Luminex Corporation
Q4 2016 Earnings Call Transcript

Published: 7 Feb 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to Luminex Corporation's Fourth Quarter and Full Year 2016 Earnings Conference Call. My name is Latif 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 fourth quarter and full year 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. We'll be following our standard agenda today. Homi will review our 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, 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 first quarter 2016 earnings call. On January 9, we preannounced a strong finish to 2016 and issue 2017 guidance. Our solid performance in 2016 was driven mainly by significant revenue growth from our partners and growth in our sample to answer solution. Given last month's release, I will keep my prepared comments short. Our 2017 revenue guidance of between $295 million and $305 million reflects a healthy growth rate of between 9% to 13%. We anticipate our expanding portfolio of sample to answer molecular solution to account for approximately $45 million of our 2017 revenue. We believe these businesses will grow rapidly for the next few yields for several reasons. First, as a result of the integration of Nanosphere, Luminex entered 2017 with molecular cells and support of over 100 people. These professionals are fully cross-trained and can address both the microbiology and molecular diagnostic labs. We just held our global sales meeting last week and the team is energized and excited to kick off the year. Second, we are rapidly expanding our ARIES IVD test menu. The FDA cleared our Group B Strep assay at the end of December and we now have three IVD cleared assays on ARIES. We submitted our bobotella assay to the FDA at year-end. We are currently in clinical study for C. Different and Group A Strep and expect CE Mark for norovirus in summer 2017. We are in the last stages of validation on [MANSA] [ph] and will provide a FDA submission timeline on our next call. Given the completion of this initial set of assays that open up the potential for significant market penetration, we can now refine our ARIES R&D efforts towards pursuing differentiating solutions. Third, on Project ATLAS, we continue to target clinical trial commencement for this system and its first assay, a high plex [indiscernible] by the end of the second quarter of 2017. Finally, in the last three years, Verigene, has enjoyed over 45% annual growth as a result of market share gains in BCID as well as expansion in syndromic testing of respiratory and gastro. We expect to continue to grow this business rapidly going forward. In summary, we are very excited about these opportunities. Consistent with prior commentary, we remain confident in our growth expectation of 6% to 8% for our partner businesses even as we compare against a strong 12% performance in 2016. We continue to see favorable trends in the growth of our partner which positively impact Luminex. 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 with a look at revenue. Total revenue for the fourth quarter increased from the prior year period by 20%, driven by broad-based organic growth and a strong contribution from Nanosphere. Of our total revenue growth for the quarter, 4 percentage points are attributable to organic growth. Assay revenue grew 36% quarter-over-quarter of which 6% was organic. The most significant portion of Nanosphere's revenue is assays, resulting in a 30 point contribution to assay growth in the quarter. For the quarter, infectious disease assay sales comprised 78% of total assay sales and grew at 54% with genetic testing sales comprising 22% and declining by 4%. Royalty revenues were up 7% this quarter, in line with our expectations of mid to high single-digit growth. Fourth quarter consumable revenues were up 5% compared to the prior year, attributable to healthy demand across our partner base. The sequential decline is in line with our previous commentary regarding our expectations that consumable revenue for the second half of 2016 would be down from the first half. For the full year 2016, aggregate consumable sales grew 12% over 2015 levels. Our higher margin items, consumables, royalties and assays comprised 80% of total revenue in the quarter and 79% for the year. However, the incorporation of our automated system revenue which includes our ARIES and Verigene platforms, played a significant role in overall corporate gross margins moving into the low-60% range. We will address this in further detail soon. System revenues were up 12% for the quarter as we shipped 272 of our multiplexing analyzers, at the high-end of our 225 to 275 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 sales is included in this line. Now let's turn to the income statement. Gross margins were 61% for the quarter, down 11% from the prior year fourth quarter and down three point sequentially. The current quarter compression in gross margin can be attributed to several factors. First, is the increase in the percentage of the entire Nanosphere portfolio of products which represented 10% of the total revenue in the third quarter and 13% of total revenue in the fourth quarter. The acquired Nanosphere revenue components have significantly lower gross margins than our existing portfolio. But nonetheless, have improved sequentially. Secondly, during the quarter we experienced a net unfavorable impact resulting from an update of inventory standards which although is an adverse effect currently, it provides for better direct margins per unit moving forward. Finally, we are still experiencing a low level of ARIES overhead absorption of fixed manufacturing overhead expenses as a result of the low volume of assay sales. Expectations are that as ARIES assay sales increase as a result of our rapidly expanding ARIES assay portfolio, absorption and utilization will increase correspondingly and aggregate ARIES gross margins which are currently low will rise. We see current gross margins at the low point in our gross margin digression and as a result expect gross margins to [tipper] [ph] in the short-term and begin to rise again as our sample to answer assay volumes and margins increase. Operating expenses increased 