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Edited Transcript of GNMK earnings conference call or presentation 5-Aug-19 8:30pm GMT

Q2 2019 GenMark Diagnostics Inc Earnings Call

Pasadena Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of GenMark Diagnostics Inc earnings conference call or presentation Monday, August 5, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hany Massarany

GenMark Diagnostics, Inc. - CEO, President & Director

* John Frederick Ek

GenMark Diagnostics, Inc. - CFO

* Scott Mendel

GenMark Diagnostics, Inc. - COO

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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

* David Joshua Saxon

Needham & Company, LLC, Research Division - Associate

* Doug Schenkel

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* John Hsu

Raymond James & Associates, Inc., Research Division - Research Analyst

* Mark Anthony Massaro

Canaccord Genuity Corp., 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

* Xiaoxiao Ma

BofA Merrill Lynch, Research Division - Associate

* Leigh J. Salvo

Gilmartin Group LLC - MD

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to today's conference call to discuss GenMark Diagnostics second quarter 2019 financial results. My name is Lori, and I will be your operator on this call. (Operator Instructions) Please note that this call is being recorded today, Monday, August 5, 2019, at 1:30 p.m. Pacific Time and will be available on the Investors section of GenMark's website at www.genmarkdx.com.

I would now like to turn the meeting over to Leigh Salvo.

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

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Thanks, Lori, 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 for future events or performance are forward-looking statements. For example, statements concerning our 2019 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 statement 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 Hany Massarany, President and CEO of GenMark. Hany?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [3]

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Thank you, Leigh, and good afternoon, everyone. Joining me today is our Chief Operating Officer, Scott Mendel; and our Chief Financial Officer, Johnny Ek.

In the second quarter, we delivered strong commercial results and increased operational efficiency while also continuing to advance innovation and future product development. The sustained strengths we see in our fundamentals, combined with the growing market opportunity for ePlex, give us continued confidence in our business outlook and the opportunity to raise our 2019 gross margin guidance to the range of 31% to 33% for the full year.

I'd like to take the next few minutes to review our second quarter performance and recent business developments. Scott will then provide an update on our key operational initiatives and the progress we've made during the quarter. And finally, Johnny will wrap up with additional details about our Q2 financial results and 2019 guidance. After these prepared remarks, we will open the call for questions.

So beginning with revenue. We drove another quarter of strong top line performance with total revenue of $18.4 million, representing growth of 23% compared to prior year. This robust post-flu season result was largely driven by ePlex revenue growth of over 70%, which is highly indicative of the continued strong adoption of our proven ePlex system in the marketplace. In fact, ePlex revenue in the quarter accounted for over 65% or $12 million of total sales. And with the recent launch of our suite of FDA-cleared BCID panels, we are more confident than ever that we can continue to build on this momentum to drive future growth.

We believe that the combination of our best-in-class ePlex platform, its differentiated test menu and broad market adoption, together with the continued strong execution of our high-performance commercial teams, position our business at a very exciting inflection point with a long runway for future growth.

As Scott will cover in more detail shortly, we've also made very good progress driving manufacturing efficiencies in the quarter. As a result, we once again saw a strong improvement in ePlex gross margin, which, in turn, made an important contribution to our overall second quarter gross margin of 36%. Based on current plans and ongoing activities, we remain confident that we can achieve our target of 60%-plus gross margin over the next 2 to 3 years.

On the ePlex commercialization front, we placed 45 net new ePlex systems and ended the second quarter of 2019 with a global installed base of 438 ePlex analyzers compared to 267 in Q2 2018, an increase of 64% over the prior year period. Competitive wins in new customer site made up a significant portion of our placements both in the U.S. and international markets. The value proposition of our ePlex system continues to resonate with customers across a wide range of health care settings and testing volumes.

With its scalable capacity and workflow efficiency, ePlex is enabling some of the highest volume labs as well as smaller health care settings to recognize the value of near-patient rapid syndromic testing, which is becoming ever more essential for the effective management of high-risk patients.

