Q4 2020 Genmark Diagnostics Inc Earnings Call

Ladies and gentlemen, and thank for standing by and welcome to the <unk> diagnostics fourth quarter and full year 'twenty and 'twenty earnings call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session. The ask that question. During the session you will need to press star one on your telephone keypad. If you require any further assistance. Please press star zero and I would now like to hand, the conference of our Dear Speaker of today Leigh Salvo. Thank you. Please go ahead.

Thank you Peter and thank you all very much for joining us today before we begin I would like to inform you that certain statements made by Jan Mark during the course of this call may constitute forward looking statements any statement about our expectations beliefs plans objectives assumptions of future events or performance are forward looking statements for example.

Statements concerning our 2021 financial and the operational 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 guaranteed 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 and these forward looking statements are detailed and general Mark filings with the SEC Gen market seems 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.

And I.

I'd now like to turn the conference call over to Scott Mendel, President and CEO of Denmark Scott.

Thank you Leigh good afternoon, everyone. Thank you all for joining us for our fourth quarter and full year 2000, and 'twenty conference call I'm joined on the call today by John <unk> Our CFO.

2020 was truly a transformational year for Denmark, both financially and operationally.

In line with our pre announcement total revenue for 2020 and grew 95% year over year to $172 million.

Our top line acceleration was the key driver of it and achieving cash flow positivity for the first time and Gen marks history generating approximately $6 million positive cash flow from operations.

This is an exciting milestone for our team and we are committed to further margin improvement on top of continued topline growth.

Operationally, it's hard to believe that one year ago with the COVID-19 pandemic was just beginning and Jan Marc was among the first to provide molecular test designed to detect Sars COVID-19 two.

While not our on our scheduled roadmap, we quickly assembled the team and and less than one month. They designed manufactured and shipped test of customers for validation of our tests designed.

And those teams continued to deliver throughout one of the most challenging years that any of us have ever experienced.

Despite overwhelming demand for that single target test, we kept our eye on our syndromic approach to diagnosing the infectious.

The infectious diseases, and creating enduring revenue streams.

We quickly shifted development to the Eplex RP panel, which simultaneously identify as 'twenty, one pathogens, including Sars Covid, two and provides a more streamlined workflow than our original RP panel.

On the commercial front our revenue model is built on growing the installed base of Eplex analyzers and our global commercial teams delivered.

During 2020, we placed an additional 265 eplex analyzers, taking us to and installed base of 792, Eplex analyzers at customer sites around the world up 50% from year end 2019.

More than 95% of 'twenty and 'twenty placements contracted for RP, two and or BCA D panels on multiyear agreements with committed volumes, providing us with visibility to and enduring and predictable revenue stream of approximately $135 million using unexpected annuity of $175000 per placement.

While demand for our RPG panel continues to drive a large portion of our revenue or blood culture identification panels created significant opportunity for continued revenue growth.

Our <unk> panels are designed with the broadest coverage of organisms and resistance genes, which is critically important and managing bloodstream infections that can lead the sepsis.

Pre pandemic, our <unk> panels drove about 80% of our placements and we expect a similar trend as COVID-19 gets under control through broader vaccination and herd immunity.

In 2020, approximately 50% of placements include of Dci D, which validates that we executed our commercial strategy of prioritizing customers interested in adopting syndrome and solutions and not just interested and access to of COVID-19 test.

And importantly, we have a significant opportunity to drive further adoption of <unk> within our expanded installed base.

We expect our BCD panels will be a major driver of our growth in 'twenty and 'twenty, one and beyond.

And the bloodstream infection market from multiplex molecular diagnostics is very large and and the early stages of adoption.

Our latest estimates are that this market opportunity is approximately $900 million and only about 15% to 20% penetrated.

We are encouraged by the increasing cadence of implementations and confident we will see a growing number of customers implanting, our BCD panels, and fact, three large hospitals already implemented our pcie panels, this year, representing more than $4 million and expected annual revenue.

Turning to manufacturing.

And while driving rapid top line growth, we committed significant resources to expand our eplex consumable capacity, including investing more than $20 million to build out a new manufacturing facility that can accommodate up to six additional eplex consumable lines.

We validated the first line of this facility during December with the second New line and validated earlier. This month slightly ahead of our previously communicated expectations.

These additional lines enabled us to achieve our production capacity goal of 160000 and consumables per month by year end and approximately 200000 per month with the recent addition of the fifth line.

We are recruiting and training additional manufacturing talent to fully leverage this additional capacity.