32% for the quarter and obviously reflected the incorporation of Nanosphere. In our continuing focus on growth in efficiency and as a direct result of the acquisition of Nanosphere, we undertook a reorganization in the fourth quarter and estimate this action will save the company approximately $9 million annually. R&D expenses for the quarter were up 22% 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 should begin to fall towards our longer-term targets of around 15% of total revenue. SG&A costs were up 24% for the quarter, excluding amortization, from quarter four 2015 but again this growth rate incorporates an approximate 3.2 million addition attributable to Nanosphere. Excluding Nanosphere SG&A expenses grew by only 10%. For the fourth quarter we generated an operating loss of 3% or $2.4 million. Those directly affected by $2.5 million of re-org charges, a $1.1 million of standard cost adjustment and $750,000 of cost related to the Nanosphere integration, without which we would have been profitable. Our consolidated effective tax rate for the year was 30%, slightly above our longer-term expectations in the high 20s. For the quarter, we posted a net loss of $3.4 million or $0.08 per share, although not unexpected internally, we want to provide some additional clarity to our investors so that no confusion develops with respect to our commitment to remain profitable and continue to generate cash. Included in the quarter were several onetime costs, including a total of $2.5 million of severance and restructuring costs, $1.1 million of standard cost adjustment and $750,000 of integration and valuation services related to the acquisition of Nanosphere. Obviously, none of these are expected to repeat in future quarters. As I mentioned previously, absent these effects, we would have posted a profit. With respect to Nanosphere accretion, we committed to accretion no later than the end of 2017. For the fourth quarter of 2016, the estimated loss attributable to the addition of Nanosphere was $3.4 million, representing the entirety of our reported loss. If we adjust for approximately $300,000 of restructuring cost allocated to Nanosphere activity, the run rate loss would be approximately $3.1 million. Obviously, this assumes constant revenue and gross margin level coupled with steady operating expenses. When we announced our restructuring on January 9, we indicated that the annualized effect of the communicated changes totaled $9 million. The restructuring activity was a direct result of opportunity, overlap and simplification of our business model following the Nanosphere acquisition and contemplated in our discussion of short-term accretion. On a quarterly basis, this will be $2.25 million per quarter. As a result of these changes, it becomes obvious that accretion is not far off as coverage of less than $1 million remains to reach that threshold. Revenue growth coupled with margin improvement will get us there prior to year-end. Now quickly turning to the balance sheet. We ended the fourth quarter with approximately $93 million in cash and investments. For the full year 2016, net of the $93 million expended for the purchase of Nanosphere, we generated almost $40 million of cash, $12 million of which was generated following the acquisition. We anticipate that as our profitability improves and we approach and move through accretion, that our ability to generate cash will improve as well. Other balance sheet metrics like DSO and quarters of inventory on hand remain quite favorable at 40 days and 1.5 forward quarters respectively. As we mentioned in our press release on January 9, we expected to deliver between $295 million and $305 million of revenue for 2017. We look at our revenue in three distinct buckets. The first is our partner business that delivered approximately $140 million of revenue during 2016. Our expectation here is a growth roughly equivalent to the growth rates of the markets in which our partners operate of mid to high single digits. This includes a super majority of our system and consumable revenue and all of our royalty revenue. It also includes a service component in a number of smaller categories like shipping, part sales etcetera. We continue to expect between 225 million and 275 multiplexing system placements per quarter. The second is our automated solutions which include Verigene and ARIES. We expect this revenue stream to grow in excess of 150% of 2016 reported revenues of $17 million or in excess of 40% over 2016 pro forma revenues of $32 million, which consist of ARIES actual and the full year of Verigene revenues both reported by Nanosphere and Luminex. As indicated previously, we anticipate this revenue stream to contribute approximately $45 million of revenue in 2017, driven by ARIES uptake as our menu offerings continue to rapidly expand and sustain growth of the acquired Nanosphere portfolio. The third grouping is our non-automated solutions which we currently expect to contract from approximately $113 million as a result of both the loss of LabCorp CF by midyear and reduction of other non-strategic revenue streams like PGx and bio-defense by approximately 6% to 10%. If we look at our consolidated revenue line items, we expect the following. System revenue should grow at close to 10% as a result of both healthy multiplexing system placements at the top of our expected 225 to 275 per quarter range, and the inclusion of both ARIES and Verigene system sales. Consumable revenues are expected to grow at low to mid-single digit rates. Royalty should continue to grow at the mid to high single digit range, a direct function of the growth rates of the markets in which our partners participate. Assay revenues in the aggregate are expected to grow at almost 20%. Infectious disease assays which include ARIES, Verigene and our non-automated solutions are expected to grow in excess of 30% but will be offset by declines driven by both the anticipated loss of CF and a reduction in non-strategic PGx and bio-defense revenue. Finally, we expect to deliver between $73 million and $75 million of revenue for the first quarter of 2017 in line with current analyst expectations. I will now turn the call back over to Homi for some final comments.

