Luminex Corporation
Q2 2014 Earnings Call Transcript

Published: 29 Jul 2014

[Operator:]

Good day, ladies and gentlemen and welcome to Luminex Corporation’s Second Quarter 2014 Earnings Conference Call. My name is Crystal, and I will be the 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, sir.

[Harriss T. Currie:]

Thank you, Crystal. Good afternoon and welcome to Luminex Corporation’s conference call for the second quarter 2014 financial and operational results. Today, Patrick Balthrop, our President and Chief Executive Officer and I, will discuss the results 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 would 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, 2013, 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’ve 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 will be available on our website in accordance with Regulation G. I’ll now turn the call over to our President and CEO, Pat Balthrop.

[Patrick J. Balthrop:]

Thank you, Harriss. Welcome to our second quarter 2014 earnings call. We will be following our usual agenda today. In our prepared comments and presentation, I’ll summarize the second quarter corporate highlights, Harriss will review the financial performance and I’ll conclude with a review of our 2014 priorities. After that we’ll open the call for your questions. Starting with our financial highlights, we generated another solid performance in the second quarter, achieving second quarter total revenue of $55.6 million driven by strong growth in royalties, systems and consumable revenue. We were also very pleased with the performance in our assay business during the second quarter. Well, assay sales declined versus the first quarter this was expected. You’ll recall that in May we informed our investors that it’s reasonable to experience a decline in assay sales from the first quarter to the second quarter of the year as sales in the first quarter benefited from seasonal trends particularly in our RBP product line. In addition, year-over-year growth comparisons were affected by non-recurring events in 2013. After adjusting for these non-recurring re-agent sales in our pharmacogenomics line, we experienced growth in assay sales of 6% and growth in total revenue of 8% for the quarter on a pro forma basis. Finally, to complete the analysis on a year-to-date pro forma basis, growth in assay sales is 19% and total revenue growth is 10%. Other highlights from this quarter’s income statement include continued strong gross margins of 69% driven by our strategic focus on cost and favorable product mix from sales of our higher margin items. And as you know we consider the company’s gross margin position to be a significant and sustainable competitive advantage. GAAP net income was $4.7 million or $0.11 per diluted share representing a significant increase over the prior year period. On a non-GAAP basis, net income was $8.5 million or $0.20 per diluted share. Finally, we generated positive operating cash flows during the quarter of $10.2 million ending the period with cash and investments balance of $89.7 million up from $81.9 million at the end of the first quarter. Now, transitioning to our corporate highlights

[Harriss T. Currie:]

