Luminex Corporation's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.29.13 | About: Luminex Corporation (LMNX)

Start Time: 17:00

End Time: 18:04

Luminex Corporation (NASDAQ:LMNX)

Q1 2013 Earnings Conference Call

April 29, 2013, 17:00 PM ET

Executives

Patrick J. Balthrop Sr. - President and CEO

Harriss T. Currie - CFO, SVP, Finance and Treasurer

Matthew Scalo - Senior Director, IR

Analysts

Daniel Leonard - Leerink Swann

Doug Schenkel - Cowen and Company

Daniel Arias - UBS

Zarak Khurshid - Wedbush Securities

Tycho Peterson - JPMorgan

Dana Walker - Kalmar Investments

Operator

Good day, ladies and gentlemen. Welcome to Luminex Corporation's First Quarter 2013 Earnings Conference Call. My name is Keith and I'll 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).

Now, I would like to turn the presentation over to Matthew Scalo, Senior Director of Investor Relations, for opening remarks. Please go ahead.

Matthew Scalo

Thank you, Keith. Good afternoon and welcome to Luminex Corporation's conference call for the first quarter 2013 financial and operational results. Today, Pat Balthrop, our President and Chief Executive Officer; and Harriss Currie, our Chief Financial Officer, will discuss these results released today after market close. In addition to the audio portion of our conference call, we have prepared a slide presentation that is 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 these differences are detailed in our Form 10-K for the year ended, December 31, 2011, and our quarterly reports on Form 10-Q for subsequent periods, filed with the SEC. 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 may be covered in this presentation. To the extent that any non-GAAP financial measures are covered, a presentation of and reconciliation to the most directly comparable GAAP financial measures will be included in this presentation and/or 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 Sr.

Thank you, Matt. Welcome to our first quarter 2013 earnings call. In our prepared comments and presentation, I'll summarize the first 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 began 2013 with a solid performance, achieving first quarter total revenue growth of 12% on an adjusted basis, driven by 15% growth in adjusted assay sales and 23% growth in royalty revenue. For our assay business, we believe that using an adjusted growth rate offers our investor a more realistic and more accurate reflection of the operational trend over the last six months.

This approach is more realistic because, as you recall, at our investor event in December, we announced our plans to transition to a direct molecular diagnostic sales force beginning January 1st of this year. That transition has occurred successfully, which I'll describe later.

In order to provide a seamless transition for our lab customers, we agreed with our former distribution partners that they'd be able to sell through the first quarter. So to ensure supply for our customer, we shipped to our distributors approximately $2 million of advanced assay purchases in the fourth quarter.

In the first quarter, therefore, after making this adjustment, we delivered 15% growth on assay sales. And to complete that analysis, our fourth quarter 2012 adjusted assay growth rate was 35% year-over-year.

Our assay growth in the first quarter reflects continued momentum in our infectious disease franchise, including double-digit growth within our stable respiratory viral customer base, contribution from our gastrointestinal pathogen panel, as well as strong growth from our LDT assay portfolio or lab-developed tests.

We're also pleased with progress made in our Biosurveillance and companion diagnostic programs which contributed to our first quarter performance. Other highlights from the quarter's income statement include our gross margins which improved to 71% and reflect a product mix shift towards higher margin items. And lastly, excluding our non-cash and one-time costs, non-GAAP net income was $7.9 million or $0.19 per diluted share.

Taking a step back from our first quarter highlights, on slide 5, we've displayed Luminex's two core business segments and how each contributes to the company's achieving our long-term strategic goals. On the left-hand column, we've isolated the financial performance of the technology and strategic partnership or TSP group, which accounts for approximately 60% of our total revenue.

Through the strong commitment and investment from our partners, the technology and strategic partnership group generates healthy mid-teens operating margins and positive free cash flow. We remain highly committed to supporting our strategic partners and helping them achieve their goals. And based on factors such as long-term contractual commitments of growing installed base and royalty growth rates, we expect continued healthy growth from this core foundation.

We've leveraged our partnership businesses to expand into exciting new market opportunities such as molecular diagnostics which is reflected in the assays and related products, or ARP segment shown on the right side of this slide. Our position is strongest in higher volume, more sophisticated diagnostic testing laboratories. We've developed market leadership positions in categories such as cystic fibrosis, over 90% of which is performed in sub-acute testing locations like large reference labs, because of the efficiency and performance of our core multiplexing technology.

Our multiplexing capabilities have also provided leadership positions in infectious disease testing. That multiplexing capability plus our product's ability to address the increase in customer need for throughput delivers significant value to the laboratory. And as customer volumes grow and menu expands, particularly in large medical centers, we believe we have a sustainable competitive advantage.