[Homi Shamir:]

Thanks, Harriss. Since joining Luminex over two years ago, we have worked out to find meaningful strategic growth, simplifying the businesses, improve efficiency and drive profitability and cash flow. We have delivered on those efforts. We have successfully managed through some headwinds from partner excess base inventory and the changing landscape in our genetic portfolios. In spite of that, I am very pleased that we grew the businesses 14% last year and provided double-digit growth revenue guidance for 2017. We intend to continue our meaningful revenue growth trend beyond 2017 by both organic and inorganic means. This ends our formal comments. Operator, please open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Sung Ji Nam of Avondale Partners. Your question, please.

[Sung Ji Nam:]

Homi and Harriss, could be maybe give us more color in terms of what's driving -- what's the underlying assumption for partner business growing at such a strong rate on the back of a very strong year. And related to that, kind of where you guys are -- or some of your partners I think are, as you mentioned, in the replacement of their installed base and was curious as to where they are in terms of that replacement cycle.

[Homi Shamir:]

Sung Ji, thanks. First, when we are looking at the partner business, we see that they are enjoying also kind of a mid-single digit growth. And we are pushing the organization to deliver a little bit more than them. Obviously, we have some advantage. You see that it'' probably some of the recycle of, upgrade of the system. And also I think we are pushing the organization to execute better. That’s where I don’t think and I keep saying it all the time in conference, I don’t think we will be able to repeat the growth of double digit but if we can be around 6%, or 7% or 8%, we will do well. But again, it's partly we see what the partners are doing and we think we can work with them and execute better on what we can offer them. We also, you have to remember, we don’t have any more headwinds of inventory, as I mentioned earlier in the call. Last year we grew 13% and actually the growth was slightly lower in the One Lambda. In the bid business is wasn’t significant, it was not in the millions of dollars but still it wasn’t a -- there was a slight decline there. We knows that this year we are outside of the inventory and this number is going to go up for us. So when you look at all that, we are feeling good where we are going, at least in the range of the 6% to 8%. Obviously we need to move into the year and see if the numbers are not getting better. We would like the numbers to be better.

[Sung Ji Nam:]

Okay. Thank you for that. And then in terms of on the sample to answer molecular side. Are you seeing increased demand for your ARIES platform now that you have GBS approved, FDA approved. And for Verigene, ahead of the ATLAS launch, was curious as to what do you think is the biggest growth driver for that before you guys launch the next-gen system. Thanks.