Thanks, Pat. Let’s begin the financial review with a look at revenue. As Pat mentioned previously, total revenue for the second quarter grew by 2% over the prior year period. We sold a total of 268 multiplexing systems in the second quarter of 2014, which included 96 MAGPIX systems, 148 LX systems and 24 FLEXMAP 3D, replaced the total of 266 multiplexing systems in the second quarter of 2013. System revenues were up for the quarter by 9%, driven by system mix with a higher concentration of LX and FLEXMAP 3D systems versus MAGPIX systems compared to the prior year quarter modestly offset by a reduction in punching systems sold through our Australian subsidiary as result of the restructuring. No additional punching system sales are expected in the future. Consumable revenues were up 7% for the quarter, largely due to an increase in bulk purchases from both our largest customers as well as others. During the quarter 14 customers purchased in bulk and comprise 9.7 million or 77% of total consumable revenue compared to 8.9 million or 76% of total consumable revenue in the prior year quarter. Royalty revenues were up for the quarter by 10% representing total reported end-user sales on xMAP technology of $114.6 million. And factoring out one time royalty minimums and royalty audit findings, base royalties increased by 9%, although assay growth was modestly lower year-over-year a prior year benefit is from some non-recurring revenue related to reagent sales in our pharmacogenomics line from a customer that subsequently declared bankruptcy. After adjusting for these non-recurring items adjusted assay growth would be 6% and adjusted total revenue growth would be 8% for the quarter. Within our total assay sales for the quarter, infectious disease sales comprised 67% and genetic testing sales comprised 33%. This compares with 68% and 32% respectively in the second quarter of 2013. In the aggregate, our higher margin items, consumables, royalties and assays comprised 75% of current quarter revenue, down from 77% in the prior year. Looking briefly our revenue growth by segment, our partnership segment or TSP revenues grew by 7% for the quarter, driven by growth and all major components of the business. Our assay related products segment or ARP revenues decreased slightly by 4%. The decline was driven by the formation decline in assay revenue primarily attributable to the bankruptcy of a previous customer and remaining, but declining irregularity in the timing of our other assay revenue components. Excluding the effect of the non-recurring items previously discussed, ARP revenue growth in the aggregate would have been 8%. Now, let’s turn to the income statement. As discussed previously, revenues grew 2% for the quarter. Gross margins for the quarter were 69% at our strategic target rate and we remain confident in our ability to maintain gross margins in the strategic range of high 60s% to low 70% range and continue to see this as a significant competitive advantage. GAAP operating expenses increased slightly by 1% for the quarter. A couple of items with respect to the composition of our GAAP operating expenses, R&D expenses decreased 4% over the prior year period and represented 20% of revenue for the quarter compared to 22% of revenue in the prior year quarter, primarily due to savings and material spending as part of the shift in ARIES system development from alphas to betas. The restructuring we initiated in the third quarter of 2013 to focus our resources was also a contributing factor and we realized those efficiencies. We currently expect consolidated R&D expenditures for the full year 2014 to be in the 20% of revenue range based on our current revenue guidance range. SG&A cost increased by 4% over the prior year period and represented 38% of revenue up slightly from 37% in the prior year. Of the components of SG&A, general and administrative costs were essentially flat year-over-year and we saw modest growth in sales and marketing expenses as a result of some incremental resource investment associated with our direct sales activities. You will recall in recent public comments and as Pat mentioned earlier that we anticipate additional incremental investments and sales in marketing activity in the second half of 2014 prior to the launch of ARIES. In our comments today, we referenced certain non-GAAP operating measures. We believe that adjusting for certain items and the related tax effects, reflects operating results that are more indicative to the company’s ongoing performance while improving comparability to prior periods. And as such, may provide our investors and enhance understanding for the company’s financial performance. For the second quarter, GAAP operating margin was 9%, flat with our second quarter 2013 GAAP results. Non-GAAP operating margin was 18% representing a 1 percentage point increase over 2013 non-GAAP results. Our non-GAAP adjustments are detailed in the reconciling table at the end of our slide presentation and are incorporated into our earnings release. The effect of tax rate for the second quarter was 1% representing a significant decrease from 28% in the prior year quarter. As a reminder our effective tax rate fluctuates depending on a host of factors such as the distribution of income across our global jurisdictions. Low effective tax rate for the quarter can be attributable to the affects of the lying down of our restructuring activities and profits in foreign jurisdictions against which we’ve full valuation allowances. Year-to-date effect tax rate is approximately 17%, we currently expect our effective tax rate for the year on a GAAP basis to be below 20% and the cash tax component to be less than 50% of booked tax expense. For the quarter we generated GAAP net income of $4.7 million, on a diluted basis this amounts to a $0.11 per share compared with net income of $0.09 per share on a fully diluted basis in the second quarter of 2013. On a non-GAAP basis, we generated net income of $8.5 million or $0.20 per diluted share, up 19% from $7.1 million or $0.17 per diluted share in the prior period. Now turning to our two core segments. GAAP operating profit of our technology and strategic partnership segment was a healthy 26% of TSP revenue for the quarter, an increase of 5 percentage points from the prior year. The increase in TSP GAAP operating profit is due to the revenue growth coupled with consistent gross margin and a decline in operating expenses. The decline in operating expenses can be attributed to an incremental shift in resources previously focused on TSP segment activities towards ARP segment activities consistent with our growth strategy. The GAAP operating loss of our ARP segment was 17% of ARP revenue for the quarter compared to a loss of 6% in the prior year, although the percentage appear substantial. The absolute dollar decline in ARP operating profit was $2.5 million, the increase in operating loss in ARP segment is attributable to a combination of lower ARP revenue and a lower gross margin, but still within our expected range as a result of product mix coupled with an increasing ARP operating expenses, a significant portion of which can be attributed to the resource shift from TSP activity to ARP activity discussed previously. As Pat mentioned earlier, we ended the quarter with $89.7 million in cash and investments, up $7.8 million for the March 31st balance, we generated $10.2 million operating cash flow and $2.4 million in proceeds from stock issuances related to our ESPP and stock option exercises offset by capital expenditures of $3.2 million. We had no share repurchases during the second quarter. At June 30, both DSO on accounts receivable and DPO on accounts payable were favorable at 45 and 47 days respectively. Finally, we had approximately 1.8 forward quarters of inventory on hand at June 30. This slide summarizes our cash investment flow for the second quarter of 2014. The takeaway here is that we continued our historical trend of generating strong quarterly operating cash flows, which served to fund our capital expenditure requirements and other items, ending with $89.7 million in cash and investments at June 30 and we expect to continue generating incremental cash investments on a quarterly basis, it would be reasonable to expect an increase in aggregate capital expenditures in the second half of the year related to manufacturing automation initiatives for the ARIES cassettes. And now on to 2014 revenue guidance

