Genmark Diagnostics Inc
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Good day ladies and gentlemen, thank you for standing by. Welcome to the GenMark Diagnostics 2016 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded today Tuesday, May 3, 2016. I’d now like to turn the conference over to Ms. Jenn Manship of GenMark. Please proceed.

[Jenn Manship:]

Thanks, Shenelle [ph]. 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, plans, objectives, assumptions or future events or performance are forward-looking statements. For example, statements concerning our 2016 financial guidance, the development and commercialization 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 differ materially 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 would now like to turn the call over to Mr. Hany Massarany, President and CEO of GenMark. Hany?

[Hany Massarany:]

Thanks, Jenn and good afternoon, everyone. I’m joined on the call today by our Chief Financial Officer, Scott Mendel; as well as our Founder and Senior Vice President of Research and Development, Dr. Faiz Kayyem. Today, we have a few prepared comments and then we will be happy to respond to any questions that you might have. Our prepared comments will cover the following topics. First, I will provide an overview of our performance in the first quarter of 2016, including a general update on the progress of our ePlex program. Then, Scott will walk us through operating results for the quarter. And finally, Faiz will provide more specific details regarding the status of our ePlex Respiratory Pathogen panel, and its path to CE Mark. So, let’s start with a high level review of our first quarter performance. And once again, our U.S. commercial team delivered excellent results. We grew Q1 revenues by 9%, compared with the first quarter of 2015 and expanded our installed base of XT-8 analyzers to 644. As you all know from our last earnings call, understanding and addressing the variability in our ePlex cartridge manufacturing process has been our top priority over the past few months. As a reminder, this variability became evident early in February, after we completed the transfer to manufacturing our ePlex Respiratory Pathogen panel and as we ramped up cartridge production to support CE Mark and key regulatory studies. And as a result, we focused our efforts on assessing every step of ePlex cartridge manufacturing, including incoming raw material specifications and inspection, quality control methods and training, as well as manufacturing equipment and work instructions. And today, I’m pleased to let you know that we’ve identified the main course of product variability to be an outsourced reagent and we believe we’ve now put in place appropriate measures to rectify this problem. Furthermore, as a result of our focused efforts we also identified other secondary areas of product and process and variability and we’ve implemented additional techniques to maximize product reliability. And based on all this, we have resumed production level manufacturing and rigorous testing of the ePlex Respirator Pathogen panel and we’re on track to achieve CE Mark this quarter. We plan to initiate U.S. IVD clinical studies shortly after CE Mark and now expect to complete FDA submission towards the end of Q3 or beginning of Q4. We continue to be very pleased with the high quality of ePlex results, which we’ve now demonstrated on thousands of test cartridges both internally and in collaboration with KOLs in the U.S. and more recently two beta sides in Europe. And now that ePlex cartridges are performing at the expected level of reliability to support CE Mark, we look forward to a successful ePlex launch this quarter in Europe and FDA submissions later in the year. And with that I will now hand over the call to Scott Mendel. Scott?

[Scott Mendel:]

Thank you Hany and good afternoon everyone. We issued our financial results prior to this conference call and will be filing our Form 10-Q shortly after the call is completed. During the first quarter of 2016, our revenue increased 9% to $11.1 million, compared to the first quarter of 2015. The annuity for analyzer in the first quarter was approximately $68,000, down 7% versus prior year, due to the light flu season. And our average annuity per analyzer over the last four quarters is in the mid $60,000 range. Gross profit for the first quarter of 2016 was $6.7 million or 60% of revenue versus $6.1 million or 61% of revenue in the first quarter of 2014, also reflecting the light flu season. Total operating expenses were $19.4 million for the quarter, an increase of $3.3 million compared to the same quarter of 2015. Marketing and sales expenses were $3.7 million flat versus prior year. Research and development expenses were $12.3 million, an increase of $3.5 million in preparation for the CE Mark. And finally, general and administrative expenses were $3.4 million in the first quarter, a decrease of $252,000 versus the prior year period, primarily driven by the suspension of the medical device excise tax and reduction in the [indiscernible]. During the first quarter, we recorded $277,000 of interest expense related to our debt facility. Our net loss per share for the quarter was $0.30, with weighted average shares outstanding of approximately $42.7 million. Net loss per share in the same quarter of 2015 was $0.24 per share when weighted shares outstanding were approximately $41.8 million. We ended the quarter with $38 million in cash and investments and we plan to continue utilizing our cash balances, primarily to complete the analytical and clinical ePlex studies required for CE Mark and FDA submissions, as well as expanding our global commercial organization. In addition to our cash balances, our existing debt facility can provide up to an additional $30 million in connection with achievements of certain commercialization milestones. During the first quarter 2016, we also maintained our focus on minimizing working capital requirements resulting in DSOs of 50 days and DSI of 72 days. I will now turn the call over to Faiz, to provide additional details regarding ePlex.