We have also begun work on our sixth Eplex line that we expect to complete and the second half of 2021, which will increase our capacity to approximately 250000 consumables per month.

Okay.

This additional line will be useful and keeping up with demand, reducing overtime and providing critical capacity to support our assay development and process improvement initiatives that helped drive the gross margin improvement.

As capacity has increased we have been investing and additional R&D resources to accelerate menu and technology development.

These teams needed need a need access to a steady stream of manufacturing capacity to complete their work, which has been the challenge for the past year as demand for our RP panel exceeded our capacity and we prioritized customer demand over internal development requirements I'll touch more on the development priorities momentarily.

As I conclude my comments on <unk>.

I would like to acknowledge the amazing accomplishments that our team delivered our employees remain focused on delivering the highest quality molecular solutions to our customers and their patients.

Which required perseverance dedication and courage, while navigating the same fears and challenges faced by all of you during this unprecedented pandemic.

And so proud of what our team has accomplished and I'm thankful to be part of the Gen Mark family.

I'll spend the rest of my comments on how we're thinking about 'twenty and 'twenty. One we are focused on three key priorities.

These panels will drive our 2021 growth joined by Gi and future panels, as we move into 2022 and beyond.

We also plan to continue expansion outside the U S driving strong revenue growth through both RP and pcie adoption.

Our second key priority is delivering financial execution, specifically improving gross margin.

We are committed to achieving 50% gross margin as we exit 2021, and 60% as we exit 2022, we have a roadmap to achieve these goals and are allocating resources to deliver.

And the third key priority is delivering innovation, including enhancing current panels, completing new panels such as Gi.

And investing and longer term of advanced technology development.

More specifically our top menu priorities for 2021 are to complete our Gi panel development and commence clinical studies and the second half of the year.

Our assay development team is also focused on enhancements to our RP panel and preparing for future five 10-K submission, which would be required if the EUA for COVID-19 is sunset of it.

We began the RP two enhancement work and the second half of 'twenty and 'twenty with the goal to complete the development this year.

Our teams are also laying the groundwork for additional menu, which includes evaluating several potential panels using feedback from key opinion leaders market research as well as assessing the competitive landscape.

Our goal is to begin development on two additional new panels in 2021.

We will begin and we will provide updates during future calls as appropriate.

With expanded manufacturing capacity and an exciting market opportunity. We are confident that now is the time to accelerate our investment and menu development and lay the groundwork for strong revenue growth and the years to come.

At the same time, our engineering teams are driving advanced technology development with a focus on tweaking, our software and cartridge capabilities to deliver faster and more sensitive results and expand our sample preparation capabilities.

In addition, the menu expansion and consumable innovation. We're also focused on extending our lead with respect to Eplex software features and functionality.

A key component of our value proposition and Eplex is streamlined workflow, including several key software differentiators such as our ability to link patient results with physician action to improve patient management, using our patented templated comments functionality.

We are taking steps in 2021 to create a pipeline of enhancements that will help drive continued eplex adoption over the longer term.

Now that I've laid out our key 2021 priorities I would like to take a few minutes to provide some color on the COVID-19 related trends that provide both business opportunity and the form of strong demand for our product, but also some business challenges.

First COVID-19 has continued to drive strong demand for our Eplex RP, two panels, which is outpacing our capacity.

To put this in context throughout the quarter. Thus far we have consistently carried open orders and the $10 million to $15 million range, which we are working hard to fulfill.

While we cannot predict what will happen and the rest of the year, we have established plans and priorities to continue driving strong revenue results.

Based on current COVID-19 trends, we are planning for a return to a more typical demand level and the spring and summer for RP panels, followed by stronger demands and fall and winter.

This is based upon an assumption of the return to some sort of normalcy do the vaccinations herd immunity and personal behaviors.

As a result, we would likely see COVID-19, and circulating along with various other seasonal flu pathogens as we head into the fall and winter.

This scenario provides a very strong use case from molecular syndromic solutions, such as our Eplex RP panel.

Based upon these assumptions we plan to pivot our focus towards driving further BC idea of adoption during the spring and summer specifically, we plan to complete BCA, the implementations that customers already contracted and those and our opportunity funnel, which combined could add more than 100 customers running our BCD panels.

And therefore with continued commercial execution, we believe we can drive this year's Q2 and Q3 revenues.

And in line with last year, even though last year's results were at an all time high and due to the pandemic.

Because we do not sell of Covid only test and we have multiple syndromic panels on market, we see a path to continued revenue growth, even if the COVID-19 cases and testing declines.

