Luminex Corporation
Q4 2014 Earnings Call Transcript

Published: 3 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to Luminex Corporation’s Fourth Quarter and Full Year 2014 Earnings Conference Call. My name is Whitley, and I will be your coordinator 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 call over to Matt Norman, Manager of Investor Relations, for opening remarks. Please proceed.

[Matt Norman:]

Good afternoon and welcome to Luminex Corporation’s conference call to review the fourth quarter and full year 2014 financial and operational results. On the call today are Homi Shamir, President and Chief Executive Officer and Harriss Currie, Senior Vice President and Chief Financial Officer. We will follow our standard agenda today. Homi will review our fourth quarter and 2014 corporate highlights, provide an update on our pipeline products and share some of his observation since joining Luminex. Harriss will then review the financial performance and 2015 guidance. After that we will open the call for your questions. As a reminder today’s conference call is being recorded and a replay will be available for six months on the Investor Relations section of our Web site. One departure to note from prior year earnings calls is we will not be including a slide presentation today or on future calls. However, we plan to provide enhance disclosures in our earnings releases and prepared remarks in order to maintain the same level of transparency. I would remind everyone that certain statements made during the course of today’s call 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 period filed with the Securities and Exchange Commission. We encourage you to review these documents and 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 call. To the extent that any non-GAAP financial measures are covered, a presentation of and reconciliation to the most directly comparable GAAP financial measures is included in our earnings release which is available on our Web site in accordance with Regulation G. I’ll now turn the call over to our President and CEO, Homi Shamir.

[Homi Shamir:]

Thank you, Matt. Good afternoon and welcome to our fourth quarter and full year 2014 earnings call. We’ve finished 2014 generating record revenue of 227 million for the full year. We also had a record quarter achieving revenue of 58 million for the fourth quarter, reflecting 5% growth over the prior year, delivering by strong growth in asset sales of 34% and 10% growth in royalty revenue. We also add a strong gross margin at 74% and record earnings of $0.52 per diluted share of the quarter. Harriss, our CFO will discuss our financial results in more detail in his prepared remark. Prior to joining Luminex, I was the CEO of another diagnostic company, Given Imaging for approximately eight years, which was sold to Covidien early last year for close to $1 billion. I came onboard with Luminex to transform the company into a key diagnostic player in the Molecular Diagnostic space. Having been here for now 100 days now, I am even more excited than when I just join the company, given the opportunity ahead of us and our strategic position in the marketplace. We have made substantial progress on our pipeline products ARIES and NxTAG RPP. ARIES is our sample-to-answer system which will target the low-plex testing market which is simple, easy-to-use solution. During the fourth quarter of 2014, we completed the final stage of development for the systems, the software and the cassettes. We are now actively preparing for clinical trials which are on track to begin in March because the majority of patient samples are already collected. We are very confident in our ability to maintain the current schedule which is under file 10-K submission targeted for late summer and IVD clearance in the U.S. for the system and HSV Assay during the fourth quarter of 2015. I recently attended some customer demos for the ARIES platform. These customers were extremely impressed by the system given how simple it is to operate and its unique set of features which is very encouraging to us. We want to make substantial progress on our new multiplexing Assay NxTAG RPP. NxTAG RPP is an upgrade to the chemistry in our xTAG RVP product and is targeted to moderate to high volume labs in the multiplex market. In the fourth quarter we completed development for NxTAG RPP and we are on schedule to begin clinical trials this week. NxTAG will follow a similar time line to ARIES with FDA clearance targeted toward the fourth quarter of 2015. I would like to take a moment to share some of my initial observations since joining Luminex. I have had the opportunity conduct deeper strategic and operational review of the company which has further confirmed my confidence and excitement about our future. In my time here at Luminex I have been very impressed by the high level of employee talent in the company. In order to ensure we leverage our existing employees effectively and efficiently, we recently implemented several operational improvements designed to create additional synergies across the organization. For example, we combined our sales and marketing organization particularly at the management level which we believe will allow us to better serve our customers and partners more effectively and efficiently. Another example involves transitioning our R&D organization. Now that we finished development of NxTAG RPP we are redirecting R&D resources in our Toronto location to accelerate development of the first wave of ARIES Assays as well as additional assays after launch. To ensure we come to the market with a robust menu, these changes will position us to execute more effectively in the marketplace. Moving onto 2015 priorities. For Luminex 2015 is a key transitional year as we prepare for the launch of ARIES and NxTAG later in the year. In the near term we do have some challenges ahead of us particularly in the consumable revenue due to inventory management challenges by our largest partner. In addition, we recognize that the next generation sequencing could impact the growth trajectories of our genetics assay portfolio mainly in cystic fibrosis. ARIES will provide additional color on this item in our 2015 guidance discussion here shortly. However, I wanted to emphasize that the long-term future for Luminex is very bright and exciting. We have significant growth opportunities ahead of us particularly with the launch of ARIES with a broad menu of assays which will considerably expand our addressable market in years to come. In 2015 we are focused on delivering our pipeline products on schedule while continuing to execute in the market with our current portfolio. I'm also confident that our recent organizational changes will drive operational improvements. Now Harriss our CFO will review the financial data and afterwards I will conclude with some closing comments.