[Faiz Kayyem:]

Thank you, Scott. The ePlex system continues to demonstrate a level of performance and ease of use that is revolutionary in the field and I and the GenMark team cannot wait for to see our RP Panel and then the blood culture ID panels and others as well. As Hany has previously mentioned, we’ve been working to achieve the acquired level of reliability to support the upcoming launch of ePlex in Europe and we thought it would be helpful to provide specific details about this work and what we have achieved. The ePlex cartridge features numerous process checks and internal control molecules designed to ensure quality results and high performance of the system. The internal control molecules in our ePlex cartridge are amplified by PCR, prior to detection using eSensor electronics. This PCR reaction is what began sailing intermittently around the beginning of February. And so we immediately tested the relevant raw materials of the PCR reaction and we did not at that time note any deficiencies in these materials because we didn’t immediately identify a smoking gun and because the PCR reaction began feeling just as we scale manufacturing, we initiated a systematic assessment of our entire supply chain, and manufacturing processes to drive out any related variability. Our efforts in these areas were comprehensive and rewarding. For example, we identified opportunities to improve our manufacturing processes to reduce variability and also through software programming, we optimized some of the digital microfluidic movements in the ePlex cartridge to make the RPS an even more reliable and robust to variations in manufacturing. We’ve now implemented these improvements and we will continue to deploy others over time as part of our culture of continuous improvement to drive the highest product performance and reliability. That said, we did not identify an ePlex design issue on internal source of manufacturing variability that cause the primary decline in PCR performance. Rather than finding an internal manufacturing inconsistency, we instead identify the main root cause for this problem to be a decline and the stability of one of the externally supplied reagents used in the PCR reaction. This reagent is a commercial product that is custom formulated for GenMark by a major life sciences supplier. It is rigorously tested by the supplier and then again tested by GenMark as part of our upcoming QC process, our incoming QC process. Neither we nor supplier noticed the change in performance of this reagent in the initial lots, however subsequent assessment has confirmed that this reagent demonstrates variable levels of stability in the ePex cartridge. This variation and stability was primarily responsible for the inconsistent levels of product reliability we recently experienced. Now, that we’ve identified the problem what have we done about. Three things, we continue to work with our primary supplier of this reagent to improve the stability of their product in our ePlex system. Second, we engage with other life sciences companies that manufacture similar versions of this reagent. And third, we developed improved testing methods to discriminate stable from unstable regions in our ePlex system. These actions enabled us to more effectively evaluate performance and stability of reagents from several sources using both isolated assay components and full sample to answered ePlex cartridges. At this time, we now understand and have addressed the variable performance issues we were observing with this raw material. As a result of these efforts, we are on track for CE Mark this quarter and FDA submission towards end of Q3 or beginning of Q4. I’ll now turn the call back to Hany for some final remarks.

[Hany Massarany:]

All right. Thanks very much, Faiz. So in summary, Q1 was another quarter of strong performance for our company and we are very optimistic about the remainder of 2016 and beyond. Our North American commercial team continues to deliver excellent results and with sustained sales execution, we believe we will achieve the projected growth of our revenues, market share and installed base of XT-8 systems over the next several quarters. Furthermore, our sales forces both domestic and international continue to lay the foundation and prepare the most important market for the launch of our ePlex sample to answer system and of course most importantly, now that ePlex cartridges are performing at the expected level of reliability we are driving hard to accomplish all ePlex deliverables relevant to our launch plan in Europe and in the U.S. We will now open the call to questions. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Doug Schenkel of Cowen and Company. Your line is now open.

[Ryan Blicker:]

Hi, this is Ryan Blicker on for Doug. Thanks for taking my question. So, you talked about how cartridge reliability is now stable or up the reliability at which you need to support a launch, is that reliability still consistent with the level of manufacturing volume that you need to support the launches?

[Scott Mendel:]

Yes. Thanks for the question Ryan and the answer is yes. We are now back at manufacturing level production with the required level of reliability.

[Ryan Blicker:]

Okay. That’s helpful. And I guess considering that just trying to understand the time a bit better. Considering that I guess, why would CE Marck take, I guess if it was to the end of Q2 in another two months, what steps are still left for you guys to get that?