This is the benefit of our product positioning and the recurring revenue stream nature of our business model.

In terms of COVID-19 related challenges for our business.

Southern California, and saw a large spike and cases that began during the holiday season and continued well into the first quarter.

We experienced a sharp increase and the number of employees that were quarantine due to the exposure to COVID-19, with the vast majority of those exposures related activities outside of work.

This particularly impacted our ability to fully utilize the additional manufacturing capacity, we just completed.

Recent trends are showing significant improvement with declines and Covid cases in our area.

We are optimistic that these positive trends will continue as the vaccine becomes more widely available.

We estimate that approximately 40% to 50% of our employees have already received or and the process of receiving their vaccinations, which should also help minimize COVID-19 related absenteeism going forward.

And before I turn the call over to Johnny I would like to address the non operational topics and I'm sure is on many of your minds and that topic is an article that reported Gen. Mark is exploring a sale after being approached by potential buyers.

Per genmar corporate policy, we did not provide comment on those rumors nor can we provide any information for the article.

While these types of rumors can be very distracting for our company. We remain focused on our mission to deliver high quality molecular diagnostics solutions that enable better patient outcomes.

Our customers and their patients are our top priority and we remain focused on their needs.

With that I'll turn the call over to Johnny for a deeper review of our fourth quarter financial results and guidance for 2021.

Thank you Scott.

Total revenue and the fourth quarter was $50 $1 million and increase of 84% versus 2019.

Eplex revenue for the quarter was $45 $4 million and increase of 138% over the fourth quarter of 2019.

And the fourth quarter of 2020, our commercial team placed 70 net new Eplex analyzers, taking our total eplex placements to 792 as of December 31 2020.

Average annuity per Eplex placement for the quarter was approximately $220000 and increase of 49% over the fourth quarter of 2019.

Fourth quarter gross profit was $19 4 million or gross margin of 39% of revenue versus $9 1 million or 34% of revenue in the fourth quarter of 2019.

This represented an increase and gross profit contribution of over $10 million or five points of margin.

We produced a record number of Eplex consumables during the quarter. Despite the COVID-19 direct labor challenges, we experienced as we exited 2020.

In the fourth quarter, we executed and important cost reduction initiative that transferred of labor intensive process two of third party provider at a lower cost. This is one key driver of the cost savings that we expect to see and 2021.

And.

Total operating expenses were $21 $5 million for the quarter, representing an increase of $3 7 million compared to the fourth quarter of 2019.

The majority of the increase was driven by continued investments in R&D. In addition to increases and G&A supporting the significant growth experienced in 2020.

Our net loss per share for the fourth quarter of 2020 was <unk>, representing a 12% improvement over the fourth quarter of 2019.

Moving to the balance.

Balance sheet, we ended the quarter with $128 million and cash and investments a decrease of $9 $1 million over the third quarter of 2020.

This decrease and cash is mostly attributable to the investments in property and equipment of $9 $9 million to further expand our manufacturing capacity.

Inventory and accounts receivable balances increased over prior quarter, resulting in cash used in operations of approximately $700000.

For the full year total revenue was $172 million, a 95% year over year increase.

Eplex revenue for the full year, 2020 was $153 million and increase of 155% over 2019.

In 2020, we placed 265 net new Eplex analyzers at customer sites. The systems generated an average annual and average annuity of over $200000 per analyzer sale.

Sales to U S customers continue to represent the vast majority of our revenue throughout 2020 and are expected to do so and the future.

Turning to our guidance for 2021, we expect another year of strong Eplex revenue growth and continued gross margin expansion with increased investment and R&D and manufacturing capacity driving positive cash flows from operations.

We expect total revenue to be and the range of $188 million to $198 million representing.

Representing year over year growth of 13% at the midpoint with Eplex revenue driving this increase.

We anticipate eplex system placements to begin to return to levels experienced pre COVID-19 for the year for the full year 2021, we expect placements to range from 200 to 220, net new analyzers and our average annuity per analyzer to range from 175000 to 190.

<unk> thousand dollars.

We anticipate 2020 full year gross margin to be and the range of 44% to 46% and to exit the year at 50%.

We expect operating expenses and the range of $85 million to $90 million.

Excluding financing activities, we expect cash usage to be and the range of $10 million to $15 million.

This concludes our prepared remarks, so at this time, Scott and I would like to open the call for your questions.

As a reminder to ask the question you will need the press star one on your telephone keypad.

Again that is star one on your telephone keypad.