A significant driver of our strong ePlex placement in the second quarter was our expanded test menu, which now includes our 3 FDA-approved blood culture ID panels, in addition to our widely adopted Respiratory Pathogen Panel. Several studies were presented at the recent ASM Microbe meeting, highlighting the performance, patient care impact and antimicrobial stewardship benefits unique to the ePlex BCID panels. Six of our early-access customers presented posters comparing our BCID panels to other commercially available molecular tests. In every case, ePlex BCID provided broader organism identification than the competitor methods, ultimately leading to more timely actionable results for more patients.

The significant impact on antibody stewardship was also highlighted by our customer study, demonstrating that the ePlex BCID Gram-Positive Panel can lead to improved antibody stewardship intervention in 50% of patients, thus, reducing doses of antibiotics, decreasing cost and avoiding adverse side effects.

The expanded ePlex menu, now addressing approximately 70% of the volume of syndromic infectious disease testing in our target markets, significantly enhances the value proposition of our ePlex system and is generating strong incremental interest in the marketplace. Along with driving future system placements, we expect this expanded menu to begin increasing testing volumes and corresponding revenue in the second half of the year.

In the U.S., the recent reorganization of our sales force and continued investment in commercial leadership and execution are positively driving commercial performance. Our newly established corporate accounts team is now focused on the most strategic customer segments, including integrated delivery networks, group purchasing organizations and other major accounts where we see tremendous upside for both ePlex system placements and menu utilization.

We are successfully building strong partnerships throughout these important customer segments, which provide a significant opportunity for widespread ePlex adoption as the centralized molecular testing becomes accessible to patients across an ever-broader range of health care settings. Our commercial realignment is also creating additional bandwidth to drive sales force productivity and increase the capacity of our sales executives to expand and accelerate their sales opportunities.

Outside of the U.S., our distributor partners in Europe, the Middle East and North Africa delivered solid results in the quarter, both in terms of ePlex placements and top line growth. We're also excited about our recent entry into Southeast Asia and the coming opportunities in Latin America, which we expect later this year.

While the U.S. will continue to account for the vast majority of our sales in the foreseeable future, we view this trend as incrementally positive to our long-term growth potential.

Turning to menu expansion. Our R&D teams remain focused on expanding the ePlex menu and testing capabilities to address the rapidly growing multiplex molecular testing market, which has the potential to exceed $2.5 billion annually over the next 5 years. Our path ahead continues to include the addition of syndromic panels for GI and CNS infections to unlock an additional $700 million-plus market opportunity.

As we have demonstrated in the past, we expect to continue a cadence of delivering new panels every 12 to 18 months and look forward to updating you on our progress as we approach important milestones.

In summary, as we enter the second half of 2019, I'm very encouraged by the momentum we are gaining. I believe our business has reached a very exciting inflection point with a superior testing platform, expanded and highly differentiated panels, strong commercial team and consistent operational execution. I'm confident that the second half of this year will demonstrate continued progress and growth in this very attractive and rapidly growing market.

At this point, I'll turn the call over to Scott for his operational update. Scott?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [4]

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Thank you, Hany. From an operational perspective, our team delivered strong results again this quarter.

First, I would like to provide additional details on the key drivers of our significant gross margin improvement. As already mentioned, our gross -- overall gross margin for the second quarter was 36%, which is a 9 percentage point improvement versus the first quarter of this year. This significant step-up, on top of the strong improvement in the first quarter, was primarily driven by our team's efforts to improve ePlex manufacturing efficiencies, and it demonstrates meaningful progress towards our gross margin goals.

As we previously communicated, manufacturing yield is an important area of focus and a key to driving significant improvement in gross margin. Our teams continue to identify, evaluate and implement process improvements to reduce overall manufacturing variability and increase yield. Some examples of these improvements include introducing additional inspection steps during the manufacturing process, improving quality control methodologies, working with our vendors to improve raw material specifications and continuing to refine our work constructions and technician training. Beyond yield improvement, other important contributors to gross margin improvement were additional overhead absorption, along with our focus on direct labor efficiency and direct material cost reductions.

Additionally, we are also focused on several R&D initiatives to support and further enhance our strong competitive positioning. These include menu expansion, technology advancements and software functionality to sustain and enhance the differentiated value proposition of our ePlex system. As part of these efforts, we invested in various projects in the second quarter that we believe will provide tangible benefits in the future, including product and technology innovations as well as direct material and direct labor cost reductions. This investment had a significant impact on our second quarter R&D expenses and primarily reflects the cost of ePlex consumables required to support these projects.

