Genmark Diagnostics Inc
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the GenMark Diagnostics 2016 Third 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, November 3, 2016. I’d now like to turn the conference over to Ms. Jenn Manship of GenMark. Please go ahead.

[Jenn Manship:]

Thanks, Vicky. 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 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 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 CFO, Scott Mendel; as well as our Founder and SVP of Research and Development, Dr. Faiz Kayyem. And 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 third quarter of 2016, including an update on the recent European launch of our ePlex system. Then, Scott will walk us through our operating results for the quarter. And finally, Faiz will provide more details regarding the next phase of ePlex program and our progress towards FDA submission. So, let’s start with a high level review of our third quarter performance. Once again, our U.S. commercial team delivered excellent results. We grew our Q3 revenues by 28%, compared with the third quarter of 2015. The majority of our Q3 revenues came from our install base of 645 XT-8 analyzers in the U.S. Switching over to ePlex, as you all know from recent communications we achieved CE Mark for ePlex system and Respiratory Pathogen panel during the month of June. Over the past few months, our ePlex commercialization efforts have been highly affective. And we are very pleased with the strong results with achieved so far. Since our last update we generated our first ePlex revenues in Europe and more than doubled the number of ePlex customer agreements to more than 30. Our global funnel of ePlex opportunities continues to strengthen, and customer feedback remains very positive, confirming the high quality of ePlex results, as well as the ease of use of the ePlex platform, its intuitive user interface and comprehensive reporting capabilities. I’m also please to inform you that the testing of clinical samples required for 510(k) clearance of the ePlex instrument and Respiratory Pathogen panel was recently completed by all external clinical sites. Our teams are now preparing our clinical study reports for submission to the FDA this quarter in line with our expectations. Over the next few months, we look forward to ramping up the commercial success of ePlex in Europe as well as continuing our preparation for U.S. launched in 2017. We’re also commencing production of ePlex cartridges in our new state-of-the-art manufacturing facility to deliver the capacity requirements to meet expected customer demand and enable planned product cost reductions. And finally, I am pleased to let you know that during the third quarter we added $29 million of cash to our balance sheet by issuing common stock under our ATM facility. And 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 we'll be filing our Form 10-Q shortly after the call is completed. During the third quarter of 2016 our revenue increased to 28% to $10.8 million compared to the third quarter of 2015. The annuity per analyzer during the third quarter was approximately $63,000, up 11% versus prior year and our average annuity per analyzer over the last four quarters is now approaching the mid-$70,000 range. Gross profit for the third quarter 2016 was $6.5 million or 60% of revenue versus $5.1 million in the third quarter of 2015, which was also 60% of revenue. Total operating expenses were $18.1 million for the quarter, an increase of $1.9 million compared to the same quarter of 2015. Our sales and marketing expenses were $3.2 million down $360,000 versus prior year. Our research and development expenses were $11.6 million, an increase of $2 million reflecting consumption of consumables and materials used to complete the clinical studies and support our FDA submission for the RPSA, as well as usage of consumables in connection with our efforts to drive menu expansion. And finally, general and administrative expenses were $3.2 million in the third quarter, an increase of $170,000 versus prior year period, primarily driven by an increase in headcount related expenses in support of our business growth. During the third quarter we recorded $480,000 of interest expense related to our debt facility. Our net loss per share for the quarter was $0.27 with weighted average shares outstanding of approximately 44.4 million. Net loss per share in the same quarter in 2015 was $0.27 when our weighted average shares outstanding were approximately 42.3 million. We ended the quarter with $54.2 million in cash and investments. Our ending cash balance reflects $28.9 million of net cash raised from issuing 3.3 million shares of common stock under our ATM facility. And in addition we continue to have up to $20 million available under our existing debt facility. We plan to continue to utilizing our cash balances primarily to expand our ePlex assay menu, as well as to scale up both our global commercial organization and ePlex manufacturing capacity. During the quarter we also began manufacturing components of our ePlex cartridge in our new facility here in Carlsbad and we spent the last year planning and building out that new facility that will house additional ePlex cartridge manufacturing lines. Furthermore, we're in the final stages of in sourcing several key cartilage sub-assemblies, which will also be manufactured in this new facility. The facility expansion in these in sourcing initiatives are key components of our long-term strategy to drive gross margin accretion. With the additional manufacturing capacity we believe this facility will support our business for years to come as global ePlex adaption continues. While investing for the future we also continue to focus on minimizing working capital requirements resulting in DSOs of 44 days and DSI of 71 days. Lastly, in relation to our 2016 full year guidance, we are reconfirming revenue in the range of $47 million to $51 million and gross margin of 57% to 59%. And with that I'll now turn the call over to Faiz to provide additional details regarding ePlex.

