Luminex Corporation
Q3 2013 Earnings Call Transcript

Published: 5 Nov 2013

[Operator:]

Good day, ladies and gentlemen. And welcome to the Luminex Corporation's Third Quarter 2013 Earnings Conference Call. My name is Glen, and I will be your operator for today. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions) I would now like to turn the presentation over to Harriss Currie, Senior Vice President and Chief Financial Officer for opening remarks. Please proceed.

[Harriss Currie:]

Thanks Glen. Good afternoon. And welcome to Luminex Corporation's conference call to review third quarter 2013 financial and operational results. Today, Pat Balthrop, our President and CEO; and I, will discuss the results that were released today after market close. In addition to the audio portion of our conference call, we’ve prepared a slide presentation that’s on our website at www.luminexcorp.com and will be available for six months. I’d like to remind everyone 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, 2012, and our quarterly reports on Form 10-Q for subsequent periods, filed with the Securities and Exchange Commission. We encourage you to review 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, as 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 be available on our website in accordance with Regulation G. I'll now turn the call over to our President and CEO, Pat Balthrop.

[Pat Balthrop:]

Thank you, Harriss. Welcome to our third quarter 2013 earnings call. In our prepared comments and presentation, I'll summarize the third quarter corporate highlights, Harriss will review the financial performance and I'll conclude with a review of our 2013 priorities, after that we'll open the call for your questions. We generated a mixed performance in the third quarter with good performance on the topline except for the effect of an unexpected speed bump by delay of a large order by our largest assay customer in the last two weeks of September which led us to finish below our internal expectations for the quarter. If this order had been booked and shipped as expected we would have achieved our internal expectations for third quarter revenue and assay revenue growth would have been around 16%. Outside of assays, our other product lines showed continued strong growth. We shipped 280 multiplexing analyzers higher than our historical quarterly average range of 200 to 250 shipments and royalty revenue grew 17% over the prior year. In addition to the delayed order other one-time items occurred during the third quarter, which are reflected in our results. As you are probably aware, one of our specialty lab customers, Natural Molecular Testing Corporation or NMTC filed Chapter 11 Bankruptcy on October 21st. Consequently, we’ve elected to take a full allowance against all accounts, receivable balances from NMTC. However, I'd like to stress that the entire receivable balance for NMTC was related to the sale which occurred prior to NMTC’s June 2013 launch of their personalized medicine panel and this allowance represents less than 2% of Luminex total revenue. On a positive note, we realized a gain of $5.4 million from the sale of our minority interest investment in Advanced Liquid Logic, which was acquired by a third-party in July. And as you know from the previous announcement, we incurred charges during the quarter due to restructuring. Excluding $2.2 million of charges related to this restructuring, non-GAAP gross margin was that 65% for the third quarter and while we acknowledge 65% gross margin is relatively low compared to our historical average, we believe the factors affecting our gross margin in the quarter such as timing of orders are transient and we expect our margins to improve near-term. The protracted administrative issues in the United States related to reimbursement of certain molecular diagnostic assays have affected Luminex, the industry and our customers during the third quarter and contributed to the delayed order that I mentioned earlier. I'll provide an update on the reimbursement situation in a moment, but I want to emphasize that given recent developments, such as the publication of the 2014 reimbursement rates, we are encouraged that we will see resolution in the near future. While we faced some headwinds within the quarter, I’d like to highlight our year-to-date performance for the nine months ending September 30th. On a year-to-date basis, we’ve delivered double-digit growth across most revenue streams. Total revenue year-to-date increased 8% year-over-year with significant contributions from royalties and assay sales up 17% and 10%, respectively. While we do face some challenges in the near-term our year-to-date performance demonstrates the continued long-term success of our products in the marketplace. Given our history of innovation and successful execution, as well as our confidence in our strategic initiatives, we expect to continue delivering strong growth in the long-term. On an adjusted basis, our assay growth year-to-date would have increased 20% over the prior year. For our assay business, we believe that using an adjusted growth rate year-to-date offers our investor a more realistic and more accurate reflection of the operational trend in 2013. You will recall from our first quarter call that we shipped to our distributors over $2 million of advanced assay purchases in the fourth quarter of 2012 due to expiration of our distribution agreements as part of our transition to a direct molecular diagnostic sales force in 2013. Additionally, factoring in the delayed order in the last few weeks of this quarter by our largest assay