Luminex Corporation
Q4 2020 Earnings Call Transcript

Published: 8 Feb 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to Luminex Corporation's Year End 2020 Earnings Conference Call. My name is Carmen, and I will 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. . I will 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, our Chairman, President and CEO. Following our comments, we'll 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.

[Homi Shamir:]

Thank you and welcome. We ended 2020 on a strong note posting record revenue of 111 million for the fourth quarter and 417 million for the full year, up 25% over 2019. Additionally, we improved our profitability to our highest level ever, posting more than 71 million in EBITDA and generating more than 50 million in cash from operation, ending the year with a cash balance of approximately 310 million. During 2020, we had the strong tailwinds in MDx revenue while we had initial pressure on our life science revenues recovered very nicely during the third and fourth quarters. With our focused R&D efforts, we developed three exciting products that not only played an important role in addressing the pandemic, they also significantly contributed to our growth for the year and set a solid foundation for continued growth, and there are more important assays coming. We also expanded our manufacturing capabilities significantly with a fourfold increase in our ARIES manufacturing capacity, a nine-fold increase in XMP manufacturing capacity. We are also investing in additional expansion of our facilities to accommodate future growth. As we enter the new year, we have become an even more diversified rapidly growing company with several new products expected to come to market. This new product and the planned increase in our ARIES manufacturing capacity will help support our growth expectation of over 15% and then we’ll also further expand both our profitability and cash position.

[Harriss Currie:]

Thanks, Homi. As Homi mentioned, we closed the year with strong operating profits and record revenue in the fourth quarter of 2020. Consolidated revenue is up 23% over the fourth quarter of 2019 to 111.4 million with operating profit at 9% of revenue. For the full year, consolidated revenue was up 25% to 417.4 million with operating profit at 10% of revenue. Significant growth of our molecular diagnostics portfolio as compared to the prior year significantly contributed to those results. Looking at our revenue line items, system revenue grew by 3 million to 23.8 million or 14% compared to the fourth quarter of 2019, while the full year was up 0.5 million to 70.8 million or 1% over 2019. For the year, although system revenue was up modestly over 2019, we did have some significant movement within our respective system revenue streams. As we mentioned before, our flow system revenues were significantly impacted by the effects of the pandemic and were down for the year. And our system revenue through our partners was down modestly by 2% year-over-year for the same reason. Those increases were fully offset by our success in molecular diagnostic system placements resulting from customers desiring to use the systems and assays we had available to address pandemic testing.

[Homi Shamir:]

Thanks, Harriss. 2020 was a year like no other we have ever experienced. Luminex performed outstanding and we are grateful to our employees and their families for dedicated effort to fight this global pandemic. The safety of our employee is the utmost important to us. But at the same time, we must continue delivering product to our customer. And as we begin 2021, we anticipate that the pandemic will continue to play a major role this year as well. We are confident in our projection of 15% growth this year, coupled with improved profitability and cash flow and the launch of several new and exciting products that will help us fight the COVID pandemic as well as expanding our best portfolio. We are looking forward to time when we get past the impact of COVID-19, but we'll do everything we can until then to continue to help address the challenges that this pandemic brings with it. Let's all be healthy and safe. With that, I would like to turn it over to the operator for your questions.

[Operator:]

Thank you. But before we open the line for questions, I would like to turn the call back to Homi for some additional comments.

[Homi Shamir:]

Finally, I wanted to give a quick real-time update on the FDA. We continue to make good progress on the warning letter and are almost done and ahead of schedule to complete all our deliverable and committed to the agency. Concerning the two pending EUAs, the NxTAG RPP plus COVID panel, we believe we are on track for approval very shortly. With respect to the VERIGENE SARS COVID effect, the status is more puzzling as we are in active review of this submission and have received a letter last Thursday afternoon explaining that the agency was declining to the review the EUA for VERIGENE I COVID-19 at this time, because they are prioritizing tests that they think will increase testing accessibility such a point of care and home test. We are reviewing option to challenge this decision since we believe getting this product in the hands of the hundreds of customer when they requested it, it will be rapidly increased accessibility. Still, at this point, we cannot say whether we will be successful in reversing this decision. However, we are still planning to submit additional EUAs to the FDA during this quarter.

[Operator:]

Thank you. . Our first question comes from Sung Ji Nam with BTIG. Your question please.