[Harriss Currie:]

Thanks Homi. Before we get into the financial review I'd like to address a change we've made in financial reporting effective immediately. As noted in our earnings release we've shifted back to reporting one consolidated entity and away from segment reporting. As Homi mentioned, we've recently consolidated our commercial operations functions. And given recent changes in organizational structure to integrate our entire organization into cohesive unit, we believe reporting as one consolidated reporting unit more accurately aligns with our operational structure and more importantly aligns with our current view of the business. Now let's begin the financial review with a look at revenue. Total revenue for the fourth quarter increased from the prior year by approximately 5% while full year revenue was up 6% both driven by solid growth and assay and royalty revenue. Notably assay performance for both the quarter and full year was characterized by balanced growth across all of our major Assay product lines. We experienced continued growth of our pharmacogenomics portfolio in GTP, coupled with recovery from the reimbursement challenges experienced in 2013. For the quarter infectious disease assay sales comprised 67% of total assay sales with genetic testing cells comprising 33%. This compares to 75% and 25% respectively in the prior year fourth quarter. Loyalty revenues were up for the quarter and full year by 10% and 7% respectively, representing total end user sales for 2014 of 456 million. Consumable revenues were down 11% for the quarter and flat for the year, primarily due to the inventory challenges experienced by our largest partner that we discussed previously. In the aggregate our higher margin items, consumables, royalties and assays comprised 77% of total 2014 revenue. Up from 75% in 2013 and have played a significant role in stabilizing our gross margins in a high-60% to low-70% range. System revenues were down 31% for the quarter and 8% for the year however if you recall in the prior year quarter we shipped a record number of systems. Additionally, the full year 2013 included over $1.5 million of revenue attributable to the Australian subsidiary that was shut down. Now let’s turn to the income statement. Gross margins for the quarter was impressive 74% due to a higher concentration of our high margin items and lower system sales. For the full year gross margin was 70%. As a result of our revenue mix favoring our higher margin items we remain confident on our ability to sustain gross margins in the strategic range of high-60% to low-70%. GAAP operating expenses increased 4% for the quarter but declined 5% for the year. R&D expenses for the quarter were up 2% over the prior year. For the full year R&D expenses were down 4% compared to 2013 and represented 19% of revenue compared to 21% of revenue in 2013 primarily the result of savings and materials spending associated with advancement into AERIS development phases including transitioning from alpha system builds in the prior year to wrapping up development and preparing for clinical trials in the current year. SG&A cost were up 5% for the quarter up from the quarter four of 2013. For the full year SG&A expenses declined 5% and represented 36% of revenue compared to 41% of revenue in 2013. Other components of SG&A sales and marketing cost increased to 9% for the year as a result of incremental resource investment associated with our indirect sales activities. However G&A cost declined 15%, primarily as a result of one-time expenses incurred in the prior year, including the resolution of our molecular distribution agreements and the bad debt expense recorded due to a former customer’s bankruptcy. These non-recurring expenses were partially offset by increased litigation cost. Foreign exchange effects in cooperated into our full year results were a modest $16,000. For the fourth quarter both GAAP and non-GAAP operating margin increased by 8 percentage points over the prior year and on a year-to-date basis GAAP operating margin increased 10 percentage points. Non-GAAP