Genmark Diagnostics Inc
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the GenMark Diagnostics Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. And I would now like to introduce your host for today's conference call, Ms. Nancy Torok. You may begin, ma'am.

[Nancy Torok:]

Thanks, Kevin, and thank you, all, very much for joining us this afternoon. 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. We believe these statements are based on reasonable assumptions. However, these statements 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 filings with the SEC. I will now turn the conference call over to Mr. Hany Massarany, President and CEO of GenMark. Hany?

[Hany Massarany:]

Thank you, Nancy, and good afternoon, everyone. I'm joined on the call today by our CFO, Richard Slansky. 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

[Richard B. Slansky:]

Thank you, Hany, and good afternoon, everyone. We issued our financial results a bit earlier today, and we're planning to file our Form 10-Q later this afternoon. We are pleased to report that for the 3 months ended June 30, 2013, our overall Reagent revenues grew 33% from the same 3-month period last year. And our base Reagent business, meaning our Reagent business without our largest pharmacogenetics customer, grew 128% from the same quarter last year. Our installed base of analyzers also grew to 384, an increase of 45 net analyzers in the quarter. Our annuity per analyzer declined to $55,000 in the quarter, due mostly to a decline in revenue from our largest pharmacogenetic customer. Importantly, the annuity per analyzer for our base business increased by 41% for the second quarter this year over the second quarter of last year. Now for some overall results. Today, we reported total revenues of $5.2 million for the second quarter of 2013, an increase of 44% compared to the second quarter of 2012, where we recorded $3.6 million in total revenues. Total 2013 year-to-date revenues amounted to $16.3 million, compared to $5.8 million for the year-to-date revenues for 2012. Reagent revenues increased 33% to $4.6 million during the quarter, compared to $3.5 million in the same period in 2012. This was driven primarily by strong second quarter sales to existing diagnostic laboratory customers, as well as by securing an increasing number of new customers. Also, the growth from same quarter last year was due to volume increases and not pricing increases. Our Q2 2013 revenue reflected the seasonality of our RVP business, which is strongest in the flu season, which is normally Q1 and Q4. Our gross margin from the second quarter was $2 million or 39% of revenue, versus $1.4 million or 40% of revenue in the same quarter last year. Our year-to-date gross margin was $8.1 million or 50% of revenue, versus $1.9 million or 33% of revenue for the same 6-month period last year. The slightly lower quarterly gross margin was realized primarily as a result of lower production volume, which generated small unfavorable production variances. Conversely, our higher year-to-date gross margin was driven by higher production volumes in Q1 2013, which generated favorable production and purchasing variances. Our overall operating expenses of $10 million -- $10.1 million for the second quarter of 2013 increased by $3.1 million compared with Q2 of last year. Our total operating expenses year-to-date amounted to $20.4 million, an increase of $7.4 million compared to the same period last year. We experienced an increase in R&D spending of approximately $2 million versus Q2 of last year and approximately $5.4 million for the 6 months ended June 30, 2013, versus the same 6-month period in 2012. This increase in R&D spending was almost exclusively due to NexGen and our investment in a strong product development and assay development staff, supplemented by fees from our dedicated NexGen R&D third-party partners. We expect to see further increases in our R&D spending as we drive to a successful launch of our NexGen platform and menu. Selling and administrative expenses increased by approximately $1.1 million compared to the same period last year, and $2 million for the 6-month period over the same 6-month period last year, due mainly to additions to our sales and commercial team and other headcount to support our growth strategy. We reported a loss of $0.25 per share for the quarter with weighted average shares outstanding of $31.9 million, compared with a loss of $0.26 per share for the second quarter of 2012 when our weighted average shares outstanding were $21.2 million. Our 2013 year-to-date loss was $0.38 per share with weighted average shares of $31.9 million, compared to a loss of $0.54 per share with weighted average shares outstanding of $20.6 million for the same period in 2012. We ended the second quarter of 2013 with $36.5 million in cash and investments, and we plan to continue utilizing our cash balances primarily to invest in our NexGen product and menu development, as well as expanding our commercial organization. Hany will shortly review the progress that we are making across the 2 strategic areas that we have previously discussed as important in achieving our long-term goal of becoming a global leader in molecular diagnostics. Before he expands on the opportunity ahead, I wanted to spend a brief moment providing further detail on our current XT-8 business. Specifically, I will break down our revenue to provide an appreciation of the continued expansion we're seeing in our base business, which is how we will now define our revenues that exclude our largest pharmacogenetic customer. This will also provide additional visibility into our business with this customer, given the uncertainty that exists in relation to the could-be amount of revenue we expect to see from them moving forward. As we have previously disclosed, our 2012 revenues were $20.5 million, of which $8.8 million came from our base business. Within 2012, our base business revenues were $1.6 million for the second quarter and $2.9 million for the first half. By comparison, in the second quarter of 2013, our revenues of $5.2 million included approximately $3.8 million from our base business, representing growth of 145% over Q2 of 2012. Similarly, for the first half of 2013, our revenues of $16.3 million included approximately $8.2 million from our base business, representing growth of 182% over the first half of 2012. So as you can see, with 145% growth in the second quarter and 182% growth in the first half of 2013, our growing and diversified XT-8 business and associated revenues continue to expand nicely ahead of our expected NexGen system launch. Based on this, we reiterate our prior revenue guidance for the year at approximately $30 million. With that, I will now turn the call back over to Hany for our business update. Hany?

