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GenMark Diagnostics Inc (GNMK)
Q2Â 2020 Earnings Call
Aug 4, 2020, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Scott Mendel -- President and Chief Executive Officer
Thank you 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 statement 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 product, 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 result expressed or implied in 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.
So with that, good afternoon, everyone and thank you all for joining us. I'm joined on the call today by Johnny Ek, our CFO. We hope you're all staying safe and healthy as we continue to face unprecedented challenges with COVID-19 pandemic. I'd like to take the next few minutes to review our recent performance and share our thoughts on the second half of 2020. I'll then turn the call over to Johnny for a deeper review of our recent financial performance and we will finish up with Q&A. On our earnings call in early March we highlighted our three strategic priorities for 2020. These included: number one, strong revenue growth; number two, making significant steps toward cash flow positivity through gross margin improvement and operating efficiencies; and number three, menu and technology development. At that time we were just beginning to see the start of the global pandemic. While we could not have anticipated depth and duration of this global health crisis, our team has remained committed to those key priorities and delivered remarkable results throughout the first half of this year and they've done so under extraordinary circumstances. With respect to our first strategic priority of driving strong top line growth, Q2 revenue was $40.1 million, up 118% versus the prior year. Our installed base grew by 71 analyzers to 652 at the end of second quarter, well ahead of our plan for this year. Placements in the second quarter included over 40 new customers, taking the total for the first half of 2020 to approximately 80 new customers.
While we did reposition a few instruments in the quarter, these were primarily underutilized units placed outside the U.S. and identified earlier this year as part of our stated objective to drive higher annuity internationally. Our commercial teams remain focused on driving ePlex placements that will deliver long-term recurring revenue streams. This is consistent with our product positioning as a provider of syndromic molecular diagnostic tests as opposed to single target tests like so many others that have recently come to market to address this global pandemic. While COVID-19 has accelerated our installed base footprint, our syndromic panels were vital in diagnosing critically ill patients prior to the pandemic and will continue to play a role when we return to a more normal environment. Our teams are transitioning customers who may have begun using ePlex for COVID-19 only to our respiratory and BCID tests. In fact, as of the end of Q2 more than 70% of our 2020 placements are already contracted for our RP and/or our BCID panels, demonstrating our success in creating enduring revenue streams versus COVID-only volumes. Beyond respiratory testing, blood stream infections are an important area of focus for our company and we are confident that our blood culture ID panels will be a key driver of revenue growth over the longer term. Even during this global pandemic, we have completed many successful validations of our BCID panels and that adoption rate is continuing to accelerate. Year-to-date, we are tracking to approximately 60% of the 2020 goal we established at the end of last year and we're relatively happy with this level of progress considering the impact of COVID-19 on customer priorities and resources. We incorporated our revised BCID adoption expectations along with increased respiratory and COVID testing volumes in the revenue guidance disclosed today.
I'm equally excited about our progress in driving gross margin and profitability improvement which is our second strategic priority. In the second quarter, gross margin was 40% and encouragingly for the first time in the company's history we generated positive cash flow demonstrating the meaningful acceleration of our business model which we expect to leverage for years to come. This performance reflects the tremendous demand we've seen from existing and new customers for our ePlex platform and our ability to address the demand in an increasingly efficient and cost-effective way. We are continuing to make progress in reducing the cost to manufacture our consumable and remain committed to our stated goal of 60% ePlex gross margins. Our manufacturing and engineering teams are implementing several more improvements in the back half of 2020 in line with our plans and those teams are beginning work on projects that are expected to yield additional cost reductions in 2021. From a supply chain perspective, our supply of instruments has increased significantly in line with our expectations and we do not anticipate instrument capacity to be a constraint for the remainder of this year. Our primary focus is executing our ePlex consumable manufacturing expansion plans. We are in the process of adding two additional ePlex lines that will enable us to substantially increase our capacity in support of the upcoming flu season. We are constructing these lines in a newly secured 73,000 square foot manufacturing facility located a short distance from our existing locations. This newest building is large enough to house an additional four lines beyond the two that are currently being constructed. Combined with our current facilities, we expect to exit 2020 the capacity to produce approximately 150,000 tests per month and then take another step-up in the first quarter of 2021 when the next line is expected to be operational.
