Luminex Corporation
Q3 2007 Earnings Call Transcript

Published: 26 Oct 2007

[Operator:]

Good day and welcome to the Luminex Third Quarter 2007Earnings Conference Call. Today's conference is being recorded. At this time for opening remarks and introductions, I wouldlike to turn the call over to the Chief Financial Officer, Mr. Harriss Currie.Please go ahead, sir.

[Harriss Currie:]

Good morning. Welcome to Luminex third quarter 2007 EarningsConference Call. I'm Harriss Currie, Vice President of Finance and ChiefFinancial Officer for Luminex. With me today, is Pat Balthrop, our Presidentand Chief Executive Officer. We issued a press release yesterday evening announcing thecompany's results for the third quarter ended September 30th, 2007. Followingour prepared remarks on these results, we'll have time to take your questions. In addition to the audio portion of our conference call, wehave prepared a slide presentation that's available on our web site atwww.luminexcorp.com. To access the presentation, click on the Company tab,access the Investor Relations link and click on the live conference call link.You'll be directed to an information log in screen. Select live slides from thelog in and then you'll be set. Pat will begin our presentation with a review of thehighlights for the quarter, operating highlights and our progress with respectto LBG and LMD. I'll then return for a financial overview of the quarterincluding data from our press release and underlying trends, and then open thecall up for questions. Before we begin, I would like to take this opportunity toremind you that certain statements made during the course of this call may notbe purely historical and consequently may be forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995. Including but not limited to statements made regarding thecompany's business outlook and projections about our revenues, cash flow,market conditions and their anticipated impact on the company, informationregarding development timing and performance from new products and any statementsof the plans, strategies and objectives of management for future operations. These forward-looking statements are based on our currentbelief and expectations and are subject to known or unknown risks anduncertainties some of which are beyond the company's control that could causeactual results or plans to differ materially and adversely from thoseanticipated in the forward-looking statements. Factors that could cause or contribute to such differencesare detailed in our press release or annual, quarterly or other filings withthe Securities and Exchange Commission. Also, we may discuss certain non-GAAPfinancial measures as defined by SEC Regulation G. To the extent that any non-GAAP financial measures aredisclosed on this call, a presentation of and reconciliation to the mostdirectly comparable GAAP financial measures will be presented on this call andbe available on our web site at www.luminexcorp.com in accordance withRegulation G. I now like to turn the call over to Pat Balthrop, Presidentand Chief Executive Officer of Luminex.

[Pat Balthrop:]

