what a trending looks like for the overall ePlex product line and it is showing progress. We’ve a lot of opportunity for continued progress and expect to make those opportunities come true over the next foreseeable future. As far as when you have that inflection point or when ePlex becomes accretive to the overall gross margin, certainly have a lot of room to go to get there. I would anticipate getting to that 60% gross margin target that we've been speaking about, over the next three to three years and it’s going to take some time for us to get ePlex to that level. Therefore, like I said in my prepared remarks, mix will be an important factor for us to consider as we formulate our guidance range for next year because certainly next year ePlex will not be accretive to the overall business because it’ll be lower than what XT-8 is and we’re mix shifting towards ePlex.

[Doug Schenkel:]

Okay, great. And then just a couple of more. On the guidance change where you are now back to guiding to the midpoint of the range for revenues, I believe you attributed that to the assumption that it's going to be a light flu season. Is that something you're seeing in the early going, or is that just making a decision to be a bit more conservative with the guidance for the year?

[Scott Mendel:]

Yes, it’s really the latter. So early indications looking at flu trends in the Southern Hemisphere as well as kind of where we’re starting off, would give us some indication that it could be a lighter than typical flue season. And so, we wanted to get the range of outcomes in Q4 reflecting that. Could it come back, Doug, and be as strong as prior years or stronger than we expect? Yes. But we didn’t want to ignore some of the early indications that we’re seeing, especially as it relates to the Southern Hemisphere flu season.

[Doug Schenkel:]

Okay. And if I could ask I guess about one more thing, going back to Palmetto. Just to be clear, with customers using your respiratory panels today and the outpatient setting receive, any reimbursement for the bacterial targets on the panel in addition to the viral pathogens reimbursed under the LCD? And I guess another Palmetto question, how should we think about your strategy in GI with what seems to be a finalization of the draft LCD at some point?

[Hany Massarany:]

Yes, Doug. This is Hany. I can start and then Scott jump in if you want to add to my answer. So Doug, we really cannot advise customers on reimbursement strategies and most of our customers have specialized reimbursement personnel to sort of help with strategies, and including how to code for reimbursement in the context of the clinical utility of the tests, as well as their interpretation of the guidance. And we’ve heard people say that look you could still receive reimbursements even if you use a broad panel, you will simply get the reimbursement that’s now for the only panel or the only code, which is three to five target I believe it is. And then you can sort of code stakes all over the other targets that aren’t in that panel, in that code I should say depending on the clinical situation -- the situation, right. And we expect that the customers -- actually today the various interpretations and various sort of situations can result in different approaches to reimbursement coding and we tend to stay out of it because obviously it’s not for us to tell them how to code for maximum reimbursement. Our position is that, we absolutely believe in the value of multiplex panels and we’ve always said that, yes, we agree that certain patients don't need a full broad panel. But more importantly, the critically ill, hospitalized, immunocompromised, elderly, et cetera patients and sometimes they are not hospitalized but they need to have access to this type of breadth of inclusivity in order to get the best outcomes. So we expect that some of our customers will approach reimbursement more aggressively to maximize their revenues so to speak or what they get from insurance. But in general the customers make those decisions based on what's best for their patient, frankly regardless of the reimbursement we believe.

[Doug Schenkel:]

Okay. And then the other part of that -- thanks for all that Hany but I guess the other part of that question was does any of this impact your strategy in GI?

[Hany Massarany:]

Well in GI for sure, again, we said before that we think this is a market opportunity that couldn’t be as big as $800 million globally. Certainly if you factor -- if you’re counting on all of the outpatient testing as part of the sort of the business case for going after GI market, then yes that will likely be a smaller market opportunity but it’s still in the hundreds of millions of dollars. So what we are doing now, as we normally award, we’re taking into account a lot of those factors. I mean the reimbursement is not the only factor that we look at and certainly Medicare reimbursement, right. If we took that as the driver of how we design panels and launch them, we would be doing things very differently, right. So we take into account most importantly the clinical utility for the high-risk patients that we’re most concerned about, we take into account the benefit to the labs because the alternative conventional methods are very hands-on. It takes days to do all the cultures. It’s opportunity for errors to get -- to act on the results is just it takes too long for patients. So that’s why customers are adopting these syndromic panels. So we believe that that's actually the most important thing we look at. We look at both the clinical utility for high-risk patients. We look at positive values for the customers in terms of workflow, connectivity, testing efficiency and we also take into account obviously reimbursement. So there’re ways that we can configure the panel to maximize the clinical value, while taking into account some of these factors and including some of the competitive dynamics that we’re seeing out there as well. And that’s what we’re doing at this time.

