Genmark Diagnostics Inc
Q3 2014 Earnings Call Transcript

Published: 1 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the GenMark Diagnostics’ Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will be having a question-and-answer session and instructions will follow at that time. (Operator Instructions). I would now like to turn the call over to Ms. Erin Lynn from GenMark. Please go ahead.

[Erin Lynn:]

Thanks, Nicholas, 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 2014 financial guidance, the development and commercialization of new products, plans and objectives of management and market trends are all forward-looking statements. We believe these statements are based on reasonable assumptions. However, these statements are not guarantees of performance and involve known and unknown risks and uncertainties that may cause the actual results to be materially different from any future results expressed or implied by such statements. Important factors which could cause actual results to differ materially from those in these forward-looking statements are detailed in GenMark's 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. In addition, our presentation today includes information presented on a non-GAAP basis. We believe these non-GAAP financial measures provide meaningful supplemental information regarding the company’s performance by excluding certain expenses and other items that may not be indicative of core business results. We refer you to the press release we issued this afternoon, which is available on our Web site for a reconciliation of these differences between the non-GAAP presentation and the most directly comparable GAAP measures. I will now turn the conference call over to Mr. Hany Massarany, President and CEO of GenMark. Hany?

[Hany Massarany:]

Thanks very much, Erin, and good afternoon, everyone. I'm joined on the call today by our Chief Financial Officer, Scott Mendel. Today, we have a few prepared comments and then we will be happy to respond to any questions that you might have. Our prepared comments will cover the following topics. First, I will provide an overview of our performance in the third quarter of 2014. Then, Scott will walk us through our operating results for the quarter and finally I’ll update you on the progress of our ePlex program. So before I hand over to Scott, let me review our Q3 2014 performance. Our U.S. commercial team delivered excellent results in the third quarter. Revenues increased by 36% compared with the third quarter of 2013. We also placed 27 net new XT-8 analyzers in the quarter, driving our installed base past the 500 mark. Third quarter annuity per analyzer was $51,000 compared to $48,000 in Q3 2013. Our FDA-cleared IVD test and research use only HCV Genotyping test continued to be main drivers of our XT-8 placements and revenue growth. And based on our strong sales performance and robust commercial funnels, we are raising our 2014 revenue guidance to greater than $29 million and gross margin to approximately 54% for the full year. We’re also on track to place 125 XT-8 analyzers in 2014. In the third quarter, we also made excellent progress toward the completion of development and introduction of our ePlex system. As previously mentioned, last quarter we completed the design of the ePlex instrument and we are now very close to locking down all aspects of the design of the overall system, including its consumable and lead assays. We remain confident we will soon bring to market the most competitively differentiated multiplex molecular sample-to-answer system and as previously communicated, we expect to complete its development by the end of this year. With that, I’ll now hand over the call to Scott Mendel. Scott?

[Scott Mendel:]

