Luminex Corporation
Q3 2015 Earnings Call Transcript

Published: 3 Nov 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to Luminex Corporation's Third Quarter 2015 Earnings Conference Call. My name is Candice and I'll be your coordinator for today. Today's call is being recorded. At this time, all participants are in 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 Matthew Scalo, Senior Director of Investor Relations for opening remarks. Please proceed.

[Matthew Scalo:]

Thank you, Candice, and good afternoon, and welcome to Luminex Corporation's conference call for the third quarter 2015 financial and operational results. On the call today are Homi Shamir, President and Chief Executive Officer; and Harriss Currie, Senior Vice President and Chief Financial Officer. We'll be following our standard agenda today. Homi will review our third quarter 2015 corporate highlights, Harriss will review the financial performance and our guidance update, and after that we will open the call 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 may be 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 31st, 2014 and our quarterly reports on Form 10-Q filed with the SEC. 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, the presentation of and reconciliation to the most directly comparable GAAP financial measures is 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:]

Thank you, Matt. Good afternoon, and welcome to our third quarter 2015 earnings call. Our financial performance this quarter was strong. We generated total revenue of over $60 million, a new record level for the company and operating profit of almost $10 million, or 94% growth over the last year. Higher revenue for the third quarter was driven by two things; sales of over 300 systems and by another quarter of double-digit growth in the molecular asset sales. We believe this result underscores the overall strength of Luminex and the value of our balanced business model and focus on molecular diagnosis. Harriss, our CFO, will discuss the quarterly financial results in more detail shortly. In addition to our strong financial results, in early October, we were pleased to announce FDA clearance for our proprietary sample to answer molecular diagnostic system ARIES, which promises to change the landscape in molecular testing for a broad range of new laboratories. This is a tremendous accomplishment for the company, but we recognize we have a lot of work in front of us. While I will not repeat the key messages from our October 7 conference call, I would like to reiterate that Luminex is fully prepared for this exciting opportunity. We're focused on executing on our go-to-market strategy as we head into 2016. We're progressing well on our target of establishing therapy evaluation systems by the end of this year and other systems under contract by year end 2016. In regards to the ARIES assay menu, we just submitted last week to the FDA a 510(k) application for our group B strep sales. We continue to expect to complete the FDA submission for C diff before the end of this year. We look forward to providing additional visibility into the ARIES menu pipeline in 2016. Regarding NxTAG RPP, we just received CE Mark for their sales and continue to receive positive feedback from our UO users. We're hoping to receive FDA clearance this year and look forward to providing this faster, more comprehensive and easier-to-use product to the market. In conclusion, Luminex looks to end 2015 with a strong financial performance at both the top and bottom-line, driven by our differentiated portfolio platform technologies while keeping focus on driving a successful commercial launch of ARIES. Now Harriss, our CFO, will review the financial data and afterwards, I will offer some closing comments.

[Harriss Currie:]