Our priorities remain ePlex menu expansion as well as platform and software innovation. And of course, we will continue to drive manufacturing efficiency and ePlex gross margin improvement that will enable us to achieve our target of 60%-plus over the next 2 to 3 years.

I'd now like to turn the call over to Johnny for a review of our financial results for the second quarter.

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John Frederick Ek, GenMark Diagnostics, Inc. - CFO [5]

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Thank you, Scott. I'll now provide details on our second quarter 2019 financials. As previously mentioned, second quarter 2019 revenue was $18.4 million, up 23% versus the second quarter of 2018, with ePlex revenue growth of 70% compared to the prior year.

Sales to U.S. customers continue to account for the vast majority of our revenue. The average annuity for ePlex placement in the second quarter was $108,000, which was -- which, as anticipated, was lower than the first quarter due to lesser volumes outside of flu season. However, the average annuity increased when compared to the same quarter last year as a result of continued customer adoption of ePlex tests and routine use. We remain confident that average annual revenue per ePlex placement will be in the $135,000 to $145,000 range, with the potential to increase in the future as customers adopt additional ePlex menu and our test menu continues to expand.

Second quarter gross profit was $6.6 million or 36% of revenue versus $4.4 million or 30% of revenue in the second quarter of 2018. Importantly, overall gross margin increased in the second quarter of 2019 compared with the first quarter of 2019 despite the mix shift to higher ePlex product sales relative to XT-8.

As Scott highlighted in his remarks, our focus on manufacturing and improvement initiatives is driving higher ePlex gross margins. Total operating expenses were $18.5 million for the quarter, representing a decrease of $1.7 million compared to the second quarter of 2018. This decrease is primarily the result of reduced ePlex development expenses given the completion of our BCID clinical studies in the prior year, partially offset by increased investment in the commercial function to support the BCID launch.

While R&D expense decreased over the prior year, as Scott mentioned, we increased our investment in R&D compared to the prior quarter to support key technology and product improvement initiatives.

Our net loss per share for the second quarter of 2019 was $0.23 compared to $0.30 in the second quarter of 2018.

Moving on to the balance sheet. We ended the quarter with $41.4 million in cash and investments. We used approximately $7.4 million of cash in operations during the second quarter. And cash used in operations decreased by $3 million over the prior year primarily due to a decrease in our net loss and reduced spend on capital expenditures.

In conjunction with our continued efforts to reduce cash usage through revenue growth and strengthening gross margins, we have also added additional optionality in managing our balance sheet by entering into an at-the-market equity distribution agreement or ATM. The ATM provides us with strategic flexibility to access up to $35 million over time. We are under no obligation to sell any shares under the ATM, and any funds we choose to raise will be disclosed periodically as required in our SEC filings. And as a reminder, our current credit facility allows for us to draw an additional $15 million later this year subject to achievement of certain milestones.

Turning to 2019 expectations. We are reiterating our previous revenue and placement guidance, including total revenue, in the range of $85 million to $90 million, additional ePlex placements of 170 to 190 analyzers and an average annuity per analyzer of $135,000 to $145,000. We continue to expect more than half of our placements and revenue will be in the second half of the year, which is common in the diagnostics industry and takes into account both the addition of new ePlex RP customers throughout the year and the BCID launch timing.

Furthermore, as Hany mentioned, we now expect gross margin to be in the 31% to 33% range for the full year versus original guidance of 28% to 30% as a result of the progress we are making on the cost and efficiency initiatives mentioned. In spite of the additional investments Scott referred to in R&D during the quarter, we continue to expect total operating expenses of approximately $65 million to $70 million and cash usage between $25 million and $30 million.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from the line of Brian Weinstein from William Blair.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [2]

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I thought we could just start with blood culture. Can you talk a little bit about how that product is doing in the marketplace? I know it's relatively new. But can you give us some idea about either contribution that you've seen, contribution that you expect or some metrics on accounts that are using this? Just some way for us to kind of understand how you're thinking about the launch and what you're thinking about for that for the second half.