customer, on a year-to-date basis after making those adjustments, we would have delivered over 20% growth in assay sales. We believe that we are strategically positioned for long-term success given our low cost manufacturing position and that our fundamentals remain strong. We continue to invest in the necessary infrastructure to support our direct molecular diagnostic sales force. We continue to see growth in new customers for products such as GPP and we are continuing to invest in our R&D pipeline, particularly in our next growth drivers such as Project ARIES and our next-generation multiplexing technology. Moving on to Slide 7. While the growth in assays in our reference lab channel was impacted in the quarter, we continued to make significant strides in our commercialization efforts for our innovative, Gastrointestinal Pathogen Panel or GPP in United States and we are on track with customer additions. In previous quarters, we described how a significant percentage of GPP wins have come from new adopters and this trend continued in the third quarter. This first-to-market molecular assay and our motivated direct sales effort are having a positive effect that we planned. Consistent feedback from physicians and labs is that they recognize the value of GPP immediately. For example, GPP received an enthusiastic response at recently conducting Scientific Symposia and we were very pleased with how GPP was received at the American College of Gastroenterology Annual Conferences, San Diego just a couple of weeks ago. Regarding pharmacogenomics, in spite of the write-down involving one customer, we continued to make good progress with our PGx assay portfolio. In July, we received FDA and European clearance for an updated Cytochrome P450 2D6 assay. Additionally, we received FDA and European clearance for a new comprehensive genotyping assay, Cytochrome P450 2C19. Overall, our genetic portfolio which includes cystic fibrosis assays as well as pharmacogenomics assays represented 36% of our assay revenue in the quarter. Our infectious disease portfolio represented 64% of assay revenue in the quarter, with key contributions from GPP, RVP and our women's health assays. As I mentioned earlier, we continue to monitors the U.S. reimbursement landscape closely. While, our company does not receive reimbursement directly from insurers for our test, our customers have been affected, particularly those who run molecular test on outpatient samples, which includes reference labs, hospital labs and other independent laboratories. As you know, the current situation has lacked consistency and transparency across payors in regions, making details and resolution at times difficult to predict. And while these are unprecedented conditions, we are seeing signs that the situation is resolving such as the publication of the 2014 reimbursement rates, which for Luminex assays are healthy. We work closely with our customers through 2013 to help them manage these unprecedented conditions. For example, our largest assay customer has attempted to maintain a disciplined approach towards purchasing given the current reimbursement situation, resulting in the unexpected delay of a large order at the end of the quarter. But our business and our strategic relationship with these customer has never been stronger. In other cases, especially smaller specialty labs, the effect has been more severe such as NMTC having filed for bankruptcy earlier this month. And while this customer’s bankruptcy was disappointing, we are still confident in our competitive position and in the future opportunities ahead of us in the pharmacogenomic segment where interest remains very high among customers. Unfortunately for us, these issues impact only a fraction of our total assay revenue. I'm confident that Luminex will be well positioned once these issues are resolved which we expect soon. On to Slide 9 for an update on our key catalysts. GPP is in full commercialization in both the U.S. and Europe. As previously mentioned, customer additions are on track and we've been pleased with the response from the marketplace. With regard to our direct selling transition, all domestic regions have been fully covered for several months by a sales professional and technical support staff. We continuously hear positive feedback from customers on this transition. We continue to mention the direct selling transition to our investors because of its strategic value. Everyday, we are better able to serve our customers with a growing portfolio of molecular diagnostic solutions in a manner that best addresses the customer’s specific needs and having a direct sales force places Luminex in the most advantageous position as a R&D investment yields and an expanded portfolio in the near-term. Regarding R&D investment, we are excited about the progress being made in our sample-to-answer system, Project ARIES. We remain on track with the overall development timeline as we move into beta testing. We will be unveiling this system in just a few days to current and future customers at the Association of Molecular Pathology meeting in Phoenix. We’ll also be holding an investor event during the conference on November 13th, which will include a demonstration of the instrument and discussion of other pipeline products. And we continued to make progress on our next-generation multiplexing technology, which we will also review in Phoenix. Clearly, these near and long-term catalysts represent exciting growth opportunities for the company. Now, Harriss will review the financial data and afterwards, I'll return to discuss our outlook for the rest of the year.