Thank you, Harriss. And thank you for attending today'searnings call. I'll take a few minutes to review the highlights of the quarter,some key metrics and provide an update on the company. Harriss will then review some financial dataand we'll follow that with the question-and-answer session. Before I begin my portion of today's presentation, I wouldlike to let you know we have asked for and received feedback from investors andanalysts about our earnings calls. Based on that feedback, I would like to maketwo points. First, based on recommendations from investors on this callwe have shortened our presentation and reduced the number of slides that we useso we'll be able to move into the question-and-answer session more quickly. Second, also in response to feedback from investors forfuture calls we've decided to move the time for our earnings calls to anafternoon time slot after market close. So, look for those changes as we goforward. Now, for the third quarter results, we're very pleased withour performance this quarter and I'll start with some key highlights. Startingwith the top line, we delivered revenue of $19.4 million, which representssales growth of 55%. In addition, the portion of that growth attributed to ourpartnership business or organic growth was over 30 of the 55 points of growth.So, our stated strategy of continuing to drive our partnership business inaugmenting and accelerating growth with our Assay Group franchise appears to besound. Also, our longer-term growth data is solid. The compounded revenue growth rates with the acquisition ofLuminex Molecular Diagnostics included is 34% over the past two years and ourorganic growth has been 25%. We shipped over 200 systems for the fourth quarterin a row reaching a total install base of 4,700. And that install base hasgrown by 48% over the past two years. Moving down the P&L, we're pleased to again report grossprofit margins of over 60% at 62% for the quarter and on a year-to-date basis,gross profit margin is at 61%, consistent with what we reported in 2006 beforethe acquisition. Our operating expenses for the quarter were a total of $15.3million. Let's look at the pieces. 500,000 of that $15.3 million was a one-timetrue up of the in process R&D charge associated with the LMD acquisition,which was the only change from the announcement of the charge that we reportedon August 9th. That leaves R&D and SG&A. We said that we expectthat our administrative expenses would not continue to grow at historicalrates. Consistent with those comments in the third quarter, expense increasesover the second quarter once you set aside the non cash charge I mentioned,were almost entirely at R&D not administrative function. And finally, the process of integrating Luminex MolecularDiagnostics in Toronto, as we reported last quarter remains on track. Ourpartnership business or Technology Group continues to grow nicely. Harriss will break out the numbers for you in a few minutes. But our partners continue to demonstrate thepower of xMap technology as together we outgrow the market and take marketshare. Our Assay Group, which includes LBG and LMD deliveredtop-line growth year-over-year of $8.5 million, including 750,000 inyear-to-date growth from LBG assays in our first year of operations. Our product development pipeline is strong and we have againachieved all of our milestones. Investing in our future and building a strongpipeline has been a priority for the company over the past three years. Ourresults are encouraging. And lastly, as we announced on October 12th, weimproved our balance sheet recently with a $12.5 million settlement payment. Now, for a few key metrics. Our install base exceeds 4700with the addition of the 203 systems that we shipped this quarter. In the topright of the slide, you'll see our consolidated revenue of $19.4 millionpresented graphically with our historical data. You can see why we'reencouraged about our future. At the bottom of the slide, the graphics of the trends ofour high margin product lines in our Technology Group are also favorable. Wehad our highest ever-consumable revenue this quarter, which impacted our fourthquarter moving average and we also had record royalty revenue. I'll touch on a few highlights in the Assay Group and theTechnology Group and then Harriss will review the financials. Our Assay Group consist of our internally funded LuminexBioscience Group or LBG and the acquired business in Toronto, Luminex MolecularDiagnostics. LMD's cystic fibrosisproduct franchise remains strong and has upside potential in the future withadded distribution strength and due to our FDA-cleared status. LMD's new Respiratory Viral Panel or RVP is still underreview by the US FDA. We continue to be engaged favorably and constructivelywith the agency. Clearly, we're disappointed that we do not yet have theproduct cleared but we expect to receive that clearance soon and once we do,our primary distributor in the US Fischer is prepared to execute. Within LBG, we have successfully seeded the market with ourFlexmiR MicroRNA panel this year. Our market research indicates strong interestin a custom product whereby a researcher can order and receive a panelconsisting only of the microRNAs in which he or she is interested. We're pleased to be on schedule to launch our custommicroRNA product called FlexmiR Select in November. Our pipeline of products inour Assay Group is strong also in both molecular diagnostics and the specialty marketswhere LBG is focused. And finally, you may be familiar with the FDA's recentlypublished guidance on a class of products call ASRs. We believe that Luminex is uniquely well positioned to beable to respond to increased regulation due to the fact that we're ISOcertified and compliant with the FDA's quality system regulation including CGMPmanufacturing facilities in both our R&D and manufacturing locations hereat Austin as well as in Toronto. Our Technology Group or our partnership business continuesto thrive. Over the past two plus years, our royalty revenue has grown at 40%.In user sales, the combined revenue on the install base of instruments as ofthe third quarter was almost $200 million on an annualized basis. This end usergrowth rate of 50% compounded is five times the market growth in our marketsegments over that same period. The demand for our technology as measured by instrumentplacements is at an all-time high. We have reported four consecutive quarterswith over 200 shipments. This performance is an indication of the outlook andinvestment by our partners in xMAP technology. Their confidence is supported by our investment in our coretechnology such as the FlexMAP 3D instrument scheduled for launch in 2008. Thecumulative effect of our partner's successes in life science research and thediagnostics markets of immunoassay and HLA transplant are the drivers. We're pleased with our performance in the Technology Group.In summary, Luminex is on track to achieve our long-term objectives. We're verypleased with our quarterly results, our execution and our results overall. So, I'll now turn the call over to Harriss to review thefinancials and then we'll take your questions. Harriss?

[Harriss Currie:]

