Luminex Corporation
Q4 2019 Earnings Call Transcript

Published: 11 Feb 2020

[Operator:]

Good day, ladies and gentlemen and welcome to Luminex Corporation’s Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Dwayne and I'll be your conference 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 Jeff Christensen, Senior Director of Investor Relations, for opening remarks. Please proceed.

[Jeff Christensen:]

Good afternoon. And thank you for joining us. With me today are Homi Shamir, President and CEO; and Harriss Currie, Senior Vice President and CFO. Following their 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 website.Certain statements made during the course of today's call may 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 and 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 31st 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 is included in our earnings release, which is available on our website in accordance with Regulation G.I'll turn the call over to our President and CEO, Homi Shamir.

[Homi Shamir:]

Thanks, Jeff. Welcome everyone to our call to discuss our fourth quarter and full year operational results.As we suggested on our last earnings call, we delivered a strong fourth quarter by growing revenues both sequentially and year-over-year, with a return to profitability. As expected, our LTG revenue stream finished the year unchanged with the prior year at $149 million, supported by strong growth in our royalty stream, which is the primary indicator of our partners’ success in the marketplace. We estimate that our partnership revenue will grow in the mid and high single digit in 2020. Our Flow Cytometry revenue grew in line with the expectation, closing out the year with more than 10% growth and with the similar outlook for growth in 2020.Total Molecular Diagnostic revenue was down but was directly affected by departure of LabCorp women’s health and other related products which slowed revenue totaling $32 million for the year. Adjusting for the LabCorp departure, Molecular revenues were up 4% for the year and sample-to-answer revenue was up 21% for the year. As we move into 2020 with the launch of VERIGENE II product expected midyear, we estimate that sample-to-answer revenues will be up approximately 25% for the year.2020 will be a transformative year for Luminex, with three new product launches supporting a return-to-accelerated growth. As I mentioned, the first new product is our VERIGENE II system. Currently, the VERIGENE II system and our GI flex assay are being reviewed by the FDA. We plan to submit respiratory assay next week and then commercially launch the system and both assays soon after the clearances.The many improvements that come with the VERIGENE II system should make for compelling offering over both the current system and competitive products. The new system provides a fully automated solution, featuring room temperature storage with significantly reduced footprint, achieving equivalent throughput to the current VERIGENE system. Assays are being designed to take advantage of our flex support, which allows labs to pay only for what they need. All these new features coupled with feedback from end users give us confidence that our current growth trajectory in sample-to-answer solution will continue to be strong.The second exciting new product is our next-generation xMAP system, previously referred to as a SENSIPLEX, which we’ll be launching under the official name xMAP INTELLIFLEX. This new system provides modern enhancement for what is widely considered today to be the gold standard platform for multiplexing. With cumulative XMP shipments, to-date of approximately 17,000 systems, this new system provides a significant upgrade opportunity. INTELLIFLEX will initially be focused on the protein research market. It really represents a modern dimension of technology that the market has trusted for us for the past 20 years. Development of the system has been completed and we are currently working through the process of putting the system in our partner hands for validation of the revised feature set, and we are looking forward to rolling this out to the market mid-year.Finally, within our Flow Cytometry group is the Guava easyCyte next generation system. The goal of this system is to strengthen our position as a leader in the benchtop flow cytometry space. With software enhancement to augment the ease-of-use, rebranding to align with our global portfolio of products and numerous other walkaway announcements, we look forward to continuing to grow our newly acquired Flow Cytometry revenue stream.Following this exciting new addition to our portfolio will be additional VERIGENE II assays, including blood culture, gram-positive, gram-negative and yeas, as well as meningitis, and numerous other opportunities still in evaluation but with excellent promise. We are confident in our ability to achieve our guidance range of $352 million to $362 million based on both the new products that I have mentioned and the effective execution we have shown with respect to the current portfolio.Now, I will turn it over to Harriss for a financial update and our 2020 guidance and then return with some closing comments.

