Genmark Diagnostics Inc
Q2 2015 Earnings Call Transcript

Published: 6 Aug 2015

[Operator:]

Good day, ladies and gentlemen. Welcome to the GenMark Diagnostics' 2015 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded today Thursday, August 6, 2015. I would now like to turn the conference over to Ms. Jayne Manship [ph] of GenMark.

[Jayne Manship:]

Thanks, Shawn. 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 that 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:]

Thanks, Jane. And good afternoon, everyone. I am 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'll provide an overview of our performance in the second quarter of 2015. Then Scott will walk us through our operating results for the quarter. And finally I'll update you on the progress of our reflex ePlex program. So starting with the high level review of second quarter performance. Once again our US commercial team delivered excellent results in Q2. We grew our revenues by17% compared with the second quarter of 2014 and extended our installed base of XT-8 analyzers by 29 to 591 analyzers. Our FDA cleared RPV test and research use only HCV genotyping tests continue to be the main drivers of XT-8 placements and revenue growth. Our focus remains on the transfer of ePlex cartridge to manufacturing. We've made solid progress during last quarter and understand the critical importance of completing this transfer. We believe we are close to reaching the levels of reliability and production scale up required for clinical studies and CE launch. And based on our current plan, we continue to expect to launch ePlex in Europe by the end of fourth quarter. As far as 2015 guidance is concerned, we are maintaining our revenue guidance in the range of $38 million to $40 million, while increasing our gross margin guidance to between 57% and 59% for the full year. We delivered XT-8 placement in line with our first half guidance and we are maintaining our guidance for25 to 35 additional XT-8 placements in the second half of the year, reflecting the transition of our commercial team's focus towards building the ePlex funnel as we progress through the back half of 2015. 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 will be filing our Form 10-Q shortly after the call is completed. During the second quarter of 2015, our revenue increased 17% to $7.6 million compared to the second quarter of 2014. The annuity for analyzer in the second quarter was approximately $52,000 and it is typical for the non flu season. Our four quarter average annuity per analyzer is in mid $60,000 range. Gross profit for the second quarter was $4.4 million or 57% of revenue versus $3.5 million or 53% of the revenue in the second quarter of 2014. Overall operating expenses were $16.3 million for the quarter, an increase of $1.6 million compared to the same quarter of last year. Marketing and sales expenses increased $325,000 to $3.7 million, primarily driven by increased employee-related expenses. Research and development expenses were $8.9 million, an increase of $800,000 driven by continued investments in our ePlex system. And finally general and administrative expenses increased $440,000 versus prior year period to $3.7 million primarily driven by employee-related expenses. During the second quarter, we also recorded $245,000 of interest expense related to our debt facility. Our net loss per share for the quarter was $0.29 with weighted average shares outstanding of approximately $42.1 million compared with the net loss of $0.27 per share for the same quarter of 2014 when our weighted average shares outstanding were approximately $41.3 million. We ended the quarter with nearly $63 million in cash and investments and the cash balance reflects about $10 million that was drawn down from our debt facility in March of this year. We expect to continue utilizing our cash balances and additional amounts made available our debt facility primarily to complete the 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 strong results with DSOs of 45days and DSI of 65 days. As Hany mentioned, we are reaffirming our 2015 revenue guidance of $38 million to $40 million and increasing our full year gross margin guidance to 57% to 59%. On a previous call we communicated that we would be significantly expanding our field based commercial team. While we have continued to add resources to our commercial internationally, we are synchronizing the US team expansion with the expected timing of our ePlex launch in the US. Therefore we expect to finish 2015 with approximately 40 people on the field based commercial team, an increase of 30% from prior yearend. The increase represents the build out of our international sale team with the US build out expected to occur in 2016. Lastly, you may notice when you read the 10-Q that we signed a lease on facility nearby our current location. We are kicking off the build out at this facility which will be our primary manufacturing location for ePlex consumables. Prior to completion of the build out we have sufficient capacity at our current facility to support the trail and launch of ePlex. With that I'll now turn the call back over to Hany to provide more details on ePlex.

