GenMark Diagnostics' (GNMK) CEO Hany Massarany on Q3 2017 Results - Earnings Call Transcript

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About: GenMark Diagnostics, Inc. (GNMK)
by: SA Transcripts

GenMark Diagnostics, Inc. (NASDAQ:GNMK) Q3 2017 Earnings Conference Call November 2, 2017 4:30 PM ET

Executives

Hany Massarany - President and CEO

Scott Mendel - CFO

Faiz Kayyem - Founder and SVP, Research and Development

Johnny Ek - VP Finance and Accounting, Corporate Controller

Analysts

Ben Andrew - William Blair

Sung Ji Nam - BTIG

Mike Matson - Needham & Company

Doug Schenkel - Cowen & Company

Anne Edelstein - Bank of America Merrill Lynch

Mark Massaro - Canaccord Genuity

Andrew Cooper - Raymond James

Operator

Good afternoon, ladies and gentlemen, and welcome to today’s Conference Call to discuss GenMark Diagnostics Third Quarter 2017 Financial Results. My name is Danielle and I will be your operator on this call. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions]. Please note that this call is being recorded today, Thursday, November 2, 2017 at 1.30 PM Pacific Time. It will be available on the Investors section of GenMark’s Web site at www.genmarkdx.com.

I would now like to turn the meeting over to Johnny Ek from GenMark. Please go ahead.

Johnny Ek

Thanks, Danielle, 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 2017 financial guidance, the development, regulatory clearance, commercialization and features 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

Thank you, Johnny, and good afternoon and thank you all for joining us. I’m joined on the call today by our CFO, Scott Mendel; as well as our Founder and Head of R&D, Dr. Faiz Kayyem.

First, I will provide an overview of our third quarter 2017 results, including progress on our ePlex program. Scott will then walk us through financial results for the quarter. And finally, Faiz will provide more specific details regarding ePlex performance and menu. We’ll then open the call for your questions.

Third quarter results demonstrated strong progress toward achieving the key initiatives that we believe will accelerate our long-term growth and position us for continued success in the global multiplex molecular diagnostics market, which we believe is still less than 20% penetrated.

I will talk in more detail about our accomplishments and positioning during the call today. But first, I would like to start by summarizing our third quarter results.

Revenues in the third quarter were $11.6 million, an increase of 7.3% compared with the third quarter of 2016. Our performance was highlighted by strong placements of our ePlex analyzers.

Our global funnel of ePlex opportunities continues to strengthen and customer feedback remains very positive confirming the high quality of ePlex results as well as the ease of use of the platform, its intuitive user interface and comprehensive reporting capabilities compared to available alternatives.

In the third quarter, we placed 65 analyzers in end-user labs in the U.S. and in multiple European countries and we finished the quarter with an installed base of 147 ePlex analyzers. We expect to end the year with an installed base of 185 to 200 ePlex analyzers.

We’ve gained valuable insights through our early commercialization efforts of ePlex in both Europe and the United States, and I’d like to take the new few minutes to provide some additional color on the dynamics we’re seeing in the field today, which have impacted our third quarter results and that we’ve taken into account in our revenue and gross margin guidance for the remainder of 2017.

As many of you know, the acquisition process for a diagnostic system can be complex and lengthy. Our process typically starts with an initial agreement to install an ePlex system at a customer site followed by a period of evaluation and validation, which ultimately leads to a formal agreement for the implementation of ePlex in routine clinical use.

In the United States which has previously represented all of our business this process has historically averaged approximately 90 days. We’re experiencing some difficulties in selling ePlex into the European market as compared to our experience and expectations in the U.S. This is currently translating to a more complex and longer cycle in Europe from ePlex placement to a routine implementation and revenue generation which is largely driven by two factors.

First, while there is strong clinical and laboratory support for ePlex in Europe, the administrative approval process is taking significantly longer than expected and in some cases in excess of 180 days. As a result, many of our ePlex placements in Europe have not yet started to generate meaningful consumable revenue.

And second, due to the complexities of the European market and partially related to the administrative process, access to capital appears more constrained, which is resulting in more reagent rentals than we had anticipated. The net result is that revenue contribution from ePlex in Europe is coming in meaningfully lower than we had originally anticipated, thereby lowering our overall near-term revenue expectations for the business.