[Sung Ji Nam:]

Hi. Thanks for taking the questions. Could you help me just clarify the VERIGENE II, the FDA I guess rejecting the review process? I'm sorry, what happened to VERIGENE I?

[Homi Shamir:]

Yes, it’s VERIGENE I.

[Sung Ji Nam:]

Sorry. They're reviewing both or VERIGENE I and not II?

[Homi Shamir:]

At the moment, as I said, we have two EUAs review with the agency, where the next step COVID-19 -- to add the COVID-19 to the next -- COVID-19 and full to the next step and we have a standalone COVID-19 for VERIGENE I. We have not submitted yet the VERIGENE II and ARIES together with COVID-19 which is scheduled to be submitted later on during this quarter. We were in active review of the VERIGENE I and we received a letter on Thursday from a different department in the FDA that stated that they are declining it due to other priority for testing. We obviously think it’s not correct because the VERIGENE I adding an assay on VERIGENE I COVID-19 close to 800 customers using a VERIGENE I instrument and all of them are major hospitals across the nation is substantial needs for them. As a matter of fact, they are requesting us to do so. So I'm hoping that we will write a letter to the FDA and hopefully they will reverse their decision. But we wanted to be upfront in what is happening. It took us all by surprise.

[Sung Ji Nam:]

Okay, got it. And then any updates in terms of IVD assays in non I guess respiratory related? Is the FDA still putting things on hold?

[Homi Shamir:]

Everything is on hold.

[Sung Ji Nam:]

Okay. Any visibility in terms of when they might start reviewing those again?

[Homi Shamir:]

No idea. My feeling is that we’ll probably do it until we see a slowdown in pandemic, EUA approval, et cetera. So it’s going to be for a while.

[Sung Ji Nam:]

Okay. And then lastly from me just would love to hear kind of the latest feedback on INTELLIFLEX, how that launch is going? I think you guys are targeting kind of a broader commercial launch this year.

[Homi Shamir:]

Actually all our major partners – major partners in life science have the product now. Two of them are training their sales force and ready to launch it. I don't have behind that anymore comment to provide about it. But from the initial comment, they're all excited about the product. And we have a large installed base that we are looking to upgrade it.

[Sung Ji Nam:]

Great. Thank you so much.

[Homi Shamir:]

Thank you.

[Operator:]

Thank you. Next is Steven Mah with Piper Sandler. Your question please.

[Steven Mah:]

Great. Thanks, Homi and Harriss. Maybe just a follow-up question on FDA. So did they give any other color why, because you said point of care but you said they're not prioritizing VERIGENE I. So does that mean that they're focusing then on the at-home lateral flow?

[Homi Shamir:]

Yes. In the letter they say they are prioritizing tests that will increase testing accessibility such a point of care and at home test. That's what they said to us. So that was that took us all by surprise and I don't want to go beyond that. But it took us all by surprise. As I said, this did not come even from our reviewer that was reviewing that came from completely different part of the agency. So we will approach them and talk with them, because there is a very big installed base who need it. So sometimes they can make also human mistake.

[Steven Mah:]

Okay, great. And then maybe just a couple of questions on your guidance. So you mentioned customer demand, so just COVID-19 is going to be strong in the next and the very near term. And there seems to be a lot more belief amongst people that we have not yet peaked in terms of COVID-19 testing yet. So that and then plus the given -- given the new Biden administration stance will likely increase COVID-19 national testing. Why would you reiterate guidance? What would it take for you to increase the year-end guidance or are you just being conservative?

[Homi Shamir:]

Well, first we would like to be conservative in this time, okay. And if you look what happened in Q4, initially we were a little bit concerned by the guidance that we gave for the full year. We’re reducing 5 million and that we beat in 7 million. It's very hard at this stage to try to predict what's happening and where we are going. Just a matter of argument, we all on this line know, for example, flu testing is very minimum, almost not exist. On the other end, if I go to life science, we need to go in order to recognize revenue installed system, customer system that’s coming mainly, I'm not talking about MDS in the life science, countries -- some countries are closed, some institutions are closed, travel and et cetera. So you really don't have the flexibility to know from day to day what's happening, okay. And even if I use the VERIGENE I issue with the agency, we were in active review. We were hoping to receive it almost any day. And suddenly out of the blue, we got this letter from the FDA. So all what we are saying is we are feeling very confident that we’ll lead our 480, but we rather not to be bound into trying to both predict what happened next month or the next two weeks or et cetera. Because it's behind everybody control. Yes, we can provide the guidance, but we will be very conservative on that and we don't want to repeat what happened in Q4 when we reduced it and then we beat it substantially.

