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GenMark Diagnostics (NASDAQ:GNMK)

Q4 2013 Earnings Call

March 11, 2014 4:30 pm ET

Executives

Teresa White

Hany Massarany - Chief Executive Officer, President and Director

Richard B. Slansky - Chief Financial Officer and Principal Accounting Officer

Analysts

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

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Jeffrey Frelick - Canaccord Genuity, Research Division

Brad Mas

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

Operator

Good day, ladies and gentlemen, and welcome to the GenMark Diagnostics 2013 Fourth Quarter and Year-end Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. I would now like to turn the conference over to your host for today, Ms. Teresa White. Ma'am, you may begin.

Teresa White

Thanks, Mary, 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. 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 result 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. 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 website, for a reconciliation of the differences between the non-GAAP presentations 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, Teresa, and good afternoon, everyone. I'm joined on the call today by our Chief Financial Officer, Richard Slansky. And as usual, 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, Richard will walk us through our operating results for the fourth quarter and full year of 2013; then I'll provide an overview of our business progress and 2014 objectives and milestones.

Now before I hand the call over to Richard, I'd like to make some comments in relation to our 2013 performance and 2014 expectations. Our U.S. commercial team delivered excellent results in 2013. Excluding NMTC, we grew our base business by 120% compared with 2012 and expanded our installed base of XT-8 analyzers by more than 165. Our FDA-cleared RVP test and research-use-only HCV Genotyping Test were the main drivers of our XT-8 placement and revenue growth. Based on our commercial activities and plans this year, we expect to expand our installed base of XT-8 analyzers by 125 and generate approximately $25 million of revenue.

Also, as planned in 2013, our rapidly expanding international commercial team successfully introduced our XT-8 System to certain strategic accounts in Europe, in advance of this year's anticipated launch of our NexGen system. Based on advance discussions and agreements reached with several European key opinion leaders, we expect to achieve a small number of key NexGen placements in Europe later this year.

Finally, last year, our R&D organization remained totally focused on the successful completion of all key milestones towards the development of our NexGen sample-to-answer system, and we continue to be very pleased with the progress that we've achieved so far. We believe we will bring to market the most competitively differentiated multiplex molecular sample-to-answer system, and we expect to complete this development by the middle of this year and very close to our previously communicated time frame.

With that, I will now hand over the call to Richard Slansky. Richard?

Richard B. Slansky

Thank you, Hany, and good afternoon, everyone. We issued our financial results before this conference call, and we'll be filing our Form 10-K shortly after this call.

We had another strong quarter of revenue growth from our base business. We are pleased to report that for the 3 months ending December 31, 2013, our total revenue from our base business grew 58% from the same 3-month period last year. And as Hany mentioned, our base business for the 12 months ended December 31, 2013, grew 120% over last year.

Our installed base of analyzers increased by 38 net analyzers in the quarter and now stands at 413 analyzers. As of December 31, 2013, not one active customer represented 10% or more of our revenue, which we believe enhances our position and speaks to the strong adoption of our products by new labs based on the compelling value proposition of our eSensor technology.

As you no doubt recall, Natural Molecular Testing Corporation, or NMTC, represented approximately 50% of our revenue in the first half of 2013. We had no sales from NMTC in the second half of 2013. For the full year, NMTC represented only about 30% of our 2013 revenue.

Our annuity per analyzer was $64,000 in the quarter. This is compared to $48,000 in the third quarter and $62,000 in the first quarter of 2013. These numbers represent sales from only our base business, including RVP, which, as you know, is partially driven by the 'flu season.

Now with the exception of our revenue discussion, I will address both the reported GAAP results and our published non-GAAP results. Our non-GAAP results exclude the impact of certain non-recurring costs and other items which we believe are not indicative of our core business result. Again, we believe that excluding these items and the related effects from our financial results reflect operating results that are more indicative of our ongoing operating performance while improving the comparability to prior periods.

Today, we reported total revenues of $6.5 million for the fourth quarter of 2013, in line with our expectations. This represented a decrease of 32% or $3 million compared with the fourth quarter of 2012, where revenues were $9.4 million, $5.4 million of which was attributable to NMTC. Total 2013 revenues amounted to $27.4 million compared to $20.5 million in 2012 or a 34% increase.