[Patrick J. Balthrop:]

In 2014, we’re off to a strong start as our sales force continues to win in the marketplace with our robust portfolio of platforms and proprietary assays. Our pipeline has never been stronger and remains on track for commercial launch of a number of new products in the near future. Financially in 2014, we expect to continue building on the momentum achieved in the first half of the year and to deliver a solid revenue growth year all along maintaining our industry leading gross margins. And in an environment we’re down with cost pressures expected to be present for the longer term, we expect our high gross margins to be a major sustainable competitive advantage. Well, all that said we will continue to manage the business with an eye on our strong financial position and our responsibility to shareholders. This ends our formal comments, Crystal please open the line for questions.

[Operator:]

(Operator instructions) Our first question will come from the line of Brian Weinstein from William Blair, please proceed.

[Unidentified Analyst:]

Hi guys, this is Matt in for Brian this afternoon. Thank you for taking the question. Last quarter you said from a macro perspective, you were cautious and optimistic now to sort of looking system placements the trend has been extremely strong here last few quarters. Just wonder if you could give us maybe updated thoughts on the end markets right now? Thanks.

[Patrick J. Balthrop:]

Well, the end markets appear to be strong, the details regarding our system mix just as a reminder were 148 LX 200 systems in the quarter, 24 FLEXMAP 3Ds and 96 MAGPIX systems. The number of that total that might stand out a bit is the FLEXMAP 3D number, in the first quarter for example, I believe we shipped 9 FLEXMAP 3Ds for the quarter. And as you may remember FDA clearance was received on FLEXMAP 3D last year and we’ve a nice opportunity developing in the transplant segment with one of our largest customers and our largest partner which continues to go well and to bode well for the future. And so, the other two numbers are more or less that is the MAGPIX and LX 200 numbers are more or less indicative of the continued strong and user demand that we see in both life science research proteins as well as in the diagnostic segment. The one outlying number there that that I think also bodes well for the future is that FLEXMAP 3D as I mentioned.

[Unidentified Analyst:]

Okay, thanks a lot on that color. And then, and I just want to apologize for the background noises if you’re hearing it. Just briefly I know you would not update anything on the timing of the launch for ARIES, but you mentioned starting clinical trials in the near future and I know you (inaudible) just wanted to know if there’s any color not related to the launch or timing but any other color you could provide on this progress with ARIES and that’s all from me? Thanks guys.