[Steven Mah:]

Yes, okay, that makes sense, Homi. And the contribution from VERIGENE I COVID testing, can we assume that's baked into the guidance you provided for the year or is that primary --?

[Homi Shamir:]

For sure there is there, because we build it. But again, the most -- don't forget so far, the contribution for COVID-19 on the VERIGENE I was zero. Okay. So we assumed something into the guidance. But on the other end, the raise in the guidance, as I said, a lot of ARIES ramp up of ARIES production that incorporate and I think we have enough space in there to either it will happen or not, although I believe it should happen to deliver the guidance. Concerning the guidance, again, we have to remember that the guidance also like every -- we provide the guidance in a similar thing happened in 2020, probably 45% of the guidance or the revenue happening in the first half of the year and 55% happening in the second part of the year. So we’re feeling it will be the same story or the same trend this year.

[Steven Mah:]

Okay, got it. And then my last question, similarly on guidance on life science and research tools business, does your full year revenue guidance, does it bake in some conservatism given that there were some lockdown, for example, like in California back in January? How are you guys thinking about that, especially given vaccine rollout seems to be less than optimal, then maybe have more outbreaks?

[Harriss Currie:]

Yes. So the way you have to think about it, Steven, is that what we built into the guidance is I believe I said in my comments was a moderate recovery of the life science size of business, both in flow and our partnership businesses span a variety of different verticals within the life science landscape. So we're expecting some recovery. Although there are new strains, the vaccine in places is purported to not be working as well as they might expect. People are actually learning to live with it. You're beginning to see traffic again. You're beginning to see more people out. And so as they learn to live with it, as they allow us to come into their facilities and install systems, we will see growth in life sciences in both flow and our partnerships recover, maybe not 20% growth, right, in those businesses, but they will be some modest growth there. That coupled with the significant expansion of ARIES manufacturing that we believe will be significantly utilized gets us to the 480. After that, when you think about upside, there's a variety of things that could happen, but we certainly don't want to bake those in until Homi says we get better visibility on that.

[Steven Mah:]

Okay, got it. Okay, so it sounds like you've baked in quite a bit of conservatism. Okay. All right. I Appreciate it. Thank you.

[Operator:]

Thank you. Next we have Brandon Couillard with Jefferies. Your question please.

[Brandon Couillard:]

Thanks. Good afternoon. Homi or Harriss, is the new ARIES capacity effective in place effective now, as in the first quarter such that sample-to-answer revs should be up sequentially from that expanded capacity in the first quarter?

[Homi Shamir:]

Yes. We are ramping it up as we speak. Obviously, like every ramp up you have some small hiccup and et cetera, but it's for sure you will see Q1 last year compared to Q1 this year a substantial increase. But really, the biggest increase you start seeing Q2 and a further increase in Q3 and Q4 when we get more than we get there. But yes, you will see a substantial increase during this quarter already happening.

[Brandon Couillard:]

Thanks. And then Harriss, could you quantify the backlog that you exited with coming out of the fourth quarter, I think mostly tied to the sample-to-answer of business? And would you expect to recoup that ownership against most of that excess backlog in the first quarter? And then any color as far as just how to think about the seasonality of gross margins as we move through the year understanding the mix is kind of a wild card. But is there any difference sort of between the first half and second half we should think about?

[Harriss Currie:]

Yes. So as Homi mentioned, think about first half, second half like 45-55 when you think about the split of revenue. Certainly, we are -- if we were to deliver all of the close to $15 million of ARIES backlog in the first quarter, then you wouldn't then also buy that same volume of purchases that you had scheduled because now you have expiration issues and inventory issues to manage. So what you would expect is a tick up in volume, you'd expect this to add accounts at a more rapid rate. So the overall volume of ARIES assay revenue, you would expect to go up but you certainly wouldn't expect to satisfy all that backlog plus sort of a standard forecast for the quarter. That would way oversupply the people that ordered. What we know is that we have a number of people that want product. They want us to get as fast as we can. We've allocated as best we can. Now we'll be able to more fully supply those. And over time that number will work down to almost meaningless level, if you will, as we move, except for orders that are placed for future delivery that happens on a regular basis, right, scheduled orders from customers that order once a month, once a quarter, once a week to have those delivered and they make minor modifications to those as we go.