[Operator:]

And our next question comes from Tycho Peterson with JPMorgan. Your line is now open.

[Tycho Peterson:]

Hey, thanks. Maybe starting with BCID, Hany you kind of called out that some of the placements this quarter were driven by BCID. Are you able to quantify out of the 45 how many were if specifically driven by BCID and how we should think about that trending for the next couple of quarters?

[Hany Massarany:]

Not exact numbers, Tycho, but certainly it’s a small number of placements. We’re not yet rolling this out broadly to the marketplace until we’ve clearance, but we’ve had a lot of interest from some of the premier sort of institutions, hospitals in the US and we’re pleased to be able to do some of that work ahead of clearance.

[Tycho Peterson:]

I guess just thinking ahead along those lines, are you able to give us any sense of how we should think about throughput increasing on the back of BCID rollout next year?

[Hany Massarany:]

Well we sort of said that the annuity per ePlex analyzer is in the sort of 120 -- we said 100 to 120 and so far we believe that we will end up on the sort of the high end of that range. And with the introduction of BCID and sort of as we -- as the market sort of adopts our panels, we expect that to sort of bump up to the 150 and maybe even with future menu exceed that as well. So I think overtime we certainly see going from the 120 to 150 and even beyond as we bring additional panels to ePlex.

[Scott Mendel:]

Tycho, this is Scott, I would just add to that that for 2019 that’s not what we’re talking about 150k range for that, that’s a little bit over time. What we need to contemplate and factor into the guidance that we’re going to get for 2019 on the fourth quarter call is the mix of current RP customers adopting BCID versus standalone BCID because as you know and would expect in general BCID testing volumes on average would be lower than what an RP testing volume is. So we got to factor that in, the adoption of current installed base that are running RP and what that does to the overall annuity replacement would drive it up and balance that with how many standalone BCID implementations we have because obviously would be a slightly lower volume test on average.

[Tycho Peterson:]

Okay. That makes sense. And then as it relates to the Europe, I am just wondering if you can bring us up to speed on how those initiatives have gone in terms of shortening the selling cycle and then repositioning to what extent repositioning of systems play overall in the quarter?

[Hany Massarany:]

Really going well, Tycho. I want to preface my answer by saying that the most important market for us for our product at this time is still the US market and especially with the launch of BCID sort of in 2019, US will contribute the vast majority of our placements and revenue growth. However, we've also made very good progress outside of the US. We have now secured distributor partnerships in most of the Central and Western European key markets, but also in other markets within Europe and outside of Europe as well. And we’ve also optimized our team in terms of size of our team and structure of our team, managing our European business to an optimum structure and size to work in hand-in-hand and in conjunction with these distributor partners. And as a result, we’re actually seeing improvement across the board in terms of the decision-making process, in terms of putting some of the earlier placements that weren’t generating much revenues, putting them to good use and now turning them on again in other sites and so on and so forth. So I would say overall it has been going well and we continue to expect to improve on that.

[Tycho Peterson:]

Okay. And then just one last one, I appreciate all the Palmetto and I understand it is a small revenue base at risk, if other MACs follow suit. Can you just clarify how other MACs actually set anything at this point in terms of following suit or just should we put in the bucket of theoretical risk?

[Hany Massarany:]

Yes. I think at least one other MAC followed suite with Palmetto. Sorry?

[Scott Mendel:]

And one more is in draft.

[Hany Massarany:]

And one more is in draft. One definitely followed suite and issued a final LCD and another one is in draft and there’s sort of a process by which the MAC has to go to follow what Palmetto has done and I think it’s a process that’s sort of takes around six months from going to draft, allowing a period of comments and then sort of going to a final LCD as we understand it. So even for this to go broadly across all MACs covering Medicare and Medicaid before we talk about anything else beyond that, we’re talking about sort of middle of next year and beyond.

[Operator:]

And our next question comes from Derik De Bruin with Bank of America. Your line is now open.

[Derik De Bruin:]

So just a couple of questions. So on I guess a few if you’re expecting a mild flu season right now and that’s sort of where things are looking I guess, how should we think about that as it rolls up into ‘19 or is it too early for you to sort of comment?

