Luminex Corporation
Q1 2019 Earnings Call Transcript

Published: 7 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to Luminex Corporation’s First Quarter, 2019 Earnings Conference Call. My name is Carmine 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 welcome to Luminex Corporation's conference call to discuss our first quarter 2019 financial and operational results. On the call with me today is Homi Shamir, President and Chief Executive Officer. We’ll be following our standard agenda. Homi will review our corporate highlights, I'll review the financial performance and after that, we will open the call up for 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 website. Certain statements made during the course of today's call may not be purely historical and consequently maybe forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the company claims the protections provided by Section 21E of the Securities Exchange Act for 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 risks 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 on this call. To the extent that any non-GAAP financial measures are covered, a presentation of and reconciliation to the most directly comparable GAAP financial measure will be included in our earnings release, which is available on our website in accordance with Regulation G. I’ll now turn the call over to our President and CEO, Homi Shamir.

[Homi Shamir:]

Thanks for joining us today to discuss our first quarter 2019 financial and operational results. Overall I'm pleased with the results of the quarter which were in line with our expectations. For the last two years we have prepared and positioned ourselves well for the departure of the LabCorp Women's Health business. The first quarter, was the first quarter in which the departure significantly impacted our result. Thankfully it will only impact our comparison for the next two quarters and then it will be largely behind us. I'm very confident that by the fourth quarter of this year we will be a much stronger and more diversified company moving forward with both double digit growth and expanding gross margin and profitability. We continue our strategy of building Luminex into a substantial player in both MDx and life science businesses. As a reminder, the mid-point of our revenue guidance for this year is $340 million and as we leave 2019 we expect to be growing at double digit rates. Therefore our goal remains to exceed revenue of $500 million, fueled by organic growth and supported by our diversified portfolio and substantial investment in R&D. Harriss will discuss our financial in more detail later, but at high level, as I mentioned in our press release, we delivered approximately $82.5 million of revenue in the first quarter. We’ve seen our previously communicated expectation of $82 million to $84 million. Our LTG revenue stream grew by 1%, reflecting the guidance that we previously communicated. Our MDx revenue stream was flat compared to the prior year after the adjustment for $11 million of LabCorp departure and the addition of $11 million of flow related revenue from the acquisition that we closed on December 31. We indicated previously that the departure of LabCorp Women's Health revenue could result in a headwind of about $35 million for 2019. In the current quarter LabCorp related revenues were down approximately $11 million, reflecting almost one-third of the full years expected reduction. Obviously the loss of this high margin revenue affected our profitability in the quarter. As we look forward, we expect that the second quarter will reflect an additional $30 million or $35 million total reduction. This will be reflected in the guidance the Harriss will discuss later. Overall, by June 30, we expect the $24 million of the total $35 million headwinds related to LabCorp will have been realized. During the third quarter we expect an additional headwind of $7 million and at that point the LabCorp departure will be substantially behind us. Despite the departure of this business, we are pleased to let you know that LabCorp recently extended its CF commitment for another two years to the end of 2021. In addition to observing the LabCorp headwind, I was pleased with our ability to deliver this result in spite of a much weaker respiratory season than expected. We approximately 20% fewer patient presented with respiratory related symptoms compared to prior year. We believe that the week flew season impacted Q1 by a few million dollars as compared to last year strong comp, with the impact being felt evenly between sample-to-answer and non-automated system. Therefore our growth in sample-to-answer tempered a bit in the first quarter to 16%, however we expect to return to a growth of 30% or more in Q2. We also added approximately 50 new contracted systems during the quarter. Gross margin dropped as we expected in the quarter, mainly due to the LabCorp effect and the position of the flow cytometry business. We generated a modest operating loss as a result of the margin compression coupled with initial dilutive nature of the flow cytometry acquisition. Gross margin on the flow business should improve significantly in the second quarter based mainly on the absence of acquisition adjustment required as part of the first quarter result. As previously guided, we still expect the flow revenue stream to accretive by the end of the year and to be a net contributor to the overall profitability. With the first full quarter of activity of our newly acquired flow business under our belt, we remain excited about the prospect for this business. The flow revenue stream grew by double digits in the first quarter relative to what was included in the Merck revenue in 2018. We are continuing to integrate this business and anticipate that most of the process will be concluded by the end of this quarter. This includes the transfer of manufacturing from India to Austin, as well as enabling flow activity we’ve seen in the financial, IT and ERP system of Luminex. Our new colleagues in sales, marketing, customer support and R&D are fully engaged and performing very well. The first quarter was also extremely busy with R&D and clinical trial effort, although this resulted in higher than usual expenses. This effort is critical for future growth and has a significant impact on our profitability in Q1. We are expecting a reduction to this impact after the end of Q2. For example, we had three clinical trials in process during the quarter. This is unusual for Luminex, but accelerate our future product pipeline. We are planning to submit to FDA as follows