We believe that the market in Europe will continue to emerge and you can rest assure that we’re taking steps to position our company for long-term success and better returns on our investment in Europe.

Although we are experiencing headwinds in Europe, we are extremely pleased with the early adoption of ePlex in the U.S., the world’s largest market for our product and anticipate that this will help offset lower European-driven revenues as we progress into 2018.

To put this in perspective, as only one quarter on the U.S. market, ePlex placements in the U.S. represented more than 70% of our total placements in the third quarter and we expect the growth of ePlex placements in the U.S. to far exceed those in Europe for the foreseeable future.

Moreover, our experience with the sales cycle thus far in the U.S. is relatively in line with our expectations in terms of placements, capital acquisition assumptions and implementation process.

Overall, we are incredibly optimistic about our opportunity to capture market share in the molecular diagnostics market. However, we anticipate a slowdown in placements during the flu season primarily driven by certain customers’ hesitance to adopt a new technology as testing volumes peak.

Furthermore, we believe that competitive dynamics will drive an overall greater mix of reagent rentals going forward. And as a result of these factors and the headwinds we are facing in Europe, we are adjusting our 2017 revenue guidance range to $51 million to $53 million.

Moving on to our ePlex menu. As we highlighted in the second quarter, we achieved CE Mark for the complete family of ePlex bloodstream infection assays, including the blood culture identification gram-positive, gram-negative and fungal panels.

We designed these panels to offer the broadest pathogen inclusivity and drug resistance markers of any multiplex molecular solution on the market today, and as such we are highly confident they will meaningfully improve the management of this critical disease state and provide a new tool to help address the growing public health crisis and antibiotic resistance.

We are pleased with the design and performance of our blood culture ID panels. However, during the past few months we identified some opportunities to improve certain aspects of their manufacturability. We are taking the time necessary to implement these improvements before commencing our clinical studies for FDA submission.

We have also revised our approach to completing these studies and submissions and now plan to execute them on a more staggered timeline than concurrently. As a result, we now plan to commence blood culture ID clinical studies shortly with FDA submission now expected midyear 2018.

Before I turn the call over to Scott, I want to reiterate that our team remains fully committed to delivering on this amazing opportunity to provide rapid, comprehensive and actionable molecular diagnostic results to efficiently manage patient care.

Our proprietary Sample-to-Answer multiplex technology enables a uniquely differentiated panel that not only drive cost effectiveness and workflow efficiency in the laboratory, but can also be used across all care settings to help improve patient outcomes and reduce overall cost of care.

We’re energized by the positive customer feedback we continue to receive on ePlex. One of our new customers recently shared with us the positive impact ePlex is having on their institution.

The hospitals, emergency department physicians are enthusiastic about how the reduced turnaround time is helping them better manage patient flows, and our broad RP panel has already identified pathogens that would not have been detected by their prior methods.

And based on the ePlex workflow and advanced LIS capabilities, the lab is now planning to run RP testing on all three shifts. This is a perfect example of how ePlex is designed for the patient and optimized for the lab.

With that, I will now handover the call to Scott Mendel. Scott?

Scott Mendel

Thank you, Hany. Our third quarter 2017 revenue was $11.6 million, up 7.3% versus the third quarter of 2016. XT-8 accounted for the majority of the revenue during the quarter, however, ePlex revenue contributions are increasing incrementally now that we received FDA clearance.

As Hany noted, we finished the quarter with 147 ePlex instruments placed at customer sites. Our XT-8 platform continues to perform well and in line with our expectations. Our placements remain steady at 627 analyzers installed at customer sites.

The annuity per XT-8 analyzer was $59,000 which is typical for the third quarter. The average annuity per XT-8 analyzer over the last four quarters was $71,000, consistent with prior results.

Although it’s early in this option cycle and we have yet to experience a flu season with ePlex in the U.S., we believe our previously communicated annuity expectation of $100,000 per ePlex analyzer remains feasible. We expect this to increase over time as we bring additional ePlex panels to market.

Third quarter gross profit was $4.2 million or 36% of revenue versus $6.5 million in the third quarter of 2016, which was 60% of revenue. Our third quarter gross margin reflects the impact of ePlex overhead costs relative to ePlex consumable volumes.

