Luminex Corporation
Q2 2008 Earnings Call Transcript

Published: 2 Sep 2008

[Operator:]

Good day everyone and welcome to the Luminex second quarter 2008 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Harriss Currie. Please go ahead, sir.

[Harriss Currie:]

Good afternoon. Welcome to the Luminex Corporation conference call to discuss second quarter 2008 financial and operational results. I'm Harriss Currie, Vice President and Chief Financial Officer. Today, Pat Balthrop, our President and CEO and I will take you through our quarter two 2008 results, highlights, and the remaining outlook for 2008. We issued a press release earlier today announcing the company's results for the second quarter ending June 30, 2008. Following our prepared remarks on these results, we will have time to take your questions. In addition to the audio portion of our conference call, we have prepared a slide presentation that's available on our website at www.luminexcorp.com. To access this presentation, click on the company tab, access the Investor Relations link, and then click on the live conference call link. Our presentation will be available on our Web site for six months. Before we begin, I'd like to take this opportunity to remind you that certain statements made during the course of this presentation may not be purely historical and consequently may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements made regarding maintaining and growing revenue, the growth in demand for our products and technology and our partners' ability to enhance that growth, the increase in productivity and profitability of our installed base of systems, our and our partners' ability to achieve worldwide reach for our products, our ability to promptly respond to market opportunities within our targeted segments, the use of our secondary offering proceeds, the long-term value of our products in various strategic markets, our ability to develop new products and to penetrate existing and new markets, our ability to develop new strategic partnerships, our long-term financial targets, our strategic plan and product development milestones, the advantages of our regulatory compliant processes, the competitive advantages of our products, our business outlook and projections about revenues, cash flow, expenses and market conditions and their anticipated impact on the company, information regarding development, timing, and performance of new products, and any statements of the plans, strategies, and objectives of management for future operations. These forward-looking statements 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 press release or on our annual, quarterly, or other filings with the Securities and Exchange Commission. Also, certain non-GAAP financial measures as defined by SEC Regulation G may be covered in this presentation. To the extent that any non-GAAP financial measures are covered, a presentation of, and reconciliation to the most directly comparable GAAP financial measure will be presented in this presentation and will be available on our Web site at www.luminexcorp.com, in accordance with Regulation G. I'll now turn the call over to Pat Balthrop, President and Chief Executive Officer of Luminex.

[Pat Balthrop:]