[Patrick J. Balthrop:]

Well, this maybe a little bit reparative from what I said on my formal remarks, but program development is progressing nicely as expected, no major shifts in timing either way. And obviously if that changes we’ll let you know we’ve recently in the last couple of months have made the decision not to talk about any specifics regarding particular development milestones and that’s purely for competitive reasons as you may remember. We took a similar approach as it related to our announcement of the launch assay menu and so that’s you should interpret the situation with ARIES. So, I’ll just say that we are extremely excited about what that product is going to do for us, the customer feedback has been very positive particularly some of the more recent customer feedback that we’ve had with customers who have seen the system and kind of run the system in Austin etcetera. And so, we continue to say, we continue to believe that we’ve a differentiated position with this product and we are very excited about its future.

[Unidentified Analyst:]

Thanks Pat.

[Operator:]

Our next question will come from the line of Zarak Khurshid from Wedbush, please proceed.

[Zarak Khurshid:]

Hi, good afternoon gentlemen. Thanks for taking the questions. Just following up on the last one there with respect to ARIES, Pat can you just really clarify how many clinical trials you expect to have going at once when things get started?

[Patrick J. Balthrop:]

Well, we have five launch assays as I think we talked about this on the last quarter call and so not all those assays are going onto clinical trials at the same time. And number one and number two we’ll not do clinical trials for all five assays that’s obviously not in the plan and so if your question is, are we concerned about the ability to complete our clinical trials or the capacity that a individual clinical trial site has then the answer to that is, we are not concerned about it at all and the good news is that we’ve a lot of our samples archived or have had lot of samples archived etcetera so that should not be a bottleneck for us.

[Zarak Khurshid:]

Thanks for the clarity there and then couple of follow-ups obviously one of your competitors is investing pretty aggressively in their pipeline. Do you foresee a situation where you may want to accelerate your investment in the ARIES pipeline?

[Patrick J. Balthrop:]

Well, we believe that the commercial opportunity we’ve is significant and as I mentioned in my formal remarks and I think as Harriss reemphasized we expect to increase our sales in marketing investment commensurate or consistent with what we consider to be a significant opportunity, we announced that for the first time formally back in May and we’re kind of reaffirming that today. I understand that wasn’t exactly your question. We believe that the way to think the future menu however, and this is a really critical point is that the fundamental design of this particular system is that it uses a universal protocol which we consider to be a significant advantage. And so, the customer run any number of tests on this system side-by-side and they can all run, they can mix and matches they choose because of that universal protocol. So the steps are identical from one assay to the next. The reason why that’s relevant to your question is because it also facilitates rapid menu expansion. So the market leader in this particular industry took, I don’t know 10 years or so to get to about 8 or 10 assays available. We’re going to have 5 at launch and we believe that will be able to follow that quickly with handful relatively soon. So, the nature of your question is, do we think of a strong assay menu is a critical success factor, and the answer is, yes we do. In addition we believe that we’re well positioned to be able to make that happen whether it’s entirely Luminex investment or working with our partners or other assay developers who may have expertise in a particular category and we’re more than open to doing that and are evaluating that as we speak.

[Zarak Khurshid:]

Thanks again for the clarity there. Last one, just on the transplant business, can you just maybe help us understand the underlying kind of organic growth in that business and maybe the well be ness or lack thereof or smoothness of that business going forward? Thanks.

[Patrick J. Balthrop:]

Well, I think some of the underlying data there are in the developed market, the developed world. The ongoing growth in organ transplants continues to be mid single digit, 4% or 5% number. The thing that – this driven growth historically has been the increased testing per transplant being the driver as opposed to the underlying rate of growth of the transplant, the number of transplants themselves. And so that market continues to be a strong market, in terms of its growth rates, fundamental and user sales, we don’t disclose kind of individual partner results, but I would tell you that if I look at the top four partners that we have which include transplant partners but also include life science research partners. The end user sales growth there in the second quarter was a double digit number in percentages. The year-to-date number is also in the double digits so I’ll just leave you with that number, I think that’s about as granular as I can get.