Total operating expenses were $18.9 million for the quarter, an increase of $850,000 compared to the third quarter of 2016. Sales and marketing expenses were $5.1 million, up $1.9 million versus prior year, primarily driven by an increase in employee-related expenses.

Research and development expenses were $10.2 million, a decrease of $1.4 million reflecting reduced ePlex instrument development expenses partially offset by an increase in cost for developing additional panels.

And finally, general and administrative expenses were $3.6 million for the third quarter, an increase of $300,000 versus the prior year period, primarily driven by employee-related costs.

During the third quarter, we recorded $1 million of interest expense related to our debt facility. Our net loss per share for the third quarter was $0.28 with weighted average shares outstanding of approximately $54.7 million. Net loss per share in the same quarter of 2016 was $0.27 when our weighted average shares outstanding were approximately $44.4 million.

Moving on to the balance sheet, we ended the quarter with $86.9 million in cash and investments. We are focused on minimizing working capital needs by closely managing our accounts receivable and inventory balances. When compared to second quarter 2017, our accounts receivable balance increased modestly to $7.8 million and our inventory balance was flat.

Turning to guidance for 2017, based on a longer-than-anticipated cycle time for European ePlex placements to generate revenue, coupled with our expectation for an overall higher mix of reagent rental placements, we are revising the range of our 2017 revenue guidance to $51 million to $53 million.

Gross margin for 2017 is now expected to be in the range of 38% to 40% reflecting our revenue and volume estimates for the remainder of the year. And as Hany noted, we expect to finish this year with global ePlex placements in the range of 185 to 200 analyzers.

Now, I’ll turn the call over to Faiz to provide additional details regarding ePlex.

Faiz Kayyem

Thank you, Scott. As you know, we received clearance from the FDA in June to market our ePlex instrument and respiratory pathogen panel in the U.S. The ePlex instrument features True Sample-to-Answer capabilities, fast order-to-report workflow and scalable random access functionality that optimize performance for the lab.

The RP panel addresses upper respiratory infections targeting more than 20 viruses and bacteria in an easy-to-use assay and we are now focused on driving adoption of our ePlex RP panel with this important clinical indication as the 2017-'18 flu season begins.

Additionally, we’ve increased our clinical research activity and have presented several peer reviewed manuscripts and posters this year on the ePlex RP assay. This includes reporting of our RP clinical study results that are currently undergoing peer review for publication later this year in a well regarded microbiology journal.

As Hany mentioned, in addition to our focus on commercialization of the ePlex system and RF assay, we’re taking some time to improve the manufacturability of our blood culture ID family of tests before initiating clinical studies in support of U.S. FDA submission.

For example, we’ve modified the assay software to improve manufacturing tolerances and robustness. These modifications have no impact on product performance but do improve overall manufacturing yield and reliability. These software modifications are complete and have been rolled into all three blood culture tests, as have improvements to the manufacturing processes of the BCID cartridges.

While making these changes, we took the opportunity to implement a few product enhancements that improve the unique clinical value of the ePlex BCID family. These changes are being rolled into both the CE IVD products and the U.S. products that are going through the clinical and regulatory process leading to FDA submission by midyear 2018.

Meanwhile, several sites in Europe have initiated early access programs with the BCID panels. These sites are generating real world data that highlights the unique clinical utility and laboratory benefits of the ePlex BCID solutions.

We’re delighted to see these sites realize many of the benefits we designed into the BCID family of tests, including faster time to ID and resistance indication and also the potential for earlier action involving appropriate antibiotic treatment or de-escalation, as well as detection of some organisms missed by standard of care that would have resulted in changes to patient management.

We and our early access customers are also very pleased with the asset performance in the field as it closely mirrors our internal data generated for the CE IVD registration. We also continue to make good progress with the antimicrobial stewardship research initiative we announced earlier this year and have active research projects underway to demonstrate the clinical utility of the BCID assays in supporting more appropriate use of antibiotic therapy. We expect to highlight these early access experiences with several posters and manuscripts at major conferences later this year and early next year.

I’m also pleased to report on some early progress with the ePlex gastrointestinal pathogen panel. We’ve developed assays for over 30 targets and controls on the ePlex system demonstrating ePlex’s utility with this most challenging sample type on a highly multiplex family. We’re very pleased with the performance of the targets in early studies and continue to optimize assay sensitivity and specificity on the ePlex cartridge.

