Genmark Diagnostics Inc
Q2 2016 Earnings Call Transcript

Published: 29 Jul 2016

[Operator:]

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the GenMark Diagnostics 2016 Second 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 Thursday, July 28, 2016. I’d now like to turn the conference over to Ms. Jenn Manship of GenMark. Please go ahead.

[Jenn Manship:]

Thanks, Mischelle. 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 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'll now like turn the conference call over to Mr. Hany Massarany, President and CEO of GenMark. Hany?

[Hany Massarany:]

Thank you, 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. As usual, 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 second quarter of 2016, including an update on the initial launch of ePlex in Europe. Then, Scott will walk us through our operating results for the quarter. And finally, Faiz will provide more detail regarding the next phase of ePlex program and our progress towards FDA submission. So, let’s start with a high level review of our second quarter performance. And once again, our U.S. commercial team delivered excellent results. We grew our Q2 revenues by 64%, compared with the second quarter of 2015. And furthermore, we placed 13 XT-8 analyzers in end user labs during the second quarter. To fulfill these placements, we redeployed non-existing XT-8 analyzers from certain low test volume customers and replaced four new analyzers in end user labs thereby expanding our installed base of XT-8 analyzers to 648. Now switching over to ePlex. As you know from our June 8 press release, last month we achieved CE Mark for the ePlex system and Respiratory Pathogen panel. Achieving this milestone was one of the most important events in our company's history. And we are delighted to have accomplished this crucial goal. We are very pleased with the initial feedback we are receiving from our early European installations. Over the past few weeks, we installed ePlex systems in 12 European customer sites. And initial feedback has been very positive confirming the ease of use of ePlex platform, its intuitive user interface and comprehensive reporting capabilities. As expected we are gaining valuable knowledge from the initial European installations. While continuing to make progress along the regulatory path to FDA submission. Based on European customer experiences and feedback, we implemented minor improvement to our ePlex respiratory pathogen panel and we shortly plan to commence clinical studies in support of FDA submission which we expect to complete during the fourth quarter of this year. We are pleased with the high quality of ePlex results and believe that the minor improvements recently incorporated will enhance the respiratory panel performance across customer site both in Europe and the US. And over the next few months, we look forward to ramping up our commercial success in Europe as well as completing FDA submission later this year. With that I'll 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 second quarter of 2016, our revenue increased an impressive 64% to $12.5 million, compared to the second quarter of 2015. The annuity per analyzer in the second quarter was approximately $76,000, up 42% versus prior year, due in part to the unusually late flu season. Our average annuity per analyzer over the last four quarters is now in the $70,000 range. Gross profit for the second quarter 2016 was $7.8 million or 62% of revenue versus $4.4 million or 57% of revenue in the second quarter of 2015, resulting from strong revenue performance and manufacturing productivity. Total operating expenses were $20.4 million for the quarter, an increase of $4.1 million compared to the same quarter of 2015. Our sales and marketing expenses were $3.3 million, down $400,000 versus prior year. Research and development expenses were $13.2 million, an increase of $4.3 million reflecting consumption of consumable used to complete the internal studies in support of CE Mark and preparing for the commencement of FDA studies for the RPSA as well as usage of consumable by additional ePlex asset development team's connection with our efforts to drive menu expansion. And finally, general and administrative expenses were $3.9 million in the second quarter, an increase of $214,000 versus the prior year period, primarily driven by an adjustment to our estimated liability for indirect the suspension of the medical device excise tax and reduction indirect taxes. During the second quarter, we recorded $308,000 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 $42.9 million. Net loss per share in the same quarter of 2015 was $0.29 per share when our weighted shares outstanding were approximately $42.1 million. We ended the quarter with $37.5 million in cash and investments and we plan to continue utilizing our cash balances, primarily to complete the analytical and clinical ePlex RP studies required for FDA submissions expand our ePlex assay menu and scale up our global commercial organization and ePlex [Technical Difficulty]. During the second quarter, [Technical Difficulty] some $10 million of our debt facility, our existing debt facility provide up to an additional $20 million. We continue to focus on minimizing working capital requirements resulting in DSOs of 39 days and DSI of 70 days. Lastly in relation to our 2016 full year guidance, we are reconfirming revenue in the range of $47 million to $51 million while raising gross margin to 57% to 59%. Now I'll turn the call over to Faiz to provide additional details regarding ePlex.