[Harriss Currie:]

Thanks, Pat. Let’s begin the financial review with a look at revenue. Overall, Slide 11 shows our third quarter revenues and respective growth rates on a consolidated basis. As Pat mentioned previously, consolidated revenue for the third quarter grew by 1% over the prior year, led by strong growth in royalties. Looking at our revenue growth by segment, our partnership segment or TSP revenues grew by 6% for the quarter. As you can see, the TSP revenue increase for the quarter was driven by the increase in royalty revenue of 17%, representing reported end user sales of $114.3 million or $457 million on an annualized basis. System and consumable revenues were essentially flat for the period and other revenues were up approximately 8%. Other revenues for the TSP include services and support, training, license amortization, parts and shipping. We sold a total of 280 multiplexing systems in the third quarter, finishing the quarter of cumulative shipments of multiplexing systems of 10,410. All of our multiplexing system sales for the quarter were made in the TSP. For the 280 multiplexing systems replaced, LX systems accounted for 128 units. We shipped 135 MAGPIX units and the remainder of our multiplexing shipments were FLEXMAP 3Ds. The flatness in consumable revenues reflects continued stabilization of purchase volumes from our largest customer and some headwinds from our LSR focused partners. As noted in our second quarter call, our LSR focused partners had cited lower consumable utilization per installed system due to tightening research budgets in the U.S. with the implementation and sequestration on April 1st as well as tightening of research budgets in other select countries. There are 22 bulk purchases of consumables in the quarter, totaling $10.7 million or 83% of total, ranging from $101,000 to $4.2 million. Our ARP segment revenue declined for the quarter by 6%. The decline in the current quarter can be attributed primarily to decline in ARP system revenues of 90% which represent both the decline in the sale of punching systems from our subsidiary in Australia and the elimination of system sales to our distribution partners as agreements expired at the end of 2012. Assay sales were down 2% for the quarter but as Pat mentioned previously we’re heavily affected by the delay of an order from our largest assay customer. For the quarter, infectious disease assay sales comprised 64% of total assay sales with genetic testing sales comprising the rest. This distribution is comparable to the third quarter of 2012. In the aggregate, our higher margin items, consumables, royalties and assays comprised 75% of current quarter revenue, a one percentage point increase from the concentration of the prior year. On a year-to-date basis, our TSP revenues grew by 5% and our ARP revenues are up 11%. We adjust for the purchase of inventory by our former distribution partners in the fourth quarter of 2012. ARP segment revenue would have grown by healthy 19% on a year-to-date basis. Consolidated gross margin for the quarter were 61% but as Pat mentioned included $2.2 million impairment charge, the quarter in conjunction with our restructuring plan announced in August. On a pro forma basis, excluding net charge, gross margin would have been 65%. The decline in gross margin percentage after adjustment for the impairment charge is primarily the result of three factors, the decline in the average system price discussed previously, the decline in the percentage contribution of our higher margin LMA or Luminex Madison Assay sales of approximately 10%, resulting primarily from the delay by our largest assay customer, and continued investment in our customer and technical support functions. We remain confident in our ability to maintain gross margins in high 60% to low 70% range on an ongoing basis. GAAP operating expenses increased 10% for the quarter and as a reminder, GAAP operating expenses include $2.1 million of cost related to our restructuring plan announced in August and $3.9 million charge attributable to the allowance for the entire receivable balance from Natural Molecular as a result of their recently filed bankruptcy. Couple of other items to note with respect to the composition of our GAAP operating expenses although we currently expect consolidated R&D expenditures for the full year to remain in the low 20% range as a percentage of revenue based on our current revenue guidance range. The increase in SG&A can be primarily attributed to increases related to taking full control of our molecular diagnostic channel. For the third quarter, consolidated GAAP operating margin was a loss of 8%, a 15 percentage point decline from 2012 GAAP results, largely driven by the $4.3 million in restructuring costs recorded in the quarter, along with the charge associated with the allowance for natural molecular. On a non-GAAP basis, the third quarter operating margin approached 7%, down from the prior year percentage of 19% but still inclusive of the NMTC bad debt expense. We do not currently believe that we have any additional material exposure related to our account receivable balances. Consolidated effective tax rate year-to-date was 67%. Our effective tax rate fluctuates depending on our host of factors such as the distribution of income across our global jurisdictions. We currently expect our effective tax rate for the year on a GAAP basis to be approximately 60%. The high effective rate is a function of a higher than expected proportion of our 2013 sales being derived from our domestic locations in Austin and Madison and a corresponding higher than planned loss from our Australian location in Brisbane. This loss and related lack of financial performance in Australia is one of the reasons we announced restructuring in August. Because we currently have a valuation allowance on both our Australian and Canadian tax assets, there is no income tax benefit for GAAP purposes. For the quarter, the effective rate on our U.S. operations was only 25% with the inability to recognize the benefit for allowed-for taxed assets resulted in the higher effective tax rate. Other jurisdictions in Netherland, China and Japan have no material effect on the ETR in the current year. For the quarter, we generated net -- GAAP net income of $796,000, on a diluted basis, $0.02 per share, compared with income of $0.04 per share in the third quarter of 2012. On a non-GAAP basis, we generated net income of $2.3 million or $0.06 per diluted share, down $0.09 from the prior period. The allowance for NMTC receivable contributed almost 100% of the decline in EPS on a non-GAAP basis. Now turning to our two core segments. GAAP operating profit of our technology strategic partnership segment was a healthy 28% of TSP revenue for the quarter, an increase of 5 percentage points from the prior-year period primarily due to the increase in royalty revenue and a shift of research and development resources towards development activities within our ARP segment. The GAAP operating loss of our ARP segment increased, driven by the modest reduction in revenue, pretax restructuring charges and the allowance for bad debt expense recorded in the current quarter, offset somewhat by non-recurring acquisition costs, expensed in the prior year, that are not present in the current year figures. We ended the quarter with $62.7 million in cash and investments, up $19.7 million from June 30th balance. We'll discuss the components of the increase on the next slide. DSO on accounts receivable stood at 55 days equivalent to December 31, 2012 balance. And inventory on hand at September 30th was approximately 1.7 forward quarters of total inventory and is near our target range. Slide 16 summarizes our year-to-date cash and investment flow. During the quarter, we experienced strong operating cash flow, additionally due to the acquisition of Advanced Liquid Logic for which we held an ownership stake. We received cash proceeds of $9.5 million, resulting in $5.4 million gain. Year-to-date we have expended $14 million on our share repurchase plan and $7 million on the final settlement of our former molecular distribution agreements. A repurchase plan will substantially complete as of the end of the third quarter. Now on to 2013 revenue guidance. We are revising our 2013 revenue guidance to a range of $212 million to $217 million. From a macro level perspective, we remain cautious about the life science research market given that LSR focused partners decided lower research budgets in the U.S. The real swing factor from our prior guidance, our expectations for assay sales from our reference lab customers, who have been dealing with the external market factors by managing the timing of their purchases, they have demonstrated this hike management can significantly affect our quarterly results. For example, for the first two quarters, our average assay revenue was $20 million while the current quarter assay revenue was $16 million. As Pat mentioned earlier, the reimbursement issues appear administrative in nature and should prove temporary, but nonetheless, we believe it's prudent to consider these in the context of our communicated guidance. Obviously given their recent bankruptcy filing, note value has been attributed to NMTC until our last or workable plan results if and when they emerge from -- for reorganization. I'll now turn the call back over to Pat for some final comments.

