Q3 2019 Earnings Call
Good afternoon, ladies and gentlemen, and welcome to todays conference call to disguise Genmark diagnostics third quarter, why do you maintain financial with.
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I'd now like to turn the meeting over to lease salvo.
Investor Relations.
Thank you Shane 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. A performance are forward looking statement.
For example statements concerning our 20 my team financial and operational guidance. The development regulatory clearance of commercialization of features of our 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 <unk> 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 July .
Mark filings with the FCC.
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'd now like to turn the call over Hany, Massarany, President and CEO of Genmark any.
Thank you Julie and good afternoon, everyone with me today, our Scotland, our COO and Johnny Oh CFO .
I'd like to begin todays call and with an update on our commercial performance then Scott will discuss operational highlights and Johnny will conclude with the financial details.
Tom will open the call for questions.
Third quarter results reflect continued success in delivering quality placement of our reflects plus.
While also driving our operational efficiency and advancing our innovative product pipeline.
Our commercial momentum in the quarter was propelled by the recent addition about three M.D.A. create blood culture I'd panels as well as continued demand for hours to retreat pathogen panel.
More specifically starting with top line financial performance, we achieved strong third quarter revenues of $20.9 million, representing 32% growth over the prior year period.
Like says in the quarter grew by 98%.
Over the prior period accounting for $13.4 million or 64%, Oh total third quarter revenue.
Gross margin was consistent with our expectations about 34%.
We remain on track to achieve 2019 gross margin guidance of 31 could 33% and longer term goal, 60% plus.
Drilling down to our commercial performance, we placed 51 net new Eplex analyzers worldwide in Q3, 29 team, resulting in a global installed base of 489, Eplex analyzers compared to 300 and Twond in Q3, 2018 I mean.
Crisco, 57%.
We are very pleased with the continued strong adoption of our Republic system by hospitals and reference labs of all sizes, both in the U.S. and internationally.
Proximately, 65%, although our U.S. eplex placements in the quarter wondering labs, which had an incumbent rapid multiplex molecular platform and we continue to hear from customers that due to the unique benefits of RV click system. They are now much better equipped.
To realize the value of in your patient rapid syndromic testing, which is becoming ever more essential in the effective management of high risk patients.
Our recently launched blood culture, I'd panels, which provide the broadest target coverage available on the market today. So they did take shelf, Texas are significantly bolstering our competitive position.
Enabling us to go boys broader and deeper with key accounts and drawing widespread new customer interest.
In the first full quarter RBC idea of out of energy in the U.S. revenue contribution from RBC I'd panels was a meaningful component.
Overall Eplex revenues importantly, BC I'd is not only driving eplex revenue and placement, but also enabling us to capture additional aki business by offering an expanded solution was still in early innings of each launch BC I'd has already contributed to grade.
Other than 70% of year to date Eplex placements with our people through you know about 40% of these please.
Why do we do not anticipate providing quarterly metrics at the same level in the future. We wanted to highlight how the additional VC I'd he's already contributing to our competitive positioning.
A key tool for demonstrating the value proposition and clinical impact of RBC I'd solution to customers is conducting retrospective reviews of their own labs positive blood culture data for the prior 12 month period.
In these real world analyses, we are consistently able to show, 10% to 20% broader pathogen coverage compared to competitive alternatives.
These reviews also demonstrating the clinical impact cost savings and anti microbial stewardship benefit that Eplex PCR de provides at the patient provider and hospital system level.
Another contributing factor to the market acceptance of our reflex B.C.I.D. panels is their unique ability to drive more appropriate use of anti microbial therapy, which is directly aligned with new CMS conditions of participation regulations that require.
The U.S. hospitals to develop and implement antibiotic stewardship programs.
These programs are designed specifically to reduce microbiota resistance and increase the spread of infections caused by multi drug resistant organisms.
Like CPC I'd hoax aggressive these goals by delivering broad pathogen and resistance gene coverage and perhaps more importantly, it's the only solution that offers an integrated template to comment I'd module to make the diagnostic results immediately actionable.
In alignment with local practice guidelines and pharmacy formula that result.
Overall awareness for Bcr de continues to grow through our marketing efforts and the support of key opinion leaders globally. Several studies were presented during I'd week last month, which highlighted both the labar tree benefit as well as the patient management impact.
Of the Plex BT I'd.
One study presented had to infectious disease pharmacist make blinded decisions regarding antibiotic selection based on rapid diagnostic test results. The comparison favored our reflects BDC I'd panel scored higher in both Gram negative and Gram positive.
Organisms versus competing panels.
