Luminex Corporation
Q3 2016 Earnings Call Transcript

Published: 1 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Luminex Corporation's Third Quarter 2016 Earnings Conference Call. My name is Kelly and I will be your coordinator for today. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the prepared remarks there will be a question-and-answer session. [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:]

Good afternoon and welcome to Luminex Corporation's conference call for the third quarter 2016 financial and operational results. On the call today are Homi Shamir, President and Chief Executive Officer, Harriss Currie, Senior Vice President and Chief Financial Officer; and Dr. Tadd Lazarus, our newly appointed Senior Vice President and Chief Medical Officer. We'll be following our standard agenda today. Homi will review the third quarter corporate highlights; Harriss will review the financial performance. 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 Web site. 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 today hereof and are based on our current beliefs and expectations and are subject to known or unknown risks and uncertainties some of which are beyond the Company's control that could cause actual results or plans to differ materially and adversely from those anticipated in the forward looking statements. Factors that could cause or contribute to such differences are detailed in our Form 10-K for the year-ended December 31, 2015 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 the 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 directly comparable GAAP financial measures is included in our earnings release which is available on our Web site 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 2016 earnings call. We are pleased to report another strong quarterly performance generating revenue of over $71 million up 18% from a year ago. We are very pleased with Nanosphere momentum quite impressive considering we're in the early stages of our core selling activity. Also note, Nanosphere growth this quarter was fueled by all of it's test which include triple digit growth from its' newest test. Our integration activity as a whole are moving forward according to plan which Harriss will provide additional details. First, Luminex is fully committed in support of our strategic partner, an area we expect to grow just over 10% in 2016. And it's nice to see that during this quarter and year-to-date all three companies of this growth system, consumable and royalties are growing at a healthy pace. And second, Luminex is focused on broadening its market leadership in infectious disease with sample to answer platform ARIES and Verigene leading the way. We believe Luminex is the only company that provides solutions for both targeted and syndromic testing in a lab. As you know when I joined the Company we faced two major headwinds which we have successfully managed excess inventory at One Lambda and the loss of the CF business from LabCorp. We have worked our way through the inventory situation and we are now projecting growth moving forward at One Lambda. In fact in the current year our expectation of a decline in this customer has not occurred. We have also managed the transition of CF with LabCorp so it should occur next year rather than in the first half of 2015 as originally anticipated. And I’m happy to say we have one additional CF businesses from other customer in the meantime. LabCorp also provides LDT-based solution called NuSwab which incorporate our MultiCode reagent. We have been informed by LabCorp that we do not win an RSP for the next iteration of this product. Currently we anticipate selling approximately 36 million of NuSwab related materials to LabCorp in 2016 under a legacy customer agreement that unlike most are significant agreement could be terminated on a 90-days notice. To better manage this situation, we have negotiated an amendment supply agreement that is bonding for not less than 18 months starting January 1, 2017 with a minimum purchase requirement of 63 million to June of 2018. At this stage similar to CF we are uncertain as to the exact timing of the departure of these business lines. It may not effect 2017 revenue growth at all and in the second half of 2018 this product line is anticipated to be less significant to our future. Now let me continue with a few additional highlights from the third quarter before I turn it over to Harriss. On our ARIES sample to answer platform we submitted our Group B Strep assay to the FDA at the end of September. When cleared, this will be our third IVD cleared assay on the system. We believe the GBS assay is important as address a large and strategic market opportunity. In addition, we have commenced a clinical trial for bobotella and are planning to summit it to the FDA by the end of 2016 or early 2017. We started a clinical study for C. Diff last week and plan to start a study for Group A Strep around year end or early 2017. On project Atlas the internal name for our next generation Verigene System which address the syndromic testing market we are targeting to begin clinical trials by the end of the second quarter of 2017. The first assay on project Atlas will be i-plex gastro panel. And lastly we remain in a great financial position with 84 million in cash and no debt. Now Harriss will review the financial data and afterwards I will return with some closing comments.