operating margin increased 7 percentage points, largely driven by the increase in revenue coupled with the increased contribution from our higher margin revenue streams and additional operating leverage realized through thorough management of our expenses. The full year 2014 had an income tax and benefit of 39%. The favorable effective tax rate for 2014 reflects an income tax benefit recorded in the fourth quarter due to the partial release of Canadian deferred tax assets valuation allowance as well as recognition of benefits in the Netherlands which were generated by the waver of intercompany debt and restructuring losses related to the Australian entity. The tax benefit of those items totaled approximately $19 million giving us a pro forma effective tax rate of 29%. We will record income tax expense on profits generated on our Canadian subsidiary over the near-term, and as a result expect our consolidated effective tax rate to be in the 25% to 35% range over the next several years, absent any other significant discrete items. For the year we achieved GAAP net income of 39 million or $0.92 per diluted share compared with income of 7.1 million or $0.17 per diluted share in the prior year. On a non-GAAP basis we generated net income of 37.8 million or $0.90 per diluted share. Now turning to the balance sheet. We ended the year with a 107.7 million in the cash and investments, generated 16.1 million in operating cash flow during the quarter and 49.3 million in operating cash flow for the year. At December 31, both DSL on accounts receivable and DPO on accounts payable were favorable at 46 days and 71 days respectively. Today we announced our 2015 revenue guidance between $230 million and $236 million. Factors to consider included with respect to consumables during 2015 we expect a contraction of approximately $10 million from our largest partner as a result of the inventory challenges we’ve discussed previously. We expect these pressures to continue over the next several years. We believe that our relationship with this partner remains strong and they’re continuing to invest in our technology. The royalty stream from them has growing steadily indicating further penetration in use of our technology within their market and we expect them to launch a new product incorporating our technology in the next few months. Absent contributions from this partner, we expect aggregate consumable growth from our remaining partners to be in the double-digits. Taking these factors into consideration, we expect consumables overall to be down in a mid-single digits for 2015. With respect to assays, we expect assay revenue growth in the low to mid-teens in 2015. This includes our expectation that our CF business will be down a few million dollars as a result of pressure from other technologies and our largest customer. Should this pressure materialize, it's our expectation that the effect on our CF business with this customer will be permanent, absent the effect on our CF business, we expect remainder of our asset portfolio to grow in excess 20%. This growth is driven by continued adoption of our GPP product continued expansion of our PGX franchise and further expansion of our MultiCodes franchise. Given current timings for the ARIES launch our guidance range assumes only minimal contributions from ARIES systems and consumables in 2015, even though we expect an RDO version to be available by the third quarter. For modeling purposes, please be aware of the typical seasonality in hardware sales. Historically, first quarter system sale have been the weakest quarter of the year. As Homi noted earlier, we consider 2015 to be a transition year for the company. As we prepare for the launch of our key pipeline products towards the end of the year. While we manage the business for the long-term, we want to provide a bit more color on the first quarter for modeling purposes and as a result we like to tell you that we expect first quarter revenues to fall within between $55 million and $58 million. I’ll now turn the call back over to Homi for some final comments.