[Harriss Currie:]

Thanks Homi. As Homi mentioned, revenue in the first quarter was in line with our expectations. Consolidated revenue for the first quarter was $82.4 million, flat from the quarter reflecting the expected decline in LabCrop and the addition of our new flow cytometry business. In the first quarter flow cytometry contributed $11.4 million. This contribution was offsetting by the decline assay sales to LabCorp of $11 million. Our LTG revenue stream was approximately $35 million, up 1% for the quarter, but double growth in royalty revenue, offset by a decrease in consumable and multiplexing systems revenue as previous guided. It’s interesting to note that the end user sales reported by our partners continue to grow steadily. Our molecular diagnostics revenue stream was down 25% for the quarter, primarily driven by the $11 million impact of the LabCorp departure. Excluding LabCorp this revenue stream was down 2% for the quarter, reflecting lower respiratory sales as the current flu season was light, compared to the heavy flu season in the first quarter of 2018. As Homi mentioned, it was down approximately 20% in patient presentations. For our sample-to-answer products, both the number of active customers and utilization per customer has continued to increase. For the first quarter the annual utilization rate per customer for our VERIGENE products increased to $111,000 up 6% from the prior year, and for our ARIES product line, average annual utilization was $51,500, up 1% from the prior year. Turning to our revenue line items, system revenue nearly doubled in the first quarter of 2019 as compared to the prior year, primarily driven by the acquisition the flow cytometry business. Remember, that the flow revenue streams are 90%-plus system revenue and service. During the first quarter, we placed 210 multiplex systems, not including ARIES and VERIGENE systems, compared to 218 in the prior year quarter. As a reminder, we're expecting approximately 100 less FLEXMAP 3D for the e full year 2019, as a result of the substantial completion of One Lambda’s upgrade cycle. Included in the system revenue, our sales of our xMAP system, sales of both our ARIES and VERIGENE systems, sales of our flow systems and a range of rental allocations for those systems placed under reagent rental agreements. Consumable revenue declined 10% from the prior year quarter, driven primarily by lower bulk purchases. As previous communicated, we had some large partner purchases in the first quarter of 2018 that didn't repeat at the same level in 2019. Royalty revenue grew 16% for the quarter. This reflected an increase in base royalties of $1.2 million, in addition to a favorable mix of royalty rates. As reminder, total royalty revenue includes base royalties, a couple with audit findings, self-reported shortfalls and accrual adjustments. Based on user sales, we are up nearly 10% for the quarter, not including the items listed previously. Similar to our molecular diagnostics revenue stream, assay revenue declined 24% in the first quarter, primarily driven by the expected loss of LabCorp sales which declined approximately $11 million from last year. Excluding this impact, assay revenue in total remained at prior year levels. Now turning to the income statement, we posted gross margins of 56% for the quarter, down by 9 percentage points from the first quarter of 2018. This decline was primarily driven by number one, the $11 million in reduction of LabCorp assay sales which typically carry a much higher gross margin than our corporate averages; number two, the absorption of the flow cytometry business which negatively impacted our margins in the first quarter; and number three, a change in sales mix weighted heavier in sample-to-answer sales. Sample-to-answer assays carry a lower gross margin relative to Luminex’s historic margins and therefore causes an adverse margin effect from a higher sample-to-answer sales mix. Gross margin for the acquired flow business was only 37% in the first quarter and included adverse impacts which are temporary or one-time in nature resulting from the acquisition accounting. Excluding these temporary impacts, we anticipate gross margin for the flow business in the second quarter should improve significantly. Our operating expenses for the first quarter showed an increase in both R&D and SG&A, primarily due to the inclusion of the flow cytometry business, clinical trial activity and a number one time integration costs. Overall OpEx was up $11.1 million or 29% relative to the prior year and included just over $6 million of flow cytometry related expenses and another incremental $3 million related to clinical trial activity. As Homi mentioned earlier, we are heavily engaged in three clinical trials and we do not