GenMark Diagnostics, Inc. (GNMK)

[mick]

Edited Transcript of GNMK earnings conference call or presentation 2-Mar-20 9:30pm GMT
https://finance.yahoo.com/news/edited-transcript-gnmk-earnings-conference-154823415.html


Thomson Reuters StreetEvents Thomson Reuters StreetEventsMarch 11, 2020
Q4 2019 Genmark Diagnostics Inc Earnings Call

Pasadena Mar 11, 2020 (Thomson StreetEvents) -- Edited Transcript of GenMark Diagnostics Inc earnings conference call or presentation Monday, March 2, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Frederick Ek

GenMark Diagnostics, Inc. - CFO

* Scott Mendel

GenMark Diagnostics, Inc. - COO, Interim President & CEO

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Conference Call Participants

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* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* Max Masucci

Canaccord Genuity Corp., Research Division - Associate

* Michael Stephen Matson

Needham & Company, LLC, Research Division - Senior Analyst

* Sung Ji Nam

BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

* Leigh J. Salvo

Gilmartin Group LLC - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the GenMark Diagnostics fourth quarter earnings conference call. (Operator Instructions)

I would now like to hand the conference over to Leigh Salvo, Investor Relations to proceed with today's conference call.

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Leigh J. Salvo, Gilmartin Group LLC - MD [2]

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Thank you, Demetrius, 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 2020 financial and 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 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'd now like to turn the conference call over to Scott Mendel, Interim President and CEO of GenMark.

Scott?

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Scott Mendel, GenMark Diagnostics, Inc. - COO, Interim President & CEO [3]

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Thank you, Leigh. Good afternoon, everyone, and thank you all for joining us. Before I begin, I'd like to say it's an honor to be entrusted with leading GenMark Diagnostics. As a longtime member of this organization, I have a deep understanding of our core capabilities and the attractive opportunity in front of us, both of which make me excited to lead this talented and dedicated team.

With the launch of ePlex in 2017, GenMark has become a leader in multiplex molecular diagnostic testing. I am confident the significant and expanding clinical value the ePlex system offers to health care providers will serve as a cornerstone for GenMark's sustained long-term growth. On behalf of our employees and myself, I would like to thank Hany Massarany for his 9 years of leading our company, and the role he played in the development and launch of ePlex that has positioned us to capitalize on this very exciting syndromic molecular testing market.

Before we dive into our recent company performance, I would like to address the topic that is front and center in the news, on our minds, and impacting our lives in many ways. The emergence of COVID-19 is a developing global health care emergency. Today, we announced our recent development and initial research use only shipments of ePlex test kits designed for SARS coronavirus 2 detection. While not on our scheduled road map, we quickly assembled the team, and in less than 1 month, they designed, manufactured and shipped initial tests to customers for validation of our test design.

It's a clear demonstration of our team's ability to execute and the ability to adopt ePlex to meet a specific market need. We believe launching a test for this rapidly emerging virus was an imperative for our customers and their patients. Beginning last week, an RUO version of this test was shipped to our distributor in Hong Kong as well as to several key sites in the U.S. that have access to clinical samples. We plan to use information from these customers to support our submission of an Emergency Use Authorization, or EUA, to allow hospitals to adopt this test for clinical use.

And of course, we will continue to monitor this virus and potentially leverage these development efforts into a future version of our existing RP panel.

Moving on to our business performance. I'd like to briefly look back at 2019 and recap our progress and achievements that have positioned us favorably for the year ahead.

Last year, we had 3 primary goals. The first was to expand our menu through the launch of blood culture identification panels. The second was to drive strong revenue growth through increasing placement and adoption of ePlex. And the third was to drive gross margin improvement. I am proud to say that our teams delivered on all 3 of these goals.

In 2019, we successfully launched our ePlex BCID panels, which helped drive strong revenue growth. Total 2019 revenue was $88 million, representing growth of 24% over 2018. ePlex revenue grew by 59% driven by an installed base of 527 analyzers as of year-end.

We were also successful in our other main objective of expanding gross margins toward a long-term goal of 60% plus. Gross margin for full year 2019 was 32.5%, up from 27.5% in 2018, driven entirely by improvement in ePlex gross margins.

Turning to fourth quarter performance. Total revenue increased to $27.2 million, representing growth of 40% compared to the prior year period. This strong performance was fueled by ePlex growth of 58% compared to the fourth quarter of 2018. Demand for our respiratory pathogen panel was in line with our expectations for a moderate flu season. Our commercial team placed a total of 48 ePlex analyzers in the quarter primarily driven by interest in our BCID panels. However, our installed base increased by a net 38 due to the reassignment of 10 previously placed analyzers. The majority of these reassigned units were from 1 U.S.-based customer that did not implement ePlex as originally planned. It is important to note that these analyzers had not begun the implementation process, and therefore, they had never generated revenue.

