Genmark Diagnostics Inc
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to the GenMark Diagnostics' First Quarter Earnings 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 follow at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the conference to our host for today’s call, Ms. Erin Lynn. You may begin.

[Erin Lynn:]

Thanks, Tanya, 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 2015 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 material from those in these forward-looking statements are detailed in GenMark's filing with the SEC. GenMark assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances occurring after this call or to reflect the occurrence of unanticipated events. I will now turn this conference call over to Mr. Hany Massarany, President and CEO of GenMark. Hany?

[Hany Massarany:]

Thank you, Erin, and good afternoon, everyone. I'm joined on the call today by our Chief Financial Officer, Scott Mendel. 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. Our prepared comments will cover the following topics. First, I will provide an overview of our performance in the first quarter of 2015. Then, Scott will walk us through our operating results for the quarter. And finally, I will update you on the progress of our ePlex program. So starting with a high level review of first quarter performance, our U.S. commercial team delivered excellent results in Q1. We grew our revenues by 28% compared with the first quarter of 2014, and expanded our installed base of XT-8 analyzers by 22 to 562 analyzers. Our FDA cleared IVD test and research use-only HCV genotyping tests that continue to be the main drivers of XT-8 placements and revenue growth. As you all know, we are continuing to advance ePlex sample-to-answer system toward European launch and we are working hard to accomplish this important goal by the end of this year. We are confident in the design of ePlex and continue to generate excellent results internally with test conducted on full ePlex cartridges and better instruments. As recently communicated, we are currently working on the transfer of our ePlex sample-to-answer cartridge to manufacturing with continued focus on reliability and production scale up to support the levels required for clinical studies and European launch. As far as 2015 guidance is concerned, we are reiterating revenue guidance in the range of $38 million to $14 million with gross margin in the range of 53% to 55%. We are also maintaining our FDA placements guidance for approximately 50 analyzers in the first half of 2015 and since we plan to shift more of our U.S. commercial focus to building ePlex funnels later in the second half, we expect to install an additional 25 to 35 XT-8 analyzers in the last two quarters for a total of 75 to 85 XT-8 placements in 2015. With that, I will hand over the call to Scott Mendel. Scott?

[Scott Mendel:]

Thanks, Hany, and good afternoon, everyone. We issued our financial results prior to this conference call and we will be filing our Form 10-Q shortly after the call is completed. As Hany mentioned, during the first quarter 2015, our revenue increased 28% to $10.1 million compared to the first quarter of 2014. These results exceeded our internal expectations and although the flu season was very strong at the beginning of the quarter, we did see a drop-off pretty rapidly during the February timeframe. In spite of this, we were still able to deliver 28% growth versus prior year due to a few orders that came in earlier than anticipated. Our gross profit for the first quarter was $6.1 million or 61% of revenue versus $4.3 million or 55% of the revenue in the first quarter of 2014. Overall operating expenses were $16.1 million for the quarter, an increase of $3 million compared to the same quarter in 2014. Marketing and sales expenses were up $700,000 at $3.7 million, primarily driven by increased employee-related expenses. Our research and development expenses were $8.8 million, an increase of $1.5 million driven by continued investments in our ePlex system. And finally general and administrative expenses increased $700,000 versus prior year period to about $3.7 million primarily driven by employee-related expenses. Net loss per share for the quarter was $0.24 with weighted average shares outstanding of approximately $41.8 million compared with the net loss of $0.21 per share for the same quarter of 2014 when weighted average shares outstanding were approximately $41.1 million. We ended the first quarter with nearly $71 million in cash and investments and during the quarter, we drew down the first $10 million tranche on our debt facility as planned. We expect to continue utilizing our cash balances primarily to complete analytical and clinical ePlex studies required for European launch and FDA submissions as well as expanding our global commercial organization. Our focus on minimizing working capital requirements continue to deliver results with DSOs of 39 days and DSI of 60 days. As Hany mentioned, we are reaffirming our 2015 revenue guidance of $38 million to $40 million based in part on the strong growth we experienced in the first quarter. We expect the fourth quarter to deliver the strongest growth rate over the prior year driven by the anticipated impact for the flu season, revenue from additional XT-8 placements as well as moderate ePlex revenue contributions. Based on these factors, we expect our Q2 growth rates to be more modest while maintaining our expectations for full year growth rate of approximately 28%. With that, I'll now turn the call back over to Hany to provide more details on our ePlex systems.