Thank you, Hany, and good afternoon, everyone. We issued our financial results prior to this conference call and will be filing our Form 10-Q shortly after the call is completed. During the third quarter of 2014, our revenue increased 36% to $6.3 million compared to the third quarter of 2013. Our gross profit for the third quarter was $3.6 million or 57% of revenue versus $0.5 million or 11% of revenue in the same quarter last year. As a reminder, during the third quarter of 2013, the company recorded approximately $1.2 million of charges and costs related to a former customer, NMTC. Excluding those charges, third quarter 2013’s gross profit would have been $1.7 million or 36% of revenue. Therefore, on a non-GAAP basis, our gross margin was up 21 percentage points versus prior year. During the current quarter, gross profit was driven by a higher than expected absorption due to higher revenue and related production volumes, as we build inventory to satisfy our strong respiratory panel sales growth. Overall operating expenses were $13.9 million for the quarter, an increase of 1.1 million compared with the third quarter of 2013. Research and development expenses increased $2.5 million related to our ePlex development activities. Sales and marketing expenses increased $700,000 after adjusting 2013 third quarter expenses for the approximately $2.5 million one-time charge related to a former customer, NMTC. Finally, general and administrative expenses increased 300,000 primarily related to personnel costs. Net loss per share for the quarter was $0.23 per share with weighted average shares outstanding of approximately 41 million compared with a net loss of $0.30 per share for the same quarter of 2013 when our weighted average shares outstanding were approximately 36 million. Excluding the charges related to NMTC, the third quarter of 2013 net loss per share would have been $0.24. Additionally, our current quarter net loss per share was favorably impacted by $610,000 reduction in a tax reserve due to the expiration of statute of limitations for an uncertain tax provision. A full reconciliation of GAAP to non-GAAP measures can be found in the tables filed with our Form 8-K. We ended the quarter with $79 million in cash and investments and we plan to continue to utilizing our cash balances primarily to invest in our ePlex system, as well as to expand our commercial organization. We continued our focus on minimizing our working capital requirements resulting in DSOs of 34 days and DSI of 55 days as of September 30. We currently have no long-term debt. As Hany mentioned earlier, after a strong execution thus far in 2014, we will again increase our full year guidance. We now anticipate 2014 revenue in excess of $29 million and gross margin of approximately 54% for the full year. Consistent with prior guidance, we are on track to place 125 net new XT-8 this year, which would bring our XT-8 total consolidated to 538. Our 2014 estimates for SG&A expenses remain in the mid $20 million level and R&D expenses are now expected to be in the low $30 million range. While we will provide formal 2015 guidance during our fourth quarter earnings call, it is important to highlight that as we complete development of ePlex by the end of this year, our investment profile will reflect the progression of the program into clinical trials and commercial launch. As previously communicated, we plan to pursue FDA clearance or approval for all ePlex assay panels. During 2015, we expect to conduct clinical trials for most of the seven panels that are currently in development. Additionally, we have already begun the build out of our European sales team and that investment will continue in earnest throughout 2015. We also plan to expand our U.S. sales force in preparation for the expected U.S. launch of ePlex in late 2015. By the end of next year, our global sales team is planned to more than double in size from the 30 people we have today. We will provide more details during our fourth quarter earnings call, but as you just heard, 2015 will be an exciting year for our company as we move into the clinical trials and commercialization phases of ePlex. With that, I’ll now turn the call back over to Hany to discuss our progress on the ePlex system.

[Hany Massarany:]

Thanks, Scott. I would like now to review our progress and expectations toward the development and launch of the ePlex system. As we have discussed on prior calls, our R&D organization has been exclusively focused on the development of our ePlex system and its associated test menu. And as you also know by now, 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. I'm pleased to report that we are on track to complete development of the overall ePlex system including one or more of the lead assays by year end. Development will be followed by verification and validation, European launch and clinical trials as planned in the first half of next year. In addition, we expect to submit 510(k) applications to the FDA midyear 2015 and launch ePlex in the U.S. in late 2015. Specifically, we are in the late stages of testing alpha instruments produced by our manufacturing partner. As a reminder, last quarter we completed the design, development and testing of prototype units and transferred instrument design to our manufacturing partner. Production of beta units will begin next month to support internal and external validation studies, clinical trials and our European launch. Now I’m very pleased with how well the instrument is meeting its design objectives and I’m confident customers will be as well. Our blood culture ID and respiratory pathogen panels are also meeting important design criteria, including assay sensitivity and specificity. Using alpha instruments, we are now finalizing all sample-to-answer functions, including digital microfluidics, nucleic acid extraction and amplification, as well as eSensor detection. We are also in the final stages of transferring cartage design and assay formulation to manufacturing. In addition and as I mentioned previously, we are planning an extensive test menu for the ePlex platform. Our initial ePlex assay menu will also include a gastrointestinal infection panel, an HCV Genotyping panel, a CNS panel and a fungal pathogen panel. Once the ePlex system has been launched, we expect to bring to market additional assays at a rate of several per year and I look forward to updating you on our assay roadmap at a future date. In conclusion, Q3 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 has again delivered excellent results and with continued strong sales execution and funnels, we believe we will sustain the projected growth of our revenues, market share and installed base of FDA systems over the next several quarters. Furthermore, our sales force both domestic and international continue to lay the foundation and prepare the most important market for the imminent launch of our ePlex sample-to-answer system. Our R&D organization is focused on completing the development of our ePlex system and transferring its design to manufacturing. We expect to complete ePlex development by the end of this year. In addition, with seven development teams working on ePlex assays, we expect to follow-up blood culture ID and respiratory pathogen panels with additional menu content in the not too distant future. 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.

[Operator:]

(Operator Instructions). Our first question comes from the line of Shaun Rodriguez with Cowen and Company. Your line is now open. Please proceed with your question.

[Shaun Rodriguez:]

Hi, guys. Good afternoon. Thanks for taking the question. So Hany, I was hoping you could elaborate on the external validation testing that’s been going on or will be going on. So for the beta systems that you expect over the next few weeks, are these going to select XT-8 customer labs or who are they going to? How many external partners have you been working with at the alpha stage? Just trying to get a sense for in how many hands the alpha and then the beta units will get into and the sorts of feedback that you have been collecting on that?

