Genmark Diagnostics Inc
Q4 2014 Earnings Call Transcript

Published: 25 Feb 2015

[Operator:]

Good day, ladies and gentlemen, thank you for standing by and welcome to the GenMark Diagnostics' Fourth 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]. I would now like to turn the conference to our host Ms. Erin Lynn. Ma'am, you may begin.

[Erin Lynn:]

Thanks, Eric, 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 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. I will now turn the conference call over to Mr. Hany Massarany, President and CEO of GenMark. Hany?

[Hany Massarany:]

Thanks Erin and good afternoon, everyone. I'm joined on the call today by our Chief Financial Officer, Scott Mendel. And today, we have a few prepared comments and then we will be happy to respond to any questions that you might have. Our prepared comments will cover the following topics. First, I will provide an overview of our performance last year and expectations for 2015. Then, Scott will walk us through our operating results for the fourth quarter and full year 2014. And finally, I will update you on the progress of our ePlex program and 2015 objectives and milestones. Before I begin our business review, I’d like to update you on recent changes to the GenMark Board of Directors. We are pleased to welcome two new members to our Board, Lisa Giles and Mike Kagnoff. Both Lisa and Mike complement the strong technical and operational expertise of our existing Board Members and we are delighted to have them onboard. Furthermore, Steve Worland has decided to resign from our Board in order to dedicate more of his energy to this company as President and CEO. We thank Steve for his valuable contributions over the past couple of years. For more information, please refer to the press release we issued yesterday which provides additional detail about Lisa and Mike’s background. And now on to our business discussion, and let's start with a high level review of our 2014 performance and 2015 expectations. Our U.S. commercial team delivered excellent results in 2014, excluding NMTC, we grew our base business revenues by 59% compared with 2013 and expanded our installed base of XT-8 analyzers to 540. Our FDA cleared RVP test and researches only HCV Genotyping test continue to be the main drivers of XT-8 placements and revenue growth. As recently communicated, last year we completed the development stage of the ePlex sample-to-answer system. ePlex is designed to be the most competitively differentiated platform in multiplex molecular diagnostics delivering superior performance and testing efficiency to customers globally. As expected 2015 will be a transitional year for our company. As we continue to grow and support our XT-8 business while shifting more of our focus toward ePlex. With the completion of the development phase of ePlex, our team is now preparing to execute the relevant analytical and clinical studies which must be completed prior to launching the system, and as previously communicated we expect a mid-year launch of ePlex in Europe and 510(k) submissions to the FDA in the second half of this year. We expect 2015 revenue to be in the range of $38 million to $40 million representing growth of 25% to 30% over 2014. The vast majority of this revenue will be driven by XT-8 given our expectation for a mid-year launch of ePlex in Europe. Gross margin this year is expected to be in the range of 53% to 55%, and based on our commercial activities and plans this year we expect to expand our installed base of XT-8 analyzers in the U.S. market, and since we plan to launch ePlex in Europe in the middle of the year and expect to shift more of our U.S. commercial focus to building ePlex funnels in the second half, at this time we are providing guidance on XT-8 placements for the first half of 2015. And accordingly, we expect to install approximately 50 XT-8 analyzers in the first two quarters. We intend to provide second half placement guidance for XT-8 and ePlex analyzers by the end of Q2. 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-K shortly after the call is completed. During the fourth quarter of 2014, our revenue increased 52% to $9.8 million compared to the fourth quarter of 2013 and our gross profit for the fourth quarter was $6 million or 61% of revenue versus $3 million or 47% of revenue in the same quarter of 2013. Overall operating expenses were $14.7 million for the quarter, an increase of 1.4 million compared to 2013. During the fourth quarter, research and development expenses were $8.5 million, an increase of 2.3 million over 2013 driven by our ePlex development activities, both completing the development of the system and assay as well as exempting the development of all other ePlex assays. Sales and marketing expenses were $3.1 million for the quarter, an increase of $300,000 driven by employee related expenses. And finally, general and administrative expenses decreased nearly $1 million versus the fourth quarter of 2013 to 2.9 million, while 2014 included a slight increase in employee related expenses, that increase was more than offset by the one-time charge related to the termination of an unnecessary IP license that was recorded in the fourth quarter of 2013. Net loss per share for the quarter was $0.21 with weighted average shares outstanding of approximately 41.5 million compared with a net loss of $0.26 per share for the same quarter of 2013 when our weighted average shares outstanding were approximately 41 million. Hany mentioned some of the 2014 full year highlights that I’ll provide additional details. Revenue grew 59% to $30.6 million when compared against our base business revenue in 2013. Our gross margin for the full year was $17.5 million or 57% of revenue and our operating expenses were 56.5 million, an increase of $9.8 million mainly driven by the investment in the development of our ePlex system. And finally net loss per share for the full year was $0.93. We ended the year with nearly $71 million in cash and investments and we plan to continue utilizing our cash balances primarily complete the analytical and clinical ePlex studies required for both European launch and FDA submissions as well as expanding our global commercial organization. In addition to our existing cash balances earlier this year we also put in place a debt facility for up to $40 million. This will provide enough capacity to carry a company through to cash flow positivity under normal operating conditions. During 2014, we also maintained our focus on minimizing working capital requirements resulting in DSOs of 35 days and DSI of 60 days as of the 31st of December. In addition to the 2015 revenue and gross margin guidance Hany already provided, it's important to recall our previous communication regarding operating expenses. During 2015 we expect to conduct clinical trials for most of the seven ePlex panels currently in development. Additionally, we’ve already begun to build out our European sales team and that investment will continue interest throughout 2015. During the second half of the year, we also plan to expand our U.S. sales force in preparation for the expected U.S. launch of ePlex in the first half of 2016. Therefore by the end of the year, our global commercial team is planning to more than double in size from the 30 or so people we had at the end of 2014. With that, I’ll now turn the call back over to Hany to discuss our progress on the ePlex system and our 2015 objectives and milestones.