[Hany Massarany:]

Thank you, Scott. I would now like to review our progress and expectations towards the launch of ePlex system. As you know, this is a multiplex molecular sample-to-answer system, which will integrate sample preparation steps, including extraction and amplification, together with our proprietary eSensor detection technology, and enabled by proprietary digital microfluidics to allow the detection of multiple molecular targets on a single test cartridge. In addition to preparing for the relevant analytical and clinical studies, which must be completed prior to our European launch, we have been very busy transferring our fully integrated ePlex test cartridge to manufacturing. It is critical that we achieve production reliability and scale up to support the levels required for clinical studies and European launch. As we communicated previously, this is taking longer than we originally expected. However, it’s essential to me quality and reliability standards. Specifically scale-up of high quality printed circuit boards that meet our specifications was a challenge which took longer than expected to achieve. Similarly, transfer of certain components from development to production tooling is behind initial plan but is expected to be completed within the revised timelines. We recently showcased ePlex at major industry exhibitions, in the U.S. and Europe. Customers were very enthusiastic about the functionality of ePlex as well as initial data presented at these meetings in relation to assay designs and performance. We’ve committed to bringing to market the highest quality system we can and establishing the high volume assembly processes necessary to support the clinical studies and European launch. We expect to accomplish this within the revised timelines and look forward to a successful European launch in the fourth quarter of this year. So in conclusion, Q1 was another quarter of strong performance for our company and we are very optimistic about the remainder of this year and beyond. Our North American commercial team continues to deliver excellent results and with sustained sales execution, we believe we will achieve the projected growth of our revenues, market share and installed base of XT-8 systems over the next several quarters. Furthermore, our sales forces, both domestic and international continues to lay the foundation and prepare the most important markets for the launch of our ePlex sample-to-answer system. Our R&D and manufacturing organizations are laser focused on the transfer of our sample-to-answer test cartridge to manufacturing with continued focus on reliability and production scale up to support the levels required for clinical studies and European launch. And in addition, with the significant development progress made across our seven ePlex assays, we expect to follow-up our lead blood culture ID and respiratory pathogen panels, with additional menu content in the not too distant future. And of course, we will continue to focus on organizational talent, infrastructure and processes to scale up our business and support future growth. We will now open the call to questions. Thank you very much.

[Operator:]

[Operator Instructions] And our first question comes from Mike Matson of Needham and Company. Your line is open.

[Mike Matson:]

Thanks for taking my questions. I guess I just wanted to start with the guidance for the XT-8 placements in the second half, just little bit below where you’ve been modeling. But I just want to understand that what the cause of that is. I mean, it sounds like it’s because your commercial organization is really shipping to focus on the ePlex, is that correct?

[Hany Massarany:]

Yes. It is. So, as I mentioned, our U.S. sales force later on this year will shift focus to building funnels and preparing the market for ePlex. This is what we expected all along. And that's why we didn't really guide for the second half of this year on our previous earnings call. But at this stage, we're expecting to play something like 75 to 85 XT-8 systems this year while of course, preparing the market for ePlex launch.

[Mike Matson:]

Okay. Thanks. And then with the delay in ePlex, I mean does this change your cash requirements and was this kind of contemplated at all when you did the GE credit facility, was there any risk that this is going to cause you to have to come back and raise some additional money?

[Scott Mendel:]

Yeah. Mike, this is Scott. So part of the reason we put the GE debt facility in place was to give us flexibility. This slight delay that we previously announced doesn’t really change our position as it relates to under normal operating conditions, not really needing to come back to the equity market at this time. The other thing to take into consideration is with this delay as you know, we were hiring from a commercial perspective and we have the ability to slip a little bit the hiring process to help offset the delay in revenue and cash.

