GenMark Diagnostics' (GNMK) CEO Hany Massarany on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: GenMark Diagnostics, (GNMK)

GenMark Diagnostics (NASDAQ:GNMK)

Q1 2014 Earnings Call

May 06, 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

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Matthew Larew

Jeffrey Frelick - Canaccord Genuity, Research Division

Tejas Savant - JP Morgan Chase & Co, Research Division

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

Brad Mas - Needham & Company, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the GenMark Diagnostics First Quarter Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference call, Ms. Teresa White. You may begin, ma'am.

Teresa White

Thanks, Kevin, and thank you, all, very much for joining us today. Before we begin, I would like to inform you that certain statements made by GenMark during the course of this call may constitute forward-looking statements. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are forward-looking statements.

For example, statements concerning our 2014 financial guidance, the development and commercialization of new products, plans and objectives of management and market trends are all forward-looking statements. We believe these statements are based on reasonable assumptions. However, these statements are not guarantees of performance and involve known and unknown risks and uncertainties that may cause the actual results to be materially different from any future results expressed or implied by such statements.

Important factors which could cause actual results to differ materially from those in these forward-looking statements are detailed in GenMark's 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.

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 CFO, 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, I will provide an overview of our performance in the first quarter. Then Richard will review our operating results for the same quarter. And then finally, I will update you on the progress of our NexGen program and 2014 milestones. So before I hand the call over to Richard, let me review our Q1 2014 performance.

Our U.S. commercial team delivered excellent results in the first quarter. Excluding NMTC, we grew our base business by 84% compared with the first quarter of 2013. We also placed 31 net new XT-8 analyzers in the quarter, which expanded our installed base to 444. Our FDA-cleared RVP test, and research use only HCV Genotyping Tests were the main drivers of our XT-8 placements and revenue growth.

Our annuity per analyzer was $72,000 in the quarter. This is compared to an annuity per analyzer from our base business of $64,000 in Q4 of 2013 and 62,000 in Q1 of 2013.

As you know from our last call, this year, we expect to expand our installed base of XT-8 analyzers by 125, and now after a strong start to 2014, we expect to generate at least $25 million of revenue.

Also, as communicated previously, we successfully introduced our XT-8 System to certain strategic accounts in Europe, in advance of this year's anticipated launch of our NexGen system.

So in addition to placing 31 new XT-8 analyzers in the U.S. market, this year, we also placed 12 XT-8 analyzers across several European key opinion leader sites. Based on progress with these KOLs, we expect to achieve a small number of NexGen placements in Europe later this year.

Finally, we have made excellent progress toward the introduction of our NexGen sample-to-answer system, and we are very pleased with both the platform and assay performance results that we've achieved so far.

We remain confident we will bring to market the most competitively differentiated multiplex molecular sample-to-answer system, and we expect to complete its development this summer, 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-Q shortly after this call.

Today, we reported total revenues of $7.9 million for the first quarter of 2014. This represented a decrease of 29% or $3.2 million compared with the first quarter of 2013, where revenues were $11.1 million, $6.8 million of which was attributable to NMTC. Therefore, our base business or our business without NMTC grew from $4.3 million in Q1 of 2013 to $7.9 million in Q1 of 2014, representing an 84% increase, as Hany indicated. Reagent revenue during the current quarter from the company's base business increased by 85% over the prior year period.

Our gross profit for the first quarter was $4.2 million or 53% of revenue versus $6.1 million or 55% of revenue in the same quarter last year. Our Q1 2014 gross profit reflected a onetime vendor purchase price and manufacturing variance credit, which represented about 3 margin points, plus higher-than-expected absorption due to the higher revenue and related production volumes, which contributed another 3 margin points to the current quarter.

Our overall operating expenses of $13.1 million for the first quarter of 2014 increased by $2.8 million compared with Q1 of last year, mainly due to an increase of $1.9 million in research and development expenses related to our NexGen platform and assay development activities; an increase of $600,000 in sales and marketing expenses related to our European sales force buildup and continued expansion of our U.S. sales force, ahead of the launch of our NexGen system; and an increase of $300,000 in general and administrative expenses, primarily related to personnel costs.