Thanks, Homi, and good afternoon. Financially, we had a great quarter. Total revenue for the third quarter increased by 7% over the prior year period to $60.6 million. The key drivers of the quarter-over-quarter growth were expanded system sales of approximately $2 million, or 26% growth over the prior year period and continued healthy double-digit growth in our assay product portfolio. For the quarter, we sold 307 multiplexing analyzers including 164 LX systems, 113 MAGPIX systems, and 30 FLEXMAP 3-D systems. While pleased with the strength in historically soft capital equipment quarter, I would highlight the third quarter system revenue benefited from our initial backlog of system orders received near the end of the second quarter that remained unfulfilled by quarter end, coupled with several unanticipated orders during the quarter. This spike is purely related to order timing and in no way represents an ongoing trend. As we move into the seasonally strong fourth quarter, we anticipate the number of systems will be down sequentially, but still near the high end of the historical quarterly range of 200 to 250 units. Given that the overall mix of multiplexing systems has become relatively stable, in 2016, we will no longer provide individual system types, but we'll continue to disclose total multiplexing systems in the aggregate. And of course, we'll provide quarterly placement figures for our new ARIES systems. Third quarter assay growth reflects continued broad-based momentum in our infectious disease franchise as well as continued growing demand for our pharmacogenetics product offering. For the quarter, our infectious disease portfolio represented almost 70% of total assay revenue, while genetic assays represented the remainder. Consumable revenues were down 10% for the quarter and in line with our expectations in our previous communication regarding the key driver of this decline. Namely, the inventory management issues of the top customer. Exclusive of our top consumable revenue customer, consumable revenue grew by approximately 17%. Royalty revenues were up for the quarter by 6%, directly attributable to an increase in reported end user sales by our partners. Royalty-bearing sales reported by our partners totaled approximately $120 million for the quarter and for the year-to-date period, have been split approximately 70/30, diagnostic sales versus research sales. In the aggregate, our higher-margin items, consumables, royalties and assays, comprised 76% of current quarter revenue, down from 80% in the second quarter, but consistent with that of the prior year. The shift in product mix has had a direct impact on sequential gross margins. Gross margin for the quarter was 69%, consistent with that in the third quarter of 2014, but sequentially down from 73% in the second quarter largely due to product mix shift. We remain confident in our ability to sustain gross margins at or around 70%. GAAP operating expenses were down $1.9 million for the prior-year third quarter, but roughly flat when we exclude the $1.3 million of restructuring costs that were recorded in the third quarter of 2014. R&D expenses decreased 2% from the prior year period and represented 17% of revenue for the quarter. Given our expectations of continued investment in the development of additional ARIES assays, we currently expect consolidated R&D expenditures for the full year 2015 to be between 18% and 20% of revenue based on our current revenue guidance range. SG&A costs were essentially flat compared to the prior year period and represented 35% of revenue for the quarter. We anticipate overall SG&A to increase in the fourth quarter as we expand our customer-facing sales and support groups in the third quarter in advance of the launch of the ARIES platform. Currently, sales and marketing costs comprise about half of total SG&A. I would also like to make investors aware that with the FDA clearance of the ARIES system in the fourth quarter and the market launch at AMP next week, amortization of purchased intangible assets, in-process research and development, or IPR&D, acquired in conjunction with the GenturaDx transaction will begin to flow through the income statement. We expect incremental amortization expense of approximately $600,000 to be recognized in the fourth quarter with a recurring quarterly charge of approximately $900,000 per quarter thereafter. This is a non-cash charge, but want to ensure investors are aware of this as we move into the launch of ARIES. For the third quarter, GAAP operating margin was 16%, contributing to almost double of the operating profit dollar amount from that in the prior year. Obviously this was the result of the combination of revenue growth, consistent gross margins and operating cost control. Non-GAAP operating margin was 23% for the quarter, two percentage points higher than 2014 third quarter non-GAAP results. The effective tax rate for the third quarter was 34%. We currently expect our full year effective tax rate to be approximately 25% to 30%, as is reflected in our ETR for the year-to-date period. As for any other significant discrete items, we expect our long-term effective tax rate to settle in the high 20s. For the quarter, we achieved GAAP net income of $6.4 million or $0.15 per diluted share, compared with income of $5.6 million or $0.13 per diluted share in the third quarter of 2014. On a non-GAAP basis, we generated net income of $9.3 million or $0.22 per diluted share, compared to $11.5 million or $0.27 per diluted share in the prior-year period. Now turning to the balance sheet. We generated $8.5 million of cash and investments for the quarter and ended the quarter with $136 million in cash and investments. In addition, in the fourth quarter, we have received a one-time payment of $2 million from the settlement of a breach of contract and patent infringement dispute. This payment will be reflected in our fourth quarter financial results. At December 30th, DSO on accounts receivable stood at 40 days. Our ongoing expectations are for DSOs to settle in at approximately 45 to 55 days. Considering our year-to-date performance at expectations for the fourth quarter, we're raising the bottom of our 2015 revenue guidance range by $3 million, resulting in a revised guidance range of between $235 million and $238 million. This would suggest fourth quarter 2015 revenues of between $57.7 million and $60.7 million. Our new 2015 revenue guidance range balances continued execution with respect to our molecular diagnostic assay portfolio, which we expect to grow in the mid-teens for the full year 2015, incremental government contracts, grant revenue, system shipments slightly in excess of our initial expectations, and consistency of our consumable strength. I'll now turn the call back over to Homi for some final comments.

[Homi Shamir:]

Thanks, Harriss. Given today's challenging market condition, I have heard from investors that our story of balanced growth, strong gross margin, and profitability combined with the ARIES opportunity resonates with them. I sometimes use the analogy of a chair with each leg representing a catalyst for the company's overall success. The Luminex chair currently has a few legs. We have the partner business in mid-single-digit growth business with the opportunity for high 20s or better operating margin. The legacy molecular diagnostic business in mid to high-teens growth business with improving profitability and soon to be launched ARIES sample to answer platform, which will add to the molecular diagnostic franchise. And with a strong balance sheet, Luminex can be aggressive in the market should the right opportunity present itself to add an additional leg or two of growth. In summary, it is an exciting time at Luminex. We continue to execute in all forms of our balanced business model and look forward to the ARIES market launch this week at the AMP conference here in Austin. We will be hosting an ARIES-focused investor event on Thursday, November 6th, where investors will hear from two ARIES early-access users about their experience to-date. I look forward to seeing many of you here. This ends our formal comments. Operator, please open the line for the questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Dan Arias of Citigroup. Your line is now open.