anticipate that this level of spending on clinical trials will continue. Operating profit declined $18.9 million for the quarter to an operating loss of $3.6 million, primarily due to the aforementioned gross margin compression and operating expense increases. We anticipate that as we bring flow margins back up, continue to improve our sample-to-answer margins and benefit from further growth in our LTG revenue stream, then margins will climb further, but are not likely to completely return to historical levels. Our effective tax rate for the quarter ended March 31 was a benefit of 184%, reflecting a discreet 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. Absent significant discrete items, we expect our consolidated full your effective tax rate to be between 10% and 20%, which incorporates adjustments to the one time impacts of the U.S. Tax Reform in the current quarter and adjustments to our overall tax expectations based on jurisdictional distribution of revenues and expenses. We continue to assess our business model and its impact in various tax and jurisdictions. Our balance sheet remains strong with over $61 million in cash and investments after absorbing a recent purchase of the flow cytometry business. We used $14.8 million of cash in the quarter, inclusive of the payment of annual commissions and bonuses that occur in quarter one, capital expenditures of $3.8 million and dividends paid of $2.7 million and now some visibility in the second quarter of 2019. For the second quarter we expect to deliver total revenue between $80 million and $83 million with over 10% coming from our new flow revenue stream. We expect system revenue to be up, but the base business down slightly, but elevated by the contribution from the flow revenue stream as more than 70% of the flow revenues are derived from system revenue. Consumable revenues remain robust in comparison with the second quarter of 2018. We anticipate that total royalties will be flat to down relative to the first quarter, but up modestly versus our prior year quarter. As you know, included in aggregate royalty revenue are audit findings and accrual adjustments given the recent change in accounting rules. We should see growth in base to end user sales, and therefore growth in base royalty revenue. However coupled with these other elements, royalty revenue can be volatile from quarter to quarter. For assay revenue we expect to see an additional $40 million headwind from LabCorp in the second quarter. In addition we anticipate another challenging comp and respiratory given last year's exceptionally strong and long flu season. With respect to profitability, we anticipate modest improvements in gross margins from the first quarter as a result of several factors. First, as a result of accounting rules, all acquired flow inventory had been mark-to-market so the gross margins on the flow revenues were artificially low in the first quarter, but we will exhaust all the acquired inventory in the second quarter ending this negative impact. Second, the manufacturing service agreement with Millipore Sigma and its markup is expected to conclude at the end of the second quarter. The above factors will be tempered by the fact, there are 2019 growth is expected to be derived primarily from our sample-to-answer franchise and the presence of flow revenues, both of which have gross margin below our recent corporate averages, and could represent a third of total revenue for the quarter. Obviously this margin compression affects the overall profitability. Although we expect to be cash flow positive for the year, from an earnings standpoint we could experience another quarter or breakeven or loss. Stabilizing factors include the volumes and margins of the flow business returning to a steady state, completion of integration activity and a further expected rise in overall volumes across the entire business, giving us the added benefits of economies of scale. One thing to keep in mind is that mix is still a significant driver to our ultimate reported gross margins. We still experience quarter-to-quarter volatility in mix, which can push gross margins up or down depending on the relative line item contributions. We have a lot of clinical trial activity occurring in 2019 and as a result R&D expenses are higher than 2018 further affecting current profitability. But as we demonstrated through the integration of Nanosphere, we paid careful attention to operating expenses, margins and cash flow. We do not take these matters lightly. It is our top priority and we are committed to returning to a sustainable and growing profitability by the end of the year. Finally we believe will show positive cash flow in the current quarter. Now I’d like to turn it back over to Homi for some final comments.