Thank you, Harriss. Good afternoon and welcome to our second quarter 2008 earnings call. We're extremely pleased with our accomplishments for the quarter. We achieved another set of records in revenue, in gross profit, in consumable sales, and in royalty revenue. We successfully completed a secondary offering which rose over $74 million and we finalized and advanced several important deals and milestones which we'll discuss today. On the call today I'll review our second quarter financial highlights and our other significant events and achievements, Harriss will then provide you with a more detailed review of the financial results, I'll return at the end of the call to provide an update on our annual revenue guidance, and then we'll open the line for your questions. Luminex delivered record revenue of $24.3 million for the second quarter, a 38.7% increase over the second quarter of 2007. Included in this record revenue number is another quarter with over 200 systems sold and shipped which represents seven consecutive quarters of system shipments of 200 or more. Consumables and royalties, which are our highest margin revenue items, not only set records but also grew at 157% and 55% respectively versus the second quarter of 2007. All that combined to achieve an overall gross margin of 68% for the quarter, again an all time high. Lastly, we're continuing to manage our SG&A expenses which for the second quarter in a row came in almost exactly at the run rate that we established in the fourth quarter of 2007. On June 16, we announced a secondary common stock offering of 3.5 million shares including a 15% over allotment option. These shares priced at market on June 25 at $19.91 a share. We also executed the overallotment option raising a combined net total of $74.8 million. We are pleased with the results of the offering. and with an even stronger balance sheet. we're now positioned to promptly respond to market opportunities within our targeted segment. These proceeds will be used for general corporate purposes which could include continued investments in R&D, investments in companies, technologies or products, capital expenditures, and potential acquisitions. Additional highlights for the quarter, the demand for xMAP Technology continues to be robust with another quarter of over 200 instruments sold. And our B's royalties and end user sales were all at record highs. In addition, we continued to improve our already strong market position in Cystic Fibrosis. Just one example, the Ontario Newborn Screening Program has accomplished the Canadian Ministry of Health and Long Term Care's mandate to screen all newborns born in Ontario for 28 different rare genetic disorders. The program began offering genetic testing for Cystic Fibrosis using the xTAG Cystic Fibrosis kit from Luminex, our CF39 product. And xTAG RVP, our respiratory viral panel, the first respiratory panel of its kind to be cleared by FDA which they did in January, continues to perform ahead of internal expectations as we gear up for the upcoming flu season. We continue to execute our growth strategy, focusing on four key elements, the further development of our product pipeline which includes the development of new assays such as RVP II, the GI and fungal panels as well as the development of our instrument platforms such as the new FlexMAP 3D which is scheduled for introduction late in 2008; entering new market segments where there is a distinct benefit of using Luminex technology to improve efficiency, accuracy, and flexibility such as the molecular diagnostics infections disease segment as well as the animal health, biodefense, and Newborn Screening market segments. We'll continue to penetrate our existing markets, working to steadily expand our installed base of instruments. And finally, another important growth driver is to continue to drive and develop our strategic partnership business by working closely with our current partners and selectively adding new partners who will enhance and expand Luminex's total growth. Executing this strategy, we've achieved several milestones so far in 2008 including the FDA clearance of RVP, the shipment of our 5,000th instrument, and new partnerships and agreements such as with Abbott for global distribution of RVP and with Tyson Foods in the Food, Safety, and Animal Health market. Future milestones in 2008 will include the submission of our ASR products, CF70, CF97, and AJP for review by FDA, and the continued development and expansion of the available menu of products for both Luminex and our partners. As I mentioned before, we're excited about the upcoming launch of our FlexMAP 3D system which is on track for a fourth quarter market release. And we continue to progress toward the launch of our Newborn Screen assays. We anticipate transferring from research to manufacturing in the third quarter and initiating field trials with key partners. Customers with whom we've discussed this product are excited about applying the efficiency of multiplexing to the growing number of tests for each newborn. And finally, we realize the importance of automation to our customers and we're continuing to make nice progress in this area. Now, I'll turn over the call to Harriss who will review the financials.

[Harriss Currie:]