Our gross profit for the fourth quarter was $2.9 million or 45% of revenue versus $4.7 million or 50% of revenue in the same quarter of last year. Our gross profit during 2013 was $11.5 million or 42% of revenue versus $8.8 million or 43% of revenue for 2012. However, as we previously communicated, during the current year, we recorded a onetime inventory reserve of $1.2 million related to specific inventory that we manufactured for NMTC. We also impaired $300,000 worth of manufacturing equipment related to NMTC, bringing the total 2013 NMTC-related reserve to $1.5 million.

Excluding these non-recurring charges, our non-GAAP gross margin for 2013 was 47%. We prepared reconciliation of non-GAAP financial measures as part of our financial press release, which we issued before the call, so we direct you there for additional information.

Overall operating expenses of $13.2 million for the fourth quarter of 2013 increased by $3.9 million compared with Q4 of last year, mainly due to continued investment in our U.S. sales force ahead of the launch of our NexGen system and the onetime noncash write-off of $1.6 million in previously capitalized payments in connection with the termination of a licensing agreement that we deemed not to be necessary for our business moving forward. Research and development expenses increased $2.2 million due to our continued commitment to develop our NexGen platform and its assay menu. On a non-GAAP basis, excluding the $1.6 million impairment charge, operating expenses for the quarter were $11.6 million. Our total operating expenses during 2013 amounted to $46.4 million, an increase of $15.7 million compared to last year.

Sales and marketing expenses increased $6.4 million year-over-year, mainly due to our sales force expansion and the increase in our allowance for doubtful accounts reserve of $2.7 million related to NMTC.

General and administrative expenses increased $700,000 during that period due to the non-recurring impairment charge of $1.6 million, which was partially offset by reduced fees for outside services.

Research and development expenses increased $8.5 million due to our NexGen platform and assay development effort. So on a non-GAAP basis, operating expenses for 2013 were $42 million.

We reported a loss of $0.26 per share for the quarter, with weighted average shares outstanding of approximately 41 million compared with the loss of $0.15 per share for the same quarter of 2012, when our weighted average shares outstanding were 31.8 million. In addition to the license impairment charge for the current quarter discussed above, the loss per share included a onetime adjustment of approximately $0.5 million related to the foreign currency impact of liquidating our foreign subsidiary Osmetech plc. On a non-GAAP basis, the loss per share for the quarter ended December 31, 2013, was $0.21.

Our 2013 loss was $0.95 per share, with weighted average shares outstanding of 35.3 million compared to a loss of $0.84 per share, with weighted average shares of 26.2 million for 2012. The loss per share includes the license impairment of $1.6 million, total NMTC-related adjustments of $4.2 million, a onetime realized gain of $1.4 million from the sale of preferred stock in a private company and a $0.5 million comprehensive loss related to foreign currency impact of the liquidation of our foreign subsidiary. So on a non-GAAP basis, the loss per share for the year ended December 31, 2013, was $0.82.

We ended the year with approximately $106 million in cash and investments. We plan to continue utilizing our cash balances primarily to support operations, by investing in our NexGen product and menu development, as well as expanding our commercial organization. Based on our current business plan, we anticipate that our cash balances will be more than sufficient to bridge us to a positive cash flow position.

Our DSOs at year end were 37 days, and we continue to manage our accounts receivable very closely. As part of our cash management efforts, we are now keeping a very close eye on inventory levels, and we have no long-term debt.

We continue to improve our internal control environment by building a high-quality finance organization and refining our business processes to support our anticipated growth, both in the United States and internationally. Hany will shortly review the progress that we are making across a few strategic areas that we've previously discussed as important in achieving our long-term goal.

Before he expands on the opportunity ahead, I wanted to spend a brief moment on our 2014 guidance. Our 2013 revenues were $27.4 million, of which $19.2 million came from our base business. We are projecting our 2014 revenue to be approximately $25 million or a 30% increase over our base business performance in 2013. This year, we are targeting a gross margin of 44% and projecting 125 net new XT-8 placements, bringing our total XT-8 placements installed base to 538 by the end of 2014.

