Luminex Corporation
Q3 2009 Earnings Call Transcript

Published: 5 Nov 2009

Operator:

Good afternoon and welcome to the Luminex Corporation third quarter conference call. Today’s call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Director of Investor Relations, Mimi Torrington; please go ahead ma’am.
Mimi Torrington:

Thank you, Jessica. Good afternoon and welcome to Luminex Corporation’s conference call for the third quarter 2009, financial and operational results. I’m Mimi Torrington, Director of Investor Relations. Today, Pat Balthrop, our President and Chief Executive Officer; and Harriss Currie, our Chief Financial Officer will discuss our third quarter results highlights and the remaining outlook for 2009. Today we issued a press release announcing the company’s results for the third quarter ended September 30, 2009. Following our prepared remarks we will have time to take your question. In addition to the audio portion of the call we have prepared 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 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 maybe 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 Form 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 maybe 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:

Thank you, Mimi. Good afternoon everyone and welcome to our third quarter 2009 earnings call. We are very pleased with our results for the quarter. I’d like to start today by reviewing some of the key factor that have impacted us this quarter this year, as well as over the longer term and then review our company highlights and other significant events in and achievements occurred during the quarter. I will then turn the call over to Harriss he will provide you with more detailed review of the company’s financial results and then I will return at the end of call to provide an update on the annual review guidance for 2009 and the outlook for 2010 and beyond. Then we will open the line to your questions. We e are very encouraged with our results for the third quarter and we are very encouraged about the trajectory as a business including how the fourth quarter is shaping up and the outlook for 2010. The unique nature of the 2009 macroeconomic environment has had an impact on us, and everyone else. There was a great deal of uncertainty regarding capital spending in the end user markets in part due to the economy and expectations for the potential receipt of stimulus funding. Another impact related to the economic condition was our partners’ response to this environment. As they pursued greater efficiencies such as inventory management our revenues specifically timing of bulk consumable purchases were affected. We’ll spend some time talking about consumables during the call today. We don’t anticipate significant revenue due to stimulus funding, but as the stimulus begins to reach the marketplace, the feedback and data from customers and partners are that the tightness in the capital equipment markets will continue to relax. We saw this effect in our results this quarter with very healthy system revenue. Although we believe there’s the opportunity to experience some benefit from the stimulus link this year and into 2010, we have not included any impact of the stimulus in our guidance estimate. We have achieved significant milestones in executing our international growth plan; we have established entities in both Shanghai and Tokyo. These achievements and other international opportunities will position the company to further expand our market presence over the long term. The topic of healthcare reform remains a hot one. We’re closely monitoring the proposed legislation and its potential impact especially regarding the medical device fee. There are still many unknowns and like you we await the final draft of the legislation and to find out if it gets signed into law. However, in estimating the potential impact, it is important to keep in mind that only a fraction of our U.S. revenue would be subject to the fee under the proposed legislation. We also believe that research and appropriate diagnostic can be a useful tool in improving outcomes and reducing long term healthcare costs. We’re actively engaged with congressional representatives to make sure our voice is heard regarding this proposed legislation and our continued focus has been to develop product that both improve outcomes and reduce healthcare delivery costs. If we continue to deliver these types of products, we expect to be well positioned in the marketplace, regardless of the make up of any final healthcare reform plan. Lastly, there’s a 2009 outbreak of novel influenza A H1N1 that’s affected Luminex and all of us. I’ll update you on the progress we’re making in the impact related to H1N1. In the third quarter we set a new company record shipping 259 systems, the highest number in Luminex history. This total includes 11 of the new FlexMAP 3D instruments. Cumulative systems shipments have now passed the 6500 market with 6514 systems shipped an increase in total instruments shipped of over 8707 systems over the prior year’s cumulative total an increase of 15%. We achieved record system revenue of $9.2 million for the third quarter an increase of 18% over the third quarter of 2008. System revenue as of September 30, 2009 on a year-to-date basis is over $21 million an increase of over 3% in what has been a very difficult year for capital spending an impressive result. Our R&D investments over the past several years leading to the launch of FlexMAP 3D has helped system revenue and will continue to drive growth as it opens new markets for us in several incremental growth segments. Greater system shipments lead to continued future revenue streams in consumables, assays and royalties. So we are very encouraged by the strong number of systems we shipped this quarter. Luminex delivered revenue of $29.1 million for the third quarter, modest growth, but solid performance in a difficult market and a sequential increase of 5% over the second quarter of 2009. Solid sales of our Respiratory Viral Panel and cystic fibrosis test in our assay group led to reagent or assay revenue of $6.2 million for the quarter. Assay sales were favorably affected in the prior quarter by the H1N1 operate, which of course bolstered RVP sales. Assay group sales increased 12% over the third quarter of 2008 and were very encouraged by the continued growth that the assay group is delivering. Along with assay’s higher margin revenue lines, of consumables and royalties for the third quarter were $6.1 million, and $4.7 million respectively. Royalties and end user assay sales showed continue healthy growth, are positive indicators for end user and give us confidence in the growth trajectory of the business. Consolidated gross profit margin was 64% of sales for the quarter. This was less than the prior year quarter driven by product mix, specifically increase system sales, which accounted for 31% of total revenues. Sales of our higher margin items assays consumables and royalties continued to be a higher percentage of our total sales. These three items accounted for 58% of consolidated third quarter 2009 revenue, which is down from 63% in the Q3 of 2008, again due to product mix. More on consumables in just a moment. Total assay sales by Luminex and our partners continued to show good growth with end user sales of $80.8 million for the quarter, an increase of 16% over the same period 2008 and an 8% sequential increase over the third quarter. This metric affectively demonstrates the healthy ends user market demand for both our products and our partner’s products and with our system placements continuing at a healthy rate we believe this will be a continuing trend. In summary, we believe we have passed through a very difficult economic environment and that end user markets have begun to stabilize. We shipped a record number of systems, end user demand continues to grow as evidence by increase royalties and we achieved several strategic milestones. One touch milestone is the FDA clearance of a new version of our xTAG Cystic Fibrosis Test design to address the end user need for ease of use and simplicity, a top priority for the company. The new test detects 39 CF-causing gene mutations using a new chemistry and protocol that have been streamline to make the test faster and easier to use with less hands on than any other CF test available. We also held our Seventh Annual European Multiplexing Technology symposium, Planet xMAP Europe in early October in Amsterdam. The event was extremely well attended with over 450 attendees. This event is an excellent opportunity for researchers and scientists from across Europe and around the world to assemble and share knowledge on the innovative ways in which they’re applying Luminex’s xMAP technology. The feedback in our ability to grow significant industry relationships has been excellent and we look forward to our next Planet xMAP USA, which will be held in Baltimore in the spring of 2010. Our geographic expansion continues to progress, we held the official opening of entities in Shanghai and Tokyo. These new offices enhance our presence in Asia and are an important part of our long term growth strategy. We look forward to continuing to drive growth on an international basis. As we mentioned on our last call, in July, we announced the FDA clearing. The FDA cleared labeling updates for our xTAG RVP to include data about the performance of test in humans infected with the 2009 pandemic strain of influenza A, H1N1 or swine flu. We were pleased to be the first company to receive this enhanced labeling and are assay continues to address a key market need. Recent peer reviewed independent studies demonstrate that RVP can aid in diagnosing whether a patient is carrying a typical seasonal respiratory virus or an unknown type of flu A virus. Therefore, xTAG RVP can be a critical first line of defense in viral surveillance and identifying patients with more common respiratory infections from those with more novel cases. In order to increase awareness of our RVP product, we recently launched a new xTAG RVP awareness campaign with focus messaging, positioning and branding directed primarily to infectious disease and pediatric physicians, as well as patients. The purpose of the awareness campaign is to present the benefits of RVP as compared to traditional testing methods to encourage physicians to request RVP from their testing facilities, and to provide important education for patients. This is a comprehensive campaign, the Cornerstone of which is our new website www.xtagrvp.com. The website was created as a resource for physicians and patients seeking information or influence in other respiratory viruses, as well as a diagnostic testing optioning available to detect respiratory viruses today. In addition, www.xtagrvp.com website offers the latest information on our respiratory viral panel. We’ve also launched a complementary print and online ad campaign targeting select medical journals and developed educational material and brochures for education and in office support. We’re entering one of the most unpredictable flu seasons we’ve seen in years and as many of us have been hearing and seeing in the news, the prevalence of H1N1 flu has caused public concern, especially for those deemed to be of higher risk. Sales of RVP in the third quarter were quite healthy and we’ve experienced an increase in demand for RVP thus far in the current quarter. So we expect it to experience stronger sales of RVP through the fourth quarter and finally regarding an update on our new xTAG RVP fast product. This product has launched in Europe with a CE mark and early results are quite good. As we’ve stated before we expect clearance and launch in the U.S. to occur after the start of this flu season likely in the first quarter of 2010. Now let’s turn and look at two specific areas that are important revenue drivers for the company, systems and consumables. Harriss will provide additional detail in a few minutes, but I’d like to take a few minutes to address these two areas. As I mentioned during our call in August, we did not expect the pause in capital spending that occurs in Q2 to continue into Q3. The concerns our customers had in the second quarter, regarding caution and the timing of their spending due to overall economic conditions, and the prospects of impending stimulus funds eased in the third quarter as we projected. Demand for our systems occurred as we expected and we shipped 259 systems a record number for the company. System placements were especially strong in the life science research segment, which was more affected by the pause that occurred in the second quarter. We estimate the actual number of system shipments due to stimulus grant funding to be minimal in this total. As we look forward, historically the fourth quarter has been the strongest quarter for us in terms of system shipments and we see no reason why this fourth quarter would be significantly different. Now I’d like to spend some time discussing consumables. We stated many times that we expect volatility in consumable bulk purchases due to the manner in which our partners place orders and we believe this will continue to be the case. As we’ve reported, it’s also true that we’ve experienced a downward trend in consumable purchases over the past several quarters, and it’s important for you to know, that we have an extensive analysis of the consumables revenue stream and we’d like to share the summary of those results with you today. First, the business model remained strong and the long term health of the business is quite good. There are several factors contributing to the consumables trend, none of which individually appear to be systemic in nature, nor indicative of future results. Overall, we experienced a change in purchasing behavior by our largest bulk purchasing partners, manifested by delays in bead purchases as well as 2008 tough comparables, attributable to several factors. These factors include number one, volume purchases in 2008 at a high rate from one of our partners in transplant that have not yet repeated, as this partner awaits the regulatory clearance and commercialization of the new products they developed. Number two, higher purchases of our magnetic beads in 2008 for development reasons, as partners in life science, converted their current assay lines to our magnetic bead format in anticipation of the launch of MagPlex next year and to enhance automation and ease of use, a top priority for them and for us. Number three, increased focus on return on assets and lead our inventory management by some of our partners during 2009 as a result of internal initiatives due to the macro economic climate, leading to some purchase delays. I’ve had personal meetings with our top partners to assess the situation. Considering their significant investments, the continued increasing royalties and reported royalty bearing sales during recent periods. It is clear that our partners are having success in their commercialization efforts. Reported royalty bearing sales have increased by 17% from $63.6 million in the third quarter of 2008 to $74.6 million in the third quarter of 2009, and all of this indicates a healthy business. We believe the congruence of factors that affected our bulk consumables revenue in 2009 not to be indicative of a longer term market trend. So we do not expect the downward trend in consumables to continue. As part of the analysis, we have also assessed future consumable sales with our partners, and based on this feedback, from our partners, we’re very confident that consumables will return to growth in the near term. Keep in mind that, due to the limited number of partners purchasing in bulk, we do expect to experience continued volatility. While 2009 has been a dynamic year we remained focused on our plan, we’re executing on our new products including the commercial launch of FlexMAP 3D and working with our customers in labs in efforts surrounding H1N1 and the use of our xTAG RVP and expanding our geographic presence. We continue to expand our menu invested new products and achieve our milestones. Our new product development projects continue to hit their milestones including MagPlex our next instrument platform, which just recently achieved the major development on schedule. Everything we learn about MagPlex makes us more excited about its potential. Our assay programs including newborn screening and our poultry assays are on track for commercialization in the near term. We also highly focused on our automation strategy to streamline end user work flow. We’re committed to emphasizing cost and expense discipline and the number of cumulative systems shift continues to grow. All of these factors we expect will continue to drive longer term profitability. Now I’d like to turn over the call to Harriss to comment on the financials.
Harriss Currie:

Thanks, Pat. This slides a summary of the operating results reported in today’s release. Total consolidated revenue for the third quarter of 2009 was $29.1 million, an increase of 1% over the third quarter of 2008 revenue of $28.9 million. Consolidated gross profit margin for the third quarter was 64% compared with third quarter 2008 gross profit margin of 68%. Net loss for the third quarter was $6 million, but the loss per share of $0.01 a share. Overall we achieved modest growth in revenue, for the tough comparable quarter. Gross profit margin percentage decreased to 64% for the three months ended September 30, 2009 from 68% in the prior year, as a result of a mix shift away from the higher margin items consumables, royalties and assays in favor of systems. The increase in operating expenses from $16.6 million for the third quarter of 2008, to $19.3 million for the current quarter, is primarily the consequence of a long term plan to enhance our infrastructure and prepare the company for long term growth. Primarily, the increase is consisted of additional personal cost and related stock compensation travel cost associated with the increase in employee, contract employees and headcount has increased from 381 to 423 from September 30, 2008 to September 30, 2009. Now, operating income, obviously decreased due to the decreased of absolute gross profit dollars and increase in operating expenses. For nine months ended September 30, 2009. Total revenue increased by 8% to $82.5 million from $76.3 million for the comparable period 2008. The increase in revenue was attributable to an increase in $4.9 million in assay revenue and continued growth in royalty revenue in the technology segment offset by decrease in consumable sales. On a GAAP basis, we experienced a net loss of $2.3 million and a loss per share of $0.06 for the nine months ended September 30, 2009. On an adjusted basis excluding the effect of the senior lawsuit settlement of $4.35 million, earnings per share for the first nine months of 2009 is $0.05 per share compared with earnings per share of $0.03 for the first nine months of 2008. As we mentioned before, we don’t have significant FX effects reflected in our financial results. However, as we continue to expands globally and transact and local currency more frequently we maybe exposed to additional FX risks. In the current quarter, we had a total negative impact of approximately 57,000 of FX related adjustments incorporated in our results. On a year-to-date basis the total negative FX impact is only 130,000. Quarter three 2009 consolidated revenue of 29.1 million was distributed as follows, $9.2 million in system revenue representing the sale of 259 LX systems that includes 11 FlexMAP 3D systems, $6.1 million in consumable revenue or microspheres, representing a decline of 27% from the third quarter of 2008, $4.7million in royalties, representing 22% growth over the third quarter of 2008. $6.2million in reagents or assays, representing 5% growth over the prior year quarter, $4.5million in service revenue and $1.5 million in all other revenue, which includes spare part sales, shipping fees, license amortization, and training charges. Our quarterly revenue distribution for the third quarter showed here compared to the third quarter of 2008. Noted in the prior year, our higher margin items consumables, royalties, and assays represented 63% of total quarterly revenue. In the third quarter of 2009, these high margin items represented approximately 58% of revenue. We anticipate these high margin items will continue to represent a significant percentage of our revenue mix. On a year-to-date basis, we achieved 82.5% of revenue distributed as follows. Putting 1.4 and system revenue an increase of the 3% over the prior year period, 20.3 million in consumable revenue, a decrease of 13% approximate% over the same prior year period. $13.5 million in royalty, a 25% increase over the prior year, $18.2 million in reagents or assay a 37% increase over the prior year, $ 4.3million in service revenue and $4.7 million and all other revenue. Now I would you like to review the key components of consolidated revenue systems that a higher margin item assays console and royalties to raise some additional color around our result. On this slide, we’ve illustrated the system shipments per quarter for the last two year, alone with result in cumulative system shipments at the end of each period. You will note that in every quarter except the second quarter of 2009, we were either in or above our expectation of between 175 and 225 system shipments per quarter. As Pat mentioned previously, we did not expect the pause in second quarter capital spending to continue into the third quarter and as we had projected, the concerns our customers had in the second quarter regarding cost and capital spending eased and we shipped a record number of systems. System placements were especially strong in life science research segment, which was more affected by the pause in the second quarter. We continue to expect to ship between 175 and 225 systems per quarter, including FlexMAP 3D. However, once we established some additional history with the FlexMAP 3D system, we may adjust our expected range. As you may have noted, we experienced the fifth sequential quarter of consumable revenue decline since the third quarter of 2008. After through analysis of the decline, we’ve identified several contributing factor, none of which individually appears to be systemic in nature or indicative of future results. Overall, the decline manifested itself through decline in activity at varying times from our largest partners. The third and fourth quarter of 2008 and first through third quarter of 2009, we had bulk purchases totaling 7 million, 6.8 million, 6.1 million, 5.5 million and 4.3 million in consumables respectively. Alternatively, non-bulk consumable sales vary within a much smaller range between 1.2 million and 1.8 million with the largest amount of non-bulk sales taking place in the current quarter with 1.8 million of non-bulk consumable sale. As Pat touched on, we believe the decrease in bulk purchases can be attributed to several factors, including purchases in prior periods or significant volumes of consumables, related to the conversion of our partners assay product portfolios, from carboxyl beads to magnetic beads primarily in anticipation of our new MagPlex system in 2010. Secondly, volume reductions in bulk purchases for several of our partners as a result of a reduction in total consumable needs, such as the regulatory clearance and commercialization phases of development of new products; third, increased attention on inventory management by our partners as a result of the overall macroeconomic climate and four, an increase on our partners focus on generating current revenue from commercialized products. The success of our partners’ commercialization efforts is reflected in the rising level of royalties and reported royalty bearing sales, during the period over, which the consumable revenue has declined. Reported royalty bearing sales have increased by 17%, from $63.6 million in the third quarter of 2008 to $74.6 million in the third quarter of 2009. This slide illustrates a consolidated view of consumable, royalties and assays and total assay sales by us and our partners. You can see the increasing trend overtime of royalties and assays represented by the yellow and green blocks and overall even with the reduction in consumable purchase in the short term, there are high margin items in the aggregate has flattened, not decline and mirror the overall trends of our total revenue. We currently expect, as a result of changes in overall economic environment discussed by pat previously to return to a growth mode. We continue to experience revenue concentration in a number of limited numbers of strategic partners. Two customers accounted for 27% of consolidated total revenue in the third quarter of 2009 at 14% and 13% respectively. For comparative purposes, these same two customers accounted for 35% of total revenue, 17% and 18% in this third quarter of 2008. The decrease in percentage of total revenue represented by our two largest customers is primarily due to the decrease in the dollar amount of bulk purchases, by these two customers, due to the varying consumable needs during regulatory clearance and commercialization phases of development with our partners’ products in new markets and the economic environment. No other customers accounted for more than 10% of the total revenue in the quarter. It’s also important to note, while the top two partners are a smaller percentage of sale, all other representing all other revenue grew 13% over the third quarter of 2008. Another item of note here is a related flatness of our two largest partner sales over the past two years. We can see the growth that existed prior to market issues that Pat discussed earlier, that peaked in the third and fourth quarters of 2008. We’ve studied this phenomenon extensively and are confident that these partners will continue to be productive contributing customers well into the future. However, we expect that fluctuations will continue with these partners and others. However as the base of Luminex business continues to grow over the longer term, the present of volatility should decrease. Regarding our operating expense, we made a significant commitment to R&D. R&D expenses were 19% of revenues for the current quarter, up from 15% of revenue in the third quarter of 2008. The increase in absolute dollars of R&D expenses is consistent with our goal of increasing our investment in R&D, but lowering R&D as a percentage of revenue towards our long term target. Unfortunately, the flatness of revenue year-over-year, contributed to the short term increase in R&D as a percentage of revenue. It’s also important to keep in mind, this chart reflects only Luminex’s internal R&D expenditures. Our partners also had significant R&D efforts on our technology underway. We’re also committed to maintaining our expense discipline, and are committed to delivering top line revenue growth. For the current period, SG&A was 47% of revenue. The increase in SG&A was primarily related to the enhancement of our sales and marketing and operates functions and overall facility expansion to support our growing infrastructure. Significant components to the increase, for increases in personnel costs, related stock compensation expense, and travel costs associated with increase in personnel. As we said before, we do expect that overtime, there will be a modest increase 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. On a consolidated balance sheet reflecting cash and investments of $115 million at September 30, 2009, compared with $124.1 million of total cash investments at year end 2008. As we said before, our investment balances are predominantly held and highly liquid securities and funds. As a result, we do not believe that our cash reserves are significantly exposed to fluctuations in market activity. As you recall, Luminex recorded goodwill and required intangible assets in conjunction with the L&D acquisition. The goodwill asset is subject to an impairment analysis on a regular basis, and the intangible are amortized over their estimated useful lives and also reviewed for impairment annually. To-date, no impairment of our goodwill balance or intangible asset balances has been necessary. As of September 30, 2009 our daily sales outstanding or DSO on accounts receivable was 60 days, compared with an unusually low 36 days at December 31, 2008. We had approximately $12. 7 million of consolidated inventory at September 30, 2009 and as we 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 September 2009, was approximately $113.4 million compared with $131.5 million at the end of 2008. The decrease has been primarily driven by our decision to shift the portion of investment mix to longer term, but highly liquid securities, take advantage of slightly higher interest rates and investment and facility expansion to support our operations. Total liabilities both short and term long have essentially been at constant during 2009. As a reminder all the initiatives that Pat and I discussed are designed to lever long term financial objective from a revenue, investment and profitability perspective as you see here. Based on our current financial performance, we do not believe that these long term targets are unreasonable. Although, we may fall short of our long term targeted annual revenue growth of 25% in the current year as a result of the macroeconomic factors that were discussed earlier. We remain confident in our ability to deliver on this metric in the long term has the exceptions of and excitement with our technology and solutions we provide remains in the marketplace. One final item before I turn it back over to Pat. As we form up by 2010 plan we maybe required to release up to $30 million of the valuation allowance that currently exit on our US federal and state deferred tax asset. These assets are a function of our remaining US federal and state NOL totaling approximately $70 million. The threshold measurement is a more likely than not standard for future realization in US federal and state deferred tax assets. This impact about the $30 million but we’ve seen as tax benefit in the quarter of release and based on current total shares outstanding could result in a benefit of up to approximately $0.75 per share. In the short term, the release would likely cause us to displace a high effective tax rates on our income statement, possibly exceeding the highest corporate tax rate to which were currently exposed. Although the cash tax paid would be significantly lower than our effective tax rate, due to our use of existing net operating loss carry forwards that are available through 2028. Our Canadian non-capital income tax loss carry forwards are not anticipated to meet the more likely than not standard; at the full valuation allowance of the related Canadian deferred tax asset will remain. I will now turn the call back over to Pat to review the 2009 outlook and revenue guidance.
Pat Balthrop:

Thank you, Harriss. As you saw on our release we have updated and narrowed our full year 2009 revenue guidance to be between $118 and $126 million. We feel confident in this revised guidance based on where we currently stand in the quarter. We are encouraged by the remaining outlook of 2009 as we expect system shipments to continue to be strong. RVP sales continue to progress and as we expect consumes to return to growth. Royalties and end user assay sales are trending nicely which all point to a healthy fourth quarter. We are also optimistic regarding 2010 as we expect to launch our new metric system in the second half and additional LX 200 FlexMAP 3D placement to occur. Additionally, new assays such as RVP fast, poultry serology and screening will begin to ramp in 2010. 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, to insure the long term growth of the company and insure the continued 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 have demonstrated our ability to control expense, but we are allowing for some incremental increase to fund our long term growth initiatives such as our recent decision to fund our geographic expansion project and the RVP awareness campaign. In summary, while the first three quarters of 2009 have been volatile we have remained focus on executing our long term growth plan, advancing our product pipeline and building the company for the longer term. The fourth quarter is shaping up nicely and indications are positive for a healthy 2010. This ends our formal remarks today. We will now open the line for your questions. Jessica, if you could open the line for the Q-and-A, I’d appreciate it.
Operator:

(Operator Instructions) We will take our first question from David Clair from Piper Jaffray.
David Clair:

Its Dave Clair here with Bill Quirk, I guess the first question I have would be on the RVPs performance in the quarter. So if you can just maybe give us some color on the how that performs sequentially?
Pat Balthrop:

Well, as I mentioned David, this is Pat during my remarks, the second quarter was an unusual quarter because the H1N1 outbreak and although we don’t provide line item revenue guidance, I will say that 2002 was unusual. The third quarter on the other hand looked more like a traditional third quarter; it was more a situation where customers were gearing up for anticipation of receiving samples. What we have seen since then however is that as patients started to present to the healthcare system, with flu like systems that revenue has continued to accelerate, that’s about as much detail as I can give you.
David Clair:

Okay. I appreciate that, and then just a little bit of question here on guidance. I was hoping, just kind of using the low end of the range that you provided. I mean that suggests a pretty nice sequential ramp here in the fourth quarter. Just hoping you can give us some additional color on how we’re getting there?
Harriss Currie:

Sure. So first of all to get oriented year-to-date sales in third quarter are $82.5 million. So to achieve the guidance at the low end, $118 million obviously we have to deliver our fourth quarter revenue of $35.5 million. Although, we don’t provide line item revenue guidance, so I can’t go into a lot of detail. The fact is to get us there will be continued robust instrument sales. The third quarter was a very nice quarter. The fourth quarter traditionally is a very solid quarter for a variety of reasons and based on where we are in the quarter. We expect to deliver a very nice instrument revenue number for the quarter. As I mentioned a second ago, the RVP revenue continues to accelerate and based on what’s happening in the marketplace and the number of patients presenting to the healthcare system. So we expect RVP to be tailwind as well. Then lastly, as I mentioned during my remarks we expect revenue to return to a growth mode versus where we finished this quarter for example. So all of that adds up to us being highly confident and delivering a total revenue number that’s within the guidance range.
David Clair:

Okay, great and just one last question for me on the pipeline. I know you mentioned poultry. I was just hoping, I’m sorry, poultry and newborn. I was just hoping you could give us some color on fungal, and meningitis, and the gastrointestinal. Are those still kind of near term launches?
Pat Balthrop:

The first product added the L&D pipeline that we expect is actually the GI panel. You will have to stay tuned on that. We don’t expect that to be a material event in 2010 and the other products will likely be revenue events beyond 2010.
David Clair:

Okay. Thank you.
Operator:

We will go next to Doug Schenkel - Cowen & Co.
Doug Schenkel:

Hey, Good afternoon, guys.
Pat Balthrop:

Good afternoon.
Harriss Currie:

Good afternoon.
Doug Schenkel:

Clearly you guys had a really good instrument quarter. It was record quarter as you talked about just followed a uniquely weak quarter. How do we get comfortable that this strength was truly a function of a better capital environment versus timing or maybe a little mix of both? I guess I was trying to get a hand alone, what happened in the quarter, and what were we think of as being the baseline on a normalized basis heading into year end?
Pat Balthrop:

So, Doug I think it’s fair to say, when we said that there was in the second quarter, what we characterized as a pause. Then the reason why we use that term is because we expect it to see instruments or otherwise would have been shipped in revenue recognize in the second quarter to occur later and that’s exactly what we saw. So although in the second quarter, we did a number in the 150s and this quarter we did number in the 250s. The second quarter number compared to what other companies experienced in the second quarter. We were very pleased with although within our traditional range. The number in the 250s that we experienced in the third quarter certainly was affected to some degree by that pause effect. More importantly what we’re hearing about the availability of capital funds and the normal day-to-day sales cycle and so on, it appear that what was a short term pause doesn’t appear to be in effect any longer and so we’re seeing that because we have a high degree of confidence and how the fourth quarter is going to finish on the capital front and that feels a lot more like normal time to us.
Doug Schenkel:

Okay. So, at this point, despite the fact that there was some timing you accountable that the environments are improving and you’re going to see that normal end of the year pick up in terms of the number of instruments placed...
Pat Balthrop:

I’m not sure, you use the word pick up and that’s a relative number, I don’t know how to respond to that. Tell you that fourth quarter is always a very healthy quarter for us, I think both the second and third quarter were unusual in opposite reasons for the reasons we discussed. We did confirm our expected 175 to 25 range, but we acknowledge that with the exception of that one quarter, that is the second quarter of this year that we’ve been within or above that range for the vast majority of the pass eight quarters.
Doug Schenkel:

As you guys always provide for us your top two accounts continue to account for about a quarter of your sales, a little more than that I believe. These accounts are down against tough comps 14% year-over-year for many of the reasons that you talked in your prepared remarks. Impressively, the other three quarters or so of sales were up over 20% year-over-year, and with said, as long as these headwinds continue in top two. It seems like it’s going to be hard for you guys to get back to double digit sales growth let along 15% year-over-year goal that you’ve outlined overtime. So with that in mind, is there a specific timeline that you could provide us way for an expectation for one LAN and this new product clearance. Is this what it’s going to take for them to start growing again, and then while your other top two customers was down year-over-year. Sequentially growth looks a bit better this quarter, do you think you’d maybe turn the corner there?
Pat Balthrop:

I can’t speak on, on behalf of any of your partners regarding the timelines for commercialization of any products if they may have. What I can tell you as I mentioned in my remarks was that, the way you should evaluate the comparables is that there was a significant purchases of beads from us in 2008, as our parts did two things
Doug Schenkel:

No, I think that’s where I was going essentially if you get product clearance then you can move forward with that product. I guess the question is largely does that allow them to start generating more revenue, and it sounds like that’s the case, it sounds like that’s primarily what we’re waiting for certain customers, is that fair?.
Pat Balthrop:

I think that’s fair.
Doug Schenkel:

Sorry last one on the other top two customer, I believe that some of the weakness was attributed to challenges in the academic end market, I guess the hope would be the best starts to get better heading into next year.
Pat Balthrop:

So we have our two largest customers that you mentioned one is One Lambda, the other is Bio-Rad going to. The Bio-Rad does business with us, again in both with life science research and diagnostics. The experience we had in the second quarter around capital sales was primarily focused in the academic life science research segment, which is whereby Bio-Rad does a significant amount of business with us. On the capital side, that’s correct, on the bead side, however, that the comparable issue was the 2008 to 2009 comparable, because they purchased significant portion of mag beads from us in 2008, because they converted their current assay portfolio all of the different assay applications that they have, to Luminex magnetic bead format for two reason, number one because customers are asking for better ways to automate all their testing including Luminex based testing and magnetic beads facilitates that. Secondly and frankly and more importantly, they wanted to have all those assay applications developed when we introduced in MagPix in 2010 because you need MagPix in order for the assays to be led by MagPix and they want have all of that work done so that they get a running start when we introduced that product in 2010. So, its really a comparable issue from 2008 to 2009 and as we roll through 2010 we expect an actually created environment where will be able to accelerate growth.
Doug Schenkel:

Okay. That’s really helpful. Thanks for taking the questions.
Operator:

We will go next to Scott Gleason with Stephens.
Scott Gleason:

Hey Pat and Harriss. Thanks for taking my question. First, Pat I guess I was just hoping maybe when we look at the system placements in the quarter, you guys are starting to get to a timing and where some of your older legacy systems are coming up on a five year, service line, I guess can you give us any kind of granularity in terms of what percentage of the system placement this quarter might have been part of the replacement cycle for older instrument?
Pat Balthrop:

I would say that number is approaching zero.
Scott Gleason:

Okay. Zero in this quarter. Then I guess Pat we have done a little bit of digging in kind of some of the stimulus programs. It looks like the lot of that capital equipment programs are available their or actually for higher ticket items. I guess is the guys are senses that, the Luminex system kind of a lower cost platform that you are guys going to be available for any of those I guess capital equipment purchase programs.
Pat Balthrop:

As I mentioned in my remark, Scott, we don’t have any of our current systems or forecasted systems for the fourth quarter that we have included in our guidance that we believe our stimulus related, most of the way that we have primarily been affected by the stimulus is perhaps best described as being indirect basis, in the second quarter of 2009. The portion market that was most dramatically effected by capital spending tightness was the academic segment which is where the NIH funding grants flow and a lot of those academic institutions a valuated their overall capital expenditures, not just a Luminex portion of that and we are awaiting to get a better sense of the likelihood of the NIH funds starting to flow before they release their of capital equipment spending, and they we saw the pass in second and why picked up in the third quarter. So therefore we don’t for the reasons that you described and based on our conversations with customers we don’t expect there be a significant impact on our business as it relates to the stimulus, keeping in mind that if you look at our business we do business internationally, we do business in life science, research and diagnostic and so compared to other companies with which you will maybe who where all the business close into the research segment that’s up the same case for us and for all those reason we would be as effected by the stimulus programs is other companies might be.
Operator:

We will go next to Tycho Peterson with JP Morgan.
Sung Ji Nam:

Hi, this is Sung Ji Nam for Tycho Peterson. Thanks for taking the questions. As far as you placed 11 FlexMAP systems, could you give us a sense of what type of customers kind of breakout between pharma versus academic?
Pat Balthrop:

Yes. I would say first of all we have about 30 year so systems in the field, cumulatively through the end of the quarter and they are high end academic research institutions as you state and pharma and I would say their on a relative basis their more heavily weighted toward pharma than academics, but we expect their to be that trend more or less to continue I would say, so its early to for us to draw any significant conclusion about what that mix might be, but I would say 30 that we have in field would be, maybe a 2/3, 1/3 split, 2/3 in favor of the pharma segment.
Sung Ji Nam:

Okay and then for your RVT platform, understand that you had a tough quarter-over-quarter comp could you give us a sense of what the competitive landscape is like if there is any impact from that as well.
Pat Balthrop:

I would say there has been very little impact from a competitive standpoint, the position of our product, of RVP is actually somewhat unique. Most of the customers that we have of RVP are higher in tertiary training institutions, who understand the unique benefits that RVP can deliver by evaluating the presence or absence of these different respiratory viruses. I don’t want to miss to sound like there’s no competitive situation there are, but most of the time, the decisions that the customers makes is not based on our products versus another molecular panel for example. It’s in almost all cases conversion from a culture type method to molecular method, because they want to be able to deliver the clinical results that their physicians are tell them, that they’re looking for. So we haven’t really had a lot of competitive activity as it relates to RVP.
Sung Ji Nam:

Great, thank you.
Operator:

We will go next to Isaac Ro with Leerink Swann.
Isaac Ro:

Thanks for taking the question. Good afternoon.
Pat Balthrop:

Hi, Isaac.
Isaac Ro:

Hi. Just briefly on the sort of 3D trends you mentioned on instrumentation, looking pretty strong here. Just wondering, if that could maybe drive kind of sustain gross margin pressure at least on a year-over-year basis, if you’re looking fourth quarter?
Pat Balthrop:

Isaac, this is Pat again. I don’t think so. The overall mix for the company, including assays which of course are on a blended basis, 70% plus gross margin, these are 90% plus gross margin. Royalties are 100% margin of course and recognizing that the current quarter will have a little bit of a depressed gross margin, because of the amount of sales that we had associated with our beads versus a very heavy instrument quarter. We think that’s more that anomaly and basically therefore the company’s historical gross margin numbers closer to the high 60s would be more reasonable, keeping in mind that on the hardware side, we expect both FlexMAP 3D and MagPlex to be more profitable than on a per instrument basis then our current LX200s are.
Isaac Ro:

Got it. Very helpful, and then just H1N1, but it’s a very kind of flu situation here is that progression kind of goes to the season here. I’m wondering, some companies are seeing or hopeful that demand for flu related testing products and kind of ration to maybe early second quarter of next year. I’m wondering, if you are seeing any sort of noticeable changes in demand from potential customers as the outbreak progresses and in specifically, to the extent that some of the rapid test may has been sort of more specifically outlined and have force activity in specificity, do you find sort of additional opportunities to go back to customers, you’re looking for something that’s more sensitive?.
Pat Balthrop:

Yes, there’s a lot of questions in there Isaac. So let me see if I can touch on other relevant points. The first thing is the customers that we sell RVP to, are not typically rapid customers. So everything you said is true about the sensitivity and specificity and the documented reliability issues around the rapid test. That is more concentrated in lower end institutions and physicians offices. For example, in contrast to the customers that is performing RVP. What’s driving our activities in RVP is a couple of things. Number one, the awareness by the public and the awareness to the physician, in addition to just the incidence rate, the volume on a per customer basis. So a customer that was a customer of ours in the first and second quarter the volume that they’re seeing is increasing. It is called same store sales, right. So same store sales has turned out to be also a growth factor and that was part of the original strategy to penetrate the market and establish a customer base. So when an outbreak like this occurred obviously you would expect same store sales to occur. The last factor is the successful introduction of RVP test in Europe is initialed a lot of activity. We had a lot of customer in Europe that like the concept of RVP, but had decided to wait for the availability of RVP Fast, because it’s faster and easier so as the season has approaches H1N1 related as well as just a normal seasonal flu. We have also seen a increased interest in the product, because we have RVP Fast available.
Isaac Ro:

It’s very helpful. Thank you. I mean, just lastly, on stimulus. It sounds like as you mentioned that maybe a lot of the funding or really materialize more in 2010. I’m wondering if you feel like have anymore granularity in the last few weeks, there been more announcements, and I’m hearing that a large number of grants were actually still not yet processing on the SG&A. So the extent it is going to create a bottleneck downstream for customers to spend the money, have you seen any updates there in the last few weeks or days?
Harriss Currie:

No, we haven’t.
Pat Balthrop:

No, we haven’t. The most significant effect that we’ve seen as it relates to stimulus is, that we had a lot of our partners who serve the life science research segment. Those partners would be above Red Millipore and life technologies for example. Who we’re us in our own, deceits with customers confirmed this that the availability of capital dollars in the budgets remained. The issue was really timing, and the event that was going to allow those funds to be release was a sense of confidence on the part of the administration of those academic institutions that they were going to be successful in our each grants and what we saw on the third quarter was that they had that sense that they were going to be successful with some portion of NIH grants and that allows them to begin to spend their capital dollars that they had previously budgeted pre-stimulus for Luminex capital. So, earlier in my remarks, I referred to that as an indirect reflect. So we don’t anticipate getting a lot of NIH grants directly to the stimulus package. That will lead to instrument sales for us. What we’re really seeing is those as funds those funds begin to flow and as the administrators begin to develop a sense of confidence that they’re going to have access to those funds, that they’re now deciding to release the capital they had budgeted previously, which are leading to instrument sales for us.
Isaac Ro:

Got it. Thank you very much. Appreciate it.
Operator:

We’ll go next to Derrick DeBruen with UBS.
Derrick DeBruen:

Hi, good afternoon.
Pat Balthrop:

Hi, Derrick.
Harriss Currie:

Hi, Derrick.
Derrick DeBruen:

Hey, how are you? Given the fact that you’re really ramping up your instrumentation, production, how are your guys in terms of capacity, do you need to do any capacity expansions in the future?
Pat Balthrop:

We actually, as Harriss has mentioned, I think just briefly in his remarks. We did have some facility expansion, actually in every location that we have. Here in Austin, which is where we do our instrumentation manufacturing as well as in the Netherlands we’re primarily a commercial entity that is sales and service and customer partner support. In Toronto, where we manufacture our molecular diagnostics assays, we were in the process of expanding all those facilities. So we believe, we have a good sense of what the manufacturing requirements are and we’ve taken those into account as we’ve expanded our facilities. We believe also, Derrick that the wildcard there will be MagPlex, which we are very excited about, but obviously that’s not available to the second half of 2010. Keeping in mind that with our existing facilities we currently operate somewhere between the shift or shift and a half when we have a surge requirements and so for all of those reasons we believe, we have adequate capacity, but I think we at the closer to the MagPlex launch before, we can really state unequivocally.
Derrick DeBruen:

Thanks. That’s helpful. I mean how close is the assay group to profitability, is it profitable yet?
Pat Balthrop:

The assay group isn’t quite to profitable, but virtually close on us, if you add back sort of all the non-cash expenses, stock comp, depreciation and amortization and all that, they’re right out we refer to is cash income. So they’re really close. With the launch of a couple of more assays and such this will over the…
Derrick DeBruen:

Okay and I guess when you look about, when you look at your R&D program and also the potential for acquisitions of content, I guess if you talk about what you’re seeing are you actually looking for stuff or are you in part of the increasing R&D just acknowledgment that you are going to have long term development.
Pat Balthrop:

We expect to achieve our long term growth rates organically, direct, but those that chart, the last, I think the second to last slide that we showed, the one that Harriss ended his remarks on, that showed the long term objectives of the company. What we are looking for is ways to accelerate the timeframe by which we can achieve those long term objectives. You will remember we did a secondary offering in June of 2008 rise $75 million in cash, we did that to enhance the balance sheet to give us the maximum flexibility so that if we wanted to do an acquisition of proprietary content or automation or technology or any of those things that we would have the maximum flexibility by which to do that. So, the 2009 has been an odd year, also because of the deal flow and so we have been actively evaluating opportunities that would be accretive to the company and so on. We just haven’t found any yet and so I guess we reserve the right to pull the trigger on such a deal once we find one, but right now we don’t have any targets identified that would describe as being likely.
Derrick DeBruen:

Okay. Thank you very much.
Operator:

We will go next to Stephen Simpson with Northland Securities.
Stephen Simpson:

Thank you. I don’t know if you previously discussed this or not but did you give a number or how many labs are currently using the RVP.
Pat Balthrop:

We weren’t asked that and we didn’t give the number, but what I would say is that what we said last quarter was a number that was in the high double digits. So, approaching 100. As we evaluate the current activity, I frankly don’t know the number off the top of my head, but it would be in excess of that today, particularly encouraging as I did mention just a couple of minutes ago is the activity we have going in Western Europe.
Stephen Simpson:

Okay. Thank you very much.
Operator:

We will go next to Herb Pathfinder with Wells Fargo.
Herb Pathfinder:

Can you try to quantify how much the shift of magnetic beads might have caused the short fall in your beads sales, what concerns me is that if that product is not due out until the second half, how can you expect a substantial recovery in your bead sales at least in the short run, if that is been effect so far.
Pat Balthrop:

Herb that keep in mind is that the magnetic beads that we have are required to for a test to be run on instrument MagPix of introduced next year, but the magnetic beads were also comparable with the all the instruments that we have now. So our partners who are developing assays on magnetic beads expect to continue to buy them on a ongoing basis for a variety of reason primarily the fact of magnetic beads are easier to automate because you are more effectively and there magnetic washers and other automation equipment that existing labs all around the world. What you saw in 2008 was the work that was done by our partners to convert their existing applications to magnetic beads, so that they would have them available when launch because they expect that to be very nice incremental growth driver, but they will continue to buy them as they sell in to current customers to use our current fleet of instruments.
Herb Pathfinder:

What percent of your bead sales would be magnetic beads?
Pat Balthrop:

I don’t know the number off the top of my head.
Herb Pathfinder:

Is the margin about the same as ordinary beads?
Pat Balthrop:

The margin is very high on both on the non-magnetic as well as the magnetic bead so there wouldn’t be any significant margin impact, but I will there is a price premium for the magnetic bead.
Herb Pathfinder:

So you don’t think that issue, then is going to necessarily prevent the bead sales from recovering to a normal level in the next quarter or so.
Pat Balthrop:

I do not.
Herb Pathfinder:

The other thing I want to quantify expecting you, Harriss said 175 to 225 shipment sale, what you normally would expect that were saying you thought the fourth quarter would be better than the third quarter. Can you just clarify that, because I don’t if you want us to expect that shipment sales would be above the third quarter, which should become a hard to achieve I think.
Pat Balthrop:

If I said that, Herb, it was an error on my part. I don’t think I said that. What you should expect is that the fourth quarter has historically been the highest volume quarter for us in year, that not to say that it will be this year, but it’s always been a very healthy quarter. So I wanted to make sure that you and the rest of our investors and analysts did not expect to see a 150 to 250 and then a dramatic decline from there. I think you should expect to see a number that is within or maybe slightly above our traditional range.
Herb Pathfinder:

One last thing, do you see enough indication in October about these sales to be comfortable with the fourth quarter or you haven’t seen it yet, or you can’t comment of that?
Pat Balthrop:

I believe what I said, Herb, was that I expect beads sales to return to growth in the near term.
Herb Pathfinder:

So answering the fourth quarter, but hopefully it is, I guess. Okay.
Operator:

We will go next to Daniel Owczarski - Avondale Partners.
Daniel Owczarski:

Yes, thanks. Good afternoon.
Pat Balthrop:

Hi, Daniel.
Harriss Currie:

Hi, Daniel.
Daniel Owczarski:

Just a couple of quick follow-ups, have you talked about on the consumable side, what percentage of consumables are typically being put into tips and sold to end users, and then what percentage is typically for these R&D if it like the magnetic beads and it sound like the one seems to be consistent, but the other one is coming down, but have you talked about or could you give an indication about what that typical breakdown is with consumables?
Pat Balthrop:

We have not broken that down, Dan. I will tell you it’s somewhat difficult to do, because when we ship our beads to our partner. The same beads that they use in R&D, that never generate a royalty, may also take into their factory that go into kids that generate a royalty, and our partners typically don’t know what portion when we ship the product is going to go in one direction and another either because biology and developing biology based our products can sometimes to be difficult to predict, so we have not historically broken that out and only because it’s pretty difficult for us to do.
Daniel Owczarski:

Okay and then for the one item to commentary that it sounded like they were waiting for some FDA clearance. Is that an incremental or a product that’s in addition or an assay in addition to what they do now or is that a replacement for what they’re doing?
Pat Balthrop:

It’s not really a replacement. I will tell you that what they’re doing is investing in expansion in areas such as high resolution type of transplant and also making investments in post transplant monitoring types of applications. The number of markers that are published in what’s called the nomenclature update, which happens twice a year, where markers that are discovered in the meantime that our clinically validated and need to be added to their assay portfolio, that basically how it works. So they buy beads from us to incorporate those into their kits on an on going regular course of business basis. However, there’s also the high resolution product that they’ve also been developing where they’re using our technology, which is historically been an area that’s been a growth area for them and for us. So that’s a lot of the activity they engaged in 2008, it was high resolution application development and developing new applications as the nomenclature is updated. The high resolution effort continues to be a significant priority for them and they still have additional work to do there.
Daniel Owczarski:

Then just finally on the CF-tests, did it contributed all in the quarter and what are you targeting or who are you targeting first for target customers right off about here?
Pat Balthrop:

The CF-39 version 2 product that we got clear than actually gives us the ability to more effectively compete in the portion of the market that is not in the major reference labs, you may remember from our prior discussions that 80% to 85% of the test volume, in CF presides in Genzyme. We have the business in Genzyme with the CF 39 version two does for us is give us a product that easy to use more streamlined and so on that will allow us to more effectively, get customers and remain 20% of the market. The number of customers we have, there is relatively modest, but obviously it gives us the opportunity to close those customers and then the portion of the business that is in Western Europe, the European market is much more sensitive to automation and ease of use than North American market is and so having a product that’s easier to use in more streamline, also gives us the opportunity to get customers in Western Europe that have been more difficult for us to close up to this point. Keeping in mind, however that the European market in terms of test per year is much smaller than the U.S. and Canadian market.
Daniel Owczarski:

Thank you.
Operator:

Next we have Peter Lawson with Thomas Weisel Partners.
Patrick Donnelly:

This is actually Patrick Donnelly for Peter. Thanks for taking the question. I was just wondering with the instrument placements you guys had a significant up tick this quarter, but just trends with FlexMAP, put those 16 placements in 2Q down to versus 11 this quarter. So I was just wondering put some color on that?
Pat Balthrop:

Patrick, 16 versus 11 is really a function of, the 16 that we had in the quarter, because we officially took the product to commercialization about mid June, and so we reported 16 instruments and as I think we mentioned on the second quarter call, a number of those were actually instruments that were in place that we invoiced in effect when we took the product to commercialization. So we didn’t have to ship and install them. The 11 that we did this quarter, we were actually very pleased with, we believe as the product hits its stride and as we have a number of applications available, by us and our partners on that system, we expect it to be on an annual basis, a number that will be in the high double digits in terms of annual placements. Recognizing that each one of those instruments is a lot more productive than our current install base is just because of the nature of accounts it goes into. So we were pleased with the 11 and frankly we’re very encouraged with the way the product is performing and how it’s been accepted by the market.
Patrick Donnelly:

Great. Thanks. Then just with the high margin products, there were a 58% of revenues this quarter, down from 63% last year. As you said 4Q is really a strong instrument. So, I was just wondering where you that get back up to the 63% you saw last year, or we’re going to see it somewhere around 60% for next quarter?
Pat Balthrop:

I can’t really hang a number on it. Obviously, but I will tell you that I think this quarter was artificially low, because of the very heavy concentration of hardware and the relatively modest amount of consumable sales.
Patrick Donnelly:

All right. Great. Thank you.
Operator:

Next is Dan Leonard with First Analysis.
Dan Leonard:

Thank you. I had a couple of questions about your expenses. If I’m look at Q3 versus the Q2 results, why did you grow your operating expenses at a faster rate than your sales growth?
Pat Balthrop:

Well, the operating expenses we actually run and company based on what our strategic priorities are. So what you would see in operating expenses is not a conscious decision by us to grow our operating expenses faster than our sales growth. We just manage to the company according to what we think are those strategic priorities we focus on hitting our R&D milestones. We decided to open an office in China, we decided to open an office in Japan, we added some people to be able to drive that. We also decided to pull the trigger on the RVP awareness program that I mentioned and other things, because we think those were all the correct decisions. I mean, we did not decide to grow our operating expenses that are higher rate than our revenue. We just decided that these were the right things for us to do, and so we did them.
Dan Leonard:

On those programs for example, RVP awareness program, how is that your responsibility and not the responsibility of your distribution partners, to promote that product?
Pat Balthrop:

It’s the responsibility of both actually. When it comes to distribution awareness at the physicians office level and with customers and so on, part of the overall campaign includes their involvement to achieve that and you also need to recognize that the portion of the channel that we capture versus as a manufacturer versus what the distributor captures is a much more significant portion. So, it is very much worth while and best on our part in the breakeven on that is you don’t have to celebrate to get to breakeven.
Dan Leonard:

Then my final question, since you have been talking to partners, you probably have an answer, why would you partners convert their products and might be two years ahead of the anticipated Meg takes launch that’s a primary driver.
Pat Balthrop:

The reason that I mentioned a couple times already all on the call including the fact that automation and use of use is on going priority and concern among a lot of customers and the fact that there are magnetic bead washers and other pieces magnetic equipment that exist in these labs and for them to continue to penetrate the market and address the needs of the customers it was important for us to develop the magnetic beads, they just chose to do the work in 2008 for those reasons and basically they got the MagPix applications for free.
Dan Leonard:

Okay. Thank you.
Operator:

Next, is Dana Walker with Kalmar Investments..
Dana Walker:

I have 68 questions that haven’t been asked yet. First question which might be identifying and maybe you don’t have an answer but have you determined that the number of beads per test sold is a number, where there’s flex? I am wondering if your customers are finding ways to use fewer beads per test sold.
Pat Balthrop:

That’s a very good question. Before answer is yes we have investigated and no they’re not. One other thing that we evaluated or maybe put on the list about factors that we wanted to investigate and understand was exactly what you describe and without going into a lot of detail we have validated in objective third party way that’s not case.
Dana Walker:

Does the number of Flex per test sold determine how many beads are within a test?
Pat Balthrop:

Sure, but over beads used per region is pretty much a constant number and the instrumentation that we use has a range within which the number of beads it sees in effect has to be at a particular number. So if you only have a four flex you need fewer beads and if you have a 10 flex or a 20 flex that’s for sure. That the most of the products that are partners develop however are well into the double digits and I would say the vast majority are over 20.
Dana Walker:

You are not aware that any mild difference in the number of flexes as your business grows is influencing that number in any meaningful way on comparing consumable trends versus your royalty trends.
Pat Balthrop:

Not aware of any, no.
Dana Walker:

Now, that we have put that to rest. What did you observe and I suspect will see this one your queue comes on actually but maybe you can four shadows. What if you determine your royalty trends were with your top two customers versus last comparable quarter?
Pat Balthrop:

There were actually consistent with their historical trends which are a reason why we are confident in when we did the consumables analysis, that the effect that we talked about was a transient one. They report the royalties of course on a quarterly basis, including the end user sales etc. so the royalty trends partners has continued on trajectory of the same trajectory they have been on the last couple of years.
Dana Walker:

Which is healthy growth.
Pat Balthrop:

Yes.
Dana Walker:

Despite the fact that the revenue in this quarter would be down.
Pat Balthrop:

Correct.
Dana Walker:

Alright. Third question, have you taken any steps given the volatility that this puts into your numbers to discourage both the transactions?
Pat Balthrop:

We have not taken any steps to discourage that, over the longer term as difficult 2009 has been for those bulk bead transactions and so on, over the longer term it’s a better thing for us to do, that is to have bulk bead transactions because the only reason why, a partner by beads in bulk as they want to into manufacture a lot of product, or to more lot of these develop future products both of which are good thing.
Dana Walker:

Is there a bulk discount though?
Pat Balthrop:

There is not. The same price they pay for a millimeter of beads, they pay for three liters beads on a per milliliter basis.
Dana Walker:

Shifting gears you mentioned earlier how you were increasingly confident about what MagPix might mean for the company. Would you mind expanding upon that?
Pat Balthrop:

Sure. I think if you look at the portfolio that we have, we have FlexMAP 3D which is a instrument that is applicable for a relatively few number of very sophisticated and very high volume less. The current instrument of which we had 6500 in the field the LX 200s is moreover a work force instrument, but as we evaluated our opportunities longer term, and have spent time with our partners and doing significant customers and market research there are significant numbers of potential bead users and developed world on a more distributed lap basis. So think of those as private investigators who maybe exist in an academic institution but have their samples perform data at a core lap more in the developing world, where there’s a lot of research being conducted where thus the footprint and the price point of the current instrument is such, that it makes a difficult for our partner for to turn those customers, those scientist in few customers. For all those reasons and as we have completed our development milestones and showed the product to partners and potential customers and so on, everything that we hope to see we are seeing at least so far.
Dana Walker:

Alright, a couple of last quick is their given that nice inflexion in system placements, is there anything different in the mix and/or the customers for those placements that reflects to your incremental customer happens to be or target markets in which your customers reside?
Pat Balthrop:

I would say no. I mean there’s a compared to historically, if you look at the revenue side, Dana, because of a FlexMAP 3D price point, then that represents a higher percentage of the revenue, but on a placement basis, if you look at the LX200 placements, this third quarter versus last third quarter for example, the mix of life science research versus diagnostics [Technical Difficulty] so on has not changed dramatically.
Dana Walker:

Final question and then I’ll leave the other 60 for another time. If you take a nice step up in revenue this upcoming quarter, would you expect that to be a new floor or something closer to a new floor that would set the table for 2010?
Pat Balthrop:

I would say, we’ll tell you more about that when we report our fourth quarter and give 2010 revenue guidance.
Dana Walker:

Actually one of the things comes to mind, if recalling some of your investor conferences, where you’ve talked about gastro, meningitis, and GI perhaps being 2010 events. What is affected the timeline for those three tests?
Pat Balthrop:

As I mentioned before, I believe we expect GI to be a 2010 event. The other products that we’re evaluating are the first of their kind and as such they are, as we always knew they would be significant technical challenges. If we’re successful in developing those products, we believe we’ll have a significantly and highly differentiated product, but there are just not all that easy to do.
Dana Walker:

Okay, thank you.
Operator:

Next is Matthew Scalo with Canaccord Adams.
Matthew Scalo:

Hi, guys just a couple of quick questions here. Have you noticed a change in addressing RVP testing? Have you noticed a change in decision behavior at these tertiary care institutions from when they were ordering testing volumes, because they didn’t really know what it was and now with all of the information that’s come out from the CEC, they may avoid testing or at least limit the testing in the third quarter, fourth quarter going toward, or limit it to just hospitalizations.
Pat Balthrop:

I would say Matt that, I don’t have the number off the top of my head, but the majority of samples that are performed on RVP are in-patient samples already, and so particularly in those institutions that are serving higher risk populations, the children’s hospitals for example, which is where there’s a lot of the activity going on. As the season approaches, excluding H1N1, the thing to keep in mind is that in those institutions, the season in their mind includes things like the RSV season, because RSV is a significant issue in children’s hospitals, and the symptoms are the same whether they have flu A, flu B, one of the para flu or RSV A or RSV B. So as we move into the season, we actually believe that when the seasonal flu incidents rate continues, that the fact that we have this product that will address the clinical needs that exist in the institutions where we are focusing our attention, will actually allow us to continue to enjoy nice revenue streams. So I understand why you are asking the question, because of what’s happening with other companies who have products in this space, but because of the nature of our product and the constituents in that product, we believe that it’s a slightly different scenario for us.
Matthew Scalo:

Okay, terrific, and then switching to MagPix, you touched upon it. As far as distribution or go to market strategy, do you use existing channels such as Abbott or Fischer, have those been established?
Pat Balthrop:

This is about MagPix, is that what your question is?
Matthew Scalo:

About MagPix, yes.
Pat Balthrop:

Yes, so we were expecting to use existing channels. I would remind you Matt, that Abbott and Fischer are distributors for molecular diagnostics assays and the equipment in the diagnostics market, we don’t expect MagPix to be in the diagnostics market, for example in 2010. Like FlexMAP 3D, we expect FlexMAP 3D to be used in diagnostics labs longer term, but the initial placements and applications will be in research labs for research work, and similarly with MagPix we believe the early engaged partners and the assay applications will be for research labs doing research on using MagPix.
Matthew Scalo:

Okay, I guess last question did you mention the number of new partners that were signed up this quarter if any, and then was there any interruption from the resent acquisitions of some of your smaller partners in this quarter?
Pat Balthrop:

We did not announce any new partners this quarter, that’s the answer to your first question. We didn’t experience any disruption regarding consolidation by our current partners. The consolidation events that spring to mind over the past couple of quarters have been GenPro’s acquisition of Tepnel, Millipore’s acquisition of Epidimy [ph] using two examples. Epidimy was not one of our partners, but will enhance Millipore’s multiplexing business, because of the nature of what they do. GenPro’s acquisition of Tepnel, we haven’t really seen any disruption type of effect. What we have seen historically when one of these smaller partners who may be innovative but a little less resourced, is acquired by a larger multinational, more well funded company, it ends up being a positive event for us. We saw that when Millipore acquired up state, when Millipore acquired Linko, we saw it when Biosources acquired what is now life technologes, etc… So for all those reasons we haven’t encountered a situation yet, where a smaller company was acquired by a multinational company where that has turned out to be a bad thing. Almost all the small partners that we have are acquired by those big companied because they are growing fast, and so if anything, it actually ends-up, looks after the business because they are successfully integrated in leading to enhanced investment in the portfolio and Millipore is the best example of that.
Matthew Scalo:

Fair enough. Thanks Pat.
Operator:

Next is Tycho Peterson with JP Morgan.
Sanjay:

Hi, this is Sanjay for the follow-up. Just a quick clarification on the newborn screening; as far as the timing for, and I apologize if I missed that, and also whether or not what the timing is for a launch in China.
Pat Balthrop:

So the newborn screening assay which has been developed, we call that NeoPlex4. In corporates four markers that will be used in the new born screening labs around the country. We expect to launch that product at the end of this year, early 2010, outside of the United States. It will be a 510(k) submission to the US FDA, and that has been confirmed and the clinical plan is underway etc, and so we expect that to be a 2010 event in the United States, but we expect to commercialize that at the end of this year, maybe early 2010, in the very early part of 2010 outside of the United States, and so that is where we stand with the newborn screening. Was there another part to your question that I did not…
Sanjay:

In terms of monitoring China…
Pat Balthrop:

Okay, sorry about that. So we don’t expect to launch NeoPlex4 in China in the near term. We do have an agreement with a Chinese company called Mingyong that will help us penetrate the newborn screening market there. That’s more of a partner relationship than a product distribution relationship.
Sanjay:

Great, thank you.
Operator:

Next is Alastair Mckay with GARP Research & Securities.
Alastair Mckay:

Yes, hi Pat. Have you given any thought to quantifying the RBP, using the emergency use of resolution mechanism that FDA has made available for some or is there a way to add all of those that are directly H1N1.
Pat Balthrop:

Yes, actually Alastaire we’ve had conversations about that including conversations with FDA. You’ll recall that back in June we received some updated labeling related to H1N1 regarding our assay labeling, but to your point, the logo specific to H1N1 is not one of the constituents that we have in the panel. The competitive advantage that RVP has in the marketplace is the number of targets that it detects and its ability to subtype flu A, and we had that sub-typing capability already, based on our conversations with customers, and with the regulators. The basic clinical value would be minimal at best, because right now a patient that is flu A positive and is not seasonal flu A positive has resulted to be H1N1 positive. So the clinical information they get today, would not be enhanced if we did the EUA, so we haven’t done it.
Alastair Mckay:

Okay thanks.
Operator:

We will take our last question from Ashim Anhan [ph] with (Inaudible).
Ashim Anhan:

Thanks guys. I think I probably missed this number. If you can give me how much were the bulk consumables this quarter.
Harriss Currie:

The bulk consumable purchase for the quarter were $4.3 million. Now on bulk we’re $1.8 million.
Ashim Anhan:

Okay, wonderful. Now in terms of swine flu I know there have been plenty of questions, so just if you can tell me, obviously the swine flu cases are probably down versus what you saw in the second quarter, but how have you seeing the swine flu cases, post close of the third quarter, if you would like to comment on that?
Pat Balthrop:

I believe what I mentioned in my remarks was that we are actually seeing an acceleration in the fourth quarter, of the number of cases, and the samples that are arriving and current customers are increasing etc. So, whether that continues through the rest of the fourth quarter we’ll have to wait and see, but that’s what we’re experiencing now.
Ashim Anhan:

Okay, and obviously RVP has been launched in Europe, any time lines in terms of US launch?
Pat Balthrop:

We expect that clearance in early 2010.
Ashim Anhan:

Okay. Now, I was doing the simple math and maybe it’s too simple and it’s giving me the wrong answers. Considering that you have many high number of placements in terms of shift, it looks like the ASP has gone down significantly and this will be kind of going in the other direction that I would have thought considering you have FlexMAP 3D now in the make.
Pat Balthrop:

The ASP for our current Luminex 100, Luminex 200 actuals in the third quarter of 2009 was actually a higher number than it was in the third quarter of 2008.
Ashim Anhan:

But sequentially in comparison to second quarter ‘09
Harriss Currie:

Yes, the one thing you need to make sure you take into account, is that with our systems, the system revenue if you divide it by the specific number of systems which you don’t take into account is often times the system is bought with or without, and that’s why platform or sudden platform or sometimes folks buy the system in advance and then come back later and buy a certain XY that’s included in total system revenue, but becomes a bit of an outlier and in the calculation that you are doing, if you just use the gross number for your calculations.
Pat Balthrop:

So the number that you mentioned is accurate, but you should not interpret that as meaning that we did something to pricing, because we did not.
Ashim Anhan:

That actually was the question. Finally, this is regarding the continued weakness in consumable growth, though you actually see enormous growth in royalties. Would you like to comment on long term strategy, like you obviously have done very well with Blue [ph] and you lounging another product, and that there are more products in the pipeline. Considering this weakness in consumables, would you consider being more aggressive in the Assay Segment going forward? This is just a broad picture question.
Pat Balthrop:

We already are being aggressive in the Assay Segment. Ashim, we basically evaluate the market and do the market segmentation, so that in certain segments we try to be aggressive by ensuring that we will continue to achieve market penetration with our partners. I would use the diagnostics market transplant as an example, and in the research market multiplex proteins an example, with transplant partners like OneLand in Gen-Probe and with life science research protein partners link Bio-Rad and Millipore. The molecular diagnostics market on the other hand we expect to succeed longer term by investing in assays, and in some of the specialty markets we are doing that we well. So I’m not sure that they are mutually exclusive. The only thing that ends up being a critical issue is what we can afford to do, based on our overall financial picture, and so the good news is that we believe that in the technology segment where we are succeeding with our partners, that as you’ve heard us say before, we believe we’ve achieved critical mass in terms of R&D dollar expenditure. So the incremental expenditure going forward, and as the company grows and as we invest in R&D will likely be very, very heavily weighted toward assays, and therefore allows us to be increasingly aggressive there.
Ashim Anhan:

Wonderful, thanks a lot guys.
Operator:

This concludes today’s question-and-answer session. At this time I would like to turn the conference back to our speakers for any closing remarks.
Pat Balthrop:

Well thank you for your attention and your interest in the company. We are looking forward to closing the year strongly and giving you an update in 2010. We hope that you enjoy the rest of the year and have a happy holiday season. Thanks very much.
Operator:

That concludes today’s conference. Thank you for your participation.

Luminex Corporation Q3 2009 Earnings Call Transcript

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Luminex Corporation
Q3 2009 Earnings Call Transcript