[Brandon Couillard:]

Super. And then do you happen to have a target number of new sample-to-answer placements you expect to make in '21? And any color as far as the timing of the V II launch?

[Harriss Currie:]

So, yes, what I would tell you is this year we did a tremendous number, 450. Last year, we did right at 200. We're going to be somewhere in the middle, most likely, with those. Unlikely I would say to be maybe as high as we were, but certainly it will be a healthy number for sample-to-answer placements. But keep in mind that if you have had an opportunity to see some of our recent investor discussions, 75% of our revenue comes from recurring items, whether it's beads, royalties or assays. Every system we place, almost every system we place, unless it’s replacement, layers on additional revenue on top of that. So you end up with a compounding effect as you go as you sell more and more systems. And so growth happens naturally, if you will, as we continue to place systems and layer the new customers’ volumes on top of the existing customers’ volumes and customers that we only had for a portion of the year annualized in the following year. So a lot of math, if you will, that goes on there that helps us drive revenues upwards.

[Brandon Couillard:]

Got you. Thank you.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. Next question is from Brian Weinstein with William Blair. Your question please.

[Griffin Soriano:]

Hi, guys. Good afternoon. This is Griffin on for Brian. Thank you for taking my question. Just first here, can you help us understand the trend in molecular diagnostics a bit, down sequentially over the last few quarters? Is that pricing coming in or early buying? And then how can you marry that up with the capacity expansion you're building with ARIES?

[Homi Shamir:]

Yes, it's a good question. We have to remember in molecular diagnostic, Luminex have three offerings in the COVID-19 or overall. It's the NxTAG, it’s the VERIGENE I and ARIES. VERIGENE I, we did not really have any solution yet, as you heard earlier, but we did not have any solution for the COVID-19. As a matter of fact, we felt pressure there because there is less blood culture testing, obviously less GI testing and less -- so that's put a pressure on the revenue in this product, because there is less of specialization as well. On ARIES, we ramp up very quickly. And from Q1 and Q2, we were in maximum production until now that we are doubling or continued to expand it and fill them. So that will give us the ramp up and really the fairly tremendous revenue of the risk coming online, because of the expansion of manufacturing. And the next step, again, it's having the same issue. We had -- very in the beginning of the pandemic, everybody ran to buy respiratory product. Now there are more concentrating on the COVID-19. And so we have the COVID-19 solution, but that's become a little bit more stagnant in the number. It's not going beyond what we saw before and not declining. So, really the goal for us will be coming out of the ARIES moving forward. We have not seen – and one more thing about the pricing, we have not seen any pressure on our prices because in any -- in most of the cases, we were fairly keeping our prices to what we used to sell before the pandemic.

[Griffin Soriano:]

Okay. And on the ARIES, so just on the guide, you're looking for about 63 million in incremental here in '21, most of that coming from ARIES, call it 4 million tests at 30 RSP, that's a pretty big bump from 2020. Why is the mid-single digit assumption on the base the right number and just can you touch a little bit more about that build to 480?

[Harriss Currie:]

You're talking on the life science’s side of the business, the partner business and the flow business, correct, mid-single digit growth?

[Griffin Soriano:]

Yes.

[Harriss Currie:]

Well, first of all, we talked about seeing some modest recovery on the life science side. We believe that COVID is going to be with us for a while, and especially it's going to affect this year, maybe not totally the way it affected last year, but it's certainly going to affect this year. And as it does, but people learn to live with it, we're going to see recoveries there from where they bottomed out effectively in the third quarter of last year. We began to see recovery. We should continue to see recovery there. We don't want to overcall that too higher. And the aggregate growth rates of the markets that our partners plan, we're only growing in the mid to high-single digits to begin with anyway. That's $150 million of a $400 million business. The flow business was growing a little slower, around -- a little higher at 10%, much smaller number. Flow got hit hard last year. It will recover some this year. You add all that together and you’re in the mid-single digits and what is we'll call the life science business and molecular diagnostics grows at 20 plus because of the manufacturing.