The GI panel will allow users to select from a small set of reporting options. A user configurable software feature designed into the GI multiplex panel to assist laboratories with managing physician preferences and hospital guidelines. I look forward to updating you on ePlex and assays currently in development.

I will now turn the call back to Hany for additional comments before we open up the call to questions.

Hany Massarany

Thanks, Faiz. Q3 was our first full quarter of ePlex availability in the U.S. and a very important quarter of accomplishments for us. Our commercial teams delivered solid results in Q3 and we are especially delighted with the positive market response to the U.S. launch of the ePlex system and RP panel.

We are confident in the uniquely differentiated value proposition of ePlex compared with alternative systems and we are more convinced than ever of its significant competitive advantage and market opportunity.

Our confidence is well supported by strong sales funnels and continued positive customer feedback regarding overall ePlex performance. We’re also excited about the initial success of the ePlex blood culture identification panels in Europe and launching these panels in the U.S. next year.

We will now open the call to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question comes from Brian Weinstein from William Blair. Your line is now open. Please go ahead.

Ben Andrew

Great. Thanks, guys. This is actually Andrew on for Brian today. I wanted to start with kind of the selling cycle here and where these placements are going. Can you talk a little bit about the types of accounts that you’re putting these in? Are they large or small hospitals? And then are these competitive wins, or are you going into some new territories? Thanks.

Hany Massarany

All right. Thanks, Andrew. As we previously indicated, our focus is on the 200 plus bed-size hospitals, so consistent with our strategy. We’re placing ePlex systems in 200 bed-size hospitals as well as in reference labs as well. In the third quarter, the vast majority of our placements were in the U.S. market, as I mentioned 70% of our placements in the U.S. market and the majority of those were in new customer sites as opposed to replacing XT-8 systems, for example. And I think that’s about – what was the second part of your question, Andrew?

Ben Andrew

It was around just competitive wins that you’re seeing.

Hany Massarany

Yes. So we are competing in the marketplace and displacing competitors as well as placing systems in customer sites who are doing these tests for the first time.

Ben Andrew

Got it. And then the second question I had was on manufacturing. It sounds like you guys are taking some steps with the pipeline stuff, but there’s nothing going on with the respiratory panels, correct?

Hany Massarany

That’s correct. So the improvements or the opportunity to improve the blood culture ID yield and manufacturability is not relevant at all. These opportunities are not relevant to the RP panel and not impacting manufacturability of RP.

Ben Andrew

Got it. Thanks, guys.

Hany Massarany

Thank you.

Operator

Thank you. Our next question comes from Sung Ji Nam from BTIG. Your line is now open. Please go ahead.

Sung Ji Nam

Hi. Thanks for taking the questions. I guess starting off with a clarification. For your blood culture assay, I understand there are early access customers in Europe. Are you pushing out for commercialization in Europe until the manufacturing is improved as well?

Hany Massarany

No. We are actually promoting, we’re selling blood culture ID panels in Europe. It’s a controlled launch but certainly we’re selling and implementing blood culture ID in Europe at this time.

Sung Ji Nam

Okay. And then as for – this might be early but as for the ratio of reagent rental to capital sales, do you have a sense of how that might look like? And also, do you think there are more reagent – in terms of percentages reagent rentals, you expect that to be higher in the U.S. as well?

Hany Massarany

Yes. So in the third quarter, the mix was sort of in line with our expectations of 40% to 50% capital to reagent rentals. We do expect that to shift more toward reagent rentals certainly in Europe as a result of the complexities and sort of the length of the cycle, especially the administrative steps right at the end in terms of final approvals. But also based on just the way the market is going competitively, we expect that mix to be – to see that in the U.S. as well.

Sung Ji Nam

Okay. And just last one on kind of the competitive landscape and dynamics, you kind of touched on that. But was curious as to is your sales force seeing an increasing competition in terms of – from the major players as well as maybe some of the other technologies that might be in the adjacent areas?

Hany Massarany

Well, certainly in relation to multiplex molecular Sample-to-Answer systems and competitors in the market, we are seeing a shift more toward reagent rentals.