[Harriss Currie:]

So, Sung Ji, with the clearance of every additional assay on the ARIES system, we are seeing the demand slope increase. So, obviously the most recent clearance has helped lift the demand for those systems and we expect that the clearance of additional items will continue to lift that. The Verigene system placements interestingly are going well. More conversions, because there was a number of systems that Nano has to replace prior to the acquisition that were in evaluation mode. And a lot of the reasons for staying in evaluation mode for so long was because people were uncertain about the financial condition of the company. As we assured them that they were going to be around for a while, our ability to convert some of those was improved and they were converted, but there are a still a lot of those that are available. The additional opportunity of ATLAS that you mentioned down the road, hasn’t really affected the trajectory of the Verigene conversion because there we found in some interviews with participants in the industry that there is a lot of people that like the Verigene system the way it is. There is others that want a combined system that will fit better into their work flow but other laboratorians enjoy the Verigene system as well. We are experiencing broad-based growth across their entire menu. So not only the gram positive and gram negative assays but also in the respiratory and the gastro. Everything in that portfolio is growing and contributing to the positive momentum that we are seeing with that product line.

[Homi Shamir:]

I would just say, it was interesting to see our sales force, combined sales force last week here in Austin for about four days, getting trained and getting motivated. Actually getting very excited about the opportunity. You know as somebody was telling me today that actually it was amazing to see that now we have a combined organization go to market of over 100 something people that four years ago we have three people in this [MDX] [ph] area. So we are moving in the right direction and I think, again, I am feeling fairly bullish where we go with sample to answer because of the combined sales force and because we have a unique offering both in the syndromic and in the targeted account.

[Operator:]

Thank you. Our next question comes from Tycho Petersen of JPMorgan. Your line is open.

[Steve Reiman:]

This is Steve Reiman on for Tycho. Thanks for taking my question. Maybe just first, can you give us a sense of what percentage of the Verigene business is now blood culture versus respiratory? And, sorry, if I missed this, but can you update us on the progress of launching Verigene in Japan?

[Harriss Currie:]

Yes. So first the percentage of the blood culture and everything else, it's the majority of that revenue stream. A lot more than 50%. So it's....

[Homi Shamir:]

60%.

[Harriss Currie:]

We don’t break it out but it's significant. And it continues to be a significant growth driver to the portfolio. I will let Homi talk to you about the Japanese launch of that product.

[Homi Shamir:]

Yes. We are waiting still to the reimbursement. We know reimbursement is coming, we are just hopeful it will come the next couple of months. And when I am saying come, it will arrive. The question is, at what kind of level. Our partner, they are actually thinking it will be in the higher level but nevertheless, last week or the week before, we are [touching] [ph], we are participating in major trade shows or conference in Japan. We showed the product for this time. We got an extremely good review and interest in the product and in general we are feeling in the Japanese market similar to what we have seen here in the States. They would like to move to a system that is almost sample to answer or automated system than non-automated in this respect. So we are just sitting and waiting and it's actually feeling fairly comfortable, at least with the discussion I had with them or the team has with them, that they are going to receive the reimbursement in the right amount.

[Steve Reiman:]

Got it. And then you gave us some good color on the gross margin dynamics this quarter. Can you talk about how the gross margin profile of the ATLAS System is expected to compare to Verigene? Is that expected to be accretive to Nanosphere gross margin position?

[Harriss Currie:]

Certainly the gross margin on the Atlas products will be accretive, especially to where the gross margins for Nanosphere is set today. But it is being designed with cost in mind, obviously there is an opportunity with the consolidated system to maybe charge a little more for a single unit rather than buying two units and opportunity to engineer the cost structure appropriately.

[Steve Reiman:]

Got it. And then finally, you still have a lot of cash on the balance sheet. As you mentioned, you're still generating a lot of cash, so could we potentially see you do a buyback or are you still prioritizing bolt-ons?

[Homi Shamir:]

I think, to be honest, we can all the time do buyback or pay dividend, but we are looking for additional opportunity like Nanosphere and if we find it, we will execute on that. I think Nanosphere was a very good acquisition for Luminex and we continue to search for that.

[Operator:]

Thank you. Our next question comes from Dan Arias of Citi. Your question, please.

[Daniel Arias:]

Homi and Harriss, I think that you were about $1 million or so above my revenue number for the quarter. How should we think about the run rate off of the $9 million this quarter for Nanosphere and then how back-half weighted are you thinking 2017 might be as the business ramps?

