Luminex Corporation
Q1 2020 Earnings Call Transcript

Published: 5 May 2020

[Operator:]

Good day, ladies and gentlemen and welcome to Luminex Corporation's First Quarter 2020 Earnings Conference Call. My name is Latif and I'll be your coordinator for today. Today's call is being recorded.At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions]I would now like to turn the call over to Harriss Currie, Senior Vice President and Chief Financial Officer for opening remarks. Please proceed.

[Harriss Currie:]

Good afternoon and thank you for joining us. With me today is Homi Shamir, President and CEO. Following our comments, we will take your questions.As a reminder, today's conference call is being recorded and a replay will be available for six months on the Investor Relations section of our Web site. Certain statements made during the course of today's call may not be purely historical and consequently may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company claims the projections provided by Section 21E of the Securities Exchange Act of such statements.These forward-looking statements speak only as of the date hereof and are based on our current beliefs and expectations and are subject to known or unknown risk and uncertainties, some of which are beyond the Company's control that could cause actual results or plans to differ materially and adversely from those anticipated in the forward-looking statements. Factors that could cause or contribute to such differences are detailed in our Form 10-K for the year ended December 31 and our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. We encourage you to review these documents and we undertake no obligation to update these forward-looking statements.Also, certain non-GAAP financial measures as defined by SEC Regulation G may be covered in this call. To the extent that any non-GAAP financial measures are covered, a presentation of and reconciliation to the most direct comparable GAAP financial measures will be included in our earnings release which is available on our Web site in accordance with Regulation G.I'll now turn the call over to our President and CEO, Homi Shamir.

[Homi Shamir:]

Thanks, Harriss, good morning and welcome to our call to discuss Luminex Corporation, first quarter result. As you're all aware, we are living in unprecedented times vastly different from anything we ever experienced. While we are all deeply concerned with everything from the health of well being of the world population to the state of the economy Luminex is fortunate to be well positioned for this global pandemic.Without technologies, dedicated employees into rapid development, we will be able to quickly produce through emergency use authorization assay, our NxTAG CoV Extended Panel in our ARIES SARS-CoV-2 assay. To all of this, our employees remained engaged and exhibited creativeness, the resourcefulness and dedication, managing multiplied project as a team and finding solution for our customer and their patients. At this point, we have ramped up production to be able to provide more than 500,000 NxTAG and ARIES test per month, the majority of which are NxTAG with the remainder split between a ARIES assay and ARIES Extraction Cassette.Our dedicated workflow is a strong as ever and I'm proud to say that our outlook is having a direct impact on this pandemic. As a direct result of the test, we are delivering to the market a number of our customer have announced the plan to increase testing capacity using our technologies. Additional, a number have announced they've purchased Luminex System to allow for COVID-19 testing in-house as opposed to sending samples out for testing, which ultimately, mean test results can be delivered to patient in a matter of a few hours instead, in several days. Consistent with our mission, our products are delivering critical result to our customer in a clinically actionable time swing.Just a reminder, most of our customers are moderate to high complexity labs and our technology continue to deliver excellent results. Additionally, we are seeing a significant update of our xMAP beads and associate systems going to our partners who are working on the entire span of COVID-19 solution from serology test, to treatment, vaccine development and many other initiative to help combat this Corona