Another labar tree director from a major academic medical center in the northeast share shared her early experience with eastlink species.
Hi, lighting potential to significantly streamlined blood culture diagnostic work flows by eliminating numerous other tests that are collectively required to achieve comparable inclusivity.
Finally, we are pleased to announce that out ran positive clinical study manuscript is under review for publication in the journal of clinical Microbiology, how do we expect papers summarizing the gram negative and fungal studies to be submitted for review before the end of the year These and play.
And future studies enable us to partner with some of the leading institutions and investigators in the country, including a major U.S. cancer Center, who participated in a fungal study and recently went live with four three D.C.I.D. panel.
[noise] I'd now like to comment briefly.
On recent updates to the reimbursement landscape and Genmark status as a reminder, late last year and earlier this year. So isn't many Medicare administrative contractors, you should local coverage determination, which were strict coverage of large risk or treat testing panels.
Certain patients most commonly in the outpatient setting.
While these more restrictive coverage policies have had only a modest impact on our coffee business to date in certain cases. They have resulted in confusion among our customers and reduce access to a high clinical value test for high risk patients such as the elderly and the.
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In response to this we worked collaboratively with various stakeholders to provide clarity about how eplex copy panels will be covered.
And paid for during the 2019 2020 respiratory season and to that end. We're pleased to shares at a proprietary laboratory analysis or P.L.A. J code has recently been assigned to Eplex RP by the enemy and published in the drop 2020 clinic.
Collapse fee schedule with a preliminary recommendation by CMS to cross woke up this eplex RPP on a code to the existing CPT code for risk retreat panel testing.
Based on our discussion with the rather than stakeholders. We are optimistic that the Blake's P.L.A. code, we'd be reimbursed for the upcoming flu season, ensuring access for Medicare and Medicaid patients to be in their relevant geographic markets.
We are grateful to those at the A.M. may multi JAKKS and CMS, who have constructively engaged with us on this important topic.
In summary, as we enter the final quarter of 2019, I'm very encouraged by the momentum set our company continues to gain.
With a highly differentiated menu and a superior testing efficiency eplex is increasingly being recognized in the molecular multiplexing market as the best in class platform for delivering high quality patient Center care.
I'm also confident that our strong commercial team and consistent operational execution, along with the ongoing advancement of our R&D priorities will continue to drive our performance and growth in this very attractive and rapidly growing market.
This point I'll turn the call over to Scott.
Operational update Scott.
Thank you Hani from an operational perspective, our teams are primarily focused on three priorities. The first is supplying our customers with eplex consumables. The second is investing in contingent continuous improvement efforts that are critical to achieve our stated gross margin targets and the third this menu expansion.
My comments today will be mainly focused on our plan to drive continued gross margin improvement, which is an important company priority as well it's important to our shareholders.
During the third quarter, we invested significant resources and manufacturing capacity to drive gross margin improvements, our engineering and manufacturing teams tackled many projects during the third quarter given the typically lighter production volumes that result from our respiratory business seasonality.
More than half of these projects were focused on improving manufacturing processes to reduce variability and increase yield.
The remainder of the projects were split between implementing quality control procedures, and working with our suppliers to reduce cost and incomings material variability.
In the fourth quarter, we expect a significantly higher volumes, coupled with our teams improvement efforts to be key contributors to eplex gross margin.
We remain committed to achieving our 2019 overall gross margin range of 31, the 33%.
Well as exiting 2019 with Eplex gross margin of approximately 30%, which not only represents a significant improvement over 2018, but also is an important step towards achieving our longer term gross margin goals.
Looking beyond 2019, we have a multiyear funnel of opportunities to drive additional gross margin improvement by reducing direct material costs of our eplex consumable.
We have prioritized this funnel based upon implementation time.
Technical assessment and return on investment.
As a result of this prioritization process most of the opportunities that we're currently working on will provide direct material savings in 2020.
Beyond direct material.
Our engineering resources have similarly developed a list of manufacturing process improvement opportunities.
These improvements will increase manufacturing yield by reducing process variability and eliminating waste as well as driving direct labor efficiency.
Our initial process improvement priorities are focused on the preparation and processing of our PCB, which is the backbone of our proprietary E sensor detection technology.
As well as the preparation in application of our reagents that are critical to our detection process.
In addition to our efforts on direct material and direct labor productivity.
We expect to capitalize on our rapidly increasing production volumes, thereby driving gross margin expansion through additional overhead absorption.
Our teams have a track record of driving gross margin improvements as demonstrated by our success with the XT eight product line.