[Hany Massarany:]

Thank you, Scott. I would now like to review our progress and expectations towards the launch of the ePlex system. As you know, ePlex 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. On our last call, we shared the challenges we were confronting in a process of transferring the ePlex cartridge to manufacturing specifically in relation to achieving the levels of production reliability and scale up required to support clinical study and CE launch. As we communicated on that call, this process is essential to meet our quality and reliability standards for launch. Since our last call, we have taken several additional actions to help address these challenges. Importantly, we have established a new technical operations group to drive all aspects of transfer, manufacturing process optimization and scale up. We were fortunate to be able to recruit an expert in a transfer and manufacturing scale up of molecular diagnostic product to lead this critical function reporting directly to me. This has enabled us to deploy additional resources to put even greater emphasis on the critical activities associated with manufacturing transfer and process validation. These actions have had a positive impact on our transfer process. A few examples of our accomplishments since our last call are as follows. To start with, the PCB manufacturing challenges we described on our prior call have now been addressed. We have implemented the necessary process control and quality checks to consistently achieve the quality standard and scale we require in this area to support clinical studies and CE launch. Additionally, all ePlex reagents necessary to support CE launch are currently in production with former transfer to manufacturing expected to be completed this quarter. Furthermore, injection molded part of our ePlex cartridge have either been or are in the process being transferred to production mold capable of supporting required volumes. Also all required manufacturing equipment to support scale up of cartridge manufacturing for launch has been installed and qualified and at GenMark as well as our supplier partners. And finally, we've collected 100% of the banked clinical samples necessary to meet the clinical study design for our respiratory panel and are making very good progress towards collecting the required sample for our blood culture assays. As we drive towards our CE launch in Q4, there are certain key milestones that we expect to achieve this year on the path to this important goal. First, we expect to install ePlex systems in end user locations and commence data study during the third quarter. And second, given the positive results, we believe we will generate from the data studies and are continued progress on production reliability and scale up, we expect to complete external and analytical study during the fourth quarter which is in accordance with our current plan to accomplish CE launch by the end of the year. Upon successful completion of these analytical studies, we expect to initiate external clinical studies to generate the necessary data for our planned FDA submission in a first quarter of 2016. So in summary, we are pleased with the progress that we have made with ePlex in the last quarter. And the continued enthusiasm of customers about the ePlex system and assay. We are committed to bring into market the highest quality system we can and establishing the high volume assembly process is necessary to support the clinical studies and European launch. We expect to accomplish this within stated timeline and look forward to successful European launch in the fourth quarter of this year. So in conclusion, Q2 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 result and we believe we will achieve the projected growth of our revenues and install base of FDA system over the next several quarters. Furthermore, our sales force is both domestic and international; continue to prepare the most important market for the launch of our ePlex sample-to-answer system. Our R&D manufacturing and new technical operation organization is laser focused on the transfer of our sample-to-answer test cartridge to manufacturing. We've made solid progress during the last quarter and are committed to completing this transfer during the third quarter. 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 for questions. Thank you.

[Operator:]

[Operator Instructions] Your first question comes from the line of Brian Weinstein from William Blair. Your line is now open.

[Brian Weinstein:]

Hey, guys. Thanks for taking the questions, good afternoon. So appreciate the update on the timing here. Can you just kind of confirm -- I want to make sure I heard you right; do you intend to file in the US in the first quarter? Did I hear you right? I just want to make sure that they were clear on that.

[Hany Massarany:]

Yes, Brian. Based on our current plan and continued progress on the transfer processes as well as obviously positive outcomes from the data and analytical studies which we are expecting, our plan is to generate data to file for FDA in the first quarter of next year.

[Brian Weinstein:]

Okay. And then as we look at kind of what remains -- obviously you talked about addressing the issues that you know about. Did you sense that there are other risks too in this timeframe at this point or how locked in are you guys? Is there a risk that from kind of scale up situation that there is the potential for additional delays or are we pretty much locked in at this point?

[Hany Massarany:]

Well, at this stage, Brian, our plan has us completing all this in time for CE Mark by the end of Q4. We have a few things to do over the next few months obviously. We have to complete the formal transfer of assays to manufacturing. We have to complete the transfer of the remaining injection mold at cartridge components to production mold. All this is of course work in progress that has already commenced. We have to validate of course the required production reliability and scale up including funnel optimization of automation and environment setting et cetera to execute the external data analytical studies during the fourth quarter as well. So, look, there is always risk of issues that we don't know what we don't know but based on current plan it is our expectation that we complete this third stated timeline.

[Brian Weinstein:]

Okay. And do you think you have any ePlex actually launched in the market by the end of the year? I mean in terms of anything generating any kind of revenues.

[Hany Massarany:]

They are two different questions. We will have systems in the field in US and Europe to complete the necessary study. And with the late launch -- the late Q4 launch in Europe, we are going to push hard to place some systems but as far as revenue generation in 2015, it would not be significant.

[Operator:]

Your next question comes from Mike Matson from Needham and Co. Your line is now open.

[Brad Moss:]

Hey, good afternoon, guys. This is actually Brad in for Mike. Just first question just kind of the back of the last question. See I think you guided $2 million to $4 million of ePlex that you expected at the end of Q4. So I am assuming that's -- I mean that's more than they are not significant revenues just described so do you consider this delay in ePlex for launch in Europe because I mean just kind the change the -- it is around and if there is anything you can point you there.