[Mike Matson:]

And then my final question is just around the FDA classification for your various panels. It looks like at least with Biofire that one of their panels is going the de novo route to meningitis and encephalitis panel. So how confident are you that all of your panels will be profound of that 510(k) in the U.S.?

[Hany Massarany:]

So, we expect most of the panels to be 510(k), with the exception of the hepatitis C genotyping panel, which we expect to be a PMA and that’s going to take, obviously longer to bring to market.

[Mike Matson:]

Okay. Thanks a lot.

[Hany Massarany:]

Thank you.

[Operator:]

Our next question comes from Brian Weinstein of William Blair. Your line is open, Brian.

[Brian Weinstein:]

Hi. Great. Thank you, guys.

[Hany Massarany:]

How are you, Brian?

[Brian Weinstein:]

I am good. Thank you. Hany, can you talk about specific things that the commercial organization is doing to sort of build that market? As we’ve seen in many tradeshows together and just hearing in the field, the field seems to be pretty well aware that this product is coming and is anticipating. So what type of market building activities are you going to be pushing the sales force to really engage in?

[Hany Massarany:]

All right. Thank you, Brian. So we are very focused on obviously preparing the key markets for this launch and we’ve had some time to do that. So to start with, we are hiring commercial people. So we said we will approximately double our commercial organizations globally by year end. And of course as part of that, we are calling and engaging with all the key opinion leaders in all of those important markets. We are also building the funnels along the way. As you know, we have attended all of the key conferences and expect or plan to continue to do that. We are showing the system at all of those conferences and also meeting with key potential customers at those meetings, of course. We are also working on training the sales organizations over time as we expand the commercial force. We are also training everyone on the system itself and so on and so forth. We are also engaging with some of the key opinion leaders that will be participating in the pre-launch studies, which will include the relevant analytical and clinical studies, but also planning on some of the health economic studies that will support the sort of growth and future development of those markets. Those are just some of the examples of the activities that we’re currently engaged in.

[Brian Weinstein:]

Okay. That’s helpful. And then with respect to the scale up of the manufacturing side, just want to be clear about this. The issue is that you guys have identified at this point, you have solutions for all of them but have not implemented those solutions across the board yet. But do we -- you have identified the problems and you believe you have solutions to those problems, correct?

[Hany Massarany:]

That’s correct, Brian. In some areas, we have implemented the solutions and then others, we’ve identified the solutions and we are in the process of implementation at this stage.

[Brian Weinstein:]

Okay. Great. That’s it for me for right now. Thanks, guys.

[Hany Massarany:]

Thank you, Brian.

[Operator:]

Our next question comes from Shaun Rodriguez of Cowen and Company. Shaun, your line is open.

[Ryan Blicker:]

Hi. This is Ryan Blicker filling in for Shaun. Thanks for taking my questions.

[Hany Massarany:]

Thank you.

[Ryan Blicker:]

So just going after last question, can you provide a little bit more color on what key milestones really remain in scaling up the manufacturing before you able to launch clinical trials?

[Hany Massarany:]

Well, so as we already disclosed, the focus is really on the transfer to manufacturing and ensuring that we have reliable production at scale to support the clinical studies and the initial European launch. We are confident in the design of the system. We are not dealing with any -- with redesigning the product itself. There isn’t a fundamental technology issue, but rather we are working to complete the transfer so that we can achieve the reliable level of production at scale to support the studies and the launch. And that’s what we are focused on right now.

[Ryan Blicker:]

Okay. Thank you. That’s helpful. And I guess just a quick modeling question, so thinking about OpEx throughout the course of the year, should we expect it to increase a bit from Q1 levels, or do you expect it to remain about steady from here?

[Hany Massarany:]

Yeah. It will continue to increase really for two reasons. Number one, as we build out the commercial teams as previously communicated in the back half of the year, you’ll have some increase from marketing and sales perspective. Secondly, as we get into the clinical and analytical studies, R&D cost would obviously rise throughout the year.