[Hany Massarany:]

Thank you, Richard. I would now like to review our accomplishments for the second quarter of 2013. I will focus my comments on the growth of our current XT-8 business, as well as the progress of our NexGen development. I will also update you on the initiatives that we're putting in place to establish our international business. So let me start with the current XT-8 business. Our sales force continues to perform extremely well. In addition to the strong Reagent growth year-over-year, we achieved 45 net analyzer placements during the quarter. This put us at a total installed base of 384 analyzers in the field at the end of June. Our commercial sales funnels for the remainder of 2013 are very robust, and based on our current trajectory, we expect to place more than 150 analyzers in the field this year. As Richard indicated, Q2 reagent annuity per analyzer was $55,000. Excluding our largest pharmacogenetics customer, reagent annuity per analyzer actually grew by 41% year-over-year. Furthermore, Reagent sales to this customer dropped approximately to 30% of total Reagent revenue in the quarter, compared with approximately 60% in the second quarter of 2012. Importantly, excluding this customer, Reagent sales grew by 128% year-over-year. This growth in our base reagents and annuity per analyzer was boosted by continuous customer adoption and volume growth across our test menu, particularly our FDA-cleared Respiratory Viral Panel and our HCV Genotyping test. As you will recall, our FDA-cleared RVP simultaneously detects and differentiates 14 clinically relevant viruses from patients with influenza-like illness, and compared to other multiplex Respiratory Viral Panels, the GenMark RVP test delivers superior sensitivity and laboratory efficiency. Since launched, we secured numerous RVP customers who have continued to provide excellent feedback about its performance and ease of use especially versus the competition. Also, as previously communicated and supported by several studies, our recently launched HCV Genotyping direct test provides more comprehensive genotyping direct from blood and plasma samples with greater subtyping specificity. We've continued to secure new customers every month since we launched this product, and feedback regarding its performance in terms of specificity, sensitivity and workflow, as well as turnaround time has been very positive. While we believe the pharmacogenetics testing market has long-term potential, based on the uncertainty surrounding the current reimbursement landscape, we still think it's prudent to be conservative with our projections in relation to this sector of our business. And to this end, while we recognize there may be upside, we've recently reduced our revenue expectations from this sector and are now projecting very little revenue from our largest pharmacogenetics customers in the second half of 2013 and in 2014. Before I move to NexGen, let me touch briefly on the initiatives we're putting in place to establish our international business. You will remember that we appointed a very experienced head of international some months ago to lead the establishment of our ex-U.S. business, ahead of the launch of our NexGen system in the second half of 2014. Our planning is advancing well, and we expect our international distribution channels to be a combination of direct operations and highly qualified distributors. We will introduce our XT-8 systems to KOL sites in certain countries, the first of which is being initiated this month. As we look to establish our technology and certain tests to these markets in preparation for the launch of NexGen, we are currently finalizing a comprehensive business plan which outlines the rollout of our international business by country based on a selective and prioritized basis. Now let me review our progress in relation to the development of our NexGen system. As we've discussed on prior calls, our attention over the last 12 months in R&D has significantly shifted to the ongoing development of our NexGen system. As you also know by now, this is a multiplex