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Edited Transcript of GNMK earnings conference call or presentation 21-Feb-19 9:30pm GMT

Q4 2018 GenMark Diagnostics Inc Earnings Call

Pasadena Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of GenMark Diagnostics Inc earnings conference call or presentation Thursday, February 21, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hany Massarany

GenMark Diagnostics, Inc. - CEO, President & Director

* 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

* John Hsu

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

* Mark Anthony Massaro

Canaccord Genuity Limited, Research Division - Senior Analyst

* Ruizhi Qin

JP Morgan Chase & Co, Research Division - Analyst

* Sung Ji Nam

BTIG, LLC, Research Division - Director

* 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 Fourth Quarter and Full Year 2018 Financial Results. My name is Carmen and I will be your operator on this call. (Operator Instructions)

Please note that this call is being recorded today, Thursday, February 21, 2019 at 1:30 p.m. Pacific Time and will be available on the investor section of GenMark's website at www.genmarkdx.com.

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

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

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Thanks, Carmen 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 2018 financial 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 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 and thank you all for joining us. Before we review our 2018 results and objectives for 2019, I'd like to comment on the management changes we announced in our press release earlier this afternoon.

I'm delighted that effective today, Scott Mendel is assuming the newly created role of Chief Operating Officer and Johnny Ek has been promoted to Chief Financial Officer after serving as our corporate controller for the past 5 years.

As COO, Scott will be responsible for our entire product delivery process, from new product development through product manufacturing and supply. In his new role, Scott will lead our integrated product development, manufacturing, and quality organizations to further our mission of delivering the most innovative and highest quality molecular diagnostic solutions to meet our customer needs and help improve patient outcomes.

A fundamental aspect of this mission is our continued focus on delivering ePlex gross margin improvement to achieve our target of 60% plus over the next 2 to 3 years. As we continue to drive revenue growth and business expansion, we must also optimize our organizational structure and processes to enable effective decision making and sustained focus on our most important initiatives, including leading edge product innovation, operational excellence, and world class commercialization.

We're very pleased with the strong market adoption of our ePlex system and of course, this will continue to be a significant business priority in 2019 and beyond. It's also crucial that we accelerate all efforts to drive manufacturing efficiency and gross margin and I strongly believe that aligning our product delivery functions and processes under Scott's leadership will enable us to deliver on these important imperatives.

We're also pleased to have an excellent finance team and strong processes, which will enable a smooth transition of the CFO role from Scott to Johnny. Since joining GenMark in 2013, Johnny has made significant contributions to the company and played a pivotal role in our finance organization. His GenMark experience, leadership skills, and his thorough knowledge of our financial operations make him the obvious choice as our new CFO. Johnny is a great addition to our executive team and has the full confidence of our entire organization and Board of Directors.

Turning to our agenda for the call today, I'll begin with a brief review of 2018 and recent highlights that have positioned us for a strong 2019 and beyond. I'll then turn the call over to Scott to review our fourth quarter and full year 2018 results, as well as our financial guidance for 2019. I'll conclude the call with a summary of our objectives and goals for this year. Then we will open the call for questions.

Looking back on 2018, we entered the year focused on driving ePlex market adoption and test menu expansion, as well as improving manufacturing cost and deal efficiencies. I'm proud of what we've been able to accomplish in 2018, including the substantial progress that we made across the many goals that we set for our organization, both short and longer-term. Briefly, this past year, on the ePlex commercialization front, we saw solid execution by our commercial team, which resulted in ePlex revenue surpassing XT-8 revenue early in the year.

A severe 2017-2018 flu season was certainly a factor. But more importantly, the uniquely differentiated value proposition of our ePlex system, together with its excellent performance in the field, continued to fuel revenue growth throughout the year. We ended 2018 with a global install base of 354 ePlex analyzers compared to 196 at year-end 2017, an increase of 81%.

We placed ePlex systems both in small hospitals that had never previously performed molecular testing but saw the value of near patient rapid testing, as well as in some of the largest and most strategic testing labs in the world, where ePlex's workflow and integration are driving significant efficiencies.

In 2018, we made important investments in our commercial infrastructure. In the U.S., we successfully recruited top tier talent to end the year with 30 field sales personnel. Over the next couple of years, we expect to expand our U.S. sales force by more than 30%.