[Harriss Currie:]

Thanks Homi. Let's begin the financial review and then look at revenue. Total revenue for the third quarter increased from the prior-year period by 18% driven by healthy broad-based organic growth and a strong contribution from Nanosphere. Of our total 18% revenue growth for the quarter, 5 percentage points are attributable to organic growth and 13 percentage points can be attributed to Nanosphere. Assay revenue grew 32% year-over-year of which 6% was organic. The most significant portion of Nanosphere's revenue is assays resulting in a 26 point contribution to assay growth in the quarter. For the quarter infectious disease assay sales comprised 78% of total assay sales and grew at 53% with genetic testing sales comprising 22% and declining by 13%. Royalty revenues were up 8% this quarter in line with our expectations of mid to high single-digit growth. Third quarter consumable revenues were up 12% compared to the prior year attributable to healthy demand across our partner base and the sequential decline is in line with our previous commentary regarding our expectations and consumable revenue for the second half of 2016 would be down from the first half. Total revenues from our partners grew approximately 10% for the quarter and remained in excess of 10% for the year. For the full-year 2016, aggregate consumable purchases are still expected to increase in excess of 10% over 2015 levels. In the aggregate, our higher-margin items, consumables, royalties and assays comprised 78% of total revenue in the quarter. However, the incorporation of Nanosphere revenue which has a much lower aggregate gross margin than our existing business played a significant role in our gross margins landing in the mid-60% range. I'll address gross margins more completely in just a second. System revenues were up 9% for the quarter as we shipped 294 of our multiplexing analyzers above our 225 to 275 historic quarterly range. This figure continues to reflect a combination of new demand and the underlying replacement cycle. Additionally, revenue attributable to both ARIES and Verigene System placements is included in this line item. Now let's turn to the income statement. Gross margin for the quarter was 64%. If we reconcile this to our expectations of gross margins in the 70% range, there are two primary cognitive factors. First, the required fair market value adjustment of purchase inventory which provided a 1% burn. And second, the very low aggregate Nanosphere margins which accounted for the remaining 5% divide. One item of note is it as a result of classification changes for items like depreciation and manufacturing equipment, space utilization, labor utilization et cetera, that were previously captured in operating expenses. The previously reported Nanosphere gross margins in the 40s are now lower. This reclassification represents in our opinion the appropriate application of cost to manufacturing and inventory, and only shifted these expenses from OpEx to cost of goods sold and had no net impact on the bottom line. With expense categorization complete and the acquired Nanosphere inventory drawn down, we believe quarterly gross margins will exit the year higher than 64% but still in the mid-60% range. As we progress in Verigene and Atlas sales drive future growth, we expect gross margins from these product lines to improve significantly. Operating expenses increased 30% for the quarter and obviously reflect the incorporation of Nanosphere, as well as about $0.5 million in Nanosphere deal related costs. If we exclude Nanosphere, the total operating expenses this quarter grew 7% from the year ago and reflects our continuing focus on efficiency while growing the business. R&D expenses for the quarter were up 26% over the prior year and represented 18% of revenue reflecting the addition of Nanosphere. Over time and as we optimize our research efforts, total R&D costs begin to fall towards our longer term targets of around 15% of total revenue. SG&A costs were up 23% excluding amortization for the quarter from quarter three 2015 but again this growth rate includes an approximate 4 million addition attributable to Nanosphere. Excluding Nanosphere the SG&A expenses grew 5%. For the third quarter operating margin was 6% and 16% if you exclude Nanosphere. This operating margin reflects the inclusion of the first full quarter Nanosphere, along with leverage realized through efficient management of our base business. Our consolidated effective tax rate for the full-year is currently expected to be 22% below our longer-term expectations in the high 20s. For the third quarter we achieved net income of $2.8 million or $0.06 per diluted share. Excluding the impact of Nanosphere our net income per diluted share would've been about $0.21. On a non-GAAP basis we generated net income of$ 9.1 million or $0.21 per diluted share for the third quarter. With Nanosphere integration proceeding as planned, our expectations remain that we will maintain both profitability and positive cash flow and achieve accretion no later in the fourth quarter of 2017. Now quickly turning to the balance sheet. We ended the third quarter with approximately $84 million in cash and investments. Days sales outstanding on receivables was a healthy 39 days and inventory remains right above our targeted 1.5 quarters of forward inventory. Revenue guidance for the full-year 2016 is expected to be in the range of $267 million to $270 million resulting in overall growth over 2015 of between 12% and 14% of which approximately 67% can be attributable to the acquisition of Nanosphere. Nanosphere is expected to add between $7.5 million and $8.5 million of revenue in the fourth quarter of this year. System revenue is expected to continue to be robust with strong total multiplexing system placements and a modest contribution from both ARIES and Verigene. As mentioned previously, consumable revenue is growing just over 10% for 2015. Royalty revenue for the year is expected to grow in the mid-single-digit range, assay revenue for the year is expected to grow in the mid-to high teens and in the mid-single digits excluding ARIES and Nanosphere contributions. As mentioned last quarter, trends in the genetic portfolio particularly in CF and PGx continue to face headwinds. I'll now turn the call back over to Homi for some final comments.