[Hany Massarany:]

Thanks, Scott. I would now like to review our progress and expectations towards the launch of the ePlex system. As you know by now, this is a multiplex molecular sample-to-answer system which will integrate sample preparations steps including extraction and amplification together without proprietary eSensor detection technology and enabled by proprietary digital microfluidics to allow the detection of multiple molecular targets on a single test cartridge. As you can expect, our R&D regulatory and clinical affairs organizations are very focused on ePlex and its associated test menu. In addition to preparing for the relevant analytical and clinical studies which must be completed prior to our European launch, we have also been very busy transferring cartridge design and assay formulation to manufacturing. I am pleased to report that we are on track for a mid-year launch of ePlex in Europe and expect to submit five 510(k) applications to the FDA in the second half of 2015 and launch ePlex in the U.S. in the first half of 2016. We’ve also begun production of the beta unit required to support all internal and external validation studies, clinical trials and initial European launch activities. But we’re very pleased with how well the instrument, cartridge and lead assay are meeting their design objectives and we are confident that customers will be as well. Finally, as I have mentioned previously, we are planning an extensive test menu for the ePlex platform, we’re making excellent progress with the initial ePlex assay menu which includes gastrointestinal infection panel, an HCV Genotyping panel, a CNS panel and a fungal pathogen panel. Once the ePlex system has been launched, we expect some of our other assays to launch in Europe in late 2015 and in the U.S. in late 2016. So going forward, 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 road map at a future date. So in conclusion, 2014 was another year of strong performance for our company and we are very optimistic about 2015 and beyond. Our North American commercial team continues to deliver excellent results and with sustained sales execution and strong funnels, 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 force both domestic and international continues to lay the foundation and prepare the most important market for the imminent launch of our ePlex sample-to-answer system. Our R&D regulatory clinical phase and manufacturing organizations are laser focused on the necessary ePlex deliverables to support all internal and external validation studies, clinical trials and initial European launch activities. In addition with seven development teams working on ePlex assays we expect to follow up our 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.