Sung Ji Nam

Okay. Thank you.

Operator

Thank you. Our next question comes from Mike Matson from Needham & Company. Your line is now open. Please go ahead.

Mike Matson

Hi. Thanks for taking my questions. I guess I just wanted to start with you’re talking about placements and then you kind of walked through the process, so I just wanted you to clarify. When you count something as a placement, is that effectively after they’ve gone through the evaluation and you have the formal agreement in place?

Hany Massarany

No, Mike. We place a system in a lab after we have a signed agreement with the lab, with the customer essentially agreeing to what we have to do during the period of time when the system is sort of being evaluated and validated. We agree on volumes. We agree on pricing. We agree on acquisition method. But we formalize that at the end after we complete that process. And once that’s formal, then sort of the implementation in terms of revenue generation begins. So there is a bit of a lag between signing the initial agreement, completing the process, formalizing the supply agreement and implementation for revenue generation.

Mike Matson

Okay. And so is what happened in Europe then that you had some of these placements but then it didn’t end up going all the way through to that final point where you’re getting the revenue or --?

Hany Massarany

Yes, it’s taking longer. So we have very strong support and traction in Europe and certainly working through the process I just described all the way to the very end which is sort of when you get involved with the administrators to finalize and formalize the agreement, that’s where it’s being held up and delaying revenue recognition. And obviously if that includes capital, it’s delaying capital recognition as well. This is a challenge that other competitors are seeing as well. It’s not unique to GenMark or to ePlex. This is something that’s more European market as opposed to a specific product or supplier.

Mike Matson

Okay. But you’re confident that you’re not going to see that same type of situation play out in the U.S., I guess be it from early placements that you had?

Hany Massarany

Yes, we are. Look, we’ve known all along and we said all along that the European market is less advanced. It is not as developed as of course the U.S. market in terms of the adoption of syndromic panels, in terms of the readiness to sort of make these decisions and we are already seeing a very different dynamic. Obviously we’ve been in the U.S. market for many years with our XT-8 system and we’re not seeing a change in relation to the acquisition process with respect to ePlex.

Mike Matson

Okay, all right. And then finally, I think this was asked just prior to me getting on but I just want to make it – I guess clarify. So you’re saying that your primary competitor is also seeing increased placements under reagent rental now as well. It’s just the dynamic I guess of having two players in the marketplace now that they kind of use some of their monopoly power to maybe force the customers to have to pay for these things upfront. Is that essentially what’s happening or is it – I just want to make sure that you’re not at some of a disadvantage if you’re having to resort to reagent rental placements while they’re still able to sell their systems?

Hany Massarany

No. We don’t believe so, Mike. There are multiple suppliers on the market and I think if you look at even their revenue and placement mix U.S. versus elsewhere in the world or U.S. versus Europe, you see the sort of the same dynamic in terms of how big and how important the U.S. market is versus other markets including the European market. So it’s not something that’s unique to us and we don’t believe that we’re disadvantaged at all. It is different to what we expected in terms of the complexity and the length of the cycle and that’s really what’s driving our future expectations for revenue in fourth quarter and we expect that that will also reflect in our 2018 guidance as well when we make it.

Mike Matson

All right. Thanks a lot.

Operator

Thank you. Our next question comes from Doug Schenkel from Cowen. Your line is now open. Please go ahead.

Doug Schenkel

My first question is what percentage of ePlex placements are XT-8 conversions thus far?

Hany Massarany

Very few at this stage. So the vast majority in 70% plus are new customers, not conversions from XT-8.

Doug Schenkel

But around 30% are conversions. That seems higher than what we were expecting. Is that what you expected in the early going, because I know when we talked about this prelaunch, my sense was not that you would have thought close to a third of placements were conversions.

Hany Massarany

Well, it’s a little bit difficult to take a number based on our first full quarter of launch and sort of extrapolate that to what the conversion is going to be. It’s early days. Like I said, we’ve only got one quarter under our belt and we’ll see how that mix changes over time. We’re expecting and certainly our focus is on new customer segments.

So as you know, Doug, we’re looking to acquire new addresses to gain market share, to drive ePlex into markets where XT-8 is really not a fit. But we will of course protect our XT-8 business. And when we do that, we do it at a premium. So it is something that we’re working with our XT-8 customers on a case-by-case basis to ensure that we’re able to meet their needs with ePlex, if that’s what’s required, but also certainly to protect our business and drive a premium by doing that.