[Harriss Currie:]

So when you think about Nanosphere, Nanosphere in the quarter contributed about $9.5 million. So you annualize that and your $38 million run rate absent any growth into 2017 towards that $45 million target that we talked about for both Nanosphere and ARIES combined. We certainly would expect some progression in that revenue line item the pace of which would contribute to that 20% year-over-year growth rate of our assay portfolio. The Nanosphere portfolio historically has been growing in excess of 40%. It's been pretty significant. You obviously can't maintain that forever. So we would expect over time that growth rate would temper a little bit. Hopefully not to fast but certainly we expect that Nanosphere portfolio to be lucrative and contribute a significant amount of growth in 2017.

[Daniel Arias:]

Okay. And then, Harriss, if we're just looking at resource allocation this year, how would you suggest we look at things if we just want to sort of contemplate traditional xMAP versus ARIES MultiCode, versus Nanosphere? I guess what, from a dollar standpoint might be the sort of approximate percentages that we should have in mind when we are thinking about prioritization across the business?

[Harriss Currie:]

So if you think about R&D distribution, R&D cost distribution, you would expect that a minimum maintenance cost devoted to the xMAP technology. Currently we aren't developing new assays on the Hi-Plex technology. We reserve the right to do so in the future. But today we aren't. So there is a minimal amount of R&D that’s focused on that but a significant amount of manufacturing and maintenance and other activities that are focused there, obviously manufacture is not R&D, but costs that are allocated to that. And then you have ARIES and you have ATLAS. There is a lot of effort being put into R&D, especially given the incremental ARIES clearances that we have talked about through the end of this year. Clinical trials are big part of that and clinical trials are carried within R&D and clinical trials can run anywhere from half a million dollars to multi-million dollars depending on the number of constituents in an assay. Then will be the development of ATLAS and ATLAS, the development efforts there are significant as well as is the development of that first assay, the enteric assay, followed by the clinical trial on what is a higher plex assay. So some more complicated clinical trials and therefore it's a little more costly. So as you think about, you say that probably the number one cost investment is around ATLAS. The number two cost investment is around ARIES, the number three is on the traditional xMAP technology. In that order.

[Daniel Arias:]

Okay. Maybe if I could just sneak one more in there. Any additional thoughts on the impact of LabCorp Roche in 2018? I know you're focusing on '17 guidance here, but just relative to what you guys have said in the past, anything different versus expectations when you first talked about the issue itself?

[Homi Shamir:]

No, I mean as we keep saying to you guys, as soon as we know better if they are phasing out or not, there is no news about it. Basically concerning the CF business, we have been expecting them to depart by the end of this quarter, early Q4. We heard some rumor and I am not sure we had -- when I say rumor, I am not so sure it's hundred percent yet, that they might stay with us a little bit longer. I mean bring us more into a three year period since they inform us. Honestly, we will know better than a year from now when they would be coming closer and seeing is Roche been able to deliver to them. If Roche had been able not to step on some of our IP and our technology, and then we would see where we are going. We will keep you informed, obviously, it's such an important issue to us. And by the way, they are important customer to us as well.

[Operator:]

Thank you. Our next question comes from Brandon Couillard of Jefferies. Your question please.

[Brandon Couillard:]

Homi, could you give us a sense of your ARIES instrument placement goals for 2017? And then the part would be for Harriss, how we should think about the consumables pull through per instrument exiting the year once you have the additional four assays approved on the box.

[Homi Shamir:]

I really don’t have a -- I did not set up a goal for bulk sales and I will explain why. Mainly it's because we keep saying we are going to put boxes only in places where we are going to make money. And I said this in the beginning, about a year ago, when we set it up and that’s where we are pushing. More important to me and to the organization is that we will achieve more than couple of million dollars of sales of the ARIES during this year. We [indiscernible] all three clear assay and hopefully before the end of the year six or seven. I am looking at additional three or four which will bring us to six or seven. I am looking forward to seeing more demand, full of millions of dollars coming for contribution that eventually will help us to be in double-digit millions in 2018. So I really don’t care about the boxes. I care about the count who is going to generate revenue for us and also I would like to improve our gross margin. So just giving boxes, it cost us money. I want the boxes to generate the revenue. Now if you look at the $45 million that I keep saying that I am looking to achieve this year from sample to answer solution. Probably 10% to 15% will come from the ARIES, eventually the rest will come from the Verigene. Looking at 2018, you would see an increase probably in the percentage coming from the ARIES and eventually ARIES maybe one day will be 30% out of this portfolio. But that’s the way we are looking and also that’s the way we are compensating ourselves. We are compensating them on the revenue not the system they are replacing in the field.