[Homi Shamir:]

Thanks Harriss. In summary our core focus will be supporting our partners, driving adaptation of our sample to answer platform solutions which include ARIES and Verigene and maintaining our strong financial position. Regarding an organizational update, I’m very pleased that Dr. Tadd Lazarus has joined us as a Chief Medical Officer which today being his first day. Dr. Lazarus brings an impressive track record of success and leadership to this newly created role. We have confidence that he will quickly make a meaningful contribution. In addition we have promoted Dr. Scott Johnson who has been with us for over 15 years and currently overseas assay development and Dr. Chuck Collins who joined us in 2006 and currently run our hardware and software development to be the senior leaders of research and development and report directly to me. The combination of Dr. Lazarus, Johnson and Collin comprise a very strong team to lead us into the future. Also we are promoting Todd Bennett who has been with us for four years from our VP global sales and customer operation to a Senior VP. Our senior leadership team is now complete. Lastly we look forward to seeing you at AMP in Charlotte starting November 9 and we'll also be attending the Piper Jaffray and Citi Bank Healthcare Conference held in the fourth quarter. This ends our formal comment. Operator, please open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Sung Ji Nam with Avondale Partners. Your line is open.

[Sung Ji Nam:]

Hi. Thanks for taking the questions. I'm sorry I missed this, but did you guys break out the customer placement number for Verigene Systems as well as ARIES?

[Harriss Currie:]

We did not but what we mentioned Sung Ji was it we were well on our way to meeting that targeted ARIES placement number of around 100 by year end and Verigene we didn't breakout. The Verigene System revenue number and placement number such as small component of our total overall system number that it although I think it, it could have been previously really important to models we think that it’s a lot less important today.

[Sung Ji Nam:]

Okay. And then in terms of the Verigen System, were there a particular panel that was stronger than the others, or was it pretty much stronger across the board as far as the -- ?

[Homi Shamir:]

I think - Sung Ji, this is Homi. It was across the board all of them but as I mentioned we've seen triple digit growth in not in the blood culture mainly in the GI and [RTT] [ph] assay very, very nice growth and very encouraging growth but it was very strong of course all the assay portfolio.

[Sung Ji Nam:]

If I could squeeze one more in. In terms of your pharmacogenomic business, could you talk about what the outlook is there? I know that you commented that's not necessarily kind of a core focus going forward potentially. But was curious as to the few customers that were -- where you were seeing some headwinds in the recent quarters?

[Harriss Currie:]

Yes, so what we're finding Sung Ji is that, that our technology is very good that doing generic testing however it's probably not the best doing the generic testing. And as alternative methodologies for pharmacogenomic testing are developed we’re finding the customers if prices is right for them or displaying a tendency to shift over those other technologies. And so as a result our business itself is healthy but we believe it over the next five years it's likely that the level of business there will decline and as a result that’s one of the reasons for a focus on other areas primarily infectious diseases in our partnership business where both performed very well this quarter. We're going to focus on the places where we can actually make some progress.

[Harriss Currie:]

Yes, let me say Sung Ji, it's a [indiscernible] that we don’t put R&D because we have the product as part of the regulatory rating but for example it's an area if the customer want to buy the right price we sell to them but we’re not going to start selling the product and making less margin to our overall portfolio. And on the other hand I got the self stores which from the beginning of next year is becoming a combined self store to focus on today sample to answer solution because that's a bigger future for us than the pharmacogenomics.

[Sung Ji Nam:]

Okay. Thanks so much.