molecular sample-to-answer system, which will integrate sample preparations steps including extraction and amplification, together with our proprietary eSensor detection technology to enable concurrent detection of multiple molecular targets on a single-test cartridge. We are designing this system with all the necessary reagents fully incorporated in self-contained test cartridges and the required fluidic movement enabled by proprietary digital microfluidics technology. We've demonstrated a prototype of our NexGen system at last year's AMP Meeting. At AMP 2013, we intend to unveil an advanced NexGen prototype system and provide customer demonstration in our exhibition booth. These demonstrations will allow customers to interact with our NexGen system, including the innovative user interface we have developed. We expect these demonstrations to be well attended and expand awareness among both our current and future customers. In relation to the platform and cartridge development, we are making excellent progress and expect to complete assay integration on the cartridge this quarter. We are using one of our most complex assays, RVP, as the vehicle to this integration process and we are very pleased with the results that we've accomplished so far. As mentioned previously, we are also developing an extensive test menu for the NexGen platform, with an initial focus on infectious disease, and I'm now delighted to provide more details on our menu roadmap. Our initial NexGen assay menu will be RVP, sepsis, both gram positive and gram negative, Gastrointestinal Infection panel, or GI, and HCV Genotyping. We believe our choice of the initial NexGen menu, combined with the performance characteristics of our all-electronic system, addresses large underserved market segments that will allow our commercial teams to achieve rapid and broad adoption across our existing and future customer base on a global basis. Our R&D organization and partners are well-advanced in the development of our NexGen cartridge instrument software and initial menu of assays, and we are very pleased with the achievements and test performance results to date. As you know, our proprietary electronic detection system doesn't suffer from certain interferences and complexities that impact other optical detection technologies. So in principle, we believe that no other available technology can match our ability to perform through multiplexing in an IVD environment. This, combined with digital microfluidics for fully automated and rapid sample preparation, is what underpins the uniqueness of our NexGen system. We continue to believe we will bring to market the most competitively differentiated multiplex molecular sample-to-answer system, and we're on track to complete its development in the second quarter of 2014. So in conclusion, and as I stated in my opening remarks, Q2 was another quarter of exceptional execution and performance for our company, and we are very energized and optimistic about the remainder of 2013 and beyond. Our commercial team has developed -- delivered very strong results in Q2. And boosted by our uniquely differentiated HCV Genotyping and FDA-cleared RVP test, we believe we are poised to place many more XT-8 systems, expand market share and grow revenues over the next several quarters. Plans to establish our international business are progressing well. And in the future, we believe the ex-U.S. markets will make a significant contribution to both our top line revenues and our bottom line profits. Our R&D organization is very focused on completing the development of our NexGen sample-to-answer system. This is where most of our attention will be over the next several quarters, and you can expect to see our investment in R&D continue to increase as we drive to accelerate towards NexGen platform and associated menu development during the remainder of this year and beyond. Of course, with continued focus on organizational talent, infrastructure and processes, we are well and truly ready for significant business growth. We will now open the call to your questions. Thank you.