[Hany Massarany:]

The most important steps are completing all of the required analytical studies and completing the submission or the documentation of the data that would support CE launch. We are pushing aggressively to achieve this as soon as possible. We believe that it will be accomplished by the end of the quarter or earlier.

[Ryan Blicker:]

Would you be willing to provide whether or not those analytical studies have commenced as of today?

[Hany Massarany:]

We are in the process of completing those analytical studies.

[Ryan Blicker:]

Okay. Thank you.

[Hany Massarany:]

Thank you.

[Operator:]

Thank you. Our next question comes from line of Bryan Weinstein of William Blair. Your line is now open.

[Bryan Weinstein:]

Hi, guys, can you hear me? Just making sure.

[Hany Massarany:]

Yes. Hi, Bryan.

[Bryan Weinstein:]

Hi, guys. So, I understand and depreciate the commentary on the solution here. If there was to be an additional delay, would this be something that you would able to talk to us about in real-time or we have to wait until the next kind of earnings call to kind of understand what the progress is? In other words, are we going to get anyway of having any sort each quarter update or how this is progressing?

[Hany Massarany:]

Well. Thanks to the question Bryan. I mean at this stage, we expect to complete the analytical studies and CE Mark and we expect to communicate upon the achievement of CE Mark. So once we accomplish that, we will communicate as opposed to wait until the next earnings call. You’re asking that if we don’t would we communicate earlier and I guess, can’t really talk about that. So at this stage, our plan is to communicate upon the completion of CE Mark.

[Bryan Weinstein:]

What’s the progress of the other assays at this point? If they’ve installed because of this or you’ve been able to do additional work to kind of move them forward here as well?

[Hany Massarany:]

We’ve continued some work on some of the assays. So the focus on the next wave of assays including or specifically the blood culture ID panels and some of the other assays are more delayed, so to speak, since which put all of focus on completing CE launch with RP and then maintaining the momentum with the blood culture ID panels behind that. Upon the launch of RP, we will of course start working more aggressively on the other assays that we had communicated on before. So, it is still our goal to maintain activities on all seven assays we have those teams in place and we intend to reinitiate activities as we go.

[Bryan Weinstein:]

Last question from me, did you guys reiterate your guidance of $47 million to $51 million in gross margin of 53% to 55% or has that changed and of that total? Of course the Lab Corp is now a large percentage of that, this was disclosed in your 10-Q. Can you describe what percent of your revenue now comes from Lab Corp and what is specifically the products that they are purchasing? Thanks.

[Scott Mendel:]

Yeah. Ryan this is Scott. We did not reissue any updates on to guidance. So, we believe at this the $47 million to $51 million on revenue is achievable as well as the 53% to 55% gross margin. As to recall, when we gave guidance last quarter, we said that there was just a modest amount of revenue reflected in the guidance relative to ePlex and again with this short delay, we don’t feel like there is any need of this time to reiterate guidance. Lab Corp is significant client as you mentioned, we did disclose that in our 10-K. We haven’t disclosed what percentage.

[Bryan Weinstein:]

Can you talk about what products they were purchasing?

[Scott Mendel:]

We haven’t disclosed that either Bryan.

[Bryan Weinstein:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from Tycho Peterson of JP Morgan. Your line is now open.

[Patrick Donnelly:]

Hi, guys. It’s actually Patrick in for Tycho. On the ePlex with FDA submission now late 3Q early 4Q, you know assuming you’re going miss the U.S. flu season or how are you thinking about that?

[Hany Massarany:]

Yeah. At this stage, we’re focused on the submission as you know we’ve been working closely with FDA as well as with the clinical sites to complete the clinical study and submission to FDA. The launch timing really depends on how long it takes to review and clearance to be done by FDA. We’re doing everything possible to compress that time. As I said by working ahead of time with FDA and all the sites by collecting all the samples that we need to collect ahead of time, commencing the comparator testing that we’re doing. So, we’re hoping to keep that time to a minimum, but obviously we can’t be certain on the exact timing of FDA clearance.

[Patrick Donnelly:]

Okay. Thanks, and then just given the significant efforts, you guys talked to fine issues that they kind of popped up earlier this year. I mean, did you incur any additional cost over the last couple of months you didn’t foresee and can you explain some jump up this quarter anything like that?

[Scott Mendel:]

Yeah. Patrick this is Scott. So, what you saw in the financial results when I spoke to in my prepared remarks was that R&D expense was up considerably versus prior year period and that reflects the offers we made to move the ball down the field on CE Mark and I don’t think that that level of spending would necessarily be something ongoing.