[Faiz Kayyem:]

Thank you, Scott. As Hany mentioned, we remain on track for 510(k) submission of our ePlex instrument and RP assay to the FDA later this quarter. Specifically we’ve completed the performance and documentation of all internal verification and validation studies on the Respiratory Pathogen panel. The results of these studies will be included in the FDA submission to support our analytical claims for various performance attributes such as limits of detection, specimen handling and stability, cross-reactivity and the testing of potentially interfering substances. We're pleased with the performance of the ePlex instruments and assays in these studies and especially with the ease of use in high workflow capabilities of our scalable system. Furthermore, we've recently completed the testing of all clinical samples at our five clinical study sites. As with the internal studies the high capacity and ease of use of ePlex system allowed all clinical sites to perform the work in an efficient and straightforward manner. This work involved testing over 3,000 fresh and frozen clinical specimens on an FDA cleared competitor method and on ePlex. Our clinical trial sites reported positive user experiences with the ePlex system and a valid run rate above 95% as we expected and as we achieved in the internal studies as well. Overall, we're quite pleased with the system and look forward to submitting to the FDA later this quarter. Separately, we’ve also made substantial progress with our blood culture ID family of assays gram positive, gram negative, and fungal. Testing of these three assays with clinical specimens is ongoing . We’re targeting to complete CE Mark of one or two of these assays this and the remainder early next year. Accordingly, we anticipate U.S. launch of the blood culture ID assays in the second half of 2017. Beyond RP and the blood culture ID assays we have several other panels in the development and we look forward to updating you on our expanding menu in subsequent earnings calls. In the meantime Hany has some closing remarks before we open up the call for questions, Hany?

[Hany Massarany:]

Thank you, Faiz. Q3 was another quarter of strong performance for our company. Our North American commercial team continue to deliver excellent results and we are very optimistic about a strong finish to 2016 and continued success in the future. We’re delighted with the launch and early success of ePlex in Europe. And we are very pleased with the feedback from the initial European installations. With the recent completion of all the required clinical testing for 510(k) approval of the ePlex instrument and RP panel, we’re now preparing our clinical study report for submission to FDA this quarter. And over the next few months, we look forward to ramping up commercial success of ePlex in Europe, as well as continuing preparation for U.S. launch in 2017. And with that we will now open the call to questions. Thank you.

[Operator:]

[Operator Instructions] And our first question comes from Tycho Peterson with JPMorgan. Your line is now open.

[Tycho Peterson:]

Hey, thanks guys. Maybe just first question on menu blood culture and fungal I think you’ve been talking about two of the three approved by year-end now you’re talking one to two, so can you maybe just talk a little bit about what’s changed in terms of the timeline?

[Faiz Kayyem:]

This is Faiz. Hi, Tycho. We have -- all three assays are very much advanced and in clinical testing right now. And we’re targeting to get one or two done this year and the remaining one or two done early next year, not a real shift in timeline, just as we get close to the end of the year I think we have a little better visibility and see it as being towards the end of this year or early next year before we have all three assays completed.