Thanks, Pat. Let's begin the financial review with a summary of our progress over the past few years. This slide provides a snapshot of the company's results and progress over the past two years. Our revenue of $24.3 million for the quarter, when viewed as another data point on the trend, is very encouraging. As Pat mentioned, our total revenue grew by approximately 39% over the past year, all organic and at a compound annual growth rate of 35% over the past two years including the effects of the acquisition. System shipments remained strong and our technology continues to be in high demand as our business model continues to provide significant reach and growth. Our installed base grew by almost 20% since the second quarter of last year. As healthy as that growth rate in the installed base is, please note the chart in the bottom left of the slide which displays our quarterly royalty revenue. Royalty revenue grew by 55% over the prior year, almost three times that of the installed base growth, demonstrating that our installed base of instruments is growing more productive and more profitable. The data supporting this is shown in the bottom right chart where you can see that annualized end user sales in our installed base was over $234 million, a new high. For the second quarter of 2008, we had $6.3 million in system revenue, $8.5 million in consumable revenue or microspheres, 157% growth over the second quarter of 2007; $3.4 million in royalties, 55% growth over the second quarter of 2007; $3.5 million in reagents or assays; $1.2 million in service revenue; and $1.2 million in all other revenue which includes spare parts, shipping, licenses, amortization, and training. Our quarterly revenue distribution for the second quarter of 2008 is shown here compared to the second quarter of 2007. Note that in the prior year, our high margin items, consumables and royalties, and assays represented only 53% of total quarterly revenue. Partially as a result of the acquisition and additionally as a result of growth in our consumables and royalty revenues, the current quarter has approximately 64% of these high margin items. We anticipate as a result of our expectations of relatively constant system placements that these high margin items will continue to become a more significant percentage of our revenue mix and will contribute to an upward movement of our gross margin percentage. On a year-to-date basis, we have $12.9 million in system revenue; $15 million in consumable revenue, growth of 86% over the first half of 2007; $7 million in royalty revenue, growth of 46% over the first half of 2007; $7.3 million in reagents or assays, $2.5 million in service revenue; and $2.5 million in all other revenue. Again, we can see the higher percentage of the high margin items in the current year relative to the comparable period in 2007. Remember that in the current year, we have six months of LMD activity included in the year-to-date results and only 4 months of LMD activity year to date during 2007. Total consolidated revenues for the second quarter of 2008 as I said were $24.3 million, up 39% over the second quarter of last year. Gross margins improved 9 points from the prior year, and we reported a net loss of $959,000 or $0.03 per share. First half 2008 revenues are up 39% as well with increased gross margin percentages relative to the prior year period. As a reminder, the second quarter and year-to-date 2007 figures include an $8 million expense associated with the write-off of IP R&D or in-process research and development related to the LMD acquisition. One item that Pat mentioned earlier in his remarks was our goal of holding SG&A expenses close to the fourth quarter 2007 level excluding unanticipated items. Total SG&A expenses in the fourth quarter of 2007 were $11.9 million and for the second quarter of 2008, they were $12.1 million. As you can see, we've accomplished that goal for the current quarter. This slide displays revenue and operating income or loss by segment for the quarter and first half ending June 30 of 2008 and 2007. Items of note for the quarter include 49% growth in Technology Group revenue and improvement in Technology Group profitability due to those increases in consumable and royalty revenues. Gross profit in the Technology Segment increased from 57% in the second quarter of '07 to 68% for the second quarter of '08 primarily as a result of the significant increase in consumables and royalty revenues. We achieved 203 system shipments in the second quarter, increasing the cumulative shipments to date by almost 20% over the second quarter of '07 for total cumulative shipments of 5,402. Quarter two gross profit percentage for the Assay Segment increased to 67% from 65% in the second quarter of '07. Significant improvements in the operating loss of the Assay Group, you may recall that in the second quarter of '07 included an $8 million write-off of IPR&D. Items of note on a year-to-date basis include 34% growth in Technology Group revenue and improvement in Technology Group profitability, first half Technology gross profit increased to 66% from 60% in 2007, 63% growth in the Assay Group revenue. As a reminder, year to date 2008 revenues for our Assay Segment include six months of revenue from LMD and LBG while revenue for the six months ended June 30, 2007, include six months of LBG and only four months of revenues from LMD, as the LMD acquisition, formerly Tm Bioscience, was finalized on March 1, 2007. First half gross profit percentage for the Assay Segment increased to 71% from 64% in the first half of 2007. Another metric we use to track the progress of our business is what we refer to as cash income. Cash income is net income for the period adjusted for significant non-cash items like depreciation, amortization, and stock compensation expense. Here you can see that in the second quarter of 2007, which was the first full quarter of consolidated operations following the acquisition of LMD, we had approximately $600,000 of cash loss for the quarter which was similar to our quarterly performance during '06. In the first full quarter of consolidated activity, as we had indicated, the acquired operations were dilutive to our previous performance. During the third and fourth quarter of 2007 and continuing through the second quarter of '08, our efforts to grow revenues, expand margins, and control expenses, played a large role in the improvement in the cash income metric. A reconciliation of cash income to GAAP net income is provided on a separate slide at the end of this presentation. It can also be viewed on the Investor Relations portion of our Web site at www.luminexcorp.com. This slide shows consolidated consumable revenue, consolidated royalty revenue, and the fourth quarter moving average of consumable revenue with the elimination of royalties paid and consumables purchased by Tm Bioscience or LMD in periods prior to the acquisition. We believe this demonstrates the long-term health of our consumable and royalty streams and we expect these trends to continue. As previously noted, consumables and royalties now account for a higher percentage of total revenues. Another item of note is the relative volatility of the consumable stream. Bulk purchases are those purchases in excess of $100,000 from a single customer for the quarter were approximately $7.2 million or about 85% of total consumable sales. Bulk purchases in the aggregate have continued to increase over time and have contributed to relatively consistent increases in our consumables stream on an annual basis. However, we still have quarterly fluctuations for which timing is difficult to predict. Even with the volatility of bulk purchases, the long-term moving average has continued to climb as a result of the climb in aggregate consumable revenue. Additionally, the non bulk purchases have remained at fairly predictable levels of between 1 million and 1.4 million over the past two years. At June 30, our consolidated balance sheet reflected total cash and investments of $112.6 million compared with $34.2 million of total cash and investments at December 31, 2007. As of June 30, our daily sales outstanding or DSO on accounts receivable was 38 days compared with 51 at December 31, '07. At June 30, 2008, we had approximately $8.5 million of consolidated inventory and as we've indicated previously, we attempt to manage our inventory to a level that appropriately reflects our current production needs and expectations of future quarterly sales. Working capital at June 30, 2008 was approximately $120 million compared with the $40.8 million at the end of 2007. The increase obviously was primarily driven by the proceeds from the secondary offering. As a reminder, all the initiatives that Pat and I have discussed are designed to deliver the long term financial objectives from a revenue, investment and profitability perspective as you see here. Please note that these new numbers take into account the incremental business related to the Tm acquisition, now known as LMD. Based on our current financial performance, we do not believe that these targets are unreasonable. I'll now turn the call back over to Pat to review the outlook for the remainder of 2008.