[Homi Shamir:]

Thanks Harriss. As I said earlier, we are pleased with the first quarter result and the progress we continue to make towards the company. I am very excited about our future. We have about two more quarters to go until we are substantially passed the loss of LobCorp and as merged as a much stronger diversified company. During this time we will continue to build a solid foundation in our sample-to-answer portfolio as well as in the live science businesses. By the end of this year Luminex will again be posted for double digit growth, improved gross margin and a return to profitability and increased cash flow. To conclude, I am really happy to lead a great company with extremely dedicated employees who are committed to achieving our long term objective. We saw innovative technology and a strong management team. I am very confident that in the near term we will demonstrate in Luminex on of my favorite slides, show me the money. This ends our formal comments. Operator, please open the line for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question is from Sung Ji Nam with BTIG. Your line is open.

[Sung Ji Nam:]

Hi, thanks for taking the question. Homi, could you remind us again in terms of your sample-to-answer expectations for the balance of the year, you're still guiding to over 30% growth, you know realizing that the first quarter you had a tough comp. Could you just remind us again kind of what you think the driver could be for the balance of the year, especially given that VERIGENE II is you know – will be submitted by the end of the year, but not available until next year.

[Homi Shamir:]

No, that’s what I felt. VERIGENE II is going to submit it in August and hopefully three months after that it will be available. Until now we follow our submission. We got it within the 90 days, so hopefully we continue on this track record. Yes, we are stull targeting to be on a running rate on $100 million before the end of the year, which mean Q4 of this year it should be under $24 million, $25 million, but nothing changed in out assumption and we keep pushing for that. We see the continues growth of new customers and existing customers. That’s why I said in the call that we are comfortable about going back to the 30% gross on the VERIGENE. As a matter of fact, if you only compare our 16% growth, I compare it some of our competitors where again they have not been there in this levels. So we are feeling good where we are going, and the business is doing well there. So I think MRSA is going to help us as well. So there is nothing changing in our assumption to be in the running rate by the end of the year of $100 million.

[Sung Ji Nam:]

Great and then for the flow cytometry business, obviously seeing a lot of good growth there, could you also talk about kind of where you are seeing strength in terms of the end market you are targeting, maybe some applications you might want to highlight there as well. Just kind of curious as to kind of what's driving the strength there?

[Homi Shamir:]

The strength is, I think we are more focusing the business, okay and I think we are lucky to – the defense force was integrated very quickly and we basically bought all of them already to our kickoff meeting that we had in February in San Diego. They interact with the rest of our team, lean about Luminex. Again I don’t know if was beginning luck or not, but we had a very nice increase year-over-year. We had close to 25%. I don’t think it will repeat, but as we said earlier during the acquisition, we anticipate this business to grow over 10% throughout during the year, also in the year to come. But beyond that it’s come across the profit line. It came from the Guava and it came also for the imaging side. So it came cross and we are just looking forward to continue, to finish the integration by the end of this quarter. It obviously will help us a lot in the gross margin. We anticipate at least another 10 point of gross margin to add. We transfer manufacturing from India to here. As a matter of fact we started seeing initial system being built there. So we feel good about where the business is going. We just need to start building more strategy going forward with this business, but beyond that it’s performing very well.

[Sung Ji Nam:]

Great! And then just lastly, any updates on SENSIPLEX? If the timeline is still on track for that launch?

[Homi Shamir:]

Yeah, we are expecting their call. We have already two major of our partners in the last one or two months they came to see the system. As a matter of fact we have our team, trying to see on them and talking with them about the system and actually demonstrating to them the system. So I think we are on track that by the end of this year, early next year we’ll provide them the system hopefully even earlier than that, but they will start testing it. Now here we are losing control because it’s their hands and we are trying to emphasize to them, to how to really bring it to the market as soon as possible, and we have some leverage there but I don’t want to go the – through the call about that.

[Sung Ji Nam:]

Great, thank you so much.

[Homi Shamir:]

Thanks Sung Ji.

[Operator:]

Thank you. And our next question is from Brian Weinstein with William Blair. Your line is open.