[Hany Massarany:]

All right. Thanks for the questions, Shaun. So we haven’t started external studies yet and we haven’t disclosed the number of sites or who they are, where these studies will be performed. We do have a number of sites actually for both alpha and beta studies. Most of them will be in the U.S. but there will be some in Europe as well. And we already have all of those sites sort of ready to start once we complete the development of the system later this year. We also already have agreement with FDA, so we’ve done all the pre-subs with FDA and we have agreement for the initial lead panel on intended use as well as clinical study designs. We’ve also started collecting samples as appropriate and necessary to be able to supplement those external studies with a batch of samples as appropriate and agreed upon with FDA.

[Shaun Rodriguez:]

Okay, that’s helpful. And a pricing question I guess that’s relevant both to the base business as well as we look forward to the ePlex opportunity. So anything going on into the flu season with regard to respiratory panel pricing as there are a couple of competitors that might be in positions that could see them get more aggressive? And anything that you’re sensing as labs stock up for the flu season?

[Hany Massarany:]

No. Pricing for RVP – actually for all of our products, pricing has been stable and as expected. So we haven’t seen any sort of pricing pressure in relation to the flu season.

[Shaun Rodriguez:]

Okay.

[Hany Massarany:]

What was your question about ePlex? I mean we haven’t disclosed pricing as you know…

[Shaun Rodriguez:]

No, it was more a question about the market pricing overall as we think about how it evolves over the next 18 months and where ePlex will be relevant. But you answered the question. And then last one, just a model question for you, Scott. So good gross margin progress again. So if I just take revenues up to your guidance for the full year and the implied guidance for Q4 – even the 54% gross margin for the year looks a bit conservative just on the sequential. Is there anything that is going to be hitting in Q4 that might not allow you to see the sort of usual sequential step up in gross margin this time around or is 54 potentially even a little conservative?

[Scott Mendel:]

So the guidance that we gave implies about $8 million in revenue, about $4.5 million gross profit, which gets you to about 55% gross margin rate for the fourth quarter. That’s within a couple points of what we had in third quarter and at this time given that we’re calling kind of a moderate flu season, we think that’s the appropriate level of gross margin to factor in right now.

[Shaun Rodriguez:]

Got you. Thanks, guys.

[Operator:]

Our next question comes from the line of Brian Weinstein with William Blair. Your line is now open. Please proceed with your question.

[Brian Weinstein:]

Hi, guys. Thanks for taking the questions. Hany, I just want to clarify. Did you say that CE mark would be middle of next year? Did I hear you correctly? Can you just be specific on when you expect to launch in Europe?

[Hany Massarany:]

No, no, no, I didn’t say middle of the year, Brian. I said earlier in the year. So we expect to complete development by the end of this year and immediately after that, we start on the validation, verification studies and both the internal analytical studies as well as external clinical studies, but along the way we expect to launch in Europe with CE marking earlier in the year next year. And what I said about midyear was the expected submission to the FDA for 510(k) applications.

[Brian Weinstein:]

Okay, that’s what I thought but I just wanted to verify that. Okay. And then can you talk a little bit about the system number? It was a little bit lower this quarter than we thought. I mean it looks like you need to have something like 35 to 40 or so, I think it’s 38 for the fourth quarter. Can you just talk a little bit about the funnel that you guys have there? And then as a corollary to that how do you – has your thinking changed at all about how the XT-8 customer versus the ePlex customer, how that plays out or the cannibalization between the two?

[Hany Massarany:]

Yes, Brian, so we did 27 net XT-8 analyzers in the quarter and we’re on track to do the 125, so you’re right. The math would say that we need to do a minimum of 36 in Q4 and we feel good about that given the funnels that we have. It doesn’t always like up with the end of the quarter. Sometimes deals sort of fall through and they happen early the next quarter, and that sort of was the situation in the third quarter. As far as the – I think you were asking about the impact of ePlex on XT-8, our thinking hasn’t changed in relation to that. I mean as you know, the menu on ePlex will be largely different with the exception of RVP, is an overlapping product or test and we’re obviously going to be targeting the decentralized sites who are not capable of performing molecular testing today. So with ePlex we’ll be able to open up that market to thousands of hospital labs and reference labs not doing any molecular testing today. So we expect that we will continue to of course support XT-8 systems in the field, place some additional systems, but soon our focus will substantially shift to ePlex as we prepare the market and then launch the product in Europe first and then later on in the year in the U.S.