[Operator:]

[Operator Instructions]. And our first question comes from Tycho Peterson of JP Morgan. Please go ahead.

[Tycho Peterson:]

Hany just thinking about European launch later this year and U.S. next year. Can you maybe talk to the number of sales adds you need in both territories over the next kind of 12 to 18 months?

[Hany Massarany:]

So as Scott mentioned as at the end of last year we had approximately 30 or so people -- commercial people in the field, and we expect the number over the next 12 months to double maybe actually slightly more than double from the low 30s to low to mid 60s by the end of this year. Longer term we expect to have something like 50 plus people in the U.S. sales people and maybe a little bit over half of that number in Europe in addition of course we are continuing to invest in field technical people and various management sort of support structures to execute globally with our sales organizations.

[Tycho Peterson:]

And then on the XT-8 guidance, just wondering on the thought process and just providing guidance for the first half of the year on placement, and does that imply anything different for the second half of the year, just trying to think about how you're thinking about the ramps for the full year?

[Hany Massarany:]

Yes, since we are launching or we plan to launch ePlex in the middle of the year, we felt that it would be appropriate to provide guidance sort of closer to the end of the second quarter prior of course to launching the system in Europe rather than now. And as I mentioned in the script, we also expect to shift more of our focus in the U.S. with our commercial organization to prepare for the launch of ePlex in 2016 to work on the funnels to expand the sales force et cetera. So with that we decided to provide guidance for the first half at approximately 50 XT-8 systems, now remember last year we placed 127 analyzers all year, so we expect that approximately 50 analyzers will be placed in the U.S. market in the first half of this year and then we will provide guidance for the second half both for XT-8 placements and for ePlex placement, so we of course expect to continue to place XT-8 systems in the U.S. in the second half but will provide the guidance at the time that we do it for both XT-8 and ePlex closer to the beginning of the second half.

[Tycho Peterson:]

And then just last one quickly on content, not to put the cart before the horse before you’ve rolled out all seven assays. But if we think about kind of additional menu development, is that something that A, you're probably communicating to add new assay programs and B, is that something we could hear about maybe later this year or is that more of a '16 even?

[Hany Massarany:]

I think the answer are yes and yes, so we are working hard to finalize our menu road map at least for the next wave of panels beyond the first seven and in due course we will certainly communicate on our plans in that regard.

[Operator:]

Our next question comes from Mike Matson of Needham. Please go ahead.

[Mike Matson:]

I guess just wondering as you transition through the year and start to focus more on the ePlex launch. Are you concerned at all that competitors might try to use that as an opportunity to come in and prey on some of your XT-8 customers and maybe try to switch into similar competing products?

[Hany Massarany:]

And we’re always focused on our existing customers of course and continue to do everything we can to support them and exceed their expectations. We’re not really concerned about losing customers, XT-8 customers to competitors at this stage we have a very stable installed base and very stable customer base, I should say. And really the market, the focus with ePlex will be on a different market segment XT-8 as we mentioned in the past, we certainly expect some of our existing XT-8 customers to also bring in ePlex for expanded menu but like I said we’re not really concerned about the focus on ePlex sort of detracting from our ability to support and maintain our XT-8 customers.

[Mike Matson:]

And then question for Scott just on the -- I understand you don’t give quarterly guidance, but with the operating expenses during 2015, I mean I guess my read of what you're saying is there was expenses were probably ramp through the year as we progress toward the midyear EU launch and then continue to ramp as we progress towards the U.S. launch? Is that a reasonable way of looking at things or am I over simplifying it?

[Scott Mendel:]

Yes, I think that’s a good way to think about it, the sales and marketing expenses obviously will ramp a little bit in the first-half of the year as we build out the European team because European launch is contemplated mid-year and then in the back half of the year you’ll see even further acceleration of ramp as we expand the U.S. team in preparation for IVD launch in the U.S. in the first half of 2016. From an R&D perspective with most of the seven assays beginning clinical trials as we get throughout the year you’ll see that ramp kind of continuing throughout the year on a steady state.

