Luminex Corporation
Q1 2009 Earnings Call Transcript

Published: 9 May 2009

[Operator:]

Welcome to Luminex Corporation first quarter conference call. (Operator Instructions). At this time, for opening remarks and introductions, I would like to turn the conference over to the Director of Investor Relations, Ms. Mimi Torrington.

[Mimi Torrington:]

Welcome to Luminex Corporation's conference call to discuss first quarter 2009 financial and operational results. I am Mimi Torrington, Director of Investor Relations. Today, Pat Balthrop, our President and CEO; and Harriss Currie, our Chief Financial Officer, will discuss our first quarter results, highlights and the outlook for 2009. We issued a press release earlier today announcing the company's results for the first quarter ended March 31, 2009. Following our prepared remarks, 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 is available on our website at www.luminexcorp.com. To access this presentation, click on the company tab, access the investor relations link and click on the live conference call link. Our presentation will be available on our website for six months. 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. These forward-looking statements speak only as of the date hereof and are based on our current beliefs and expectations and are subject to known or unknown risks and uncertainties, some of which are beyond the company's control, that could cause actual results or plans to differ materially and adversely from those anticipated in the forward-looking statements. Factors that could cause or contribute to such differences are detailed in our Form 10-K for the year ended December 31, 2008, and our quarterly reports on the 10-Q for subsequent periods filed with the Securities and Exchange Commission. We encourage you to view these documents and the cautionary language we have included at the beginning of the slide presentation we are presenting today. We undertake no obligation to update these forward-looking statements. Also, certain non-GAAP financial measures are 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 measures will be included in this presentation and/or be available on our website 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:]

Welcome to our first quarter 2009 earnings call. We're pleased with our accomplishments for the quarter, especially in these unprecedented economic times. The company continued to execute well. While sequential quarterly revenue was down, it's important to note that this resulted from caution in overall customer spending behavior, timing of purchases in consumable and assay categories and a lighter than anticipated flu season. We executed well, delivered good sales growth in a down market, and key metrics improved nicely, such as gross margin, royalties and end user assay sales. So we remain confident regarding 2009. In addition to the financial results for the quarter, we also advanced and completed several project milestones, which we'll discuss today. I'll review our financial highlights and other significant events and achievements that occurred during the first quarter of 2009 and since our last call. I'd also like to take a moment and discuss with you the current market trends, our objectives for 2009, as well as some of the key projects and success factors that we see moving forward. Harriss will then provide you with a more detailed review of the financial results, and I'll return at the end of the call to provide an update on our annual guidance for 2009. Then we'll open the line for your questions. Moving to an overview of the numbers, Luminex delivered revenue of $25.6 million for the first quarter of 2009, an increase of 11% over the same period in 2008. I mentioned earlier that we remain confident regarding 2009. One of the reasons is that even in what everyone recognizes as a tight capital spending environment, system shipments were again in excess of 200 for the first quarter. We shipped 203 systems in total, including two FlexMAP 3D systems. This represents the tenth consecutive quarter of system shipments for the company over 200. Cumulatively, shipments have now passed the 6,000 mark with 6,097 systems shipped. That total is up 17% from a year ago. Royalty and consumables revenue for the first quarter of 2009 were $4.5 million and $7.6 million, up 29% and 16% respectively over the first quarter of 2008. We still continue to experience timing volatility in our consumable revenue as a result of bulk purchasing patterns by our partners. Royalty bearing sales as reported by our partners continued to grow nicely to $65 million for the quarter, a 21% increase over the same period in 2008. This shows the continuing demand for our products and our partners' assays. Consolidated gross profit margins were a healthy 69% for the first quarter compared with first quarter 2008 gross profit margin of 66%. Our consolidated gross margin was driven by percentage increases in our higher margin items. These accounted for 64% of consolidated first quarter 2009 revenue compared with 60% in the prior-year period. Assay group sales were $4.5 million for the first quarter. Due to the mild flu season, the sales of our xTAG Respiratory Viral Panel were comparatively light in the first quarter as labs did not need to replenish product shipped last year. This is reflected in our assay group sales number. However, the mild flu season in the first quarter has been offset by favorable effects in our RVP product resulting from recent events related to H1N1 or swine flu, which I'll touch on later. Also during the quarter, as we previously announced, we settled the litigation with the Research Foundation for the State University of New York and the Board of Trustees of the University of Illinois. As part of the settlement, we made a one-time cash payment of $4.35 million with no admission of fault by Luminex and a complete release of all claims. We felt that this was the right thing to do in order to put this behind us and avoid potentially greater future expenses, and ultimately it would be better for the company and our shareholders. Given the unique nature of the overall economy, regarding expenses, as a management team, we felt it was prudent to exercise one of the company's fundamental principals, that being that resources lag results. Therefore, as we entered the year, we elected to continue to execute control over expenses, which clearly contributed to profitability, which, excluding non-recurring items, was an earnings per share of $0.04. In addition to these financial metrics, we also achieved several strategic milestones and events. We previously discussed the importance of our China strategy. We recently received our registration certification from the SFDA in Beijing for the LX200 system, a key milestone for the company. This further opens a large market as we execute our geographic penetration strategy with the establishment of a corporate entity in China that will enable us to provide greater service and improved logistics to our partners and end customers and build our business longer term. During the quarter, we launched xPONENT 3.1 software for use on our LX100 and LX200 systems. xPONENT 3.1 includes more than 65 new features designed to benefit scientists and laboratory professionals across research and clinical diagnostic markets in simplifying laboratory workflow and increasing productivity. We've been receiving very good feedback on our new FlexMAP 3D system. Full market launch is ahead of schedule, and we're very excited about the future opportunities this exciting new product offers. On the partners side, Luminex signed an expanded license and supply agreement with Charles River Laboratories as part of our initiative in animal health. Just yesterday, we concluded our annual scientific symposium Planet xMAP here in Austin. We're extremely pleased with the turnout as hundreds of potential customers and partners attended the three-day event. At Planet xMAP, scientists, researchers and medical professionals came together with Luminex and our partners to review scientific studies and performances of products and assays built on our xMAP technology. Renowned featured speakers included former FDA Commissioner, Mark McClellan; and Francis Collins, who headed the Human Genome Project. In addition, we extended stimulus package information and resources to all the attendees, which will assist them in grant preparation and grant writing. Overall, we were extremely pleased with Planet xMAP. Looking at our financial progress across several metrics, we continue to be confident for the remaining of 2009. While you will notice the sequential decrease on a quarterly basis in our consolidated revenue, I'd like to remind you that there have been non-recurring one-time items that impact our results from time to time, such as the one-time price adjustment that we discussed in the third quarter 2008. Also, we do experience volatility in our consumables and assays, as you know, due to timing of partner orders, as well as flu season patterns. As I mentioned previously, in the upper right hand panel of this slide, you'll see that we continue to build our installed base as we, again, shipped over 200 instruments. In the lower left, you can see that royalties continue to grow nicely. In the bottom right panel, the consumable four quarter moving average has grown nicely as well over the past several quarters. I know I don't have to explain the unique nature of the current economic environment. We have seen some effects as have our partners. This often affects capital equipment sales most acutely. We were pleased with the instrument shipments that we had in the quarter, but the market is different now than it was a year ago. Our customers and partners tell us that there is still capital in budgets, but that the purchase cycle has lengthened as customers exercise caution about spending. Industry consolidation is still expected, although the pace is uncertain. We have seen some effects of this over the past year, mostly affecting our partners. The stimulus package is delivering a buoyancy effect on the research market, which adds confidence to our partners who serve the science research channel, but it also appears that any effects of the stimulus package will not be seen until the later part of this year. Of course, there is the recent H1N1 outbreak that has affected Luminex and all of us. I'd now like to spend a few minutes on the recent outbreak of H1N1 or swine flu. According to the CDC, as of May 7, there were 642 identified cases in the United States, and according to the World Health Organization, 2,099 cases globally. This virus took us and the rest of the world by surprise. When we launched our xTAG RVP test last year, we could not have possibly predicted the swine flu outbreak that we're experiencing today. We knew that xTAG RVP would be able to dramatically change how respiratory viruses are diagnosed, 12 viruses detected at the molecular level quickly, accurately and simultaneously, but we could not have begun to know the role it and in particular its influenza subtyping capabilities would be able to play in an outbreak like the one we're facing today. xTAG RVP is playing a critical role in clinical labs and public health labs, because it's the only commercially available FDA-cleared product that can subtype influenza A. Our RVP product can provide the information that a physician and a public health official needs. Does this patient have a respiratory virus? If so, is it flu A? Most important of all, if it is flu A, is it seasonal flu or a more serious subtype? We work closely with our customers and national state provincial and local health authorities and validated with real samples, including H1N1 samples from various countries, the performance of our assay. For these reasons, we have experienced worldwide interest, and we have increased production accordingly. We also dedicated a session at our recent Planet xMAP symposium to the topic of H1N1. Our plan for 2009 remains the same. As a company, we're executing on our key opportunities such as RVP and the upcoming full commercial launch of FlexMAP 3D. We will continue to expand our menu, hit our milestones and since resources lag results, exercise cost and expense discipline. Our installed base continues to grow, and we will drive profitability. I'd like to take a moment to comment on the external environment in 2009, our strategic outlook and how we continue to believe we are well positioned. There are several factors to consider when as an investor or potential investor you evaluate Luminex and our business. First, it's important to realize that Luminex has a strong balance sheet with a significant cash position with over $120 million, and we're generating cash. Second, our management team has consistently delivered on our commitments, achieved our milestones and demonstrated that we can execute. Third, Luminex operates in market segments that are relatively diversified. We have product partnerships and opportunities in life-science research, in clinical diagnostics and in specialty segments such as animal health, biodefense and newborn screening. As we've seen recently with RVP, the demand for xMAP technology remains strong because of its unique multiplexing capability, its impact on reducing labor content, and improving productivity. In tough times, when headcount additions are rare and current laboratory staff is stretched, customers respond favorably to adopting our technology and this demand also includes our assay products. We have opportunities for growth with cost effective assay products like xTAG RVP. We also have additional market penetration opportunities in segments where we currently market products. In uncertain times avoiding risk including regulatory risk is common among customers. So, given our favorable regulatory status, we are very often on attractive alternative source of assay products. In lean times like these, capital equipment purchases are often constrained, and like other companies, we have seen this recently, but we have found historically that the purchase of our instrumentation is minimally affected in these types of market conditions due to the significant productivity benefits of xMAP technology and because the price point of our system is relatively low compared with other products. And finally, our product pipeline is strong with productivity enhancing products like the FlexMAP 3D and several others that are launching over the coming months and years. In this environment, companies that are well positioned are those that generate cash and have a strong balance sheet, that have a good track record of keeping commitments and execution, with strong end user demand across the diverse business. Obviously, we believe that Luminex fits all these criteria and therefore we believe that we remain well positioned. For all these reasons, in these unprecedented times, our 2009 plan remains simple. To stay focused on continuing the successful execution of the strategies and pans that we have had in place over the past few years. I'll now turn to the discussion over to Harriss to review the financials and then I'll return to discuss our guidance. After that, we'll open the call for your questions. Harriss

[Harriss Currie:]

Thanks, Pat. Let's begin with financial review with a look at our consolidated results for the first quarter of 2009. This slide is a summary of the operating results reported in today's release. Total consolidated revenue for the first quarter was $25.6 million, an increase of 11% over 2008 first quarter revenue of $23 million. Consolidated gross margin for the first quarter was 69%, compared with first quarter 2008 gross profit margin of 66%. We are continuing to manage SG&A expenses and for the fifth quarter in a row, we delivered on that objective. We'll take a look at a chart of the actual operating expenses in just a bit that supports this achievement. Overall, the growth in revenue related margin expansion and operating cost control were the primary drivers behind the improvement in adjusted net income and adjusted earnings per share compared to the first quarter of 2008 of $2.7 million and $0.07 per share respectively. As we mentioned before, we don't have a significant FX effects yet incorporated into our financial results; although as we become more global and begin to transact in local currencies, we may be exposed to additional FX risks. In the current quarter, we only had approximately $27,000 of FX related adjustments incorporated in our results. For the first quarter of 2009, we had total consolidated revenue of $25.6 million distributed as follows. $6.1 million in system revenue representing the sale of 203 systems including two FlexMAP 3D systems, $7.6 million in consumable revenue or microspheres representing 16% growth over the first quarter of 2008, $4.5 million in royalties representing 29% growth over the first quarter of 2008, $4.2 million in reagents or assays representing 9% growth over the first quarter of last year, $1.4 million of service revenue and $1.7 million in all other revenue, which includes spare parts sales, shipping fees, license amortization, and training charges. Our quarterly revenue distribution for the first quarter of 2009 is shown here compared to the first quarter of 2008. Note that in the prior year, our higher margin items consumables, royalties and assays, represented only 60% of total quarterly revenue. In the first quarter of this year, these high margin items represented approximately 64% of the total revenue. We anticipate that these high margin items will remain a significant percentage of our revenue mix. Next, I want to show a few slides to illustrate some of the volatility we experienced in our individual revenue streams and others that will illustrate long-term consistency. This slide shows consolidated revenue for the past nine quarters. An interesting factoid not apparent from this chart is the upward progression of gross margins over the period presented from 63% in the first quarter of 2007 to 69% in the first quarter of this year. Over that time, system revenue as a percentage of total revenue has dropped from 34% in the first quarter of '07 to 24% in the current quarter. Assays, consumables and royalties on the other hand have increased as a percentage of revenue from 51% in the first quarter 2007 to 64% in the current quarter. This upward shift in gross margin was anticipated as a result of relatively constant system placements and the follow-on revenue that has resulted. I'd now like to discuss the key components of revenue to provide you a little more color on our results. The upper left chart illustrates how the steady rate of quarterly system shipments has affected our cumulative shipments totals, and that contributed to the upward shift in margins that I referred to on the last slide. As Pat mentioned earlier, this was the tenth quarter in row in which we shipped 200 plus systems. The upper right chart shows overall consumables or microspheres stream for the last nine quarters, and we can see the relative volatility of this revenue stream over the time period presented. However, the long-term moving average, the metric on which we recommend our investors focus has risen 56% over the prior year and has risen 127% over the first quarter 2007. This resulted in a 51% compound annual growth rate over the period presented. I'd like to take a moment and comment on bulk purchases. This line breaks out our consumables stream into bulk and non-bulk purchases. As a reminder, purchases in excess of $100,000 for a single customer are considered a bulk purchase. A couple of items to now here are that one, bulk purchases are by far the largest component of our consumable revenue stream representing approximately 80% of our total consumable revenue in the current quarter, and two, the consistency of the non-bulk purchases over the last nine quarters. Another item of note is that the number of customers buying in bulk is a very low percentage of total purchasing customers. For the fist quarter of 2009, we had bulk purchases totaling approximately $6.1 million from 11 customers ranging from $120,000 to $3.2 million and non-bulk purchases totaling approximately $1.5 million from over 300 customers. As our partners continue their development and commercialization efforts, we expect the overall dollar amount of bulk purchases to continue to climb on a long-term basis. Although quarterly consumable sales remain volatile, this slide shows the upward trend in annual consumable revenue that we currently expect to continue. You can see that over the past four years we've experienced a compound annual growth rate in consumable revenue of approximately 39%. The chart on the lower left illustrates the relative consistency of our royalty revenue stream. One item to note here is that historically the first quarter of each year presented has varied from the overall trend as a result of the timing of minimum royalty payments that are typically collected in the first quarter of each year. Finally, the chart on the lower right shows our reagent revenues. Due to volatility from consumer and partner ordering patterns, and a lighter than anticipated flu season, sales of reagents in the first quarter of 2009 were down sequentially. However, as Pat mentioned earlier, recent events related to the swine flu outbreak have had an offsetting favorable effect. Regarding our operating expenses, we made a significant commitment to R&D, as you can see on the top slide, but over time, and you can see some progress here. We expect R&D as a percentage of revenue to trend towards 15%. It's also important to keep in mind that this chart reflects only Luminex's internal R&D expenditures. Our partners also have significant R&D efforts on our technology underway. With respect to SG&A, we had another successful quarter in executing our plan to closely manage our SG&A expenses. We do expect that over the course of 2009 that there will be modest increases in SG&A, and although we expect the absolute dollar amount of SG&A expenses to increase, we expect SG&A as a percentage of revenue to decline. Finally, we're very pleased with our management team's ability to control this expense line item during the first quarter of 2009. Our consolidated balance sheet reflects a total cash and investments of $122.1 million at March 31, 2009 compared with $124.4 million of total cash and investments at December 31, 2008. Our investment balances are held in highly liquid securities and funds predominantly backed by the full faith and credit of the US government. As a result, we do not believe that our cash reserves are significantly exposed to fluctuations in market activity. As previously disclosed, Luminex reported goodwill and acquired tangible assets in conjunction with the L&D acquisition. The goodwill asset is subject to impairment analysis on a regular basis and the intangible assets are amortized over their estimated useful lives and also reviewed for impairment annually. To-date, no impairment of our goodwill balance has been necessary. As of March 31, 2009, our daily sales outstanding or DSO on accounts receivable was 49 days compared with 36 days at December 31, 2008. We expect that overall, our consolidated DSOs will remain less than about 55 days. At March 31, we had approximately $11.4 million of consolidated inventory on hand. 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. Obviously, unforeseen demand can affect our ability to manufacture and deliver systems on specific requested dates. Working capital at March 31, 2009 was approximately $119.2 million compared with $131.5 million at the end of 2008. The decrease in the current quarter was primarily driven by decision to shift a portion in our investment mix to slightly longer-term securities to take advantage of higher interest rates. As a reminder, all of 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. Based on our current financial performance, we do not believe that long-term targets are unreasonable. I'll now turn the call back over to Pat to review the 2009 outlook and revenue guidance.

[Pat Balthrop:]

Thanks, Harriss. As you saw in our release, we currently expect full year 2009 revenue to be between $125 million and $135 million. Of course, this adjustment reflects the effect in the first quarter. Although the market conditions remain uncertain and we've experienced some incremental revenue opportunities such as H1N1, the full year effect of these are not yet clear, so the guidance reflects our current best projection. In terms of systems sales and placements, as we have previously stated, we expect to place between 175 and 225 Luminex systems per quarter in 2009 with pricing dependent on the configuration in partner mix, and we continue to expect placements within this range. In addition, we advise that our investors hold us accountable for continuing to deliver against our strategic plan and our product development milestones. 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. We believe that our investments in combination with the significant investments being made by our partners will help ensure the long-term competitive advantage of xMAP technology. Finally, although not part of our guidance, our goal for SG&A is to continue to manage our expenses closely. We demonstrated in 2008 and in the first quarter our ability to control expense. We are allowing, however, for some incremental increase to fund our long-term growth initiatives as required. In summary, we are pleased with our first quarter results and we continue to be excited about 2009 executing our growth plan, advancing our product pipeline, and enhancing relationships with key partners. This ends our formal remarks today. We'll now open the line for questions. Justin?

[Operator:]

(Operator Instructions). We'll go first to Dan Leonard with First Analysis.

[Dan Leonard:]

You're talking a lot about swine flu. Could you help us try to quantify the potential benefit to you from the swine flu outbreak?

[Pat Balthrop:]

The difficulty with that, Dan, is understanding clearly demand. If we were having this call just two weeks ago, for example, I am not sure we'd be even talking about that particular topic. The overall market opportunity that we talked about in the past for RVP, assuming the total market is in the $75 million to $100 million range, that's assuming a couple of things; North American and Western European market segments as opposed to the rest of the world and that there're 1.5 million to 2 million tests that make up that $75 million to $100 million number. Of all those numbers I just gave you, the one that's most difficult to predict as it relates to whether it will change is the number of tests that will be generated, because I think you would agree that patient and physician behavior in the coming months will be different than it has been in the past because of increased awareness and concern over H1N1. So, what we're trying to convey on the call today is to make sure that as a result of that, we expect the number of customers and the volume that we have to increase. I think it's premature for us to try to quantify that in any significant way just because the situation remains so fluid.

[Dan Leonard:]

Well, you mentioned that you're increasing production on an already elevated level of inventory, and I assume you would have seen a change in ordering patterns over the last couple of weeks already. Would it be possible just to get some insight into what that looked like?

[Pat Balthrop:]

Well, the way to think about that is that we expected the normal second quarter ordering pattern to be in effect. Then when the news broke and we started interacting with the public health authorities and getting calls from customers, we moved quickly to be able to increase production. So, we called our oligonucleotide suppliers and made sure that they increased production and all the other components, and then we scaled up the factory accordingly. We obviously began receiving increased orders, and we're filling those as fast as we can, allocating product when necessary to ensure that we can supply all customers accordingly. So, what we could tell you is the fact that we definitely expect the second quarter RVP number to be a higher number in revenue than it was in the first quarter, but how much higher and how that affects the rest of the year is extremely difficult to forecast at the moment.

[Dan Leonard:]

Okay. Pat, in hindsight, should we look at the bump in your assay group revenue in Q3 and Q4 of last year from its run rate of $4 million to $4.5 million a quarter up to a run rate of $6 million to $6.5 million. Should we view that as stocking of the RVP products in front of the flu season?

[Pat Balthrop:]

There is really a couple of pieces of that, and I'll give it to you in three pieces. Only one of those am I going to be able to quantify, I am predicting, to your satisfaction. In the third quarter, we had three things that happened. Number one was the fact that there was some RVP ordering that occurred. As we've said in the past, it's typically under normal conditions. It's in the third quarter that customers purchase product for the purpose of validation and in anticipation of adopting a particular product, but not because they're receiving a lot of samples. So, that was one of the things that you would see increase third quarter reagent revenue over second quarter. The second factor was timing of orders that we received from our biggest customer. So, as we've disclosed previously, our biggest reagent assay product is our cystic fibrosis line. Our single biggest customer is Genzyme. Genzyme, as they manage their own inventory, they may have some swings from quarter-to-quarter. That was one of the things that happened in third quarter. The third one and the one that we talked about before, but I'll remind you of, and the one that I can quantify, was the one-time price adjustment. I believe that number was just under $350,000 in the third quarter that reflected a price adjustment to Genzyme based on a six-year contract extension that we had agreed to with them during the quarter. As part of that contract, there was a price adjustment that included a year-to-date price catch-up that we recognized all in the third quarter.

[Operator:]

We'll go next to Doug Schenkel with Cowen and Company.

[Doug Schenkel:]

You placed at least 200 instruments over the past 10 quarters. You again got instrument placements to a range of 175 to 200 per quarter over the balance of the year. My understanding is, or at least my understanding was, that this range went below 200 in part because of the capacity associated with the 3D, which you launched in the fourth quarter. Assuming this is correct and keeping in mind that there were only a couple of 3Ds placed in Q1, unless 3D placements really start to ramp over the next couple quarters, why shouldn't we be thinking that your quarterly instrument placements would be at least at the midpoint, if not at the higher end, of the range?

[Harriss Currie:]

You said our range is 175 to 200. It's actually 175 to 225.

[Doug Schenkel:]

I'm sorry, 175 to 225.

[Harriss Currie:]

The range itself results from volatility that exists, a little bit like in our consumable revenues, a potential with our partner purchasing patterns. As we have mentioned previously, a number of our partners have forecasting requirements. They provide a minimum forecast for us right at the beginning of each quarter. Typically when you roll those up, they fall near the bottom of that range. Because we don't have a lot of visibility on the upside of that range, that's how we derive the bottom number. That bottom number certainly could happen, and we would be happy from a consistency of system placement basis if systems fell anywhere within that range. The last time we were below that range, obviously, was 11 quarters ago. The range itself is not affected by FlexMAP 3D sales, because those are produced on a different line. We have the ability with or without the production of FlexMAP 3D to produce in one shift about 300 LX200s a quarter. So, if the demand was 300, we could produce all 300 even if the demand for FlexMAP 3D was up as well.

[Doug Schenkel:]

You don't think the placement of a 3D at an end market customer necessarily means that if it weren't for the 3D that they might have taken on multiple legacy instruments?

[Pat Balthrop:]

Doug, this is Pat. I think that you should not think of FlexMAP 3D as customers that would adopt that system that otherwise would have purchased LX200s. We've attempted to convey in previous discussions that FlexMAP 3D is primarily designed to take us and our partners into market segments that LX200 has not had the speed or the capabilities that those customers require. One of the ways that we get to that is, to the number of customers that we have that have more than four or five LX100s or LX200s is a single-digit number of customers. So, there is not a lot of customers that we have out there that would take FlexMAP 3D to replace their current LX200s and customers that are adopting the technology, that will be able to adopt it with FlexMAP 3D, have not been able to in the past because of the throughput capabilities of the current instrument.

[Doug Schenkel:]

Your consumables growth moderated a bit more than your royalty income did. Given that it looks like royalties actually did a little bit better than consumables in the quarter, I am just wondering if you might be able to talk about how we should be thinking about that. It seems like your end user demand is holding up pretty well, but maybe the consumables demand didn't hold up quite as well. I am just trying to think about how we should look at that from a moving forward perspective.

[Pat Balthrop:]

You might be tired of hearing is talk about these bulk purchases, but the one thing we try to be consistent about is for our investors to pay attention to the royalties line in particular. The reason for that is because royalties are affected only by one thing, and that is the consumption of assays on the installed base of systems. So that number goes up on a pretty steady basis over time. It is true that we have occasional one-time royalty payments, catch-ups and so on that may make that number move a little bit, but certainly not at the same rate as consumables. So, as our partners continue to build out their menu and as we continue to increase the installed base, then the consumables will continue on their upward trend over the longer term, but from one quarter to the next, they may have a peak or a valley. So, the way to think about the consumables over the longer term is to look at that four quarter moving average and to look at the royalties trend and those two are both pointed in the right direction, which is why we remain optimistic.

[Harriss Currie:]

Let me give you another way to think about it also is that of all our revenue line items, the consumable line item is the one large line item that stretches over multiple quarters. Typically when we sell a system, it gets delivered to an end user in a quarter. Typically when we recognize a royalty, it's for the sale of an assay that took place over the prior quarter. Service revenue is for service that's performed or amortized over that particular period. Same with training and other stuff. Consumables, because of those bulk purchases, they may buy consumables and use those over one, two, three quarters and then come back three quarters later and buy another bulk item. So, the consumables are very difficult to relate to any of the other revenue line items that we have. So, I know you want to try to build a relationship there, and I think over time one may develop, but in the short term, I think it's very difficult to quantify that relationship.

[Doug Schenkel:]

Last question, anything that really surprised you in terms of how the end markets held up in the quarter? I know some of that is hard to comment on given that you don't have perfect visibility, but some other companies in this space have indicated that academic government spending may have moderated a little bit in the quarter as researchers spend more time focusing on their grants for stimulus funding in the hospital end market. Even though most of your instruments are placed at low to no cost, there has been some talk that hospitals are even reluctant to take on instruments that are placed on reagent rental agreements. Anything that you can comment there?

[Pat Balthrop:]

I would only say, Doug, that we're aware that other companies have reported market softness in capital equipment for a variety of reasons. As I mentioned during my formal remarks, we have seen some of this behavior as well. I would say that it's our impression that we haven't perceived it to the same degree that we perceive other companies have. Sales activity remains high, but the sales cycles appear to be extending. Customers still have money in their budget, but they're just being a little more cautious about the rate at which they spend that capital. That said, we still did another 200 systems in the quarter. So we pay attention to what other companies have to say. We listen very closely to what our partners offer. The diagnostics market, as you noted, is not affected as much because of the fact that a lot of the systems they're placed at no charge, but also because if you use our largest diagnostic partner, as an example One Lambda, who is in the transplant business, whether there is an economic slowdown or not, it doesn't typically affect organ transplants. That's not an operation that anybody puts off. So the underlying demand in the marketplace in the diagnostics market is one that is not as affected by economic conditions. So, we're watching the whole capital equipment part of our business and interacting with our partners very closely. We're cautious about that, but we remain optimistic. Of course, you heard the 175 to 225 number we mentioned before.

[Operator:]

We'll go next to Scott Gleason with Stephens.

[Scott Gleason:]

Harriss, can you give us on a dollar basis what bulk shipments were down sequentially on a quarter-to-quarter basis, on a percentage basis?

[Harriss Currie:]

In the fourth quarter, bulk purchases were about $6.8 million, and they were $6.1 million in the current quarter.

[Scott Gleason:]

Okay. So, down about $700,000 sequentially?

[Harriss Currie:]

Yes.

[Scott Gleason:]

You guys have a substantial amount of cash on hand. I know you've talked in the past that one of the potential uses for that cash would be to acquire additional proprietary content for your assay segment. Can you maybe just give us a sense if that's still pretty significant strategic initiative of the company?

[Pat Balthrop:]

Well, obviously, when we did the secondary offering, we did it for a reason. We're, obviously, pleased given recent events with our balance sheet. It gives us a lot of flexibility to execute on a variety of strategic opportunities, including assay opportunities, as you mentioned. We remain open to potential acquisitions and other strategic deals, and we are spending management time in evaluating whether any of those makes sense for us to do. If we did them, we would expect them to be consistent with our strategy. What that means is it would be in one of the market segments that we have repeatedly stated are our focus, perhaps additional content in molecular diagnostics and in the research markets. If we were to do anything, it would most likely be in the nucleic acid segment. The reason for that is because we currently have active partners in multiplex proteins and the likelihood that we would do a deal in that space is not very high, just as it's not very high that we would do a deal in the transplant segment because we have active and successful partners there. So, as we go about doing evaluating all the opportunities, as you can tell, we've given it some thought. We have some criteria set. They include financial criteria as well as strategic criteria and technology criteria, and we're remaining very disciplined about that. Obviously, when you have a balance sheet like ours, we get a lot of calls, but we're being very careful about how we go about evaluating any opportunities so that we can make sure we do the right thing or the company and for the shareholder.

[Scott Gleason:]

Pat, obviously, you guys have been very successful in the past in adding new strategic partners. Can you just give us a sense for potential discussions that are going on there and whether that number should continue to go up this year, the number of strategic partners that you guys have?

[Pat Balthrop:]

Over the past several years we have added the occasional strategic partner, Scott. Last year, we did a deal with Becton Dickinson, as you may remember. The number of partners that we have is not our issue. We have a lot of partners. What we need is active engaged partners that invest in the technology, buy beads from us, pay us royalties and so on. So, the number of partnerships that we enter is not as significant as the nature of those partnerships. So, we continue to pursue various partnerships in order to advance the company's business and strategy. How many we do is not as important as the quality of those partnerships. So, I wouldn't really pay a lot of attention to whether we're making a lot of announcements about partnerships, but more the announcements that we do make how substantive they are.

[Scott Gleason:]

Then just one last quick question. Can you guys maybe give us a sense on a year-over-year basis, the RVP product, what the impact was in the quarter just so we can get a sense for what the impact was on the numbers there?

[Harriss Currie:]

Remember, the first quarter of last year was right after clearance. The RVP sales in the prior year were pretty small relative to where they are today. So with this being the full first quarter of commercialization, what we can say, because we don't give line item commentary on specific assay sales, that they were substantially larger than they were last year.

[Scott Gleason:]

On a sequential basis then, Harry, can you maybe compare with the fourth quarter and just give us a sense for what the change might have been there?

[Harriss Currie:]

Roughly flat.

[Operator:]

We'll go next to Peter Lawson, Thomas Weisel Partners.

[Peter Lawson:]

Harriss, I wonder if you can give us an idea of the run rate that the assay business has to be on to be profitable?

[Harriss Currie:]

Peter, that actually depends on the assay mix there. As you know, our different assay products carry different margins. Assuming the exact same mix of assays and the same margins, one could draw the conclusion that net of the litigation assignment to that that we would have to generate $5 million or $6 million of assay revenue at the equivalent mixes. The issue there is that as the assay revenue grows, that mix is obviously going to change and margin is going to change on the incremental assay. So it's really hard question to answer.

[Peter Lawson:]

Does that margin decrease as you get more revenue through the business?

[Harriss Currie:]

The assay segment?

[Peter Lawson:]

Yes.

[Harriss Currie:]

Remember, we said that we think overall that the assay segment margins should be 70%-plus.

[Pat Balthrop:]

Maybe this will help you. We have made a lot of our incremental R&D investments over the past year or two in the direction of our assay business. So, we have a lot of R&D that's going on now for products that will be introduced obviously 2010, 2011 and so on. We expect to continue to increase the level of R&D investment in the assay business, but as Harriss mentioned, it's dangerously close to profitability now. So we expect to continue to invest in that to drive gross margin dollars and so on in contrast to what we believe we've achieved in R&D in technology group, the core business here in Austin, which is more or less critical mass where we don't expect a lot of significant R&D investment. So, when you look at the assay business, if you project the company's revenue growth over the longer term, more and more of that is going to come from the assay business, and we're going to continue to invest in that business, leveraging the previous R&D investment for sure, but also trying to build out our assay menu over time.

[Peter Lawson:]

During the quarter, did you see any inventory destocking by your partners on the consumables side? Was it one large partner or multiple partners?

[Harriss Currie:]

Inventory stocking?

[Peter Lawson:]

Destocking.

[Pat Balthrop:]

Not that we know of, Peter. We don't have any information or data that leads us to believe that timing of [de-purchases] or whatever was out of the ordinary in comparison to what it might have been a year ago.

[Peter Lawson:]

I wonder if you can just provide some more color around the DSO issue. Was that a large customer or was that kind of just a general thing you were seeing across the board?

[Harriss Currie:]

DSOs really are dependent upon the terms of the partners we sell to, timing of the placement in the quarter. Typically, first quarter DSOs you would expect to be a little longer than fourth quarter DSOs, just because in the fourth quarter, a lot of the sales take place before the holidays. The first quarter, there is a lag of those sales. So they happen more towards the end of the quarter. So that timing by itself can cause shifts in the sales and payment patterns.

[Pat Balthrop:]

One other thing that might be helpful is we believe, and I think Harriss has said this in the past, that about 50 days DSO is what our business should normally run at. Acknowledging that, we have had a couple of quarters in the past where it's been in the 30s. So therefore, the first quarter DSO, I would suggest, is not the anomaly. It's more the one that's in the 30s that we consider to be an anomaly.

[Peter Lawson:]

Okay. So we shouldn't read anything into that about the macro-economy.

[Pat Balthrop:]

We don't think so, no.

[Operator:]

We'll go next to Derik De Bruin with UBS.

[Unidentified Analyst:]

This is Dan in for Derik. Pat, I know you haven't talked too quantitatively about booked or expected revenues for the RVP test, but when we think about next year, are you able to make any comments about the level of expansion beyond the current clinician base that you foresee as a result of the RVP [FAST] test? How should we think about the growth there?

[Harriss Currie:]

Well, that's a difficult question to respond to, Dan, given the recent events. Now, I think it would be a fair criticism for you to say that's assuming that you would have answered my question before this thing happened, which I'm not sure that I would have been able to do then. The best I think we can do is, as things progress and as this very fluid situation becomes less fluid and maybe more firm, that we'll be able to add some additional color to that. The best I can really do for you is to tell you that we know what we did in the first quarter on the topline with RVP. The second quarter is going to be a higher number than that, but which is counterintuitive given the seasonality, which, if nothing else, tells you that the whole respiratory viral situation is unusual. So, I can give you a number. I am just not sure I can give it to you at a level of precision and accuracy that would be what you would want.

[Unidentified Analyst:]

Okay. I was actually even picking H1N1 out of the picture and just thinking about what the RVP FAST brings as far as improved performance. Is there a percentage of clinicians that you now think you'll be able to reach or you'll see some uptick from that maybe weren't as onboard with the last tests or just waiting for the second version or a faster version?

[Pat Balthrop:]

Sorry, I didn't catch that new one. So the RVP FAST remains on track in terms of development. A lot of situations like this H1N1 thing, good news bad news. The good news is that we have more customers ordering product. The bad news is a lot of those customers are also customers that we would call in to do clinical trials for RVP FAST. They're otherwise distracted today, but we're working through that with them. The RVP product that we're selling today is the one that was in the pipeline when we acquired Tm. As I am sure you recall, that product performs very well, but there is a couple of key problems that our customers have told us about. One is that the time from sample to answer is too long. It's 6, 6.5 hours, and it has a number of steps in it that they would like reduced. So, RVP Fast will be obviously faster, closer to three hours sample to answer, and the number of steps has reduced dramatically down to two or three from what is today five or six. So, the response we've gotten from customers who have seen the product is very favorable, and we think we can sell it to more people, because there are some customers who just haven't adopted the current product because it takes too long and it's more complicated than they would like it to be. What that would actually mean in terms of numbers of customers or revenue we have in our forecast for the year; however, everything about that forecast is now in question because of those same customers are also affected by what's happened with H1N1. It is true that RVP Fast will have an incremental effect, and we always expected it to, but the magnitude of that is by definition affected by what's happened with swine flu.

[Unidentified Analyst:]

Harriss, you guys are right in the middle of the target margin range for your long-term goals. Do you think you could see getting to the upper end of that range by 2010 or in 2010 as you start to add some of the higher margin assays?

[Harriss Currie:]

I certainly can see getting to the upper end of the range. 2010 certainly is a possibility to be in the 70s, but it's going to depend on mix. So I say that with a big qualifier that is it possible, certainly it is. We could certainly enjoy the fact that it got there, but no guarantees.

[Pat Balthrop:]

Dan, the other thing to think about is we built that model with the assumption that we want to continue to place hardware that will then consume those higher margin items. As you know, we're rolling FlexMAP 3D out now, expanding the instrument platforms that we have and taking us into new market segments. In 2010, we expect to do that at the other end of the market with MagPix. Of course, when you place an instrument at our hardware margins in anticipation of future revenue in the form of assay sales or bead sales, then in that period when you have a relatively higher portion of hardware sales, then that has a dilutive effect on your gross margins. So, our long-term strategy is to continue to be in that 70% range plus or minus a few points, because the more instruments we have in the field, the more dollars of earnings we generate. We know that that's obviously what we're trying to do.

[Unidentified Analyst:]

Lastly, any update on the avian and/or newborn screening assay as far as development or timing? With the Avian assay, is there anything to suggest that maybe the H1N1 outbreak may translate into a higher testing for poultry as farmers look to get more vigilant with protecting their flocks?

[Pat Balthrop:]

The updates are that those two projects remain on track, and we expect them to be end of 2009 fourth quarter-ish timeframe for product availability. As far as the flock monitoring, when you say avian, I am assuming that you mean our flock monitoring process. Just to remind you about what we're doing there is we're working with Tyson and with Tyson's flocks. They inoculate their flocks with vaccines and then test for the antibodies. On a statistical basis, they'll take a sample from a breeder or every X number of chickens and then run that sample to ensure that the antibodies are presented and therefore that the vaccine remains effective. What they vaccinate for is something that is an industry standard and currently does not include avian flu or anything else. I think strategically, however, the point that you make remains a good one, and that is that the fact that food animals are involved in infectious diseases and so on, we believe over the longer term, we'll increase the amount of emphasis on testing those in those markets before the food animals are slaughtered or so-called animal health and then afterwards in what is normally referred to as food safety. Our technology, again, longer-term is very well positioned there, because if they test for more and more things then that's a multiplexing problem that we can address. So, I think it's a longer-term issue rather than immediate opportunity.

[Operator:]

We will go next to Daniel Owczarski with Avondale Partners.

[Daniel Owczarski:]

Pat, can you talk a little bit more about the timing for RVP fast? I thought that you wanted to get it out for the next flu season, but if it's not at the FDA yet. Is that still an aggressive expectation I have already for stocking over the summer?

[Pat Balthrop:]

I don't think so, Dan. This is a 510(k) submission. The current product that's we are selling today was what is called a de novo 510 (k). To have 510(k) status, there needs to be what is called a predicate device, that is a product that has already been cleared by FDA and it is against that already cleared product that the new product is compared with clinical data and so on to facilitate clearance. Traditionally, the 510(k) review cycle has been about 60 days, and so that has been true for 20 years, and so we expect RVP fast once it goes to FDA to be on roughly a 60-day review cycle so, therefore, as we generate all the data and the data goes in, as long as we get that product available by end of the summer, we just have to make sure that we have it in by mid-summer in order to have it available for sale by third quarter and fourth quarter for evaluation by the customer.

[Daniel Owczarski:]

Then outside of RVP, in this second quarter so far, are you seeing any changes in ordering patterns for assays or consumables? I understand that it sounds like you are still confident of demand out there, but maybe pointing to a change in ordering patterns for the weakness in the first quarter and I understand the historical perspective, but is there any data recently that makes you think that demand is still out there and this is just temporary in this first quarter?

[Pat Balthrop:]

Well, I think the way to think about that is just to go back to the guidance number, the revenue guidance number that we talked about. We clearly have some increases and decreases with things like RVP. We certainly have some changes in the market based on capital equipment sales and so on that we talked about earlier, but if we had any reason to believe that the assay sales that we had or that we expected rather were going to be dramatically affected, I think that we would have reflected that in our guidance. Once again, just to remind you that the thing that dominates our assay sales are the two biggest product lines we have are cystic fibrosis and RVP and cystic fibrosis is concentrated in a relatively few number of customers and so we have a pretty good idea about what's going on with those customers. It is not something that we have to do a lot of market forecast about. We can go directly to the customer and assess that.

[Daniel Owczarski:]

Okay. Similar thinking for consumables?

[Harriss Currie:]

With consumables, Dan, that is just really a function of all purchases. You have to be careful; you don't look at it as a trend or a falloff, as this has happened before and it's pure the timing of these bulk purchase from these customers. Over the past couple of quarters, we've had like 13 in the third quarter of last year, 12 in the fourth quarter, 11 in the current quarter that number could just as easily have been 13 or 14 this quarter, but it wasn't. So, you have to pay attention to the long-term moving average and watch that, and even though that's dipped once or twice historically, the longer-term trend is upward as our partners continue to place systems and the systems they place continue to consume beads and assays.

[Pat Balthrop:]

So, Dan, on the consumables, just to be crystal clear, we are pleased with the overall trends there. The quarter-over-quarter decline is not concerning to us. I would draw your attention to what's happening with the royalties and what's happened with the installed base, both of which have continued at their historical rates. We do still experience the bulk purchase phenomena as we've talked about numerous times. We do expect that bulk purchase phenomenon to continue. The key here is the long-term trends.

[Operator:]

Your next question comes from Tycho Peterson with JPMorgan.

[Unidentified Participant:]

Hi. This is [Sangeet] sitting in for Tycho today. Thanks for taking the questions. If I could go back to the H1N1 opportunity, more of a clarification question; could you kind of tell us where the demand is coming from? Is it mostly your regular customers? In terms of market share, recognizing that you had the only FDA approved test. There are some other tests that customers can potentially use to try to find whether it's A or B and then use your test for kind of the final step of the process and also see if there was any demand coming from internationally?

[Pat Balthrop:]

Yes, do you have access to the slide presentation? Are you looking at the slides as we are talking?

[Unidentified Participant:]

It's actually through the webcast so it's kind of frozen on the last page.

[Pat Balthrop:]

Okay. So, that's good. I am going to change the slide here now, okay?

[Unidentified Participant:]

Okay.

[Pat Balthrop:]

So, can you see it?

[Harriss Currie:]

It will take you about 20 seconds if you are on the webcast.

[Unidentified Participant:]

Okay.

[Pat Balthrop:]

So, we put a slide together to try to address some of the issues that you mentioned and so the way to think about what's happening in the market is shown here. When a patient presents to the healthcare system, they have symptoms of some type of respiratory infection, fever, et cetera. So, if they go the physician today, and particularly given over what's happened over the last couple of weeks, then they get a flu test done sometimes in the physician's office, most often outside the physicians office, but it can typically go one of two directions assuming it's not going to go to a viral culture. As you mentioned, it could go to a rapid or other type of test that tests for total flu A, and if the patient does have flu A and they get a positive result, two things happen, as you can see on the left-hand side of the slide here. First of all, the physician and the patient are confused and concerned with that flu A positive because H1N1 is flu A, of course, and so what they're really concerned about is do I have this new pandemic virus? The answer is if you do a rapid or other total flu A test alone, that positive result doesn't tell you whether you have anything other than one of many viruses, and the sample is sent to a public health lab, CDC or state health lab in particular for subtyping. As you may have heard in the press, those public health labs are swamped at the moment with literally hundreds of samples that they have to processes, almost all of which are either negative, because they haven't been tested before, or they're total flu A positive but not subtyped. Now, same situation when a patient presents and the flu test is done with xTAG RVP because of it's subtyping capability they get one of two results if it's a positive. Number one, it's positive for flu A and positive for one of the seasonable subtypes and so the conclusion is seasonal flu. You may be undergoing unpleasant symptoms, but you will resolve the infection, liquids, chicken soup and bed rest, right? Or it's a positive flu A but negative for the subtyping for seasonal flu, which means you should be concerned and the sample needs to go to the state health lab. So, the customers that we're interacting with are the ones that we are telling this message to and they understand it. The general public, and frequently the ordering physician does not, and so we have some things in a plan to try to improve that. Most of the customers that we have now are either hospital labs or a clinical reference lab, like one of the publicly traded names, or their state health lab. So, in the United States there are approximately 40 state health labs that have the capability to do molecular testing, and we have our product in a significant number of those, less than half but pretty close to half. So, as we work with those state health labs, the way to think about xTAG RVP over the longer-term is, it has the potential to be the triage test to determine seasonal flu or not, and if it's not then you use a lot more resources and improve the overall systems response time to determine whether it's a concerning subtype by being able to test only the ones with the CDC swine flu test that are subtyped as indicating that that test should be performed. So, therefore, the customers that we're serving are those hospital and clinical reference labs, as well as the state health labs.

[Unidentified Participant:]

Okay, great, thank you. In the past you talked about when your partners are acquired by some of the larger players there is a bump up in terms of sales and I was wondering initially when they're going through the acquisition or the process if there is any disruption, for example, with Tepnel acquisition by Genomic Health and Panomics by Affymetrix, I know recently.

[Pat Balthrop:]

So, as you know, we have some experience here in terms of consolidation of our partners by others, as well as consolidation by our partners. Panomics was acquired by Affymetrix as you mentioned, at the end of last year, Tepnel was acquired by GenPro I believe that deal closed the first week of April. That trend may very well continue. As you also mentioned that has typically proven to be beneficial to Luminex and we believe that it will be beneficial in these cases. However, our experience has shown that there is a period of time during which those companies who have been acquired are effectively integrated into the new entity. But once that gets done, it becomes a beneficial event for Luminex because the companies that are acquired are typically acquired because they are outgrowing the market and almost all of that is driven by their xMAP technology based product, that is the Luminex based products. Larger companies including companies like GenPro, for example, that have more resources after that integration is complete, provide more global presence, more financial resources, invest in R&D and invest in sales and marketing resources that over a longer period end up having a favorable affect on bead purchases and royalty payments and so on. We have had that experience in the past, as I mentioned, with companies like Millipore who acquired a couple of Luminex partners, as well as with what is now Life Technologies when they were In Vitrogen they also acquired a Luminex partner and we had a favorable affect from that. So, for all those reasons, once integration is complete, we expect to have a favorable effect in this case because we look at the situations and we assess them as being very similar to those that we have experienced previously.

[Unidentified Participant:]

Great, and one quick question for Harriss. Could you breakout the system shipment for technology versus assay?

[Harriss Currie:]

I can breakout total revenue for technology versus assay, I said technology versus assay, you mean, system shipments. We only had about five systems shipped in the assay group, and the remainder were shipped in the technology group.

[Operator:]

We will go next to Alastair Mackay with GARP Research and Securities.

[Alastair Mackay:]

Patrick, I was wondering if you could say anything about the FlexMAP 3D customers that you sold those two units to. Can you characterize them in any way?

[Pat Balthrop:]

Sure, Alastair. The customers that, including the two in the first quarter, and those that have gotten the early versions of the product are typically in one of two class of customers; big pharma or big research. Those products that are being used today, the FlexMAP 3D customers are using the product today, are for the most part have adopted FlexMAP 3D because of its throughput capabilities, less so because of its increased multiplexing capability. As you may remember, we designed the instrument with a number of different features, but the two main ones are the fact that it's three times as fast as our current instrument and it can multiplex up to 500 whereas the current instrument multiplexs up to 100. We designed the instrument in such a way so that all the assays that have been developed on our current instrument platform are compatible with FlexMAP 3D as well, so another way of saying that is the first 100 beads that we have on the 500 bead plex that we have on FlexMAP 3D, those first 100 beads are the same 100 beads that we've historically been providing to our partners and, therefore, the assays that they used in prior years that they used those beads to develop those assays are, therefore, readable and compatible with FlexMAP 3D. The number of assays that are available today that are over 100 plexes is pretty much zero so, although we expect that to change over time, therefore, the customer that are buying the instrument today are buying it because it's faster, and those are, as I said before, big research or big pharma that are for the most part doing multiplex protein analysis with the system.

[Alastair Mackay:]

In a way this next question relates to that, can you talk a little bit about in the technology group your customers and partners use of the technology for nucleic acid based assays and tests compared to immuno assays. Is there a trend there? Things holding steady?

[Pat Balthrop:]

Well, I would say, Alastair, that within the technology group, which is where that piece would reside, the reason why it would reside there is because the life science research market segment is where academic research and pharma biotech research would reside, and we serve those markets today by way of partnership with companies like Bio-Rad, Millipore, Life Technologies, and all the products that are sold in that market on our current instrument platform are multiplex protein assays, with the sole exception of we do sell beads directly to some researchers who then develop their own nucleic acid panels for specific research projects, but we don't have a significant amount of bead business in life sciences research that is nucleic acid kits. There are more beads sold for home brew or other types of assays that are developed by researchers. The reason why we included the 500 plex capability on FlexMAP 3D was because we believe that that's an opportunity for us and for our technology and we intend, now that we have the appropriate technology platform to penetrate that market, we are evaluating a variety of strategic options that will allow us to use that platform to penetrate life science research in nucleic acids. Those options would include the possibility for an acquisition that I mentioned in response to a previous question, but also licensing with partners and other mechanisms. I'll stop there and see if that answers your question.

[Alastair Mackay:]

Yeah, that does. In terms of any large pending partnership deals that might involve assays in the nucleic acid area that would be worth commenting on?

[Pat Balthrop:]

My experience, Alastair with any partnership deal is you only know you have it when you have a signature, and we've been involved and I know you've had the same experience, right? A lot of great deals that end up feeling like they're going to close and they never do. So, for all those reasons, we prefer to only talk about deals once they are actually done.

[Operator:]

We will go next to Kelley Roche with Leerink Swann.

[Kelley Roche:]

So, most of my questions have been answered already, but just looking back at FlexMAP, do you have any idea what we can expect for placements through the end of the year or anything like that? I know we have about five or six, or this quarter two, but five or six overall.

[Pat Balthrop:]

Well, we obviously haven't disclosed that, Kelley. What we have been pretty consistent about, though, is making sure that our investors understand that this system has some pretty unique capabilities and is targeted at a higher volume customer, like the ones I was just mentioning in response to Alastair's questions, big pharma big research, but there are fewer prospects in that class. Although each customer you close is a lot more valuable in terms of annual consumable purchases per customer per instrument, there's also fewer of them, and so the number of systems that we expect to sell of FlexMAP 3D will be a fraction of what we would expect to sell with LX200, even once we get to full product launch.

[Kelley Roche:]

Okay, understood. Then just sort of looking, I know you said you placed in the big research area for these 3D customers. Do you think of what's kind of a backlog there if there is any? Are you seeing people kind of consider this but waiting for the NIH funding to kind of flow through is that the sentiment?

[Pat Balthrop:]

I would say, we have not seen that. It doesn't mean that it doesn't exist, Kelley, but as you noted we're very pleased with the performance of the product and it's early acceptance, but it's also true that there haven't been a lot of them placed. So, just because we haven't seen it, it doesn't mean it's not in the market. It just means in those few customers that to whom we have delivered this particular system we haven't seen it.

[Operator:]

We'll go next to Un Kwon with Wedbush.

[Un Kwon:]

I was curious. So, your SG&A expenses were down year-over-year and sequentially. Is there a significant variable component to this or are you actually cost cutting?

[Pat Balthrop:]

We are not cost cutting. We do have some expenses that occurred for example in 2008 that we have done something about, not the least of which is legal expenses. As a result of the settlement, one of the things that we can forego is paying lawyers money to help us litigate things, and so that's one of the reasons why we did the settlement that we announced a couple weeks back. The number of people that we have and other types of SG&A programs is actually higher than it was a year ago, although, as I mentioned before, we're being prudent about that based on the overall economic conditions.

[Un Kwon:]

Got it. So, how should we model this going forward? Should we incrementally grow it from this lowered base?

[Pat Balthrop:]

So, I think, what you should expect is that we will continue to manage our expenses very closely. We will have some strategic investments that we will make. We talked previously, for example, and I mentioned during my formal remarks the fact that we are moving into China, a lot of the expenses associated with that will be SG&A expenses, but they will be more incremental in nature. So, you shouldn't necessarily assume that our expenses will stay flat for the year, but we expect them to increase at a somewhat modest rate.

[Un Kwon:]

Okay. Then as far as your revenue guidance is concerned, are you including any impact from the NIH stimulus?

[Pat Balthrop:]

Well, we obviously are working with our customers and partners on the stimulus package that's not new or unique to us, a lot of other companies are doing the same. What's a little unclear is to what degree those grants are going to be realized and, in addition to that, the degree to which they will actually result in revenue in 2009. I think we see the world the way a lot of other companies do, which is that the stimulus package is if there is going to be any effect in 2009, it's more likely to be toward the end of the year and so, although we are turning the crank hard and working closely with customers and partners to do the best job we can as it relates to the stimulus, it's unclear to us whether it would have any material effect on the top line in 2009.

[Un Kwon:]

Got it, okay. Then just one quick one for Harriss. The gross margins, would you be able to break that out by segment?

[Harriss Currie:]

Actually, the two segments were roughly equivalent, 67% in the assay group and 69% in the technology group, because that's such a large portion. It dominated the margins and so overall they were 69% for the company.

[Operator:]

We will go next to Matthew Scalo with Canaccord Adams.

[Matthew Scalo:]

Just a quick clarification here. The timing of bulk orders; were there any orders that came in say at the last day of the quarter that you didn't ship out that fall into April, May?

[Harriss Currie:]

Matt, you know we don't talk about the specific timing of those orders that they came. What we can tell you is that the number of bulk purchasers in the first quarter was less than in the fourth quarter. We have in total about 15 or so customers that buy in bulk. Over time, they all of them purchase, but typically all of them don't within a typical quarter. So, what I can tell you is what happened. Again, we had 11 guys that purchased anywhere between $120,000 or so and over $2 million. So, it's a wide range of purchases by these guys and it's difficult because we don't provide the line item guidance to guide you, if you will, on what to expect in the second quarter.

[Matthew Scalo:]

Okay, fair enough. I guess, one of the things I took away from the user meeting was kind of the complexity of the molecular test for infectious diseases, meaning fungal, GI, meningitis. I'm just kind of curious as far as have you learned things from the RVP test that allow you to accelerate the development of those three tests getting it through the FDA, number one. Number two is are these, all three of those tests, are they going to be de novo 510(k)s or will they be 510(k)s?

[Pat Balthrop:]

Our operating assumption, Matt, which is reflected in our discussion about the availability of those assays is that they will all be de novo 510(k)s and by definition of course that means that there may not be a predicate device, but there is an available method as we saw with RVP. The available method in the case of RVP was viral culture and if I could just use fungal as an example, the available method is blood culture and so that fits the de novo classification. Now, we have to go through the process and have before we can absolutely confirm that, but based on what we know today, we expect them to be de novos. I think the point that you make about the complexity of the product, we actually consider to be a good thing, not because we want our products to be complex, but because it just talks about the critical nature of the clinical problem and assuming we can deliver these products as we currently have them configured and as we currently believe we can, then it gives us somewhat unique position in the marketplace and that's always a good thing. So, the experience we've had with RVP has been helpful in a number of ways, not just on the regulatory cycle, but also understanding, for example, the value of making sure that you deliver a product to a customer that has their ease of use characteristics included in addition to the product, the assay performance characteristics included so that you don't have to go back and spend incremental dollars to develop the product they really what, which is what we've done with RVP fast.

[Matthew Scalo:]

Can I ask as far as progress in adding additional content to either the RVP and the ability to, I'm assuming the RVP fast is the same 12 types or subtypes as the RVP test is?

[Pat Balthrop:]

That's a fair assumption.

[Matthew Scalo:]

Okay. Is there any progress with adding additional content, you already have approved in the US market for in the US?

[Pat Balthrop:]

We don't expect the reasons of rationale that FDA used in late 2007, because we received clearance on January 3, 2008 for RVP. We don't have any information that leads us to believe that the way in which they will evaluate RVP fast will be different, at least not concerning the targets that are available outside the United States in comparison to those that are on the current FDA clear products the 12 targets that we have. So, we're assuming, and I think you should assume, that RVP fast will have the same number of targets.

[Operator:]

We have a follow-up from Peter Lawson, Thomas Weisel.

[Peter Lawson:]

Harriss, I wonder if you could just comment upon the pricing in the quarter, instruments versus consumables if there was any weakness there.

[Harriss Currie:]

Weakness in pricing?

[Peter Lawson:]

Yes.

[Harriss Currie:]

In a macro sense, there was no weakness in pricing. Typically, on an annual basis, we actually raise the price per unit on our consumables and systems, so overall the decline in consumable revenue is primarily attributable to a decline in units of consumables shipped. In the system revenue, again, that's dependent upon mix. We've said many times that our average price per system can fall any place between around $27,000 and $32,000 depending on which customers buy, and we remain within that range. It's really a function of who buys what. The prices for our partners, as you know, were contractually stipulated and we typically don't vary from that. So, there is no discounting at the end of a quarter to stimulate system sales.

[Operator:]

At this time, there appear to be no further questions. I'd like to turn the call back over to management for any additional or closing comments.

[Pat Balthrop:]

I'd like to express our appreciation for your attending our first quarter conference call. We look forward to seeing you in person in the not too distant future and if not, then talking to you in 90 days. Thanks very much.

[Operator:]

That does conclude today's conference call. Thank you for your participation.