[Dan Arias:]

Good afternoon guys. Thank you. Homi or Harriss, pretty healthy FLEXMAP number for the quarter. Can you just talk little bit about placement dynamics? I'm curious if research or clinical demand is driving the installed there. And maybe if you could just talk about U.S. versus Europe, that would be helpful.

[Harriss Currie:]

So, the primary placement of those FLEXMAP 3Ds is in a diagnostic setting with one of our larger diagnostic partners. And that would be Thermo, their HLA products. As you may know, they are moving a number of their placements over from the previous LX 200 system to FLEXMAP 3Ds. And so, they are buying quite a few FLEXMAP 3Ds. There's obviously some other research placements there, but I would say that the majority of the strength was a result of placements with our largest partner.

[Homi Shamir:]

One more thing to add there, Dan. Thermo has a substantial amount of units in the field that through the heels have to be upgraded. So, we see it is a good opportunity to us moving forward.

[Dan Arias:]

Got it, okay. Maybe just a follow-up on the outlook, Harriss. If I look at 4Q, the new sales range seems to imply that revenues sequentially are flat to slightly down quarter-over-quarter, which just seems a little conservative just given the way that 3Q to 4Q has tracked previously. Can you just help us there? Is there something inventory-related or flu-related at all?

[Harriss Currie:]

Not flu or inventory-related, but you also know -- you will note that with respect to the third quarter number that we were a bit outside of our guidance range provided at the prior quarter. There were some systems that were actually anticipated later in the year having to do with some government contracts that materialized earlier than expected. And then some -- some additional systems placed ex-U.S. in the Far East that actually were expected to be later in the year in the aggregate caused the third quarter to be a little higher than we expected and as a result, the fourth quarter to be a little lower than initially expected. Primarily system related though.

[Dan Arias:]

Okay. Maybe just one last one. Any indications on purchasing for RPP ahead of the flu season or too early to tell there?

[Harriss Currie:]

We're having good success with the RUO version of RPP and customers are excited about the product. They are enjoying the ease-of-use relative to the previous product. And they're looking forward to getting the FDA-cleared version.

[Homi Shamir:]

And also we have seen a nice demand in New York. As you know, we got the CE Mark. We’re getting a very, very positive comment from customers there.

[Dan Arias:]

Got it, okay. Thanks very much.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. And a next question comes from Zarak Khurshid of Wedbush Securities. Your line is now open.

[Zarak Khurshid:]

Hey, guys. Good afternoon. Thanks for taking the questions. First couple on C. diff, is the submission here ahead of your internal plan? And I was wondering how you're thinking about the differentiation of the product versus the incumbent C. diff players.

[Homi Shamir:]

The submission is, as we expected, on time. We submitted GBS to the FDA. And very shortly we said we'd submit C. diff before the end of the year on the [indiscernible]. We are tracking into that. So we are very pleased how things are holding to us in this respect.

[Zarak Khurshid:]

Sounds good. And then just a follow-up on your large CF customer and the transition to NDS, any new updates there? Thanks, guys.

[Homi Shamir:]

Yes, there is a couple of update there. Obviously, as you all know, initially we thought they would be phasing out on the second part of this year. But we all informed you that they are going to stay with us longer. But we are currently in ongoing negotiations with them regarding the extension of the CF business into ‘16 and even beyond. As soon as we know, and I think it will be reflected in our guidance for 2016, we'll let you know. But we sound optimistic that it could stay with us longer than we anticipate. And obviously its part of that is they are having some -- not particular, but we all know that NGS has some issue in the reimbursements. So hopefully we can and we will do, by the way, everything we can do to return the business for longer time or longer as we have serve.

[Harriss Currie:]

Next.

[Operator:]

Thank you. And our next question comes from Tycho Peterson of JPMorgan. Your line is now open.