We're building on that large medical center leadership as we successfully combine RVP with GPP in these large accounts. The 45% compound annual revenue growth of our assays and related products group on the right-hand side of the slide reflects these ongoing accomplishments.

As a company, we continue to leverage this portfolio model as well as our platform technologies to develop first-mover, innovative and novel solutions that address significant market opportunities. In fact, examples of the kind of market opportunities include cleared assay products such as GPP, as well as the lab-developed test segment.

In January we received FDA clearance for our innovative gastrointestinal pathogen panel and followed that up with the April 15th announcement of FDA clearance of GPP on our now clinically validated MAGPIX system. This MAGPIX clearance is an important milestone for Luminex as it positions us for GPP market penetration, as well as additional future assay clearances.

At our global sales meeting, we launched the GPP assay to our direct sales force with a well-defined go-to-market strategy and I'm pleased to report that we are exceeding our internal target for customer wins to-date. A number of these early wins, about 50% in fact, are customers that are new adopters of our xTAG multiplex molecular assays, which is a very encouraging trend. This is a strong indicator of the high level of interest in the market for this first-mover assay.

The other half of GPP customers are current RVP users who have added GPP and agreed to longer term contracts for RVP which is also very encouraging. This confirms our strategy of launching first-mover assays and expanding our infectious disease product line to maintain and grow our share.

Moving on to slide 7, over the last few quarters we've highlighted the overall size and significant of the lab developed test or LDT market. We believe our proprietary technologies offer molecular labs a unique solution that enables us to assist the customer to rapidly validate and bring online a new diagnostic test while being able to handle increasing volumes once the assay is commercialized.

Our experience indicates and LDT-enabled platform and enhances the molecular labs overall loyalty that once an LDT is up and running, the customer is less likely to switch technologies even when an assay receives clearance. Recently, we've compiled independent market research data that confirms that the number of molecular tests continues to expand and the number of molecular capable labs in the U.S. continues to grow.

The volume of U.S. molecular testing continues to be concentrated at approximately 600 large hospitals in reference labs. The data shows that on average, molecular labs use over three different platforms to process their daily samples with larger labs incorporating as many as 10 or more. The customer's choice of platform depends on a number of parameters specific to the individual labs needs, but common needs are breadth of test menu, system throughput and capacity as well as other workflow considerations.

So why are LDTs important and how do lab-developed tests affect the competitive dynamic? The data confirm that of these large molecular labs, over half report that they regularly develop, validate and perform LDTs, so that they can meet the expectations of the ordering physician and the patient. This capability is extremely important for the lab and this area is one in which our proprietary technology excels due to its openness and flexibility.

We are pleased with the contribution from this segment which has continued to gain momentum in 2013 and all indications point to continued growth opportunities in the future. We announced another future growth opportunity in March when Luminex signed a collaboration and license agreement with the pharmaceutical company Merck for the development of a companion diagnostic test.

This test which will be compatible with existing Luminex instruments measures proteins identified in patients with mild cognitive impairment. This is not a molecular diagnostic test but an immunoassay. It is intended to be used in the patient's screening process in Merck's high profile, Alzheimer's drug development program and as a potential companion diagnostic upon launch.

As you know, Alzheimer's is a complex and devastating disease and while our understanding of this disease is improving, there are few if any effective therapeutic solutions on the market. So we're pleased to be working with Merck to play a significant role in this critical long-term program and look forward to providing updates as progress warrants.

In addition to those developments, I'd also like to provide an update on our exciting sample-to-answer system with the internal code name Project Aries. We've made significant progress on the enhanced redesign of the hardware as well as the implementation of proprietary software that will simplify overall workflow. We are well into the alpha stage and have built a number of systems which we expensed in the first quarter.

Assay menu development is well underway. We're demonstrating this new high volume, high capacity system this week to current and future customers at the Clinical Virology Symposium in Florida. Our progress with Aries is the driver of the growth in R&D this quarter and although we expect to maintain R&D spend as a percent of revenue overall, this line item may fluctuate depending on the timing of various stages of development.

For the investor community, we plan to provide additional details on the demonstration of Project Aries of industry events such as the Association of Molecular Pathology meeting in November. You can also expect further information on the Aries menu as we approach commercialization. Additional details will follow as we get closer.

On slide 10, we summarize our priorities for 2013. Of these important initiatives, I'd like to provide additional information on our direct selling initiative in molecular diagnostics. Our direct sales activities kicked off in January and I'm pleased to report all domestic regions are fully covered by sales professional and technical support staff.