Finally, our continued investment in both our domestic and international commercial organizations, as well as our research and development efforts, will drive our SG&A expenses to the mid-$20 million level and our R&D expenses to the mid-$30 million level in 2014.

With that, I'll 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 fourth quarter of 2013 and objectives for 2014. I'll update you on the growth of our current XT-8 business, as well as our progress and expectations towards the development and launch of the NexGen system. I'll also update you on our international business efforts and plans.

So starting with the current XT-8 business, as I mentioned earlier, our sales force continues to perform extremely well. As stated, Q4 annuity per analyzer was $64,000. In addition, we grew our base business by 58% in the quarter compared to the fourth quarter of 2012. Furthermore, we achieved 38 net new analyzer placements during the quarter, which put us at a total installed base of 413 analyzers in the field at the end of 2013.

Excluding NMTC, our base business grew by 120% in 2013. This strong growth was driven by continued customer adoption of our FDA-cleared Respiratory Viral Panel and our RUO HCV Genotyping Test. Since launching our FDA-cleared RVP, we've secured a significant number of very large volume customers in the U.S. market who have continued to provide excellent feedback about this product in terms of its performance and ease of use, especially versus the competition. Also, as previously communicated and supported by several studies, our HCV Genotyping Direct Test provides more comprehensive genotyping direct from blood and plasma samples with greater subtyping precision. Feedback regarding the performance of this product in terms of detection, accuracy, workflow and turnaround time has been very positive.

I'd now like to briefly update you on our international initiatives. We're making very good progress toward establishing our international business ahead of this year's anticipated launch of our NexGen system. As previously communicated, we've already developed a compressive business plan, which outlines the rollout of our international business by country, and we're now working to establish European distribution channels, including direct operations and highly qualified distributors. We've already established our European legal entity and placed several employees on the ground in Europe. Furthermore, we've placed XT-8 Systems in several KOL sites in Europe as part of our plan to introduce our technology and company in preparation for the launch of NexGen later this year.

Now let me review our progress in relation to the development of our NexGen system. As we've discussed on prior calls, our R&D organization has been exclusively focused on the ongoing development of our NexGen system and its associated test menu. 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 to enable concurrent detection of multiple molecular targets on a single test cartridge. We're designing this system with all the necessary reagents fully incorporated in self-contained test cartridges, and the required fluidic movement is enabled by proprietary digital microfluidics technology. Our R&D organization and partners are well advanced in the development and integration of our NexGen cartridge instruments software and initial menu of assays, and we're very pleased with the achievement and test performance results to date.

In relation to the platform and cartridge development, we are making excellent progress. As an example, during the fourth quarter, we achieved assay integration on the cartridge of both our gram-positive and gram-negative Sepsis panels. One important area of progress in the first -- in the fourth quarter was related to the packaging and stabilization of assay reagents on the NexGen cartridge. As you know, the NexGen cartridges are being designed for long shelf life and room temperature storage to address customer needs and to minimize shipping costs. We're very pleased with the results we've accomplished so far, and I look forward to updating you as we continue to make progress on this important program.

As mentioned previously, we're also planning an extensive test menu for the NexGen platform with an initial focus on infectious disease. In addition to the gram-positive and gram-negative Sepsis panels, our initial NexGen assay menu will also include RVP, Gastrointestinal Infection panel, or GI, and HCV Genotyping. Furthermore, as a result of our decision to increase the number of assay development teams, as I mentioned on our last call, the first new team commenced the design of a central nervous system, or CNS, infection panel at the end of the fourth quarter. Our CNS panel will address the most common pathogens associated with meningitis and encephalitis. Our NexGen panel addressing these infections of the central nervous system and providing rapid sample-to-answer performance will address a critical unmet clinical need, and we're very pleased to be working on this assay at this time.

We continue to believe that we will bring to market the most competitively differentiated multiplex molecular sample-to-answer system, and we are scheduled to complete its development mid-2014, very close to our previously communicated time frame. Also in May, we intend to demonstrate the advanced prototype NexGen system in Europe and provide customer demonstrations in our exhibition booth at the European Congress of Clinical Microbiology and Infectious Diseases in Barcelona, Spain, supporting our intended x U.S. launch in the fourth quarter of this year.