We reported a loss of $0.21 per share for the quarter, with weighted average shares outstanding of approximately $41 million compared with a loss of $0.13 per share for the same quarter of 2013 when our weighted average shares were approximately $32 million.

We ended the quarter with approximately $98 million in cash and investments. We plan to continue utilizing our cash balances, primarily to invest in our NexGen product and menu development, as well as to expand our commercial organization. Based on our current business plan, we anticipate that our cash balances will be sufficient to bridge us to a positive cash flow position.

Our DSOs at March 31, 2014 were 32 days, our DSIs at March 31, 2014 were 103 days 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 U.S. and internationally.

In our March call, we projected our 2014 revenues to be approximately $25 million or a 30% increase over our base business performance in 2013. As Hany indicated earlier, after a good start to the year, we believe we will at least achieve this number.

We are also on track to accomplish our gross margin guidance of 44% and net new XT-8 placement target of 125, which would bring our total XT-8 installed base to 538 by the end of 2014.

Also, on our last call, we announced that our continued investment in both domestic and international commercial organizations, as well as our research and development efforts, would drive our SG&A expenses to the mid-$20 million level and our R&D expenses to the mid-$30 million level in 2014. And we remain comfortable with these numbers.

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 progress and expectations toward the development and launch of the NexGen system.

We recently participated in the Clinical Virology Symposium held in Daytona Beach, Florida. And at this event, we hosted a workshop and provided demonstrations of our prototype NexGen system. The workshop and NexGen demonstrations were very well attended by both current and future customers, and we're continuing to experience strong customer interest in our NexGen system and related test menu.

As we've discussed on prior calls, our R&D organization has been exclusively focused on the 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, and enabled by proprietary digital microfluidics to allow the detection of multiple molecular targets on a single test cartridge.

Our R&D organization and partners are in the final stages of development and integration of the NexGen cartridge instrument software and initial menu of assays.

Our progress and test performance, as measured against our rigorous product development plan has been excellent. As an example, we completed the design and began fabricating prototype instruments and full [ph] consumables.

In addition, we've optimized our blood culture tests, both gram-positive and gram-negative, to achieve the required limits of detection. And we've begun assay integration of our Respiratory Panel.

One important area of progress in the first quarter was related to the packaging and stabilization of assay reagents on the NexGen cartridge. We have initiated accelerated and real-time stability studies, with the aim of validating long shelf life and room temperature storage to address customer needs and minimize shipping costs.

We're very pleased with the results we've accomplished so far, and I look forward to updating you soon on the completion of the NexGen development and the first phase of its commercialization in Europe.

In this regard, and to support our intended European launch in the fourth quarter of this year, we intend to demonstrate an advanced prototype of the NexGen system in our exhibition booth at the ECCMID conference next week in Barcelona, Spain.

As mentioned previously, we're also planning an extensive test menu for the NexGen platform, with an initial focus on infectious disease. So in addition to the respiratory panel, as well as gram-positive and gram-negative Sepsis panels, our initial NexGen assay menu will include Gastrointestinal Infection panel, HCV Genotyping and a CNS panel.

Furthermore, I'm pleased to announce that we have begun the design and development of a seventh assay for the NexGen platform. This assay is being designed to detect and differentiate a broad range of pathogens associated with invasive fungal infections in critically ill patients.

The rate of invasive fungal infections is increasing, and delays in appropriate diagnosis and therapy initiation increases the length of hospital stay and is associated with increased mortality rates and healthcare costs.

A NexGen panel addressing invasive fungal infections and providing rapid sample-to-answer performance will address a critical unmet clinical need, and we're very pleased to have begun work on this assay.

So in conclusion, Q1 was another quarter of strong performance for our company, and we're very optimistic about the remainder of this year and beyond. Our North American commercial team has again delivered strong results, 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.

In addition, our sales force is laying the foundation for NexGen, with multiple high-performing assays enabled by our eSensor technology and, at the same time, building excellent customer relationships.