[Harriss Currie:]

Thanks, Homi.As Homi mentioned, we had a strong fourth quarter with growing revenues and a return to profitability. Consolidated revenue for the fourth quarter was $90.5 million, up approximately 12% for the quarter and up 6% for the year. Excluding LabCorp, revenue was up 13% for the quarter and 19% for the year, inclusive of Flow Cytometry revenues.Our LTG revenue stream was approximately $39 million for the quarter and $149 million for the year, down 7% for the quarter, and flat respective to the prior year. Quarterly consumable revenue was impacted by the timing of purchases from certain partners. The timing of consumable purchases by our partners provides the largest level of variability of our LTG revenue stream. However for the year, we experienced strong growth in royalty revenue with double-digit growth from the prior year, which indicates that our partners are having success with our technology in the marketplace. For the first time ever, royalty revenue has surpassed consumable revenue, and we have every reason to believe that trend will continue as more and more of the consumables we sell to our partners are being used in commercial application.Flow Cytometry revenue was up over 10% for the year, as expected in comparison to the revenue reported in the Merck financials in the prior year. As a reminder, our image-based flow cytometers are big ticket items. And as a result, we've frequently experienced revenue volatility associated with the sales of these systems.Our Molecular Diagnostic revenue stream was approximately $39 million for the quarter and $137 million for the year, flat for the quarter and down 16% for the year, primarily driven by the LabCorp departure, which impacted the year by $32 million. Excluding LabCorp, this revenue stream was up 1% for the quarter and 4% for the year.Performance here was driven by the continued success of our sample-to-answer franchise, which was up 15% for the quarter and 21% for the year. For our sample-to-answer products, both the active customers and the utilization per customer have continued to increase. For the fourth quarter, the annual utilization rate per customer for our VERIGENE products increased to 122,000, up 12% from the prior year quarter. And for our ARIES product line, average annual utilization was 57,000, up 7% from the prior year.Turning to our revenue line items. System revenue more than doubled in the fourth quarter of 2019 and grew more than 75% for the full year, driven by the acquisition of the Flow Cytometry business. During the fourth quarter, we placed 306 multiplex systems, not including ARIES VERIGENE systems, above the high end of our communicated expectation of 225 to 275 per quarter. Included in system revenue are sales of our xMAP systems, sales of both, our ARIES and VERIGENE systems, and reagent rental allocation for those systems placed under reagent rental agreements.Consumable revenues were down 25% for the quarter and 3% for the full year as this revenue stream was impacted by the timing of purchases from our partners.Royalty revenue was relatively unchanged for the quarter, however, was up 8% for the full year. This reflected an increase of base end-user sales reported by our partners and a favorable mix of royalty rates. These increases were partially offset by lower audit findings and adjustments in the current year. Base end user sales were up more than 10% for both the quarter and year, not including audit adjustments.Similar to our Molecular Diagnostic revenue stream, assay revenues were down 2% for the quarter and 16% for the year, primarily driven by the reduction in LabCorp. Excluding this impact, assay revenue was up modestly for the quarter and up 6% for the full year, inclusive of Flow Cytometry revenue, growth that was predominantly driven by our sample-to-answer assays, as previously discussed.Now, turning to the income statement. We posted gross margins of 55% for the quarter and full year, down 5 percentage points from the fourth quarter of 2019 and 7 percentage points from the prior full year. This decline is primarily attributable to the reduction in LabCorp assay sales and a change in sales mix, weighted heavier towards lower gross margin items. As we continue to focus on improving our sample-to-answer margins through both volume and cost efficiency, we anticipate margins will improve in 2020.Excluding the amortization of intangibles, OpEx was down 3% for the quarter, primarily due to acquisition-related expenses in the prior year. On a full-year basis, OpEx was up 15%, predominantly due to the absorption of ongoing Flow Cytometry expenses not present in prior figures.Operating profit for the quarter was $3 million, up $2 million relative to the prior year quarter. For the year, we incurred operating losses of $12 million, primarily due to the aforementioned gross margin compression and absorption of Flow Cytometry expenses. However, our profitability in the fourth quarter is a good indication of the revenue levels required to achieve profitability in 2020.Our effective tax rate for the fourth quarter of 2019 was 40% as compared to a whopping 337% in the fourth quarter of 2018, which incorporated adjustments to the onetime impacts to the U.S. Tax Reform in the prior year quarter.Our balance sheet remains strong, with over $59 million in cash and investments after absorbing the $75 million purchase of the Flow Cytometry business. We generated over $13 million of cash from operations in 2019, while absorbing dividend expenditures and initial losses from the Flow Cytometry business. This continued generation of cash in the face of modest losses is a great indicator of the residual strength of our business after LabCorp and shows our capacity to adapt and to continue to fund operations and our dividend on an organic basis.As we disclosed in early January, we expect revenues for 2020 to be between $352 million and $362 million. We expect our partnership revenue stream to grow in the mid to high single digits. Additionally, we expect our flow revenues to grow by about 10% for the year, resulting in mid to high single digit growth for the full year for our total life science and clinical tools. Additionally, we expect our MDx solutions to grow in the mid to high single digits with the sample-to-answer component growing in the mid-20s and incorporating the launch of VERIGENE II at or around mid-year. We also believe that for the full year 2020, our operating expenses should be roughly flat with 2019 and gross margins should remain in the mid-50s, obviously affected on a quarterly basis by mix.For the full year, we expect revenues to be between $165 million and $175 million in the first half of the year and $185 million $195 million in the back half of the year, about a 45-55 split. The growth in the back half of the year results from both our new product launches and the purchase timing of our partners. Currently, first quarter revenues are expected to be between $82 million and $84 million, which includes a reduction from the prior year in LabCorp revenues of approximately $4.5 million, $2.5 million from women's health and another $2 million coming from CF. This will be the last quarter that LabCorp women's health has a negative impact on our quarterly revenue. But we will continue to be affected by CF decline of approximately $2 million per quarter until the end of the year. The CF declines are purely the result of the timing of contractual commitments, but we anticipate LabCorp CF revenues will increase in 2021 compared to 2020. We expect 2020 to be a profitable year for Luminex as a whole, but estimate that we require revenues in excess of $87 million to be consistently profitable on a quarterly basis. We also expect to be cash flow positive for the year.Now, I'd like to turn it back over to Homi for some final comments.