Turning to our third priority of expanded menu and technology development, our initiatives toward supporting this global healthcare crisis have been an obvious and immediate priority. In addition to a quick pivot to develop and commercialize a stand-alone ePlex COVID-19 test in March, we developed and launched our ePlex RP2 panel one of the first rapid results syndromic panels that provides detection of 21 viruses and bacteria that cause common and often serious respiratory infections, not limited to but including COVID-19, influenza A and B, RSV and rhinovirus or the common cold. At the end of June, we submitted our RP2 EUA and began commercialization. We expect EUA approval in the very near future. We placed a priority in advancing development and quickly bringing to market our RP2 panel as it can provide rapid results to diagnose what pathogen is causing a patient symptoms. Many of these pathogens produce similar symptoms such as fever, cough and body aches and we believe that syndromic panels will be a critical diagnostic tool this fall and winter as the flu season coincides with the ongoing risk of COVID-19. RP2 has a number of key competitive advantages. In addition to being one of the fastest sample-to-answer molecular multiplex panels on the market today, our recent analytical studies indicated an improved limit of detection on our RP2 panel. And from a customer's point of view, RP2 delivers improved workflow reducing hands-on time by 50% now requiring one minute or less to simply pipe at the patient sample directly into the ePlex cartridge and insert the cartridge into the instrument. The transition to RP2 is gaining momentum and includes large hospital networks such as Vidant Health and Northwell Health to community hospitals like Graham Regional Medical Center located just west of Dallas.
We've all heard reports of patients that have waited for days to receive their test results versus our ePlex RP2 panel that delivers results in under two hours a potentially life-saving technology in treating critically ill patients. Graham Regional Medical Center began using RP2 as the COVID-19 surge hit their area in mid-July. They have reported that since implementing RP2 they reduced their turnaround time from seven to 10 days to getting results in under two hours. And they are using ePlex to help with resource management in particular their medical staff. An example that Graham Regional shared with us was that when one of their nurses recently spiked a fever, they tested her using RP2 and sent her home. Within two hours the test result indicated she was negative for COVID-19 but positive for rhinovirus which is the common cold so she was able to come back to work as soon as she recovered. A negative result for COVID-19 alone would not have given them confidence to bring you back to work without knowing the cause of her fever. This is critical to helping ensure staff availability to treat patients during the pandemic. Additionally, the FDA Commissioner Steven Hahn commented in a recent article about the importance of combination panels that include SARS-CoV-2 for the upcoming flu season. He highlighted that syndromic panels can provide comprehensive diagnostic information with just one swab or sample and the efficiency of these tests can go a long way to providing timely information for those sick with an unknown respiratory illness. Beyond COVID and RP2, we have now returned to focusing on our GI panel and future technology development. While we continue to make progress on this commitment, our top priority remains to supply ePlex test to customers that have adopted our platform. Given the extraordinary and unexpected customer demand for our on market tests, we are experiencing some delays relative to our original plans, but we believe prioritizing the needs of our customers and their patients is the correct decision and I'll provide more details on upcoming calls.
Undoubtedly, 2020 has presented extraordinary healthcare challenges with extensive consequences. And GenMark has been forever transformed not only because of COVID-19, but importantly, because our team came together to deliver a rapid response to this global pandemic, while demonstrating a resilience and commitment to support our long-term goals. I'm very appreciative of the hard work and sacrifices our employees are making to develop, manufacture, and distribute panels to enable better patient outcomes and proud of the role we've been able to play in supporting those on the front lines and helping patients. Our team has been unwavering in their drive to support the fight against the spread of this pandemic, while simultaneously not losing sight of our key corporate priorities that ultimately support our long-term growth. This is no small achievement in the light of the challenges we also face in our daily lives such as limited access to child care, school closings, and caring for our loved ones and I want to express my sincere thanks to their ongoing dedication. We are committed to keeping our employees safe and healthy by rigorously carrying out workplace safety measures and guidelines.
And with that, I'll turn the call over to Johnny for a deeper review of our second quarter financial results.
Johnny Ek -- Chief Financial Officer
Thank you, Scott. In the second quarter of 2020, total revenue was $40.1 million, an increase of approximately 118% versus the second quarter of 2019. With ePlex revenue growing by 195% compared to the prior year. Sales to U.S. customers continue to represent the vast majority of our revenue. Average annuity per ePlex placement for the quarter was $188,000, an increase of 74% over the second quarter of 2019. Second quarter gross profit was $15.9 million for a gross margin of 40% of revenue versus $6.6 million or 36% of revenue in the second quarter of 2019, representing an increase in gross profit contribution of $9.3 million or four percentage points reflecting the steady progress toward our goal of 60% gross margin over the next two to three years. The gross margin improvement over the prior year is the result of continued execution on our initiatives to minimize yield loss maximize direct labor efficiency through continuous manufacturing line training and audits, while continuing to build record numbers of consumable units. Our recent investments in additional manufacturing capacity will enable us to increase consumable output to the level Scott outlined previously with the additional square footage available to us to scale with increasing demand and achieve our longer term gross margin target. Total operating expenses were $18.5 million for the quar,ter representing an increase of $61m000 compared to the second quarter of 2019. Our net loss per share for the second quarter of 2020 was $0.07 representing an improvement of $0.16 from the second quarter of 2019. Moving to the balance sheet, we ended the quarter with $132.8 million in cash and investments which includes approximately $75.4 million of net proceeds from the sale of common stock in a public offering during the second quarter. Excluding these financing activities, we generated positive cash flows for the first time in the company's history of $7.2 million, which includes an investment of approximately $751,000 in manufacturing equipment.