Please standby, while we compile the Q&A roster.

And for your first question.

Doug Schenkel with Cowen Your line is open.

Hey, Thanks. This is Chris on for Doug today. So thanks for taking my questions, maybe just starting with flu. So that's clearly been a very light flu season in the U S and it doesn't seem like this has impacted utilization or demand for the RP panel based on your prepared remarks, but just want to confirm that's the case and then maybe more broadly.

And what is the the 'twenty and 'twenty, one can see and Bose guidance assume for contributions from <unk>.

Okay.

Sure. So Chris this is Scott I'll start off and John and can add and anything that I might Miss So on your first question was related to the impact of flu or whats going on with flu circulation currently on our demand and as I stated in the prepared remarks, you're right, we're not seeing any impact on our demand at this time in fact.

Demand for our RP panel continues to outpace our capacity.

And we've been dealing with open orders throughout the entire quarter. So that's great news for us from a demand perspective.

And as it relates to <unk> adoption and the driver and this year. It certainly is driving a significant amount of about the growth and our revenue.

Along with adding additional customers from an RFP perspective, but we do believe <unk> to be a very key contributor to our growth and 2021 as well as beyond that and that has to deal with the large market opportunity.

And the low penetration rate and in diagnosing bloodstream infections with molecular solutions and our product is very well positioned to address that market opportunity based upon eplex as workflow, but also upon the <unk>.

Inclusivity that RBC of D panels have relative to competition.

Got it thanks, and maybe in terms of just the placement guidance and 2021.

And I was hoping if you could give us an update on your customers' environment in terms of are they able to evaluate and use just place orders.

Do you need the.

COVID-19 environment and to improve a bit more before your sales force cash.

<unk>.

Target the customers again.

Yes, so from a customer.

Perspective, it varies by region of the country and and really state by state, but we do see more of the customers opening up to on site visits from our commercial teams and.

So that is certainly ongoing and we believe that all of that trend will continue in spite of that the the virtual visits using zoom and other methods has really been and enabler for us to continue to drive growth from a commercial perspective, so we really haven't felt the negative impact.

From the the lockdown and not being able to see as many customers.

And so that's on the actual commercial side on the application specialist side. Those are the folks that are going on site to do implementations on training.

And any servicing they've continued to be able to visit sites on a regular basis, even throughout the entire pandemic, so and that really has not affected us at all.

So yes, we think we're in pretty good shape from a placement perspective, the funnel is strong for the year.

And we do believe the interest and BCD is continuing to accelerate and increase and will be a key driver of placements not just the revenue growth, but also the placement growth for this year.

Okay, great. Thanks for taking my questions.

Welcome.

And your next question comes from the line of Tycho Peterson with Jpmorgan. Your line is open.

They sort of Tycho Peterson your line is open.

Please check if your line is on mute.

Okay.

Peter why don't we move to the next question. Please.

And for your next question, we have Brian Weinstein.

With William Blair. Your line is open.

Okay.

Mr. Brian Weinstein your line is open.

Yeah.

Okay.

Yeah.

Okay.

And we are moving to the next question.

And.

Max Masucci with Canaccord Genuity your line is open.

Hi, This is Stephanie on for Max and C. J. Thanks for taking the question.

Can you provide more detail around how we should be thinking about the pacing of instrument placements and 2021 and.

And the assumption that you've embedded for a recovery out of the pandemic.

And also given that the pandemic is of global issue and different area, but the low.

We'll cover at different speeds should we be thinking about the U S versus international split any differently.

Thank you Stephanie this is Johnny and maybe I'll start with the placement cadence and then maybe Scott can help with the international commercial question.

From a from a placement perspective as I mentioned in my prepared remarks, we expect to return to that pre pandemic level and the pacing will be similar we don't expect a significant difference and pacing even in 'twenty and 'twenty are pacing was still relatively steady through the year, there's demand for our systems and replacing those.

The and we expect to see that kind of throughout the throughout 2000, 2021, and one as well.

Yes, and this is Scott no no change really to the mix between <unk> and U S.

<unk> continues to present, an amazing opportunity just like in the U S. But I don't see a big shift just because of whats going on country by country nothing that we're forecasting of that our teams are telling us to be aware of so I don't really feel like that albeit of.

Difference from what we've experienced in the past and just to add to John's comment.

On pacing of placements of <unk>.

And typically what you see is.