[Operator:]

[Operator Instructions] Our first question comes from Bill Quirk with Piper Jaffray.

[William R. Quirk:]

Hany, I guess I wanted to talk about the overall instrument placements and then I guess what you guys are looking at from a guidance standpoint. I understand the expectation that you would typically see a little bit of a slowdown in terms of the summer months on instrument placement, but then we also typically tend to see this ramp back up in the fourth quarter. And so I'm a little curious, as we look at the back half of the year, you guys are up -- it's looks to me like taking a fairly conservative light here as you're guiding, basically, with placements down second half over the first half and, in fact, even down year-over-year. So maybe you could just talk to us a little about that

[Hany Massarany:]

I didn't follow the placements trend that you just outlined, Bill. We expect to place more than 150 systems or analyzers in the field this year, which is what we've guided to. So we're on track to do that. We have placed 87 systems in the first half, and we expect to place the balance of those analyzers over the next -- in Q3 and Q4. We're also on track to achieve our guidance of approximately $30 million for the year. I hope I've answered the question. But...

[William R. Quirk:]

Yes, I know. I think you did. I mean it certainly sounds like you're going to be tracking to at least the bottom end of that, but certainly such that you're probably going to be comfortably above that 150 number. Just shifting topics a little bit, just thinking about some of the commentary in the market regarding NexGen and integrating the ALL technology from a front-end standpoint into your electrochemical detection. Could you just give us a little update here, Hany, kind of where are we in development? Are there any signposts that we should be looking for as well? It sounds like AMP will probably be the next one, but I don't want to put words in your mouth.

[Hany Massarany:]

Okay. Well, thank you for the question. So as we have previously stated, our development program is continuing to progress as scheduled, and we are on track to completing development by the end of Q2 2014. So as an example, during the quarter -- during the second quarter, we developed and transferred the sample preparation and PCR chemistries for 2 of our initial assays to our integrated NexGen cartridge. And of course we'll continue to provide updates on future earnings call. And, as I mentioned, we will demonstrate an advanced prototype at the end, in the fall.

[William R. Quirk:]

Perfect. And then, Hany, last one for me is just given all the challenges across the space regarding some of the molecular reimbursement issues, can you just talk to that? You guys didn't really address that in your prepared comment, but certainly it's an issue that's garnering a lot of chatter, both around conference calls and certainly at the ACC last week.

[Hany Massarany:]

Yes, thanks, Bill. Well look, as you know, since the various MACs published there initial schedule in Q1, there have been several revisions. CMS has also recently initiated the national level rate setting process, which will final -- will publish the final rates in November and then become effective in January 2014. In parallel to CMS, we also know that the private payers are also establishing rates off of this new codes. So we understand, of course, that Medicare has delayed certain payments, while its contractors, or the MACs, are working through the rate setting process. And in general, we believe that reimbursement, sort of, is likely to be fluid in the short term, becoming more stable by year end with both CMS and private payers sort of taking a position clearly by then. We haven't seen any impact on our infectious disease business with respect to reimbursement. And we think, in general, the revisions have been moving in the right direction. But like I said, that's sort of going to be finally established at a national level later this year.

[Operator:]

Our next question comes from Brian Weinstein with William Blair.

[Brian Weinstein:]

Hany, I just wanted to clarify one thing. You've talked about the assay integration on the cartridge this quarter and you mentioned RVP, but I think in response to Bill's question, did you say you've validated 2 assays on that? I just want to clarify that.

[Hany Massarany:]

No, I mentioned that we sort of developed and transferred sample prep and PCR chemistries for 2 of our initial assays. In relation to -- look, as you know, Brian, in prior quarters, our development work concentrated on model systems demonstrating and optimizing functionality of each assay component. For example, sample prep, PCR, detection, et cetera. This quarter, we plan to achieve a very important internal milestone before the end of this third quarter by demonstrating complete sample-to-answer detection with our highly multiplexed RVP test. So this test will be performed on numerous cartridges using multiple independent standalone instruments, approximately 10, in fact. And this milestone addresses sort of the real world reproducibility of our integrated sample-to-answer cartridge and instruments, initiating a new stage of our development in which we shift our attention to optimization, reproducibility of the assay and, of course, packaging and delivering the integrated reagents into the test cartridge.

[Brian Weinstein:]

Okay. And the reason that RVP was chosen first, is that because -- you talked about your menu with the 4 products that you talked about, will RVP be the first that comes out on that? Are they all coming out at the same time? And then kind of a second question there is these are -- this is the most difficult table for you guys to do and to prove on the sample-to-answer system or would it be something like that, like a GI panel using stool?

[Hany Massarany:]

Well, we chose RVP because it is a complex panel and a complex sample type, and also because we have an IVD product as well, and we felt that this would be appropriate to work with RVP. We will launch the system with multiple panels concurrently. So we haven't really sort of said if RVP is going to be the first or second but, as I mentioned, the initial launch menu will certainly include RVP.

[Brian Weinstein:]

Okay. And then last thing for me is you cracked the door a little bit on 2014 and you talked about very little revenue contribution from your largest customer in '14. Is there any other way that you guys want to characterize 2014, in general? And how we may want to be thinking about growth as we head into next year?

[Hany Massarany:]

Yes. I think what we wanted to do, Brian, is to sort of give visibility and transparency to our base business, independent of our largest pharmacogenetics customer. It's obviously too early for us to be guiding on 2014 right now. But we wanted to sort of make sure that you have the information to understand the growth of our underlying base business, independent of NMTC.