We will continue our commitment to quality placements that will generate a recurring revenue stream, which is an important component of our business model. Our U.S. commercial team is contributing to win in both -- is continuing to win in both greenfield and competitive accounts. Similar to prior quarters, approximately 70% of placements in the fourth quarter were within labs that previously had a competitive platform. And again, BCID was the primary driver of about 80% of our placements.

Moving on to our fourth quarter gross margin progress, which is a critical step to achieving cash flow positivity and improving profitability. Our goal is to achieve 60% gross margins from ePlex, just as we have with our legacy XT-8 platform. We are steadily improving ePlex gross margins, and have plans in place to achieve our gross margin target in the next 2 to 3 years. Initiatives to drive direct material and direct labor efficiencies saw continued traction and improvement in the fourth quarter.

We achieved record manufacturing output for the quarter, which helped drive strong overhead absorption. Manufacturing yields have also been a key component in gross margin improvement, contributing to both direct labor and direct material efficiencies.

We finished the quarter with gross margin of 33.5%, and total year gross margin of 32.5%, which was at the top end of our increased guidance range. We are very pleased with that progress. And in 2020, we expect to further improve manufacturing yield, leverage our production capacity and deliver additional direct material cost improvements through both supply chain initiatives and reducing scrap during the manufacturing process.

Looking ahead into 2020, our 3 main priorities are: one, strong revenue growth; two, making significant steps towards cash flow positivity through continued gross margin improvement and operating efficiencies; and three, menu and technology advancement.

I'll start with our priority to drive strong revenue growth.

Our 2020 revenue guidance can be broken down into 3 main categories: recurring revenue from our existing customers; revenue from ePlex analyzers already placed and in the process of implementation; and additional placements expected in 2020. We expect the majority of our 2020 revenue to be driven by the recurring revenue of our ePlex systems already in routine use. In addition, completing implementations of existing placements, not yet in clinical use, will be a key contributor, along with new placements to the extent they are implemented within the year.

I would like to spend additional time discussing these last 2 categories of revenue, starting with completing the implementation of already placed ePlex analyzers. Since the launch of BCID in the middle 2019, we have learned that the implementation process for these panels requires focused efforts from our team and a variety of constituents within the hospital. Because the majority of placements now include BCID, the time frame for implementation has been trending longer than our initial 3- to 6-month expectation. With additional experience and focus, we are confident that we can improve the implementation process.

To put into perspective why we are highlighting implementation time frames, our current funnel of customer implementations is expected to generate approximately $15 million in annualized revenue when they are all in routine clinical use. Completing these implementations as quickly as possible would increase how much of that annualized revenue we could realize in 2020. So what are we doing about this? We've implemented detailed steps to streamline the process, we are measuring and incenting our teams to successfully complete these implementations and we are adding additional specialists to help expedite the most challenging steps frequently encountered during the process. New placements are also expected to drive revenue growth to the extent they can be implemented within the year and begin generating revenue. In 2020, we expect our U.S. commercial team to drive placements in line with 2019 results, with our BCID panels driving many of those opportunities. Outside the U.S., we will continue to expand, but likely not at 2019 levels, which reflected the broad global expansion through establishing distributors in Europe, the Middle East, Latin America and Asia. We have established our 2020 placement guidance range, reflecting continued strength in the U.S. market and a measured approach to international expansion.

Regarding our second priority, we expect continued progress on improving ePlex gross margin in 2020. Our teams are already implementing improvements to drive direct material and direct labor reductions, and we should experience continued overhead absorption improvement through increasing production volumes. As part of our focus on improving margins and driving to cash flow positivity, we will also closely monitor, analyze our pull-through.

This is an important area of focus outside of the U.S., where placements have been generating much less revenue annuity than in the U.S. In fact, the average of U.S. placements is nearly 6x that of placements outside the U.S. As a result, we are carefully reviewing country-by-country performance, including evaluating existing placements on their ability to drive adequate revenue per placement as well as margins in line with our long-term goals. This evaluation is an important factor in our 2020 placement and revenue guidance ranges that Johnny will discuss shortly. In 2019, we expanded our international footprint to more than 30 countries. And in 2020, we will be laser-focused on maximizing the return on that investment, and allocating our time and resources to those areas that can drive both revenue growth and margin expansion.

Turning to our third priority of menu and technology advancement. Our GI panel development is the primary area of focus. Our team is in the optimization phase of development, which include adjusting both assay and key manufacturing process parameters to obtain the best performance across all targets on the panel. Our goal is to begin clinical trials in late 2020, which should result in regulatory submission in the first half of 2021. In addition, we have additional development teams working on future technology advancements to support the longer-term pipeline of new products as well as a software team developing enhancements and new features for our ePlex platform, which have been a key feature of ePlex's competitive advantage.

To conclude, as hospitals continue to transition to near-patient multiplex molecular testing, ePlex has established a strong value proposition. Through our experienced commercial team, armed with the best-in-class system, improving margins and continued menu and technology advancement, we are well positioned to drive revenue growth and profitability improvement.

I'd now like to turn the call over to Johnny for a review of our financial results for the fourth quarter and guidance for the full year in 2020.