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GenMark Diagnostics, Inc. (NASDAQ:GNMK)

Business and Annual Revenue Guidance Update Conference Call

June 17, 2013 4:45 pm ET

Executives

Nancy Torok - Executive Assistant

Hany Massarany - Chief Executive Officer, President and Director

Analysts

William R. Quirk - Piper Jaffray Companies, Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Mark Massaro - Canaccord Genuity, Research Division

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to today's conference call. [Operator Instructions] As a reminder, this conference is being recorded today, Monday, June 17, 2013.

I'd now like to turn the conference over to Ms. Nancy Torok of GenMark. Please begin.

Nancy Torok

Thanks, Tyrone, 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 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

Thanks, Nancy, and thank you all for joining us this afternoon. As you know, last week, our largest customer, NMTC, issued a press release announcing a partnership in connection with the launch of their laboratory-developed, comprehensive Personalized Medicine Panel, which was built using Luminex's technology. Needless to say, that announcement has negatively affected our stock price over the last few days. Since that time, we have sought to better understand the impact, if any, that this announcement would have on our expected 2013 financial performance.

This afternoon, we issued a press release updating our 2013 revenue guidance to approximately $30 million from our original estimate of approximately $35 million. We expect the largest impact of this guidance revision to be in the second and third quarters. As we consistently communicated over the last several quarters, we have remained cautious regarding the future revenue contribution we expected to receive from the pharmacogenomics sector, including NMTC. In addition, we noted that certain sectors of our customer base, including pharmacogenomics as it relates to NMTC, were experiencing delays in receipt of reimbursements from Medicare, which have placed additional pressure on growth in these areas.

Based on the continued uncertainty regarding the Medicare reimbursement landscape and its impact on the pharmacogenomics sector, we maintained a relatively restrained outlook with respect to this segment of our customer base. We believe NMTC's recent announcement has introduced additional uncertainty regarding our ongoing partnership with them. While we have continued to receive acknowledgment from NMTC's CEO that they will honor the binding commitments they have made in our contract, we believe it is prudent at this stage to take a more conservative outlook and reduce our revenue expectations from NMTC for the remainder of the year.

Despite this, I'm happy to report that our core business continues to exceed our expectations with new customers, increasing placements of new analyzers and expanded menu utilization. We believe this strengthens our business, and even with the continuing uncertainty surrounding NMTC, we believe we are positioned to grow our revenues this year by approximately 50% over 2012. And just as importantly, we are excited about the future and the progress we have made towards the development of our NexGen sample-to-answer system, which we believe will position us for significant growth and is core to our future success as a global leader in molecular diagnostics.

With that, we will now open the call to questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from William Quirk of Piper Jaffray.

William R. Quirk - Piper Jaffray Companies, Research Division

First question for me, Hany, is given the comments that NMTC has talked to you about in terms of honoring the contract and yet the decision to conservatively take down the numbers, are we to read into that then that NMTC has been basically ordering above the contractual minimums, and so you're essentially taking the numbers down to where the contractual minimums are for the balance of the year?

Hany Massarany

Yes. Thanks for the question, Bill. We haven't actually disclosed this information before in relation to the exact minimum commitments that are specified in our contract with NMTC.

William R. Quirk - Piper Jaffray Companies, Research Division

Okay, got it. And then perhaps, Hany, second question, and I think this just probably touches on your comments regarding the biggest changes to numbers being in the second and the third quarter of this year. So is it safe to assume that the vast majority of the products, that they are running are indeed the genetic products? And I noticed that they have an RVP which, I assume, is yours as well. It looks like the majority of the testing is on the genetic side.

Hany Massarany

Yes, Bill, they're not actually using any other products from GenMark other than the pharmacogenetics panels. So they're not actually using our RVP product.

Operator

Our next question is from Brian Weinstein of William Blair.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

This is Matt in for Brian. Hany, I just want to confirm that while the revenue guidance number is coming down, the placement guidance is not coming down. Is that right?