[Pat Balthrop:]

Regarding our annual revenue guidance, we are reaffirming our previously stated guidance of between $95 million and $105 million of revenue for the year 2008. In addition, we advised our investors hold us accountable for continuing to deliver against our strategic plan and product development milestones. We previously stated and now believe even more strongly that our regulatory compliant processes, procedures, and status will be a strategic advantage for us for years to come. With regard to expenses, over the longer term we intend to invest in R&D and scale this expense with the company's growth, eventually arriving at 15% of revenue in R&D expense. We believe that this investment in combination with the significant investments being made by our partners will ensure the long term competitive advantage of xMAP technology. Finally, our goal for 2008 in SG&A is to manage our expenses closely, holding them at or near the fourth quarter 2007 run rate, net of one-time items and exchange variances. In summary, we're extremely pleased with our results for the second quarter. We're continuing to execute our growth plan, making progress with our product pipeline and advancing our relationships with our key partners. This ends our formal remarks today. We'll now open the line for your questions. Robbie, if you could now open the line for the Q&A please.

[Operator:]

(Operator instructions) We'll go first to Peter Lawson with Thomas Weisel Partners.

[Peter Lawson:]

Hi, Pat. I just wondered if you could talk through the dynamics of the Assay business. It looks kind of sluggish quarter over quarter. Is that from seasonality?

[Pat Balthrop:]

Hi, Peter. The Assay business continues to be robust as you know particularly with RVP and frankly with CF as well, although CF is not a seasonal business, it is a concentrated business where we have a significant portion of our revenue in a few customers. The result of that is that the timing of orders and such, as well as the seasonality of RVP can affect the numbers from a growth perspective. To reassure you, however, we continue to add customers, RVP continues to track well. Our Assay business continues to be robust. We're even more optimistic than we ever have been.

[Peter Lawson:]

And at what scale does that business get breakeven?

[Pat Balthrop:]

I'd actually have to run the numbers. As Harriss noted in his remarks, we're at 70% gross margin in that business now and when we acquired LMD a little over a year ago you'll also remember that our factory utilization was less than 20%. And so we don't have a lot of expense or capital expenditures to add to scale that business. So the point of all that is, it won't take much. I don't have the numbers off the top of my head though.