[Homi Shamir:]

Thank you. We at Luminex are very excited about the future of the company with an increasing emphasize on the fast growing Molecular Diagnostic market and the launch of ARIES and NxTAG later this year, we expect to well position for accelerating growth in future year. While 2015 is expected to be year of transition as evidenced by our guidance release today, we are focused on execution and delivering our pipeline product to the market in time. We are on track and confident in our ability to maintain the current schedule. We look forward to visiting with many of you in the upcoming Leerink Conference in New York City next week. This will end our formal comments. Operator, please open the line for questions.

[Operator:]

(Operator Instructions) Our first question comes from the line of Dan Leonard with Leerink Partners. Please proceed.

[Dan Leonard:]

First question on NxTAG -- is it fair to say, since you are shifting R&D resources from NxTAG to ARIES, that there is no plan to expand menu further on the NxTAG chemistry?

[Homi Shamir:]

For the time being yes, as a matter of fact NxTAG will start clinical trial this week and we see the race now is to develop as much as we can additional assay for the ARIES. Therefore, we have a very talented team in Toronto and at least for the next 12 months while we launch more than the initial five assays that we’ve spoken about, our planning is to increase it and those people will be all utilized in developing those assay menu. Obviously, when we feel that we have some spare resources there we put them for additional development in the NxTAG.

[Dan Leonard:]

Understood. And then my follow-up question; Homi, can you give me a bit more of a flavor of what's happening on the ground in cystic fibrosis testing? Is the threat here a direct threat, where your big customer is changing out orders that they used to fill with your technology and using a different technology? Or is it indirect, where physicians are ordering a different type of CF test than they used to? Or carriers screen more broadly, and they just can't fulfill that demand with your technology?

[Homi Shamir:]

Let me help you out there, this is a specific indication by our major CF customer, their intent is to move to next generation screening from standard methodologies; us being one of them for CF testing. There are some -- there some obviously validation in other -- call them challenges if they had to go through, but they have expressed their intent to do that. So this isn’t physicians changing out the way they order the test, it’s to provider changing out the methodology by which they will provide the answer.

[Operator:]

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

[Brandon Couillard:]

Homi, could you sort of speak to how you view your priorities for the balance sheet going into next year both from an M&A perspective as well as buyback?

[Homi Shamir:]

Yes thanks Brandon. First we are very, very confident and very excited also about the ARIES and we are going to continue the development on as I mentioned earlier -- additional assay, but also we see how we can expand the platform with ARIES too in the future to multiplexing what you guys can recall it ARIES v2. But we see a big opportunity then, at the same time we have a very strong balance sheet and if we see some technical acquisition and I'm not speaking about platform I'm speaking about additional assay that we can plug into the system and grow the business further, we will be looking at that. At this stage I don’t -- I cannot say that we have any target, as a matter of fact we do not have group even looking at that so we just put couple of people to start looking if we can find some opportunity. If we find and that make senses, we will use it but again let me emphasize it's not for a platform, we are very happy with the current platform we have and what it can offer us in the future and even beyond that in the mid-term by expanding it to the multiplex and so we'll see what we can do but with a strong balance sheet, we need to think out to grow the business also.

[Brandon Couillard:]

And you've mentioned streamlining the manufacturing operations, making some changes internally in terms of the sales and marketing teams, I mean how should we think about OpEx for the year and any change you could quantify like perhaps specific cost savings in terms of dollars that you would expect to be able to capture this year?

[Harriss Currie:]