Preparing for the European launch of our NexGen system later this year is progressing well. And in the future, we believe that the x U.S. markets will make a significant contribution to our business. 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, as we drive to complete the NexGen platform development and assay menu during the remainder of this year and beyond. With continued focus on organizational talent, infrastructure and processes, we're well and truly preparing for significant business growth.

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

Question-and-Answer Session

Operator

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

Shaun Rodriguez - Cowen and Company, LLC, Research Division

So just another question on the o U.S. launch. It sounds like KOL placements of NexGen by year-end. But just to be clear, does that mean a broad commercial launch also in Q4? Or is that something that we're really thinking about more to start 2015?

Hany Massarany

Thanks for the question, Shaun. As we indicated earlier, the launch in Europe will be late this year, and certainly, it will not be a very broad launch. So we are going to begin with key opinion leaders and sort of roll out the system into next year as we sort of expand our commercial efforts in Europe.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Okay. That's helpful. And then you mentioned you accomplished assay integration on RVP, I think, in the prepared remarks, and I think last quarter, you mentioned you accomplished this on the gram-positive and negative Sepsis panels. But has this happened for GI and HCV Genotyping? And maybe how far away is the CNS panel from full integration?

Hany Massarany

You want it all at once, Shaun. So we're making -- yes, we're not there yet, of course, with every panel, but we're making very good progress along those lines. So we expect that soon after launch, we'll be expanding our menu of panels. And certainly, over the next 12 months or so, we expect to launch 6-plus panels on the NexGen system.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Okay. Got it. And then just the last one. I think last quarter, you talked about winning some big RVP accounts. Can you talk about whether those were on line to be significant contributors in the quarter, whether RVP tracked ahead of your expectations, given what I think is characterized as a pretty light season for flu incidents? And also, to be clear, the international XT-8 customers that you placed to just get them going with RVP, those aren't revenue-generating customers, right?

Hany Massarany

Yes, that's correct. So we're not generating revenues in Europe yet. And I will say that the flu season was consistent with our expectations, as you said, nothing too severe, so it was a moderate season. But frankly, we secured more customers and gained more market share than we expected. So certainly, RVP was a good contributor to our growth in Q1.

Operator

Our next question comes from Matt Larew with William Blair.

Matthew Larew

I'm sitting in for Brian today. Just want to follow up on sort of the o U.S. panels with some questions about the U.S. timeline here in terms of trials for systems and assays, how to think about that timeline. And then because you will have more assays fully integrated at U.S. launch, can we think about a U.S. menu that potentially has multiple items when it comes on board?

Hany Massarany

Thanks for the question, Matt. So as we indicated before, and this is not changing, our studies, our clinical studies, will begin in the second half of this year. Our expectation is -- I'm not sure if you guys heard all this. We have some interference here. But, anyway, I'm not going to be distracted by it. So we continue to believe that we'll be ready for FDA submission for U.S. IVD in the first half of next year and for U.S. IVD launch in the second half of next year. So you're right that, by then, we will have multiple panels developed on system, but the limiting factor will really be the regulatory part and the submission process as opposed to the availability of panels fully developed on the system.

Matthew Larew

Okay, Hany. That's helpful. And then just thinking about the placements here this year and recognizing that, typically, the first quarter has been a little lighter. With NexGen coming on board, o U.S. in the second half year and then more broadly in the first part of '15, how confident are you that, that 125 is still a good number, recognizing that maybe -- or if there is any cannibalization here on the XT-8 and the NexGen?

Hany Massarany

Well, thanks. No, we're not expecting that we want to achieve this number. We are on track to achieve 125 XT-8 placements this year. In terms of NexGen, we don't have anything, really, for NexGen in our numbers this year. Very, very little.

Operator

Our next question comes from Jeff Frelick with Canaccord.

Jeffrey Frelick - Canaccord Genuity, Research Division

Hany, can you just maybe walk us through the exercises that you undertake in choosing new assays? Do you go through some customer focus groups? Just what's the process there?

