Genmark Diagnostics Inc
Q4 2016 Earnings Call Transcript

Published: 1 Mar 2017

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the GenMark Diagnostics 2016 Fourth 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, February 28, 2017. I’d now like to turn the conference over to Jenn Manship of GenMark. Please go ahead.

[Jenn Manship:]

Thanks, Bliss, 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 2017 financial guidance, the development and commercialization and futures 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 that could cause actual results to differ materially from those in these forward-looking statements are detailed in GenMark’s filings with the SEC. GenMark assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances occurring after this call or to reflect the occurrence of unanticipated events. I 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 Head of R&D, Dr. Faiz Kayyem. And as usual today we have a few prepared comments, and then we will be happy to respond to any questions that you might have and our prepared comments will cover the following topics. First, I’ll provide an overview of our performance last year and expectations for 2017. Then Scott will walk us through our operating results for the fourth quarter and full year 2016. And, finally, Faiz will update us on the progress of ePlex program and 2017 objectives and milestones. So let’s start with a high level review of our performance in 2016 and expectations for 2017. Our U.S. and European commercial team delivered excellent results in 2016. We grew our revenues by 25% compared with 2015. ePlex contributed to the last year’s top line, but the majority of revenues came from our installed base of XT-8 analyzers in the U.S. As you all know, last year we accomplished two very important goals in relation to the market introduction of our ePlex system and Respiratory Pathogen panel. First, we achieved CE Mark in June and commenced a controlled launch of ePlex in Europe in late 2016. And second, we completed our 510(k) submissions to the FDA in December of 2016. Our 2016 ePlex commercialization effects have been highly effective and we’re very pleased with the customer commitments that we have obtained. As you know from our January press release, we finished the year with more than 55 customer agreements for over a 85 ePlex instruments, several of which we installed in customer sites in 2016. Ramping up ePlex placements and revenues in Europe, as well as driving a successful launch in the USA, will remain significant areas of focus and priority in 2017. Our regulatory and clinical affairs teams are working closely with the FDA to support the agencies review and clearance process, which is progressing in accordance with our expectations and we anticipate will conclude positively in the near future. Last year we also commenced production of ePlex cartridges, actually components of the ePlex cartridge in our new manufacturing facility. We are on track to complete the installation and validation of an additional manufacturing line and extra automation which should more than double our production capacity by the middle of the year. As part of this effect, during the fourth quarter we also worked on the in-sourcing of key cartridge subassemblies currently manufactured by external suppliers and we are now managing the final stage of these transfers. We believe that bringing these critical components in-house will enable us to address some related manufacture – manufacturing yield challenges that have impacted our ability to fully support our internal menu development programs while also meeting customer demand. This means that during the past few months our menu development teams received fewer ePlex cartridges than their plans required. And based on this we are making a slight revision to the launch timeline of our Blood Culture ID menu. We now expect to achieve CE Mark for all three panels during the second quarter. We’re excited about our approach to Sepsis testing and based on multiple internal and external studies with several thousand samples, we are very pleased with the performance of all whole three Blood Culture ID panels. 2017 will be a pivotal year for our company, as we successfully launch ePlex in the USA and drive its continued adoption and business success in the European and U.S. markets, while of course also continuing to support our FDA business in the U.S. In 2017, we expect revenue to be in the range of $65 million to $70 million, representing growth of approximately 30% to 40% over 2016. We also expect gross margin this year to be in the range of 48% to 52% down from 2016 as we launched ePlex in the U.S. and continue to drive its growth in Europe and domestically. 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-K shortly after the call is completed. During the fourth quarter of 2016, our revenue increased 13% to $14.9 million compared to the fourth quarter of 2015. The annuity per analyzer in the fourth quarter was approximately $86,000, in line with prior year. Our average annuity per analyzer over the last four quarters is in the mid-$70,000 range. Gross profit for the fourth quarter 2016 was $8.6 million or 58% of revenue versus $8.5 million in the fourth quarter of 2015 which was 64% of revenue, reflecting a slight shift in product mix that in line with our expectations. Total operating expenses were $20.7 million for the quarter, an increase of $3.7 million compared to the same quarter of 2015. Sales and marketing expenses were $4.5 million, up $1.1 million versus prior year, primarily driven by an increase in employee-related expenses. Research and development expenses were $12.4 million, an increase of $2.2 million, reflecting consumption of consumables and materials used to complete the clinical studies in support of the FDA submission for the RP panel, as well as usage of consumables in connection with our efforts to drive menu expansion. And, finally, general and administrative expenses were $3.8 million in the fourth quarter, an increase of $460,000 versus the prior year period, primarily driven by employee-related costs. During the fourth quarter, we recorded $470,000 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 46.5 million. Net loss per share in the same quarter of 2015 was $0.21 per share, when our weighted average shares outstanding were approximately 42.4 million. For the full year revenue grew to $49.3 million, an increase of 25% compared to 2015. Gross profit for the full year was $29.6 million or 60% of revenue. Our full year operating expenses were $78.6 million, an increase of $12.9 million mainly driven by development costs of our ePlex system. Net loss per share for the full year was $1.15 and weighted average shares of 44.1 million. We ended the fourth quarter with $41.6 million in cash and investments. This ending cash balance reflects several large capital purchases related to our manufacturing scale up and an increase in working capital use during the fourth quarter. In addition to our cash balance, we continue to have up to $20 million available under our existing debt facility. We plan to continue utilizing our cash balances primarily to expand ePlex menu, as well as to scale up both our global commercial organization and our ePlex manufacturing capacity. We are maintaining our focus on minimizing working capital requirement, as much as possible resulting in DSOs of 43 days and DSI of 74 days. While Hany already communicated high level 2017 revenue and gross margin guidance, I will provide some additional detail. Our revenue profile in 2017 reflects two important factors. Number one, similar to last year we expect our first quarter revenue to be about 15% to 20% lower than the prior year’s fourth quarter revenue. And number two, the majority of our ePlex revenue is expected in the fourth quarter as Europe will have four to five panels on market during the second half of 2017, while we also expect to drive strong revenue growth in our first flu season with our ePlex RP panel in the U.S. Based on these factors we expect much larger percentage of revenue in the fourth quarter of 2017, then we are typically seeing in the previous years. Beyond revenue, it’s also important to think about 2017’s operating expenses relative to 2016’s results. As Hany communicated, we expect gross margin to be in the 48% to 52% range, reflecting the impact at ePlex volumes that ramp up in the later part of the year. But it’s also important to note that some of these ePlex consumable costs that contributed to 2016 R&D expenses are now reflected in the 2017’s gross margin guidance. Therefore we expect 2017 R&D expense to be in the mid-$30 million range, significantly lower than 2016. Sales and marketing expenses are expected to be in the mid-$20 million range, reflected continue growth in our sales professionals and global marketing costs associated with the ePlex launch. We expect only a modest increase in G&A during 2017 to approximately $50 million to $70 million as we expand our team to support the business growth. And with that, I’ll now turn the call over to Faiz to provide additional details regarding ePlex.