Thanks, Pat. As I discuss the results for the third quarter,keep in mind that the consolidated results for the third quarter of 2007include a full three months of consolidated operations for Luminex and TmBioscience, now known as LMD, however the year-to-date 2007 numbers only includethe operations of LMD since March 1 of 2007. Total consolidated revenues were $19.3 million, up 55% overthe third quarter last year and included $3.4 million from our Assay Group.Gross margins were comparable to the prior year and we reported a net loss of$3.3 million or $0.09 per share. As Pat mentioned, the net loss for the quarter includednon-cash items totaling $3.7 million of which $1.3 million wasacquisition-related amortization of identified intangible assets and write-offof additional in process research and development. Year-to-date, revenues are up 38% with gross marginpercentage equivalent to the prior year period. Included in the year-to-dateloss of $15.2 million are $8.5 million of in process R&D write-off and $1.7million of amortization of acquired intangibles. Our financial statements reflect our current estimates ofthe purchase price allocation of the acquired assets and liabilities associatedwith the Tm Bioscience acquisition. Previously we stated these would befinalized in the third quarter, however certain matters continue to be reviewedand these allocations are anticipated to be finalized during the fourthquarter. With respect to our year-to-date total loss of $0.45 pershare, approximately $10.2 million or $0.29 per share is attributable to thewrite-off of acquired IP R&D and amortization of acquired intangibleassets. For the third quarter, we had $5.5 million in systemrevenue, $5.7 million in consumable revenue or microspheres, $2.7 million inroyalties, $3 million in reagents or assays, $1.2 million in service revenueand $1.3 million in other revenue which includes spare parts, shipping, licenseand training. Our quarterly revenue distribution for the third quarter of2007 is shown here compared to the third quarter of 2006. Note that in theprior year, our high margin items, consumables and royalties and assaysrepresented only 45% of total quarterly revenue. Partially as a result of the acquisition and additionally,as a result of growth and our consumables and royalties revenue, the currentquarter has approximately 59% of these high margin items. We anticipate, as a result of our expectations of relativelyconstant system placements that these high margin items will continue to becomea more significant percentage of our revenue mix and it will contribute to thecontinued upward migration of our gross margin percentage. On a year-to-date basis, we have 16.8 million in systemrevenue, $13.8 million in consumable revenue, $7.4 million in royalties, $7.8million in reagents or assays and $3.3 million in service and $4 million in allother. Again we can see the higher percentage of high margin itemsin the current year relative to the comparable period in 2006. Remember, thatin the current year, we only have seven months of LMD included in the resultsand none during 2006. At September 30, 2007, our consolidated balance sheetreflects total cash and investments of $18.3 million, compared with $45.7million at December 31, 2006. You will recall the decline from the year-endbalance includes the retirement of approximately $13.2 million of debt existingat the time of the acquisition and another $5 million of acquisition-relatedcosts. Additionally, we made significant infrastructureimprovements to our Austin manufacturing and service facilities and at ournewly acquired Toronto location. As previously disclosed, Luminex recorded good will relatedto the Tm acquisition. The initial good will asset was subject to adjustmentupon recording of final transaction related costs and allocation of thepurchase price based on the company's final determination of the fair marketvalue of the acquired operations assets and liabilities. Luminex has completed a substantial portion of its valuationanalysis and as a result a portion of the goodwill balance has been allocatedto be identified intangible assets and in process research and development. The allocation to-date has consisted of a $36.1 millionallocation from goodwill to intangible assets with $1.68 million of amortizationassociated with those identified intangible assets taken year-to-date throughSeptember 2007 and $8.5 million of identified in process research anddevelopment, expensed year-to-date. The identified intangible assets subject to amortization haveestimated useful lives of between one and 15 years and will result inapproximately $825,000 per quarter of amortization expense on a go-forwardbasis. At the end of the quarter, we had approximately $7.6 millionof consolidated inventory. As we indicated previously, we attempt to manage ourinventory to a level that appropriately reflects our current production needsand expectations of future quarterly sales. Obviously, unforeseen demand can affect our ability tomanufacture and deliver systems on specific requested dates. As of September30th, our daily sales outstanding or DSO on accounts receivable was 59 days,compared with 60 days at the end of the prior quarter and 53 days at year-end2006. As we've noted before, we believe that 50 to 60 days is asustainable level for DSO. And finally, working capital at September 30th wasapproximately $20.1 million, compared with $44.2 million at the end of 2006. This slide shows revenue and operating income or loss bysegment. Items of note from this slide include 34% growth in Technology Grouprevenue before illumination and improvement in Technology Group profitabilityand a significant increase in Assay Group loss positions fueled primarily bythe dilutive nature of the acquisition and non-cash acquisition-related costsof $1.3 million for the quarter as discussed previously. This slide shows consolidated royalty revenues andconsumables with the elimination of royalties paid and consumables purchased byTm Bioscience or LMD in periods prior to the acquisition, audit adjustments andone-time payments. We believe that it demonstrates the long-term health of ourroyalty stream and we expect this trend to continue. As previously notedconsumables royalties now account for a higher percentage of our total revenues. Another item of note is the relative volatility of theconsumable stream, which will be discussed in the next slide. Both purchases orthose purchases in excess of $100,000 for a single customer for the currentquarter, were approximately $4.5 million or about 80% of total consumablesales. Both purchases in the aggregate have continued to increaseslowly overtime and we have -- and have contributed to pretty consistentincreases in our consumables stream on an annual basis. However, we still have quarterly fluctuations for which thetiming is difficult to predict. Note that even with the volatility of bulkpurchases that the long-term moving average has continued to climb. Additionally, the non-bulk purchases have remained at fairlypredictable levels over the periods presented. At the end of the third quarterof 2007, our long-term moving average of consumables stood at approximately$4.3 million per quarter. As a reminder, all of the initiatives that Pat and I havediscussed are designed to deliver long-term financial objectives from arevenue, investment and profitability perspective as you see here. Please note that these numbers take into account theincremental business related to the Tm acquisition now known as LMD. Based onour current financial performance, we do not believe that these targets areunreasonable. I’ll now turn the call back over to Pat.

[Pat Balthrop:]

So, Katie, if you could now open the call, open the line forthe question-and-answer period?

[Operator:]

Absolutely. Thank you. (Operator Instructions) And we'lltake our first question from Peter Lawson with Thomas Weisel Partners.

[Peter Lawson:]

Harriss, I wonder if you could break out where theacquisition related costs fell to $1.3 million and what it is expected to be in4Q and if it is going to drift through to 2008?

[Harriss Currie:]

Sure. Of the $1.3 million, Peter, $0.5 million was thewrite-off of additional in process R&D and the remainder was amortizationof those acquired, identified intangibles. As I mentioned in my comments, thatthe -- assuming no more adjustments to the IP R&D number or the subsequentallocation adjustments to the identified intangibles, in the near term the amortizationexpense related to those intangibles should be about 820 -- I guess, 850 aquarter.

[Peter Lawson:]

Okay. Thank you. And then, Pat, what's the discussion likewith the FDA on the lung panel, what's the delay, do you think?