Hany Massarany

Okay. Thanks very much, Jeff. Yes, so we do a lot of voice of customer. We -- so, for example, at the CVS meeting that just happened a few weeks ago, we met with a bunch of customers, and we engaged with them to better understand their needs in terms of clinical utility but also workflow and testing efficiency. We'll be doing the same in Europe and every other meeting that we participate in this year, of course, to continue to validate our assumptions and to also define the next wave of panels. We monitor the literature. We, of course, look at what competitors are doing. So there's a pretty robust and involved process by which we determine what should be in the panel in terms of the pathogens, in the case of infectious disease, which you know is our focus for the foreseeable future. But we also get down to the level of what sort of the limits of detection, sensitivity, specificity requirements, and we do that through our marketing and clinical sort of organizations.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then with respect to the European KOLs that took some XT-8s in, were they performing some testing? Did you give them some assays? And just kind of what were you observing or trying to get out in this quarter? Or are we still kind of waiting to see some outcome stuff out of these guys in the next quarter or 2?

Hany Massarany

Yes. So we have, like I said, a number of systems, 12 systems placed across multiple KOLs in Europe. Their experience has been very positive with the platform, with the XT-8, as well as with the RVP test. So we limited our interactions to RVP. As you know, the objective was really to introduce our company and our technology, our eSensor technology, in preparation for the NexGen launch. So we're not really looking to generate XT-8 revenue out of those sites. We have received very positive feedback. In fact, we do have a session scheduled at ECCMID. It's a workshop where 3 of those KOLs will be presenting and reviewing their experiences with others. And it has been very encouraging. So based on those interactions, we feel very optimistic about the introduction of NexGen to the European market and the initial launch later this year.

Jeffrey Frelick - Canaccord Genuity, Research Division

And are these large hospital laboratories familiar with molecular, in general?

Hany Massarany

Yes, absolutely.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then last question from me. The RVP and Sepsis clinical trials, I know you've mentioned they'll begin second half of this year. How large will the studies need to be?

Hany Massarany

Oh, I think they will be large enough to comply with the requirements based on our -- the claims that we want to make for intended use and clinical utility. Jeff, we had already begun to collect samples. We submitted 3 subs to FDA in relation to those panels. And so we have a pretty good understanding of what has to be accomplished in terms of the filings, and we're on track to do that.

Operator

Our next question comes from Tycho Peterson with JPMorgan.

Tejas Savant - JP Morgan Chase & Co, Research Division

Guys, this is Tejas in for Tycho. Just wanted to get your thoughts on the pacing of R&D and SG&A through the year. I mean, should we expect sort of sequential increases so that you get to your mid-20s and mid-30s range? And then for next year, will it be sort of incrementally higher as NexGen rolls out?

Richard B. Slansky

Okay, great question. I think what you'll see, and many of the analysts have this out there, is that the increase in R&D will be in the earlier -- as we increase over the first 2 quarters of the year, you'll see it going up a little bit more for the clinical trial work that we're going to be doing in the second half of the year. So somewhat incremental from quarter to quarter on an R&D basis and sequential for the 4 quarters on an SG&A basis. Next year, it will flatten out, to some extent, as we transition from more of a development effort to more of a sustaining effort until we develop our next system. So I think that, that will be a reasonable approach if you model it that way.

Tejas Savant - JP Morgan Chase & Co, Research Division

Okay. And then in terms of the ramp of headcount for your x U.S. sales force, you said earlier that it was expected to be in the teens this year and then increase from there. Is that still the expectation?

Hany Massarany

Yes, I think so. We already have a number of people in our European commercial organizations, and we intend to continue to expand. Of course, we'll pace it with the launch activities. I said previously, that will be in the low-teens, so we'll -- I think we'll be on track to do that. And then over time, we'll build ourselves and commercial organization to address the key markets in Europe directly. We will also, of course, have distributor relationships for other markets in Europe as well.

Richard B. Slansky

And those individuals are almost exclusively sales and sales support. So we've got our molecular application specialists that will support the direct sales effort, but all of the rest of the work will be done from an administrative basis, either here or through a third-party logistics company.

Tejas Savant - JP Morgan Chase & Co, Research Division

Okay. And then just to wrap up here, can you give some qualitative commentary around how you think about XT-8 placements in 2015 and beyond once sort of NexGen becomes your main focus?