We are balancing our desire to rapidly achieve our stated gross margin goals with a rigorous and methodical validation process. So that we can ensure ongoing supply upper FDA cleared panels for our customers.
In addition, our research and development teams also made strong progress on future menu.
The G.I. development team has now moved into the project phase that focuses on dialing in the optimal settings of various parameters before then moving on to analytical and clinical studies.
Well Gee is our top development priority, we have additional resources focused on advancing our pipeline of panels as well as other technology and software innovations.
Our funnel of opportunities span several years and we expect these technology and software investments to drive the long term growth of our business beyond its traditional menu expansion.
We look forward to sharing more details on the advancement of our development pipeline as important milestones are achieved.
Our teams are focused on delivering a strong fourth quarter laying the groundwork for continued gross margin expansion in 2020 and beyond as well as making significant process on RG I panel and technology pipeline.
I'd now like to turn the call over to Johnny for a review of our financial results for the third quarter.
Thank you Scott I'll now provide details on our third quarter 2019 financials.
As previously mentioned third quarter 2019 revenue was $20.9 million up 32% versus third quarter of 2018 with year over year Eplex revenue growth of 98%.
Sales to us customers continue to account for the vast majority of our revenue.
The average annuity per eplex placements in the third quarter was $106000 consistent with our expectations outside of flu season, and represented an increase of 20% over the third quarter of 2018.
We continue to expect the average annual revenue for the flex placement will be in a 135000 to $145000 range for the year.
Third quarter gross profit was $7.1 million or 34% of revenue versus $5.6 million or 36% of revenue in the third quarter of 2018, which highlights the continued shift to higher eplex product sales relative to XT eight.
As Scott mentioned in his remarks, our focus on manufacturing improvement initiatives is driving higher eplex gross margins through the year.
Total operating expenses were $17.3 million for the quarter, representing an increase of $1.1 million compared to the third quarter of 2018.
The increase over prior year is the result of our investment in the launch of RBC I'd panels and the costs associated with the validation and go live of the systems placed for BC I'd use.
Our net loss per share for the third quarter of 2019 was 20 cents a share consistent with our loss per share in the third quarter of 2018.
From a balance sheet perspective, we ended the quarter with $33.2 million in cash and investments we used approximately $10 million of cash in operations. During the third quarter of 2019 versus $12.5 million in 2018, driven by favorable working capital results.
In the third quarter of 2019 cash usage increased over the second quarter by $2.5 million, primarily due to increases in accounts receivable of $3.7 million and inventory of $2.7 million that will be readily converted to cash in the short term we.
We drove global Dsos of 37 days, DPL 41 days and Dxi of 75 days for the quarter.
Additionally, we added $2.4 million in cash to our balance sheet during the quarter from a sale of shares through an ATM.
As a reminder, our current credit facility allows us to draw an additional $15 million later this year subject to achievement of certain milestones.
For the remainder of 2019, we continue to expect total revenue in the range of $85 million to $90 million Eplex placements of 170 to 190 analyzers with an expectation closer to the midpoint.
And an average annuity per analyzer in the 135 to $145000 range.
As mentioned, we anticipate gross margin for the year to be between 31% of 33% and we continue to see our operating expenses between 60 $570 million for the year.
We expect cash usage to be at the high end of our range of $25 million to $30 million, depending on the timing of orders and revenues through the fourth quarter.
This concludes our prepared remarks, so at this time panning, Scott and I would like to open the call up for your questions.
Okay.
Ladies and gentlemen.
The question at this time. Please press Star then the number one key on I touched on telephone. If your question has been married or you wish to remove yourself from the Q price key.
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[noise].
First question comes from the line of Brian Weinstein of William Blair. Your line is now open.
Hi, guys. This is Casey on for Brian .
Could you guys talk about the strength of the funnel and how it stands now versus maybe a quarter or even a year ago and how is it developing and what kind of time to close your sorry.
Yes.
I'll take it and you guys can add.
If you have comments.
I would say that the funnel is very healthy and continues to strengthen.
Says and leasing.
The launch of the FDA cleared.
The panels.
We're now able to reach.
Many more customers and opportunities.
To place additional Eplex systems in new accounts.
It also to work with existing.
Placements going back to the installed base.
Add BC I'd.
To the menu being utilized as you will remember.
For a while we were only selling.
Respiratory panel and now with BC I'd, you were able to go back to the existing customers and managed that funnel of opportunities as well as additional placements.
We're very.
Comfortable with with the with the.
States itself.
Hello, and like I said, it just continues to strengthen and we're very pleased with that.