[Pat Balthrop:]

Despite the uncertain near-term environment, we continue to invest in our future growth drivers as we aim to be in a position to successfully execute on our plans when the reimbursement environment improves. These include project ARIES as we described, leveraging our direct sales force to drive adoption and use of our proprietary assays. In summary, we remained focused on our strategic initiatives and executing our long-term growth strategy. Within our propriety assay portfolio, we are pleased with the user feedback in the U.S. for our GPP assay, and we continue to see excellent opportunities within our LVT strategy. We continue to make significant progress with project ARIES which will open up sizable market opportunities in future years. With all that said, we’ll continue to manage the business with an eye on our strong financial position and our responsibility to shareholders. We look forward to hosting our investor event on November 13 in Phoenix at the Association for Molecular Pathology Annual Meeting. We plan to unveil the ARIES system for the investment community including discussions of ARIES position in the market place and why we believe it will be a core driver of the company’s long term growth. For more information and to register for this event, please contact Mat Norman in Investor Relations. This ends our formal comments. Glen, please open the line for questions. Question-and-Answer Session

[Operator:]

(Operator Instructions) And your first question comes from the line of Tycho Peterson with JPMorgan. Please proceed.

[Tycho Peterson:]

Hey guys. Thanks for taking my question. I guess, first, as we think about just fourth quarter here and some of the gives and take, can you give us the sense of what you are factoring in around flu stocking. Can you also talk about -- are you assuming divestiture of the newborn screening business by year-end and then can you kind of quantify the headwinds from NMTC in terms of what takes away from our prior projection?

[Pat Balthrop:]

So as far the guidance is concerned Tycho we are assuming a mild-to-normal flu season so no significant stocking is included. Regarding the other factors as Harriss mentioned during his remarks, we believe it’s prudent to consider the affect that in the reference lab segment, significant orders can have and so we are being prudent in that regard. Aand as far as NMTC is concerned, as I think Harriss also mentioned that there is nothing included in our guidance for NMTC for either personalized medicine panel or any other products.

[Tycho Peterson:]

Okay. And then on GPP last quarter, you talked about Europe, I think you were still working through some issues there and it was doing okay but behind expectations, can you may be just talk about where you are on the European rollout?