[Tycho Peterson:]

And then on respiratory, last quarter you talked about early feedback leading to some improvements in the panel addressing sample variability, has that all been addressed at this point?

[Faiz Kayyem:]

Yeah, we made some changes as you recall to -- primary to software that controls the drops and the assay and we’re very pleased with the assay overall and those changes have helped us to achieve a very high level of robustness in Europe, where we did see a little more sample variability than we have in the U.S. with that robust performance improvement translates as well to the U.S. There are some European sites that sometimes apply non-nasal pharyngeal swab samples to our cartridge and we’re seeing some fairly good results with those as well. So yeah, I would say those changes were valuable and helping us sustain high-level of reliability.

[Tycho Peterson:]

Okay. And then last thinking ahead to the launch of ePlex, any sense of what you think mix might be between one tower and multi tower configurations? And then how should we be thinking about XT-8 placements post the ePlex launch? Thanks.

[Hany Massarany:]

All right, I will take that question Tycho. And as you know of course, system is scalable up to four towers, so customers can start with one and then add up to three additional towers as time goes on and as their volume changes with menu expansions and utilization. We expect good mix I think, on average, we expect approximately two towers per site, but of course we already know that some will have four and some will have one. So I think the average will be more like two initially. And then that will increase as we expand menu and drive utilization in the field. As far as XT-8 is concerned, as you know Tycho we believe that ePlex will drive our future growth and valuation. And accordingly we're shifting our focus to ePlex. So my expectation is that that while we will continue to support XT-8 of course and value our XT-8 customers we’ll take a good care of them. But as we expand ourselves organizations globally and in the U.S. our focus will continue to shift toward ePlex.

[Tycho Peterson:]

Great thank you.

[Hany Massarany:]

Thank you.

[Operator:]

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

[Doug Schenkel:]

Okay, good afternoon and thanks for taking the questions guys. Actually maybe just building off of one of Tycho's last questions, the 30 customer agreement, actually I should say that more than 30 customer agreements that you've made in Europe presumably, should we expect those to also be consistent with what you just described Hany in terms of number of towers for placement should -- are you expecting those to be around two each or is there some reason maybe think about a different number of towers in different geographies?

[Hany Massarany:]

Yeah I think it's a good assumption to make an average of two. Again it's a small end we're expecting this number to increase significantly over the next few quarters and we'll have a much better feel for that overtime. But I think it's a reasonable assumption to make at this stage that an average of two is what we're expecting to see.

[Faiz Kayyem:]

Regardless of geography.

[Hany Massarany:]

At this stage like I said again it's a small end. And we have a number of customers looking to acquire four towers and some with one. So I would say that's a sort of a good assumption to make at this stage.

[Doug Schenkel:]

Okay, that's great. And then in terms of the sales force build out, could you just provide an update on where you are and if you are hiring targets have evolved at all for North America or Europe?

[Hany Massarany:]

Yeah so if you remember Doug we had slowed down a little bit our hiring in North America sort of in the prior quarters in order to sort of be more aligned with the timing of the launch in the U.S. And we haven't changed since then. So our expectation is to end up somewhere in between 30 and 40 commercial sales people globally. Most of those will be in the US, so we're thinking that Europe is going to approach and end up maybe in the teens possibly the mid-to-high teens. And then the U.S. will be 25 plus over the next few months. And we've already started this hiring, this expansion of our commercial organizations and it's going according to plan. That number of course moving into 2017 that number will increase again and we're expecting to be somewhere in the 40 to 50 sales people globally. Doug also don't forget that in addition to that we have a number of distributors in certain markets in Europe. And I think the number now is at approximately five distributors in Europe. So of course we're relying on our direct sales forces to handle the key Central and Western European markets, but in the south and some countries in the North we already have distributors in place to take care of those markets.

[Doug Schenkel:]

Okay, that's great. Thanks for taking the questions.

[Hany Massarany:]

Thank you.

[Operator:]

And our next question comes from the line of Bryan Weinstein with William Blair. Your line is now open.