Brandon so this is Harriss let me address the OpEx to begin with -- to begin with we actually -- we completed a pretty good 2014 on what was flatter than expected revenue with pretty significant profit, very significant cash flow generation over the year. And so as we move into 2015 as we approach the launch of NxTAG, approach the launch of ARIES, it's an opportunity for us to invest in both our sales force and additional R&D efforts that Homi mentioned earlier to enhance the size of the ARIES menu at launch. So I would look at 2015 as a year of investment and then in 2016 is where we would start to again realize the leverage that we’ve realized over the past few years in driving that profit before taxes -- or, really, for us, operating profit is a good proxy for that to -- an excess of 10%, 10%-12% and continue to drive before that longer-term target of 25 plus percent at the operating line. Your second question was the opportunities within gross margin to improve and Homi mentioned his desire to -- even though we do have industry leading gross margins to improve those further. Which you may or may not be aware of is we have three separately operating manufacturing facilities in our Company -- one in Austin, one in Madison and one in Toronto. Each of these organizations has functions that overlap other functions and at the various locations and we have opportunities, through both our purchasing power, improve additional manufacturing engineering to synergize cost out of both our systems and our assays and consumables that we manufacture. So we're taking a look at all of that. We believe there is at least a couple of points available that we can squeeze out of that overtime, that the challenge you’ll have in getting complete visibility about it is the fact, that our margins do fluctuate a little bit based on the mix of higher margin items consumables royalties and assays and systems. But I think in the aggregate overall you'd expect at least a point or two improvements and on $200 million right a point is 2 million, two points is 4 million, that's an additional 4 million that's flowing down to either cover incremental operating expenses or to go the way through to the operating line, hope that helps.

[Operator:]

Your next question comes from the line of Brian Weinstein with William Blair. Please proceed.

[Brian Weinstein:]

Can you just let us know

[Harriss Currie:]

Yes so Brian this is Harriss. CF is in the neighborhood of a quarter of our total assay portfolio today it's grown pretty significantly since the acquisition of Tm Bioscience and no that didn’t go to zero. The pressure that really NGS can provide on our CF testing portfolio really works most efficiently in the centralized labs of which our largest customers have centralized labs, in more distributed testing currently the cost of the system and the operational efficiencies that would have to be realized wouldn’t justify the switch, but in a highly centralized core lab it certainly makes a lot more sense. So that’s where the pressure is, CF certainly wouldn’t go to zero but following the loss of several million dollars of revenue this year in the event of a full transition, that number could be $10 million in 2016.

[Brian Weinstein:]

Okay. And then on the consumables side -- I don't know if I heard this right, but you said down $10 million dealing with the inventory management. And did I hear you say that that's something that's going to continue for the next several years? I don't know if I heard you correctly on that. Can you just clarify what the comments were that you made around the inventory management there?

[Harriss Currie:]

The reduced purchases will continue over the next couple of years, as a result of those pressures. So what you wouldn’t expect is a $10 million reduction from that customer in 2015 and then a $10 million rebound in 2016.

[Brian Weinstein:]

Got it. But are we looking for an additional leg down in 2016? Or do we baseline down where we are at right now, where you're talking about the $10 million? Or is this something that is an ongoing process, where it's a $10 million hit this year, and it's another several million next year?

[Harriss Currie:]

It is most likely going to flatten off after this year until we work them through their inventory issues.

[Brian Weinstein:]

Got it. My last one for you is around the instrument placements. It was a light quarter. I know you had the comps last year, and you mentioned some of the factors there. But it was a lighter quarter overall. Is there anything specific that you guys saw that caused it to be as light as it was? Any thoughts about what that looks like going into 2015 and going forward?

[Harriss Currie:]

Probably the biggest driver of the system number Brian; two drivers. Number one was the inclusion of BSD last year in revenue, anyway, and no revenue this year. The second was a significant number of MAGPIX minimums that were contractual minimums that were fulfilled at the end of 2013 that did come through in 2014. And so there is -- it’s primarily MAGPIX in the decline it’s driven by contractual minimums, the level of those minimums and their presence in contracts. We still feel very comfortable about our multiplexing franchise. We reiterate -- or expect 200 units and 250 units -- a quarter we acknowledged, that we have been above 250 for quite a while, but we are still in the 200 and we are certainly pleased being in the 200 at this point expect to stay there and for 2015 again, deliver 800-plus multiplexing systems over the course of the year.

[Operator:]

Your next question comes from the line of Shaun Rodriguez of Cowen and Company. Please proceed.