[Pat Balthrop:]

I am sorry the last part of your question, Tycho, was about the European rollout?

[Tycho Peterson:]

Just updated us on GPP in Europe, you had called out some headwinds last quarter, I think it was U.K.?

[Pat Balthrop:]

So the way to think about that is that we believe that we are on a good trajectory in Europe. Because of what happened in 2012 where we -- as we rolled the product out, we didn’t make as much as progress as we expected. We made a number of changes there regarding our European organization and we are very pleased with the progress that we are making. But I think it’s fair to say that we got off to a slower start last year and that’s kind of affecting the ramp that we are experiencing this year but the slope of that ramp is very encouraging in Europe. In United States, the progress that we are making on GPP because I mentioned is right on track. The numbers of customers that we expected to have at this time et cetera that’s right where we wanted to be. Harriss just reminded me that I neglected to answer a question you asked a minute ago, Tycho, about new born screening divestiture by year end and we have nothing included in our guidance associated with that divestiture. Tycho Peterson - JPMorgan Okay. And then just last one on ARIES, can you remind us, I mean you talked about the ‘14 launch, can you remind us about the next kind of milestones and timing of the actual commercial launch?

[Pat Balthrop:]

I would ask you to tune in when we are in Phoenix in next week and we will be able to fill in with all those other details.

[Operator:]

And your next question comes from the line of Dan Leonard with Leerink Swann. Please proceed. Justin Bowers - Leerink Swann Hey good afternoon. This is Justin on for Dan. So Pat, could you just give us an update where the industry is in the terms of reimbursement debate and kind of what we should look for over the next few weeks or months and then just in term of the orders, are you seeing similar behavior with any of your other customer or was that just kind of isolated?

[Pat Balthrop:]

So regarding a reimbursement situation and it’s been a somewhat surreal experience in 2013, primarily administrative in nature. A lot of the test that our customers have been experiencing difficulties getting reimburse have always been -- have historically been reimbursed. And so I don’t think anybody really saw the events of 2013 coming as it were. And so as we’ve gone through the year, we and our customers, I think have been working as closely as we can to make sure we do the right -- make the right decisions to manage the business on an on -- on a kind of day-to-day basis and that’s what led to the delay in the order in the third quarter. Because it’s difficult to predict that’s also have effected our guidance for the fourth quarter. But I want to emphasize is I think I mentioned in my formal remarks that we are encouraged about what we are seeing for 2014. As you may know the November 1, 2014 reimbursement rates were published and for the assay that Luminex manufactures themselves, those reimbursement rates are quite healthy and way into the triple digits for most of these molecular tests. So we are encouraged, once we get through this difficult period, we are encouraged about how that will shape up. But that’s what affected us in 2013 and that’s what affected customer behavior, that behavior has been true for our single largest customer, but frankly true for other customers as well and as I mentioned, I think, in my formal remarks concentrated in the reference lab channel as opposed to the hospital lab channel. Justin Bowers - Leerink Swann All right. Thank you.

[Operator:]

And your next question comes from the line of Dan Arias with UBS. Please proceed.

[Dan Arias:]

Yeah. Hi guys. Thanks for the questions. Head on GPP in the U.S., just to clarify, should we assume that the fact that the rate of new customer additions is on track means that the way you guys are thinking about revenues ramping going forward is the same as it was prior to launch?

[Pat Balthrop:]

Yes. I think the adoption rate on the customer side is where we had always planned it and there has been on a individual customer by customer basis a -- not the most robust adoption but, meaning that some customers have offered the test but not really ramped as we had previously expected. I would say those are more the exception in the rule. So it is not universal. If you do some customer surveys, you -- for example you may run into a customer like that. But overall we are pleased with the progress we are making in and it will certainly be a growth driver for us in 2014.

[Dan Arias:]

Okay. And as MAGPIX clearance by the FDA impacting that uptick or that interest from customers, I think you…

[Pat Balthrop:]

Yeah.

[Dan Arias:]

… talked about that has being a strategic importance last time?

[Pat Balthrop:]

Yes. It is. We’re -- because it gives customers the option. Many of these customers, I am estimating half are already xMAP users so they may have an instrument in place. But that instrument may not necessarily be in the right laboratory in the institutions. So MAGPIX gives them an alternative to use the same instrument as their neighboring laboratory on a different floor down the hall may use or to adopt the MAGPIX system because it’s easier and smaller, and so it definitely -- giving a customer a choice like that is definitely a favorable factor.