[Ryan Blicker:]

Okay. And -- sorry, two more quick ones. So do you still expect to do seven clinical trials for all the assays in 2015 or will some of those slip? And then also just quickly on guidance on gross margin, with ePlex being push back, is there reason our gross margin wouldn’t end up a bit better than previous guidance at the same revenue levels? Thank you.

[Hany Massarany:]

All right. So in relation to the clinical studies, we never expected to have all seven commencing this year. We knew that there would be a number of studies obviously commencing this year, especially the lead assay, so blood culture ID gram-positive, blood culture ID gram-negative, as well as RP. The other studies would start soon after that. And as far as gross margin is concerned …

[Scott Mendel:]

Yeah, I can handle those.

[Hany Massarany:]

Yeah.

[Scott Mendel:]

So from a gross margin perspective, we reconfirmed our guidance of 53% to 55%. As we talked about on the last call, there will be some impacts from ePlex from a gross margin perspective. We’re still anticipating a modest amount of revenue in our current guidance from ePlex and there will be still be some modest impact in gross margin. XT-8, gross margin is performing well as evidenced by the performance in Q1, 61% gross margin, which we’re very pleased with.

[Ryan Blicker:]

Thank you.

[Operator:]

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

[Mark Massaro:]

Hey guys. Thanks for taking the question.

[Hany Massarany:]

Thank you, Mark.

[Mark Massaro:]

So I’ll be curious to hear maybe some commentary out of the ECCMID show. And related to that, with respect to customer feedback for ePlex, how should we think about the rollout of ePlex, call it, the first two quarters of 2016 because I’m just trying to get a sense for may be the cadence of instrument placements. And what I’m really trying to get at is any type of pent-up demand for ePlex in Europe?

[Hany Massarany:]

Yes. Thanks, Mark. So as you know, we held corporate workshops, both at CVS in the U.S., as well as ECCMID in Europe, both of them occurred very recently like last week. And the customers continue to be very, very interested in ePlex and enthusiastic about the launch of the system. So we certainly have pent-up demand in Europe and in the U.S. as well, we had a lot of interest in the platform and the menu that we're working on. At this stage, we're not going to provide sort of any numbers in terms of 2016 ePlex placements. But we feel very good about the funnels that we’re building the level of interest from the key markets and the progress that we're making toward bringing the best product that we can to market by the end of this year in the fourth quarter.

[Mark Massaro:]

Great. And then maybe at the other show, at the Clinical Virology Symposium, can you kind of walk us through maybe some of the highlights as it relates to, perhaps, your hepatitis C genotyping panel meeting clinical needs and what types of information came out of that workshop that’s encouraging?

[Hany Massarany:]

I beg you pardon. Can you repeat the question? I didn’t quite understand the question.

[Mark Massaro:]

Yeah. Sure. Out of the Clinical Virology Symposium, wanted to see if you had any takeaways with respect to your HCV genotyping panel in terms of anything that encouraged you that came out of the show that makes you incrementally more positive on your opportunity in this space?

[Hany Massarany:]

Yeah. So, well, certainly, we didn’t really cover HCV genotyping in the workshop. So the workshop was focused on ePlex technology and initial analytical and some data that we generated with clinical samples that we ran internally. And so we were able to showcase the platform itself, as well as data from sample-to-answer panels across the lead assays, including respiratory wire -- respiratory panel, as well as both the blood culture ID panels. However, I would say the level of interest in HCV genotyping remains high and our volumes continue to grow every single quarter. We secure additional customers and ship more tests every quarter. So that’s a trend that we expect to continue and that’s of course why we’re also developing HCV genotyping panel on the ePlex, as well as, obviously, the panel that we already have on the market on the XT-8 system.

[Mark Massaro:]

Great. And maybe my final question. For the blood culture panels slated for ePlex? Have you already identified a fix number of targets or is that an iterative process where you may identify additional targets and maybe add those to the panel?

[Hany Massarany:]

We have done a lot of work, Mark, to define the panels. So a lot of voice of customer sort of sessions with key opinion leaders, both in the U.S. and in Europe. We feel pretty good about the content of the panels that we have in place, where we pretty much completed development of this panels as you know. So at this stage, we don't anticipate changes. We shared the content of these panels at recent workshops in the U.S. and in Europe. So those are now publicly sort of available information.