Outside of the U.S., we also made good progress expanding our distributor network beyond the main central and western European geographies. While we still expect the U.S. market to account for the vast majority of our revenue and placements in the foreseeable future, we plan to continue expanding our international reach as we selectively drive our commercial efforts in other regions of the world.

As you know, ePlex menu expansion is a significant area of focus for our company, and in 2018, we made excellent progress. We successfully completed all clinical studies and submissions of our 3 ePlex block culture ID panels to the FDA and achieved 510(k) market clearance for our gram-positive panel and fungal pathogen panel. We continue to anticipate clearance of our gram-negative panel in the near future.

We are delighted with the growing body of customer studies, peer-reviewed journal articles, and conference presentations, which further demonstrate the performance and utility of the ePlex BCID panel. This includes 4 peer-reviewed publications, over 10 posters and presentations at major industry conferences, and 10 early access evaluations ongoing at U.S. sites. And we have several additional clinical, utility, and health economic studies planned for 2019.

Operationally, we significantly improved ePlex manufacturing yields throughout 2018. And I'm very pleased that our manufacturing facility was able to support our growth and customer demand, including during a very severe flu season. Last year, our engineering and supply chain teams also made meaningful improvements to the direct material and direct labor costs of our ePlex test cartridge, which significantly improved ePlex gross margin compared with 2017. Scott will elaborate on our plans to further drive manufacturing efficiencies and gross margin in 2019 and beyond.

From a top line perspective, total revenue for 2018 was $70.8 million, representing an increase of 55% over 2017. ePlex revenue for the full year was $37.9 million, an increase of more than 270% over 2017. Throughout the year, our top line performance was largely driven by the solid pace of ePlex system adoption and continued strong demand for our respiratory pathogen panel.

And from a market perspective, the multiplex molecular market continues to grow. Over the past 5 years or so, the global respiratory multiplex testing market grew from approximately $150 million to $500 million per year. We expect syndromic testing for other infectious disease states to follow the same path, especially bloodstream and gastrointestinal infections.

And with the growing number of other disease states that are transitioning to multiplex molecular testing, including central nervous system, lower respiratory tract, and bone and joint infections, to name a few, we believe this market opportunity has the potential to exceed $2.5 billion annually over the next 5 years. As a result, we are investing in menu expansion and ongoing product innovation.

While 2019 growth will be driven by our respiratory and BCID panels, our R&D teams remain focused on menu technology and software development for longer-term growth. Our top priority from a menu development perspective is a GI panel. In designing this panel, we carefully considered reimbursement, customer needs, and market dynamics as well as the investment and development timeline requirements. And at this stage, we're not providing additional information regarding anticipated market availability of the GI panel, but expect to provide updates on our progress as we approach important milestones.

In addition to developing a highly differentiated assay menu, we've also been investing in several aspects of ePlex software functionality that create durable advantage. This includes the ability to integrate the diagnostic workflow from order to report; the ability to link the diagnostic test results to actionable information for the physician that can be customized at the lab and hospital level; and the ability to automate and eventually remotely manage the core administrative and quality control functions on a network of systems.

Over the next few years, we expect to release multiple software revisions to enhance functionality in these areas and further differentiate ePlex as the platform of choice in molecular testing.

Overall, I am pleased with what our team has accomplished in 2018 and look forward to an exciting 2019. At this point, I'll turn the call over to Scott for his financial review and additional comments regarding guidance and operational priorities for 2019. And then I'll be back to conclude our prepared remarks and open up the call for questions. Scott?

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

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Thanks, Hany. As previously mentioned, our fourth quarter 2018 revenue was $19.4 million, up 21% versus the fourth quarter of 2017, with the U.S. continuing to account for the vast majority of our sales. The average annuity per ePlex placement was $140,000 in the fourth quarter as well for the full year 2018. We are very pleased with this result and it provides a good basis for our 2019 revenue expectations.

Fourth quarter gross profit was $5.3 million, or 27% of revenue versus $4.7 million in the fourth quarter 2017 or 30% of revenue. Compared to the third quarter of 2018, gross margin decreased by 9 percentage points driven by the shift to higher ePlex product sales relative at XT-8, which we noted on our last call. We are continuing to focus on and make progress with our manufacturing improvement initiatives to drive higher ePlex gross margins.

Total operating expenses were $15.9 million for the quarter, a decrease of $2.8 million compared to the fourth quarter of 2017. This decrease was largely due to reduced ePlex development expenses. Our net loss per share for the fourth quarter was $0.21 compared to $0.26 for the fourth quarter of 2017.