[Dan Arias:]

Got it. Okay. And then just to clarify, Pat or Harriss on guidance, the new range assumes that the large order that got delayed this quarter comes through in 4Q, correct. You are not allowing for some sort of potential on push off to ’14, right?

[Pat Balthrop:]

No. That’s, I mean, that’s correct, but you have to remember that with all of our large customers, excuse me, with our large customers whether they are frankly on the TSP side or the assay side, we get multimillion dollar orders. And so the ordering question, we may book that order in the third quarter but there maybe toward the end of fourth quarter that may slip in. Frankly, we didn’t anticipate that necessarily in the third quarter hence our comments but that’s what reflected in our cautionary guidance.

[Dan Arias:]

Got it. Okay. Thanks.

[Operator:]

And your next question comes from the line Bill Quirk with Piper Jaffray. Please proceed.

[Bill Quirk:]

Hey. Great. Thanks. So, first off, if we think about, preliminary thinking about 2014, Pat, obviously there is a lot of moving parts going on between NMTC, reimbursement, which positively it sounds like things are starting to shake out a little bit, Project ARIES launch in the back half of the year? Any preliminary thoughts about how we should start to think about that’s given that, let's say there are quite a few moving parts going on for 2014?

[Harriss Currie:]

Well, we’ll be prepared to talk about that obviously when we report our fourth quarter results, Bill, and I will defer to then. I will say though that I think the moving parts that you mentioned based on what we know today those moving parts are accounted for and behind us. We don’t anticipate a new-born screening or restructuring event to recur. We don’t anticipate a natural molecular type of event to recur, et cetera. So, part of what you see in the third quarter results is dealing with all those issues so that we can move into the fourth quarter in 2014 without any of those issues hanging over us.

[Bill Quirk:]

Understood. And then just to go back to an earlier question and apologies, still trying to obviously get all the math squared away on our end here, but if we think about the delta in guidance? Can you help us think about what percentage of that is life sciences versus diagnostics and to the extent that you can even pull out NMTC, I think that will be really helpful? Thank you.

[Pat Balthrop:]

I don’t -- I am not sure we are prepared to separate our delta in guidance from TS -- from the partnership segment versus the Assay segment, except to say that and the reason for that is because we don’t provide front-end guidance in that way. So our total revenue guidance is, as I think Harriss mentioned and I confirmed is really intended to make sure that we are setting our full year expectations in the most prudent way possible. That’s about as detailed as I can get at the moment.

[Bill Quirk:]

Okay. And then, one last one for me here and this is on Project ARIES, recognizing that we are all going to get a chance to see it here very soon? Can you help us think a little bit, more so on the logistics side, Pat? Should we expect that your existing suite of diagnostic tests is going to be transitioned over there, something that we should expect and immediately upon launch within a year, just any logistics here to help us think about positioning would be great? Thanks.

[Pat Balthrop:]

Well, rather than do that on this call, Bill, I’d rather keep you in suspense, frankly, and we will obviously be able to do that in a fair amount of detail and hopefully, in a robust way that will be more than satisfactory to you when we are prepared to do so in Phoenix next week.

[Bill Quirk:]

Got it. Thanks guys.

[Operator:]

And your next question comes from the line of Brandon Couillard with Jefferies. Please proceed.

[Brandon Couillard:]

Hey. Good afternoon. Pat, could you parse out how much of the third quarter revenue shortfall may have been competitive or what you are seeing in terms of the competitive landscape, particularly around the CF category? And should we expect, I understand visibility is low but would you anticipate the reimbursement headwinds to perhaps persist into early 2014, is that a risk, or do you think that would be fairly somewhat back to normal by that point?

[Pat Balthrop:]

Well, I, first of all, on the competitive landscape the issues that we’re dealing with will have nothing to do with competitive displacement, particularly in the CF category, as you may know CF is concentrated in primarily two main customers and one of those is our single largest customer our Labcorp. And the -- and so the -- we don't provide product or line item revenue commentary, but what I will say is that that wasn't really a factor in and what we’re talking about as it relates to this third quarter order issue. The -- regarding the second part of your question about reimbursement the way we're thinking about it and the way our customers are thinking about it is that the reimbursement headwinds the everybody is encountering in 2013 are expected to persist into the first part of 2014 only because when you do a test in 2013 you don't get paid for it necessarily until the early part of 2014. And so anything, any test that’s done in 2014 is reimbursed in 2014 rate assuming that these administrative issues that we talked about before resolve and everybody seems to believe that they will be resolved that it will be a slight hangover into the early part of next year but not one that will last through the year.