virus outbreak in this many ways as possible. So while we are very focused on the most critical issues facing our customers today, we are also playing a pivotal role in being part of the meet to long-term solution to this current crisis.We delivered 90.4 million of revenue in the quarter, just $59,000 shy of our previous result in the fourth quarter of 2019, with a significant benefit realized from the sales of all the respiratory focused products.Our total our Total Molecular Diagnostic revenue, which include both automated and non-automated products totaled 45.2 million was up 28%. LTG total 36.8 million was up 5% in our flow revenue stream total 6.5 million less than 42%. Most specifically, we know our molecular diagnostic revenue were positively impacted by the pandemic.Although we cannot say exactly what was the effect was and we did not have COVID related products available until the end of the quarter many of our customers use our respiratory products to rule out everything back COVID-19.Our LTG revenue were in line with expectation up 5% with the majority of the growth attributable to increased consumable sales, compared to the first quarter of 2019. Our flow revenues were significantly affected by the COVID-19 pandemic, as we saw a number of customers close their facility, and all significantly limited access to their research facilities. In addition, we have more than 2 million of revenues, which we were unable to either install or ship.Operating expenses in the quarter were less than they were last year and as a result of revenue got gross margin maintenance in expense management will return to profitability in the quarter well ahead of schedule.As we look to the rest of 2020 and beyond, we see more clearly than ever the value that our current and future portfolio can play in addressing critical and life altering diseases. We are planning on incorporating SARS-CoV-2 targets assay into our VERIGENE I and VERIGENE II, as well as our NxTAG-RPP Respiratory Syndrome panels so that our customer can have access to valuable products that deliver reliable results in a timely manner.We have sufficient manufacturing capacity to accommodate those new offerings and have additional planning in place to further expand our manufacturing capacity to meet the growing demand for our products. We are planning to increase our test manufacturing capacity from just over 500,000 tests today to more than 800,000 tests per month by the end of June.The majority of this capacity will still be used to produce NxTAG products. We are also working on serology solution and we'll provide more follow on days when we have more information to share. But to remind you, our xMAP technology is uniquely suited to assist laboratories professional in the development solution to COVID 19 pandemic.In particular, our ability to make millions of beads at the time translated into minimal variability at each sample well, and since xMAP software reads hundreds of beads at a time, where other technology only take one reading at a time, we are able to deliver a very high level of specificity and sensitivity which is extremely important in serology assay.In addition, our 96 well format for xMAP base assays provide an ideal testing platform from high throughput such as a public health screening.Finally, regarding the xMAP INTELLIFLEX system will remain on track for mid-year launch in the initiation of our early access program with our partners. We believe that INTELLIFLEX system will provide our research customer which much needed improvement over the current FM3D and LX200 system and will help to maintain our position as the market leader in the mid to high flex protein research.We expect revenue for Q2 will be at above 105 million or up 26% or more compared to last year. With respect to the full year, while we are extremely confident that we will beat the top-end of our current revenue guidance of 362 million, we are not able to give a specific updated guidance range at this time due to the uncertainty that COVID-19 is causing to all the economy. We anticipate providing our update full year revenue guidance in conjunction with our second quarter earnings release.With that, I would like to turn it over to Harriss to discuss the financials in greater detail, and then I will return with some final comments.