And then one more on.
How is pricing holding up and as the market, becoming more competitive on price versus menu or system benefits.
[noise] pricing is holding up reasonably well.
Occasionally we see some aggressive pricing out there, but were always able to.
Differentiate.
Our solution based on the value proposition and.
In general, we're able to command and sustain a premium pricing.
You know so again, you know obviously with more options out there and additional competitors coming into the market. We expect that there will be.
Pressure on pricing, but so far it's holding.
Reasonably well.
Thanks, that's all for me.
Thank you.
Next question is from the line of bearing the burden. Your line is now open.
Hi, good afternoon.
Hi, there Derrick Yeah, hi, yes, so a couple of questions. So.
I guess the first one it's like what's the initial work for the flu season, I mean, what are your sort of expectations relative to last year.
Well.
We're we're not seeing anything.
Crazy to shed Derek.
Oh sort of major activities, we haven't seen much of it yet it's difficult to comment on something that's not happening just yet.
As you know it was a relatively strong or severe season in the southern hemisphere, but we're not aware of any credible way of sort of predicting what's going to happen here in the northern hemisphere. So at this stage, we haven't seen a lot of activity yet and.
Time, which path.
Great and you grid good progress on the gross margins I know, it's a little bit early to talk about 2020, but you can you give us some general sense on how do you see the progression over the next couple of years, how we should think about.
How long will take this figure to that 60% target.
Sure. Derek this is Scott I'll handle that we continue to think 60% is a two to three year goal on the current years progression was mainly driven by improvement in yield offer the line.
So thats continues to drive 2009 teens result.
As we look into 2020, although we're not providing explicit guidance right now I, our expectation would be that the majority of the improvement will come from direct material as I mentioned on the call. We have a multiyear funnel of opportunities to drive direct material cost down and we would expect the improvement in 2020 to come mainly from direct material and.
Then also from just additional production volumes driving absorption of the overhead costs.
Again, two or three years out that's our goal to hit that 60% plus gross margin.
And then one final one you mentioned some some competitive wins just talk about.
The nature of the system situations place measured the customers and what was the driving force behind wins.
Yes.
Derek we've really done well across the board.
In smaller and bigger labs in hospital and reference labs.
We.
In the quarter.
Approximately 65% of AD placements.
Well one against.
An incumbent that was already in the lab.
And BC I'd.
The main driver of our competitive wins in 40% of the cases up he came along with it as we expected.
But certainly BC I'd.
Also is generating a lot of interest and.
Traction is really.
Picking up in in the field.
Great. Thank you very much.
Thank you.
We have the question from the line of Mark Massaro Canaccord Genuity. Your line is now open.
Hey, guys. Congrats on a good quarter I guess hemi you indicated obviously BC I'd had a really nice quarter driving a lot of the placements are you talked about how RBC I'd had a meaningful amount of revenue.
Is there any way for you to get any more granular than that and then you know I'm just yes. My model I had like 2 million. So I was just curious.
How the revenue trended relative to your expectations as well.
All right Mark I'd, rather not get into a more details about the revenue by assay, but.
Okay I'll give you a hint you where you know close by.
It certainly was a good contribution relative to our.
Mid teens low to mid teens of Eplex revenue in total.
But again, we really.
I don't want to and don't intend to report revenues by I say at this stage and the revenue okay inline with our fill up the revenue growth was inline with our expectations Mark from from a B C. D perspective, and we continue to see.
Implementation times inline with expectations in that three to six month timeframe. So everything operating according to plan, thus far from BG I'd perspective.
Great that's helpful and then.
Can you give us a sense for.
The Pos code.
To the extent that that that initiative, the new code can help.
Displace some of the concerns.
Is there any way for you to quantify maybe.
Maybe.
The percentage of customers that were confused.
By the prior code.
Let's say not so many.
As we said all along this wasn't all that relevant to us since the vast majority of testing on the plex is and.
XT eight for that matter.
Comes from in patients.
Hospitalized critically ill patients most likely in I see you all for immuno compromised and so on and so forth. So.
It was never a big issue for us and we saw very minimal impact of the reimbursement issues on.
Business.
It was important to clarify and take one other sort of objection or issue out of the way. So we're not expecting.
Materially impact based on the P.L.A. J code, but.
It is something that.
It just takes that question off the table I guess with respect to Medicare patients, mostly that's what we're talking about here.
Okay and last question for me can you just talked about any changes to the competitive marketplace.
Seems relatively status quo to me you guys have done very nice job with the XT eight and now certainly with Eplex, but as we think about some of the other systems that have launched can you just give us a sense for competitive dynamics in general.