Moving onto the balance sheet. We ended the fourth quarter with $45.2 million in cash and investments. We used approximately $4.4 million of cash in the quarter, excluding financing activities, which was the lowest cash used in the quarter since we began developing ePlex. The cash usage improvement was largely driven by progress we have been making on ePlex margins and strong working capital management, especially collections of accounts receivable as well as prudent inventory management.

We recently expanded and restructured our term loan agreement to provide more financial flexibility at favorable terms. The agreement added $11 million to our balance sheet on February 1 and extended the interest only period 1 year beyond the previous debt facility. Also, upon reaching certain revenue milestones, we have the option to draw an additional $15 million and extend the interest only period by an additional year. There are no financial covenants associated with this new agreement.

Turning to the guidance for the full year 2019, we expect total revenue to be in the range of $85 million to $90 million, additional placement of 170 to 190 analyzers, and an average annuity per analyzer of $135,000 to $145,000. We expect more than half of our placements and revenue will be in the second half the year, which is common in the diagnostics industry and also takes into BCID launch timing.

2019 gross margin is expected to be in the 28% to 30% range and operating expenses are expected to be approximately $65 million to $70 million. Taking all this into consideration, we expect another year of cash usage improvement with 2019 cash usage to be in the $25 million to $30 million range.

We expect our ePlex platform to continue to drive our growth and to account for about 75% of total 2019 revenue. This would represent 70% year-over-year growth of ePlex revenues.

Before I hand the call back to Hany, I would like to take a few minutes to provide additional detail regarding our recent organizational changes. I'm excited to assume the new role of Chief Operating Officer, where I will dedicate my time to working with our talented teams across R&D, manufacturing, and quality to continue delivering high-quality and innovative products that meet our customers' needs and improve patient outcomes.

As Hany mentioned, driving gross margin to our target of 60% plus over the next 2 to 3 years is a top priority. We've already taken several important steps towards accomplishing this important business imperative. Specifically, we have reorganized our engineering teams to drive the various aspects of manufacturing efficiency, including direct material improvements, yield, and direct labor efficiency. These new teams have already constructed multiyear funnels of opportunities, which we prioritize to drive the most impact as quickly as possible.

Our manufacturing and cost efficiencies improved substantially during 2018, but we still have room for improvement and we are confident that these changes position us for further success. Based upon our XT-8 experience and lessons learned, we believe we have the right capabilities to repeat that successful outcome.

While we do not anticipate reporting manufacturing yield or specific cost per unit, we do plan to provide commentary where appropriate about key improvements being made.

With respect to our finance function, Johnny has been right beside me for the nearly 5 years I've been at GenMark. We've worked very closely together and I'm committed to a smooth transition and confident he will be a strong chief financial officer for GenMark.

And now, I'll hand the call back to Hany for his final remarks.

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

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Thank you, Scott. In closing, we are highly confident in the uniquely differentiated value proposition of our ePlex system and its excellent performance in the field. We believe that the strength of our respiratory panel combined with the recent launch of our BCID panels and enhanced software functionality will further differentiate ePlex as the platform of choice in molecular testing.

This year, we will remain laser focused on driving ePlex placement, revenue growth, and gross margin improvement while continuing to advance product innovation and operational excellence. We've taken significant steps to ensure that we can deliver on these goals, including expanding our commercial team and organizing our R&D and manufacturing functions under one common leadership to deliver the highest quality products that will satisfy customer needs.

We believe this year will be another exciting and successful year for our company, our customers, and our investors. At this time, Scott, Johnny, and I would like to open the call for your questions. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Brian Weinstein with 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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Thought we'd just talk a little bit about gross margin. You guys have identified steps that you're taking to improve gross margin but the guidance is still kind of 28% to 30% and I think you just did 27% in Q4. There's a little bit of improvement there but what's holding that back in the near term considering all the things that you guys have identified? Do they just take longer to put into place or why wouldn't gross margin be a little bit better next year?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [3]

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Sure, Brian. This is Scott. I'll handle that question. One of the things to note is in our guidance we gave an indication of how much of our revenue in 2019 is expected to be driven by ePlex. So there's quite a bit of mixed shift happening between 2018 and 2019 that needs to be taken into consideration when looking at the overall gross margin.