Hany Massarany

We're not really prepared to talk about 2015 at this stage. We'll definitely have time to do so in the future. I'll say what we said before, which is that the XT-8 will continue to be an area of focus for us since we're not replacing many of the tests. So the menu for NexGen will be different from XT-8. We will focus NexGen on infectious disease, and therefore, we expect to continue to support XT-8 and our XT-8 customers for other tests that they're using today.

Operator

Our next question comes from Nicholas Jansen with Raymond James.

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

Guys, a lot's been covered, but maybe talk a little bit about the regulatory pathway for HCV Genotyping. I assume that's the last of the 7 that would get FDA-approved. So I'm just trying to get a sense of when we should expect that test to reach the market.

Hany Massarany

Yes, it is most likely the last test to be approved in the U.S. We believe that this will be a PMA submission. So as you know, it will be more involved than the other panels, which are all 510(k) submissions. And then in Europe, it is a -- it has a different path. We need to submit to a notified body. So it's not as burdensome, if you like, or involved as a PMA submission here in the U.S. It's probably more like a 510(k). So we expect it to be cleared or released in Europe first and then later in the U.S. as a PMA.

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

And then lastly, in terms of the commercial infrastructure in the U.S., I know it's probably more of a 2015 or 2016 discussion. But how do we think about the need for more aggressive sales and marketing efforts domestically as we think about the launch of NexGen longer-term in the states?

Hany Massarany

Yes. Good question. Of course we intend to continue to invest in our commercial organization in the U.S. I've said before that we need maybe 50-plus salespeople by the time we were sort of steady state in the U.S. with NexGen. We will build that up over the next couple of years. It's not going to happen immediately. Right now, our commercial team worldwide consists of 40-plus people, about 40 people. 25 of those are in a field, and most of them are sales account executives, et cetera. And so we will be ramping that up -- that number up quite significantly over the next couple of years.

Operator

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

Brad Mas - Needham & Company, LLC, Research Division

Just first off, do you -- can you guys point out any other tests that drove growth this quarter or was it mainly from the big RVP wins?

Hany Massarany

Well, as I mentioned, it was our infectious disease tests. So it was RVP and HCV Genotyping. But, of course, being the flu season, RVP was a bigger contributor.

Brad Mas - Needham & Company, LLC, Research Division

Right. And then can you guys just describe how you guys think of the market for the fungal tests?

Hany Massarany

In terms of what? We -- as I mentioned in my statements, obviously, we think it's an important market in terms of clinical utility and sort of impact on patients, et cetera. We think, globally, it's maybe a $50 million to $60 million market, and it's an important panel to have in conjunction with the others that we're developing.

Brad Mas - Needham & Company, LLC, Research Division

Okay. And then just last from me, off the strong Q1, just curious on your thoughts about not -- I mean, I know you said it will exceed $25 million, but just wondering your thoughts about not officially raising guidance.

Hany Massarany

Sorry, I didn't quite get the question. I'm sorry. I can't hear you very well. Can you repeat that, please?

Brad Mas - Needham & Company, LLC, Research Division

Yes. Just wondering, with the strong Q1, why no change to guidance?

Hany Massarany

Well, our guidance was for the entire year. As you know, we don't guide by quarter. We're very pleased with the performance in the first quarter, and we know that we've exceeded consensus of most of the analysts. We exceeded the numbers out there. And we're on track, as I've said, at least to achieve the number that we indicated before.

Richard B. Slansky

I think if you look at the impact of RVP, both in the first quarter and then model that out to the fourth quarter, we need to try and guide you down in the middle quarters. Hany said we don't really guide by quarter, that's up to you, but we're leaving the guidance at $25 million.

Hany Massarany

So we've assumed a moderate, sort of nothing too severe for the flu season, the 2014, '15 flu season. And depending on how it goes, yes, there is a possibility that we'll do better, but that's something that we're not assuming at this stage.

Operator

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

Hany Massarany

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

Operator

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

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GenMark Diagnostics (GNMK): Q1 EPS of -$0.21 beats by $0.04. Revenue of $7.91M (-28.7% Y/Y) beats by $1.87M.