[Harriss Currie:]

Thanks, Homi.As Homi mentioned we had a great first quarter led by significant growth across our molecular diagnostics portfolio. We reported total revenue of 90.4 million up 10% over the first quarter of 2019.If you look at revenue across our respective revenue streams, we reported that our molecular diagnostics revenue stream for the quarter was 45.2 million up 28%, mainly driven by increased demand for respiratory and related products as a result of the COVID-19 pandemic.Sample-to-answer molecular diagnostics revenue was 26.3 million, up 38% over the first quarter of 2019. And non-automated molecular diagnostics revenue was 18.9 million up 17%. In contrast, our tools revenue for the quarter was 43.3 million down 6% over the first quarter of 2019 with revenue in our licensed technologies group of 36.8 million up 5% for the quarter, with a 20% growth in consumable revenue, partially offset by a decrease in royalty revenue of 6%.For cytometry revenue was 6.5 million down 42%. Our flow cytometry revenue streams were significantly affected by the current pandemic in several ways. First, as the world began to close down, the ability of our sales reps to access potential customers became limited, resulting in a slowdown in orders. Secondly, for image based orders in hand that had been shipped and already delivered to the customer, we found ourselves unable to gain access to the customer site and to install the system. Installation of the system is a key revenue recognition criteria.Finally, we had orders in hand, but no one available to receive them at the customer site. As a result, we had over $2 million of orders, either waiting for installation, or waiting to ship for which revenue recognition was not possible.Also, a final update on LabCorp, the material effects of LabCortp are finally behind us. In the current quarter, we had nominal headwinds of approximately 3.4 million representing a 4% headwind for total revenue in the quarter. We do not anticipate any further significant quarter-over-quarter headwinds from LabCorp moving forward.Looking at our revenue line items, system revenue was down 3.6 million or 23% compared to the first quarter of 2019, included in system revenue, sales of our xMAP systems, flow systems and molecular diagnostic systems a primary driver to this decline was the current quarter weakness and flow cytometry placements, those directly affected by the COVID pandemic and related shut down. This decline was partially offset by an increase in both molecular diagnostic system revenue and xMAP system revenue.We placed 223 xMAP systems during the quarter up 6%, and molecular diagnostic system sales nearly tripled during the quarter. Keep in mind, the majority of our molecular diagnostic system placements are via rental agreement and not a capital sale. As Homi mentioned, we placed just over 120 molecular diagnostic systems in the quarter only about 20% via capital sale.Consumable revenue was 12.8 million up 19% for the quarter, partially due to the timing of bulk purchases from certain of our partners. Royalty revenue was 13.3 million down 6% for the quarter primarily attributable to lower base royalties in the current quarter. As a reminder, total royalty revenue includes base royalties, coupled with audit findings, self reported shortfalls and accrual adjustments. Total assay revenue was up 26% to 43.7 million with our respiratory related products on all of our platforms up almost 100% as a result of our contributions, helping battle the Coronavirus pandemic.Our customers initially use our NxTAG products on a rule-in, rule-out basis. And now that we have EUA cleared products, we've seen that volume shift towards COVID specific products. Not surprisingly, respiratory related products comprised more than 60% of our total assay sales.Service revenue was 5.5 million up modestly by 2% and all other revenue was 3.1 million up 88% but includes approximately $643,000 of revenue from the first BARDA contract we received associated with the development of the NxTAG COVID plus panel. The second BARDA contract that we received associated with development of the AIRES COVID assay will be recognized in the second quarter.Gross margins were consistent 56% with equal distribution year-over-year between higher and lower margin items. Operating expenses were roughly flat with the prior year, primarily driven by lower expenses in R&D, which reflects reduced clinical trial activity in the current quarter. This was partially offset by higher sales expenses, a direct result of our 10% growth in sales.Our revenue growth, consistent gross margins and operating expense control all contributed to a significant improvement in our operating profit.Our effective tax rate for the quarter ended March 31, 2020 was 36% as compared to a benefit of 184% in the prior year quarter. Our effective rate is significantly affected by the distribution of profit and loss across our worldwide subsidiaries. The prior year included a discrete benefit of 6.6 million related to a reduction in unrecognized tax benefits related to the U.S. transition tax, as a result of an IRS ruling for certain aspects of the calculation of our Canadian subsidiaries earnings. We expect our consolidated full year effective tax rate to be between 30% and 40%.Cash investments for the quarter were down approximately 16 million. This was not unexpected as the first quarter every year is one in which accrued sales commissions, bonuses, et cetera are typically paid. In the first quarter of 2019, the comparable decline was approximately 14 million.Homi mentioned that our current expectations for the second quarter and full year 2020 as 105 million or higher for the second quarter, and for the full year, current expectations are to be above the top-end of our previous full year guidance of 362 million. At these levels of revenue, we would expect to be extremely profitable relative to the comparable periods and generate a significant amount of cash relative to our current cash position.With that, I'd like to turn it over to Homi for some final comments.

[Homi Shamir:]

Thanks Harriss.We are certainly looking forward to achieving more than $100 million for the first time in the company history which we will hope will get us for our $0.5 billion dollar target quicker. While our -- go out to all of those who have been impacted. We are proud to be playing a critical role in helping to address this pandemic. We are not resting on our success to-date and have plan in place to further enhance our own market product portfolio, so we can continue to be an important part of the full solution for years to come.This ends our formal comments. Operator, please open the line for question.

[Harriss Currie:]

So we certainly are witnessing unprecedented times. We wanted to provide some flavor around our current quarter expectations or the distribution of our expected 105 million plus second quarter revenue. First of all, COVID-19 is driving sales of our molecular diagnostics revenue. And we expect a potential doubling of total sample-to-answer revenue in the second quarter over the second quarter of 2019.Additionally, we are experiencing very strong demand for our NXTAG-RPP product. On the other hand, we expect flow cytometry to continue to be down relative to the prior year, but as a percentage, less than in the first quarter. And finally, we expect our LTG revenue stream to be roughly flat quarter-over-quarter.One closing remark before we open it up to questions. During the month of April, we generated approximately $20 million of cash, which brought us back above our 12/31 2019 balance.Now operator, please open the call up to questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Sung Ji Nam of BTIG. Your line is open.