So in conclusion, as I stated in my opening remarks, 2013 was another year of good, strong execution and performance for our company, and we are very energized and optimistic about 2014 and beyond. Our commercial team has delivered very strong results in 2013. And boosted by our uniquely differentiated infectious disease panels, we believe we are poised to place more XT-8 Systems and expand market share going forward. Plans to establish our international business are progressing well. And in the future, we believe that the x U.S. market 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 several quarters, and you can expect to see our investment in R&D continue to increase as we drive to complete the NexGen planned platform development and assay menu during the remainder of this year and beyond.

And with a continued focus on organizational talent, infrastructure and processes, we are well and truly preparing for significant business growth in the future.

We will now open the call to questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Brian Weinstein from William Blair.

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

This is Matt in for Brian. Just quickly on the timing of the release, it sounds like you're a little bit further ahead maybe on the gram-positive, gram-negative, and then you'd mentioned before on the RVP. How can we think about what assays out of that initial group will be ready to go right at launch and then how will [indiscernible] rest of that?

Hany Massarany

All right, thanks for the questions. So those are the assays that are most advanced in terms of product development, and we expect that those assays will be available at or very soon after the launch of the system.

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

Okay. And then, obviously, another big step-up here in R&D. Any way to think about the pacing of that throughout the year? Is there any lumpiness to that or fairly mid-spread, and I'll jump back.

Hany Massarany

In terms of the assay development?

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

In terms of the R&D spend throughout the year.

Hany Massarany

Yes, I would say that the R&D will be -- investment will be increasing. We have a lot to do in terms of completion of development of the platform itself and the initial menu of assays. But also, as you know, we commenced all of the external clinical studies that will generate the data for both FDA submissions and CE Marking, and that's going to happen in the second half of this year. So we're expecting to ramp up R&D investment in the second half of the year.

Operator

Our next question comes from Shaun Rodriguez from Cowen and Company.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

On NexGen development, you're saying that you still expect completion midyear. Just hoping you could maybe a bit more specific on expectations for when you expect clinical trials to get going for the U.S. regulatory process. And related to that, it sounds like, based on the pacing for RVP and the Sepsis panels to be available on the system in the U.S., is it fair to assume those are trials that will be going concurrently?

Hany Massarany

Yes, thanks for the question, Shaun. So the data will be generated through the clinical studies that will be commencing in the second half of this year, soon after the completion of the development process by the middle of the year. And it's -- the same trials will generate the data that will ultimately be presented or submitted to the FDA, and a subset of this data will be used for CE Marking. So all of that is going to happen in the second half of this year. We're not expecting FDA submissions until earlier in the year next year. And we expect -- and obviously, depending on the review process with FDA, but we expect to have U.S. IVD products on market in the second half of next year.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Okay. And you talked previously about bringing on additional assay development teams, and I think in your prepared comments, you provided an update on the CNS panel coming out of one of those. But can you just provide a more specific update on how many of those teams are, for now, fully staffed and up and running and how we should really expect or think about that, the assay development portion of the R&D infrastructure, to scale over the course of this year?

Hany Massarany

Yes, thanks, Shaun. Currently, we have 6 assay development team sort of fully staffed in place, basically working on the 6 panels that we already disclosed. We have started putting together the seventh team, and we expect that team to be in place in the second quarter, essentially, now shortly. And we've maintained 7 teams working on expanding our menu, based on our roadmap for the foreseeable future.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Okay. And lastly, where do you expect the direct o U.S. sales force to be by the time you launch commercially o U.S., just in terms of direct headcount that you're expecting?

Hany Massarany

In the U.S.A.?

Shaun Rodriguez - Cowen and Company, LLC, Research Division

No, o U.S., outside the U.S.

Hany Massarany

O U.S., I'm sorry. We have a handful of people already that we have recruited. The initial focus will be in -- on Europe, both with our own direct people in the key markets in Europe, but also we'll be working with distributors in other markets like Italy, Spain and Eastern Europe, et cetera. And we expect to have something like in the teens by sort of the second half, closer to the end of this year, as we launch the CE Mark system in Europe. And then, from there, obviously, moving into next year and beyond, we'll be building on that number.