[Brian Weinstein:]

Yes, thanks for taking the questions. On the flow business, was it a little bit better than expected in Q1, and the reason I ask that, it sounds like the guidance for Q2 was about, if I heard you right, about 10% of the $80 million or so would imply it’s down sequential. So was there anything kind of in Q1 that was better than expected of pulled forward anything from Q2. Am I thinking about that right?

[Harriss Currie:]

So actually Brian, the Q1 business was in line with our expectations and what we said was we expect the flow business to be 10% or more of the revenue, not 10%. So certainly it will be in excess of 10% in the quarter. So based on our guidance range you would expect it to be you know approaching the same level or above where it was in the first quarter. Now we grew significantly in the first quarter that we mentioned 25% plus over the prior year numbers that were reported, not in our financial statements obviously, but in the Merck financial statements. That rate of growth is, certainly we’re not going to grow at that rate over the course of the year, but we still remain really comfortable with you know our mid $40 million projection for the flow business for the full year.

[Brian Weinstein:]

Great, thanks for the clarification on that, and then as a follow-up, can talk about the customer additions that you guys are targeting on sample-to-answer and what you guys think you need to add still to that customer base to get to your year-end goals and then more broadly speaking, can you just talk about you know the penetration of the customers on your sample-to-answer systems versus kind of where you think they could ultimately be. So where do you see your penetration at this point?

[Homi Shamir:]

Yeah, we continue Brian. We added I believe close to 50 systems during the quarter. If you look at the numbers that we added Q3 and Q4, a few of them just coming online and we bring them up, so they continue to drive the business. As a matter of fact we could see it even in the – when we look at the respiratory team, the sample-to-answer, even in Q1 when you compare it to Q1 last year we saw a very nice growth in the overall number. Obviously in average it’s below because we have more customers, but you continue to see our new customers coming, and its coming both from new customers and competition. We are on track to achieve what we wanted for the year and I hope that answers the question.

[Brian Weinstein:]

That’s it from me. Thank you.

[Operator:]

Thank you. Our next question comes from Dan Leonard with Deutsche Bank. Your line is open.

[Dan Leonard:]

Thank you. I was hoping you could elaborate a bit on the sample-to-answer performance in the quarter. It came in a little bit light of what we are looking for, and Homi I thought you internally were looking for $20 million plus in the quarter and it seems to have come in a bit light versus that. And I appreciate the flu season, but I had thought a year ago flu wasn't a big driver of the results there. So can you maybe the tie all the loose ends for me?

[Homi Shamir:]

No, you are right, it came in shy in about $600,000, $700,000 where we talked about and it mainly came from the respiratory serrations. So purely as I said in the call, we probably were a little bit more aggressive when we came with the guidance, not only in the automated system or sample-to-answer, but also in the non-automated, especially in the respiratory. They impact us probably around $2 million. But you know I can tell you that for example in the last day of the quarter, we have over $600,000 or $700,000 to sample-to-answer the three corner shape, so that’s moving into obviously Q2. So I’m not worried about not achieving where we wanted to achieve or our sample-to-answer. We see the pipeline, we see the growth. So I feel very confident where we are going there.

[Dan Leonard:]

And may be just a quick follow up, can you talk a bit since you are going to submit this product in Q2 here, the pipeline for MRCA test. Do you have customers that are actively you know clamoring for that test? Is there a pipeline – do you expect it would contribute in a relatively short order or how are you thinking about that that roll out?

[Homi Shamir:]

I not sure how much MRCA is going to add a standalone as a revenue, but it creates more opportunity, our customer that are using CB [ph] for other things that are asking for that. So it’s a door opener for us, but I’m not sure then if it’s going to add substantial jumping on our revenue. From the beginning when we came with the product, the design and that’s why we brought it slightly later than the rest of the Manuel. We saw it, it’s a door opener.

[Dan Leonard:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Tycho Peterson with JPMorgan. Your line is open.

[Tycho Peterson:]

Hey thanks. Maybe I’ll start with LabCorp. I mean I know you guided for a $35 million headwind for the year. You saw $11 million of that this quarter. Now with the contract extension, can you maybe just take about how we think about this flowing through and should we still be assuming the $35 million headwinds?