To be more specific, in 2018, ePlex was about 50% of our overall revenue and that's moving up to the 75% range. So the guidance on overall gross margin reflects that mixed shift. The teams have been making really good progress in 2018 and we continue to expect to build on that progress in 2019. Much of the improvement in 2018 was driven by manufacturing yield and getting that to the range that we want to be in.

But that's what's really driving the overall gross margin is really the mixed shift. And once you take that into consideration, you can see we're driving some really strong ePlex gross margin improvement.

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

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And just to stick on the gross margin theme, the 60% target, Hany, I think you said 2 to 3 years is where you think you can get - when you get the gross margin at that level. Coming from 30% this year, it's doubling. So that's a long way away. Have you identified all of the steps at this point that are required to get there? And what are the biggest steps that you have to put in place? Can you kind of walk us through kind of rank order of what the biggest things are that you are going to be doing, other than sort of mixed shift, which I guess will turn more positive just as ePlex gets more profitability? But beyond that, just specific manufacturing improvements that you guys have identified.

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

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Yes, thank you, Brian. I'll start and then I'll hand over to Scott to sort of build on my comments in his new capacity as COO in charge of all this.

Look, we have a very good plan in place. We've been working on this, as you know, Brian, for a long time now and our teams have put together a comprehensive plan. Scott mentioned multiyear prioritized initiatives that will get us there over a period of time. Look, of course, volume is going to play a big part of it and absorption of our facilities and sort of overheads, et cetera. But also continued improvements in relation to yield, direct labor, and direct material.

So we have opportunities that we know we can pursue to get there. This is work, good work that we've been doing over time now. So this isn't sort of like some new things that we've come up with. We've done it before with XT-8. We know what it takes. We have a good plan in place and under Scott's leadership, with the team that put this plan together, we're really committed to driving and getting to the outcomes that we expect over the next few years.

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Scott Mendel, GenMark Diagnostics, Inc. - COO [6]

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And I'll just add a couple points to that, Brian. If you think -- if you look at where we've been with ePlex gross margins, we exited 2017 with negative gross margin. And we improved that substantially as we moved through 2018. In fact, exiting 2018, we had improved ePlex gross margins to about double-digit. In 2019, in the guidance we provided, that would expect another 2x to 3x improvement over where we exited 2018.

So we are driving that towards that 60% plus gross margin target that Hany spoke about in pretty rapid timeline. The biggest drivers, as Hany mentioned, is first, stabilizing manufacturing yield to the range that we've been able to achieve with XT-8. Just to give a little more insight, we expect manufacturing yield to be in the 90% to 95% range. We're not quite there yet. We've made tremendous progress and that's what drove the majority of the gross margin improvement in 2018. We'll get a little bit more from that here in 2019.

But then as Hany mentioned, overhead absorption, the specific initiatives that the engineering teams are driving to reduce direct material, whether that's finding alternative suppliers, or looking at the amount of material we use as we're manufacturing the consumable. Those are some examples of how we're driving down direct material.

And then obviously, direct labor is more about process improvements and reducing the amount of handling time on the lines, in addition to automation. So that's kind of the order that we're going through and that's the main priorities that I'll be working on with the engineering, manufacturing, and quality teams.

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Operator [7]

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Our next question comes from Mark Massaro with Canaccord Genuity.

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [8]

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Wanted to start on the guide. It was higher than my expectations and above the Street. And so I really wanted to ask how are you guys contemplating the contribution from blood culture ID in 2019? If we just take the midpoint to the 2018, you get about $16.7 million of revenue growth for 2019. So I'm wondering how much of that will be growth of respiratory panel versus contribution from the new BCID products.

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [9]

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All right, I'll take a crack at this, Mark. Thanks for the question and then Scott can add if required. Mark, we've done a very thorough assessment sort of starting with a bottom-up analysis of our funnel, and have good visibility to where we will be winning new business versus expanding sort of our business with existing customers. So we feel pretty good about the range that we're guiding to.

And we don't, as you know, split revenues up by product line. We expect that blood culture ID panels will take longer to implement and sort of put in routine use compared with respiratory. Respiratory panels have been in use for some time now. The market is well penetrated and it doesn't take as long for customers to do the necessary work to transition to molecular syndromic panels. So we do expect that BCID will take a little bit longer.

As you know, we also have 2 of the 3 panels we didn't get clearance until very late last year. So we are in the process of launching BCID while waiting on the final clearance from FDA, which we expect very shortly.

So I believe that we've correctly sort of baked the BCID opportunity in our guidance and we feel good about that.