[Harriss Currie:]

So when you think about pull through the ARIES system today, if you are talking about not an M1 but a full ARIES system that can do two full cartridges an hour which is 12 cassettes -- sorry, every two hours. 12 cassettes every two hours, 8 hour day. That’s 48 that you can run at an 8 hour day. The pull through today through an ARIES system is less than 10% which means it is less than 5 cassettes a day on an ARIES system. Our expectation that the pull-through the year, again, as the assays increase, the number of available assays increase throughout the year, that pull-through will hopefully be more than the 10% number but I really hesitate to give you too specific of a number other than to say we hope that will improve. We believe it will improve and will likely double from where it is today.

[Brandon Couillard:]

Thanks. That's helpful. And then just one more for you, Harriss. First on the, if you could help clarify the gross margin commentary. I think you described it as being at a low point right now. Should we expect that sequentially as we move through the year to directionally improve or lift higher? And then secondly, any goalpost you can give us in terms of operating expenses for the year and perhaps what you're building in for the effective tax rate for the year? It would be helpful. Thanks.

[Harriss Currie:]

Yes. So from a gross margin standpoint, as I mentioned in my comments, I think we are in the trough of gross margins, especially with the standard cost adjustment that flowed through that obviously you wouldn’t expect to repeat anytime soon. We do that once a year and it's normally not quite as significant and so as a result you would expect over the course of the year gross margins to temper from a little higher than where we were in the current quarter and then begin to grow as our cost position on both the ARIES portfolio and the Nanosphere portfolio improve. The margins on the Nanosphere portfolio improve reasonably significantly between the third and fourth quarters but the ARIES revenue also grew and ARIES revenue, it is very low margin right now because of the low throughput and the low absorption in a factory that is set up and ready to produce ARIES cartridges at a significantly higher rate without adding any additional infrastructure to do so. So we are well positioned to make ARIES a successful product to sell it in the marketplace but the margins are low. So as those margins begin to drift upwards, but as a percentage of revenue it becomes a bigger percentage, the upwards drift of the margin is offset by revenue becoming a higher percentage and as a result we expect in the near-term for those margins to temper in that low to mid-60s range. And ultimately it's our belief as ATLAS gets [indiscernible], which should yield better margins and that the ARIES and Nanosphere margins continue to rise that we would be able to get our aggregate gross margins back up close to that 70% range. Lot of moving parts there but I hope that answers your question.

[Brandon Couillard:]

No, that’s very thorough, thank you. And then just secondly, any goalpost you can give us, parameters for OpEx expectations for the year and perhaps the effective tax rate we should bake in?

[Harriss Currie:]

Well, if you think about OpEx and you think about it in percentages, you think about how our percentages where we ended the year, R&D was about 18% revenue for the whole year. We would expect as we move forwards in the current year that R&D would remain at/or slightly below the 18% for the year. That SG&A in the aggregate was up pretty significant for the quarter but that SG&A would continue to temper moving forward because the assembly of the sales force and the integration of that sales force is finished. There is leverage just available within G&A but we don’t talk about G&A separately but G&A and the sales and marketing costs that are coupled together as one SG&A, are roughly half and half. And so there is some leverage there as well that you expect the G&A to partly increase at all. So half of that bucket won't increase. The other half of the bucket certainly will drift up as more sales result and more commissions are paid and such that drives that, but not at the same rates of expense increase. So I think that overall, from operating profit perspective, you could expect a couple of points of improvement at the operating profit line you expect to accompany when you eliminate those onetime charges that we talked about, to move back into profitability as accretion gets delivered, as Nanosphere, the acquisition in the aggregate becomes profitable, you would expect continued upwards drift in profitability and then you would expect the effective tax rate to again to settle in just below 30%. The current year was a little strange because of the acquisition, because of some offsets in the U.S. entity that still taxed fully. So a lot of moving parts there as well.