[Zarak Khurshid:]

Great, thanks again.

[Operator:]

Our next question will come from the line Drew Jones Stephens Incorporated, please proceed.

[Drew Jones:]

Hi, guys. You talked a lot about revenue trends in the second half of the year, but can you walk us through what we should look for in terms of operating margins and I guess specifically you talked a little bit about sales expansion, how significant is that going to be, how quickly does it ramp what’s the incremental SG&A associated with that?

[Patrick J. Balthrop:]

So, I’ll turnover to Harriss here in a second Drew, we will just kind of frame it for you. As you know we have one official guidance number that’s our annual revenue guidance and so that’s kind of the one number we need you to stay focused on. Well that said we also recognize that you and others build an overall P&L and include some assumptions and so, we wanted to let you know that we think it’s a really good thing that the market is responding to ARIES and NxTAG the way they’re responding and therefore we expect to add sales resource to take advantage of that opportunity. We expect that to begin in the second half of this year and a ramp through the year and into 2014 and when we’re finished with that we believe that we will have in terms of feet on the street that kind of stuff that sales force that can compete with anybody. Regarding the specifics about what the actual increase is or isn’t is not something that we’re in a position to disclose. Harriss may be able to add some additional color on that.

[Harriss T. Currie:]

No way to really think about it. Operating margin really is three component, the top line revenue, the gross margins that result from those in the operating expense numbers so we mentioned that in my guidance comments that the back half of the year and obviously to get within the revenue guidance range that we provided is going to be bigger than the front half of the year. We also mentioned that we expect to build and maintain gross margins in that strategic range that we’ve had mentioned before high 60 to low 70 as a result. One could summarize that gross profit will remain positive and as a result the operating expenses that could certainly increase in the back half of the year with both the conduct of clinical trials as Pat mentioned earlier and investment sales and marketing wouldn’t be to the extent where operating margins if they were to decline would be significantly affected. So that is sort of a way to think about it, revenue growth, growth and gross profit dollars but not such a significant investment in the back half of the year that would significantly affect those percentages.

[Drew Jones:]

Okay, but is it safe to say that operating margins we won't see that we what we saw 1Q level until maybe 2015 again?

[Harriss T. Currie:]

We don’t provide specifics around that so I can only really tell you what I have, is sort of expectations going forward.

[Drew Jones:]

Okay. Thanks guys.

[Operator:]

(Operator Instructions) Our next question will come from the line of Bill Quirk from Piper Jaffray, please proceed.

[Unidentified Analyst:]

Great, thanks. Good afternoon. This is Alex on for Bill. Touching on the competitive launches by others, how are you thinking about the GI market now given these recent launches?

[Patrick J. Balthrop:]

Well, as I mentioned in our formal remarks, we obviously are – as the first mover in the multiplexing molecular space as we saw with the RVP market, we’ve recently had some I should say, a new entrant in the multiplexing molecular market for GI and that particular competitor is BioFire as you may know. And in the case of the BioFire product it has a couple of unique features, one is, it’s very highly priced, it’s also very low volume meaning that there’s a limited number of tests that one can get out, one can produce in a shift. And so what we mentioned 90 days ago on the call was that we actually expected the new entrant to help us increase awareness of the value of the gastroenteritis, differential diagnostic panels rather than be a significant competitive fight in the field and that’s turned out to be true. And because there is now, not just us there’s another company that’s tabbing the benefits of that particular, of a multiplex gastroenteritis in differential diagnostic panel that may last forever of course, but in the short, intermediate term it’s actually been a net positive. And the reason for that is because to boil it down to its basics. The high volume accounts where we’re their product doesn’t, isn’t well suited for the customers volume needs and those customers that they’re focusing on which are primarily their lower volume respiratory viral panel customers that they serve today with their FilmArray system that they’re talking to those customers about their gastroenteritis panel. And those customers are not Luminex customers today, so the result is that we’re serving one volume segment, they’re serving the other and we’re both working to educate the market about the benefits of the panel. So, at least, what we predicted has turned out to be true and we’ve to watch it closely but right now it’s not really affecting our trajectory at all.