[Hany Massarany:]

Yes, it’s a bit early. We’re not the authority on how the flu virus would actually behave. So just to be transparent here, we’re just going by what happened in the Southern Hemisphere and places like Australia, I think it was just sort of a drop of 40% albeit in [France] that’s compared to the most severe flu season on record and then just very early indication here in the US. It just seems like there is a chance that it will be a light season. We can't be certain of that. As Scott said if it can turn quickly and we’re ready for it regardless of how severe or not. And if it is a light season, then there would be an impact on the first quarter as well. But again look it can be light and sort of delayed and then it becomes severe, I mean it can go in different ways, but typically if it’s a light flu season, it would impact the fourth quarter of this year and possibly Q1 of next year.

[Derik De Bruin:]

Got it. And can you just talk a little bit about the competitive landscape so far and I mean there’s been some new introductions in Europe where some -- just there’s some new companies being pushed in Europe, is like have you had any change in the competitive dynamics in the market?

[Hany Massarany:]

We haven't -- look we’re obviously watching and very interested in that and we see it all as a good news because there seems to be a lot of interest in multiplex sort of syndromic sample-to-answer panels that approach to diagnostics. And I think all of this interest validates the opportunity and the utility of these panels but frankly a lot of it is still very early days and we haven't seen yet significant competitive activities across the board. So we continue to monitor and we take into account what obviously other people are doing and saying, as we contemplate the final configurations of our products for example, but we’re pleased because we believe that it will take multiple strong competitors, suppliers to really develop this market over many years to come across multiple disease states. So we welcome that.

[Derik De Bruin:]

Right. And I guess any initial feedback from the commercial -- on the commercial reimbursement, are you getting any pushback at all on trying to go to the Medicare rate?

[Hany Massarany:]

No.

[Derik De Bruin:]

Are you hearing that in the market?

[Scott Mendel:]

Not yet, it’s too early. We will continue to stay close to customers and make sure we understand how they are going to be compliant with the LCDs and what potential impact that could have but we’re not seeing anything yet.

[Operator:]

And our next question comes from Mike Matson with Needham & Company. Your line is now open.

[Mike Matson:]

Hi, thanks for taking my questions. I guess I just wanted to start with the BCID launch. How should we think about the impact of that on your gross margins, is it positive, neutral or negative?

[Scott Mendel:]

Mike, it’s Scott. The margin profile of BCID is relatively the same as RP. They largely share all the same components et cetera. So we improve ePlex gross margin from an RP perspective, that would carry over to BCID as well. But the same comment holds true to that I said earlier on, we have work to do to continue to make that positive progress as it relates to ePlex gross margin. And until a point in time where we get it up towards [respirators], we have to keep an eye on mix shift.

[Mike Matson:]

Okay, thanks. And then just a question on the MACs and Palmetto. So the 5% number that you’re quoting that’s really just Medicare outpatient. So if private pay -- let’s say 100% of private payers also stop paying for these on an outpatient basis, what would the revenue exposure be at that point?

[Hany Massarany:]

Yes. Again, Mike, this depends on the timing of that and as we introduce additional panels that aren’t impacted by that at all. So in terms of calculating that as a percentage of our own revenue, it’s difficult to do that. But obviously the more payers that follow suit, the more the impact would be. However, overall, it would still be pretty small impact, I mean we’re talking like about 5% maybe around 10% who knows. So that’s a sort of -- again, assuming that everyone follows suit and it’s just that most of our volume is coming from hospitalized patients as opposed to outpatient that impact maybe more on other companies depending on where their systems are and how much of the volume is coming from outpatients but for us it's not a significant impact.

[Mike Matson:]

Okay. That’s helpful. I was just trying to put sort of an upper limit on worse case scenario. Thanks.

[Hany Massarany:]

I would say -- to be conservative, I would say somewhere around it’s between could be 5% or less and maybe in the worse case 10% to 15%.

[Operator:]

And this does conclude today's question-and-answer session. I would now like to turn the call back to Hany Massarany for any further remarks.

[Hany Massarany:]

Alright. Well, thank you very much. Really appreciate the questions and look forward to updating you on progress in the future. And if you happen to be in San Antonio over the next few days, please come by and look forward to seeing you there, come by our booth or our workshop as well, which I think is tomorrow morning -- no, Wednesday morning, early morning. Alright. Thanks, everyone. Have a good day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today's program. You may all disconnect and everyone have a great day.