[Operator:]

Our next question comes from the line of Tycho Petersen with JPMorgan. Your line is open.

[Unidentified Analyst:]

Hey, guys. It is Steve on for Tycho. Thanks for taking my question. You have strong multplex analyzer quarter. Can you give a little bit more on what is driving the strength? And 225, 275 systems per quarter still the right way to think about it, given the recent strength you've seen?

[Harriss Currie:]

Yes so we remain steadfast on 225 to 275 acknowledging that we've been above that for several quarters. The strength is actually all across our partner business. It's strength in the U.S., strengthen in the Far East, a steady rate of placements in Western Europe and then there is a component of that, that is the replacement cycle some of which we have visibility to, some of which we don’t, as a result of the vagaries that the partnership model creates sometimes for customers for instance like Bio-Rad on which we do not perform the service. So we don’t have visibility to whether or not an instrument is being replaced or not. But from the data that we have, the overall market is healthy, the placements among all of our partners remain healthy and opportunities abound.

[Unidentified Analyst:]

Got it. I understand you don't want to give exact numbers, but can you say if you placed any M-1s in the quarter? And can you talk about any of your feedback you've gotten from smaller labs regarding M-1 system performance?

[Homi Shamir:]

Yes, we place couple of M1 system and we start seeing more and more that have been spoke environment that it's really fitting the overall portfolio very nicely and we continue to look forward to sell more system but as Harriss mentioned earlier, we are on track to deliver our 100 number, but it's really worked what is going to drive everything there is the menu. I think we are doing amazing progress now with our menu development, I'm expecting as I said earlier GBS to get somewhere before the end of the year, early next year FDA clearance, with clinical trial instead is going well. Bototella I think by the end of this week we will finish the clinical trial and then we have obviously good data together and submit to the FDA but probably it will happen before the end of the year. So it's going well also I cannot reveal the name of the customer, we've seen one customer who give us a multiplier order for three units and three years commitment. So we're very clear about, so we think more and more in this area. And again we need to - we are driving into development of 7 to 8 assay before the end of the year - end of the 2017 to be precise. So - but I think as I keep saying to the team, I think the train left the station and we start accelerating there.

[Harriss Currie:]

Yes in other way to think about ARIES is the promise of menus what's going to drive placements and that's what is doing today, the delivery of that menu it is going to drive profitability, significant profitability on that system as a throughput per system increases. Today honestly the throughput per system is reasonably low but as that menu fills out both of the revenue generated and pull through of each placed ARIES System will increase.

[Unidentified Analyst:]

Got it. And then just last for me. As you noted, you still have a lot of cash in the balance sheet, even post deals. How are you guys thinking about capital deployment priorities? And do you have the ability to do bolt-ons, given the iteration that's going on?

[Harriss Currie:]

We do. As you saw from our results we maintained our commitment to be both profitable and positive cash flow, so the expectation is that cash flow balance will grow forward. I would caution you to think about in the next couple of quarters where we don't plan on thinking about any additional capital acquisitions until we are fully integrated both operationally and systematically with Nanosphere. Now there are opportunities out there, there are fewer everyday but we are keeping our eyes open and look forward to hopefully in the not too distant future get on the call and announcing another Nanosphere type deal.

[Operator:]

Thank you. And our next question comes from the line of Bill Quirk with Piper Jaffray. Your line is open.

[Laura Sand:]

Hi. This is Laura Sand on for Bill Quirk. Thanks for taking the question, and congrats on the selling quarter.

[Homi Shamir:]

Thank you.

[Laura Sand:]

Can you provide your updated thoughts on Nanosphere's pipeline? And how are you thinking about the opportunity to expand outside of the US?

[Homi Shamir:]

Okay. That's a excellent question. A first pipeline obviously we are all Luminex 10 Nanosphere putting all the effort into the Atlas System and we are hoping that by the end of this year, early next year we stabilize the systems, we stabilize the first assay while we start what we call a lot of pre-clinical trial before we start the clinical trials somewhere during Q2 and by the way it's going to be a big trial with a lot of sites. So we are trying to run with the clinical trial very quickly in order to finish it faster and bring it to the FDA as soon as we can. But beyond that, our team across the company working also to develop additional assay and I don't know if I'm ready now to talk about that, we could probably can talk about that more face to face in MP or we are looking obviously there is a lot of other opportunity into - in the multiplexing areas for the Nanosphere System, one of them by the way, we will try to convert some of the assay we have now on Verigene System. So if I take out [indiscernible] we will have to see if we want to add some additional pathogens into those assay and release them to the market also on the - of the new Atlas. So that said, that's a way we're doing it and we are in a good direction there as well.