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [3]

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All right. Thanks, Brian. The BCID launch is going very well. We have many customers either evaluating and validating those panels or already using them routinely. And the feedback has been very, very strong. So we're pleased with the -- how the launch is going so far. BCID, as I mentioned in the prepared remarks, drove many of our placements, I would say, the vast majority of our placements in the second quarter. And we expect the volumes and the revenues to come in later in the year, as we indicated already. So we're very pleased with the progress so far.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [4]

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Do you expect those accounts to also be bringing on the respiratory as well? Or were those wins primarily just on blood culture?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [5]

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Yes. Many of our BCID customers either are already using our RP Panel or in case of the new placements, we anticipate that ultimately, we will have all 4 panels used routinely by those customers. We expect by year-end to have somewhere between 20% and 30% of our installed base utilizing both the RP and BCID panels.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [6]

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Okay. With respect to gross margin, I think for the first half of the year, you guys were kind of in the 31.4%, 31.5% area. The midpoint of the guidance is 32%. You just came off a quarter where you put up 36%. So can you talk about why the -- to us, it would -- that would be a little bit conservative. Can you talk about some of the dynamics in Q3 and Q4 other than overhead absorption that might cause that to come down in Q3 and then spike up in Q4? Or are we not thinking about that correct?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [7]

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Yes. I think the only thing that you're missing, Brian, is the impact of mix. So as we move through the back half of the year, you're going to see ePlex revenue represent in the 70% to 80% range of total revenue because you have BCID adoption on top of the already live customers on a respiratory panel perspective. So second quarter, as Johnny mentioned, was 66% of revenue was ePlex, and that's going to step up quite a bit. So we are still making quite a bit of progress or expecting to make quite a bit of progress on ePlex gross margin in the back half of the year. In fact, we remain committed to exiting 2019 on ePlex stand-alone gross margin in the 30% range.

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Operator [8]

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Your next question comes from the line of Doug Schenkel from Cowen.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [9]

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Just a quick follow-up on the last question. If we're doing the math right and making the right logical leaps, it seems like ePlex gross margin was well into the 20s this quarter. If we're doing this right, that would seem to be a pretty notable improvement really in any quarter but especially in one where pull-through actually declined sequentially due to normal seasonality. So I just want to see if we're in the right neighborhood, and if so, if there are any timing dynamics that might have temporarily boosted ePlex gross margin, or if this is truly reflective of what seems to be a pretty notable improvement relative to what we've seen in the last few quarters.

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Scott Mendel, GenMark Diagnostics, Inc. - COO [10]

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Sure, Doug. I can handle that. You are correct. The mid-20% range would be a good way to be thinking about ePlex gross margins in the second quarter, a significant step-up from the first quarter. The drivers of that were primarily yield and getting the overall manufacturing yield into that 90% to 95% range, which we've spoken about on prior calls. The team has done a great job getting the yield stabilized towards that level. We still are expecting, from second quarter through the end of the year, that improvement. There is still opportunity to drive more gross margin from a yield perspective as well as starting to realize some of the investments we've been making on direct material cost-reduction efforts. So we feel good about the funnel of opportunities to continue that progression on ePlex gross margins, and it is there through the remainder of the year, again, just taking into consideration the mix shift because we do expect ePlex to be a substantial portion of our overall revenue as we exit this year.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [11]

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Okay. That's great, Scott. And congrats, lots of nice progress made there. I guess another follow-up to one of Brian's questions. Is it fair to say that at this point, the impact of having BCID out there, the full menu, FDA approved in the U.S., is -- clearly, it's going to be on the instrument side at least at this point. Would it be fair to say the funnel's a little bigger than it would have been without BCID heading into Q3?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [12]

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Yes. I think that's a fair assumption to make, Doug. As I mentioned, I think almost every one of our placements in Q2 included BCID, many of them in conjunction with RP, of course, but BCID featured with every -- almost every placement. And we have very strong funnels just based on the value proposition of the BCID, how uniquely differentiated the panels are in terms of inclusivity, the breadth of antibiotic resistance genes that are covered. But also, just the way that we've approached this area of testing based on the gram stain, so gram stain-driven approach really is making a lot of traction with our customers, and we're generating a lot of interest. So we expect to see BCID panels drive placements for the foreseeable future over the next few quarters, but also the revenues and -- the volumes and revenues that will come with that is sort of as we expected in our guidance, and we can expect that to accelerate going into 2020.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [13]