[Richard B. Slansky:]

Yes. And, Brian, I'll just add that I know I threw out a lot of numbers earlier, but part of that was to try and give a little bit more clarity between the base business and the larger pharmacogenetic customer so that you could see not only the trending in the base, but how that business was growing and how we might be able to project it out, both for the latter part of this year and the next year and then later on, the RVP seasonality. So there is a lot of information there, and if there are further questions on that, we can probably touch upon it. But there is a significant growth in the base business without that one customer. And as the numbers grow, the percentages, of course, will decline but it does show healthy growth in both place in revenue.

[Operator:]

Our next question comes from Tycho Peterson with JP Morgan.

[Tycho W. Peterson:]

Wondering if you wanted to comment on kind of the mix of the -- you had 45 net analyzers in the quarter, could you maybe just talk about how many of these we're existing customers versus new customers? And any color on competitive swap outs in your favor?

[Hany Massarany:]

Yes. Thanks, Tycho. We haven't sort of reported this split before. But it was certainly a combination of existing and new customers. I don't know what the exact split was. And, as I said, we sort of not reported that in the past. We have placed a number of systems to basically drive both RVP and HCV Genotyping tests, so they were the sort of primary drivers of our growth and placements in the quarter.

[Tycho W. Peterson:]

And then as we think about that, I guess, that utilization number you quoted off of the base business, up 41% on annuities, I mean how do you think about that tracking in the back half of the year? Can you just talk about where you see consumable pull-through going through ALL on the base business by year end?

[Richard B. Slansky:]

Sure. We continue to see good progress. It's not going to have a very large impact than we had with that one pharmacogenetic customer, so that's why we've pulled the annuity per analyzer out and just focused on it directly. But there would be continued growth both in the number of placements, as Hany mentioned earlier, to reach our 150 level or potentially more, and the revenue that goes with it. And the weighting would definitely be Q4 over Q3 with -- depending on how the flu season goes, and that would drive the RVP Reagent consumable business. But overall, we see that, that number will continue to rise. And if you look at that going backward, based on just on the base business without that pharmacogenetic customer, you'll see that it had been growing over the last recent few years. So it's moving absolutely in the right direction, and we'll continue to see some good progress there.

[Hany Massarany:]

So, as you know, Thyco, we -- depending on the severity of the flu season, we also expect the annuity per installed analyzer in the field to be more in the Q4 and then Q1 next year, which tends to be the high-volume sort of quarters with RVP testing.

[Tycho W. Peterson:]

And then on NexGen, have you said how many KOL sites you're going after initially?

[Hany Massarany:]

No, we haven't set that yet.

[Tycho W. Peterson:]

Okay. Any color you can provide?

[Hany Massarany:]

Not at this stage. We're on track, like I said, to complete the development of the system by the middle of next year. And of course, leading to that, we'll be working with customers, as appropriate, for alpha and beta sort of site testing, et cetera. And then beyond the completion of the system -- of the development of the system itself, then, of course, we will start our commercialization initially internationally and then, with successful sort of submissions to FDA, later on U.S. IVD.

[Tycho W. Peterson:]

Okay. And then just one last quick one. You had a question on ALL before, and obviously with the sale to Illumina, the assets changed hands. Could you just talk whether you've had discussions with them at this point? And it sounds like the timelines aren't really changing here, but just curious here about your dialogue with them.

[Hany Massarany:]

Yes. We've had very positive dialogues with both -- of course, we always have good dialogues with ALL. We've had dialogues that were very positive with Illumina before and after the acquisition. And they've indicated to us that they fully intend to support our partnership and help us be successful and basically drive our collaboration to achieve the sort of committed goals per our agreement. We believe, of course, that Illumina acquisition of ALL is very positive, it sort of validates the ALL electrowetting technology. And of course, Illumina brings a lot to the table in terms of resources, capabilities, facilities. It's good to have them so close to us here in San Diego, as well. So in general, all of our discussions have been positive, and we feel confident that we will be able to deliver on the objectives as defined in our partnership agreement.

[Operator:]

Our next question comes from Jeff Frelick with Canaccord.

[Jeffrey Frelick:]

You were kicking off your international campaign at the ACC last week. Did you start to say -- did you mention that you would start going forward with XT-8 ahead of NexGen in international markets.