Hany Massarany

That's right. We guided to 150 placements this year, and we're on track to achieve that number.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay. And then just one more quickly here, given the overlap with some of the targets, could you talk about when a physician might order one of your panels versus the broader Luminex panel? And then I'll hop off.

Hany Massarany

Thanks very much for the question. And at this stage, I'm not really able to answer the question, and that's why we're being prudently conservative in relation to this. So we have been told that, in fact, the newly launched lab-developed panel will be used with a different population of patients, but we don't have a very clear understanding in relation to this at this stage.

Operator

Our next question is from Shaun Rodriguez of Cowen and Company.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

So you previously said that NMTC would account for a low-30s percent of sales exiting the year and then teens exiting next year. Can you provide us an updated view of these estimates now?

Hany Massarany

Yes, thanks, Shaun. As you know, Q1 sales to NMTC generated approximately 63%, I believe, of our revenue. And we previously indicated that we expected this to significantly reduce over the next few quarters, leading to a percentage run rate in the low 30s by year end. And frankly, based on the additional uncertainty regarding NMTC, we're assuming a more precipitous reduction in our revised projection. So at this stage, we're not sort of providing more specific details in relation to this. And of course, we will continue to monitor the situation and do all we can to maintain our business and partnership with NMTC. But like I said in our revised projection, we're assuming the percentage of our sales coming from NMTC to be lower than what we had indicated before, leaving the year in the 30s.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Okay. So I know this is sort of implied by your previous comments, but to be clear here, it sounds like you're assuming an impact right away, right? This test from NMTC on the Luminex platform was made available, I think, with the press release. So it sounds that -- like you're expecting an immediate impact on your business from them, correct?

Hany Massarany

Well, we're not saying that the impact is actually caused by the launch of this panel, the lab-developed panel that they announced last week and as I've said before that there are uncertainties in relation to the pharmacogenomics sector in general. We talked about trends in reimbursement that have actually put pressure on pricing and volume and other factors as well, like validating and establishing the utility for these panels, which is something that is not unusual for an emerging sector like this to take time for this to sort of get traction and drive growth. And these are the factors that we've been talking about for several quarters now, Shaun. The recent uncertainty obviously adds to that, and based on that, we believe that it's prudent that we now revise our revenue guidance to approximately $30 million this year.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Okay. And last, another clarification question. So you just spoke about sort of broader challenges with this category's test as you have before, as well as reimbursement risks that are also related to this. But to be clear, the incremental pressures that are driving the lowered guidance are specific to NMTC, correct? Or are you also just sort of making a statement more broadly about your pharmacogenetics business?

Hany Massarany

Well, it is absolutely specific to NMTC as our largest customer, yes.

Operator

[Operator Instructions] Next question is from Jeff Frelick of Canaccord Genuity.

Mark Massaro - Canaccord Genuity, Research Division

This is Mark in for Jeff. Hany, I know that there are some recent large customers that have come on not named NMTC. And I guess, what I'm trying to get at is, can you just try to help us understand how some of these new customers can offset some of the expected loss business from NMTC?

Hany Massarany

Yes, thanks for your question, Mark. Certainly, our core business continues to be very strong and, as I've indicated previously, is exceeding our expectations in terms of growth and placements and menu utilization. And that's primarily driven by the new placements, so we continue to place 40-plus analyzers every quarter in the field. And obviously, that -- those placements generate additional revenues and, of course, in relation to RVP and HCV genotyping, which have also been growing nicely on driving much of our revenue growth. In relation to pharmacogenetics, as I said, it's an emerging area. It's an emerging sector, and we are seeing some additional customers, additional labs going to this area of testing. So we've seen more labs pursuing pharmacogenetics and buying systems and products from us to do that. But equally, we're seeing some of the uncertainties that aren't so atypical of an emerging sector. So I guess, the net of it all is the position that we're taking, which is being prudently conservative, I believe, to re-guide with $30 million in revenues for this year compared to the $35 million that we indicated earlier.

Mark Massaro - Canaccord Genuity, Research Division

And just one quick follow-up. Did I understand correctly you that you will not quantify the 30% number? You just lack visibility at this time. Did I understand that correctly?