[Pat Balthrop:]

Peter, we're continuing to interact with FDA regarding RVPand as I mentioned during my comments, we're obviously disappointed that wehaven't received clearance yet. And as I also said, we still believe that wewill receive clearance and soon. We remain engaged with FDA as they workthrough this de novo type submission and as they have said to us more thanonce, it is tough being a trailblazer. So, the interaction with the FDA has remained veryconstructive and engaged and positive and as a de novo submission in the firstproduct of its kind, they are making sure that they're dotting all of the Isand crossing all the Ts. We do believe that the number of constituents on the panelwill be -- will end up being fewer than the 19 that we have available in Europebut we still think it will be a substantive number in that we'll have a veryexciting product.

[Peter Lawson:]

Is that currently in beta test now the RVP and how much of alead-time do you need to get it launched and capture the major revenue for theflu season?

[Pat Balthrop:]

The product is not in beta, Peter. It is basically finished.You know, we're continuing to review data and labeling and so on with FDA now.But as you point out the season is approaching, so it is important that wereceive clearance soon and we're doing everything we can to make that happen,of course. The issue that you mention about the timing of the fluseason is really the number of customers that we can get to adopt the productand to have those customers get the product validated in advance of the flusamples beginning to arrive in the labs and so it is difficult to predict fromyear to year when the flu season starts. But typically, that happens in December, sometime afterThanksgiving and so we've developed a number of scenarios and contingency plansinside Luminex and with Fisher because Fischer of course will be our primarydistributor here, to prioritize the anticipated customers to maximize the numberof training and validation events we have to do which is all designed tomaximize market penetration and revenue for the company. Now, I want to be clear that we haven't pre-marketed orcommercialized the product in advance of FDA clearance. That's an importantthing for me to point out. But, I believe we have a solid plan that we're readyto execute once we do receive clearance and we anticipate that happening verysoon and obviously the sooner, the better. That's about as much clarity as Ican provide.

[Peter Lawson:]

Have any of the large labs actually sort of beta tested theproduct?

[Pat Balthrop:]

Well, most of the customers for this product, Peter, willactually be in an acute care setting. You know, unlike some other moleculardiagnostic markets and cystic fibrosis is one that I'm thinking of as I sithere, where a lot of those patients present into the healthcare system in anonacute manner. Because obviously if a patient presents on Monday orTuesday, if the cystic fibrosis result a physician receives comes the next dayor two or three days later, it doesn't really change the clinical decision thephysician makes. On the other hand, a respiratory viral panel product thatpatient presents typically in an acute care setting in an emergency departmentor something like that and where the result -- the timing of the result, of thephysician receiving the result is a critical thing. So, therefore, most of the customers here will behospital-based labs rather than reference labs. So, therefore, the large labshave in contrast to other markets, we don't anticipate them being a significantpurchaser of the product.

[Peter Lawson:]

Okay. And then just very briefly, I wonder if you could talkto the pace of the partnerships if there's any push back or if there is anincreased pipeline and if there is any slowdown in the sales cycle for yourproducts?

[Pat Balthrop:]

So, you're -- I'm not sure, I understood what you weregetting at, Peter. Could you repeat the question, please?

[Peter Lawson:]

How discussions are going with additional partners todistribute the products and so, for instance, the cryogens and the?

[Pat Balthrop:]

Okay. Well, first of all, let me say I'm reluctant to speakon behalf of any of our partners but what I will say is as I mentioned duringour remarks, our partnership business remains very strong. We definitely see our partners expanding their menus, thenumber of tests that are available on the Luminex platform and emphasizingtheir Luminex portfolio. All of that points in our mind to an increasedemphasis and utilization of the xMAP technology and platform in the future andan expansion of our partnership business as we reported in our TechnologyGroup. If your question is related to the LMD acquisition and ifthat has changed any of the dynamics of our partners, I would say the answer tothat is no except maybe in a positive way. You know, many of our partners have expressed significantinterest in changing the nature of our relationship with them that would givethem access to our CGMP qualified manufacturing facility and the opportunity toexpand their own offerings in the molecular diagnostics category if they're notalready in the molecular diagnostics business. So, the LMD acquisition has actually proven to be prettymuch across the board, a positive event. As far as QIAGEN is concerned,obviously the QIAGEN was a partner of ours and has been for years. Digene was apartner of ours and then with the acquisition of Digene, that relationshipbetween Luminex and QIAGEN had obviously survived that acquisition and remainsvery positive. We see, Luminex and QIAGEN based on our discussions, we seeourselves as allies in this fight rather than anything else. You know, theydidn’t -- they acquired Digene for their HPV franchise and they expect to buildon that in the future and we are hopeful that Luminex technology will play asignificant role in that.

[Peter Lawson:]

Okay. Thank you, Pat. Very helpful.

[Operator:]

Thank you. We'll go next to Dan Owczarski with BelmontHarbor Research.

[Dan Owczarski:]

Yes. Thanks. Good morning, Pat and Harriss.

[Pat Balthrop:]

Hi, Dan.

[Harriss Currie:]

Hi, Dan

[Dan Owczarski:]

For the Assay Group. Harris, it looked to be downsequentially, is that correct and not sure if you touched on it in yourcomments but what are the factors affecting that, is there is seasonality atall?