[Operator:]

Thank you. Our next question comes from Bill Quirk of Piper Jaffray. Your line is open.

[Bill Quirk:]

Just a couple of questions from me here. First off, Homi or Harriss, can you just size up the Bototella market opportunity? And then secondly, you talked about the R&D focus and timing around clinical trials, but are you officially reiterating ATLAS here by the end of '17, or is it kind of end of '17, early '18, depending on when everything gets filed with the FDA? Thanks.

[Homi Shamir:]

Yes. Again. ATLAS, I don’t want to distance or to set up a time line but our plan is to take it to the FDA before the end of -- sorry, through clinical trial before the end of the second quarter. And we have like 12 sites that will be running it. So somewhere before the end of 2017, it can be also this time 2018, we will submit or will be submitting to the FDA. So at this stage I won't want to really provide exactly the date because it really depends on how quickly we will run those 12 sites etcetera. But, again, I just want to emphasize that from my point of view the ATLAS, as we call it now, is a nice instrument but we have already a very nice instruments which is the Verigene. And, obviously the Verigene is more simple to use and combines two boxes into one but the sales force have already the Verigene so I like them to continue to push the Verigene into the market and when ATLAS will come it will come. So my focus now and the focus of the company, the first is to deliver on the $45 million and continue to grow this number rapidly. Obviously, if we have ATLAS in 2018, it would give us another boost to both the new customer who replace a new system there and obviously improve gross margin. Now concerning the Bototella, it's not a big market opportunity as the rest of the assay. I think the [CDP] [ph], it's a large market opportunity, obviously the Group a strep etcetera. But it's something else in the bag, something else to our sales force to go and speak with the customer and there opening a few more doors for arrays potential, as I said earlier, to grow it in a more than a handful of million dollar this year.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Brian Weinstein of William Blair. Your question, please.

[Brian Weinstein:]

Not a ton left here, but just to clarify for LabCorp. How much is in your guidance for next year? Did they actually inform you on CF assays that taken out? It is just not clear to me what the status is at this point as far as your guidance and what you've heard from them.

[Harriss Currie:]

So within our guidance, Brian, is the expectation they would be gone by the middle of this year. That’s it. That’s in the center of our guidance. Obviously, if they stay a little longer that was contemplated as our guidance. The upper end of the guidance and likely they would leave earlier. So the bottom end of the guidance certainly doesn’t incorporate that. As far as the dollar amount, we haven't said what the dollar amount is going to be.

[Brian Weinstein:]

Okay. Understood. We can, I think, bake into that. And then on ARIES, I'm assuming you guys hit your 100 placement target for the year, so I'd like to just, if you can confirm that. And then also, can you describe where you are winning accounts? Are you winning head to head accounts? Are you going into more the new accounts where people aren't using molecular? Are you taking other systems out as you're winning accounts? Can you just give us some idea about the success that you've had with placements with ARIES? Thanks.

[Homi Shamir:]

Brian, first we said that earlier this year when we pre-released the result that we got into [92 or 93] [ph] system. Since then we got a few more. So I think we are very close to the 100 but it's all over. I mean some of them elsewhere, some of them new accounts. Some of them, we got some accounts that we were not there and they were Nanosphere accounts. So that actually was working very nice to us that Nanosphere opened the door to us. And so it's all over, okay. I can't point to you but what is interesting, say that we are in a major site, okay. So we are in a major site and it's not kind of an obscure site across the USA or outside the USA. And by the way, majority of the system, like 90% of the systems are installed in the USA. So it's a thing that we see that all the time because of reimbursement etcetera, we see more adaption of the system in the USA in the ARIES. In Japan, when we get the reimbursement for the Verigene, we will start seeing there also big market growth in system sales.

[Operator:]

Thank you. As there are no further questions in queue, I would like to turn the call back over to CEO, Homi Shamir, for any closing remarks. Homi?

[Homi Shamir:]

Thank you, Latif, 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 day.

[Operator:]

Thank you, sir, and thank you, ladies and gentlemen for your participation. That does conclude your program. You may disconnect your lines at this time. Have a wonderful day.