[Homi Shamir:]

Yes Tycho, it’s still different issue. The one was a $50 million headwind. That $50 million will go to basically the Q2 and Q4 of last year. And the remaining $35 million to go to the year which is $11 million this quarter, $30 million Q2, $7 million Q3 and the balance $4 million in Q4. The extension of the contract is the CF, if you recall even five years ago or 4.5 years ago. When I joined the company we announced in October 2014 we already alerted you guys that me might lose the CF business, and it’s been extended regulatory at least four or five times. Recently they committed with us to another two years of extension of the CF, which mean until the end of December 20, 21, last year the CF business is $10 million.

[Tycho Peterson:]

That’s helpful. And then on flow, you know I think you talked last quarter about you know some disruption on the sales channel and maybe adding more people. Can you just talk to where you are in terms of stabilizing the sales force, and then...

[Homi Shamir:]

Yeah, go ahead.

[Tycho Peterson:]

Well and then a follow up, I just wanted to ask you know how much of the headwind from the accounting change to the margin for flow. I don't think you quantified that?

[Homi Shamir:]

First we had additional sales. We had then called the places [ph] where we lost them out and nobody knows – lost them, they did not join us. I think we have one or two more in the state, a few less maybe five in the rest of the world. The impact of the margin is actually and Harriss can jump, out of that is that TSA of all the agreement we had with Merck and which cost us substantial amount of money, because they are still running the businesses for us. That will be – most of that, when I say most of that, 90% of that will be gone by the end of this quarter. Obviously again its hard to predict and you will see more impact probable coming from Q3 and beyond when we start manufacturing here in Austin, across the street. I believe that we will see a better improvement in the Guava products and the news product and Harriss, did I miss something?

[Harriss Currie:]

Yes, so the biggest effect on the flow margins comes from the markup of that acquired inventories, which by far overwhelms the TSAs and MSAs that are in there, that are still a component. But we mentioned that in the call that our expectation is as we move from the first quarter to the second quarter or in the first quarter the margins on the flow business were in the 30s. Then in the second quarter, absent just the inventory markup that almost all that's gone, we estimate that they could jump as much as 10 points from the first quarter to the second quarter, so we could be in the mid-40s as we move into the second quarter. If you sort of do the math on roughly the same amount of revenue that passes you know additional $1 million of gross profit down to cover operating expenses and doesn't you know consider the eliminations of the TSAs and MSAs and another thing. So, the flow business should move toward profitability pretty quickly, as we grow the revenue of some of these, I'll call them one-time – these more unusual items associated with an acquisition burn themselves off, and especially as Homi mentioned, we're looking to be substantially finished with the integration activities where we have to enlist Merck MilliporeSigma for help by the end of this quarter, the second quarter. Does that help?

[Tycho Peterson:]

Okay, yeah that’s helpful. And then just last one on LTG, the consumable decline, can you just elaborate on that a little bit? I mean was that all from One Lambda or was there something else there?

[Harriss Currie:]

There were some big purchase by a couple of partners and it comes down to that bulk purchase phenomenon where partners purchase you know once every 1.5, 2.5 quarters and they lined up well in the first quarter of last year and this year there's a decline but the expectation is, is that those same partner are going to come back and order in the future.

[Homi Shamir:]

Yes, but the strength of the business is reflecting in the royalty or in the end users, and it's consistently continued to go to us. Yes, we keep finding audit that every quarter they find somebody that pay us less and that's adding to the audit. But if we could like go back in the last five or six quarter, you can see that every quarter we were anything between 5% to 12% or even more growth in royalty. So, we see the royalty you know if I take average we are probably around 7%, 8% in the last year and a half to two in royalty, which mean our end user using it more and we are getting more out of that. At the end of the day, at last you know a year ago, the first quarter was mainly One Lambda partly because of some operational issue they were anticipating. So, every quarter it's very hard to predict, but end of the day we are getting into the growth of the royalty. One more thing, about the LTG, I think LTG was slightly better than we anticipated for the first quarter. It actually came up 1%. Initially we thought it will be below to flat. It's performed very well there during the quarter and gave us more hope that may be will be some upside during the rest of the year.