[Mike Matson:]

And then just one final question on the gross margin. The guidance is a little lower than where you ended the year for '14. Is that because of the ePlex launch or is it just being a little conservative or a combination of both?

[Scott Mendel:]

So Hany gave you the guidance 53% to 55% on a full year basis. As you can expect when you're launching a new product and you have lower volumes than your kind of steady state you're going to have a little bit of headwinds. So I would say that as we launch the product in the middle of the year through the back half of the year that's when you feel some of that headwind from the ePlex launch, and that’s reflected in this full year guidance. So you could have a little bit of difference in the first half of the year which is XT-8 based revenue versus the back half of the year which has some impact from ePlex coming out.

[Operator:]

Our next question comes from Brian Weinstein from William Blair. Please go ahead.

[Brian Weinstein:]

First, on manufacturing, you had said that you had transferred instrument design to your partner and then you've made a comment also about assays and consumables, or the cartridges also being transferred to manufacturing. Are you going to manufacture all of that outside of GenMark? Is there any internal manufacturing that’s going on there?

[Hany Massarany:]

The instrument itself will be manufactured by our partner everything else by us, so all the consumable, the cartridge, the content on the cartridges we’re doing all of that internally. Now of course there are certain components that we procure and then we assemble here, so we’re not making printed circuit boards or anything like that, but we will acquire those components and then assemble here with the content depending on the panel of course here at GenMark in Carlsbad.

[Brian Weinstein:]

Where are you guys in the build out for that manufacturing and what will your capacity be for cartridges when you launch the product?

[Hany Massarany:]

Yes, we’re actually pretty well advanced in terms of setting up our ePlex manufacturing lines here internally and we believe that we’ll have sufficient capacity certainly for the foreseeable future the next 12 plus months. But as always we’re considering beyond that what it will take to sort of maintain capacity to meet the demand and support the growth that we expect globally and we have pretty good plans in place to accommodate and support all of that.

[Brian Weinstein:]

And then as you think about your ePlex launch, I know we are always away in the U.S., but I am curious about any market research that you have that you would be willing to share in terms of the lead assays that you are talking about. What's the frequency that you're kind of key accounts that you are targeting are running those kind of key assays or those lead assays on either a monthly, or yearly, or quarterly basis? Anything that you have to kind of help us frame kind of what the opportunity is besides just kind of hospital -- number of hospitals or number of customers that you could be targeting?

[Hany Massarany:]

And look as you know the lead panels that will be available at or very soon after launch will be the blood culture ID both gram-positive and gram-negative panels as well as the respiratory panel. The most advanced in terms of market adoption and acceptance as you can imagine is the RP, the respiratory panel. And as you know from tracking various competitors in the space, I mean that’s where a lot of labs are taking on this panel and we feel pretty confident that it's really well accepted and provides for the opportunities that we’ve already sort of seen and estimated in this area. On the blood culture ID we are seeing continued adoption and improvement in acceptance and adoption. So, we feel pretty good about the trend that we’re seeing so far so more and more labs are certainly very interested in those panels, I am talking about those panels understanding how they would fit into their current work flow and requirements and so on and we’re also seeing labs gradually adopt those panels and sort of validate them and integrate them in the work flow. So without giving very quantitative sort of numbers here, we feel pretty good about the trends that we see with the adoption of molecular sample-to-answer panels in those areas of testing.

[Operator:]

Our next question comes from Shaun Rodriguez from Cowen and Company. Please go ahead.

[Shaun Rodriguez:]

First on revenue guidance, so you said the vast majority is XT-8, which of course makes sense, but obviously implicit within that is some ePlex. Just so we're on the same page, can you just help us on the magnitude of ePlex contributions that are in revenue guidance? Are we talking a few million dollars here, just to make sure we are all within a reasonable range?