[Mark Massaro:]

Great. Thank you.

[Hany Massarany:]

Thank you.

[Operator:]

And we have a time for one last question from Dane Leone of BTIG. Dane your line is open.

[Dane Leone:]

Hi. Thank you. So could you maybe add a little bit more color in regarding the comments of expecting some revenues from ePlex this year? Do you think there's an opportunity to get systems place in time to actually sees some utilization during flu season or are we still thinking or are we thinking just a couple of capital placements that that would be included in revenues?

[Hany Massarany:]

Well, at this stage, we have some modest revenues in the fourth quarter of this year, which will likely come from a combination of capital but also some test panel sales.

[Dane Leone:]

And so when you think about building the funnel for the product pipeline, would you kind of discuss in detail on this call? Where for someone to make the purchase for the system, are you willing to maybe a little bit more flexible on the front end of doing more reagent rentals versus and actual capital outlay, because, I think, when we think about building the funnel or maybe a capital outlay will take a little bit more time versus something that might be on a reagent rental basis?

[Hany Massarany:]

Yes. We understand of course, but we do believe that there is an opportunity to secure capital dollars. So our initial focus will be on capital sales. And then in due course we will consider depending on the market dynamics and competitive environment so to speak, maybe it will be appropriate to consider reagent rentals later on.

[Dane Leone:]

And when you think about the pacing of the rollout now, when we say getting from production to commercial scale manufacturing that hits the specs that you guys need to have them hitting. Is there any great area that you're working in now where you get to a step function, production scale that can get you a couple of tests for the European markets? And then you're hoping that you continue to scale up as you’re going into the U.S. launch after FDA submission. Is this kind of a binary event of getting all these things together on the commercial manufacturing side, or is it more of gradient, I guess this is what I am getting at?

[Hany Massarany:]

Well, it’s obviously going to be a continued area of focus as we expand our business with more placements and additional menu will definitely see increases in volume over time. We have a plan that anticipates that and ensures that we have capacity to deal with the demand initially of course in the short term to support the clinical studies and the European launch. But beyond that as we grow our business. We obviously will be looking to increase capacity as well and we have a plan to achieve that.

[Dane Leone:]

And so as you move into commercial production, has there being any decisions to actually change the partners that you're working with or how’s that been unchanged and it is just finding solutions with the existing partners that either sourcing suppliers or doing some of the outsourced manufacturing for the ePlex product?

[Hany Massarany:]

We are working with the right partners and we’re very pleased with the relationships that we have with really excellent sort of partners around the world. But also we're doing a lot of assembly here internally ourselves with respect to the cartridge itself. So at this stage, we're not looking to make any changes to our plan as it relates to external partners or internal assembly here at GenMark.

[Dane Leone:]

Okay. And finally, I would just -- can you just -- I guess confirm that the FDA submission is still on track is what you previously related or I’m not sure you actually said on another call yet.

[Hany Massarany:]

Yes. Yes. I can confirm that, so we're engaged with FDA. We have a terrific relationship with FDA. We’ve already submitted all of the pre-subs in relation to the system itself and several panels including the lead panels. And we already have agreement on the clinical study designs, the number of samples, all relevant details, number of sites et cetera and we feel good about all that. And we’re consistent with the timelines that we communicated previously.

[Dane Leone:]

In the clinical sites, you are already lined up I suppose, right?

[Hany Massarany:]

Yes. That's right.

[Dane Leone:]

Okay. So that’s really just gaining commercial production.

[Hany Massarany:]

That’s right.

[Dane Leone:]

All right. Thank you.

[Hany Massarany:]

Thank you very much.

[Operator:]

I’m showing no further questions at this time. I would now like to turn the conference back to management for closing remarks.

[Hany Massarany:]

Well, thank you very much. And on behalf of our Board and employees, I really would like to take this opportunity to once again thank you for your ongoing support. I look forward to reporting our progress on a quarterly basis going forward. Thanks. And have a good afternoon, everyone.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.