[Sung Ji Nam:]

Hi, thank you. And thank you for taking the questions. And also thank you for everything you guys are doing in the area of COVID-19. My first question is in regards to your COVID-19 related products and also respiratory pathogen-related products. If you look at what you have currently -- what's the exposure outside of the U.S., is it significant and also, if not, then could you talk about new opportunities in testing related to COVID-19 outside of the U.S.

[Homi Shamir:]

Let me -- maybe currently we have three EUAs. We are expecting somewhere in the beginning of Q3 to apply for almost three additional EUA. One is a multiplexing completely of the NxTAG-RPP. So, the COVID-19 or the SARS will be included in the in the panel. Currently, the panel I think is 20 or 22 pathogens. We're also expecting to have -- it's VERIGENE I, but that's more as a standalone. And obviously, we are incorporating into the RRP submission we have done today FDA with VERIGENE II. So those are all expected to get EUA move somewhere during July timeframe.Concerning the second question about the international market, yes, we think international market is funny enough we start seeing now another surge coming from Asia not from China, but the rest of the country in Asia, especially coming out for our risk product mainly. So, we see a nice surge there.In our Europe, we see continuously demand for our NxTAG-RPP product as well as we have seen a lot of LTG product going on the read system.

[Harriss Currie:]

So, Sung Ji, one thing that I hope that you're not already asking which is downside, right based on the revenue we reported, just let you know, less than 10% of our total molecular diagnostic revenue today comes x-U.S., so exposure, not significant.

[Sung Ji Nam:]

Okay, great. And then just related to that, they're in terms of testing -- in the testing capacity in the U.S. and more recently and I don't know if a lot of this has been resolved, but there's been a lot of issues with the sample collection, supply shortage issues, and so was curious about given -- you continue to see strong demand. What kind of your take on what's going on with regards to that. And if you think that's been largely resolved, or if you feel like your product or your strategies is less exposed to that issue.

[Homi Shamir:]

I cannot comment about that. I really don't know how to comment.

[Harriss Currie:]

I mean, we'd see as much as you do Sung Ji either doing everything we can to increase the availability of sample media, right, and the universal transfer to get all that done. And so obviously, the supply of that has increased over time. And that's driven the -- overall help drive, the overall increase of testing across the world, to be honest, and so we're now more exposed than anybody else is there to be able to run a test that requires collection like that.

[Sung Ji Nam:]

Okay. And then, lastly, from me, could you talk about all the new products, all the new instruments you're expected to launch throughout the year. I think you mentioned, you talked about INTELLIFLEX. Could you talk about the timeline, is there any update to that for the next gen VERIGENE, as well as some of the flow cytometry products, if there are any potential delays or even possible acceleration, maybe even for the VERIGENE product line? Thank you.

[Homi Shamir:]

Yes. I mean INTELLIFLEX we still tracking into the exact timeline we used to have. We don't see any changing there. Concerning VERIGENE II, the VERIGENE II GI submission is still in the end of the FDA, if you're aware, they are not now looking in anything or proving anything that is not correlated, or related to COVID-19. The only way we have now is to put to the RFP that we submitted. Today the COVID-19 and as I said, we are expecting to get EUA for that somewhere in July. So we are working through incorporate that into that.The flow supplementary, we are also tracking what we have there. And so, we're feeling very well in what we are doing. Obviously, one thing we -- I should mention and I think I mentioned it in my script. We are doing some serology testing. It's progressing nicely. Hopefully, we'll be able to submit it to the FDA by -- the EUA by the end of this month.As a matter of fact, we're learning all the time that a customer will pass using our xMAP technology to start testing on serology. For example, we know the state of New York, they just published something earlier today that they are testing on our FM3D, they are testing for serology. I look at the white paper they submitted. They are testing for IgG, IgM and IgA antibodies because that's the beauty and that's what I try to mention in my script. We believe that xMAP technology can be playing fundamentally bring in better serology test into the market, both in the specificity mainly but eventually also in the sensitivity. And that's why we internally also developing a key today to be offer either directly or to our partners.