[Faiz Kayyem:]

Thank you, Scott. As discussed previously we completed all analytical and clinical performance studies and submitted our 510(k) applications for the ePlex system and RP assay to the FDA in December. Subsequently, we’ve been in dialogue with the FDA regarding these applications and expect to receive clearance to market the ePlex system and RP assay in the U.S. in the near future. While awaiting FDA clearance, late last year we initiated a controlled launch of ePlex in Europe, as well as additional external studies in the U.S. We are very pleased with the performance of the ePlex system and RP panel in these external settings. We’ve seen excellent concordance with market leading assays both in the U.S. and in Europe. These results have been presented at several industry conferences and manuscripts are in preparation for publications. In addition to assay performance and throughput, our European customers have provided positive feedback about our unparalleled user experience, including simple workflow, the ease of use of the user interface, LIS connectivity and data analytics capabilities. Furthermore, we’re very pleased with the performance of the BCID panels in both internal studies and external out studies in the U.S. and Europe. We’ve run 1,000 of contrived and clinical samples in internal development studies across the three panels and all panels have also been tested with clinical samples at Alpha study sites in the U.S. and Europe. Our BCID panels include some challenging bacterial and fungal targets that are difficult to growing culture and several rule-out targets to guard against contamination. We’ve seen good performance with these especially challenging targets and also with co-infections, including infections with mixed gram-positive, gram-negative and/or yeast organisms. As we’ve described at recent industry conferences, our overall Blood Culture strategy takes advantage of the fact that customers would keenly perform gram staining in their workflow after a Blood Culture borrowings positive for the presence of a growing microorganism. The gram stain provides an important early result in the Blood Culture algorithm to inform treatment decisions; it provides plating guidance for subculture. And gram stain serves as an important QC check from molecular and subculture results. With the gram stain result in hand, ePlex customers will then choose the appropriate BCID test from among our three panels. This gram stain driven strategy allowed us to develop the most comprehensive gram-positive and gram-negative bacterial panels available to provide both target ID and antibiotics resistance markers, as well as the fungal panel with significantly broader coverage of both Candida species and other fungi that are important to human pathogens. In addition, the BCID bacterial panels have been developed with the feature to safeguard against misses in gram staining. Specifically, the gram-positive panel is also able to detect the presence of a broad range of gram-negative bacteria in Candida in the sample. And the gram-negative panel is also able to detect the presence of the most prevalent gram-positive bacteria in Candida, in case of co-inflection is present or mistake occurred during gram strain. We believe these many features of our ePlex BCID assays are powerful differentiators that will improve the treatment of patients with blood stream infections. Our ePlex BCID panels will provide the sensitivity and breadth of coverage required for both Blood Culture ID, while at the same time delivering rapid pathogen identification and antibiotic resistance information as well. We believe our offering will be unique in the space and we are very excited to launch these assays in Europe soon. As Hany mentioned, we’re now on track to achieve CE Mark for all three BCID panels in Q2. We’ve also been preparing for FDA studies and submissions for these assays which we expected to complete in the second half of 2017. Finally, beyond the RP and BCID assays, we’ve begun assessing assay performance on ePlex consumable of our prototype GI panel, Gastrointestinal panel, still in development. This highly multiplex panel will detect viruses, bacteria and parasites, and minimally prepared stool samples in under two hours. We look forward to updating you further on our expanding menu in subsequent earning call. In the meantime, Hany has some closing remarks before we open up the call for questions. Hany?

[Hany Massarany:]

Thank you very much, Faiz. 2016 was another year of strong performance for our company. Our commercial teams delivered excellent results in 2016 and with the ePlex in the hands of expanded sales forces in the U.S. and Europe we are very optimistic about delivering even stronger performance in 2017. Our global funnel of ePlex opportunities continues to strengthen and customer feedback from initial installations remain 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. The FDA’s reviews of our current or recent rather, 510(k) submissions are progressing well, and we expect to receive FDA clearance for U.S. launch of the ePlex instrument and RP panel in the near future. We are beginning to reap the benefits of our commitment to manufacturing excellence and sustain focus on quality, capacity and yield to fully support the growing customer demand as well as our internal menu development programs. And finally, we continue to make excellent progress with all three Blood Culture ID panels which we expect to launch in Europe during the second quarter and submit to the FDA later this year. And we will now open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Tycho Peterson with JPMorgan.

[Tycho Peterson:]

Hey, thanks. May be Hany if you could kick it off update us on how you’re thinking about sales force expansion plans heading into the launch year-end. How should we think about customer evaluation times in the field?

[Hany Massarany:]

All right, thank you very much, Tycho. We will continue to invest in expanding our sales forces both in the U.S. and in Europe. We expect that by the end of this year, we will have 40 to 50 sales professionals globally, approximately 30 or so of those will be in the U.S., and so we’ll be ramping up the sales forces gradually over the next few quarters. In terms of – so I hope that answers your question relative to sales force expansion. In terms of how long it takes to – I guess implement and bring an ePlex online in a customer site that sort of varies, but we are thinking that it takes about a quarter. So by the time we install the system, train operators and then run all of the studies required to demonstrate to the customer equivalence of our system and the performance of our system compared to their existing method, it takes approximately a quarter to be able to do that.

[Tycho Peterson:]

Okay. And then on BCID, can you just provide a little bit more color because the timeline here, I slipped a couple of times, it doesn’t sound like they’re the real technical hurdles you need to overcome. But can you may be just walk through that decision process to push it out a little bit more into 2Q?

[Hany Massarany:]

Yes, of course. And Faiz can jump into add to my comments, but we are very pleased with the performance of Blood Culture ID panels, all three of them; fungal, gram-positive and gram-negative. We’ve worked very hard to bring to market, the best panels that we can possibly develop, and we are very close to doing that. Yes, we had hoped to have done that earlier, but we are now expecting to bring all three to market in Europe in the second quarter so soon and submit the FDA later this year.

[Tycho Peterson:]

Okay. Thanks.

[Hany Massarany:]

Thank you.

[Operator:]

Our next question comes from Brian Weinstein with William Blair.

[Brian Weinstein:]

Hey guys, how are you? Thanks for taking the question. So question just to follow-up on Hany your comment on the manufacturing yield challenges. Can you be a little bit more specific on what you’re seeing there and do you believe all these issues relative to the scale up here have been identified, and that the components that are going to be required to be in-sourced? Can you just talk a little bit more about may be the specific components and anything that you could tell us about the timelines too, kind of get those up and running? Thanks.

[Hany Massarany:]

Yes, thanks very much for the question, Brian. And look, as you know, we believe that we have a very capable manufacturing process. It enabled us to achieve CE Mark and complete FDA studies and submissions as well as support multiple installations in Europe and also early adopters in U.S. We’ve demonstrated that we can manufacture ePlex cartridges with required reliability and we are shipping good product to customers; even if as we’ve said all along, we will and we are continuing to work on improving our manufacturing processes. So, in doing so we identified opportunities to bring in a couple of components which are currently manufactured by external suppliers. And we believe that by bringing those in-house, so we are in the process of transferring those in-house, that this will enable us to continue to improve important aspects of our manufacturing process, including capacity and yield, reliability and cost of sales, these are things that we will always be working on in the future over the next several quarters. And of course, that in conjunction with implementing an additional line that will more than double our capacity by the middle of the year. We believe that this will enable us to fully support the growing customer demand, while also ensuring that our internal menu development programs are progressing and that the teams had the necessary sort of material to make the progress that we are expecting. So that’s all the risk to it. It’s going to be an area of focus for us in the future and we will continue to look for such opportunities to improve quality and reduce cost.

[Brian Weinstein:]

Okay. It’s a follow-up to that. Can you talk a little bit – I didn’t hear you guys talk about what the XT-8 installed base at the end of the period and I’m curious about that because I’m trying to understand may be what the cannibalization factor could be as we think about ePlex rolling out. Have you kind of changed your thoughts on cannibalization? How are you thinking about cannibalization is part of the guidance that you provided? Thank you.

[Hany Massarany:]

Yes, thanks for the question, Brian. Look, there has been no cannibalization in the U.S. obviously since we haven’t launched ePlex yet in the U.S., that’s going to happen hopefully soon post FDA clearance. Our installed base of XT-8 in the U.S. is sort of flat. So it’s sort of in 650 or so analyzers in the U.S. And as you know, we have directed our focus also in the U.S. to preparing the market and our team for the launch of ePlex. We expect to have some of our XT-8 customers to upgrade to ePlex and in doing so there will be an incremental, obviously the price will be higher for the ePlex RP versus XT-8 RP. Most of our focus will be on new customers, new addresses, where we’ll be able to sort of with the capability that we bring to the labs with the sample to answer our approach will be able to sort of secure that additional business in low sites. There will be some kind of cannibalization if you put it that way, but this is something that we would manage very carefully on a case by case basis. And as appropriate, yes, we will see, we will help customers upgrade to the ePlex if that’s what they want to do.

[Brian Weinstein:]

Thank you for your answers.

[Hany Massarany:]

Thanks Brian.

[Operator:]

Your next question comes from Nicholas Jansen, Raymond James.