[Patrick Donnelly:]

Thanks, guys. It's actually Patrick Donnelly in for Tycho. I guess with ARIES now approved and the launch coming at AMP, including feedback from the early-access users, how are you guys strategizing with your sales reps as to kind of pitching the system? I mean, what competitive advantages are you highlighting for customers as you go out to the market here?

[Harriss Currie:]

Well, it's really all about laboratory workflow. And simplifying the laboratory workflow system was designed to fit specifically into -- or not fit into, but to solve the problems that laboratories were experiencing with workflow. The software interface is significantly easier to use than any other system on the market. And then the sort of hands-off barcoding feature, the internal barcoding feature is pretty significant in the labs. You may know that the highest source of error within a lab is human error. The internal barcoding reduces that significantly because there's no hand keying of results or samples into the system. You scan them, interface with laboratory information system, two-way interface and the data is matched irrespective of which slot the cartridge is sitting in. So it significantly reduces if not eliminates the risk of associating a wrong result with the wrong patient. So it's really simplification of workflow, ease of use. Those are really the big selling points. And the size of the menu that's on the way in addition to the LDT capability that gives us the opportunity early on to get the system in and, again, reduce the manual nature of the LDT or ASR style assays that those laboratories are running.

[Homi Shamir:]

Patrick, one more thing to add here. We stated, and I stated in the script, that we are planning to place about 30 evaluation systems before the end of year. We are tracking very well into this number, and we're getting a very positive response. But to remind all of you, this is not only people who are using the system. We have the people who are using its clinical side and also people who are using it a few of them -- the people who will have a chance to attend AMP, there will be two users who were early-access partners using the system. So you will have a lot of opportunity to interact and speak with those people, and you will get a very positive response. So we keep going getting as we put more systems in the field, more and more extremely positive response of how the system is performing. So we are very happy about that.

[Patrick Donnelly:]

Great. And I know you talked about the 30 evaluation systems this year and then kind of back-heavy placement here in 2016. How should we think about the utilization ramp for customers in terms of timing? And then if you're willing to talk about kind of the run rate, that would be great.

[Harriss Currie:]

It's difficult to really speak to the run rate until the menu becomes more fully established. So, what our expectations for initial utilization are, as you might expect, low with the number of assays that we have. But we aren't going to put them in accounts where they are not profitable. So, the idea is to place them in laboratories where we can realize at least a modest amount of utilization to live up to the expectations that we would have for a limited menu, which is really -- currently, it's one FDA-cleared product. Followed by, Homi mentioned, we submitted GBS just about a week ago. C. diff is on the way. Other assays are behind that. And as that menu fills out and as customers begin to automate the laboratory-developed tests that they perform today and other ASR products that they run, that that utilization will increase; the cartridge utilization will increase overtime. So really all I can -- I'm not going to walk you through the math again of the 40% utilization. I'm sure you've heard that a million times on what a system could yield. Obviously, initially we're going to yield a lot lower than that $100,000-plus pull-through that we have talked about. However, we're going to place them in institutions that have the ability to realize pull-through at those levels as our menu develops.

[Patrick Donnelly:]

Great. And then if I could just sneak last one in. I know you talked about eight sales reps getting added in the back half of the year. Are those people all on board? And then do you feel like you're right-sized in that department going into 2016?

[Homi Shamir:]

Yes, they're all aboard. We trained them in the middle of September, and they are excited that we got early approval for ARIES. And they are all waiting to see those 2,000 potential customers that are coming here to Austin during this week. So they are all ready to go.

[Patrick Donnelly:]

Great. Thank you.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. And our next question comes from Dan Leonard of Leerink. Your line is now open.

[Dan Leonard:]

Thank you. My first question on the pharmacogenomics business, can you talk about the breadth of that strength? Is it one or two customers, or is it broader than that?

[Harriss Currie:]

It's a concentrated handful of customers today with other customer opportunities that our sales reps have identified and developed. You'll recall that with our pharmacogenomics products, typically we help them develop the assay that they have in mind, and then we realize an assay utilization fee as they run those. They buy the beads from us and then a significant amount of materials they use to run those assays. And so we've helped a handful of the large customers today, with another couple of handfuls of customers that could be good customers down the road should materialize to get the contract signed.

[Dan Leonard:]

Okay. And then my follow-up. Homi, you touched a bit on this at the end of your prepared remarks, but can you talk about whether or not you're using the volatility in the public markets or otherwise to nurture an M&A pipeline, or is that something that's still back burner?