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

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Mark, I'll just add one point to that as far as guidance goes and revenue. It's important to note now that we're through our first year plus of ePlex being on market that we have a sizable install base. That install base and the earnings power or the annuity per placement gives us really strong visibility into a very large portion of the revenue guide that we just gave.

So back to Hany's point, we did factor BCID in but the majority of that revenue comes from our install base and annuity we're earning off of that install base. So a lot more visibility and we feel really that the guidance range that we gave is appropriate.

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [11]

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And just my final question. You're going up against a historic flu season relative to last year. But CDC flu data is rising, which likely bodes well for this year's flu season. But can you just give us a sense on your expectations for respiratory panel demand? Here in Q1, just with respect to going up against a difficult comp? Is there any way you think your respiratory panel testing can grow on a year-over-year basis?

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

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Yes. Thanks, Mark. Look, our ePlex respiratory RP business is growing, notwithstanding the difficult comp, like you said. So the flu season is how we have predicted it and how we're modeling it in our guidance. It started -- it was light in the fourth quarter and certainly, it sort of -- there was a -- it ticked up more recently but it's still a moderate season as we've modeled it and nowhere near as severe as the first quarter of last year.

But notwithstanding that, our business is growing because we've placed a lot more systems throughout the year. We secured a lot of customers. So while the same customers that perhaps we had in Q1 of last year aren't going to do more testing, but we've grown install base of respiratory users out there and we're going to show some, we believe, some growth over Q1 of 2018.

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Scott Mendel, GenMark Diagnostics, Inc. - COO [13]

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Correct, yes. And I would just add to Hany's point. We'll probably show some growth even though it was a tough comp. But I think ePlex revenue growth will probably be around 20%, Mark. So we feel good about where we're at and that's assuming we kind of have this moderate flu season as we progress through the end of the first quarter.

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Operator [14]

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Thank you. Our next question is from Tycho Peterson with JPMorgan.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [15]

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This is Julia on for Tycho today. So maybe starting off with BCID, could you just give an update on the expected timeline for getting your gram negative panel approved? Is it still waiting the end of this first quarter?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [16]

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Yes, we hope so, Julia. We are on track. The process is going well. We're very pleased with the way that we're interacting with FDA. There's nothing to lead us to believe that this will be delayed. We're always, of course, cautious about making definite sort of commitments about dates since we're not in charge of the FDA. But based on what we know and how the process has gone so far, we hope that we'll have clearance this quarter, by the end of the quarter.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [17]

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And then in terms of your ePlex order funnel, I know you mentioned that you're already kind of starting the commercial launch process while you're awaiting approval for that third panel. So based on your visibility into the funnel so far, do you feel like most people are already placing orders knowing that they can anticipate the gram-negative panel approval soon? Or is a number of customers still holding back until they wait to see that final approval?'

Just trying to gauge how much potential upside or visibility do you have into the expected ePlex placement for the year.

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [18]

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Yes, good question and it's a mix, right. So in general, I would say our customers see the 3 panels as sort of a family of panels. So of course, they expect to have access to all of those panels eventually. But many of our customers are comfortable to start the process because it takes time to do the validations and sort of the work in the lab, the evaluation, and implementation, and so on, to transition to routine use. And the would do those sequentially anyway.

So we have a number of customers that are already moving forward and even if some will wait until all 3 are available. Keep in mind, Julia, that we received clearance very late last year. I think it was like the 28th or whatever it was, literally the last few days in December, and we had our global sales meeting not that long ago, where we officially launched our sales force. We've conducted training, launched tools, et cetera.

And we expected that in the first quarter, depending on how severe the flu season would be and how busy our customers would be that that would also be a factor in terms of their ability to sort of focus on a different panel. But overall, all of this is going as we expected and we've factored all of this in our guidance for this year.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [19]

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And then finally, in terms of -- hello?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [20]

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Go ahead, Julia.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [21]

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Finally in terms of international expansion, could you give us more detail on over what timeframe do you plan to take steps and when can we expect to see a tangible revenue impact from that (inaudible)?

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [22]

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Yes. We've already taken many steps. We have now fully implemented our hybrid model that we spoke about a year or so ago. So in the central and western European countries, we now have exclusive distributors working hand-in-hand with our small sort of dedicated focus team in those countries. But we've also expanded our direct -- not direct but distributor channels and partnerships into other countries, including in Eastern Europe. As well as last year, we've signed up multiple distribution agreements in Middle Eastern countries.

We haven't yet started on Asia-Pacific or LATAM. We've done a lot of work and met with potential partners and so on, but we haven't yet initiated any distributor agreement in those markets. So we will continue to expand very selectively our international reach outside of the U.S. But I think it's important for everyone to realize that the vast majority of our business is going to come from the U.S. This isn't unique to GenMark necessarily but this is where the U.S. is the biggest market for our product solutions and that will continue to be the case for years to come.

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Operator [23]

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Our next question comes from Derik De Bruin with Bank of America Merrill Lynch.

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Xiaoxiao Ma, BofA Merrill Lynch, Research Division - Associate [24]

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This is Ivy for Derik today. So to start off, just wanted to see how should we think about the headwinds to the placements from the reimbursement challenges we talked about last year? Or how much of that is baked into the guide that's provided today?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [25]

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Sure, Ivy. This is Scott. I'll answer that question. Regarding reimbursement, as we talked about last year, the majority of our business is inpatient and we expected really minimal impact from the recent reimbursement draft put out. And that's actually how it played out. We have not felt anything from a reimbursement perspective relative to RP business in the fourth quarter and so that is in line with what we had communicated. We'll continue to keep an eye on it but for right now,

we're not seeing any impact.

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Xiaoxiao Ma, BofA Merrill Lynch, Research Division - Associate [26]

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I see. Thank you, Scott and congrats on your role. And then just want to have a housekeeping question. How should we think about the R&D spending for next year or for the out years with the BCID expenses winding down but the GI studies still going for the next foreseeable future? So just want to see if there's any additional color there.

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Scott Mendel, GenMark Diagnostics, Inc. - COO [27]

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Sure. So I gave operating expense guidance overall. But I can share a little more color on R&D specifically. I would expect R&D to be lower than it was in 2018, really, by virtue of the fact that we had 3 clinical trials being run during 2018 versus where we're at here in 2019. So [Ivy], I think R&D expense will come down slightly in 2019 reflecting that fact.

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Xiaoxiao Ma, BofA Merrill Lynch, Research Division - Associate [28]

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Last one. Just how should we think about the higher throughput that you guys provided?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [29]

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The annuity per placement?

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Xiaoxiao Ma, BofA Merrill Lynch, Research Division - Associate [30]

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Yes.

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Scott Mendel, GenMark Diagnostics, Inc. - COO [31]

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Yes, so that was based on where we finished in the prior year. So in 2018, our annuity per placement ran right around $140,000 for the full year. That's the midpoint of the guidance range that we provided for 2019. When setting our guidance range for 2019, we took into account our experience last year, adjusted for the fact that it was an extraordinary flu season. But then also added back in what we expect to happen from a BCID pull through on top of RP. So net-net, we landed at about the same place that we had experienced in 2018, $140,000 at the midpoint of our guidance.

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Operator [32]

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Our next question comes from Mike Matson with Needham and Company.

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David Joshua Saxon, Needham & Company, LLC, Research Division - Associate [33]

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This is David Saxon on for Mike. Just wondering can you give some -- just a little more specifics on how you're preparing for the BCID launches and also just the impact you're expecting to gross margin if any.

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [34]

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Yes, thanks for the question. So we have been working for some time now on the BCID launch in anticipation of FDA clearance. As we said, we have now 2 of the 3 panels, and hopefully the third one will come soon. But in the meantime, we have been working with a number of key opinion leaders in the U.S. to develop studies or to complete studies and to generate data, which some of which was presented last year at some of the industry meetings that I'm sure you're familiar with.

So we have been ahead of clearance, working under sort of research use only agreements with a number of key opinion leaders to complete those studies and to generate the data, and presentations, et cetera. We've done that elsewhere in the world as well, and as I mentioned in the prepared remarks, there is now a substantial and a growing body of data and evidence generated by customers to sort of demonstrate the utility and the performance of our BCID panels, how they compare to alternatives.

More recently, we our global sales meeting last month, where we launched our sales force, the programs that will be implemented starting right away to launch BCID in the U.S. market and continue to drive adoption elsewhere in the world.

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Scott Mendel, GenMark Diagnostics, Inc. - COO [35]

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And then I'll add to answer the second part of the question. So from a gross margin perspective, the nice part about our ePlex consumable is it's a universal consumable. So therefore, all the improvements that we have made that positively impact RP are applicable to manufacturing our blood culture ID panels.