[Harriss Currie:]

Yes. It is primary timing of purchases by partners.Customers are still buying, using the products but the order timing canfluctuate from quarter-to-quarter. It is a little bit like the consumables butnot on as dramatic a level. So, the revenues for the Assay Group, I believewere down about 0.5 -- a couple 100,000, I think.

[Pat Balthrop:]

Yes. So Dan, this is Pat. Revenue was flat versus the secondquarter, as you know. But I want to emphasize we're very positive about ourAssay Group initiatives both LBG and LMD. And as Harriss noted, we have some big customers in thisarea and the timing of their shipments can sometimes fluctuate into differentperiods and that's what happened in the third quarter. So, we didn't lose anycustomers that business continues to expand. Those customers are still buyingand using the products but the timing of their orders can fluctuate a bit. Looking forward, RVP of course, will fall into this grouponce it is cleared. We expect to roll out our expanded FlexmiR product line,the FlexmiR Select for the microRNA research market, as I mentioned, in thevery near future and so we're very excited about that based on customerfeedback. So, I'll just summarize by saying we remain highly enthusiastic aboutour future here.

[Dan Owczarski:]

And then just to go back to the RVP. If the FDA does giveyou a modified approval or gives you less tests than the full-blown 19, I meanshould we assume that the ones that might have to wait a little bit are theones that are not as frequently occurring? I'm thinking more like the avian flu or the SARS and thatyou would keep the workforce ones like the influenza’s?

[Pat Balthrop:]

Well, I would -- the issue here, Dan is, I would say sort ofgenerally speaking, your assumption is correct. And it is the rare viruses thatare in question, I would say. You know, based on the data set that one canbuild in a submission then the more common viruses obviously are much moreeasily included in a clinical trial than viruses that are extremely rare. And so, the reason why we're very, but we remain veryenthusiastic about the RVP is because the percent of respiratory viral infectionsbased on public data as published by CDC and others, we expect no matter whatto have a substantial portion of those respiratory viruses, respiratoryinfections, covered in whatever product we get cleared by FDA. So, therefore, we think we'll have a very competitiveproduct whether that number is 19 or 15 or 10 or some other number, no matterwhat the outcome is we anticipate we'll have most of the waterfront covered.

[Dan Owczarski:]

Do you have customers here that are ready to buy, say,Luminex 200 once you get FDA clearance for that RVP? I mean could that eventaccelerate your system placements beyond what you're seeing right now?

[Pat Balthrop:]

Well, Dan, we anticipate having our systems continuing to bein the 150 to 220 a quarter range. There are some customers who have expressedinterest in acquiring either a system as a new customer or an additional systemas a result of RVP. I will tell you that as we go through our prioritizationassumptions, one of the things that we -- that is very important to us is thatwe prioritize customers who do not need an instrument, who already have onebecause obviously that facilitates market penetration with the test. But sure,there are some customers that would need additional instruments as we goforward. I wouldn't anticipate that having a huge effect on our systemshipments in the intermediate term though.

[Dan Owczarski:]

Just last then, could you give us any commentary on how theRVP is doing overseas? It sounds like there are some customers that are beyondthe validation point and are they actively reordering it? Are they beginning tostockpile it at all for the flu season?

[Pat Balthrop:]

Yes, so the RVP product is in -- is available -- is CEmarked and is available in Europe. We acquired TM, of course, in the spring andso most of the work that we've been doing in anticipation of the blue seasonhas occurred since the acquisition. And so we have -- we're basically doing thesame thing in the European countries that we're doing in the United States inanticipation of the blue season. In the case of Europe, it is not really about anything likeFDA clearance or anything like that, of course because the CE mark is alreadythere. But they have the same issue that customers here have which is thesamples haven't really started arriving in the labs yet. So we are anticipatinghaving obviously a nice European franchise. No customers have begun stockpilingit and I want to emphasize that.

[Dan Owczarski:]

Okay. Thank you.

[Operator:]

And we'll go next to Matthew Scalo with Canaccord Adams.

[Matthew Scalo:]

Hi, guys. Congratulations on a good quarter here.

[Pat Balthrop:]

Thanks Matt.

[Matthew Scalo:]

I wanted to ask as far as the consumable side. I'm trying tofigure out was it an outsized order or was it the number of bulk orders thatactually acted the quarter?

[Harriss Currie:]

I think it would tend towards a large bulk purchase. Wetalked about there were a higher number of bulk purchases than there were inthe prior quarter, obviously. But we did have a very large order as weexperienced in the first quarter of 2006, I guess.

[Matthew Scalo:]

Did you plan on Fisher as a distributor and that'spotentially the reason?