[Homi Shamir:]

No, we are working on that. We have dedicated teams looking for the right opportunity. And we are looking for the right opportunity, and when we find this, we will be glad to share with you guys. But we are, again, fully engaged in looking for opportunities. You know, the amount of cash flow that we are generating here, we will have to decide probably somewhere toward the end of next year if we could not find an acquisition how to return it to shareholder. But at the moment, it's our top priority first is to find something that we'll be pleased with that. And by the way, we have seen some opportunity, but you know, you need to digest all the opportunity and find the right ones, and not just because you would like to do something. You are going and doing it. So we are very -- having a very good control on the process.

[Dan Leonard:]

Got it. Thanks for the color.

[Operator:]

Thank you. And our next question comes from Brandon Couillard of Jefferies.

[Brandon Couillard:]

Hi, good afternoon. Homi, you've added a few new distributor relationships recently. I'm curious if you could elaborate. There's been sort of a change in strategy in terms of how do you go to market and the use of distributor partners for several of the products.

[Homi Shamir:]

Really, what we are doing here is strengthening the places where we believe we can strengthen and have a better opportunity. Mainly, they are out of the USA with Affymetrix and Bio-Techne. So we looked at some opportunity; none of them is going to impact this year. We see some impact obviously to 2016 and about after that and beyond. But you all the time we think we have a great model. We saw proven [ph] partner. They are doing a great job, all of them, but if we see some opportunity, why not to go after that? And that's what we have done here.

[Brandon Couillard:]

And then in terms of the R&D investment around ARIES, could you give us a sense of how much of the current budget is dedicated just to ARIES? And how do you, I guess, perceive the opportunity or appetite to accelerate investments given sort of the breadth of the assay pipeline with the initial approval now behind us?

[Harriss Currie:]

So today, significantly more than half of the total R&D investment is ARIES related. That includes system tweaks, assay development. You remember about a year ago when Homi mentioned that we're going to redirect the resources that were previously focused on the development of the xTAG technology toward the ARIES technology. So we deployed those resources all primarily towards ARIES development. The ARIES development will continue. As you know, the intent is to launch a significant number of assays. We've talked about by the end of 2017 to have in the teens number of assays cleared through the FDA by then, and that obviously takes a significant amount of resources. R&D expenses as a whole aren't intended to ramp significantly, but we can turn those development teams on to the new assays as they complete the new ones. So for instance, the team that developed the group B strep assay and the team that developed our firsts are now working on assays seven and eight out on the end behind our other teams. So we have a number of assay teams that will remain engaged. The investment in the ARIES will continue overtime.

[Homi Shamir:]

Yes, one of the things, Brandon, that we will be putting more emphasis on is obviously the clinical trial. And some of the assays that we are planning to bring to the market somewhere in 2017 will require more investment in R&D. I don't think from an R&D point of view we will increase at the moment the number of people. I think we have a significant amount of people both dedicated to development of the assay and also some future technology that we have in-house. But we'll see some slight that can increase due to clinical trials.

[Brandon Couillard:]

Super. Thank you.

[Operator:]

Thank you. And our next question comes from Bill Quirk of Piper Jaffray.

[Bill Quirk:]

Great. Thank you. So, first question for me, Harriss -- a question regarding your comments on the dollar backlog that you recognized in the third quarter that had been building in the second as well as the unexpected order comments. Is there any way you can help quantify those for us a little bit so that we can kind of get a better idea of perhaps what the, I guess, underlying, for lack of a better term, demand was?

[Harriss Currie:]

Yes, let me further clarify that. I may have -- as I thought about it, I realized it may be a little confusing. Every quarter, we end the quarter with what we refer to as a backlog that really isn't orders we were unable to fulfill, but orders that were placed for delivery in future periods. So that's our base that we start with in addition to expected orders from the customers. The upside in the quarter came from the instruments I talked about. Incremental diagnostic units that were unanticipated that were placed during the quarter. Far Eastern instruments that were placed during the quarter, some instruments placed under government contract that weren't expected in the third quarter that were placed -- that were expected to come in the fourth quarter. And those three items by themselves were about $1.5 million worth of incremental system revenue that was unexpected. And then you add on top of marginal better assay performance in the face of the fall-off of the respiratory viral season. We did have a fall-off in our respiratory viral products, but that was more than offset by growth in our women's health franchise and others, and pharmacogenomics. So, all in, there were some unexpected orders primarily around systems. And then there were some stability unexpected, if you will, of stability in the assay business that all provided to upside in the quarter.