It's very stable as you said, Mark we really haven't seen much of the other systems.
Yet we.
We expect them to come.
But not yet so the main players are the same players that youre aware of Youre familiar with and I'm pleased to say that were competing very effectively against them and were taking market share and growing our business.
Not just in the white space not just in.
Labs that are new to molecular but also labs.
That already have an incumbent and were able to displace those says one.
Very good that's it for me thank you.
Thank you.
We have from the line of John Ju from Raymond James.
Great.
Did you start with the.
Placements just given the.
The progress that you're seeing would be I'd and the pull through et cetera can you just help us think about.
The comment that.
During the placements question would be the midpoint I believe that actually implies a pretty pretty sizable deceleration from kind of where you've been placing.
Maybe we could start there.
I'm not sure you're breaking up a little bit John you're asking about placements and what the expectation needs for the rest of the year and we still believe that we'll be at the midpoint of our range that we guided to done forget.
That you know the flu season.
Depending on when it starts and and how busy labs may be with with the flu season with a routine testing.
Can have an impact on placements because they don't want to bring in necessarily new systems and sort of do their validations and implementations during the busy time, but on the other hand, obviously BC I'd sepsis is not as a seasonal disease. So we don't expect.
That that would impact placements that are.
By the sets so the net of it is that where.
We feel good about the range that we provided and we expect to be close to the middle of that range.
Yes.
Okay, Great and then the only other one for me just can you give us an update on maybe how the key accounts initiatives are are trending is that starting to bear fruit in the pipeline and then are you seeing any change to maybe to look the capital rental make sure Orients P. as a result of those initiatives.
The corporate corporate and strategic accounts team is doing a phenomenal job they've already has helped us secure several IDN major accounts they continue to manage our relation.
In ships that already exist with some of the major.
It depends on the east and West coast as well as National reference labs, and we expect to be securing some.
G.P.O. agreements in in the near future.
That we've been working diligently diligently to.
Secure so going really well I think it was the right thing for us to do now with the expanded menu and the traction that we're getting in the marketplace and we haven't seen.
Shift in the capital reagent rental.
Mix, we on average I mean, it's it changes sometimes quarter to quarter I think this quarter, we had more capital than we expected.
But that sort of 70 30 mixes the overall expectation, 70% reagent rentals 50, 30% capital in Q3, it was more capital than that.
Great. That's all for me thank you.
Thanks very much.
Okay.
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We have a question from Mike Matson Needham AMC. Your line is now open.
Hi, guys, it's David on for Mike Thanks for taking my questions.
First just a with regard to the competitive placements for 65% of that installs in the U.S. can you just talked about how you plex utilization in those accounts is trending.
It took to the other portion of placements.
There's no reason to expect this to be any different.
I'll just remind you quickly that.
Placements in the quarter don't really start generating revenues until most likely the following quarter.
So it takes a one to two quarters, depending on the lab, depending on the menu.
For the systems to be validated and sort of turned down for routine use.
Rich territory.
Takes a little bit less.
Less time, because labs are more familiar with.
Molecular testing for risk or treat disease since those panels have been around for a while with BC I'd, it's taking a little bit longer.
But like I said somewhere in the range up one to two quarters. So.
Largely the Q3 placements.
It would be in the process of being validated and implemented in the labs.
Now for future revenue.
Generation and we don't expect that that that would be any different from other placements that we've made in the past.
Okay. Thanks, and then I mean, I know the U.S. as the main driver, but I'm just looking at the international commercialization can you talk about.
How that's going in and I think you just got into Southeast Asia, and maybe you on America, maybe maybe that's this quarter on can you talk about how those launches are going thank you.
Yes, thanks for the question yes.
Oh, you as a business is going well.
Most of the businesses coming out of central and Western Europe .
We have a hybrid model as you will remember so we have.
At team.
In Europe working directly with the distributors in.
Europe and middle Eastern North Africa.
We have a lot of standalone sort of self sufficient distributors I mean, obviously, we support them in other parts of the world including.
Asia Pacific now.
Many countries in the middle East.
And also beginning to.
Play systems in Latin America, as well, but with all that said, obviously the U.S. still remains the big driver of revenues and the very vast majority of our our revenues now and we expect into future will continue to come from the use of market.
Okay. Thank you.
Thank you.
I'm showing no further questions at this time I would like to turn the conference back to him.
As Randy for closing remarks.
All right well. Thank you all for joining US this afternoon and for your continued support we look forward to updating you on our progress in the future have a good day bye bye.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.