[Shaun Rodriguez:]

So I'm just trying to get a sense for the proportion of the installed base that you would characterize as still fully active in consuming reagents. Right? Because when one takes consumables and tries to get a sense for per-system annuity, it obviously implies a significant decline in pull-through over time. But just wanted to give you the opportunity to maybe give us a sense for what the real denominator in that equation would look like, or maybe a better way to think about that, given some of these boxes were in place seven, eight, nine, 10 years ago by this point.

[Harriss Currie:]

Shaun let me give you a way to think about that, is that the. The depreciable life on a system like one of ours is in the neighborhood of seven years. And so for purposes of modeling the pull-through we used a seven year moving average. Based on that moving average the pull-through has been consistently if not modestly increasing overtime, however we are fully aware of systems that we placed 10 years ago that are still active in the marketplace. And so the unfortunate thing is that the way we measure these are either through our own service contracts that we have on employees that don’t provide service, but it also are fully aware of this that several of our partners provide the service themselves. And as a result we don’t have -- we have neither a relationship nor visibility to the customers at which these boxes were placed, nor obviously the utilization rate of those. So we look at as the primary indicator of the years of our technology in the marketplace is the growth in royalty overtime and our growth in royalty rates. So I will remind you that royalty rates for 2014 grew by 7%, 39.4 million representing over $400 million in end user sales up from the prior year. So from a royalty generation standpoint, our systems generate an ever increasing amount of royalties that has yet on an annual basis to decline, those annual end user sales and the total number of servicing agreements that we have in place year-over-year-over-year has continue to increase, which means of the systems replacing, more are going under service as a result in the aggregate, we’re getting better visibility over time for the number of active systems, I hope that helps somewhat.

[Shaun Rodriguez:]

It does. And another maybe higher-level question on system dynamics; when you look at MAGPIX, I think the positioning early in its launch was that -- and this makes sense -- that the throughput and the price point of that system would really allow that one to be the one to get you guys the ability to really go out, expand the market, and really accelerate placements, and that this would be pretty quickly the most significant driver of your placements as a percentage of placements. And when you look at the trends, it has kind of stayed neck and neck with LX. And in 2014 it was actually below that of LX. So even considering the minimums on 2013 and the comp dynamics there, has anything changed about the positioning of MAGPIX within the market -- the way that you guys are positioning it; the way that customers are viewing it relative to your other offerings? Just any help on what's going on there and how we should expect that mix to change or not moving forward.

[Homi Shamir:]

Yes, I think that our initial premise that MAGPIX would be a viable option for institutions that wanted a lower price system with effectively -- in the life science research market anyway, the same available throughput using protein-based assays, is a MAGPIX instrument -- obviously, doing a DNA assay that are in effect less messy, from Luminex 200 you can run a 100 constituent and on a FLEXMAP 3, obviously you could run 500 on MAGPIX you can run 50. But because the majority of assays that are run on MAGPIX are either infectious disease or protein-based research assays, there is not a significant benefit in owning a LX200 versus a MAGPIX. So what we found was that MAGPIX have been more utilized in the research market and some of our new diagnostic clients and we’re certainly looking at better ways to position that lower-plex product in both the diagnostic margin which from us would be a function of additional multiplexing assays, and of our partners optimizing their placement strategies we’ve actually reengaged our partnership support activities to provide additional incentives to our partners for increasing their level of placement there.

[Shaun Rodriguez:]

Thank you. And a last one, if you will allow me to sneak it in quickly, on the infectious disease franchise -- obviously a competitive dynamics still in focus there. Can you just say whether the RVP installed base year over year was higher or lower going into this flu season, and what your guidance implies for what the next-gen RVP assay can do to that, heading into next year's?