[Faiz Kayyem:]

Thank you, Scott. Further to my update on our last earnings call, I thought it would be helpful to share with you some information regarding our initial ePlex installations in Europe and our progress towards FDA submission. First, let me say that we are very pleased with the positive feedback we received from our initial European sites on the overall user experience and the ease of use, efficiency and performance of the respiratory pathogen panel with samples from throughout Europe. In addition, here in the US, we've installed ePlex systems at all five of our clinical sites. These sites are on track to initiate clinical studies this quarter. We expect to submit the results of these studies to the FDA during Q4. As Hany mentioned, we gained valuable input and feedback from our earlier adopters. For example, we've identified opportunities to improve our shipping, installation and training processes enabling us to more efficiently implement ePlex systems in new customer sites. We've also received feedback on the user interface and identified minor software bugs which have been addressed in a subsequent software release. Furthermore, our initial ePlex placement expanded our experience with the sample variability at different labs in Europe. The knowledge we gained from this highlighted an opportunity to work with our European early adopters to assess performance of our RP assay with these samples. As a result, we were able to incorporate minor software and [wodics] enhancements in the assay to improve its performance. We believe that these enhancements will ensure that the assay is not only more resilient to sample variability seen in Europe but also resulting in more robust assay for the US market. While we continue to pursue opportunities to improve our products and manufacturing processes, we are confident in the performance of the ePlex RP panel and we look forward to sharing data from European and US sites later in the year. I'll now turn the call over to Hany for some final remarks.

[Hany Massarany:]

Thank you, Faiz. Q2 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 we believe we will accomplish the projected growth of our XT-8 revenues market share and installed base in the US market. We are delighted to have successfully achieved CE Mark and launched ePlex in Europe. And we are very pleased with the feedback from initial installations and we look forward to ramping up our commercial activities and success in Europe over the next few quarters. And last but certainly not least, with the recent improvements made to our ePlex Respiratory Pathogen panel and our plan to initiate clinical studies in the US this quarter, we remain on track to complete FDA submission during the fourth quarter of 2016. And we will now open the call to questions. Thank you.

[Operator:]

[Operator Instructions] Our first question comes from Bryan Weinstein of William Blair. Your line is open.

[Bryan Weinstein:]

Hey, guys. Thanks for taking the question. Faiz, can you talk specifically when we talk about sample variability what do you mean? What's variable among the samples that you are seeing in Europe? Can you just be more specific about that?

[Faiz Kayyem:]

Sure, Bryan. So as you know these are a nasopharyngeal swab that are taken and but you maybe not be aware there is broad variety of different protocols for collecting these samples, devices for collecting the samples and there are some different media used in Europe. We tested all of these but we've been exposed to a very broader variety across Europe from samples coming from different parts of Europe that have been collected differently. And in addition to that stored differently. And it's given us an opportunity to really explore the performance of the assay across these different -- that these variable sample collection handling methods and to make the product more resilient to that variety.

[Bryan Weinstein:]

What were you guys seen -- what have you seen in the early sites in Europe on the invalid rate? Is that popped as an issue at all?

[Faiz Kayyem:]

So as you know driving towards low invalid rate a low repeat rate one of the key efforts that we directed in advance of achieving CE Mark. And so once we got to that low level of invalid we CE Mark the product and are seeing that level of performance. We continue to see that level of performance. But as I mentioned as we've learned from different sites across Europe, there are different rates of invalid and we found opportunities to try that number or to make the product more robust to those different variations and to maintain a high level of quality as a result.

[Bryan Weinstein:]

Okay. Do you still expect to have CE Mark and DCID panel by the end of this year?

[Hany Massarany:]

Yes, Bryan. This is Hany. So as we said before the next wave of panel, the success panels including the blood culture ID and fungal panel. So gram positive gram negative and fungal. And we are working on all three and expect to launch at least two of the three by year end in Europe.

[Bryan Weinstein:]

Okay. And last question for me is can you talk all about market development efforts kind of the in the US just generally speaking kind of where you guys are and actually take - out with efforts this for getting ready for commercialization and where are you guys with your sales force at this point, how are you ramping your sales, where do you think you need to be when you go ahead and launch this product. Thanks.