[Peter Lawson:]

Okay, and then the Newborn Screening tests, what are the tests in that and how does it overlap with your partners?

[Pat Balthrop:]

The products that we're working on as we've talked about previously are in multiplex products in protein or immunoassay categories, congenital adrenal hyperplasia and congenital hyperthyroidism. That business, as you probably know, is also concentrated in the public health labs in the United States and in the public health labs in Western Europe. The market leader in that particular segment at the moment is PerkinElmer and with a single plex ELISA type of business. And so that would be the product that we would displace if we were to be successful.

[Peter Lawson:]

Okay, thank you so much.

[Operator:]

Thank you, we'll go next to Tycho Peterson with JP Morgan.

[Sanjay Nam:]

Hi, this is Sanjay Nam [ph] sitting in for Tycho Peterson. Thank you for taking the questions. I was wondering first of all if you could give us an update on the next version of the RVP panel, particularly any more granularity around the timing of that and what specific improvements we should be looking forward to.

[Pat Balthrop:]

Sure. The RVP II is in the pipeline. As we mentioned previously, we expect to sell the current product for this upcoming flu season and have RVP II available for the flu season that will be starting in about one year from now. And RVP II will basically have the same constituent coverage, or we expect it to, the 12 markers that we have now that cover 85% of the respiratory viral infection market. It will be faster, measured in the two to three hour timeframe. And one last thing is, it will also be – this is difficult to quantify as we sit here, but it will also be significantly easier to use which we measure in terms of hands-on time. Our current product has hands-on time of about an hour to an hour and a half. Our expectation is that RVP II in addition to being faster in the two to three-hour timeframe will also be significantly easier with less hands-on time to be performed by the technician.

[Sanjay Nam:]

Okay, that's helpful. And also I was wondering if you could comment on the competitive landscape for the RVP panel, particularly from Hiagen [ph] and Prodesa [ph] and if you're seeing any recent impact there. I know it's kind of early but –

[Pat Balthrop:]

Yes, so I will start by saying that we have not seen a lot of impact. The advantages of xTAG RVP in the marketplace can be summarized in the following ways. Number one, the product is FDA cleared the other ones you mentioned are not. It's also commercially available, although I acknowledge Prodesa is in fact FDA cleared. The 12 constituents that we have cover 85% of known respiratory viral infections according to CDC data and the xTAG RVP will also deliver results basically in one shift, in about six hours. In comparison to the two products that you mentioned, Prodesa is faster, it delivers results in about three hours. Only has four viruses available to cover about 25% of known viral infections, so a lab has to make a choice, would they rather get results in three hours and miss three out of four positives, or would they rather deliver results in one shift and cover 85% of known infections. As it relates to the Kaisan [ph] product, that product is not FDA cleared and is not expected to be. It's also a product that in order to get the appropriate viral coverage, you have to run two different tests. As you may know, the adenovirus is included in one of their panels and all the other respiratory viruses are included in a separate product. And so the customer, to get the adenovirus coverage, which is extremely important in the marketplace, as you may remember, the adenovirus had a particularly virulent strain this past season, so customers are very concerned about that. And so they would have to in effect run two tests to get the appropriate coverage. And we're finding from a competitive standpoint, the FDA clearance and that factor are the ones that are most important. The reason why the adenovirus, by the way, is in a separate panel, is because of the viruses that are included, the adenovirus is a DNA virus, the others are RNA viruses. And it's easier to do the test in RNAs in one and DNAs in the other. And so we're speculating, but I expect that's why they made the product development choices they made.

[Sanjay Nam:]

Okay. And one last quick question. I didn't catch for your systems shipments, what was the portion that was in the technology segment?

[Pat Balthrop:]

We did not mention that. We mentioned the total was 203 systems shipped.

[Sanjay Nam:]

Okay, thank you.