[Hany Massarany:]

Look at this stage we’re not splitting up the revenue between ePlex and XT-8, I’ll say again at the majority of the revenue will come from XT-8 and look there -- what we’ve allowed for ePlex is a modest number based on a sort of mid-year launch and then sort of taking it easy in terms of gradually introducing the products in Europe in a controlled way and making sure that we’re ready for scale up and so on which will come later on. So, I think for 2015 it's appropriate to sort of assume that the ePlex revenues in the plan or in the guidance are modest, not significant.

[Shaun Rodriguez:]

So on ePlex, you noted the milestones on production that allow you to progress with the clinical and regulatory requirements. So on the current expected timelines, when do you actually start to place the boxes within external sites for testing?

[Hany Massarany:]

Pretty soon. As you know with a sort of launch expected to take place in the middle of this year and obviously before then we need to have completed all the studies that we’re working on and some of that work is done externally. So, we have already got plans and sites lined up both in the U.S. and Europe to complete some of this work which will happen pre-launch.

[Shaun Rodriguez:]

And lastly, just building off an earlier question in terms of your recent placements, can you just talk about how common it's getting for customers to be asking for a clear upgrade path to ePlex or even how commonly your reps are really engaging in the discussion about the different platform characteristics and timelines? Just trying to get a sense for really the awareness and what your reps are sensing in the field at this point?

[Hany Massarany:]

Yes, I would say that there is very good awareness as you know you’ve seen our boost, the key shows in the U.S. industry sort of conferences as well as in Europe and we’ve shown the system to many customers around the world and a feedback -- the response is very favorable. We have also as appropriate trained our sales force to be able to talk about our plans for the future with ePlex. And in some cases we have had customers wanting to see an upgrade path, but not the majority of XT-8 customers. It's certainly not because of lack of awareness, but I think we’ve done a good job explaining to our customers, educating our customers on the differences between ePlex and XT-8 especially with different menu and different target markets and pricing levels and so on and so forth.

[Operator:]

Our next question comes from Mark Massaro from Canaccord Genuity. Please go ahead.

[Unidentified Analyst:]

This is David filling in for Mark. Hnay, how do you see the impacts to these market playing out in 2016 to 2017? Specifically how do you see ePlex uniquely positioning itself to the other market -- other instruments on the market -- in other testament market in two or three years?

[Hany Massarany:]

Well, we believe that the infectious disease market will continue to be very strong, very attractive that’s where the big volumes of testing are and we expect that there will be continued sort of transition away from current sort of practices and technologies to molecular technologies and especially multiplex molecular approach. So, as we see more and more of the pathogens being able to be identified in a single panel sample-to-answer and in some cases with antibody sensitivity or resistance target et cetera, we expect that more and more of that -- of the testing will transition to the parts of panels that were developing on ePlex.

[Unidentified Analyst:]

And just a follow-up on HCV, are you seeing any new changes in the marketplace would that be new therapy on the market or is there going to be more testing, less testing or just can you -- are you seeing any difference and how that’s being played out?

[Hany Massarany:]

Well I can’t relate the difference very specifically to a single factor like a new drug per se as you’ve just mentioned. But we are certainly, we continue to see growth and interest and traction in HCV Genotyping in this area of testing. So more and more customers are sort of looking to set up HCV Genotyping testing and we think it's a combination of the impact of the new therapy, but also the customers awareness and need to be prepared for future targeted therapies that will require genotyping.

[Operator:]

Our next question comes from Dane Leone from BTIG. Please go ahead.

[Dane Leone:]

Just to clear up any residual confusion on the revenue guidance, if you plug in the instrument placement number on the XT-8 systems in the first half of the year and then assume no additional placements are made in the remainder of the year, you basically come out at the lower-end of your guidance range on the revenue line. So, I think we’re trying to parse out between just being conservative of, okay, let's get to market and see where the placements pace out in the back half of the year for Europe and if the U.S. approval occurs before the end of the year, and also kind of contrast that to it may take a while for utilization to ramp up, potentially into the flu season since RVP is going to be the primary driver of the initial sales on ePlex. So any additional detail there, I think would help clear up any residual confusion?