[Pat Balthrop:]

No. Fisher is a distribution partner, Matt, as opposed toour other partners which are -- which buy beads from us and then incorporatethose beads in their assay. So our large partners, our two largest partners forexample, are Bio-Rad and One Lambda. So therefore Fisher doesn't buy beads fromus. We do have a very high bead quarter as our fourth quarter moving averagemoved in a favorable direction, of course. And bulk purchases played a role inthat. We can't predict the timing of our bulk orders so we'rereally not in a position to comment about anything short term but we are verypleased with the trends that we see and anticipate that as our current and newpartners continue to commercial products, that those trends will continue. I mentioned I think in response to Peter's question, aboutthe partner activity that we're seeing and without singling out any individualpartner, we see our partners expanding their menus, investing in thetechnology, emphasizing the Luminex portfolio as part of their total productmix, that's why the end user sales are growing at five times the market growthrate and all of that stuff. So, I would, I guess, emphasize that as it relatesto consumables, it is really a favorable longer-term trend.

[Harriss Currie:]

We had 12 customers buying bulk in the current quarter.

[Matthew Scalo:]

Okay. That's helpful. Great. Thanks. As far as the ASP, thesystem, are we still looking at this kind of 25,000 to 30,000 ASP?

[Harriss Currie:]

Yes, that's reasonable.

[Matthew Scalo:]

Okay. Did it trend down sequentially?

[Harriss Currie:]

Slightly. But that's really -- it is that mix issue, thepartner mix and configuration issue. We've talked about this before. You know,we have the peripheral components, the SUDS and the XY platform and dependingon which systems are sold with those peripheral components drives the totalprice of the system. And plus individual partner processing, obviously theearlier partners often times have more favorable pricing than the newerpartners. And so as you add all of those factors together, there are several movingpieces that force us to talk about a range rather than a specific number.

[Matthew Scalo:]

And I know you guys don't like to talk about partners herebut can you give me some idea of the stage at which Bio-Rad is in as far asplacing the boxes at Quest Diagnostics?

[Pat Balthrop:]

Well, Matt, they obviously took the order for 22 or 23systems, which they announced back in July, as you remember. And I can't -- letme tell you my experience with those customers. And my experience with those customers is that they installsystems over a period of several months, run the new system in parallel withwhatever they were running before to generate all of the validation data and soon that they need before they switch over to the new to whatever the newtechnology or the new vendor is that they have selected. So that typicallytakes, in my experience, in the six-month or so time frame. I also want to emphasize that we're very excited and pleasedwith all of that Bio-Rad has done and very excited about the Quest businessthat they closed and are the process of implementing. However, I want to add tothat that as it relates to its impact on Luminex, the way to think about those23 systems is in the context of the 4700 others that we have in the field andso those 23 systems in terms of having a material impact on the Company'soverall business, I think will be extremely difficult for anyone to discern.

[Matthew Scalo:]

Okay. And then just last question on the inventory and kindof the build-up inventory, I assume that that's related to maybe work inprogress on the FlexMAP 3D meaning a possible launch in the first half of 2008versus second half?

[Harriss Currie:]

Actually, the largest portion of the inventory build-up fromthe year end balance was the acquisition of TM that we layered in some couplemillion dollars of inventory dollars related to assay products that they stock.So that's really the primary driver, FlexMAP 3D, because obviously we're stillin beta, we wouldn't be inventorying that product yet.

[Pat Balthrop:]

Matt, if your question -- the portion of your question aboutFlexMAP 3D, as we have communicated before, we expect to have that productmarket released in basically the summer timeframe of 2008. We are remained ontrack with all of our product development milestones as it relates to FlexMAP3D but we also have a lot more to go. So what I will tell you is that based on what we know today,we've hit all of our milestones and we know what our future, what our productdevelopment schedule looks like through 2007 and into 2008 and then assumingthat all goes well from this point forward. We'll be in a position to market release the product in thesummer of next year. So therefore, we don't anticipate introducing the productin the first half, which I think, was one of the questions that you had. Butmore in the middle part of the year and then as we go through the comingmonths, we'll keep you updated on where we stand regarding the milestones.

[Matthew Scalo:]

Okay. Thanks, Pat. I was just trying to base it there onthat first half of '08 question.

[Pat Balthrop:]

Thanks, Matt.

[Harriss Currie:]

Take care.

[Operator:]

Thank you. (Operator Instructions) We'll go next to UnKwon-Casado with Pacific Growth Equities.

[Un Kwon-Casado:]

Good morning.

[Pat Balthrop:]

Good morning.

[Un Kwon-Casado:]

With respect to your strong growth and royalty revenue, isthere any market that you could highlight as especially strong and where yourpenetration has increased more than others? I know that you're relatively wellpenetrated in HLA, for example. Are there other markets that your technologythat you're seeing more adoption than you have historically?