[Unidentified Analyst:]

Okay, great, got it, thanks. Still on the GI panel can you talk about any of the win rates on any deals since the competitive launch of BioFire?

[Patrick J. Balthrop:]

Only there has really been a significant change, I mean, if I were to, as I look at the financial plan that we have for the year and what we expected to project. When we put that together we didn’t really, we anticipated a potential competitive entrant, but it wasn’t clear to us when that was going to happen or if it was going to be BioFire. If I look at our year-to-date results, we’re actually ahead of where we expected to be when we put our plan together. So, I’m not sure if that helps you much, but based on what we know and what we projected, we’re actually ahead of schedule.

[Unidentified Analyst:]

Okay, great, thanks guys.

[Operator:]

Our next question will come from the line of Justin Bowers from Leerink Swan, please proceed.

[Justin Bowers:]

Hi good evening everyone. It sounds like your customers are little more optimistic on the molecular diagnostic reimbursement front and I was curious if you could just give us a little flavor about what some of those conversations have been like and then maybe what the opportunity was or is for the back half of the year or maybe another way to think about it is, what the headwind was last year?

[Patrick J. Balthrop:]

Well, as it relates to the environment, the overall environment, we mentioned throughout our comments last year as reimbursement situation was uncertain that our customers were reacting and responding to that uncertainty by more closely evaluating how much product they had on hand, our customers’ reimbursement dollar flows were more restricted as some of these administrative things were worked out. And so as we noted on the first quarter call we were pleased that the 2014 CLFS, the clinical laboratory fee schedule rates for the codes that effect our products were set and that the reimbursement rates for those are healthy, we detected very significant increase or improvement and the confidence and comfort that our customers express based on the reimbursement landscape. And I think one of the examples that I cited during my formal remarks was that the Defense Health Agency which is TRICARE which is a reimbursement on for the military had suspended reimbursement on a number of different genetic tests, somewhere like three dozen of them are so. And some of the tests that we manufacture and market like cystic fibrosis were affected by that and they recently announced, the TRICARE recently announced that they were restoring coverage for those and I think if you look at the comments made by some of our customers are particularly those that are publically traded, you will see some of that confidence or improvement in their tone reflected there. So therefore, what’s happened in the past, I think was more an uncertainty that was affecting customers’ behavior regarding purchasing and willingness to adopt new methods and so on until some of those reimbursement situations were clarified. Now that they are virtually all clarified, we see that increased confidence and comfort. So for those reasons we are optimistic that that will be able to continue to make progress.

[Justin Bowers:]

Thank you. I appreciate the color and just a quick follow-up, my NMTC was at 10% headwind this quarter, am I doing the math right there or 12%?

[Harriss T. Currie:]

NMTC contributed to the assay shrinkage of 4% to growth of 8%.

[Justin Bowers:]

Okay.

[Patrick J. Balthrop:]

Oh yes.

[Justin Bowers:]

That’s it, thank you.

[Operator:]

Our next question will come from the line of Tycho Peterson from JP Morgan, please proceed.

[Jordan Justman:]

Hey guys, this is Jordan in for Tycho. I just wanted follow back up on HLA, so could you give us a quick update on your relationship with One Lambda and then also after the LabCorp announcement that they would work Illumina on HLA, have you seen any incremental impact to your relationship with LabCorp or revenues from LabCorp in the quarter?