Doug Schenkel

Okay. I’m having a hard time getting to your Q4 revenue guidance. What are you guys assuming for reagent rental mix pricing per ePlex assay? Has anything changed there? And what’s changed for ePlex consumable revenue expectations relative to prior guidance? You previously had pretty robust expectations for what was going to happen during flu season, the impact that that would have on consumables, if like that’s maybe one variable that may have changed in the equation as well?

Hany Massarany

Well, let me start answering and then Scott will probably jump in and add to my answer. We are not changing our expectations in relation to annuity per analyzer. We expect to be in the proximity of 100,000 plus per installed system per year. Obviously, the fourth quarter is always sort of a challenge to predict because we don’t know yet how severe the flu will be this season. So there’s always that sort of element of uncertainty. But we certainly are seeing that type of annuity in the deals that we’re currently signing. That’s consistent with our expectations.

In terms of the mix, as I mentioned in the past, we’ve always said that we are going to go after capital if we can get it. We don’t want to necessarily fund and then finance an installed base if we can get the capital upfront. But we also said that we will not let that get in the way of driving market share, getting new customers and driving business growth, especially with the annuity. That’s sort of where the focus is on the blade, not the razor itself.

However, we are seeing in the U.S. and more so in Europe as a result of the process that we described, we’re seeing a shift a little bit more toward reagent rental than we expected. And we’re baking that into our forecast for the fourth quarter and obviously we’ll talk about next year when it’s time to guide for next year. But our expectation of 50-50 or so capital to reagent rental is looking like it’s going to be skewed a little bit more towards reagent rentals than capital and that’s what’s impacting our – or has impacted our Q3 revenues as well as we’ve taken into account re-guiding for the full year.

Doug Schenkel

Okay. All right, that’s helpful because I know a lot of us on the call probably don’t recall that 50 to 50 capital to reagent rental comment and we did hear your prepared remarks that it’s going to go lower than that. So I guess we can use that as we model things moving forward. I guess last question is on gross margin. The progress there has been pretty disappointing. What’s going on with yields and when do we actually start to see some improvement there?

Scott Mendel

Yes, this is Scott. I’ll take that question. Gross margins are lower than our expectations as well, really driven by the lower consumable volume than we’d anticipated in the third quarter as well as our lower guidance in the fourth quarter. Yields are in line with our expectations, actually improving quite nicely. So we’re happy from the actual manufacturing process and the yields that the manufacturing process is generating and this is really about volume. And so we still remain confident that as we move into 2018 and the volume takes off that we should see sequential improvement in gross margins in that 3 to 5 percentage point range.

Doug Schenkel

Okay.

Operator

Thank you. Our next question comes from Anne Edelstein from Bank of America Merrill Lynch. Your line is now open. Please go ahead.

Anne Edelstein

Thanks. So the first one back on the revenue conversion cycle, can you just clarify if that is impacting your ability to both place instruments and generate revenue? And if it’s both, I guess why?

Hany Massarany

Okay. If I understood – hi, Anne.

Anne Edelstein

Hi.

Hany Massarany

If I understood the question correctly, so the availability of capital is more impacting the revenue and especially the timing of being able to recognize the revenue. So even with agreements that we expect to close with capital acquisition as opposed to reagent rental, the administrative process in Europe is just taking a lot longer and this is also surprising our own customers who are looking to acquire ePlex as they sort of – as they’re understanding the process by which their administration is sort of reviewing and sort of formalizing these deals. So it’s taking longer as opposed to preventing us from being able to secure placements in the first place. I’m not sure if that answers your question or --?

Anne Edelstein

Yes. It just seems like placements outside of the U.S. have been kind of flat sequentially for a while. So I was wondering if that – the dynamic that you’re describing is impacting placements, if that explains the kind of plateau?

Scott Mendel

No, it really impacts revenue generation and the time to get to revenue generation.

Anne Edelstein

Okay. And is there something that you can do in your effort to accelerate your ability to place instruments?