Q3, being the strongest as people prepare for flu season, now and it's been a little bit thrown off because of the pandemic and as Johnny said last year. It was pretty evenly paced throughout the year because of the pandemic. We still have strong placement funnel for first quarter. So I think that'll continue to the relatively strong and then as I mentioned, because we are pivoting towards focusing on BCA the adoption of <unk>.

And Q2 and Q3 as we believe we will have a window of opportunity when COVID-19.

Is kind of a bit more on control I think that will drive the placements in Q2 and Q3, so for different reasons. It will be kind of evenly paced throughout the year than what it was last year last year was COVID-19 driven this year is Australia and yet from an execution perspective, specifically going after those pcie placement and the middle parts of the year, where we <unk>.

Of that window of opportunity.

And because typically flu and COVID-19 should be a little bit more on control.

Got it thank you for that color.

And now the question I had was so there have been different supply and demand trends for entering the placements and tough consumables sold into the hospital setting versus those sold to larger centralized labs or the point of care setting. If we think about the setting the health care professional and the traditional patient does test and <unk>.

And yes deletion.

Should we be thinking about how the supply and demand trends will play out for your company and your market segment in particular.

Sure. So I'll address that this is Scott again.

I think it's important and you've highlighted it in your questioning that everyone understand there is differences in types of testing platforms and their position for different use cases and to address different patient populations.

And when you think of within molecular and we certainly saw an increase and point of care and at home testing and that will certainly ebb and flow as the Covid cases change and levels change of Covid incidents. So I'll keep an eye on that that's not the market. We're in of course, we are in the hospital setting so and the hospital setting you have.

US from of Syndromic perspective, and we think were relatively well insulated from the big ebbs and flows within Covid testing because we're treating the most critically ill patients that are presenting at the hospital and so there is a decent level of insulation from the day to day trends of our day to day testing and staff that we might read about or see on the news.

<unk> because of where our product is the Syndromic panel is positioned there and you are using our panels because you want to know as much information as early as possible to really enable better patient outcomes and so that's why we're a bit more insulated than some of those other types of solutions that are testing for COVID-19 only either and the hospital space for Covid only at the point of care.

Likewise from a capacity perspective, you saw the largest increase in capacity really in the kind of kit based and the high throughput.

Test market, which again is not ours and Thats, where you saw the most increase in capacity and I think thats gotten itself of ahead of demand and so that's likely where youll see a little bit of pressure on and fully utilizing all of that capacity increase that has been built up again on a kit based and our automated high throughput type.

<unk> within the Syndromic space, we didn't enjoy that same level of increase in capacity, yes, we increased capacity. So did some of our competitors, but nowhere near the magnitude that you saw on those other spaces, both POC point of care as well as the automated high throughput type testing market. So again, we think we're relatively insulated from the demand.

Side, and our subset of the market did not experience the same significant increase and manufacturing capacity that you saw on the other areas.

Yes.

Got it thank you.

And your next question comes from the line of Brian Weinstein with William Blair. Your line is open.

Hi, guys. This is <unk>.

Griffin on for Bryan sorry about that the true happened there.

I'm not sure. If this was asked was gone, but can you give us a sense of how demand has trended early here in 'twenty, one with hospitalization sounds so much of the recent eyes and and then more importantly, where do you think the demand goes from 'twenty, one and I mean, I know, it's a crystal ball question, but what's your current thinking on the where demand for some jerome of molecular testing roads and.

Sure Yes.

Sure. Thanks Griffin and so this is Scott again, so we did mentioned and try to give a little color and context of what we're seeing early in 2021, and our prepared remarks, but specifically, we're continuing to see very strong demand for our RP two panel, which is the syndromic panel on.

And back to continues to outpace our ability to supply you have had a consistent.

Book of open orders throughout the entire quarter and that continues to persist. So that's good news from the demand perspective.

As we move into <unk> and you're right at the Crystal Ball I'll tell you the crystal ball on looking at.

Our business together is looking at and how we're planning around it.

And our Crystal ball basically is telling us to prepare for Q2 and Q3 to be a time, where.

Because of the vaccination and being more widespread as well as just development of herd immunity. We do think Q2, and Q3 will be a bit lighter from a volume of testing perspective, but what we are prepared to do is drive BCA. The adoption during that window. So that will help us continue to drive.

Revenue expansion. In addition, we have significantly expanded our installed base that are using <unk>, so while RP to where the volumes of testing might not be as high in the next couple of quarters Q2, Q3, because we've expanded our installed base. So march still applying a normal level of testing plus debt.