[Patrick J. Balthrop:]

Well, first of all, as you may know, we’ve had a long term relationship with One Lambda when they were independent that’s continued since they have been acquired by Thermo Fisher. And as I mentioned in response to an earlier question we saw some favorable results in the quarter as a result of – and again instrument category with our FLEXMAP 3D instrument as a result of One Lambda’s continuing investment in Luminex Technology as the market leader in HLA. As you may also know the use of sequencing type technologies in the transplant market has been around for some time and there has not really been a dramatic change in that over the past year or so. It is true that LabCorp uses sequencing technologies for obscure or I would say rare genetic mutations that includes everything from inherited diseases to HLA methods etcetera which is dramatically different from what the One Lambda business does with Luminex. And so, as I mentioned in response to an earlier question, our top four partners which includes One Lambda had very strong double digit growth this quarter and all indications are that that market as it relates to our technology continues to be strong. So, hopefully that helps you.

[Jordan Justman:]

Okay, thanks.

[Operator:]

Our next question will come from the line of Brandon Couillard from Jefferies & Company, Inc.

[Unidentified Analyst:]

Hi, this is Brandon in for Brandon. Pat just back on ARIES, I know you said you didn’t want to give us an update on the timeline, but should we be thinking about CE mark outcome as the 2015 event at this point?

[Patrick J. Balthrop:]

It’s important Brandon not to misinterpret our comments here. Program development continues as progress, the progress is expected. As I mentioned earlier there has been no major shifts in timing either way. Obviously if that changes we’ll make sure we will let you know and we don’t expect any ARIES revenue in 2014, I don’t think that’s a big surprise either. So, regarding the specific dates of FDA clearance, CE mark, specific assay launches etcetera, etcetera we will update you as those dates approach. It’s a 100% because of competitive reasons.

[Unidentified Analyst:]

Okay, back on the reimbursement dynamic, do you have a sense of where your inventory levels are from your primary assay customers relative to sort of the pre-crisis levels, that much visibility?

[Patrick J. Balthrop:]

Yes, well yes. We have a significant amount of visibility particularly with our single largest customer and that being LabCorp and some of our, some of the customers that we’ve added in the specialty segment were these pharmacogenomics labs are. So we are very close to that and we did – I think it’s fair to say that our revenue was affected in 2013 perhaps because of them kind of managing their inventory more closely. In 2014, as I mentioned a couple of times earlier because of the cloud lifting so to speak around the uncertainty around reimbursement that it’s returning to normal. And so, if anything I would say that reimbursement levels, sorry, the inventory levels are about where they were or less than what customers are running maybe 18 months ago. But certainly not, it’s our impression, based on our detailed conversations with those customers that the inventory levels are certainly not excessive.

[Unidentified Analyst:]

Okay and then last one Harriss on, could you perhaps quantify the CapEx outlay expected in the second half of the year and would you expect that to continue into the first half of next year to the degree where CapEx next year maybe actually higher year-over-year?

[Harriss T. Currie:]

Yes, likely the second half, well, I can do it for you this way, likely the second half would be greater than the first half and there are expenditures associated I mentioned earlier with automation of our ARIES production that will carry over into next year.

[Unidentified Analyst:]

Okay, but can you quantify that more specifically though?

[Harriss T. Currie:]

No.

[Harriss T. Currie:]

Okay. Super. Thank you.

[Harriss T. Currie:]

Alright.

[Operator:]

Our next question – (Operator Instructions) Our next question comes from the line of Dan Walker from Kalmar Investments, please proceed.

[Dan Walker:]

I wonder what that means when she says, before my effort to ask a question. Good afternoon. On the addition to your sales count expectation, are you going to segment your sales group from this point forward given that you have AIRGEN, you have the traditional multiplex tests and you will have ARIES tests where everybody sell everything?

[Patrick J. Balthrop:]

Well, we’re working through that now Dan. We have a significant amount of channel synergy based on the sales force that we have today once we launch ARIES. A lot of them are more significant customers in terms of volume are current multiplexing users. And so, when we roll ARIES out we believe that we’ll have existing relationships and therefore a lot of synergy to be able to access that opportunity. As we expand the sales force, we’re evaluating a number of different structures we believe maintaining a specialty force in the pharmacogenomics channel mix continues to make sense, it’s worthwhile for us this year and we believe it will continue to – we obviously have a specialized sales force in the large national accounts and they cover those very large customers. In the remainder of the molecular market, once we roll ARIES out, we’re evaluating exactly how we should structure that but it’s not kind of a significant departure from our current approach. What we choose to do as we evaluate those options is not going to be a significant departure from our current approach. I will say though that the customer response has been tremendous particularly recently and the synergy assumptions that we’ve been making all along seem to be confirmed.