[Pat Balthrop:]

Well, let me start with sort of a global comment that ourroyalties -- one of the things to pay attention to as far as our royalties areconcerned is the rate of our royalty growth in relation to the rate of growthof our install base and obviously our royalties, again, grew faster than ourinstall base growth which is a good sign because that means that theinstruments that we're shipping are more productive than the historical averagehas been. Clearly, as you mention, we're highly penetrated in the HLA marketprimarily as a result of the partners that we have. You know one of our two largest partners overall is OneLambda, who is the worldwide market leader in HLA. And the second largestplayer in HLA, Technolife Co. is also a Luminex partner. Those companies continue to do well and continue topenetrate the market and continue to grow. I would have to go and double checkthe data but the HLA market itself is growing in double-digit rates for avariety of reasons. So the opportunity that we have working with our HLApartners is not just additional -- them taking additional share, but also asthe fact that we have relationships with the top two players, and as the marketcontinues to grow, we'll also benefit from that. If we look at the other portions of our Technology Group orpartnership businesses, they are primarily made up of, in addition to HLA, theimmunoassay segment of Clinical Diagnostics. That's where the Bio-Rad Bio-Plex2200 fits. And as they continue to roll that product out, we obviouslywill anticipate additional growth there and with our other immunoassay partnersand then finally on the life science research market, with our partners in thatspace, which include Bio-Rad's life science group, includes Millipore andInvitrogen and others, on an overall basis, all of those partners areoutgrowing the market and taking share as the Luminex products that they havein their portfolio and as they develop respond to the unmet customer need thatmultiplexing can satisfy. And so therefore, if your question is, is there anyone of those segments that we are, for look of a better term, overly reliant onthan others? The answer is no.

[Un Kwon-Casado:]

Okay. Okay. I was just wondering, for example, I knowmolecular diagnostics still outside of TM, it is still relatively underpenetrated and was wondering if some of your partners in that area have -- areseeing more traction?

[Harriss Currie:]

On a global basis, we haven't yet begun to break out ourrelative across market segments. We've talked a little bit about marketpenetration. You'll recall in our target markets, the clinical diagnostics IBDside to that is significantly larger than the research side. What we've experienced over the past eight quarters is thatreally, as a result of additional products offered by our partners, additionalFDA clearances and such over time, that the clinical side of that has grown alittle bit faster than the pharmaceutical research side.

[Pat Balthrop:]

But as far as the molecular diagnostics market is concerned,if you -- the life science research -- let me explain it this way. The lifescience research markets that we have which is where Invitrogen and Milliporeand Bio-Rad's Life Science Group operate, we're in that market segment, 9 or10% penetrated and outgrowing the market with our partners. We capture that in our Technology Group reporting. Alsocaptured in our Technology Group reporting are the relationships we have withour partners in immunoassay, which is where Bio-Rad, and Zeus, and others wouldfit and where One Lambda and Tepnel would fit in HLA. We're also roughly 10%penetrated in that market. But more so in HLA than in immunoassay. As you mention, in molecular diagnostics, we're relativelyunder penetrated although we're growing nicely. Most of that is because of theTM acquisition or LMD and we anticipate as we look toward the future that thevast majority of our growth in molecular diagnostics will be as a result ofwhat we do with the LMD franchise in contrast to what our partners in thatspace do, with the possible exception in a couple of cases, of partners such asQIAGEN who obviously are extremely dominant in some key market segments likeHPB. So therefore, the opportunity going forward in molecular diagnostics, thevast majority of our performance there will be carried by LMD.

[Un Kwon-Casado:]

Okay. Actually, so that leads into my next question. Couldyou give us how you view expanding the test menu within your LMD division? Somany of your molecular diagnostics competitors, part of strategy is growing thebreadth of the test menu. So having the cystic fibrosis to get into the doorand then leveraging that to bring on the whole fleet of tests. Is that part ofyour strategy as well? And if so, what type of tests would you bring on?

[Pat Balthrop:]

Yes, so we have stated previously that our priorities willbe in the near future in primarily in two categories. They include theinherited diseases, building on our cystic fibrosis franchise as you mentioned,and in the infectious disease category led by our respiratory viral panelproduct. Those two areas will be our primary focus and we've stated thatpublicly. Looking forward, we see additional opportunities in othersegments in segments such as oncology and then longer term in the PGX orpharmacogenomics market segment as that market develops and matures. But in the-- I would say in the short to intermediate term, our primary focus will beinherited diseases and infectious disease.

[Un Kwon-Casado:]

Okay. Great. Thanks very much.

[Pat Balthrop:]

You're welcome.

[Operator:]

Thank you. We'll go next to Andrea Treaky (ph) with Shores(ph).

[Andrea Treaky:]

Hi. Can you just give me what cash flow from operations was?

[Harriss Currie:]

Cash flow from operations. Hang on just a second. I believeit was about a negative -- Andrea, I don't have it in front of me. What me toget it for you? I can give it to you before the end of the call.

[Andrea Treaky:]

Okay. Thanks. Are you seeing any cannibalization fromIllumina's product? I know it is much more higher price and the partners makemoney from your bead expression platform. They just seem to be going after twodifferent markets. But could you give us color on that, please?

[Pat Balthrop:]

Our -- Andrea, our -- the interaction that we have withIllumina's Platform, when you say that do you mean their bead express platform?

[Andrea Treaky:]

Their bead express.

[Pat Balthrop:]

The interaction that we have with Illumina bead express isapproaching zero. We see little-to-no activity from them in the market place.They have virtually no -- they have no applications available. They do havesome orders. I think they talked about having 40 orders and fewer than 20 ofthose instruments are actually placed. And of those 20 instruments that areplaced, almost none of those are active.

[Andrea Treaky:]

Thank you.

[Harriss Currie:]

Andrea?

[Andrea Treaky:]

Yes?