[Bryan Weinstein:]

Hey, guys good afternoon, thanks for taking the questions and I know people are getting sick of this, but just want to remind you that the Clubs did win the world series last night. In case you’re not aware of that, I wanted to make sure you are aware. So question for you on since you cut out a little bit at least on my phone when you were talking about the analytical studies, I think I heard you say you were pleased with the performance of those. And then I missed the next couple sentences, did you say you’re also pleased with the performance on the clinical side? And then also when are we going to see that data is there any chance we’ll see any of this AMP next week?

[Faiz Kayyem:]

Yeah so both the internal data and the external clinical data both achieved valid run rates greater than 95% as we expected and both internally and externally we had sort of excellent throughput in our high capacity system and all of that testing is done leading to FDA submission later this quarter that’s what I said earlier. And your other question related to AMP and we won’t be presenting data from our clinical studies at AMP. Though we will be presenting at a workshop and providing information on the respiratory panel Bryan.

[Bryan Weinstein:]

Okay. And then you guys have these over roughly 30 customer agreements in Europe, I'm assuming that those customer agreements are sort of live right now and that they’re going to be using product here in the fourth quarter was this in line with sort of what your expectations were going to be? I mean will there be any kind of revenue contribution from these obviously you guys didn’t change your revenue range here, but just kind of curious about how we should be thinking about these agreements in the fourth quarter in revenue from those?

[Hany Massarany:]

Yeah Brian the agreements are global agreements not just European agreement and as you know we already had a modest sort of amount of revenue coming from ePlex in our plan, in our guidance and the revenue that we’re expecting is consistent with that. The revenue is coming from Europe since we haven’t yet launched in the U.S. And while we have in excess of 30 agreement not all of those have been installed in customer sites yet. But we have significantly increased the number of systems that we have already installed in customer sites since our last update.

[Bryan Weinstein:]

Okay. And then last one from me, gross margin you guys had expected that it was going to step down in the quarter to obviously not a huge issue on the stock one way or the other, but it was up nicely relative to our model is there just sort of a delay in sort of how you guys are seeing some expenses come through there? Just kind of how we should be thinking about gross margin at least in the fourth quarter why it was better than expected in the third quarter? Thanks.

[Scott Mendel:]

Yeah Brian that reflects just the timing of the ePlex revenues, as we’ve talked about in the past we expect ePlex once it’s launched and becomes a more significant part of our revenue to have some headwind as it relates to gross margin rate. So third quarter is reflective of the majority of the revenue being from XT-8. As we move into the fourth quarter again as we have a little bit more ePlex revenue coming through consistent with our plans you’ll probably see a little bit additional headwind on gross margin versus prior year. And again that reflects the mix shift towards ePlex. As I mentioned before that headwind on gross margin will probably last for the first year or so and then as volumes increase and absorbs all the overhead and infrastructure cost that we’ve incurred in building out our capacity to handle ePlex the margin accretion will continue post the first year launch.

[Operator:]

And our next question comes from the line of Mark Massaro with Canaccord Genuity. Your line is now open.

[Mark Massaro:]

Hey guys thank you for the questions. My first one is more of a clarification question on the more than 30 global ePlex agreements. Hany are you counting the ePlex instruments that are within clinical sites in the United States or have you been signing agreements outside of Europe?

[Hany Massarany:]

We’re not counting the clinical sites of course Mark. And yes we do have some agreement outside of the Europe.

[Mark Massaro:]

Excellent, okay. And the next question is are you willing to share if you’ve had any success with reference labs in Europe or is this mostly hospitals.

[Hany Massarany:]

To be frank, I’m not sure if some of the sites are also reference labs in Europe, I think yes, I think we do have system in both reference labs and hospital labs as well in Europe. I’ll have to check for sure, I know that some of our agreements are definitely with both hospitals and reference labs, I just want to double check based on systems placed. If we have them in reference labs, as well as hospitals I think that’s true.