[Dan Walker:]

Is there something about this more recent reaction to the ARIES produce that stands out for you or is there just that many more folks that have had a chance to look at it and comparison shop in a way that makes you believe that some of the distinctions that you originally designed in are becoming more apparent?

[Patrick J. Balthrop:]

Well, I would say it’s more the ladder. For example, we design the software in a particular way to be more reflective of what customers are used to in today’s world, a lot of the choices that customers have to make today are from products that are 10 years old. And so, the software navigation is something that customers are more pleased with and more used to. Some of the things that we’ve been touting all along, we think are important to customers, things like the bench space issue which to be perfectly candid some analysts and investors of kind of – have not thought that bigger deal, but customers continue to confirm particularly recently that it is a huge deal. And then lastly, the whole, the ability to automate their lab developed test as a key differentiator. Our customers continue to –have always thought it was a good idea but once they put their hands on it they see how it works and they have done some work, now that they have the opportunity to automate them to see how big is deal, how big an impact they could have on their lab, they are telling us that. And so, those types of things are unique to the product that we are going to bring to market and we believe will allow it to be highly differentiated.

[Dan Walker:]

Would you clarify couple of comments you made earlier, you talked about the top four customer revenue number being up in excess of 10%, is that your revenue across all your different categories or is that end customer takeaway revenue?

[Patrick J. Balthrop:]

So when I said, just to be clear when I said customers, if I said that it was, I misspoke. I was referring to our top four strategic partners. So I think that was in response to a previous question and so if you look at end-user sales, royalties paid etcetera for our top four partners on a combined basis, it’s a double digit number in the percentage growth.

[Dan Walker:]

But that number wasn’t or your comment wasn’t intended to capture consumables or systems revenue or strictly an end-product takeaway number as it would flow through TU and a non-royalty mix adjusted royalty number?

[Patrick J. Balthrop:]

That number was specifically royalty revenue, so which is a direct indicator of kind of end-user sales generation.

[Dan Walker:]

Okay. One last sneak in question, can you clarify what comments you have made on a go forward about consumables expectations given that you’re beginning to demonstrate some sequential progress and anything you might offer about menu developments with your technology partnership customers? Thank you.

[Patrick J. Balthrop:]

I’m not in a position to talk about menu development among our partners except that in response to an earlier question on the transplant market, the continued and I would argue increased investment by some of our partners on our technology in response to trends in the transplant market for which our technology is ideally suited continue to be strong. On the consumable number overall we expect the – which I think is consistent with what we said on this quarter call, but I’ll reiterate it now is that we expect low single digit growth number for the year on the consumable line.

[Dan Walker:]

Is that out of character though with what you showed in Q2 given that you would expect the back half to be better than the first half?

[Patrick J. Balthrop:]

Well, we obviously are in close contact with our partners and so we feel pretty comfortable with what the forecast looks like for the back half. Each partner has a different set of priorities and inventory approaches and all that kind of stuff. So, what we can tell you is we think a low single digit growth number for the year is to be expected based on what our partners are telling us.

[Dan Walker:]

Very well. Thank you. Good luck.

[Patrick J. Balthrop:]

Thank you.

[Operator:]

No questions, I would like to turn the call back over to the President and CEO, Pat Balthrop for final remarks.

[Patrick J. Balthrop:]

Thank you, Crystal and to our investors and analysts, who dialed into the call, thank you as well. We look forward to seeing many of you at ACC in Chicago this week and if we’ll be seeing you in person we hope to do so soon. Thanks again for dialing into our call today.

[Operator:]

Ladies and gentlemen that concludes today's presentation. You may now disconnect, have a great day.