[Hany Massarany:]

Yes, Bryan. We mentioned on the last call that we were delaying some of the hiring in the US from the second quarter into the third quarter and beyond. And that's what we did. So we are building our team in the US, we've started hiring field sales people in the US to expand the team. And we are following the formula that we adopted in Europe and worked very well for us in Europe. So our intention is to continue to expand our organization. But also expand the funnel of prospect and work with customers ahead of time so that we are prepared to hit the ground running when we launch the product in the US. So that's what the commercial team in North America is doing.

[Operator:]

Our next question comes from Tycho Peterson of JPMorgan. Your line is open.

[Tycho Peterson:]

Hey, guys. Just wanted to get some color on the timing of the US launch? Had you said earlier that it was going to he sort of a late 3Q early 4Q event and has the timeline now slipped just a little bit more toward sort of the back half of the quarter? And, if so, what exactly is driving the delay?

[Hany Massarany:]

No. There is not a delay. We had said before that the submission to the FDA would be at best or at earliest late in the third quarter but more likely in the fourth quarter. And now we are saying that it's in the fourth quarter. We did take the time to act on some of the learnings and feedback that we got from the early adopters. And we were able to make the minor improvements that Faiz talked about without really causing a delay to the submission of our studies to FDA which we expect to happen in the fourth quarter of this year.

[Tycho Peterson:]

Got it. And then Hany in terms of just a differentiation of the system in your early conversations with customers in Europe which features are being sort of driving the bulk of the early interest? Is it the analytical performance, the scalability, the fact that it is modular or is it random access? What do you think is sort of clearly differentiating system from the customer perspective?

[Hany Massarany:]

Well, it's really all of the above. However, I'd say that typically the analytical performance is sort of a given. Customers quickly want to test that the panel, the assay works as expected in terms of its analytical performance, its sensitivity and accuracy and so on and so forth. But the features that made the biggest sort of positive impressions on our customers have been to do with the work flow and testing efficiency and productivity of the system. Remember, many of those customers are using either lab developed were using before ePlex either lab developed test or alternative commercial tests that are nowhere near as productive and efficient as the ePlex system. And we built the system that really has a unique and very differentiated value proposition that relates to work flow efficiency productivity hands on time, the ability to produce report, so it's sort of very efficient system. And many of our customers were impressed with that.

[Tycho Peterson:]

Got it. And then Scott in his comment mentioned the spike in R&D this quarter. How should we think about that number for the back half of the year? Do you guys expect that the trend down a little bit from here?

[Scott Mendel:]

Yes. This is Scott. So clearly we spent a lot of time and effort getting in ready for FDA submission. And that will continue little bit into Q3 obviously and then so tapering down from there as we get RP launched.

[Operator:]

Our next question comes from Doug Schenkel of Cowen. Your line is open.

[Doug Schenkel:]

Okay. Hi, thanks for taking the questions and good afternoon, guys. I think my first question is for Faiz. It is a follow up to Bryan's earlier question, not sure if it's a good one or if it's overly basic but Bryan asked about the European variability you described in your prepared remarks and then asked about progress on repeat rate. I just want to make sure based on what you described and what are you seeing, how would you characterize the risk that something similar happens at the five US clinical sites and to the extent there is any risk, how should we factor that into, how we think about any timeline risk. My guess there is not a lot here but I know we are going to get the questions so I just want to make sure.

[Faiz Kayyem:]

Thank you, Doug. So the sample variability we are seeing in the US in terms of collection handling and storing is just much lower than we see in Europe. So taking advantage of this exposure that we had in Europe to make the product more robust both to Europe and the US. I think that's substantially de-risks the US clinical trial. In fact, that's the intention of incorporating of the incorporation of these improvements that we've made into the product before we initiate the clinical trial later this quarter.

[Doug Schenkel:]

Okay. Got it. That's helpful. And then I guess one I guess it's a multi part for Scott or Hany. This is another really solid revenue quarter, a real attribute to commercial work and commercial progress you have been making. That said, is there any way tease out how much of this was attributable to the strong than expected flu season versus continued improvements in commercial efficiency? And relatedly on guidance, given the strength of the quarter I am just wondering if you thought about bumping up full year guidance and if not why? Thank you.