[Nicholas Jansen:]

Hey guys, thanks for the questions. First one from me just in terms of kind of the expectation for placement activity in ePlex, kind of what’s the – kind of underlying assumptions as we think about the 2017 rollout. And on that point capital versus rental as we think about the balance sheet or capital associated for the launch?

[Scott Mendel:]

Right. Hi, Nick, it’s Scott. With respect to our guidance – the revenue guidance, we gave 65% to 70%. We feel really good about that range of guidance. As we have discussed in the past we’re not getting guidance on placements at this time, we will report on placements as we move throughout the year, but given it’s kind of a transition year, we’re not giving placement guidance yet. I think – when you think about the placements we talked about, we finished the year with 55 agreements representing about 85 towers that probably reflected some pent-up demand, so while that’s not necessarily indicative of what the quarterly run rates will be. I think that gives you an idea that we do have a lot of demand out there. The other important part to think about is, as Hany mentioned, we’ll finish the year with between 40 and 50 sales people. So we’ve always disclosed how many folks we have and that might be a good way for you to think about adoption rates.

[Nicholas Jansen:]

Great. And then secondly in terms of the second manufacturing line, if there are any sort of slippage from the existing timeline in terms of the middle of the year, would that impede your ability to be more aggressive on the sales front out of the gate, because you want to make sure that you have enough reagents for the existing base of customers? Thanks.

[Scott Mendel:]

Yes. So as you said, we expect that the second line to be up around the end of the second quarter. That’s important from a capacity perspective, but we are also really focused on improving yield as Hany mentioned in his remarks, and so the combination of those two really help us satisfy and be confident in the successful global launch. Clearly we wouldn’t want to delay too much further than that, but between that and the additional shifts we can add another first line in the yield improvement, I think we should be okay if there is a little bit of pressure on that. But right now we don’t see that that would be an issue.

[Nicholas Jansen:]

Great. I’ll be back in queue. Thanks guys.

[Operator:]

Your next question comes from Doug Schenkel with Cowen and Company.

[Doug Schenkel:]

Hey, good afternoon. Scott, I guess sort of related follow-up to one of the last few questions. Just to be clear at this point you’re not willing to provide an assumption or share your assumption for the mix reagent rental versus cash placements for ePlex that you factored into guidance for the year, is that correct?

[Scott Mendel:]

We’re not giving a specific number, but what as we’ve said in the past, our intention is to go after capital and we’ve seen that other folks in this industry be successful obtaining capital from a placement perspective. We haven’t given specific guidance, but we expect the majority but not a significant number, more than a majority.

[Doug Schenkel:]

Okay. So given what’s been going on in the market where you have a few competitors, but primarily one bigger competitor that’s been out there placing a lot of multiplex boxes, channel check suggest that they may be getting a bit more aggressive and a bit more flexible in how they go about placing instruments. How do you factor that into your calculus in terms of how you go after the market, once you get approval? I know in the past as you said today you’ve indicated that the intent is to get mostly cash placements. But if you’re thinking evolving a little bit, as you think about the longer-term horizon and really the goal of ultimately getting as many instruments out there as possible over the next several quarters?

[Scott Mendel:]

Yes, certainly getting instruments placed is important for the growth of the business and we certainly taken into consideration what competition is doing, when we are factoring capital sales into our guidance. And so that’s why I’d say, whether it’s may be half or so, we’re trying to be relatively reasonable, because we want to make sure that we continue to drive adoption of ePlex, while also balancing cash flow.

[Doug Schenkel:]

Okay. I guess a couple of more questions along those lines. Based on what’s been going on competitively and then the fact that you’re on the market in Europe and closer to the market in the U.S., how are you thinking about the importance of menu expansion in terms of your ability to fully compete toe to toe and really go after the large market opportunity in the greenfield opportunity that exists. And I guess along the same lines based on what you’re hearing about some of your competitors, how are your thoughts evolving on assay pricing and your ability to get a premium?