[Homi Shamir:]

Yes, so our RVP franchise continues to be successful. RVP from 2013 actually grew to 2014, obviously the launch of NxTAG RPP will provide even additional stability to RVP franchise, we benefit a little bit in the fourth quarter from the -- what I’ll call an expanded flu season, acknowledging that RVP assay is not a flu assay. So we don't experience the significantly ups in heavy flu season, nor do we experience the significant downs in the lighter flu season. We’re expecting given the volume for the -- not the volume but the level of flu season today for it to have a positive effect our first quarter this year. RVP overall is a stable business, we don’t appear to be losing share and we are recapturing accounts that have made the decision to come back to us as a result of the launch of RPP and a result of a mischaracterization of the ease of use of other platform that former and now current customers -- customers I guess that were current, became, former and became current again, they cycle all the way through realizing the benefits of using our technology. So just to sum it up, our RVP business is quite stable today.

[Operator:]

Your next question comes from the line of Bill Quirk with Piper Jaffray. Please proceed.

[Bill Quirk:]

Homi, on the inventory management item and the expected $10 million revenue hit to 2015, is there any part of this due to the whole competitive dynamic within HLA between bone marrow and solid organs? And then I guess a bigger-picture question here is -- you have a couple of different businesses that are under pressure from NGS. And so how do you think about that? Or how much pressure, rather, does that put on ARIES in terms of having a successful launch to try to change the competitive dynamic in a couple of businesses?

[Homi Shamir:]

I'll answer briefly and Harriss can jump to that in more detail, but we are pleased with our biggest customer in the space of the HLA telling us they don’t see any pressure whatsoever in their business in this space for NGS technology. As a matter of fact they're planning to launch a new product very shortly. As a matter of fact they're beefing up purchasing for us the instrument for that which is 3FND system, so they feel good what they are doing. I think what happened is they had delay of launching their product, create some inventory and they had some contractual arrangement between our two company that they needed to fulfill it in the past. And that's what created the inventory. I believe that in due time and I also strongly believe that we should not push them to buy inventory although if they have a contractual agreement with us we should work with them together that's why we are partner. And we spent time with them during the JP Morgan they're feeling very good at the way their business is going. Concerning the other business with the CF we believe it's really when that MGS will impact only the CF business and this particular customer that Harriss was speaking about. So we don’t see any additional business especially when we are in the infectious disease business supporting base business and we don’t feel any reason why we should lose the business or its impact to ARIES, as a matter of fact we are excited about the opportunity ARIES is going to bring us with the menu that we're planning to launch. We are going to start clinical trial with the ARIES in the beginning of March and then almost every six week after that we will add additional assay into the clinical trial so we're feeling good where we are going. I'm not worried about MGS in this space.

[Bill Quirk:]

Okay, got it. And then just thinking a little bit about the competitive dynamics within GPP, we have a couple of competitors on the market now -- or, I guess, I -- actually have been for a couple months now, at least in terms of the most recent one. Are you seeing any effect on deals? And what I mean by that is either taking longer to close and/or are there any changes to; say the pricing dynamics that you've experienced here over the past quarter?

[Harriss Currie:]

Yes so Bill again to help you out a little bit there, our GPP business was a significant contributor to our growth in 2014 although we do see competitors like BioFire and others in the marketplace. BioFire is probably a primary competitor that we see out there. Our GPP business grew significantly in excess of 40% in 2014 as a result of the reduced cycle time, so we talked about a few years ago from identifications account to close; and then the addition of those accounts obviously quicker getting them active faster. So our GPP business is very healthy, continues to grow, continues to have a significant amount of promise and is expected to again as I mentioned in my comments earlier in the call comments to be a significant contributor to 2015 revenue.

[Bill Quirk:]

Okay. For Harris, just to clarify this, it doesn't sound like you are seeing any extension of timelines for deals. And no pricing pressure? Is that a fair characterization?

[Harriss Currie:]

Very fair.

[Operator:]

Your next question comes from the line of Tycho Peterson with JP Morgan. Please proceed.

[Tycho Peterson:]

Just following up on a couple points. Homi, the new HLA system being launched that you mentioned -- is that factored into your guidance? So in other words, could that potentially offset some of the headwinds that you've talked about, given that you're expecting this?