[Hany Massarany:]

Yes, Jeff. Thanks for the question. And as you know, we've sort of been discussing and assessing this opportunity over the past few months. And certainly, we believe that in key global markets where we have already identified significant opportunities for our NexGen business, we believe that we can leverage our XT-8 system in order to establish our eSensor technology, to establish our company and to engage with key opinion leaders in those key markets, in advance of launching our NexGen system in -- later next year.

[Jeffrey Frelick:]

Is GenMark's expectation for XT-8 placements to occur internationally this year, the second half of '13? Or not until '14?

[Hany Massarany:]

No. We expect to place XT-8 systems, internationally, this year.

[Jeffrey Frelick:]

Okay. And then talking about your largest customer, I think in the previous call you had mentioned you'd expect revenues to kind of wind down toward maybe, 30% at the end of this year and then it would have changed in '14. Does that still hold true for 2014? We should see that contribution as a percentage of revenue isn't going to change?

[Hany Massarany:]

No. So as you remember, Jeff, since the last earnings call, we had another call and we sort of revised our guidance based on the events that took place and the continued uncertainty that led us to guide to our 30 million -- approximately $30 million number for this year. And we already -- so based on this, we took down our projections quite more significantly in relation to NMTC. And as you've seen from our numbers this quarter or as we stated on this call, it has already dropped down in terms of percentage of our Reagents business in Q2 to below 30%. And I've also said that we're expecting very little in the third and fourth quarter of this year and in 2014 as well.

[Jeffrey Frelick:]

And just last question, maybe just update on sales force. So where do we stand now at the headcount and what's kind of your target exiting 2013?

[Hany Massarany:]

Right now, our commercial organization -- I apologize, I don't have the exact numbers off the top of my head because we've been expanding our commercial organization in the U.S. quite rapidly, and we've added several salespeople in the field just during the quarter, actually. So I believe that we are at over 20 people at the moment. And we expect to continue to expand, as I said on previous calls. So ultimately, we need to have more than 50 people in the U.S. and we're on a path to achieve that over the next few years.

[Operator:]

[Operator Instructions] Our next question comes from Shaun Rodriguez with Cowen and Company.

[Shaun Rodriguez:]

So on the outlook for your top customer, obviously, not surprising and certainly appreciate the conservative stance there. But there are clearly a lot of moving parts there so I was hoping you could help us understand and a little greater detail what's going on. Obviously, you have the reimbursement concerns, you've talked about it for a while, and these do appear particularly tough in pharmacogenetics right now. And also the potential competitive conversion, that got a lot of attention during the quarter, and any related near-term effects related to that, like inventory de-stocking? So when it came to you, kind of rolling up your assumptions and thinking about your expectations for this customer moving forward, is the reduction more one versus the other reimbursement and just challenges with their growth versus the expectation that they are indeed moving to another platform?

[Hany Massarany:]

Yes. Thank you for that question, Shaun. It's much more the former than the latter. So we have seen the volumes reduce significantly as a result of the Medicare reimbursement issue as we discussed before. Of course, the news about the development of the LDT, of their own homebrewed sort of lab developed test panel on a different technology, added more uncertainty to our assessment of this situation and our projections. We haven't -- we're not aware that significant, or any volumes, have actually gone to that new platform, but we've certainly seen the reduction in volumes driven by the reimbursement situation.

[Shaun Rodriguez:]

Okay, that's helpful. And I guess somewhat related, you reiterated the full-year revenue guidance. It sounds like, and correct me if I'm wrong, like your expectations for that top customer are -- it's certainly more clear but also sound maybe a bit lower than when you did your guidance revision call, I guess that was a month or 2 ago. So are you actually expecting less than now, relative to when you revised guidance? And really my question there is whether your expectations for the base business have actually risen over the last couple of months?

[Hany Massarany:]

Yes. Our base business continues to perform very well, Shaun, as you've heard from Richard. I mean whichever way you look at it, without our largest customer, so excluding our largest pharmacogenetics customer, we've grown 145% in the second quarter, this is quarter-on-quarter, on the same quarter last year, and 182% in the first half, so first half on first half.