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Okay. That's great, Hany. And one last one. The competitive landscape seems to be evolving a bit. Are you seeing anything in the field that's surprising you in terms of impact on pricing dynamics, conversion time, the funnel or anything along those lines? And presumably, you feel pretty good about what you baked into guidance for any competitive dynamics or we would have heard something about that in your prepared remarks.

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [14]

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Yes. Absolutely, Doug. So we haven't yet seen the impact of some of the new entrants, the competitors that are coming into the market. As I've said before, and we discussed this before, Doug, we see this as a positive thing, right? So companies coming into the space and validating the opportunity for syndromic testing over many years to come, I think, is very positive. It's positive to have multiple strong companies with good solutions to help develop this market. We feel very confident in the value proposition that we have with ePlex and our panels in terms of workflow efficiency, connectivity and productivity in the lab but also the differentiated panels that we're bringing to market. So we've been competing and winning, and we feel good about that. And of course, we welcome new entrants to help develop this market.

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Operator [15]

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Our next question comes from the line of Tycho Peterson from JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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I'll stick with BCID for one. You talked about increased investments in the commercial function. Can you just talk to where you are in building out this channel and any incremental investments you need to make in the back half of the year around BCID?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [17]

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All right. So thanks, Tycho. Yes. We have been investing in expanding our direct sales force in the U.S. as well as distributor partners -- network of distributors elsewhere in the world. Certainly, the U.S. continues to be the main focus, and we intend to keep sort of adding 10% more commercial people, sales executives in the U.S. over the next few years. So at this time, I think we're up to the high 20s, maybe 27-or-so sales executives in the U.S. We expect to leave this year with maybe 30 in the field and then sort of continuing to expand from there.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [18]

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And then looking a little bit further out, not to put the cart before the horse, but thinking about GI and then CNS, anything you can kind of tell us about when we could use a [normal one] particularly around GI into next year?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [19]

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Not at this stage, Tycho, I mean, other than -- look, we've designed what we believe will be a very good panel, very differentiated panel. It will cover the sort of relevant targets across the main viruses, bacterial targets and parasites as well. Our team is working hard to advance the development and making good progress with the panel, and we will communicate in due course when we're closer to relevant milestones. But we feel good about the progress of GI.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

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Right. And then lastly on the ePlex pull-through. The utilization year-over-year didn't step up that much. Obviously, sequentially, you had the flu impact, but you're $108,000 versus $101,000 a year ago. Is there anything in kind of the year-over-year dynamic to call out? I know it was a longer flu season this year than last. So maybe that's the answer. But I'm just wondering if there's anything over there in the year-over-year comparisons on pull-through.

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [21]

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Nothing that I can speak to. It's good to see that with a much bigger installed base, we're seeing that this sort of the annuity is holding, and it's pretty robust. I mean, obviously, it sort of depends on, like you said, the extent to which the flu season lasts and so on. But the good news is that we're seeing very robust annuity. This is an average. So as you can imagine, some are much higher, and some are lower. But we feel, again, good about the range that we provided and yes, look forward to sort of getting into this year. We don't know what the flu season is going to look like, but we'll expect to see an uptick, obviously, in the fourth quarter.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

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And where any of the ePlex placements XT-8 conversion? Sorry, I just have one more.

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [23]

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I don't believe we had any this quarter. I know last quarter was very -- was something like less than 10%. So we have largely converted those customers who wanted to move from XT-8 on to ePlex. There may be a few, at some time in the future, a few sort of additional conversions but nothing significant at all. So that's largely behind us now.

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Operator [24]

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Your next question comes from the line of Derik De Bruin from Bank of America.