[Brandon Couillard:]

Thanks. And then coming back to the fourth quarter guide, it seems to imply a fairly substantial sequential uptick in revenue to the tune of $5 million or $6 million, not sure if you feel comfortable quantifying the come potential size of that large order that was pushed out? But could you just sort of walk through the puts and takes that we should expect sort of by line item whether it is consumables and assays to trend in the fourth quarter relative to the third…

[Pat Balthrop:]

Well…

[Brandon Couillard:]

… understanding there is some seasonality in the fourth quarter but uncomfortable…

[Pat Balthrop:]

Yes. The size of the order that we talked about that was, so we expected in the last week or two of the third quarter. I believe I listed on one of my slides that right about $3 million. So that may help you. As far as the individual line item affects in the fourth quarter. That's not, providing that kind of detail guidance is not something we’ve historically done. So I'm not think -- I don’t think I am prepared to do that.

[Brandon Couillard:]

All right. Thank you.

[Operator:]

And your next question comes from the line of Zarak Khurshid with Wedbush Securities. Please proceed.

[Zarak Khurshid:]

Hi. Thanks for taking my question guys. With respect to the NMTC deal, do you know why they went out of business? And can you just talk to your broader exposure to pay management labs and other labs doing similar things as NMTC.

[Pat Balthrop:]

Yes. So, I'm not really qualified to speak on behalf of one of my customers, except to say that, I know they file for Chapter 11 protection that does not mean that they are not, there are out of business and I’m sure you understand the details there.

[Zarak Khurshid:]

Okay.

[Pat Balthrop:]

As I mentioned in my formal remarks, we believe that given the nature of our technology and how that’s been received in laboratories large and small, broad based very large national laboratories, as well as more focused specialized or what we call specialty labs and NMTC would qualify the specialty lab. We believe that we are very well-positioned there. We had a lot of interest in our technology. And the pain management PGX section is one that we believe over the longer term will continue to be a nice growth driver for us, not necessarily because of one customer or another customer but just as a broad portfolio across all of our clinical customers.

[Zarak Khurshid:]

Understood. And then with respect to your large customer and the reimbursement issues, I know they're putting lot of energy in resolving the problem. Do you have a sense for their progress in the third quarter and did things improve at all versus the issues previously?

[Pat Balthrop:]

Yes, I mean, I apologize for not having a lot of data there. I can only give you kind of anecdotal information based on the -- the very close way in which we work with this particular customer. I can only tell you that they are encouraged by the fact that things are -- have improved through the year, including through the -- in the most recent quarter. And they know what we know that the 2014 rates are published and they know that what we know that they’re healthy at least for the -- for the products that we have. And so for those reasons, hopefully you will detect in my tone that the third quarter and frankly as we power through this very strange year of 2013 -- strange reimbursement year. We’re very encouraged about 2014, ‘15 and beyond for a variety of reasons, one of those will be because this reimbursement landscape will be what we believe will be much clearer than it has been in 2013.

[Zarak Khurshid:]

Understood. Thank you for that and just as a quick follow-up, I think you may have mentioned in the remarks. I apologize if this is redundant but can you just talk a little bit about the EraGen business and the kind of performance there and the strength there going forward and then competitively, is there anything of LDT side that you’re seeing, maybe change that the competitive dynamic? Thank you.

[Pat Balthrop:]

Well, the EraGen business, as we refer to at Luminex Medicine continues to be a great acquisition for our company. And it is that chemistry and that facility that is at the core of what we’re doing regarding ARIES assay development. And so it continues to be a terrific performer for our company. Part of what they do is categorize or characterize in the LDT space, providing additional detail there is not something I happen to know of top of my head but it obviously has been since before we acquired the company a couple years ago was a key focus for them. And since we have -- since we have acquired the company over the past couple of years, it’s continued to -- that LDT business has continue to do well. So we’re very glad that we did that deal a couple of years ago because it's going to be a key growth driver for us, for many years to come.

[Zarak Khurshid:]

Great, thank you.

[Operator:]

(Operator Instruction) And your next question comes from the line of Shaun Rodriguez with Cowen & Company. Please proceed. Shaun Rodriguez - Cowen and Company Hi, guys. Good afternoon. Thanks for taking the question. So first I guess I’m still having trouble understanding how your large lab is dealing with the reimbursement challenges in the connection with pushing out their ordering from you. So are they doing less CS testing for example, even though I think they would agree the reimbursement is the transitory challenge or is it more with their inventory management?