[Richard B. Slansky:]

Yes. Shaun, maybe I can just add a little bit to that. We talked about total revenues in the base business last year being about $8.8 million, and then during the first half of last year, in 2012, our base business generated $2.9 million of revenues, of which $1.3 million were in the first quarter and $1.6 million were in the second quarter. If you compare that now to the base business that we're generating this year, we generated $8.2 million and basically all -- that exceeded, or almost exceeded, the amount in 2012. So of the amount, of the $8.2 million we generated this year, $4.3 million came in the first quarter, which represented a 225% growth. And then the rest of it came in the second quarter. So we're consistently adding to our growth trajectory on the base business, and we've generated $3.8 million of revenue in the second quarter, that was 145% growth quarter-over-quarter from the prior year. And so we're continuing to see substantial increases. So shortfalls in the larger pharmacogenetic customer could potentially be made up by the base business that we're seeing from all of our other customers and the utilization of our installed base.

[Shaun Rodriguez:]

That's really helpful, Richard. And just one last one, HCV Genotyping. You've pointed it out for the last couple of quarters as the key driver of placements. Could you just talk about kind of utilization trends you're seeing for the initial customers on the HCV direct product? And was there a meaningful ramp in related consumables revenue in the quarter?

[Hany Massarany:]

Yes. So we've had -- as you know, we launched our HCV Genotyping direct test earlier this year. And this is a test that provides basically better subtyping, much more specific sort of subtyping at the 1A, 1B levels compared to our first panel that we launched last year. And also, direct from serum and plasma, as opposed to the first product, which sort of started with the Roche amplicon from the viral load test. And we've seen good adoption and we've had a good bump in the quarter, for sure, as a result of HCV Genotyping and we have a very nice funnel that we expect to continue to place systems and grow that business over the next several quarters.

[Operator:]

Our next question comes from Nicholas Jansen with Raymond James.

[Nicholas Jansen:]

A lot of my questions have been answered, but maybe one more for you Richard, in terms of kind of back half of the year expense assumptions with all the increase in kind of R&D expected. Maybe help frame the size of kind of the expense ramp that we should expect as you guys do more detailed work on NexGen.

[Richard B. Slansky:]

Yes. That's great, Shaun -- or Nick, thanks. First of all, our expenses have been escalating, mainly on the R&D side, as I mentioned in my remarks. That will probably continue for a little bit as we get closer to an actual unit and some of the clinical trial work that we've been investing in and we'll be investing in. We've made a consistent theme of saying that we're going to be investing both in our commercial organization and our R&D organization. So our cost structures in those 2 will be consistent regardless of the revenue line, and I think that's what you're alluding to here. So we will see an investment in the fourth, going toward the end of the year and early next year, as we drive towards completion of our platform. And at that point, there probably will be a slight decline as we just focus on the assay menu and the expansion of the menu development. But between now and mid-year next year, there will be a ramp up in R&D spending.

[Nicholas Jansen:]

And maybe how that compares to your prior comments surrounding kind of the balance sheet with regards to your cash position? Any kind of updated thoughts with regards to that timing?

[Richard B. Slansky:]

Specifically, what do you mean there? When it relates to our balance sheet position?

[Nicholas Jansen:]

Oh, your cash position. I think you've stated before that you think you have enough cash on the balance sheet to kind of get you through kind of launch. And I just wanted to kind of get your thoughts of any changes there given what we've seen with regard to the reduction in revenue from your largest pharmacogenetic customer?

[Richard B. Slansky:]

Yes. No, fair enough, fair enough, good question, Nick. The company still have enough cash on hand for at least the next 12 months and through the completion of the development of our NexGen system. We've been looking at this and we continue to look at this. I think you're aware that as a matter of good business practice, to provide us with maximum flexibility, we did file a shelf, but at this point, we have sufficient cash to get up to the end of the development cycle of NexGen and we'll continue to look at the situation accordingly.

[Operator:]

And I'm not showing any further questions at this time. I'd like to turn the conference back over to our host for closing remarks.

[Hany Massarany:]

All right. Well thank you very much. Thanks, everyone. And on behalf of our board and employees, I want to take this opportunity to thank you very much for your ongoing support. I look forward to reporting our progress on a quarterly basis going forward. Also, I hope to see many of you at the end 2013 annual meeting in November, this year it's in Phoenix, where we plan to demonstrate the NexGen instrument and assay cartridge. So thanks, again, for your time this afternoon. Bye-bye.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.