[Homi Shamir:]

Thanks, Harriss.I'd like to end by highlighting again the significant transformation Luminex has accomplished in the past several years. During my first full year at Luminex, in 2015 our revenue was about $240 million annually, split about 50-50 between MDx and our partnership business. We faced tremendous revenue concentration risk with LabCorp in our PGx and biodefense products, which were nonstrategic and together totaled over 30% of our revenue. Today, we are out of those businesses, and even without them, the Company has grown total revenue by an average of 8% annually. We are much more strategically focused with three growing revenue streams, each with unique features that give us confidence in our ability to achieve our goal of $500 million in the next few years.Operator, please open the lines for questions.

[Operator:]

Thank you, sir. Before we go to the Q&A session, I would like to turn the call back to the President and CEO, Homi Shamir for some few remarks.

[Homi Shamir:]

Good afternoon, everybody. In the last couple of days, we have been asked a lot about the coronavirus. So, I wanted kind of before we open to Q&A to provide a quick update on Luminex activity on the coronavirus. So, first, in China, last week submitted the NxTAG RPP to the Chinese FDA for emergency use authorization approval and currently we are waiting to-date a response and approval. Additionally, a few weeks ago, we completed a large clinical trial in China for this product and have planned to submit it to the Chinese FDA soon.NxTAG RPP has 20 targets of which 4 are coronavirus. However, none of the new Wuhan corona vision is there. But the benefit of this product is currently it help rule out respiratory infection that are in the new coronavirus. Behind it, the Chinese CDC asked us to create a small panel based on the same chemistry of NxTAG RPP, and we are developing a new multiplex test containing the new coronavirus, also SARS and MERS to running parallel to our NxTAG RPP. As far as I know, that probably will be the only multiplex solution in the market. The lead time of panel on full 96 plates will be approximately 45 minutes. We can run up till 48 patients or 96 plates well. We believe that this test will shop to CDC is China within two weeks. Just to remind you, NxTAG RPP being an FDA cleared product for many years, it’s become the workhorse of the industry when you need high volume tests at a low cost.Concerning the USA market, we tested several published prime a primer and probe design on our ARIES platform. And we will publish very shortly a white paper on that. This design can be ordered together with our ARIES Extraction concept and Exo+ Master Mix to [indiscernible]. And we think it a really can be a great solution to customers and hospitals because they are using our system, and they can implement it immediately.One last thing is that we have over 40 employees in China. Most of them are in Shanghai and Beijing. For their safety, we -- they are not travelling or coming to the office. Most of them are working into home and we pray for their safety.So, with that, operator, can you turn the call back to the Q&A.