[Operator:]

Thank you. Our next question comes from Brian Weinstein of William Blair. Your line is open.

[Andrew Brackmann:]

Hi, guys, this is actually Andrew Brackmann on for Brian. Thanks for taking the questions. Maybe to start off, can you maybe add a little bit more color on the new placements in the quarter on the sample-to-answer side, and then some thoughts around what sorts of institutions those sit in? And then as we look forward, how do you think about those driving future assay sales for the business?

[Homi Shamir:]

Yes. I mean so, Andrew, this one mainly to hospital, okay? And what's nice is that I think 80% of them actually was reagent rental. So, it's mean the customer committed for three years to use our technology. So it's not only going to COVID, they see the need for the system and they've committed more long- term into that. So they basically from us placing so many units, it's creating a very strong annuity for us going forward.Obviously, there was about 20% of them also purchase system for COVID-19 or other tests. Some of them are in the USA, some of them are outside the USA. But I must say, we see also a very strong demand for system already in April. And as I keep saying, in the last -- more than a few years, we are not giving, we are not placing system. Our terminology is either, we are selling it or we are contracting for long-term. So it's a slightly different way how some of our competitors looking at that. And eventually that will create us a fairly strong annuity stream in years to come. But as I said, April was of also a very, very strong month for instrument for us.

[Andrew Brackmann:]

Okay. Thanks. And then just one on pricing for the expanded NxTAG and VERIGENE panels with SARS-CoV-2 on them, as we think about the pricing benefit that you guys might be able to capture on those. And then I just have one more follow-up.

[Homi Shamir:]

Yes. I mean the NxTAG-RPP, we are selling it exactly like the NxTAG-RPP around $40, while initially with the ARIES, the extraction cassette was in the 20 something, when we started because that was an LDT and that's a price. Now, we have [indiscernible] pricing, which is around $37, $40 for ARIES cassette in those testing.

[Andrew Brackmann:]

Okay. Thanks. And then the last one was on serology, just sort of a follow-up to the last line of questioning around the kitted product for you guys. It sounds like you're going to have something sort of by the end of the month. But how should we think about the minimum level of sensitivity and specificity that you guys are targeting for that product? Thanks.

[Homi Shamir:]

I don't want to state it at this stage, but as I keep saying, the technology is unique and you should assume high specificity for sure, okay? Also high sensitivity. But at this stage, I don't want to comment when we submitted the EUA, we'll talk about that. So you can also look at some publication that came -- start popping up around our technology and what it can do. So that's might be a reference to that.

[Andrew Brackmann:]

Okay. Thanks, guys.

[Harriss Currie:]

I mean, just let you understand, you mentioned, when are we going to start doing serology testing. We already have a customer doing serology testing today. So we may have something available as we move forward. But the Luminex technology is already being used to do serology testing.

[Homi Shamir:]

Not only serology, it's been used, as I said in the script, for brand development, vaccine development. So all the names that you see in CNBC, you see on a daily basis in the news using Luminex xMAP Technology as part of their investigation. But as Harriss said, we know for sure, the state of New York start testing serology using Luminex.

[Operator:]

Thank you. Our next question comes from Brandon Couillard of Jefferies. Your line is open.

[Brandon Couillard:]

Harriss, I was curious to see if you could put it any finer point in terms of the COVID-19 specific product revenue contribution you expect in the second quarter. You talked about 500,000 test capacity today ramping to 800,000 by June. Is that consistent with the number of tests you actually expect to sell on a monthly basis?

[Harriss Currie:]

So, obviously, we increased our capacity to be able to address the potential for significant increase in need. I think you can see from the discussion in our second quarter revenue comments that we certainly are expecting a pretty significant up tick in volume. The total capacity that we have today is weighted more toward NxTAG, which is a bead-based technology than it is the ARIES technology. The pricing for a COVID assay is roughly the same, but that capacity covers all of our products that are molecular products, not just the COVID-based products.And then, lastly, from a COVID standpoint, in the first quarter, you'll recall, and Homi mentioned this in his comments, we didn't have a COVID-specific product available until the very end of the quarter. So all the up tick in revenue that is related in to COVID was attributable to people ruling out everything, but COVID. In the second quarter, we certainly expect that rule-out effort to continue, but we also expect some lift from COVID-specific products as well.