[Laura Sand:]

Okay. Great. And you noted you're in the early stages of integrating their sales force and training on cross-selling? When do you expect to have the sales force fully integrated and ramped up?

[Homi Shamir:]

1st of January.

[Laura Sand:]

Okay.

[Harriss Currie:]

So we are well on our way to getting that work done and by the 1st of January, we will be selling as one.

[Homi Shamir:]

We had all the self stores of Nanosphere revealed. We met all of them, our teammates, they met us and now we started training most of Q4 training the teams, so 1st of January we have a combined sales force by the way we're not letting any people go there, we are putting it all together, so we are building territories and I think it's a great opportunity.

[Laura Sand:]

All right, sounds good. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Dan Arias with Citigroup. Your line is open.

[Daniel Arias:]

Yes, good afternoon guys. Thanks. Homi, it sounded like last time around, the international markets were an important part of the strategy that you guys had for Nanosphere. So I'm just curious now that you've had a quarter of think about to go about thing there, I'm wondering if you have any fleshed out thoughts on how you might realize the opportunity overseas?

[Homi Shamir:]

Yes, the biggest opportunity we have is in Japan. As I think I mentioned previously we have a distributor there by the name of Hitachi I-tech. Hitachi managed to obtain PMDA approval for the Nanosphere System. It's actually the first system in Japan sample to answer solution that have FDA clearance or PMDA clearance. And we're waiting now to get the final notifications for the Ministry of Wealth in - a Ministry of Health in Japan, it's called Ministry of Wealth and Welfare in Japan to get what will be the level of reimbursement. And hopefully it will come into the right level of the reimbursement, and I think if you get where Hitachi thinking they should get it, we will have a very good opportunity in the Japanese market to ramp it up. As we speak we have a team now Todd Bennett new Senior VP of Sales, he is now in New York meeting our team there and they're looking at all the opportunity we have with the Nanosphere and ARIES System in the European market. So we have obviously opportunity but we need to assist it but the biggest is Japan by far because of their approval and I'm hoping to get at very nice level of reimbursement there as well.

[Daniel Arias:]

Okay, great. And then if I just go back to the ARIES menu, I think I heard you say 7 to 8 assays by the end of 2017. Am I wrong, or is that down a bit from the 8 to 11 that you had talked about prior? And if that is the case are you looking…

[Homi Shamir:]

Yes, it's down because of the acquisition of Nanosphere and we had some assays you remember Dan that we included them the lease that were what we called the V1 Plus where there were the higher multiplex, there is ranging from 10 to 12 plex. Now that we have a Nanosphere there is no use to do those kind of assay. So, we went back to ARIES and we are doing what we said up till four, five say a plex and on top of that we are putting all those results on the V1 that we had into the results that we are planning to move much faster on the Nanosphere System.

[Daniel Arias:]

Got it. Okay. Maybe just one more for me, if I could. A clarification on the CF business that is offsetting LabCorp. Homi, did that increase this quarter? Or were your remarks referring to the new customers that you alluded to last time around?

[Harriss Currie:]

So yes, the CF business that we added that is in addition to the LabCorp business grew in the third quarter but as we mentioned before it's not a full offset to the ultimate loss of the, for the LabCorp business it just helps temper the overall loss of the business so that in 2017 when CF finally transitions out completely from LabCorp versus current expectation once again that the decline will have less than $10 million impact on total assay revenue.

[Daniel Arias:]

Yes, I got you. I was just trying to understand whether the amount that you were thinking was going to be an offset last quarter is same or different from where you are today. Sounds like the growth might have things up a little bit there.

[Homi Shamir:]

Yes.

[Daniel Arias:]

Okay, thanks a lot,

[Operator:]

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

[Homi Shamir:]

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

[Operator:]

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