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Xiaoxiao Ma, BofA Merrill Lynch, Research Division - Associate [25]

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This is Ivy Ma, on for Derik today. Congrats on the quarter and the gross margin progress, so just another question there. Do you have any additional line of sight for the ePlex gross margin for the rest of the year?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [26]

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Sure, Ivy. A couple of things will continue to drive gross margin this year. Number one is we'll still expect to show improvement from the manufacturing yield perspective. So that will continue to provide benefit to us in the second half. On top of that, we start to realize some of the investments that we've made to drive down direct material and direct labor costs. And then the final thing that happens quite naturally is we're starting to build for the upcoming flu season as well as BCID volume that's coming online. And so that drives overall production volumes up, and that naturally drives down overhead cost per cartridge. So those are the factors, several that we control. And then, just volume increase as broader adoption and BCID adoption continues, helps drive our overhead cost per cartridge down.

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Xiaoxiao Ma, BofA Merrill Lynch, Research Division - Associate [27]

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That's helpful. And just on top of that, [1 year, it hasn't] to reach overall GM of over 60% in the next 2, 3 years. Just any additional color on when this will happen and the out-year pacing and all that.

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Scott Mendel, GenMark Diagnostics, Inc. - COO [28]

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Sure. So we expect to exit 2019 around 30% gross margin on ePlex, so significant improvement year-over-year already. And so to get from the 30% range up to 60%, we've mentioned before that we have a multiyear funnel of opportunities, specifically on direct material cost per cartridge and reducing that amount of cost per cartridge. So that'll be a key driver as we move from that 30% up to 60%, and that'll be paced over the couple of years as well as introducing automation and other direct labor efficiency in our manufacturing process that also assists in attaining that 60%. And then as I always saying, naturally, volume and absorbing the overall infrastructure costs that we have invested in over the last 2 to 3 years, that gets us the door over a much larger volume. That will be a player although not something that we specifically are driving, it'll be an overall benefactor that gets us from 30% to 60% gross margin.

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Xiaoxiao Ma, BofA Merrill Lynch, Research Division - Associate [29]

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And last one for me. Any pricing comments with sort of pharma headlines still going on. Any update there?

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John Frederick Ek, GenMark Diagnostics, Inc. - CFO [30]

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So this is Johnny. Just mentioning the -- you referred to the reimbursement. We -- as a reminder, from GenMark's perspective, we see very little impact of reimbursement as we are primarily in-patient focused on those critically ill patients. But we haven't seen any meaningful full impact of the reimbursement.

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Operator [31]

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Your next question comes from the line of Mark Massaro from Canaccord Genuity.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [32]

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Congrats on a good quarter. My first question is since moving Mike Gleeson over to lead corporate accounts, can you just speak to how -- and I recognize it's been approximately 2 or 3 months, but can you just speak to the funnel that you have as it relates to corporate accounts and IDNs and remind us how penetrated you were into some of those big systems prior to the move?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [33]

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Yes, I can. Thank you, Mark. Look, as you know, we've always had very productive relationships and good agreements with some of the most sort of important strategic and corporate accounts in the U.S. And we see expansion of ePlex menu now to include BCID panels for sepsis, in addition to respiratory. We have a better opportunity now to engage with some of the buying groups and some of the IDNs that we didn't necessarily have relationships with in the past. Of course, some of the agreements that we already have in place were now working to add menu to expand their menu utilization by including BCID on those agreements that basically were covering respiratory up until recently. So Mike and his team are doing a very good job with that and working now with a big funnel of opportunities across some of the key GPOs but also IDN networks in the U.S. and working very much in conjunction with the direct sales force, the more traditional sort of account managers in the field in order to manage and drive those opportunities. So we expect that we will have some good success in this area over many more quarters to come.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [34]

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And in a similar way, you hired Michael Harkins to the role of SVP of Sales. Has there been any tweaks to the commercial territories? And can you remind us why you thought it was appropriate to bring him in? And then a follow-up question -- or separate question. You seem to be growing or making a bigger push OUS, notably, your recent entry into Southeast Asia. Why is now the right time to make a bigger push abroad?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [35]

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All right. So I'll start with the sales force, direct sales force in the U.S. Yes, there have been some tweaks, but that's to be expected. That's not necessarily something driven by changing leadership but rather by us continuing to always look for ways to do better to make sure that we're driving the maximum results in the field. But for sure, with the addition of Mike Harkins, now that Mike Gleeson and his team are focused on the corporate accounts, this gives us an opportunity with a dedicated leadership and of course, the experience that Mike Harkins brings to GenMark to be able to drive sales force efficiency and productivity and to make sure that we're filling the funnels and executing in the field for maximum performance. And that's going very well. So Mike has come up to speed very quickly and really is engaged very well with his team driving, as you've just seen, a strong quarter, and that will -- we expect that to continue.