[Hany Massarany:]

No. This is consistent with the timeline that we communicated on our last call. And we are maintaining our guidance for the year in range of $38 million to $40 million which is consistent with what we said before. So we don't see this as sort of the delay to either timeline or a change to revenue guidance.

[Brad Moss:]

Okay. And then Scott, I just curious with the pushing the gross margin up keeping the revenues as same, just wondering what your thoughts are there? They get the puts and takes.

[Scott Mendel:]

Sure. So the gross margin performance year-to-date has been very strong given the XT-8 results and we expect that to continue through the back half of the year. So just reflecting in our forecast which actually been happening. Strong revenue performance on the top line and strong absorption from manufacturing overhead perspective.

[Brad Moss:]

Okay. And then just last one for me .Can you just give me how many reps do you guys have in Europe now what countries they are in?

[Hany Massarany:]

Yes. We have approximately 30 commercial people in the field globally. The vast majority or two thirds of those are in the US and the balance is in Europe sort of in the low teen. And we have people in the key market in central and Western Europe, so people in the UK, in France, in Germany, in Switzerland just too sort of give you an example of where they are geographically. And our plan is to sort of go to approximately 40 by yearend and gross is mostly expansion of the ex US force as Scott mentioned US expansion starts next year.

[Operator:]

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

[Tycho Peterson:]

Hi, thanks. Couple modeling questions I guess. The 11% increase in OpEx rather large. Is that a pretty good run rate to use going forward and into the back half of the year and any color you can provide us as we think about next year in terms of incremental cost you might need to add?

[Scott Mendel:]

Yes. That's about right. It is what we've been performing so far this year. And it will continue in the back half of the year. And then next year obviously we will get to that in due course when we are ready to project revenue, we will give you some ideas on OpEx as well.

[Tycho Peterson:]

And I guess back I mean on the gross margin, I understand you are increasing based on the strong first half of the year but as we think about next year given all the various gives and takes around the new product launch but maybe higher utilization. Can you maybe just talk about any color on how we should be thinking about gross margins going forward?

[Scott Mendel:]

Yes. I mean we've said publicly that we will take a march towards the 70% gross margin over the longer term. Obviously when you launch a new product you probably have some headwinds as far as gross margin goes, so it would be reasonable to expect a slight step back next year as we launch ePlex and then growing from then on towards that 70% range.

[Tycho Peterson:]

Okay. And then if we think about the data launch any -- are you doing with -- can you maybe just talk on the menu that you are going to be putting on the data system initially and are you recognizing revenue from those? How do we think about the economics?

[Hany Massarany:]

Yes, Tycho, we have a number of sites that we already selected and contracted with for data and then some of those will continue to be part of both the analytical study that's required for CE launch and then ultimately the clinical studies for US IVD or FDA submission and along the way we will be increasing the number of external sites to do that. The lead assays are still respiratory panel and the blood culture ID panels, the grand positive and negative, but the initial studies and launch will be with the respiratory panel, followed soon after with the blood culture ID panel. And during the studies we were not going to be recognizing any revenues from product consumptions to generate the data.

[Tycho Peterson:]

Okay. And then just I guess last as we think about the full menu rollout both in Europe and US over time, no changes to kind of how you are prioritizing the rest of the menu rollout, is that right?

[Hany Massarany:]

Not at this stage. But of course we are working on the next wave of panels which will hope to be sort of communicating -- will be communicating in due course obviously but as the team is complete some of the panels that we are working on now and bring them to market, there will be rolling on to the next panels and we haven't yet talked about those. We hope too soon.

[Operator:]

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

[Mark Massaro:]

Hey, guys. Thanks for taking the questions. Hany on the blood culture ID, is it your intention to initiate the grand positive and grand negative trial at the same time such that they are cleared almost together?

[Hany Massarany:]

Yes. We haven't sort of -- we haven't communicated on that specifically but I think to the extent that we can do that then we will absolutely try to do it. Because it does make sense to do them together, yes.

[Mark Massaro:]

Okay, great. And then you mentioned that you started a new technical operations group. Can you just comment on how larger a group that is and you mentioned an expert that's reporting into to you, can you comment on this individual's background even at high level?

[Hany Massarany:]

Yes, of course. So this is something that we had plan to do, we were planning to do for some time and we were already sort of searching and sort of initiated discussion with someone who has significant experience in this field with both engineering and molecular biology background and direct experience in molecular diagnostics companies with panels and so on. And we over time of course we will be building up this organization to include all of the necessary talent to support all technical aspects of transfer, optimization of manufacturing processes, scale up et cetera. And yes we are very pleased to have attracted this new member to the team, will be on senior leadership team directly reporting into me and like I said over time we will be building up this team.