[Harriss Currie:]

Another interesting piece of information Tycho is that you may recall a year or so ago us really getting excited about getting to $0.5 billion of annualized sales from our partners royalties as well. In this quarter, our partners reported $149 million. So, let's just call it $150 million to round it, that's almost $600 million in end user sales by our partner. So that number continues to grow, continues to grow steadily and that's the primary indicator of our partners engagement and use of our technology in the marketplace and we remain excited and expect continued growth there because of the engagement that we have with our partners and their indications of the desire to use our technology in the marketplaces in which they are very well established.

[Tycho Peterson:]

Okay, thank you.

[Operator:]

Thank you. [Operator Instructions] And our next question is from Bill Quirk with Piper Jaffray. Your line is open.

[Danny Macek:]

Hi, thank you. Hey Homi and Harriss, this is Dan on for Bill. First of all, so, you guys placed 50 sample-to-answer instruments in the quarter, but the evidence is based on – what's that?

[Harriss Currie:]

Let me be clear. We contracted 50 sample-to-answer systems. So, we placed them in the market under contract with reagent commitments over a three to four-year period and moving forward.

[Danny Macek:]

Got you. Okay.

[Harriss Currie:]

Big difference from, as you know from a placement of the system with no negotiated levels of – no negotiated commitment from the customer. In these cases all 50 boxes came with a negotiated commitment.

[Danny Macek:]

Okay, got you. So does that speak to the active installed base only going out by 25 instruments?

[Harriss Currie:]

I think you heard the customer base went up by 25. The system number, if you are doing math on the – what we talked about active customers that you may have – you're seeing 25, but when you average 1.7 systems per customer, the math gets you up to that 50 contracted systems.

[Danny Macek:]

Got you, okay. Perfect, great, thank you. Okay and then one more from me, BMU’s sponsoring some PLA codes for multiplex testing to be reviewed June 24. If they were to potentially get better reimbursement for those codes. How do you think that would affect the overall market?

[Harriss Currie:]

Well, for us obviously we think it could benefit us. Our tests are not necessarily directly affected by those reimbursement changes. Our reimbursement is pretty well established. If the reimbursement goes up, certainly in the cases where we can up charge for the -- for reimbursement, not for reimbursement, up-charge in the face of reimbursement. Remember, we don't deal with the reimbursement agencies, our customers do. So if our customers were able to get a higher reimbursement for a product, it still comes down to the math of what do they have to pay for the product and what's the spread between the reimbursement that they can realize and the cost of the assay that they have to perform and obviously all the intricacies involved in the cost of the workflow and all the rest. So, it's our estimation that if those codes or the other codes are reimbursed at a higher rate, then it really won't have a material effect on us. We think we'll be okay.

[Homi Shamir:]

Yes, and you have to remember, we have the FLEX pricing capability and beyond that the VERIGENE II will be completely FLEX pricing that make us very unique in the market. And that's one of the reason. We continue to see more momentum in the marketplace opening door to us. This new custom that are coming either from never used the technology or customers that they are coming from the competitor. So I think the FLEX is giving us a huge capability to adjust the pricing in the market, and obviously when VERIGENE II will launch it, if the environment will be good we can increase the prices, if the environment is not so good for investment, we'll remain where we are.

[Danny Macek:]

Thank you guys.

[Harriss Currie:]

I mean a lot of the work here revolves around – the coverage won't change without evidence of proving clinical utility of any additional targets that get added, and clinical utility often times comes down to statistics. So without sort of definitive clinical application demonstrated it's going to be difficult for the reimbursement agencies to raise what they are reimbursing for, what in effect is the same result or the same treatment, so that's something you should consider as well.

[Danny Macek:]

Got you. Thank you.

[Operator:]

Thank you. And I don't see any further questions in the queue. I would like to turn the call back to Homi Shamir for his final remarks.

[Homi Shamir:]

Thank you Carmine and thank you everyone for your attendance on our earnings call. We look forward to see you in person in the very near future. Have a great evening. Thank you.

[Operator:]

And with that ladies and gentlemen, we thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day!