[Hany Massarany:]

All right. I can have go and then Scott feel free to add to my response. So, Doug, yes we had a strong second quarter and it was driven by the delayed or late flu season. 2015-2016 flu season if you remember it started very light so Q4 last year was a light quarter sort of really didn't get going until the first quarter but then the surprise was that the second quarter continued very strongly. So we didn't expect to exceed our own -- we ended up exceeding our own expectations and we really hadn't anticipated that. And that's something that you don't know what you don't know. So we have -- we can't be certain of what the 2016-17 flu seasons is going to be like. It's maybe similar to what we've just seen, maybe not. And we don't know just yet. We have said before that our growth in terms of revenues and placements with our XT-8 product line has been primarily driven by infectious disease assays and of course the respiratory panel is big part of that. So at this stage, we are not increasing our revenue guidance. We believe that the range that we guided to sort of covers gives us that sort of range that would cover depending on what the flu season ends up looking like. And certainly if we end up with the stronger flu season then we have a chance to exceed that number. But we are not re-guiding at this stage.

[Scott Mendel:]

Yes. The only thing I'd add Doug is that if you think about first half growth rate, first half revenue grew 33% versus prior year. First quarter was a bit light because of the late flu season. So if you think about on first half basis that feels more normal 20% to 30% growth rate is what we normally seen from our XT-8 business that factored into our full year guidance. So back to Hany's point, if we were to raise guidance we would be expecting a higher growth rate on XT-8 than what we normally been able to achieve.

[Doug Schenkel:]

Okay. That's all very helpful. One last for you Scott just to clean up question. And I apologize if I miss this in the prepared remarks. But the sales and marketing spend was little bit lower sequential, a little bit lower than at least we were modeling. Is that largely a function of just the delay in timing or really the push out by one quarter of the hiring plans in the US or is there something else there worth going out? Thank you.

[Scott Mendel:]

Yes. Primarily driven by that Doug, the push out of the hiring. And as Hany said we have started hiring folks and have made some offers before starting so we are adhering to our full year plan bringing on people in the US and then still adding folks in Europe. We think it will end somewhere between 40 to 50 sales professional globally.

[Operator:]

Our next question comes from Karen Kolsky of BTIG LLC. Your line is open.

[Karen Kolsky:]

Thanks for taking the questions, guys. And congrats on a phenomenal quarter. And couple for me. I guess just first recognizing that we are still only a month or two into the European launch. Can you provide a bit more color around your early experience in terms of the time required to move from installation and validation, are all these placements so far one tower, multiple towers and then can you also just remind us of your assumptions around capital sales versus region rental outside US?

[Hany Massarany:]

Yes. Thanks, Karen. So like you said we just achieved CE Mark last month and so it takes a little bit of time to ship and install, train and sort of support customers as they complete their evaluation and validation. So it's sort of little bit too early to say is exactly how long it takes and we expect that it will vary depending on what method they are changing from. So it's a little bit difficult to comment now or too early to comment now on -- on based 12 initial installations and some of them are moving from inhouse sort of LDT methods that may sort of involve different effort to others that it maybe moving from a commercial product. In terms of the mix so we have both single and two tower system in the initial 12. It's mostly single tower system. And we sort of expect that on average will be moving towards the two tower sort of on average, obviously we'll have some threes and fours and we might even have multiple systems in certain lab. So that sort of I don't know if that again it's little bit early to based on 12 to make any sort of final projections at this stage. What was -- I think that was third part, yes --

[Scott Mendel:]

I think the large part, the last one, capital versus region. So I am happy to answer that. From capital versus region assumption standpoint we believe that's a majority of placement especially in Europe will be capital and we haven't seen anything in the case of those assumption are incorrect. Also remember that we have the option and are providing the option to work with third party financing parties which have the same effect of being a capital sales for us.

[Karen Kolsky:]

Okay. And then how are you thinking about kind of your funnel of potential customers and how many of those potential customers will translate into actual installation in the remainder of 2016?