[Pat Balthrop:]

It’s more supply chain driven, Shaun. As I think I mentioned in response to an earlier question, when someone asked, should we infer anything about what’s happened here regarding CF? The answer to that is an emphatic no and this customer buys a lot of products from us. CF happens to be one of them and so what they're doing, as they manage their own results is managing their supply chain more closely and more rigorously than they previously had. Think a bit as kind of a cash flow management approach. I think you would do the same thing if you had a cash flow challenge associated from the source of your cash, which in this case would be reimbursement authority. One of the things that you would do is manage your assets more carefully including your inventories and so it hasn’t just affected Luminex, it’s affected other companies as well. I’m not sure, this particular customer represents the percentage of revenue for other companies as they represent for us, but and so it might be a little more visible when it comes to our results but that's, basically the background. Shaun Rodriguez - Cowen and Company Okay. Thanks. That's helpful. And another try on previous guidance questions. Your initial guidance was for double-digit consumables growth this year. So updating for the third quarter it seems that even if we pulled that flat sequentially in Q4 and it’s against a very tough comp that would still pull you, I think around $4 million or so below the initial full year guide for that line. So, appreciating the commentary on challenges to the assay segment is the key driver to the lowered guidance. Is it right to assume that lowered consumables expectations are also a material component of the new guidance? If so, would you comment on what the updated expectations for consumables might be? And, if not, can you talk about why we should see such a big implied jump in Q4?

[Pat Balthrop:]

Shaun, you might get the award for the most compound question we received today. Let me try to answer your question this way. When we set our initial guidance, what we try to do is reflect, particularly with our largest customer on the assay side and our largest partnership customers, what they tell us as we move from one year in to the next. And so the only thing we can really do is the best job we can to repeat those forecast if you will, when we set our own guidance and part of that is included in the assumption around consumables in our partnership business. And so as we put our guidance together for 2013, we did our best to reflect that. However, at the time people didn't necessarily expect things likes sequestration and other types of things affecting NIH funding and so on. And so our partner -- lot of our partner customers are affected by such things. And so as the year goes along, we try to adjust accordingly along with them. And so, I think it is fair to say that we talked about double-digit growth, when we talked about on the, say the first quarter et cetera, I’d have to go back and check the transcript but that sounds reasonable to me. And as we’ve gone through the year, we’ve adjusted our expectations based on what our customers are telling us. I will tell you though, that with all that said, we’re very encouraged by things like 17% growth in royalties and we’re very encouraged by selling 280 instruments, all of which were in the partnership business. So, over the longer-term that business continues to do very well and continues to grow quite nicely and our partners continue to invest. They may be doing some of the inventory management things that we saw them do in 2009 and that we are seeing our assay business, our assay customers do in 2013 et cetera. And so, as we try to communicate that our guidance and reflect our guidance changes through the year, the best -- the only thing we can do is really reflect what our partners are telling us. Shaun Rodriguez - Cowen and Company That’s helpful. And one just last one for me on GPP. Over the course of our checks, we have heard from lab directors who say ramping on the test has maybe been a bit more challenging than they’ve thought, because I think it is approved only for clean vials as a specimen type and not the more common Cary-Blair vial. So, number one, has this been a meaningful limiter to the launch to date? I know you sounded like you are generally positive with the launch so far. And, secondly, can you say when we might see the other key specimen types added to that label?

[Pat Balthrop:]

Well, most customers, when they take on any new assay that might be cleared for a particular specimen type, they will validate whatever specimen type they are used to using in their own hands. And so if you had attended the Scientific Symposia that I mentioned little while ago, one of the key topics there was Cary-Blair media versus other types of sample transport and what’s the best way to validate that method and so on? And it’s basically standard operating procedure for laboratories to go through that process. And so, I do think it’s fair to say that if you are using a particular transport media like Cary-Blair and you adopt a product that’s cleared in its initial clearance with Cary-Blair, that’s an easier adoption process than if it’s not clear for Cary-Blair. But it’s pretty straight forward for laboratories to be able to do that and we have many laboratories who have and so, I’m not surprised if you’ve heard that. But I think it’s a pretty straight forward process for the assay to be validated on that media type. Shaun Rodriguez - Cowen and Company Thank you.

[Operator:]

At this time, we have no further questions. I would now like to turn the call over to our President and CEO, Mr. Pat Balthrop for final remarks. Please proceed.

[Pat Balthrop:]

Thank you, Glen. And thank you for attending our earnings call today and for your interest in Luminex. We look forward to finishing another good year and we also look forward to seeing you in Phoenix at our investor event. Thanks, again.

[Operator:]

Ladies and gentlemen that concludes today's conference. Thank you for you participation. You may now disconnect and have a great evening.