Hany Massarany

Yes, so we’re certainly not just sitting back and let it sort of play out as it has more recently. We’ve been working with our European team to really address this situation to find ways to accelerate decision making and really sort of try to not get stuck in this sort of administrative phase of the sort of final decision. And in doing so, we’re looking at different ways to enable customers to acquire ePlex systems, hence more reagent rental than capital, for example, because you don’t get to that stage necessarily as much as you would with a capital acquisition. But we’re also partnering with key opinion leaders, with thought leaders in Europe to help develop the market.

So a big part of it is sort of being able to educate the market together with competitors in this space on the economic benefits and impact – that has economic impact of Sample-to-Answer syndromic molecular panels as opposed to the alternative technologies in Europe. So this is something that other companies are also working with in terms of publications, studies, et cetera. But also working with our commercial teams to provide the right tools and the right strategies to continue to drive placements and volume of testing even if the capital associated with the decision process is delayed or is a challenge.

Anne Edelstein

Okay. And when you say that most of your U.S. ePlex placements are in new customer sites, do you literally mean new customers sites, i.e. competitive wins or do you mean they already had an XT-8 and they’re adding an ePlex as well?

Hany Massarany

No, Anne. New customers that we’ve not done business with before and most of those are competitive wins. There are some customers that are doing multiplex Sample-to-Answer testing for the first time with ePlex, but most of them are competitive wins.

Anne Edelstein

Great. Thanks.

Hany Massarany

Thank you.

Operator

Thank you. Our next question comes from Mark Massaro from Canaccord Genuity. Your line is now open. Please go ahead.

Mark Massaro

Thank you. So I guess on a positive note the 65 placements were well in excess of what I was modeling for. That being said, you have not guided for instrument placements for the year. So I guess maybe a two-part. One, did the 65 placements exceed your internal expectations? And then two, do you think that you might have pulled forward some of the demand that you were expecting in Q4 to Q3?

Hany Massarany

Thank you, Mark. And I would say no. The 65 placements in the third quarter was consistent with expectations. As you know, we really manage our sales funnel very closely. We work very closely with our commercial organization in the U.S., our sales managers and down to account executives in their territories. We have very good visibility to the funnel and the opportunities out there.

We also of course expect it to do well in the third quarter ahead of the flu season, because that’s when customers want to bring in ePlex and give themselves time to complete their validations and sort of go live in time for the flu season. We did not really pull forward deals that would have happened in the fourth quarter. Of course, we’re expecting – if you do the math, we’re expecting to do something like 40 to 50 placements in the fourth quarter.

But we also know that the fourth quarter tends to be – can be a little light on placements depending on the severity of the flu season, because some customers are hesitant to make a change while their volume of testing is sort of at a high – at a peak so to speak. So that’s something that we’ll see how it plays out depending on the severity of the flu season.

Mark Massaro

Great, that’s helpful. Going way back in your company’s history, even back to 2010, '11, '12, '13, most of your --

Hany Massarany

I wasn’t here in 2010.

Mark Massaro

Fair point. But yes, just going back, historically Q4 is sequentially up in placements or right around flat just going back in time. So I guess my question is, I understand that there are certain labs that are reluctant to make a change during the flu season, but historically you’ve seen that actually play out. So I just wanted to get your thoughts on whether or not the dynamic has changed or not, or if maybe you’re contemplating either anything on the competition front or perhaps related to maybe another topic which would be syndromic test panels and thoughts around Palmetto?

Hany Massarany

All right, so I want to remind you, Mark, that XT-8 has a broad menu of multiple FDA cleared panels and therefore while of course the flu season is relevant to XT-8 as well, because we have a respiratory viral panel on XT-8 but we also have multiple other panels that are not impacted by the seasonality of the flu season. With ePlex this year since in the U.S. we only have the respiratory panel, we’re obviously expecting to feel the impact of the flu season, especially if it’s a severe one, a bit more than what has impacted XT-8 placements in the past. But this isn’t something that’s related to syndromic sort of panels in general or necessarily Palmetto or reimbursement. Like I said, it’s more right now ePlex in the U.S. is a respiratory panel play and therefore if we have a severe flu season, there may be some customers who may be hesitant to make a change during the busy time.