Hany Massarany

Yes, that's correct. We believe it will be much less. But at this stage, we're -- that's all we're saying, Mark.

Mark Massaro - Canaccord Genuity, Research Division

Okay. And just to kind of piggyback off that, do you have reasonable assurance that, that number will be above 0%?

Hany Massarany

Above...

Mark Massaro - Canaccord Genuity, Research Division

Of your total.

Hany Massarany

Above what, sorry, Mark? I didn't hear you, Mark. I'm sorry.

Mark Massaro - Canaccord Genuity, Research Division

I'm sorry. Exiting the year, do you have confidence that NMTC will continue to order from you?

Hany Massarany

Well, like I said, Mark, at this stage, we're expecting the revenues that we're generating from NMTC to be a lot less than they were in the past. And we're not, at this stage, sort of quantifying that anymore.

Operator

Our next question is from Nicholas Jansen of Raymond James.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Thinking about kind of the prior gross margin guidance surrounding approximately 50%, is there any kind of updated view with regarding to gross margins, given the pressure in the pharmacogenetic area? And then also, with your large customer perhaps being a significantly lower revenue contributor going forward, any offset that you guys can pursue on the cost structure towards the -- less cash burn this year next -- as you wait for NexGen to develop?

Hany Massarany

All right. Thanks, Nick. I'll answer the first part of the question, and then I'll ask you to clarify the second, because I didn't quite hear it, but in terms of gross margin, we guided to 50% gross margins. We expect that as a result of the volume reductions that we're now conservatively sort of anticipating that the gross margin number for the year will likely be a few points lower than that. So it may be closer to 45% than 50%, and we can certainly talk about that as we get more clarity around volumes and price mix, et cetera. So that's -- we expect that in the second and third quarter, we'll see, perhaps, a bigger impact than in the fourth quarter because, of course, with the flu season and RVP coming on board and with higher volumes, but we think that the year are, overall, will likely be lower than 50% gross margin. Now what was -- can you just clarify the second part of your question, please?

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Yes. In terms of kind of your cost structure now as one of your biggest customers is kind of becoming a much more smaller piece. I don't know if you can do, from a cost perspective, to maybe be able to diminish the impacts with regards to the cash burn that you will likely see over the next couple of quarters before you -- NexGen comes into fruition?

Hany Massarany

Yes, thanks, Nick. Of course, as always, we look at -- we monitor spending very, very closely regardless of any of this. And I can tell you what will not be impacted is our investment in the NexGen development system or our expansion of our commercialization, sort of, effort, both domestic and global. So these areas will absolutely not be impacted in any way. Other areas, we always look at and sort of, as appropriate, being very prudent. We, of course, monitor spending and take every opportunity we have to reduce spending as appropriate.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

And then maybe just one more for me in terms of one of the odds, I know you guys have been having some success lately with some larger customers. What's the potential for you to gain back some more volume from these larger customers as they enter into the pharmacogenetic testing? So I guess, the question will be, how can you offset some of this NMTC kind of revenue loss?

Hany Massarany

Yes, good question, Nick. So we have a very healthy funnel of opportunities that our commercial organization is pursuing very aggressively. We're having a lot of success in the field with the XT-8 System and our current menus. The runway is significant, and we're looking to continue to add analyzers to our installed base in the field and drive annuities. And I -- look, we're being prudently conservative in relation to this uncertainty that we're now dealing with, and if we're wrong and we end up doing better than expected, then, absolutely, we'll come back and inform you of this. We will do everything possible to maintain a very good relationship with NMTC, and we'll do what we can to support NMTC, but equally, of course, we have an agreement that we will make sure that, as much as possible of course, that we manage compliance with the agreement as appropriate to the best of our interests. So that's sort of what I can say at this stage.

Operator

Thank you. This ends the Q&A portion of today's conference. I'd like to turn the call over to management for any closing remarks.

Hany Massarany

All right. Well, thank you very much, everyone. 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 seeing many of you in the near future and to reporting our progress going forward. Thank you for your time this afternoon. Bye-bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

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