[Operator:]

Thank you, sir. [Operator Instructions] I show our first question comes from Brandon Couillard from Jefferies. Please go ahead.

[Brandon Couillard:]

Hey. Thanks. Good afternoon. Harriss, in terms of the revenue guidance for the first quarter being flat year-over-year, if you could sort of speak to some of the moving parts we should be aware of? And then, secondly, Homi, any sense you can give us in terms of quantifying the contributions from the new product launches to revenues in ‘20 as a basket overall?

[Harriss Currie:]

So, the moving parts, we do expect growth in our Molecular Diagnostic sample-to-answer products, we expect the partnership business to give us some growth. But, we are still -- as I mentioned in my comments, we still have a little bit of headwind from LabCorp in this quarter attributed to women's health. It'll be the last quarter that we ever have to worry about women's health headwinds. And those are about $2.5 million, and there's another $2 million of LabCorp headwind that’s attributable to purely the timing of contractually obligated CF purchases by LabCorp. And so, it’s our estimate that over the current year, based on the total minimums that they're required to buy from us for 2020 and 2021 that the majority of those will be bought next year. So, we'll have -- in the current year, we have a dip in CF purchases of around $10 million and then next year those purchases will rebound back up to around $10 million. So, we're talking about a slip from 16 to 5 and back up to 10. So, it's a -- there's some movement there obviously. We talked about the $2 million a quarter or so of CF headwind that we will experience for the rest of the year. Otherwise, we're expecting growth across all of our other product lines.And your other question I think was for Homi, and that was about what are contributions of new products later in the year in?

[Homi Shamir:]

Yes. As Harriss stated in his remarks, VERIGENE II is -- we are really planning to start pushing into the field immediately, although we can see some sales as soon as we get approval. Matter of fact, we got some orders already from a few customers internationally, so. But really, from revenue planning and et cetera, we are planning form the beginning of the third quarter. Although it’s really -- as I said, we are planning to probably get it going earlier. Concerning the new XMP technology, we are also planning to launch it in the beginning of the third quarter. It's in the hand of the partner, we are in negotiation with them now, how they are going to launch it. We are waiting to their feedback.

[Brandon Couillard:]

And one more, Harris. You kind of pointed to mid-50s gross margins for the year, kind of on par with where you were in ‘19. Could you help just sort of think about some of the positive, negative dynamics that kind of contribute to that bridge for the year, be in terms of mix and then the other things you might be doing internally to try to lift profitability or productivity on the gross margin line?

[Harriss Currie:]

Sure. So, as our sample-to-answer portfolio grows, the margins there are improving. But currently, the margins on our sample-to-answer portfolio are slightly below the aggregate corporate reported gross margin. So, we see improvement, but those revenues are becoming a larger percentage of total revenue. So, you end up with a rough push. Then, we have the obvious fluctuation in mix between the concentration of beads and royalties and systems and assets and everything else. And that obviously can provide a 1 or 2-point swing on a quarterly basis.So, what I'm recommending you do is consider the sort of the mid 50s and around that 55, give or take 1 point or 2 as we move throughout the year. And then as we move further into obviously 2021 and beyond, VERIGENE II becomes a bigger part. VERIGENE II obviously is going to have better margins than does VERIGENE I. As VERIGENE II becomes a much bigger component of total revenue, you would expect the margins to begin to drift upward towards what Homi talked about in our $0.5 billion scenario. And our plan four, five years from now, we think will be back close to 60.

[Operator:]

Thank you. Our next question comes from Tycho Peterson from JP Morgan. Please go ahead.

[Tycho Peterson:]

I just want to focus on the molecular business, up 1% even excluding LabCorp. Could you maybe just talk about some of the gives and takes in the quarter and any notable flu impact and how should we think about impact in the first quarter as well?