[Operator:]

Thank you. We'll go next to Daniel Owczarski with Avondale Partners.

[Daniel Owczarski:]

Yes, thanks. Hi, Pat. Hi, Harriss. Just a quick question on the R&D line, it looks like there is a little bit of a sequential uptick there. Anything specific where you're putting more resources?

[Pat Balthrop:]

Not really, Dan. We have the same products in the development pipeline that you're familiar with. Sometimes there can be a little bit of fluctuation over the run rate. Most of our R&D expense is people, obviously salaries and benefits and such. But as we bring a product to market, you also sometimes have to acquire materials. And so that's not a ratable number and so that's why you see a little bit of fluctuation. But keep in mind that we have been consistent when we've talked about our R&D spend. We expect that number to scale with the company, so although SG&A we expect to be pretty conservative on through 2008, R&D we've always said will likely continue to scale.

[Daniel Owczarski:]

Okay. And I think you get asked this every quarter, but as far the system placements for 203, any comments on customer mix or where you're getting the most traction or any specific partners that are really ramping up well?

[Pat Balthrop:]

Well, I would say we're pleased with our continued technology demand, another quarter of 200 plus. We're also pleased with the balance there meaning how instruments are being sold across all of our partners. When I say that, what I mean is we pay attention to not just how our partners perform which we can see by looking at our own numbers, but we also pay attention to the degree to which they emphasize their Luminex related businesses when they talk publicly. And so I know that you're aware of the fact that some of our partners, Millipore, Invitrogen and others over the past couple of quarters have emphasized the fact that their Luminex business continues to be robust. So with all that said, we're seeing a sort of nice balanced performance.

[Daniel Owczarski:]

Okay and then just the last question would be about the HLA market, any general comments on how that market is progressing or growing? I know it's important for you or how One Lambda, if they're continuing to gain market share, any overall comments there?

[Pat Balthrop:]

Well the HLA transplant market is very important to us and of course One Lambda is one of our two largest partners, the other being Bio-Rad. And they are the market leader and are the market leader by a significant margin. They are one of the few companies in that space that are a full product provider meaning they serve both the solid organ transplant market well as well as the registry market which is the bone marrow transplant market. They continue to do well, I think they always have. And one of the reasons why they're doing well is because what the market is asking for in terms of product performance and capability, they're able to deliver in large part because they have access to Luminex technology. When I say that, what I mean is the customers demanding both protein and nucleic acid based applications, we can do that, our technology is flexible enough to do that so they're able to respond to the market. There is a need for speed and accuracy and so on is a critical element in that market segment and they're able to address that because of the capability of xMAP technology. So One Lambda remains one of our largest and one of our most significant partners. They're doing great and we have no reason to believe that that will slow down.

[Daniel Owczarski:]

Okay. And then just is there any way to show or to comment on like order of magnitude is the market where they're participating? Is it growing just as fast or faster than it was maybe this time last year?

[Pat Balthrop:]

Well, it's difficult for me to really comment on that in any intelligent way Dan because first of all, as I'm sure you're aware, One Lambda is a private company, so access to their financial, all of their financial data, is not possible. We know that they are actively converting customers from their legacy methods to the Luminex based methods. So they are growing fast and they're growing faster than the market and faster than their run rates because not only are they taking share but they're also converting their existing legacy methods to xMAP technology based methods. But as far as what percentage that represents of their total, it's impossible for me to know that.

[Daniel Owczarski:]

Okay. Thank you.

[Operator:]

Thank you. (Operator instructions) We'll go next to Matthew Scalo with Canaccord Adams.

[Matthew Scalo:]

Hi, guys, congratulations on a good quarter. I wanted to start off with – I think I've got to go back to 2005 was the last year that we saw sequential increase in consumables. Usually you guys have a strong first quarter then it kind of ticks down in the second quarter. I'm looking at the bulk orders kind of sequential increase of $2 million. Does that reflect new types of kits being sold into the existing distributor channel? Is it one or two new distributor panels that are really stepping up here, kind of rephrasing I guess a prior question here.