Operator

Our next question comes from Tycho Peterson from JPMorgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Hany, in your comments, you talked about in the U.S. market some larger wins tied to RVP. Can you maybe just touch on how impactful those were in the quarter? Were they competitive swap-outs? Were they new versus existing customers? Any more color on that would be helpful.

Hany Massarany

Yes, thanks for the question, Tycho. Yes, we continue to make very good progress with RVP. And the 'flu season was sort of in line with our expectation and delivered strong RVP test volumes, so we're comfortable with that. And we sort of don't give out names of specific customer names, but I would say that most of our growth comes from displacing competitive systems and mostly new customers as well. So we've been taking a lot of market share with RVP, and it's sort of consistent with our expectation.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And then if we think about the guidance you laid out for XT-8 placements this year, can you maybe just give us a sense as to how many of those would be out of Europe and, concurrently, where could utilization per box go from $64,000 this last quarter?

Richard B. Slansky

Yes, Tycho, the number that I mentioned, the 125 XT-8 placements, those are all direct placements in the United States. So we're placing and will place some boxes on a temporary basis in Europe in what we call our beachhead strategy, but that's not included in our number or guidance number. That's all domestic.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And then can you maybe talk on how you view the upgrade opportunity for those customers once you launch NexGen? And what are you communicating in terms of plans to maintain a commitment to XT-8, longer term?

Hany Massarany

Well, we certainly have a long-term commitment to XT-8 in terms of continuing to place systems and support existing customers. As you know, we're not investing in additional tests to be developed for XT-8, so we don't have expand -- we're not expanding the XT-8 test menu. But clearly, we still have runway in the U.S. in the molecular labs, and we continue to place XT-8 Systems and grow our XT-8 business in the U.S. market. In terms of upgrade parts, so since our focus with NexGen initially and for the foreseeable future will be our infectious disease, there is a small overlap between our NexGen menu and existing XT-8 menu. So really, the target market for NexGen will be different from the current XT-8 installed base; however, we do expect to see NexGen systems placed in the current molecular labs in order to bring in the menu that's going to be new on NexGen and not available on XT-8, things like GI and Sepsis panels and CNS, et cetera. In situations where we have an existing XT-8 customer who's only using the XT-8 for RVP, let's say, we will be providing -- if it makes sense and if it's what's appropriate, then we are providing upgrade parts to our NexGen system from existing XT-8 users. But like I said, so most of the menu on XT-8 will not be developed initially on the NexGen system, so we're not expecting this to be a big issue in the near term.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And then last one maybe for Richard on -- as we think about inventory build into the launch, I mean, you mentioned managing your inventory fairly tightly, but can you just talk about how we should think about inventory levels for the next couple of quarters?

Richard B. Slansky

Well, I think the inventory levels for the next couple of quarters would be similar to what we've been realizing. We're still focused very strongly on XT-8. Any of the advanced supplies that we're buying that relate to NexGen won't hit inventory until we have a commercialized product. So I don't think you'd see the inventories move substantially northward in this year at all.

Operator

Our next question comes from Jeff Frelick from Canaccord.

Jeffrey Frelick - Canaccord Genuity, Research Division

The XT-8 you're placing in the KOLs in Europe, which assays are they performing?

Hany Massarany

We're placing XT-8s with RVP at this stage.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And given the -- you mentioned there was a solid contribution from RVP in this quarter, are you seeing that continued strength into Q1?

Hany Massarany

Well, it's in line with our expectations. So while we continue to see demand across our customer base in the first quarter, we believe that the season has peaked, and it's slowing down sort of as we move into March.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then the -- in this current quarter up, you gave it early, I might have missed it, was there a mix between purchases and reagent rentals with the 38 instruments?

Hany Massarany

We actually didn't mention it, but of the 38 placements in the quarter, we sold 10.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And just remind me, Hany, last question, U.S. sales force headcount, where do you stand today?

Hany Massarany

So we have about 25 people in the field. That includes account executives, it includes technical support people and a couple of the managers, so that's just sort of a mix of different roles but all in the field, approximately 25.