[Hany Massarany:]

Yes. Really as you know Karen we haven't given any specific guidance in relation to ePlex placements and revenue. When we announced achievement of CE Mark we talked about having 20 plus agreements in place with customers. So obviously we are going to start with those. We also said that we would launch a controlled launch or manage a controlled launch to start with because we wanted to make sure that we deal with early teasing problems opportunities to make improvements as we did. And also to ensure that we have -- we test our own infrastructure and processes to support these customers. So we will continue with the controlled launch. We do have a significant funnel that we've been working on over a period of time. Remember, we had a couple of delays that sort of gave us more time to qualify and add to the prospect funnel. And we've done that so we feel pretty good about the rest of the year and beyond but we will take it easy and in a controlled way to make sure that we are able to handle the growth.

[Karen Kolsky:]

Okay. And then just last one for me, more of a point of clarification, I think you kind of answer this before but to be clear the US trials had not in fact started and then were stop when you were making tweaks to the software around the sample of variability correct?

[Hany Massarany:]

Yes, correct. Of course not now, we haven't started yet running the clinical, external clinical studies in the US.

[Karen Kolsky:]

And I guess just one last follow up to that, does making these like tweak change anything in your discussions with FDA as far as maybe some of the data you submitted prior or how long it might take them to review the final submission or anything along those lines?

[Faiz Kayyem:]

No. The design of the assay is identical. These are minor changes in -- for example the software that drives to drop point A to be is not changing point A or point B. Karen, so what would be assay is identical and remains unchanged just more robust.

[Hany Massarany:]

And Karen as you know, we did install -- so we haven't -- while we haven't started the studies yet, we've installed all the systems in the site. They are all prepared, everything is really ready, we mentioned before that we had collected all event samples, so we haven't really delayed anything as a result of some of the work that we've been doing.

[Operator:]

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

[Mark Massaro:]

Hey, guys. Congrats on another good quarter. I was wondering if you could start off and comment on the pricing of the respiratory panel on ePlex relative to the pricing of your respiratory panel on XT-8? And related to that, can you remind us if you have additional targets on the ePlex panel relative to XT-8?

[Scott Mendel:]

All right. Yes, Mark. So the pricing for ePlex will be a good premium over the XT-8 panel. So XT-8 on average I mean our list price is somewhere I believe list price is in $100 or so Mark but on average our ASP is in the sort of $70 -$80, we expect ePlex to be substantially higher than that. So certainly well over a $100 per panel. So that's a sort of the expectation for pricing ePlex versus XT-8.

[Mark Massaro:]

Great. And then how about the number of respiratory targets on these panel. Have you added target to the panel?

[Faiz Kayyem:]

So for the CE Mark part which we won't be marketing in the US. There are some expanded viruses over our IBD cleared RVP panel on XT-8. But for US customers we are seeking approval of a panel nearly identical with regard to viruses as the US panel but with the addition of some additional bacterial targets.

[Mark Massaro:]

Beautiful. And then I appreciate the commentary around 12 shipments on ePlex. Can you provide the order number and I am trying to understand if there is a substantial gap between orders and shipments?

[Hany Massarany:]

What do you mean by order number? The number of agreements we have in place.

[Mark Massaro:]

Correct.

[Hany Massarany:]

Yes. So we mentioned at the time of -- when we achieved and announced achievement of CE Mark that we had more than 20 customer agreements in place. We've already shipped as you know from our release today, 12; we have installed systems in 12 separate sites. But of course we continue to add to that prospect in Europe as well as sign additional agreements. We haven't really commented on that. So that's an ongoing commercial activity.

[Mark Massaro:]

Excellent. And last one for me. You mentioned that this -- you characterized the software bugs as minor. Can you confirm maybe Faiz that the software bugs have been completely worked out both those applied into Europe and those installed in the clinical sites in the US?

[Faiz Kayyem:]

All of the software bugs that we've identified have been corrected in the current release of the software. I think I can answer the question that way. We certainly don't expect to find additional bugs but that's why they call them bugs. And then as we initiate the US clinical studies we will be loading the latest software which will include some of the improvement that I mentioned earlier.

[Operator:]

There are no further questions. At this time, I'd like to turn the call back over to Hany for any closing remarks.

[Hany Massarany:]

All right. Well, thank you very much everyone. Really appreciate the ongoing support and look forward to reporting our progress on a quarterly basis going forward. Thank you very much. Bye, bye.

[Operator:]

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