[Brian Weinstein:]

Okay. My last question is I think you mentioned blood culture and RVP. Obviously, those are the two lead assays and validation or comfort around those sample types. Can you talk about comfort with other sample types at this point and where your progress is specifically with utilization of stool and will it be on the exact same cartridge? Will there be any preprocessing steps required? Just anything that you can provide on stool as a sample type, particularly for the GI panel. Thanks.

[Hany Massarany:]

All right. So yes, we’re making progress sort of in accordance with our plans across the board. The lead three panels are the two blood culture ID panels; gram-positive and negative as well as the respiratory panel and that’s sort of consistent with what we said before. We are making progress with all other – the other four panels that we’re working on and there aren’t any sort of surprises. We have said before that there will be a very minor step, like a filtration step, if you like, for GI because we’re trying to put solid sort of samples in the cartridge but we’re not concerned about that and it’s working so far in accordance with our expectation. So we do expect to bring to market several of those panels next year, post the launch of the ePlex system.

[Brian Weinstein:]

Great. Thank you, guys.

[Hany Massarany:]

Thanks, Brian.

[Operator:]

Our next question comes from the line of Tycho Peterson with JP Morgan. Your line is now open. Please proceed with your question.

[Tycho Peterson:]

Hi, guys. Thanks. On XT-8 in the U.S., can you maybe just touch on competitive dynamics? I think last quarter you were pretty open talking about competitive wins. I think the majority of the systems last quarter were competitive wins. So can you maybe just touch on that dynamic? And then how many were kind of new versus existing customers?

[Hany Massarany:]

Yes. Thanks, Tycho. That’s what we said last quarter and it happened again in Q3. So while we do place every quarter a number of systems in existing sites to help them with either increased volumes or adoption of additional tests on the XT-8 platform, most of our placement went into brand new addresses, brand new customers.

[Tycho Peterson:]

Okay. And then how are you thinking about trends around RVP, I mean both in terms of inventory build and pacing of kind of customer orders?

[Hany Massarany:]

It continues to grow as expected and frankly a little bit ahead of what we expected and that’s why we sort of exceeded our own expectations for the quarter. Of course, we’re not yet in the flu season. I know a lot of people are talking about expecting a severe flu season. We haven’t modeled anything over the top in terms of the severity of the flu season, but we’re – certainly, we see that customers are utilizing the product more and we’re certainly very well prepared in terms of inventory and ability to support the demands in the fourth quarter and in Q1 of next year after that.

[Tycho Peterson:]

Okay. And then thinking about Europe, any feedback you’ve gotten from the XT-8 roll out there, just anything surprising from the customers? And then can you update us on where you are with distributor discussions and sales rep plans as we think about ePlex?

[Hany Massarany:]

Yes. As you know, we placed 12 XT-8 systems in Europe. We did not launch XT-8 in Europe. Rather, we used XT-8 as a beachhead to introduce the company, to introduce our technology so the eSensor electrochemical detection technology that we have on XT-8, as you know, will be also utilized in the ePlex system and we wanted to introduce the technology in Europe ahead of the ePlex launch. Feedback has been tremendous and we’ve had many of those sites present at various conferences and sort of talk to other European labs about their experience with ePlex in terms of sensitivity, specificity and so on and so forth. So very positive response to our technology in Europe. And of course significant interest and traction in relation to the launch of ePlex. So we now have people in Germany, in the UK, in France, in Switzerland and we have one distributor signed up in Italy and I think very close to another agreement in Europe as well. Overall, we have a lot of very positive interest in ePlex and we’ve started building our funnels. And as I mentioned earlier, also reach agreement with certain sites in relation to some of the early introduction for testing and beyond.

[Tycho Peterson:]

Great. Thank you very much.

[Hany Massarany:]

Thank you.

[Operator:]

Our next question comes from the line of Mike Matson with Needham & Company. Your line is now open. Please proceed with your question.

[Michael Matson:]

Hi. Thanks for taking my questions. I guess, first of all, I was just wondering both in the U.S. and Europe, probably more applicable to the U.S., when you launch ePlex, are you going to be using sort of the same sales force? Because the call point I guess would potentially be different. So I guess how do you kind of manage that between the two? Because I guess you’re targeting more of the hospital setting, as I understand it, with ePlex and whereas you’re targeting more of the molecular labs with XT-8.