This improvement in our cash usage was driven by the strong revenue growth and gross margin expansion, with relatively flat operating expenses in the second quarter. Accounts receivable collections in the second quarter also provided a favorable impact to working capital. Turning to 2020 expectations, we previously announced an increase to our full year revenue guidance to $120 million to $130 million. We are now further increasing the revenue guidance to a range between $155 million and $165 million. This updated revenue guidance incorporates the first half results and the recurring revenue from the transition of recent COVID-19 placements to the ePlex, RP2 panel, in addition to continued growth from BCID Panel adoption. We are also increasing our annual ePlex placement guidance to 230 to 250 net new analyzers, and increasing our expected average annuity per analyzer to between $175,000 and $200,000. We continue to anticipate full year 2020 gross margin in the range of 38% to 40%. We are increasing our expected operating expenses to a range of $70 million to $75 million for the year. We now expect cash usage, excluding any impact from financing activities to be approximately $10 million to $15 million. While this is an increase from our previous range of $5 million to $10 million, it is important to note that this revised range incorporates approximately $10 million of additional investment in the new manufacturing facility and build-out of the two new manufacturing lines. The strong operational results have improved our cash flow from operating activities for the year to approximately breakeven and will assist in funding this manufacturing capacity expansion to support our continued growth.
This concludes our prepared remarks. So, at this time, Scott and I would like to open the call for your questions.
Questions and Answers:
Operator
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Max Masucci from Canaccord Genuity. Your line is now open.
Max Masucci -- Canaccord Genuity -- Analyst
Hi. Thanks for taking the questions. Just to start, can you help us just understand some of the key assumptions in the updated guidance just one level deeper. Based on any trends you've observed in early Q3 and with some recent state and citywide reclosings. Do you expect to sustain a higher percentage of instrument sales as capital in the back half of the year? Or should we expect that to trend back toward traditional levels?
Johnny Ek -- Chief Financial Officer
Hi, Max, this is Johnny. Yeah. So the back half of the year anticipates the capacity we've talked about for the first half of the year, we're continuing to push to maximize that capacity. So, you can -- that's incorporated into that guidance range. In addition to an expectation that as we approach flu season obviously that we would expect Q4 to be stronger than Q3. But, there's, as you know, several unknowns as it relates to flu season.
In addition to the fact that Scott mentioned something about our ability to continue to manufacture and there's an assumption in there that we as humans have to make sure no one gets sick. And so, there's -- those assumptions baked in the full year guidance in the back half. And then, from a capital perspective, we're expecting kind of a relatively continued pace of capital. We're still seeing strong demand for that capital and would expect that sort of in the back half.
Max Masucci -- Canaccord Genuity -- Analyst
Great, and then one more. I know it's early days, but how would you characterize the early uptake of the RP2 panel and just clinicians willingness to convert from the legacy panels. Is there any change to your thinking that a segment of your customers will continue to run the single target COVID-19 panel as well? And just any general thoughts as we exit the summer here.
Scott Mendel -- President and Chief Executive Officer
Sure. I'll take that Max. It's Scott. Definitely in the early days, since we just commercially launched not too long ago. But we are encouraged by the number of folks already transitioning to RP2. As I mentioned in my prepared remarks that that's everything from very large health networks to community hospitals and the feedback has been really positive especially around the improved workflow, which means a lot to our customers. In addition as I mentioned we also improved the limited detection and sensitivity for SARS-CoV-2 on the RP2 panel. So the transitions have been going quite well. Maybe just a little ahead of our expectations. And as we talked about before we want to get everyone converted over as quickly as possible because we think a syndromic panel that has SARS-CoV-2 on it as well is going to be important as we prepare for the upcoming flu season, which is likely to be in concert with COVID-19. So again feeling really good about it, good customer feedback and we're marching steadily forward on that.