[Hany Massarany:]

All right, that’s a very good question, Doug. I’ll try to answer it. This is Hany here. Menu is important for sure and we’re committed to expanding menu on ePlex. You are aware of the various panels that we are working on as Faiz mentioned at least for 2017, there’s a big focus on the three Blood Culture ID panels followed by GI. We always look for opportunities to differentiate our menu and provide a very competitive value proposition. I think that was clear from the update that Faiz provided in terms of how we believe that we can do so in the area of Sepsis and how by leveraging the gram stain driven strategy, we can afford to position our solution in a very differentiated way by having three separate panels that offer very comprehensive coverage, and really meet the needs of our customers. So while there will be multiple solutions out there and they will meet different needs, we believe that we will have a very uniquely differentiated value proposition that will be able to command a premium and that especially in conjunction with the ePlex platform. And its efficiency and productivity in terms of workflow and patient safety and reporting capability all of those features that we have, we believe that’s the combination of differentiated panels with the platforms will be very competitively positioned. So that’s something that we’ll continue to invest in expanding our menu, but importantly continuing to offer a solution that’s differentiated across both the platform and the menu that comes with it.

[Doug Schenkel:]

Okay. Maybe just a couple of more very quick ones. On blood, just to confirm, external studies on all three blood assays have commenced at this point, is that correct?

[Faiz Kayyem:]

This is Faiz, hi Doug. External study that we refer to is Alpha studies at this time; but yes, of all three assays.

[Doug Schenkel:]

Okay. And last one. One of the big concerns in the investment community over the last several weeks has come about as a result of Illumina’s decision, discontinuing NeoPrep, given that’s based on ALL technology. Hany, you were really good in your prepared remarks about I think addressing reminding folks about your efforts to bring manufacturing and ALL related know-how in-house that’s something that’s I think been in process for a few quarters now and that includes making the supply sort of chain relationships on your own. So based on kind of the history here, the background and what you talked about in your prepared remarks, it seems like these concerns were overdone. Could you just comment on whether or not we’re missing anything and how would you characterize risk associated with the change in Illumina, basically no change from how you’re thinking about things quarter or two ago?

[Hany Massarany:]

Yes. We’re not we’re not concerned about it Doug. We have a very good relationship with Illumina. And it’s really difficult to comment on their decision since the product in question system that you’re referring to is a completely different design and it does something very different to what we’re doing with ePlex and multiplex panels that we’re developing, utilizing the Illumina/ALL technology. So we’re very satisfied and very pleased with the performance of the digital microfluidic technology that we have as part of our system. We continue to see it as very feasible and reliable and effective sort of technology and we are in the process of transferring the technology to bring it in-house and have it under our control. That will also help us drive cost of goods in the right direction. And Illumina has been very supportive and cooperative with the effort to achieve that.

[Doug Schenkel:]

Very helpful. Thank you guys for taking all the questions.

[Hany Massarany:]

Thank you.

[Operator:]

Our last question comes from the line of Mark Massaro with Canaccord Genuity.

[Mark Massaro:]

Hey guys, congrats on the progress. My first question is for Scott. Just on the gross margin. I understand you guided 48% to 52% for 2017. Can you speak to the trajectory of those margins? I know last year you’ve guided at a level that you exceeded by a pretty healthy margin exceeding 2016. So can you just speak to your comfort level on the gross margin trajectory and how much of the margin decline is related to the in-sourcing?

[Scott Mendel:]

Yes. So it’s consistent with other disclosures we made around expectations for 2017. You’re launching a new product, the volumes are a little bit lower in the first part of the year until we get to the back half of the year as I mentioned when we have four to five panels in Europe and enjoying our first flu season with respiratory panel in the U.S. So the challenge in gross margin for the year is not unexpected, it’s really related to the fact that we’ve increased our manufacturing capacity through the new facility, additional people in process, et cetera, until that volume comes in towards the back half of the year, you experienced the headwind on gross margin. We feel like we’ve got it dialed in pretty well Mark based on how we see the volumes playing out and in tandem and in think with the guidance we gave on the top line. The in-sourcing – kind of the final question here was in-sourcing impacting it. In fact, in-sourcing will help us over the long-term. As Hany mentioned, in-sourcing in these couple of sub-assembly processes are really important from a controlled perspective, from a quality perspective, but also helps on reduce our cost of goods sold. So actually that’s going to help us out over the long-term and even as we progress throughout this year.