<unk> adoption allows us to have a path to being relatively in line at the height of the pandemic, which is Q2 and Q3 last year. So we think we're well positioned and that's because of our portfolio, where syndromic test. We have many different panels that we can sell we have and expanded installed base and we're really going after that was critically ill patients that are of that.

We are presenting at the hospital. So that's kind of how we see the summer of two quarters Q2, Q3, and shaping up and then as we look into Q4 again, our crystal ball says the <unk>.

All of the COVID-19, circulating and because of.

You are likely to see some return to normalcy youll, probably see a decent amount of flu pathogen and circulating at the same time as COVID-19, plus it will be important to be able to do surveillance. Those three things all combined together build a perfect business case for using the Syndromic panel as you head into the fall and winter of 2021 and the.

And that's what we're that's what we're planning for that what we're thinking will likely play out again, that's our crystal ball here at Denmark, but it is based on our experience and the Syndromic testing market over the last 10 years.

I appreciate that and I apologize if it was sort of asked and answered there's clearly a lot there.

And just one more on capacity here and you've talked about that fixed line being more R&D focus to satisfy internal demand should we expect the space the pace of R&D and a bit of an inflection point with more fuel to that engine with this line or are you still planning on one to two new panels, a year of that and go forward basis.

Yes, so the intent of increasing that capacity, probably above what we might need for commercial and it has a good safety net commercial but the intent is exactly that growth and it is that we are ramping up our investment and R&D, we want to launch and start development of two additional panels and.

<unk> two working on RPT and Gi, So and we would actually have for going on at the same time.

And the reason we're doing that is to your point, we want and try to accelerate our menu development.

And it will take us a little bit of time to start getting out of those couple of per year, but we are making those investments and capacity as well as R&D resources. This year to set ourselves up for the acceleration of menu advancement.

Great. Thank you.

You're welcome.

And your next question comes from the line of Tycho Peterson with JP Morgan.

Hi, guys, sorry about earlier.

So maybe my first question is in terms of the placement guide for 'twenty and 'twenty, one what should we expect in terms of.

Capital sales percentage and then.

Previously you mentioned that you were able to keep pricing stable and even.

Realized from price increases as you move to two.

The larger percentage of capital sales do you expect this to continue in 2021 assuming that.

There is still a larger capital percentage versus historically.

Yes, so so what we're planning for and in the guidance both not both the placement guidance, but also the revenue guidance is we're planning for a little bit more.

Turn to normal from a capital.

Slash reagent rental of the ratio.

You said last year was extraordinary and we were probably in the 80% to 90% was capital sales, we think that will snap back to something more on the call. It $50 50 range something like that is what our what we're planning for there.

And there is still capital available.

And and there's certainly a lot of placement opportunity.

And what we are seeing is it's just taking a little bit longer.

And the sense of urgency to rush capital through isn't the same as it was at the height of the pandemic last year, but the good news is that capital is still available and from our planning purposes. We did allow for a little bit more balanced capital reagent mix than it was and in last year's pandemic height of the pandemic.

Got it and then maybe just going back to the comments you made earlier as far as demand and <unk> and <unk> being.

Coming down a bit from Covid.

Is there any upside in those quarters based on a normalized hospital environment that we'll still have COVID-19 testing protocols as elective procedures return or those types of going to be run on eplex.

Is there any sort of upside to <unk>.

I am staying steady.

And <unk>.

Yes, I mean, you can certainly build a case.

And that's plausible that would say you might still have strong demand in Q2 Q3 from.

And from our planning purposes and for guidance setting, we thought that that might be a bit and.

So based on what we're seeing again.

And the volatile environment as you know we're doing our best to give you reasonable on.

Understanding of how we're thinking about it but yes, it could be off a little bit depending on what's happening in other parts right. Like you said you could have folks going and for elective surgeries and other factors beyond just the circulation of Covid.

But of course, we would not plan on something like that happening.

Okay. Thank you.

Mhm.

And your next question comes from the line of <unk> NAV with the <unk>. Your line is open.

Hi, Thanks for taking the question.

Scott and Johnny could you talk about.

You talked about the GI channel development and the timeline for commencing clinical studies and the second half of the year just kind of curious how contingent is that.

On the day.

The environment and kind of coming back to normal I'm, just kind of curious if you guys have identified the sites currently.

Is this something that you can kind of turn on Wednesday of kind of get back to more normalcy.

And just curious about that and kind of related to that you know as far as the the trend is the potential the transition from EUA Q I D D submission.

FDA provided any color in terms of how they are thinking about that or is this something that you know we have to wait and see.