Max Masucci -- Canaccord Genuity -- Analyst
Great. Thanks for taking the question, and congrats on a great quarter.
Scott Mendel -- President and Chief Executive Officer
Thanks, Max.
Operator
Your next question comes from the line of Doug Schenkel from Cowen. Your line is now open.
Ryan Blicker -- Cowen -- Analyst
Hi, this is Ryan on for Doug. Thanks for taking my questions. Maybe starting with placement guidance. So you had 71 net placements in Q2 plus gross placements were even higher accounting for the repositioned instruments. You just talked about capital demand remaining strong. Can you talk a little bit about, why your placement guidance for the back half isn't even higher now that you're no longer capped by capacity? Are you seeing any slowdown in instrument demand at all in July and early August? Or are you capped at all by your consumables manufacturing capacity there? Thank you.
Johnny Ek -- Chief Financial Officer
Yes. This is Johnny. I think -- Ryan, I think you've got it exactly right, which is there is continued demand for the instruments. We are not constrained from an instrument perspective we have the ability to supply instruments. We really want to make sure that as we place the instruments we have sufficient consumable supply to satisfy those customers that we are placing those new instruments and make sure we've got -- we can continue to supply our already existing live customers. We really want to make sure that as they we move in the flu season that they're fully supported.
Ryan Blicker -- Cowen -- Analyst
Got it. Okay. And then on consumables manufacturing capacity, I think you said 150,000 per month by year-end, if I heard that correctly. Can you just talk about what that assumes for the first new manufacturing line? I'm guessing, that includes the process improvements you previously talked about. Does that mean that you're essentially improving only a partial scale-up of that first-line by the end of the year? And what's the likelihood you're able to get that line up and running maybe a bit faster than what your guidance implies?
Scott Mendel -- President and Chief Executive Officer
Sure. This is Scott. I can handle that. So you're remembering pretty well, the goal for exiting Q3 on our existing lines is to achieve around 120,000 units a month. So that's on our three existing lines. And that's being driven by process improvements and yield and everything that our manufacturing teams are driving. And they're doing a great job of that and they're on track to get to that type of production per month. When we bring on the next line, which is the fourth line we expect that to come on really toward the middle of Q4 in the November time frame. We're doing everything we possibly can believe me to accelerate that. But it is a lot of work it's a full line that incorporates a lot of equipment and validation from a GMP perspective. So we have to do things the right way, but we're doing everything we can to resource and plan appropriately to get that operational just as quickly as possible. And I said in my prepared remarks, we think that that will make us exit Q4 in that 150,000 range maybe a little bit above and that's where we are planning to exit 2020. And then the fifth line is expected to come on in the first quarter of 2021 shortly after we get the fourth line down we roll right into the fifth line and get the validations going out so that can hit in the first quarter of 2021. And that will take us up in the 185,000 to 200,000 units per month range. So that's our plans. And Ryan so far we're on track for that. The build-out of the new facility is going well. And the team is motivated to get that done as quickly as possible. But again we've got to make sure we do it the right way and we'll try to bring it in as quickly as we can.
Ryan Blicker -- Cowen -- Analyst
Thank you.
Operator
Your next question comes from the line of Brian Weinstein from William Blair. Your line is now open.
Brian Weinstein -- William Blair -- Analyst
Hey, guys. Good afternoon. Thanks for taking the question. I thought we got to spend a little bit on gross margin here. Looking at where you guys were for the quarter and the guidance for the year, certainly nice improvement but it would seem that there's an opportunity for that to potentially be even higher. So just can you go through kind of the assumptions that are sort of, built into that gross margin guidance in the back half of the year in particular, especially, as we think about some new pricing that's coming through on RP2? And as part of that can you kind of expand on what you think that price increase could be?
Scott Mendel -- President and Chief Executive Officer
I'll start and then I'll let Johnny finish. So I'll go the back half of the question first. So from a pricing perspective you're right Brian, Q2 let's start there reflected the fact that we definitely mix shifted toward COVID stand-alone test revenue. I believe it was between 45% and 50% of our ePlex revenue versus it was about 5% of our ePlex revenue in the first quarter. So as we foreshadowed and make everybody was aware we did mix shift toward the COVID stand-alone test. And that's probably in call it $5 to $10 price differential from what our normal RP panel is. So that definitely impacted Q2.So as we roll forward through the back half of the year that should be a tailwind. Number one we are moving toward the syndromic panel. And number two, we are going after driving a little bit higher ASP on the syndromic panel that now include SARS-CoV-2. It's in the early days Brian, but it's encouraging. So we do hope to see an uptick there which would help gross margin in the back half of the year. So is there upside in that? We hope so but we think we're being relatively prudent and thoughtful about keeping guidance where it's at until we kind of see how the RP2 transition rolls out how pricing holds and then also just looking at our yields in the back half of the year.