In terms of international growth, we're executing in accordance with our plan. So we've, all along, intended to enter some additional international markets and especially with now the availability of the BCID panels, really, the value proposition of ePlex is further enhanced with a more expanded menu that enables us to now make the effort and the investment to enter into those additional markets. And that's what we've always planned to do.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [36]

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Great. And one last one for me. When you launched the NP configuration, I think you talked about how you can better target smaller hospitals. Have you seen any early NP users migrate up and add a module?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [37]

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Yes, we have. So NP is doing very well in a smaller site but also with integrated delivery networks that have some smaller decentralized low-volume sites in addition to the central lab. Also, in certain international markets, NP is a better fit based on their volume of testing. But we've certainly seen customers that start with an NP and then, based on expanded menu and their sort of realization of the value that more capacity can provide to deal with their peak sort of volumes during the day, have expanded or upgraded to more capacity with a 1-tower system.

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Operator [38]

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Your next question comes from the line of Sung Ji Nam from BTIG.

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Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [39]

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Hany, if I heard this correctly, you said that 20% to 30% of the addressable market exiting this year will be utilizing both the respiratory and BCID panels. How do you see this kind of evolve over time? What do you think is the upside potential like over the longer term in terms of the overlap there?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [40]

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Oh, so just to clarify, what I said was 20% to 30% of our installed base. The addressable market is much larger, especially in relation to BCID since molecular syndromic testing is relatively new to sepsis testing. And we believe that the market may only be 20%-or-so penetrated over the next couple of years. We expect to see more customers migrating away from the conventional techniques and methods, mostly culture-based, over to molecular. But in terms of our installed base, we expect to see more and more customers utilizing both BCID and RP menu. And then going into next year and beyond, we expect that number to increase. Customers want to consolidate their workload in a meaningful way, and we expect that more of the customers will be using both BCID and RP Panels over time.

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Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [41]

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Okay. Great. And then what was the mix of reagent rental versus acquisitions in the quarter? And do you have -- the launch of BCID, would that potentially impact that mix either going -- I guess, going forward?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [42]

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The mix has not changed. So it's somewhere between 20% and 30% capital, and the rest is reagent rental. And that's not impacted by the launch of BCID. That's more sort of a global market trend based on availability of capital and also our efforts to drive early placements. And sometimes, it's better to get the system in the lab and up and running much earlier rather than sort of waiting for longer for when the capital is available.

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Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [43]

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Okay. And then just lastly, I know this is not your primary focus anymore, but for the XT-8 menu, the nonrespiratory menu, could you kind of talk about what you're -- the trends that you're seeing there?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [44]

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Well, it may not be the area of focus as far as sort of menu expansion is concerned, but certainly, we love XT-8. And the business there is very stable. So we continue to support our installed base of XT-8 customers. They're very happy with the system and with our support, and it's very stable. We don't expect any sort of major changes in the foreseeable future.

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Operator [45]

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Your next question comes from the line of Mike Matson from Needham & Company.

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David Joshua Saxon, Needham & Company, LLC, Research Division - Associate [46]

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Hany, Scott and Johnny, this is David, on for Mike. Just one on Europe. I think it was last year, so you were saying the sales cycle was a little longer than you initially expected. Has the expanded menu or just more time in the market changed any of the selling dynamics?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [47]

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Yes. We've gotten much better over time, and the team really is doing a good job in Europe. Again, we expect that the U.S. will continue to drive most of our placements and the vast majority of the revenues going forward. But Europe and beyond, Middle East, North Africa, now Asia Pacific, we're looking at Latin America later this year, all of those markets continue to be important to us. And obviously, as a global player and a company that wants to be a leader in this space, it's important that we're able to support those international markets.