[Patrick Donnelly:]

Okay. So you probably feel it stepped down sequentially this quarter from there?

[Scott Mendel:]

Correct. We don’t believe that level would continue.

[Patrick Donnelly:]

Okay. And then, maybe just last one, I mean have you guys seen in talks with customers, have you seen any frustration given these delays or do you still feel pretty confident in the underlying demand for the ePlex once it did, don’t you think the customers will be ready to go regardless on few delays here?

[Hany Massarany:]

Yeah, the customers continue to be very interested, very excited about ePlex, we just came back from ECCMID in Amsterdam a few weeks ago had very heavy traffic and we had a symposium there that was very well attended by 60, 70 plus customers. So, we continue to have significant traction with ePlex. As you know, most customers, most hospital labs haven’t yet moved to multiplex molecular testing sample to answer type system. So we still see this as a significant market opportunity that we’re just beginning to develop with other suppliers of course and we’re not concerned about the level of interest and traction that ePlex is getting in the marketplace.

[Patrick Donnelly:]

Okay. I appreciate the question. Thanks.

[Hany Massarany:]

Thank you.

[Operator:]

Thank you. Our next question comes from Nick Jansen of Raymond James. Your line is now open.

[Nick Jansen:]

Hi, guys. Nice quarter. Just wanted to get a little bit more thoughts on kind of the commercial activities and preparation of launch, where we are from a sales count perspective OUS, and how we should think about the building in the back half of the year?

[Hany Massarany:]

Yeah. Nick, thank you for the question. We continue to expand our international organization specifically in Europe. So, the initial focus as you know is to launch in Europe. We now have a reasonable organization in all of the key markets in Central and Western Europe. So, these are direct employees sales and support people in the field and we expect to continue to add more people over time between now and year-end. We have also secured a number of distributors in markets where we decided to partner with distributors including Italy and some of the Nordic countries as well. In the U.S., we delayed some of the hiring as a result of the delays that we’ve experienced with the ePlex more recently, but it is still our expectation to stop ramping up the sales force in U.S. this year ahead of the launch. So that sort of is the plan.

[Nick Jansen:]

Thanks for the color there. And then on there is the competitive landscape, certainly there’s been some increase noise on that front and just wanted to kind of use this time as the kind of review why you think the ePlex system once launched in the U.S. perhaps later this year, early next depending on how long is at the FDA kind of the differentiating factors on why you guys think the ePlex launch is still better than some of the peer group who has kind of launch ahead you’ve even though they’ve been originally they weren’t supposed to be, but certainly with some of the delays that you had, you kind of lagged a little bit. So just want to kind of get your broader views of the competitive landscape that’s kind of evolved in your positioning upon launch? Thanks.

[Hany Massarany:]

Well. Thanks for the question again. So, we’re obviously pleased and we’re encouraged by the success that other competitors are having as we said all along. This is a significant market opportunity that requires multiple strong competitors to develop over the next few years across multiple disease states. For sure, we’re seeing very good traction with respiratory pathogen panels and that’s encouraging, but that’s just a beginning. We believe that ePlex offers a very differentiated value proposition both in terms of analytical performance. So leveraging our eSensor electronic detection technology, the specificity and sensitivity, the ability to detect positive co-infections, we believe that we will be very differentiated on that front and then, equally in terms of testing efficiency and work flow given modularity, the scalability and continuous random access functionality of our system with a really very productive user interface. We get a lot of very positive reactions from customers when they demo the system and we certainly believe that we will be able to compete very effectively with those features and benefits.

[Nick Jansen:]

I appreciate the color. I’ll hop in queue.

[Hany Massarany:]

Thanks.

[Operator:]

Thank you. Our next question comes from Karen Kolsky of BTIG. Your line is now open.

[Karen Kolsky:]

Hi, guys. Thanks for taking my questions and congrats on the positive update. My first question is just around the variability cost by the outsource region versus some of the other secondary issues you mentioned that you addressed. Is it fair to think that the main issue was really that outsource region and some of the other changes you made were just very slight tweaks?

[Scott Medel:]

So I would say that the tweaks of the manufacturing process, but that’s a good brace. They’ve really just helped reduce the variability there and not necessarily variability that led to failure, but just variability, which is part of a continuous improvement process. I would say that the software update that we made to make digital microfluidics more robust to that variability was an important improvement we made in the product and I was pleased that we were able to do that. I think it ensures reliability of the product and robustness that’s the right word for, but absolutely the primary influence, the primary reason for decline in our reliability that we witnessed towards the beginning of this year and the primary improvement we made to recover a high level of reliability is that reagent.