[Mark Massaro:]

Great. And then can you just maybe speak at a high level about -- and I know you are not going to guide 2016 today or anything like that but just maybe talk about expectations for revenue contribution out of Europe on the ePlex, in some way is it -- you want to seed the market and place some boxes and maybe learn some lessons for the US launch but can you maybe just give a little bit of color around what type of opportunity you are thinking about?

[Hany Massarany:]

Yes. So you are right that we are not ready to guide in relation to 2016 yet Mark. We are committed to the European market and we believe that it will represent a significant opportunity in the longer term. And we are ready to develop the market and expected to do well like I said longer term. The initial launch will be a controlled launch to your point; we want to make sure that we step carefully. We learn and respond as appropriate for long term growth and success as opposed to putting a lot of systems out there and sort of stumble earlier on. And later on as we sort of get ready to talk about 2016 will be able to provide additional information in relation to expected sort of placements and revenues from Europe in 2016.

[Mark Massaro:]

Great. And just last one for me. You mentioned you hope to target 40 people in your sales force by the end of this year. How are you thinking abut scaling this through the end of 2016?

[Hany Massarany:]

Through the end of 2016, so again -- I don't think that we have provided very specific guidance but I think it is fair to say that longer term, we want to have 50 plus people in the US and 30 plus people in Europe, we will get there over the next couple of years. So we will be sort of doing it over time as we expand our business and install base.

[Operator:]

Your final question comes from the line of Dane Leone from BTIG. Your line is now open.

[Dane Leone:]

Hi, thanks guys. Can you maybe help us understand at some of the manufacturing changes that you put in place or to scale up. If any of those are structural and what kind of alter at the long term cost to goods for the cartridges?

[Scott Mendel:]

No, nothing that we have uncovered or that we addressed them right now. We suggest that there will be an alteration of our expectations as I said earlier on a call. We still feel like we can chart a course towards the 70% gross margin range over the longer term. So none of the scale that we are talking about would indicate that there is some fundamental change that would have reflected in the higher cost to good sold.

[Dane Leone:]

And would you think that when you actually get the systems into I guess the data locations that you would issue a press release or give us a heads up specifically or with that be something we just wait for the next call on?

[Hany Massarany:]

Yes, Dane, typically not with the data sort of placement so and the expectation is to be placing those systems during the third quarter. So likely be something that we will update on, on the next call.

[Dane Leone:]

Okay. And just to be clear really it sounded like most of the issues were now resolved, they were just kind of more logistics with the injection molding mostly and I guess some stuff around automation for production. So that if you just kind of simplify that the sales that you provided as that kind of what are you thinking about?

[Hany Massarany:]

More or less, yes. I spoke about this specifically about the areas that we address and the progress that we made during the quarter as well as what's remaining. So while the assays or reagents necessary to support the launch and the clinical studies are already in production. We still have to formally complete the transfer to manufacturing. We also have while it was completed the transfer of certain injection mold that components of the cartridge to production mold some parts are still -- were still in the process of doing so with other part. And then finally we have to validate all of the production reliability and scale up sort of factors including optimization of automation and so on. So I think, yes, more or less you characterized what's remaining correctly.

[Dane Leone:]

Okay. And when we think about going against into the year here, where -- when is the time that your sales reps in the field now can kind of start building the funnel, is that something that maybe is even already out there, when can your reps really start talking about the system?

[Hany Massarany:]

Yes, absolutely. We've already begun this process and we are well advanced actually for -- in Europe for example we have mature funnels, we've identified all of the early adopters and sort of key opinion leaders that we are working with and we have a good feel for where the initial placements are going and what's to come after that. As you know, we've also been -- we've shown if the ePlex system at all the key domestic and international industry meetings and conferences and we've been talking to a lot of customers both here and in the US and in Europe I beg your pardon about ePlex and certainly a lot of interest in the system. And we have a good feel for the initial sort of funnels and opportunities that we will be going after.

[Dane Leone:]

Okay. And last question for me. The clinical study protocol, is that already fully defined with FDA at this point?

[Hany Massarany:]

Yes. We've completed all of the pre subs with FDA, all of the lead panels and actually beyond and we already have agreement in relation to clinical study design, number of size, number of samples all relevant parameters and so we feel pretty good about that, yes.

[Hany Massarany:]

All right. Well, thank you very much Dane. And if I understand correctly that was the last question. So on behalf of the Board and GenMark Board and our employees, I want to take this opportunity to thank you all very much for your ongoing support. I look forward to reporting our progress on quarterly basis moving forward. Thank you very much. And have a good afternoon.

[Operator:]

This concludes today's conference call. You may now disconnect.