Sure, Thanks, Sanjay and good questions.

I'll start on the Gi on.

And the timeline risk the the biggest challenge that we have faced is the of.

The availability of manufacturing capacity and having a steady stream of that and we really hamstrung that team last year, they've hung in there that a lot of work on bench and we believe as we get past the end of the first quarter for two reasons number one we think some of the volumes will come down as far as respiratory testing, but more importantly, having additional.

Faction capacity, we believe we will start freeing up quite a bit of line time for.

And for that assay development teams and really rock and roll and we're expecting them to do great things. So that's part of the timeline risk that we've endured over the last 12 to 15 months. We believe we are getting that beyond that because of the capacity and just COVID-19 getting more under control as it relates to clinical studies and being prepared for clinical studies of analytical and clinical studies.

And we certainly are while we've been waiting and little bit for four line time for these folks to complete their development efforts and locked the designs and <unk> been working and the background doing it's much activities and and administrative work as possible to de risked the next phase of development ore.

Getting Gi completed the one area that we can't necessarily control is is is Gi sample collection et cetera, we are doing our best.

And have.

Gone out to more sites and we typically would because we were seeing less samples being available than we would normally expect and thats just really around human behavior. During the pandemic with everything being locked down from restaurants to cruise ships et cetera.

The access to Gi samples.

It is less and it would typically be and so the way that you overcome that and as you add more clinical sites to try to have more sites collecting samples for use of can derisk that part of it. So that's what we've been doing some G to try to.

And really rein it in and really keep control over this time line and make sure. There is nothing that we haven't thought about so that as our development teams have that access to the line. It's go time.

And they can make as much progress as possible. So we're trying to derisk everything we possibly can think of.

From an EUA perspective, and the FDA Hasnt said anything.

That is eminent we think it will probably be out there for some time.

But that doesn't mean, we shouldn't plan right and we.

Been around as a multiplex molecular provider for a long time.

We have good relationships with the FDA of course, but we also know it takes time and so we want to be in front of US we want to have our our panel and ready to go we would ideally like to get that completed very soon and then be ready too.

And how all of the data and get all of the studies done during the next flu season. So that we're not caught flat footed that's called preparedness and Thats, what you would expect us to do and that's what we're planning to do.

Got you that's super helpful and.

And just on the Eplex the annuity. Thank you so much for the color there as we look at kind of 2022 and and beyond.

Obviously, youre going to see some benefit from Covid related testing and 2021.

From a not necessary asking for guidance and Europe, as we think about potentially eplex annuity and 2022.

Could we assume that the.

There'll be there'll be another step down somewhere where you're guiding to 2021 I'm. Just curious if you are able if you should be able to offset.

On.

And your efforts around D C. I D in terms of the annuity growth year over year from 'twenty, one versus the plenty of tail.

Yeah. Thanks, Sanjay this is Johnny so we modeled our annuity at really sort of our pre pandemic and.

The level for 'twenty, one and we think Thats really where it is kind of going forward and I think you hit it correctly that that will have <unk> will continue to support that annuity.

We saw an increase in asps and through the year for our low on our contracts, which are contracted for the next few years. So we believe that that range that we sort of provided from a from a guidance perspective. This year sort of starts to carry into next year. It's our normal annuity range that we believe is appropriate for the near term.

Okay got you and then lastly on XT eight I know you guys haven't talked about the long time, and it's very small part of the business now have you guys and just kind of a steady state at this point or do you anticipate further declines from where you are and kind of it would you be able to break out what that was for 2020.

Yeah. So so we think it has hit its sort of steady state we have some fixed customers that debt, it's pretty predictable and it's in that $15 million to $20 million of sort of what we've shared we continue to share and that's where that business is.

And is maintained and we don't foresee changes there.

Gotcha. Thank you very much.

And your next question comes from the line of Mike Matson with Needham Your line is open.

Hi, Thanks for taking my questions I guess I wanted to ask one on the gross margin and the targets for the year. So.

What are the kind of key items the.

Need to accomplish to the total deliver on this target to get to that 50% of rate exiting the year have this thing has largely been completed and now it's just the matter of either volume or are there additional projects that need it.

The address.

Yes.

Thanks, Mike There is there's a handful of items that we have been working on I highlighted one in prepared remarks that we executed on in Q4, and we will see the benefit of that through 'twenty, one, but thats one of a handful of and a target direct labor efficiencies the target the direct materials. In addition, we'll absolutely see the burner.