Operator

Our next question comes from Brad Mas from Needham & Company.

Brad Mas

This is Brad filling in for Mike. First off, are there any plans to offer tests for hospital-acquired infections like MRSA or C. diff on NexGen?

Hany Massarany

Well, this isn't something that we have disclosed yet. So certainly, we have interest in some of these larger volume and, perhaps, simpler panels. But at this stage, we're leading with the true multiplex panels that the -- the 6 that we've disclosed so far.

Brad Mas

Okay. And then going to Europe, can you try to describe probably the market there either in terms of labs or overall dollars?

Hany Massarany

Yes, we are -- in relation to XT-8, we're not really launching XT-8 in Europe per se. We are leveraging the XT-8 with a certain number of key opinion leaders across different countries in order to establish our technology, our company, in preparation for the NexGen launch late this year in Europe. And we'll certainly update and provide more details in relation to the European opportunity in due course as we get closer to that date.

Brad Mas

Okay. And then last one, when NexGen is launched, how quickly can you guys ramp production of the analyzers and cartridges?

Hany Massarany

Well, we're planning to be able to ramp pretty quickly and certainly be able to meet the demands. And again, as we proceed here and sort of get closer to launch, we'll be able to provide more specific information in relation to this.

Operator

Our next question comes from Nick Jansen from Raymond James.

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

Two quick ones for me. In terms of the expectations for NexGen revenue contribution for '14, is there anything built into your $25 million guidance for '14 formulation. Just given your timing, I would assume there's probably not much, but I just wanted to confirm that.

Richard B. Slansky

Yes, just very, very, very little, Nick. We'll look at it toward the end of the year but very little is built into our guidance.

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

Okay, that's helpful. And then thinking about -- I know you guys don't want to give too further out on guidance, but thinking about kind of 2015 with regards to NexGen starting to build, how should we think about the XT-8 placement dynamics in -- 125 is expected for 2014. I know that's a deceleration for '13. So how should we think about kind of longer term as we build out our outyear numbers in terms of kind of the potential for XT-8 to continue to grow in terms of unit volume in '15 and beyond?

Hany Massarany

Yes, Nick, it's a good question but a little bit too early to talk about 2015 at this stage. We'll be continuing to place XT-8 Systems through the first half of 2015, and obviously, our focus will shift more and more to the NexGen as we get closer to launching the NexGen system U.S. IVD in the second half of '15. So over time, we will be shifting our focus to prepare the U.S. market for the U.S. IVD launch in the second half of next year. And obviously, once we bring the system to market in the U.S., as you can expect, our focus will be very much on NexGen as opposed to XT-8.

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

And maybe just lastly, in terms of the R&D expectations for '14, and I think you'll probably continue that same level or even a little more into kind of '15, how should we think about, eventually, getting some leverage on the R&D line? When should we think about that either leveling off or maybe coming down a little bit as the costs associated with the trials to get both systems cleared in '14 and '15, how should we just think about the ultimate leverage on the R&D line?

Hany Massarany

Yes, that's also a good question. So, again, too early to talk about future years beyond this year, but this is a big year of investment for us in relation to NexGen because we're completing the development of the platform itself, plus we have 6 to 7 panels going all at once in terms of development, as well as clinical studies, et cetera. So I think until we start the next NexGen platform, there's going to be a decline in terms of R&D investment in the future, continued focus, of course, on assay development and sort of driving the roadmap there. And then, of course, as a percentage of sale, that -- of revenues, that's going to, obviously, also be declining as we grow our revenues. But that's just sort of the -- that's what I can say at this stage, Nick.

Operator

I show no further questions at this time and would like to turn the conference back to management for closing remarks.

Hany Massarany

All right. Well, thank you very much, Mary, and thanks, everyone. Again, on behalf of our Board of Directors and employees, I want to take this opportunity to thank you very much for your ongoing support. I look forward to reporting on progress on a quarterly basis going forward. So thanks very much for your time this afternoon. Bye-bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.

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Source: GenMark Diagnostics Management Discusses Q4 2013 Results - Earnings Call Transcript
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