[Mark Massaro:]

Okay, understand. And I guess my last question is on how many of these customers in Europe are new to in-house testing within a hospital? And related to that or maybe unrelated to that can you speak for the folks that are new to in-house testing. Can you speak to any comparative dynamics you are seeing in Europe for in clinic testing?

[Hany Massarany:]

I believe that the vast majority is not all of the sites, there are sites that we’re already during molecular testing of respiratory pathogens in Europe, I don’t know if that’s the question, if you are asking were these sites already doing research testing in Europe, I believe that the answer is yes, if not all of them certainly the vast majority. As far as the competitive sort of environment, we have competed successfully in some cases with other commercial companies. But also in other cases where labs are using their own lab develop tests or panels and we’ve had success in both of those sort of situations.

[Mark Massaro:]

Great. And if I can actually sneak one last question in, typically flu testing is less prevalent in Europe than it is in the United States, but obviously respiratory panel is certainly more than just flu. So can you just speak to the utilization that you except on your respiratory panel in Europe? As we think about the flu season Q4, Q1 should we see a material spike and obviously it’s on a limited install base, but generally speaking how should we be thinking about utilization of respiratory panel in Europe relative to the U.S.?

[Hany Massarany:]

I think you can expect it to be similar in terms of seasonality. So, yes, you are right it’s a small number of systems since we just launched our ePlex in Europe last quarter, but we expect that with the flu season depending on severity of the flu season that there would be higher utilization during the fourth and first quarters than the second and the third quarter.

[Mark Massaro:]

Okay. Thank you.

[Hany Massarany:]

Thanks a lot.

[Operator:]

And our last question comes from Ethan Potasnick with Needham and Company. Your line is now open.

[Ethan Potasnick:]

Hi guys, this is Ethan Potasnick filling in for Mike Matson I apologize if there is anything repetitive here, but could you tell us on is your sale team able to pre-sale ePlex in the United States so you’ll have a funnel once it’s cleared? And could you just tell us the number of the XT-8 placement and perhaps the number of ePlex placement?

[Hany Massarany:]

Alright, I’ll take the first part of the question. So, we really are now directing our sales team in the U.S. to pre-sell ePlex so we can’t make any specific claim about ePlex until we have FDA clearance. However, we have been showing ePlex at various exhibitions, industry exhibitions in the U.S. and have been discussing with customers how they might be able to acquire ePlex systems once those system are -- once the platform and the RP panel launched in the U.S. We do expect that there may be some customers under research use only agreements to have ePlex systems in the labs post submission and prior to clearance that’s something that we're doing on a case-by-case basis rather than just selling to the market ahead of clearance.

[Ethan Potasnick:]

Okay. And the number XT-8 placements and perhaps the number of ePlex placements.

[Scott Mendel:]

Yeah I can take that this is Scott. So as Hany mentioned in his prepared remarks we have 645 XT-8 in the field that's relatively the same amount that we had at the end of second quarter. However, we did the same thing that we've done in the past, which is we had new placements but we satisfied some of those new placements by repositioning existing XT-8s that were not earning as much from an annuity per analyzer perspective as we think they should be. So it's just smart from a cash balance perspective. And then as far as ePlex placements, we're not currently disclosing ePlex placements at this time. We're getting an indication of our funnel and what we're doing from a commercial activity perspective. In due course as we move into next year we'll talk a little bit more detail about ePlex specifically.

[Ethan Potasnick:]

Okay, great just wanted to confirm. Thanks guys.

[Scott Mendel:]

You're welcome.

[Operator:]

And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Hany Massarany for closing remarks.

[Hany Massarany:]

Alright well thank you everyone on behalf of our Board and employees. I really would like to take this opportunity to thank you for your good questions and ongoing support. I look forward to reporting our progress on a quarterly basis going forward. So have a good evening, afternoon and look forward to seeing and speaking with you all soon. 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.