[Homi Shamir:]

Yes. And we need to be conservative here because part of the challenge is -- look in Europe, we cannot travel now to install some systems, okay. And how long that's going to be, initially when we -- you can think about Q1, but then people was talking about Q2 now. We sold the new strain of COVID-19. So you need to be conservative. If we beat the number and we hope we will beat the number, we will be all happy. So we do not want to come with saying, okay, life science is going to go up 10% or whatever. We think mid-single digit number is something between 5 to 7 is at this stage, under this situation, the best quote we can put out.

[Griffin Soriano:]

Got it. That's helpful. Thank you. And to just squeeze one more in here on capital deployment. This is really an intent driven capital raise with that convert over 300 million in cash. Can you give us an update on how you're thinking about targets and M&A, given the valuations that we're seeing in space today?

[Harriss Currie:]

Yes. We're seeing a tremendous number of overpriced options today. A lot of options that we believe are overpriced. And because we've been very careful, diligent about the acquisitions we've made, we've tended to pay a pretty reasonable price for the acquisitions we've made. We continue to look for those. We believe those opportunities will present themselves. And if they don't, then obviously we have to make other decisions around share buybacks or increased dividends or other things that we can do to ensure that our shareholders realize a reasonable amount of value.

[Griffin Soriano:]

Great. Thank you.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. . Our next question comes from Tycho Peterson with JPMorgan. Your question please.

[Casey Woodring:]

Hi. This is Casey on for Tycho. Maybe just going back to the 2021 guide, can you maybe talk a little bit about what you're baking in for new product rollouts, the INTELLIFLEX and VERIGENE II? How much upside maybe could a new product cycle contribute to 2021, or maybe just talk a little bit about that dynamic?

[Homi Shamir:]

We obviously put some INTELLIFLEX as an upside, but it's baked, as Harriss said, in the 5%, 7% goal of the life science and we bake it. VERIGENE II, because it's a new product, we cannot bake too much into that. And obviously when we get the agency approval on the EUA, which we are planning to submit, we'll take it from there. But as we keep saying, in order to get to the guidance is the life science in the ratios of 5% to 7% and really ramp up out of the ARIES manufacturing. There is a lot of other opportunities that came along, but that's really the way we look at the budget and all the guidance for this year.

[Harriss Currie:]

So think very modest contributions from new products with an opportunity if COVID resolves better than any of us ever thought that maybe we could move faster because number one, more opportunities open up for placements for those that are on the fringe and are on the edge. And secondly, the FDA speeds up their clearance of non-COVID related products. One, for instance, that would go on the VERIGENE II gastro product. So more the bigger -- the faster we can increase the menu on VERIGENE II, the faster the success we'll have, number one. Acquiring new customers with it, number two. Converting old customers who use VERIGENE I onto VERIGENE II.

[Casey Woodring:]

Got it? And then maybe just one more for me on OpEx. I think you guys have been guiding to around flat OpEx for 2020, and it came in a little above. What should our expectation be for 2021 OpEx this year?

[Homi Shamir:]

Yes, the OpEx came – we were guiding to around 200, 201, came around 205 if I’m not mistaken, mainly because commission and other things that we had to pay. Don't forget when we started the year, our guidance was – mid of the guidance was 357. So when you finish the year at 417, you need to pay more commission, you needed to do other things. But yes, I think the company has done and also we increased R&D activity, depreciation that already took place or accelerate on certain items and getting ready for this year. So yes, I think we have done an amazing job to controlling our OpEx in this pandemic. And we are looking at the -- obviously when you look at 480, we assume in the guidance that we will see more clinical plans there, as we are preparing mainly on the VERIGENE II but also in ARIES, as we are preparing to the day after the pandemic some travel, obviously, commission et cetera. So it's all been taken into account for 2021.

[Harriss Currie:]

So expect growth, but growth that is less than the level of revenue growth that we're talking about. So that we end up passing some of that incremental profitability with appropriate margin maintenance down to operating profit. So we increase operating profit, of course, here. And as a result, you may have again seen some of our recent investor presentations where we've been calling an expectation of EBITDA for the year to grow as well. So you would expect growth in revenue, margin maintenance, control of OpEx with all resulting in the growth of earnings.

[Casey Woodring:]

Got it. Thank you.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. And this concludes our Q&A session for today. I would like to turn the call back to Homi Shamir for his final remarks.

[Homi Shamir:]

Thank you, operator, and thank you everyone for your attendance on our earnings call. We look forward to seeing you in person in the very near future.

[Operator:]

Thank you, ladies and gentlemen, for your participation in today's conference. You may now disconnect. Have a good night.