Mark Massaro

Okay. That’s a fair point. And then maybe my last one is you lowered the Q4 revenue implied guidance by about 10 million relative to the street, yet the vast majority of your installed base is still XT-8. So I guess my question is, do you expect some of your lab customers to not do respiratory testing on XT-8 during the respiratory season or I’m just trying to better understand the magnitude of the decline in revenue given the fact that most of the installed base is XT-8?

Scott Mendel

Mark, this is Scott. I’ll handle that question. The reduced revenue guidance into Q4 is really relative to the facts that Hany laid out, which is really our experience to-date on ePlex Europe with the elongated cycles to get to revenue generation. A slight change in our expectation of capital versus reagent mix on ePlex placement both in Europe but also in the U.S., and that’s what’s really driving the change in our guidance not necessary anything to do with XT-8.

Hany Massarany

Yes, just to be clear. So we’re not expecting existing XT-8 customers to not do respiratory testing on XT-8 during the flu season. We don’t know how much the volumes will be because we don’t know how severe the flu season will be. But certainly they will do whatever testing is required will be done on XT-8 for our XT-8 installed base. So that’s not what’s driving the re-guidance of revenue.

Mark Massaro

Okay. Thanks. And if I can just sneak one last one in. The software modifications are now complete on the blood culture. You intend to submit to the FDA by midyear '18. Can you just remind us if that is a one or two quarter push-out relative to your earlier expectations or just help us frame that?

Faiz Kayyem

This is Faiz. It’s between one and two I think would be the way to frame that for yourself versus our prior expectations.

Mark Massaro

Okay. Thank you.

Operator

Thank you. [Operator Instructions]. Our next question comes from Andrew Cooper from Raymond James. Your line is now open. Please go ahead.

Andrew Cooper

Hi, guys. A lots already been asked, so I’ll be pretty quick. As we think about the updates to the blood culture ID software and the slower time to get to sort of the FDA, does that impact any of the timing of the next wave of tests that you’re looking to get to the FDA? Is there anything you can learn from what you’ve changed there that maybe makes some of that process a little bit quicker, or any color you could give on that would be great?

Faiz Kayyem

Sure. This is Faiz. Really what we’ve done – the learning we took from our experience with the respiratory panel and our work with the FDA on that being our first FDA cleared panel has led us to perform some studies that we know the FDA will ask about and to change from a simultaneous clinical study to more of a staggered clinical study to allow performance both at the clinical sites and preparation documents for the FDA to proceed in a more efficient way. That’s the main learning we’ve had. Other than that we made decisions to really focus on improving our manufacturing yield for the blood culture ID product prior to initiating those studies.

So we could really have everything buttoned up, no moving pieces before we went and initiated those studies. That’s really the learning. In both cases, I would say although these changes to the software and some of the manufacturing processes were really direct to that blood culture ID, I would say that because we use a universal cartridge platform and instrument for all of our assays here, it is true maybe to your point that some of the learning we take to improve one assay does end up impacting other assays, both commercial assays like the respiratory panel and assays still under development, like the GI panel. So we do have the advantage of taking best practices in a manufacturing processes and applying them across all of our cartridges.

Andrew Cooper

Okay, that’s helpful. So no real impact then on any of the timelines? I know you haven’t laid them out exactly, but you still feel comfortable about kind of the pace of menu expansion over kind of the long term?

Faiz Kayyem

Yes, we feel comfortable and we also are really pleased to see now across – now I would say numerous sample types that ePlex system is demonstrating very effective and robust capabilities with samples ranging from these upper respiratory to blood culture and now we’ve got internal data on a really challenging sample type stool and we’re really delighted to see that these manufacturing freckle [ph] improvements we’ve made to improve yield are likely to impact all of our future products and we have no concerns about the ability to expand menu in the future.

Andrew Cooper

Great. That’s all I ask here. I’ll follow up offline as well. Thank you.

Operator

Thank you. I’m not showing any further questions at this time. I would now like to turn the meeting back over to Hany Massarany for any further remarks.

Hany Massarany

All right. Well, thank you everyone. As I have mentioned in the prepared comments, we are very confident in the opportunity for ePlex and our ability to really drive significant growth and to create a lot of value over the next few quarters. We look forward to updating you on future calls on our progress. And on behalf of our Board of Directors and employees, I thank you very much for your support. And I wish you a happy afternoon. Thanks very much, everyone.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a great day.