[Hany Massarany:]

Okay. As Scott mentioned, we are planning for a significant expansion of our global commercial organization. So we’ll go from 30 or so people we have in the field today to double that in 2015. So, of course, there will be a lot of new people coming on board and therefore a lot of new people will be selling ePlex. Both systems actually target both the hospital labs as well as reference labs. XT-8 only targets labs who are capable of performing molecular test and specifically handling the sample prep steps required before you run the test. So extraction, amplification before you get to actually run the test and perform the detection on the XT-8 system. With ePlex we can – and there are about 1,000 or so of those labs in the U.S. and actually they are in the largest hospital centers, academic sort of teaching hospitals around the country as well as the big reference labs. But we know that there are thousands of more labs both in hospitals and reference labs not currently capable of handling the sample prep steps for molecular testing and ePlex will be able to access all of those sites.

[Michael Matson:]

Okay. Thanks for clarifying that. And then with regard to the 510(k) submissions for the initial seven tests, are those going to be submitted sort of one by one or more sort of in parallel as you're seeking to launch those in the U.S.?

[Hany Massarany:]

That will be submitted as we’re ready to submit them in the same way as we’ve handled all the pre-submissions with FDA. So as we are ready to sort of make the submission, we won’t be holding up one to be able to do it in conjunction with another.

[Michael Matson:]

Okay, all right. And then just with the AMP meeting coming up, I was wondering what you’re planning there in terms of ePlex and trying to introduce your customers to it ahead of 2015 launch?

[Hany Massarany:]

Yes, I believe we have the sort of traditional corporate workshop. I believe that’s on a Wednesday and then we’ll have the ePlex at the booth for the entire meeting. We’re already scheduling appointments and time slots for customers and others who want to see the system. And again, as we’ve seen with previous meetings, we have a lot of interest and excitement around AMP in relation to showing the ePlex.

[Michael Matson:]

All right. Thanks a lot.

[Hany Massarany:]

Thanks, Mike.

[Operator:]

Our next question comes from the line of Mark Massaro with Canaccord. Your line is now open. Please proceed with your question.

[Mark Massaro:]

Hi, guys. Thanks for taking the question. So I think you have roughly five or six sales professionals in Europe at this time. Of the 60 that you’re guiding to for the end of '15, how many will be in Europe versus U.S.?

[Hany Massarany:]

I don’t think we gave the exact number, Mark. Mostly in the U.S. I said before that we’ll sort of get in the teens in Europe and ultimately sort of steady state in Europe. I think we’ll have maybe 25, 30 people but that’s not going to happen for all next year.

[Mark Massaro:]

Okay, great. And I was wondering if – obviously you’re getting into the final stages of design and development, but could you maybe comment in terms of some of the differentiating features of your tests, things like turnaround time, notably time to results, do you see any – I guess my question is, are you pleased with where you’re at notably on the gram-positive and gram-negative assays or do you see any potential room for improvement, or are you kind of at the point where you’re comfortable with right now?

[Hany Massarany:]

We’re very comfortable, Mark, across all seven panels currently in development. Obviously, they’re at various stages of development and some are much more advanced than others, but generally speaking we’re very comfortable with performance of those panels. And depending on the panel anywhere from one to two hours is the turnaround time and very consistent with voice of customers, sort of customer needs as well as compared to what else is out there. But like you said, it’s not just the time to result, it’s the performance as it relates to sensitivity, specificity, inclusivity of the various relevant pathogens covered by these panels. And then very importantly with ePlex it’s also workflow efficiency and having a scalable system with random and continuous access that can concurrently handle all of those panels at the same time. So we’re very pleased with what we’ve been able to accomplish so far and customers continue to give us very positive feedback in relation to the design of our system.

[Mark Massaro:]

That’s great. And is it too early to comment on gross margin opportunity into 2015?

[Scott Mendel:]

Yes, we’ll give formal guidance on our next earnings call.

[Mark Massaro:]

Okay. Thanks, guys.

[Hany Massarany:]

Thank you very much.

[Operator:]

Thank you. With that, I’m not showing any further questions in the queue. I’d like to turn the call back over to Hany Massarany for any closing remarks.

[Hany Massarany:]

Thank you all very much. On behalf of our Board of Directors and employees, I want to take this opportunity to thank you for your ongoing support. I look forward to reporting progress on a quarterly basis going forward. Thanks very much, everyone. Have a great afternoon.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a good day, everyone.