[Bill Quirk:]

Very good. Thanks for the extra color there. And then I guess a guidance question. What are you guys thinking about the respiratory season here for the December and March quarters? How are you guys modeling that, and I guess what does the fourth-quarter guidance imply?

[Harriss Currie:]

Right now, our fourth-quarter guidance is sort of a mid-level average season this year. That's what others are forecasting in the market as well. The opportunity is there for, I'll say, for growth in our respiratory viral products coming around the timing of clearance of RPP. The adoption by customers that have waited for a simpler, easier to use product that could provide some incremental value. So we modeled in in our fourth quarter a sort of normal, average season. The first quarter, obviously, we'll talk about when we get out to January, first of February when we review our full-year results and our full-year 2016 guidance.

[Bill Quirk:]

Okay. Very good. And then just last one for me. Thinking about the 30 systems you're targeting to have under valuation by year end, it certainly sounds like you're tracking comfortably to that number. Help us think a little bit about the profile of some of these labs. Are these folks that have a lot of experience with a lot of different competitive systems? Is this some perhaps new to molecular? A bit of both? Just help us think a little bit about, I guess, the initial profile.

[Homi Shamir:]

It's a mix. It's a mix of profiles. Some of them are obviously brand names that we would like to be them. Some of them are educational facility. But, again, I'm less concerned about the utilization there. I'm more concerned about publication and et cetera in comparison to our competitor. We think we are making really good inroad. We have the list. The list is -- the sales for working. Each of the sales guys know exactly whom they need to do. And they are, as I said, outside of our early-access partner that I mentioned in our outside of our clinical sign. And, again, for competitive reason, I don't want to really give the profile and share it. Then we'll see some competitor running. But on the same times, when you look at them, some of those sites have equipment for our major competitors. And from some of the feedback we are getting, they would like very much. That's why they are taking the system into evaluation, our system. So I think that's where we are feeling good in the direction we are going there.

[Bill Quirk:]

Got it. Thanks very much, guys.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Brian Weinstein of William Blair. Your line is now open.

[Unidentified Analyst:]

Good afternoon. This is Matt Larew [ph] in for Brian. Just one question for me, and it's for Harriss. Harriss, now that you've begun to scale up the manufacturing here for ARIES and presumably now shipping both systems and cartridges, just wondering if you had additional thoughts on scale-up of the gross margin profile and at what point gross margins you think might become accretive from ARIES. Thanks.

[Harriss Currie:]

As you know the placement rate even on 100 systems and we mentioned this before, the 100 commercial systems if we place them all next year and place them for free and have 0% margin on those, sell just enough reagents to cover the cost, our overall gross margin would only decrement by maybe 1.5 points or so. So, given the volumes of systems that we're talking about initially, there shouldn't be any material drain on gross margins. And as the portfolio grows, as the assay menu grows, we believe that as the ARIES revenue becomes more material to the income statement that it will begin to provide more boost to gross margin and, obviously, boost down to operating profit. It's going to take a while. It's going to take menu development. But fortunately, we have a $230 million business right now that's growing. It's highly profitable that we can afford to put these systems out in the marketplace in anticipation of the growth that will come from the growth in utilization as the menu develops.

[Unidentified Analyst:]

Thanks, Harriss.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. And our next question comes from Zarak Khurshid of Wedbush Securities. Your line is now open.

[Zarak Khurshid:]

Hey, thanks for taking the follow-up, guys. Any chance that you can break out qualitatively the relative growth rates of the various assay products? Thanks.

[Homi Shamir:]

No.

[Harriss Currie:]

I mean, if we're talking about portfolios, which we talk about in our 10-Q, our genetic assay portfolio grew in the mid-single digits and our infectious disease assay portfolio grew in the mid-teens. So, that's year-over-year, the quarter-over-quarter growth. If you look at the year-to-date number, the three quarters over three quarters, the genetic assays actually grew in the low 20s and the infectious disease assays have again grew in the mid-teens.

[Zarak Khurshid:]

How is GPP doing?

[Harriss Currie:]

GPP is doing well and gaining traction. GPP is growing in significant double digits every quarter relative to the prior year. We are happy with the pace of GPP. It's proven to be a little more complicated to sell than before, but our sales reps are getting better at it and the number is growing every quarter. It's still a small base, but it's growing.

[Zarak Khurshid:]

Understood. Thanks a lot.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Homi Shamir for closing remarks.

[Homi Shamir:]

Thank you, Candace, and thank you, everyone, for your attendance on our earnings call today. We look forward to seeing you either this week in AMP in Austin or in the very near future. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone.