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GenMark 2018 Instrument Guidance Disappoints Wall Street as it Navigates European Market


NEW YORK (GenomeWeb) – Despite matching the consensus Wall Street estimate on fourth quarter revenues and matching estimates on the bottom line, GenMark Diagnostics on Tuesday provided instrument placement guidance for 2018 that left many analysts disappointed.

During a conference call following the release of the firm's financial results, GenMark CEO Hany Massarany said that its forecast for placements of its molecular multiplexed ePlex systems used for the identification of respiratory pathogens is in the range of 140 to 170 net new analyzers for 2018.

That left investors unimpressed and the day after the guidance was issued, GenMark's shares dipped as much as 18 percent.

"The net ePlex placement guidance was disappointing relative to consensus," Mark Massaro, an analyst with Canaccord Genuity, said in an interview. "Management is new in commercializing into Europe, and the European market has different nuances than the US market. So, [the 2018 guidance number for ePlex analyzers] has to do with the firm initially overestimating the ease of entering Europe."

Massarany said that the firm continues to address challenges in Europe, "particularly in relation to the length of the acquisition process from ePlex placement to routine implementation and revenue generation," and noted that in recent months, the firm completed a detailed assessment of its European commercial strategy and had begun implementing changes that would enable it "to navigate these challenges more effectively."

GenMark, he said, continues "to believe that the European market will emerge as an important driver of the company's growth over the longer term."

He said that by repositioning underutilized ePlex analyzers at new sites, the firm expects to increase the value of annuities on its installed base of instruments in Europe.

GenMark said that in US and European labs, it placed 49 ePlex analyzers in Q4 and ended 2017 with an installed base of 196 ePlex analyzers. The installed base of its older XT-8 analyzers remained relatively stable at 620 instruments in 2017. While XT-8 accounted for most of Q4's revenues, ePlex revenue is growing rapidly and becoming a larger percentage of total revenue, the firm said.

In 2018, GenMark expects an annuity per ePlex placement in the range of $100,000 to $120,000. By comparison, its XT-8 instruments have an annuity of between $65,000 and $70,000 per placement. About 70 percent of ePlex placements in Q4 were new to the firm — the instrument was cleared by the US Food and Drug Administration only this past June — and overall, about 75 percent of all ePlex placements are in the US, Massarany said.

Importantly, the "vast majority" of ePlex placements have not been replacements for XT-8 systems placed with customers, Massarany said. Instead, most were competitive wins that displaced "an existing alternative or competitive system in the field."

Massaro said that he didn’t believe that the company’s tactic of repositioning the underutilized systems had anything to with customers not liking GenMark’s system or technology. The placement guidance number is "related to administrative approvals at hospital sites and the difficulty of contracting in Europe; it's harder than they expected,” he said.

Cowen research analyst Doug Schenkel added in a research note on Tuesday that GenMark’s 2018 revenue guidance of $68 million to $72 million, representing 30 percent to 37 percent growth year-over-year, is in line with prior consensus expectations, even though GenMark's ePlex placement guidance was below the investment bank’s forecast of 200.

“Guidance for ‘net’ placements may look worse than reality on an apples-to-apples basis,” he said. “From a revenue perspective, lower placements are offset by higher ePlex pull-through, which has been better than expected thus far even excluding the severe flu season.”

William Blair analyst Brian Weinstein said that the net placements number for 2018 of between 140 and 170 compared with his model of 172. “There is some nuance here as the guidance assumes some level of repurposing of instruments from non-active accounts and does not call this repurposing a new placement,” he said. “We had not contemplated this in our modeling and management did not quantify this but suffice to say this got a lot of attention on the call.”

Also getting attention on the call was GenMark's disclosure that Jon Faiz Kayyem, its founder, is transitioning from his position as head of R&D to become a technical and strategic advisor to its management team and board of directors. "The timing of the transition is a surprise," Massaro said. "I have viewed him as a critically important member of that team."

At the same time, he noted, GenMark's management "does feel that it has solved an issue with ePlex cartridges," that had slowed the launch of the system.

GenMark expects to launch blood culture ID panels later this year. The company said that it will introduce panels with a broad range of pathogen and drug-resistance markers designed to help diagnose and manage bloodstream infections that can lead to sepsis. Although sepsis testing is becoming an increasingly competitive market, adding new content and getting customers to move to a respiratory panel plus blood culture is a "nice addition," Massaro said. "The question is what percentage of the market they can penetrate."

Massaro noted that in recent years "when firms such as Cepheid, [which is owned by Danaher], Roche, Abbott, and Hologic have expanded their test menus on one platform, the annuity per analyzer just goes higher," which bodes well for GenMark’s future annuity values given an expanded menu.

However, he also pointed out that BioMérieux's BioFire business, a GenMark competitor, has been operating in European markets for some time and it has shown that it "knows how to sell into Europe."

BioMérieux on Wednesday reported 2017 revenues of €368 million ($448.8 million) for its Filmarray multiplex PCR product line that consists of respiratory, blood culture ID, gastrointestinal, and meningitis encephalitis panels.

GenMark is working on a gastrointestinal panel with a broad range of pathogens that could be in the market some time in 2019, depending on the success of clinical trials and possible FDA clearance, Massaro said. Still, the company has a “laser focus” now on correcting challenges in Europe and completing clinical trials in advance of its BCID panel launch, so while it has a team working on a gastrointestinal panel, any discussion of it at this time is somewhat premature, he added.

At the JP Morgan 36th Healthcare Conference in January, the firm announced a new system: the ePlex NP, a scaled-down version of the firm's ePlex system targeted at customers with lower test volume requirements, including hospitals with less than 150 beds and integrated delivery networks.

The NP, with the same core functionality of the larger ePlex system, is a three-cartridge analyzer that can process up to 12 patient samples per shift. It also can be upgraded to six bays to increase the volume of tests. Although the ePlex NP system resembles a single-tower ePlex, it offers half the throughput.

“We believe that the ePlex NP will address the needs of integrated delivery networks where smaller satellite, low-volume sites can also benefit from the rapid multiplex testing,” Massarany said during the briefing with analysts on Tuesday.

He noted that the firm is “very encouraged” by the early market response to ePlex NP, and it had already contributed to placements in Europe during the fourth quarter. He expects that the NP system will comprise about one-third of its total ePlex placements in 2018 and add value to its annuity.

The market for multiplex respiratory has been developing over the past eight years, or more, and is better established than other applications of multiplex testing, Massarany said. Also, NP will make ePlex accessible to low-volume sites in a more cost-effective way and not compete with or cannibalize placements of the larger ePlex.

Massaro said it's possible that the smaller system will help GenMark with its European challenge. Particularly in Europe, there are customers with lower-throughput needs, he said.

The list price of the ePlex NP is $80,000, and a one-tower, larger ePlex lists at $150,000.

“Reducing the price to that level does open up the lower end of the market,” Massaro said. “We've seen other diagnostic companies do this.” There may be opportunities for the firm to scale up placements over time by starting customers on ePlex NP, he said, “but it’s going to take many years for that to play out.”