As Johnny mentioned one of the things that we do become a bit concerned about is just making sure we can keep our lines fully staffed. So what do I mean by that Brian? We're starting to hire quite a few more people on the manufacturing lines than we would normally require. That will put a little bit of pressure on what our normal cost of goods sold might be but we think that's the right decision to make. We have to make sure we can keep our lines going. We have to make sure that we can continue to supply product to our customers even if that means in the very short-term it's a little bit of a headwind for us in cost of goods sold. I think that investment is prudent. So that's kind of the story. That's pricing is going well. We slowly but encouraging and we're taking some measures to kind of protect our capacity and our supply in the back half it's giving us a little bit of headwind on cost of goods sold. But again we think it's the right investment to be making.
Johnny Ek -- Chief Financial Officer
And the only thing I would add is... Yes. Sorry, Brian. The only thing I would add is on the direct material we're executing as we had expected to through the year. And as we've stated previously we expect sort of that exit rate at the end of the year from an ePlex perspective to be in that 40% range.
Brian Weinstein -- William Blair -- Analyst
Got it. So Scott you and Johnny are on the manufacturing lines on the weekend. Is that what I'm to understand here?
Scott Mendel -- President and Chief Executive Officer
You'd be surprised. We have volunteered to kit and put them in boxes and all that. Unfortunately our leader in manufacturing doesn't think we're very well-qualified. He's rejected us so far but, we'll see.
Brian Weinstein -- William Blair -- Analyst
Probably smart on his part. Okay. As far as the placements go, you gave a little bit of color and I appreciate that on where some of these went but can you talk about in a little bit more detail where you're seeing success with placements new customers versus the competitive wins? I think you commented a little bit on that in the past. And just from a competitive standpoint what are you seeing out there? Because you guys are having a little bit of an impact obviously. Is there a competitive response that you've seen in the last quarter or even post quarter into July?
Scott Mendel -- President and Chief Executive Officer
Yes. I'll start it and Johnny can jump in if I miss anything. Good questions in there on what's going on competitively in placement. So let me just start at the beginning. It's kind of hard to tease a part now that we have BCID and RP and a little bit of COVID stuff going on Brian. But in general what we saw was about 50% of our placements were to new customers versus competitive takeaways. That's a bit less than what we've disclosed in the past, but it makes sense. As we start getting into more BCID driven placements you would expect that percentage of competitive takeaways to come down because BCID is a less penetrated space than what respiratory testing is. I think the other thing that we are very encouraged about from a placement perspective before I go on to competition is it was important to us that we placed systems that could create recurring revenue streams. And what I'm really excited about is of the placements that we've done in the first half of the year, about 90% of them were driven by an interest in COVID meaning they were having issues getting COVID supplied from our competitors and whatnot which is great, but what we want is to create that recurring revenue stream.
And I'm happy to report that of the first half placements about 70% of them have already contracted for BCID and/or RP. And that's something we're going to keep our eyes on and we want to convert all of them. And so, that's been something I want to make sure that everybody understands. It was a question that we were getting a lot when the pandemic first started and finally from a competitive perspective really no change from the competitive environment. There are as I mentioned in my prepared remarks a lot of new entrants into the market but they tend to be on the COVID only test not necessarily in the syndromic sample-to-answer space. And I would say the folks that we normally consider our competition and ourselves are doing everything we can to generate as much supply as possible for our customers especially to help them prepare for the upcoming flu season Brian but no big change from a competitive set perspective.
Brian Weinstein -- William Blair -- Analyst
Great. Okay. Thank you, guys.
Scott Mendel -- President and Chief Executive Officer
Thanks, Brian.
Operator
There are no further questions from participants online. I would now like to hand the conference back to today's presenter Mr. Scott Mendel. Sir you may continue.
Scott Mendel -- President and Chief Executive Officer
Thank you and thank you all for joining us this afternoon and for your continued support. I look forward to updating you on our progress in the very near future. Have a good day.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Scott Mendel -- President and Chief Executive Officer
Johnny Ek -- Chief Financial Officer
Max Masucci -- Canaccord Genuity -- Analyst
Ryan Blicker -- Cowen -- Analyst
Brian Weinstein -- William Blair -- Analyst