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David Joshua Saxon, Needham & Company, LLC, Research Division - Associate [48]

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Okay. And then in your prepared remarks, you talked about some R&D investments, product improvements and the like. How should we think about the back half? Are there any investments planned that we should know of?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [49]

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So this is Scott. What I mentioned was, you're correct, we did take some opportunity to start some studies and work on some projects that have a longer-term payback for us. And so we do not expect that, that level of R&D expense will continue in the back half of the year.

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Operator [50]

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Your next question comes from the line of John Hsu from Raymond James.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [51]

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If we could just start -- going back on the 2019 outlook, specifically on the revenue. It looks like at the high end of the range, which you held the same just by the strong quarter. Could you just help us reconcile the strong 2Q results and the business momentum with the revenue outlook, which I believe actually implies a deceleration if you compare revenue second half to second half?

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John Frederick Ek, GenMark Diagnostics, Inc. - CFO [52]

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Second half -- it's Johnny. Second half of last year versus second half of this year?

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [53]

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Correct. The $90 million would imply around $50 million of revenue, which would be a decline year-over-year.

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John Frederick Ek, GenMark Diagnostics, Inc. - CFO [54]

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We expect that strong second half within the guidance range that we've shared. But you'll recall, the flu season may have come in at a time last year, but our projections remain, have a strong second half.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [55]

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Okay. And then, I guess, just on RP versus BCID, how would you think about your market share currently? And where do you think your market share can go in both of those testing modalities over the next few years?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [56]

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Well, we expect our market share to continue to increase, and obviously, we are in a much sort of stronger position with respiratory given that the product has been available longer, and the market is actually much more penetrated. So it's sort of much more developed in the respiratory testing area with syndromic panels relative to BCID where molecular is sort of relatively new to BCID testing. So over time, we expect that more of the market will convert to syndromic testing, and our market share will continue to increase over time as we place more systems and drive more volumes to ePlex.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [57]

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Okay. Great. And then if we just think about fast forward with additional menu coming on in the $2.5 billion TAM, you've obviously talked about some increased investments, international opportunity, et cetera. And while U.S. is still going to be driving the majority of the opportunity, say, a few years from now, how do you think about maybe what percentage of revenue could be derived internationally overall? And then maybe within the $2.5 billion TAM, too, if you had a sense of how you think about the U.S. versus OUS opportunity within that.

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [58]

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The U.S. represents the vast majority of the market globally in terms of market potential over time. This is currently, of course. We expect that to continue in the future, although elsewhere in the world, other international markets, over time, will sort of catch up a bit but will not rise to that level of the U.S. market. So U.S. will continue to be -- to drive the biggest market opportunity. And therefore, for us as well, in terms of our revenues, U.S. will account, we expect, for the vast majority of our revenues in the future as well.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [59]

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Great. I guess to maybe just put a finer point on that, any -- yes?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [60]

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Hey, John, I want to interrupt 1 second. I just want to go back to the revenue question. I just quickly looked at it. I think second half of 2019 contemplates a 35% growth rate over the second half of 2018. And first half 2019 was a 12% growth rate over first half of 2018. So I just wanted to clarify, we are seeing quite a bit of growth in the back half this year driven by 2 things: number one, RP customers. There's more RP customers this year versus last year. And so that RP volume is increasing. And then secondly, the BCID volumes that we expect in the back half of this year, we've been saying that's when we'll see the revenue benefit of that, and that's tied directly to my gross margin improvement. Remember, I said volumes are going to increase dramatically for both RP and BCID, and that helps overhead absorption. So I just wanted to go back and clarify to make sure we are on the same page that we are expecting strong revenue growth in the back half of this year versus the back half of last year.

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Operator [61]

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We have no further questions at this time. I will now turn the call over to back to Hany.

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [62]

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All right. Well, thank you very much, everyone, and thanks for the great questions. Really appreciate your continued support, and look forward to updating you on our progress in the future. If anyone is planning to attend AACC in Anaheim this week, several of us will be there. We have a booth there, and we look forward to seeing you tomorrow or later this week. Thanks very much, everyone. Have a good day. Bye-bye.

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Operator [63]

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This concludes today's conference call. Thank you, everyone, for joining. You may now disconnect.