[Harriss Currie:]

So, we added a significant number of customers over the course of the year. Utilization per customer increased during the year as well. What we really were faced with was the -- even though the current -- the prior year flu season was not much more than negligible, the current year was almost nonexistent, at least through the end of the fourth quarter. One thing you have to keep in mind is at Luminex we're not like a classic frontline flu company. Our patients present in emergency room settings, acute care settings in respiratory distress. So, we're delayed relative to other people that are frontline testers. So, it takes a little longer for us to feel the effects of flu season. We hardly felt anything in the fourth quarter. Moving into the first quarter this year even its ebbed and flowed, and we haven't seen a lot. We've seen a little bit, but not much. So, the primary contributor to that was a lighter than expected flu season in the current year relative to what last year was a light flu season, but nothing near as light as it was this year. And we lost a little bit of the non-automated business along the way as has been happening over the past several years as the world moves towards automated testing solutions. Hope that helps.

[Tycho Peterson:]

Yes, that does. And then, for Homi, I appreciate your comments on corona. I guess, as we think about the revenue opportunity inside China versus out of China, could you maybe talk to how you think about those two dynamics? It seems like there's a preference for local suppliers within China? And how much revenue contribution do you think you could get this year?

[Homi Shamir:]

I don't know, Tycho. At the moment, I'm really concentrating enabling that product and trying to save people lives, okay? I'm not even thinking what revenues can they create to us. We know that the requirement coming from the CDC -- CDC is a large customer of us across China. We can provide instrument like MAGPIX and the test itself. Okay? Now, it's again, we know the -- we will -- as I said, we were testing the NxTAG RPP, completed a very large clinical trial because we think in any case, if you have the coronavirus or not, it can increase in the future when we get approval in China in couple of million dollars a year just having this test in the market. But, we are waiting further approval now. And we know for sure, there is like, what I've been told, like 50 or 60 Chinese companies that providing coronavirus tests. But, all of them are targeted, mean Wuhan pathogens. What the CDC asked us is to do with the SARS and the MERS to provide them a broader test. I cannot really at this stage giving any indication and obviously we need to make sure what we are providing them is meet their requirements. Remind you also that we don't have live test here. So, that's why we have to send it to China. They have to test it and they have to come back to us and giving us the feedback how it’s fitting, so. I have to be careful about it here.

[Tycho Peterson:]

Understood. And then, just one last one. I hate to ask again. I know Brandon asked about new products, but I didn't hear a number from you in terms of what you're actually expecting from SENSIPLEX, the new Guava system and VERIGENE II in terms of contributions this year? Could you help us just think about how meaningful this could be?

[Harriss Currie:]

Tycho, what we indicated was that given the launch at midyear that VERIGENE II, given the time, validation time as such, would have a nominal impact in the year, but it sets us up very well for good growth in 2021. So, our core VERIGENE portfolio will grow as expected. The VERIGENE II portfolio will be a much bigger contributor in 2021. With respect to what's now called INTELLIFLEX with the midyear launch, as Homi mentioned, the system is already in partner’s hands, they are validating the backwards compatibility and some of the other features. And with a midyear launch of that, then the replacement cycle start. And we estimate again, in the back half of year -- one of the reasons that our current year projections are a little heavier in the back half than the front half is that there's a modest contribution there of SENSIPLEX. We haven’t quantified it in dollars, but there will be the contribution. The expectation would be that total placement figures would drift upwards relative to where they are in the first half.And then, the third new project, the Guava next-gen is primarily a software update, easy-to-use, a bunch of easy-to-use features. We think that will help us further establish ourselves as a player in the middle level, flow cytometry business. But again, the contribution there won't be something that’s overly material, but it solidifies our position in the marketplace.

[Homi Shamir:]

Yes. But, the VERIGENE II is going to give us basically a fully automated system, not semi as we have now. It will put us as par as competitor. And we’re feeling that we’ll be in the growth of 25%. Can we it be higher? Maybe, depends, I think the first panel that we get approval -- or we’re expecting to get approval from FDA. The GI is very unique, all of them. It will be a flex pricing, which is a huge opportunity to us in the space here. So, I think, we will gain market share. And we can grow it hopefully even faster than that. At the moment, we estimate it 25%. Let's get it rolling and then we will see how to adjust it later on in the year.

[Tycho Peterson:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] I show no questions in the queue at this time. I'd like to turn the call back over to the President and CEO, Homi Shamir, for closing 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. Thank you.

[Operator:]

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