[Hany Massarany:]

I am sorry I am not sure what the question is, are you saying….

[Dane Leone:]

So the question is if we’re looking at the guidance, the revenue guidance that you just gave us and the system guidance that you just gave us, plugging that in you get to essentially the bottom end of your revenue guidance. So it seems like the actual implied revenues from ePlex is pretty much minimal for 2015. And so, the question I think we are trying to get at is, is it an expectation that ePlex in and of itself does not really contribute much because most of the adoption of the new instrument would occur for the 2015 flu season and it may take a while to actually get those placements and ramped up, so you might not catch the majority of the flu season? Or is it that you really just are being conservative? You don't really know how the pacing is going to come in once you get to market.

[Scott Mendel:]

Dane its Scott. So just taking a step back to $38 million to $40 million is what we feel is appropriate guidance at this point. The couple of things just to put some clarification on your question out there is if you think about the guidance that Hany provided on XT-8 placement, please note that most of those placements historically on XT-8 have been major rental. So you wouldn’t get a full revenue number from those 50 or so placements that Hany mentioned in the first half of the year, you would only get a range of associated with those in the back half of the year. We do have ePlex revenue factored into our guidance at a moderate amount as Hany already said. So those few things were taken in consideration when we came up with the $38 million to $40 million of revenue guidance that we provided at this time. I would also point you to for a full year on XT-8 only in the U.S. in 2014, we did $30.6 million of revenue, so you take some installed base some revenue coming from the placement that Hany talked about, add in a modest amount of ePlex revenue and that’s where we get the comfort level on the $38 million to $40 million of revenue.

[Dane Leone:]

And then on the guidance for the XT-8 placements, of that 50, are most of those pre-booked or do you have visibility into that? What percentage of that expectation is kind of already booked versus sales to be made? And when you think about the back half of the year, is your feeling that XT-8 sales will probably become de minimis with the ePlex launch or do you think there will still be a market for some of the sales in the back half of the year?

[Hany Massarany:]

So, other than the placements that were made since January 1 until now, none of the balance these are not pre-booked XT-8 sort of placement. So they are based on a good understanding of the funnel and the prospect that we’re working with which we constantly sort of assess and monitor, but nothing sort of pre-booked other than what has already happened in the first part of Q1. As far as the second half is concerned we will provide guidance for XT-8 placements in the second half and we certainly expect to be placing more XT-8 systems in the second half.

[Dane Leone:]

I guess the last one for me is just in terms of any color you can provide making headway into Europe, educating potential customers of the ePlex platform and where you think you are there, and what needs to be done until -- prior to launch?

[Hany Massarany:]

Yes, we’ve already being doing that for the past several quarters and we continue to do so leading to the launch in the middle of the year. So, we have exhibited in all of the key European conferences and expect to do the same again this year, so we did it last year and we expect to do it again this year. We already have people our own employees, in some of the key markets in Europe, in central Western Europe for example in the UK and France, in Germany, in Switzerland and so on and so forth. And we are continuing to add people in the key markets in Europe. We're working directly with key opinion leaders that were involved in the evaluation of our recent technology last year and many of those will be early adopters of ePlex. So they are rather a lot of activities going on to continue to position and prepare the market for ePlex launch, we feel very good about the level of interest and traction that we’re achieving.

[Operator:]

And there are no further questions at this time. I'd now like to turn it back to Hany Massarany for closing remarks.

[Hany Massarany:]

Well, thank you everyone on behalf of our Board of Directors and employees. I really want to thank you for your ongoing support. I look forward to reporting our progress on a quarterly basis going forward. Thanks very much and have a good afternoon. Bye, bye.

[Operator:]

Ladies and gentlemen this does conclude today’s conference. Thank you for your attendance. You may now disconnect. Everyone have a great day.