[Mark Massaro:]

Great.

[Scott Mendel:]

And the last thing I would say in gross margin, Mark is it’s important to note that the beginning part of the year when we have lower volumes gross margin will be a little bit lower than that total average that guidance we provided and as we act at the year with the volume in the flu season and having four to five panels on the market in Europe. And we should exit the year a bit above that overall yearly average that we’ve guided to. So that’s kind of how I see it playing out this year, we feel like you got dialed in pretty well.

[Mark Massaro:]

Great. It’s a lot of color. And then can you speak to market development activities and specifically as we look out into April we have ECCMID and then we have ASM around the corner beyond that. Can you talk about the degree with which some of these conferences may help increase the brand of ePlex? And related to that are there certain publications or data that we can look to that we can look forward to seeing over the next several months?

[Hany Massarany:]

Yes, Mark. This is Hany. We intend to participate in all of the key conferences in 2017. You’ve mentioned a few of them and then there will be more in the U.S. as well as in Europe. We will have our [indiscernible] team and ePlex systems on display. And also many of those conferences include workshops and if so we will be participating in the workshops with either our own team or sometimes customers or both. We’ll be there to present our results and sort of give insights into how ePlex is performing. And then, finally, as Faiz mentioned, many of the customers that have actually been working with ePlex have intend to present data at some of these conferences. So for example, ECCMID would definitely include some customer presentations as well as some of the data has been submitted for publications and we’ll keep you abreast of that as those sort of publications come to fruition.

[Mark Massaro:]

That’s great. And my last question is on annuity per analyzer, came in solid at $86,000 in Q4. I know that you’re looking to generate a premium price on your assays on ePlex. And so how should we be thinking about annuity per analyzer just at a high level? If you’re willing to go into specifics, that would be great. But even the quarter with which you would expect an inflection higher, I presume might be Q4 of 2017, is that about right?

[Scott Mendel:]

On ePlex separately you mean?

[Mark Massaro:]

Yes.

[Scott Mendel:]

Yes. So we have communicated and you said it as well that we’re premium price on ePlex, so therefore math would suggest you’re going to be higher than that mid-$70,000 range that we’ve been enjoying on XT-8. I do think it will take some time for customers not just to go live and build their volumes, whether six months to nine months or so after they install an ePlex, they get to kind of a steady state from an annuity per analyzer is probably a good way to think about it. The expectation would be you should be able to get into that $100,000 range per analyzer as the volumes come up for customers. And over time our expectation would be as menu expands, that could even exceed that amount of annuity per analyzer. But it’s going to take a little bit time for customers to get up and get their volumes going.

[Mark Massaro:]

Got it, thanks so much.

[Hany Massarany:]

Yes. Mark. Just to add to what Scott said it’s important to realize that we really have hardly scratched the surface with ePlex, right. So we’ve just launched in Europe late last year, we haven’t yet launched in the U.S. We haven’t got FDA clearance yet, that’s expected soon. So we really have the platform with the RP panel in Europe at this stage and we are preparing for a significant sort of ramping up of our capacity. And an installed base as we secure FDA clearance in the U.S. for the RP panel, but also as we bring to market several other panels this year including the three Blood Culture ID panels in Europe in the second quarter, maybe the GI panel later in the year and certainly submitting all three Blood Culture ID panels in the U.S. also in the back end of this year. So this is sort of the progress that we expect to be making over the next few quarters. And as you and I have discussed before we expect our big year to be 2018 when we have all of those panels also cleared by FDA for launch in the U.S. And we feel really good about all of that.

[Mark Massaro:]

Great. Thanks for all the color.

[Operator:]

I’m showing no further questions in queue at this time. I’d like to turn the call back to Mr. Massarany for any closing remarks.

[Hany Massarany:]

All right. Well, thank you very much everyone, really appreciate the support and all the good questions. We’re committed to make this happen, we’re very optimistic about our performance and the results that we’d be able to deliver in 2017 and we look forward to updating you on future calls. So thanks very much and have a wonderful evening or afternoon. All right, bye-bye.

[Operator:]

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