[Pat Balthrop:]

So let me comment on the consumables or our B business by stating the obvious by saying we're extremely pleased with how that's going and the overall trends. But the growth in that business Matt is being driven by a couple of factors. First of all, keep in mind that the increasing installed base is where you should start. And as Harriss mentioned in his remarks, our installed base versus the same period in 2007 grew by 19% to 20%. But it's also true that since royalties are growing at 3x that rate, Harriss also mentioned that the royalties were growing at 55%, so since royalties are growing at 3x that rate, each system that we're shipping is more productive so that creates a stacking effect. And the number of bulk purchasing partners, which represented 85% of our total consumable revenue in the quarter, was 11 or 12. And so we're still experiencing the bulk purchase phenomenon and we expect that to continue. But as you look at the details with the increasing installed base, with the royalties growing faster than the installed base, so the number of applications that are available are growing faster, the only thing we can really advise you to consider is to go back to that four quarter moving average number that we always point to. Harriss talked about it in the slide, I think it was Slide 16 or something like that. The trajectory of that number looks quite promising. We have no reason to believe that the four quarter moving average will be negatively affected going forward, bulk purchases or not.

[Matthew Scalo:]

Is there pricing power that has changed maybe over the last two quarters as far as your ability to increase price on just bulk beads?

[Pat Balthrop:]

No. I mean the agreements that we have with our partners Matt are all at a specific dollar per milliliter of beads purchased number. They get no benefit from buying in bulk. The price if they buy $100 or $2 million on a per milliliter basis is the same. Was that your question?

[Matthew Scalo:]

It is. Thanks. Is there any way that I could get a sense of the I guess increasing penetration of magnetic beads in consumables or just in general?

[Pat Balthrop:]

The number is relatively modest. I frankly don't know the number off the top of my head as I sit here. The magnetic beads are growing fast but they are a very small portion of the total. And so I'm assuming as I read between the lines, so to speak, of your question, is part of the number there, the impact of the number because magnetic beads are becoming an ever increasing portion and they might be more expensive, the answer to that or my response to that would be that would be an erroneous conclusion

[Matthew Scalo:]

That was part of it. I guess the other part was just the tie to automation and larger systems running higher volumes.

[Pat Balthrop:]

You have to keep in mind that the magnetic beads which we're very excited about for the future still represent a small portion of the total. And the reason for that is because, the reason why, we have 85% of our revenue in the quarter that was purchased in bulk. The reason why our partners purchase in bulk is because they want to consume some of that in R&D, but a lot of those beads are going into the factory as well for products that were previously developed and are now commercially available. And so the automation trends and the role of magnetic beads in the automation trends, we expect to be significant in the future, but they're not a material issue today.

[Matthew Scalo:]

Thanks. And can I just ask one last question as far as the timing of the 3D? You mentioned it's an introduction by year end. Is that clear or is it a full launch? How should I be thinking about the fourth quarter?

[Pat Balthrop:]

You should be thinking about the fact that we're going to commercially launch the product toward the end of the year, the fourth quarter of this year. And frankly, the degree to which we aggressively roll it out, as I think I mentioned when I saw you in D.C. last week, will be partially affected by the timing because it's not a good idea to launch a product between Thanksgiving and Christmas. And so therefore, we may have the product commercially available but if we get too far into the fourth quarter, we'll probably delay any kind of a significant launch until the early part of 2009.

[Matthew Scalo:]

Okay, thanks, guys.

[Operator:]

Thank you. And at this time we have no further questions. I'd like to turn the program back over to Mr. Pat Balthrop for any additional or closing comments.

[Pat Balthrop:]

Thank you, Robbie, and I'd like to thank everybody who dialed into the call and the webcast. We appreciate your interest in the company and your confidence in the company and we look forward to seeing you again.

[Operator:]

That does conclude today's call, you may disconnect your lines at this time.