<unk> of volume so all of those things are efforts that we put effort into each of those we have a a list and a focused laser focused list of things we're working on and we've executed some will continue to execute through the year and Thats why we see that exited at 50% as the day it will take us of the year to execute on all of those.

Okay, I understand and then I just wanted to ask one on the international business.

I know there is it seems like it's been more focused on the U S with the comments, but and I know there's been some challenges there and the past but.

Maybe you can just give us a quick update on where things stand there.

Sure. So the international continues to kind of be in that same range of percentage of revenue because of the growth and the U S.

It was kind of and that 10% to 15% of revenue I will say, though we had a terrific year O U S. The teams did a great job the the expansion within the current regions that we're in during 2021, but also expansion beyond those regions was really well executed by that team so definitely high growth rate.

But just kind of keeping up with the same ratio.

The U S O U S debt that wed experienced before.

I think it's.

It's an area of mic that can drive quite a bit of growth for us really as we kind of get into the 2022 and beyond timeframe. I believe that there is a lot of opportunity outside of the us debt will be able to leverage and go. After this year like I said earlier really built on <unk> adoption here, a little bit and O U S. As well and then I think as you get <unk>.

<unk> 2021 O U S becomes a bit more of an important part of our growth story.

Okay got it thank you.

Mhm.

And for your last question and we have Andrew Cooper with Raymond James Your line is open.

Thanks for the questions guys.

Maybe just first when we think about kind of through the pandemic I mean, obviously, you talked about 50% of placements, including BC.

Have any of those had the chance to sort of validate and get and running on <unk> and what it what it used to look like there because presumably some of those hospitalized patients on the track.

Sepsis.

Showing up so just curious kind of what the underlying utilization was like for BCD knowing.

And obviously stressed on capacity et cetera.

Sure. So you are right and the quoting of how much how many placements brought along and <unk>, which is actually quite compelling. If you think about during the pandemic you would have probably expected of us to say it was all of RP too.

And I thought it was important to highlight the fact that even during the pandemic, 50% of those placements, bringing along BCD is very encouraging and really highlights the value of the high clinical value of our <unk> platform and on our three panels.

So as far as the implementations we've done we have seen strong uptake and.

And we've been thoughtful about it because we couldnt turn everybody on that wanted to be turned on right of way because we were still dealing with excess demand on our RP panels of the the BCA the customers that we have turned on and the usages and quite strong.

And in many cases above what the expectations were so very encouraging Andrew that's why we feel good about what we want to do and Q2 and Q3 as far as really driving that and <unk> adoption I should also add on <unk>.

One of the key areas that we're investing and besides R&D is really increasing some of our technical sales capabilities, specifically specialists that are experienced whether it be within pharmacy or infectious disease to really help drive. These implementations, we think that that is.

A key competitive advantage for us we piloted that model in the fourth quarter of last year. It went very very well and so that part of our investment in 2021 is investing in more of the specialist that really help get these implementation across the line and help our customers be successful.

And and implementing BCD and again thats part of our confidence level and and getting these implementations done we've seen the ones that are live already they are using the product like I said at or above the levels that we expected. So so we think we're set up for some good success there.

Great. Thanks, and maybe just one more.

And just help us think about sort of the funnel on placements, obviously, you did place and elevated number and in 2020.

Likely to the customers who are already lining up are already interested in and out.

Adding and molecular Syndromic platform. So just how do we think about what that looks like and what.

And what the latest thinking on maybe what Covid has done to the view of such a platform.

More broadly and the market.

Yes.

And our opinion is that Covid did a lot for diagnostics and general specifically molecular and then even within the molecular space. We believe people of really come to understand the different types of molecular solutions and the different use cases syndromic clinical value. We believe was certainly highlighted during the pandemic.

On.

As far as its ability to very quickly look across many many different pathogens and I think the use case was was very well received and the evidence.

And the evidence has increased as far as why the use syndromic panels. So I definitely think that Covid had a positive and lasting impact on molecular in general, but then specifically the different subsectors segments of molecular has been really well understood based on what happened last year.

And I think the only the comment about the strength of the funnel for placements, we absolutely continue to see.

A strong demand for those placements and have a solid funnel that allows us to kind of project from the year.

Great and I appreciate it.

Thank you speakers I will now turn it over to Scott Mendel for closing remarks.

Thank you for joining us this afternoon and thank you for your continued support.

Our team remains committed to delivering high quality syndromic molecular tests that enable better patient outcomes. We think we're well positioned to drive continued revenue growth and this large and growing market and I look forward to updating you on our progress and the future. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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