[Homi Shamir:]

But the 800,000, not including the VERIGENE product line, okay? And as soon as we get VERIGENE in the beginning or in during Q3, it will give us extra capacity of testing of course.

[Brandon Couillard:]

Okay. And understand that you're kind of backing a bit from your full year guidance. But if we just look at the P&L, you originally talked about OpEx spend for the year being roughly flat. Curious, if you're looking to accelerate in investment projects or expecting the additional expenses in light of the top-line growth?

[Homi Shamir:]

Look, I mean, obviously, we are hiring manufacturing people because we are working now almost three shifts 24/7. So that's we'll add, but that will be reflected mainly in the gross margin, but on the same time, as we start looking in a longer term for example, do we need to put CapEx. And we start putting into for example, manufacturing of additional capacity behind what will happen in six months or nine months. If we look at, just a matter of argument, if you look at COVID to be with us in a year or two, which we believe we will be there until vaccine or other technology will be implemented. We are looking out to add couple of million dollars of investment in our automation facility mainly, okay? But overall, OpEx will continue to be flat or under control. That's really for your calculation.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Tycho Peterson with JPMorgan. Your line is open.

[Eleni Apostolatos:]

Hi. This is Eleni on for Tycho. Thanks for taking our questions.

[Harriss Currie:]

Hello.

[Eleni Apostolatos:]

So first, in terms of your 2Q guide, appreciate that your T-cell drivers are noted flow cytometry is expected to continue to decline, but as a percentage, you noted that less than 1Q. Can you talk about what will drive less of a decline in 2Q versus 1Q? Is it primarily a function of an easier comp or is there anything else underlying your forecast?

[Homi Shamir:]

No, it's mainly because China start reopening and we got impacted with that -- in China to start with. And as we look at that, we are also anticipating that, as I said earlier, we have close to 2 million of unrecognized revenue that we have not installed. So that will start seeing an installation. And we are seeing also demand for not academic, other institutions.So our feeling is that it will be less decline, but again, on overall, you're looking at very small number because the whole flow cytometry is relatively a small contributor, it's less than 10% for our total overall revenue.

[Harriss Currie:]

And to be clear, it's an harder comp in the second quarter than it is in the first quarter, because revenues in the second quarter last year were over 13 million and in the first quarter of last year they were only 11 million. So the number is going up, the percentage is going down, which means flow revenue must be going up not declining, as you alluded to in your comment at the beginning. So I want to make sure you get your arrows all pointed in the right direction as you're laying this out.

[Eleni Apostolatos:]

And then I had another question in terms of coverage of respiratory panel. Can you comment on some of the recent developments we've heard lately, namely the CMS order from last week expanding the scope of who can order respiratory tests, and the AMP and CAP joint letter to CMS requesting coverage expansion for the panels as well as news that CDC is recommending doctors to test for other respiratory infections when testing for COVID. And if you think that we could see respiratory panel coverage expansion?

[Harriss Currie:]

So certainly you would expect the overall reimbursement rate to go up for testing. Given that our tests across all of our platforms tend to be the lower priced alternative, we certainly see that as a benefit because labs that use our technology and other labs that adopt our technology can actually realize a little better profit position than they can today. Should the overall volume increase, because of the expansion of the constituents that are actually allowed to order it, then certainly we would benefit from that expanded level of testing as well.

[Eleni Apostolatos:]

Great. Thank you. And lastly, can you talk about what is left to get done before you submit your serology solution to FDA by the end of this month?

[Harriss Currie:]

What is left to be done for serology?

[Eleni Apostolatos:]

Yes.

[Homi Shamir:]

More testing and internal validation here and there. That's what we are doing and that's what we are doing.

[Operator:]

Thank you. At this time, I'd like to turn the call back over to Homi Shamir for closing remarks. Sir?

[Homi Shamir:]

Thank you, Latif, and thank you everyone for your attendance on our earning call. We look forward speaking with you in the very near future, but maybe seeing you very near future. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.