[Harriss Currie:]

Cash flow from operations, negative $750,000 but one thingyou have to consider is that when we look at the cash flow, we look at cash andinvestment flow. And so there are some pieces on the year-to-date number. You know, we have negative cash flow from operations of $7.6million but we have sales and purchases and investments and all of that thatyou need to take into account as you calculate that number. When you're lookingat true cash flow from operations.

[Andrea Treaky:]

Is there a lot of non-recurring items?

[Pat Balthrop:]

No, it is not that. It is that we invest our cash inshort-term investments that, you know, not risky things but we don't keep it inthe form of a cash or cash equivalent. So we have investments that are ineffect, like cash. They're US government agencies, securities that have amaturity date out to two years, which categorizes as a long-term investment.But to us, it is just like cash. If we had to liquidate it, we could have themoney the next day. So when we look at -- when you look at cash flow fromoperations on the cash flow statement, that -- the sale and purchase of thoselonger term investments is not taken into effect in the true cash flow. So we may have a -- I don't know, purchase a long-terminvestment down in the investment flows shows as a big negative number that theoverall cash position of the Company may not have changed. Because the moneymoved into short-term investments which drove what would appear to drivepositive operating cash flow when it is really a push. So you have to considerall of that when you look at this.

[Andrea Treaky:]

Okay.

[Operator:]

We'll go next to John Sullivan with Leerink Swann.

[John Sullivan:]

Good morning.

[Pat Balthrop:]

Hey, John.

[John Sullivan:]

Lots of noise and concerns in the news regarding global foodsafety. Can you just comment on? Are you seeing opportunities for growth fromfood safety testing and are there any of your partners especially involved ordo you have plans to be directly involved?

[Pat Balthrop:]

Well, John, in the Luminex Bioscience Group, LBG. We have acouple of priorities after our pneumococcal panel which is commercialized andafter the microRNA panel and then flex mere select which we expect to introduceshortly, after those products are effectively commercialized. Our next priorities will include newborn screening and asyou mentioned food safety. So, we do see an opportunity in food safety. Likethe other markets that we're focusing on, food safety itself is a multiplexingproblem waiting to be solved because obviously, detecting the various organismsthat might be relevant in that market can change over time and so multiplexingdelivers significant value to the end user. So we're actively pursuing that.We're spending R&D dollars in that area. And we have to -- we have a lot more ground to cover beforewe actually have a product available but we are working with large players inthe food area to co-develop a product. And so it is a little too early for us to talk about it inany kind of specifics except to say that we're excited about it. And we believethat we have the right partners, and we're working through ourcommercialization strategy there, and we are entertaining the possibility ofhandling that commercially in a more direct way because obviously we don't havethe partners that we historically had relationships with, do not serve thatparticular channel. So we're still developing some of the details there but wesee it as a very nice opportunity for us in the intermediate term.

[John Sullivan:]

Thanks very much for that. And then lastly, for me, can youalso just comment on the sort of feedback you're getting in the market fromFlexmiR? There are other microRNA analysis tools in the market and I'm justwondering if there is any competitive intelligence that you're getting backthrough Exiqon or directly regarding FlexmiR?

[Pat Balthrop:]

The feedback that we're getting John, I would say isfavorable. What we hope to achieve with the product that we have available nowis what I would call market seeding to familiarize the market with a bead-basedmicroRNA approach. As you know, those microRNAs are slightly over 20nucleotides long and where cross reactivity can be a significant issue, and soa two-dimensional array product has the disadvantage of having all of thosemicroRNAs interact with the same sample and the same way and not only does thereaction take a long time but you can also have some cross reactivity issues orspecificity problems. And so what we're hearing from customers is a bead-basedapproach mitigates that. There is obviously other ways to do microRNAs besides 2Darrays or 3D arrays like we use and that would be using platforms like ABI andthe one at the time types of tests which on one hand would eliminate the crossreactivity problem but on the other hand are expensive and take a long time todo particularly if you have a large sample size. And so, for all of those reasons, what we hope to accomplishthis year with our microRNA product to familiarize customers with the 3D arrayand with the specificity that you can get using a bead-based platform. We believe we've achieved but we did that with the intent offilling what we perceive as the more significant unmet customer need which isthis custom microRNA product that we call FlexmiR Select where a customer canchoose whatever method they want to screen for the Sanger Database of the 350plus microRNAs and then select those that they believe are relevant based ontheir individual experiment and then test only for those. That's particularly attractive in markets like pharma andbiotech where a lot of those data under the critical path initiative from FDAwould have to be submitted. And so as part of the submission of the assay or ofthe compound and so they only want to include data that is relevant rather thanextraneous data which is why we think this custom product could be verysuccessful for us. We have to get it out there and execute but that's basicallya summary of the feedback that we received.

[John Sullivan:]

Thanks so much.

[Operator:]

Thank you. And it appears we have no further questions inour queue. I would like to turn the conference back over to Patrick Balthrop.

[Pat Balthrop:]

Thank you very much, Katie. Once again, thank you forattending today's earnings call. We appreciate your interest in Luminex and welook forward to seeing you again soon.

[Operator:]

Thank you. That does conclude our conference call today. Youmay disconnect at this time.