In fact, what we expect to happen is as you add on BCID volume, it helps drive overall overhead absorption and we've incorporated that into the guidance that we provided. So net-net, a positive as we launch this new panel.

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David Joshua Saxon, Needham & Company, LLC, Research Division - Associate [36]

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Then Scott, congrats on the promotion. You've talked a little bit about manufacturing improvements you're working on and targeting. I'm just curious what milestones can you call out for us on the outside?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [37]

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Yes, I think the most important one is overall gross margin. So like I said, from time to time, I'll provide some commentary on the key improvements we made, examples of improvements, et cetera. But I'm not going to be adding additional metrics. The overarching metric that we want to look at is gross margin. And specifically, you can look at our footnotes or financials and see what revenue comes from ePlex versus XT-8 and then you can chart our progress, how we're progressing on ePlex gross margins by looking at that split. So that's ultimately the measure that will be verifiable externally.

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Operator [38]

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Our next question comes from Sung Ji Nam with BTIG.

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Sung Ji Nam, BTIG, LLC, Research Division - Director [39]

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Maybe a follow-up on the sales funnel question for ePlex, particularly for the BCID driven platforms. I was curious if you guys might be able to provide more color in terms of the breakdown between customers who currently use existing or your competitive platform versus the ones that are new to multiplex, automated multiplex syndromic panel testing.

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

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Can you clarify the question again, Sung Ji? You're asking how many of the opportunities or what sort of percentage of the opportunities are already existing RP users? Or is that what you're --

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Sung Ji Nam, BTIG, LLC, Research Division - Director [41]

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I'm sorry, existing users of competitive platforms versus folks that are new to the whole syndromic molecular testing.

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Scott Mendel, GenMark Diagnostics, Inc. - COO [42]

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So what we've been experiencing is that about 1/3 of our customers are new to syndromic versus competitive displacement. Obviously, that's largely based on our RP experience because we just launched BCID. I would expect that that would increase -- the proportion of new to syndromic would increase because BCID is less penetrated from a molecular perspective. But it's been running about 1/3 new to syndromic.

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Sung Ji Nam, BTIG, LLC, Research Division - Director [43]

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And then for the gastrointestinal panel, sorry if I missed it, but should we anticipate any potential updates or milestones throughout the year? Do you expect to release some data around that or any kind of updates there throughout the year?

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

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I think as we get to important milestones, we will provide updates.

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Sung Ji Nam, BTIG, LLC, Research Division - Director [45]

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And then just lastly, I was wondering if you guys might be willing to share the install base for XT-8 at this point?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [46]

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Yes, it is 575.

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Operator [47]

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Our last question is from John Hsu with Raymond James.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [48]

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First off, I just want to ask, if you could just go back from a strategic standpoint, obviously, congratulations to Scott and Johnny, but maybe just can you walk us through why a company of this size and maybe why now a COO is the right person to add?

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

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I'll start and Hany can jump in. One of the motivations for us making this change was gross margin improvement is a key priority both inside the company as well as important to our shareholders. And so the why now is because we've launched our platform. We have many panels cleared and on the market, and now, we're focused on commercialization and gross margin improvement. By making this move now, it allows me to dedicate all of my time to help driving gross margin improvement and also allows Hany to focus more of his time on a day-to-day basis on commercial and strategy.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [50]

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And I guess just one other one from me. I did get that you still expect the gross margin to tick up to the low 60s over the next 2 to 3 years. I believe there was a revenue figure tied to that. So is $150 million the right way to think about maybe the longer-term revenue that might be implied by that gross margin ramp?

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Scott Mendel, GenMark Diagnostics, Inc. - COO [51]

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Yes, it's probably somewhere in that range. We used $150 million as our target to get to cash flow positivity more than where we had achieved gross margin at 60%. I think the gross margin at 60% plus over the next 2 to 3 years is really indicative of the funnel of opportunities that we have and how we're sequencing those opportunities to deliver gross margin improvement.

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Operator [52]

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And sir, I'm not showing any further questions in the queue.

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Hany Massarany, GenMark Diagnostics, Inc. - CEO, President & Director [53]

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All right. Well, thank you for your time this afternoon and for your continued support, everyone. Look forward to updating you on our progress in the coming quarters. Thanks very much. Have a good day. Bye-bye.

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Operator [54]

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And ladies and gentlemen, thank you for joining us. This concludes the program and you may all disconnect. Have a wonderful day.