[Karen Kolsky:]

Okay. And then, whether it would some of the either manufacturing changes or the software changes that you mentioned. Are you able to say at this point, whether or not concordance with XT-8 has improved after these changes remain?

[Scott Mendel:]

I don’t want to make claims on our product we’re initiating with studies that critical to support our CE launch and then also our FDA submission. So we really can’t make claims on the products performance at this time, but you know as a goal we had to target XT-8 level performance and Karen, I’m very pleased with our progress against that goal.

[Karen Kolsky:]

Great. And then, just my last question, as far as the time line to FDA submission, I know you’ve been in discussions with FDA, first on time as far as the trial design and number of sites and samples things like that. Is there an opportunity to kind of work with FDA and potentially maybe increase the number of sites or something of the sort to accelerate the enrolment?

[Scott Mendel:]

Not without delaying in fact it would be counterproductive Karen. We’ve already enrolled the site and they’ve already begun making more progress on comparative studies and establishing the bank of samples that will help drive this effort. We’re very pleased with our status, with regard to these clinical sites and believe that not only the highest quality clinical program, but also in fact the most expeditious program will be to go with the sites that we currently have.

[Karen Kolsky:]

Okay. That’s fair. Thank you very much.

[Hany Massarany:]

Thank you.

[Operator:]

Thank you. Our next question comes from Mark Massaro of Canaccord Genuity. Your line is now open.

[Mark Massaro:]

Hi, guys, thanks for taking the questions. My first question is, at the last update; you noted that you’re very close to reaching the desired level of performance. Was there a point in time where you were almost at a certain level and then it steps back, and then as a result of identifying the externally supplied reagent issue, you’ve been able to move it forward, I’m just trying to understand a little more detail about the order of events and any color on the desired level of performance or any valid test results would be really helpful?

[Hany Massarany:]

Alright, thank you Mark. Yes you’re right and as we said before, you remember earlier in the year, actually at the end of last year we locked down formulation and completed the transfer to manufacturing of our RP Panel and we started scaling up production in the January timeframe in preparation for CE launch. We noticed in the early February timeframe that reliability had dropped. So that was the timeframe where we saw reliability slipping from what it was and it was approaching that sort of, we talked about the mid-90s in terms of reliability with the panel and we found ourselves below that and we decided that it was not acceptable to bring a product to market that required customers to repeat testing of 10, 11 samples in every 100, or even more than that. And that’s when we communicated that we saw this variability and started working on it.

[Mark Massaro:]

Great, and can you comment where you are at in terms of some of the performance metrics or the invalid test result, just relative to XT-8?

[Hany Massarany:]

Alright. So, we are back at the levels that are required to support now the completion of the analytical studies and CE launch. We can’t give an exact final sort of percent reliability because actually it’s the analytical studies that need to be completed as finally determine that exact number, which will be in the [indiscernible] but we are at the level that basically gives us confidence that we can now drive hard to complete all these studies and achieve CE launch by the end of this quarter.

[Mark Massaro:]

Great, so you are committed to working with this supplier, you will be using this reagent and you are pleased with the level of performance at this time?

[Hany Massarany:]

Well, as Faiz mentioned Mark, we’re doing a number of things in relation to this, including of course continuing to work with a primary supplier to help ensure that the stability of their reagent in our cartridge is consistent and where it needs to be, but we also have engaged with a number of other suppliers of similar version of this reagent and this is something we do as a company. I mean we always want to have multiple sources, especially when it comes to key materials, so, we are working with other suppliers and most importantly now that we know that it wasn’t an issue that could have been detected with the incoming QC testing or even their outgoing QC testing rather it was something that happened over time in our cartridge, and so now we have developed ways, methods to discriminate stable from unstable reagents in our own ePlex system. So, all of those things have basically enabled us to address this issue and now we’re moving forward to CE launch by the end of the quarter.

[Mark Massaro:]

Great. Thanks very much.

[Hany Massarany:]

Thank you, Mark.

[Operator:]

Thank you. And at this time I’m showing there are no further participants in the queue. I would like to turn the call back to management for any closing remarks.

[Hany Massarany:]

Alright. Well thank you very much everyone. Really appreciate your support and look forward to updating you soon. Have a good evening.

[Operator:]

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes your program. You may now disconnect. Everyone have a great day.