[Homi Shamir:]

Yes. And Tycho, that's one of the One Lambda Fisher contribution, absent the consumable decline, has been factored into our guidance for 2015 however you'll note there's an upside and downside and faster or more expansive and respected adoption of that platform quicker launch, et cetera could certainly drive this up, could offset part of that downside. So it's yes it's factored in.

[Tycho Peterson:]

Okay. And then if I go back a couple weeks ago to our conference, it seemed like you were messaging you weren't necessarily going to add incremental sales reps in 2015, but maybe do it in 2016 as the menu expands. It sounds like you are maybe pulling some of that forward. Can you comment and maybe quantify the number of reps you're thinking about adding.

[Harriss Currie:]

Yes actually I believe what we said was that our intent was not to have a wholesale increase of our sales force but to have targeted ads in dense territories in order to ensure that we had enough feet on the street to access all of the high value accounts. That could be two handful, that could be 10ish, number of sales reps. but we are not talking about 50. So the investments in sales and marketing will certainly continue however that investment won’t begin to take place and so we are lot closer to the commercial launch, RUO launch of both the RPP product and the ARIES product middle to two-thirds away through the year.

[Homi Shamir:]

And Tycho, that’s one of the reason also similar like what we are doing in R&D and shifting resources from Toronto into Madison. The development in the ARIES menu we are doing the similar here in the sales force. We are looking at current resources that we have to streamline -- especially in the part of the management because in a way where we are running two separate sales force, we integrate them under one management and similar things we are doing in the marketing. So we are getting the synergy, so that’s where we don’t anticipate adding tremendous amount of people this year. Obviously next year we will have to talk when we provide the guidance a year from now what we are doing to the sales force.

[Tycho Peterson:]

Okay. And then last one -- I know you had a question early on about M&A, and it looks like you will be opportunistic. How active are you looking at deals? And should this be with the idea of menu expansion, or potentially add-on platforms?

[Homi Shamir:]

No, we are not planning at all to look at the platform, we have a strong enough platform with a great future and actually we working on the roadmap. We know where we are taking to core platform. The opportunity we are looking it’s mainly in the assay and to see if there is somewhere around and maybe there is no that somebody that can add some assay to the current ARIES platform. So that’s what we are doing.

[Operator:]

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

[Zarak Khurshid:]

Free cash flow looked quite strong in the quarter, given this is an investment year. How do you think about free cash flow for 2015 and 2016?

[Harriss Currie:]

Given the -- obviously we generated significant amount of cash during cash investments during -- high free cash flow, obviously no debt during 2014 we would expect given some of the investments and the slower than anticipated revenue growth and the investments we are going to make to increase the trajectory of our revenue in a long-term that likely won’t be at the level that we saw in 2014, yet it should be significant. And we do have to make some additional investments for instance we spoken many times about automated manufacturing give us the ability to produce our ARIES cassettes and high-volume in a cost beneficial manner. So there are investments that we have to make there, some will flow straight to the income statement others will be capital in their form and amortized overtime, but I wouldn’t expect the same level of free cash flow in 2015 that we experienced in 2014.

[Zarak Khurshid:]

Thanks, Harriss. And then a follow-up on CF; how are you thinking about companies like Counsyl and Good Start Genetics, and the risk that they might scan some of that CF business from your bread and butter customers. Thanks.

[Harriss Currie:]

We believe we have a pretty solid product. It’s most beneficial in higher throughput environment. So in an environment where the samples are at a level appropriate to our configuration we don’t believe there is any risk there. So we haven’t given the significant amount of thought to the some of those competitors given the strength of our offering and our position to that.

[Operator:]

That concludes our Q&A. I will now the conference back over to Mr. Homi Shamir for closing remarks.

[Homi Shamir:]

Thank you all for your attendance today on our earnings call. And we are looking forward to see you in person in the very near future. Thank you.

[Operator:]

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.