In addition, over the last year, Luminex has invested significantly in our IT infrastructure and preparation to support rapid business expansion on a direct basis. Early customer feedback on the transition has been very positive and we look forward to providing our customers with an expanding portfolio of molecular diagnostic solutions in a manner that is best-in-class. As we said previously, we expect this transition will be neutral to earnings in 2013 and accretive thereafter.

Lastly, we continue to work with FDA regarding clearance NeoPlex4. Please recall that our 2013 revenue guidance factors little if any U.S. sales contribution from this assay. Clearly, we're investing in each of these strategic initiatives and are excited about the growth opportunities going forward.

Now, Harriss will review the financial data. And afterwards, I'll return to discuss our outlook for the rest of the year.

Harriss T. Currie

Thanks, Pat. Let's begin the financial review with a look at revenues. As Pat mentioned previously, total revenue for the first quarter grew by 9% over the prior year period. The quarterly growth was predominantly attributable to growth in our assay product portfolio, which grew by 6% for the quarter, growth of royalty revenue which grew by 23% and 77% growth in other revenue, which included a milestone payment for the $1 million associated with the Merck development agreement announced in the first quarter.

There were two primary factors affecting our assay growth in the quarter. First, as a result of the aforementioned fourth quarter purchases by Thermo and Abbott, we experienced no growth in our infectious disease product line. However, when we adjust for this factor and as Pat mentioned earlier, we would have realized an increase on our infectious disease portfolio in the mid teens.

Second, with respect to the growth of our assays we experienced growth in our genetic assay portfolio in high teens which also includes a contribution attributable to our LDT strategy. For the quarter, infectious disease sales comprised 62% of total assay sales and genetic testing sales comprised approximately 38%. This compares with 65% and 35% respectively in the first quarter of 2012.

We sold a total of 205 multiplexing systems in the first quarter of 2013, increasing cumulative shipments of multiplexing systems to 9,864. As a reminder, the first quarter of each year is typically our lightest placement quarter. We continue to experience some fluctuation in quarterly system shipments resulting from the timing of contractual minimums and currently from the economic uncertainty present in the life science research marketplace.

We fell within our expected range of system placements and also experienced an expected shift in the distribution of systems between LX and MAGPIX systems. In the first quarter of 2012, LX and MAGPIX systems represented 69% and 27% respectively of total multiplexing system placements. As expected and planned, LX and MAGPIX systems represented 59% and 35% respectively of total multiplexing system placements in the current quarter, and approximate 10% concentration shift from the prior year.

System revenues were down for the quarter by 6%, primarily as a result of the shift from the LX system to the MAGPIX system which has a lower price point. Also included in system revenue for the quarter were sales of 17 automated punching systems and peripherals from our Australian subsidiary.

Consumable revenues were flat for the quarter, driven by stabilization of purchase volume from our largest customer, which has contributed to the significant volatility in consumable revenue that we've experienced historically. There were 20 bulk purchases of consumables in the quarter totaling 9.6 million or 81% of the total, ranking from 103,000 to 4.2 million.

Royalty revenues were up for the quarter by 23%, representing total reported end user sales on xMAP technology of $110 million, an increase of 17% over the prior year. The royalty increases over the first quarter of 2012 can be attributed to three factors; growth in end user sales, rate increases and growth attributable to increases in minimum payments and audit findings.

Ongoing base royalties represent approximately 84% of current quarter activity of approximately $8.5 million as compared to 7 million in the first quarter of 2012 representing 18% growth. In the aggregate, our higher margin items; consumables, royalties and assays, comprised 76% of current quarter revenue, flat with the concentration the prior year. This factor was a significant contributor to the more stable gross margin percentages we've displayed.

Now let's turn to the income statement. As discussed previously, revenues grew at 9% for the quarter. Gross margins for the quarter were 71% showing improvement over the first quarter 2012, primarily as a result with increase in the percentage of our higher margin items derived from royalties, a 100% gross margin item and the inclusion of the $1 million milestone payment related to the Merck development agreement. We remain confident in our ability to maintain gross margins in the 70% range for 2013.

GAAP operating expenses increased 40% for the quarter. And as we stated on our fourth quarter call, included a one-time $7 million charge associated with settling any potential future residual payments in resolution of our distribution agreements with our prior molecular diagnostic assay distributors. Excluding this charge, operating expenses would have increased by only 15%.

Also included in operating expenses for the quarter are approximately $3.2 million of costs associated with the development of the Project Aries system, the next-generation system for our MultiCode technology that were not present in prior-year results.

A couple items of note with respect to the composition of our GAAP operating expenses for the current quarter; R&D expenses were up 25% over the prior-year period and represented 24% of revenue for the quarter. But as a result of cost associated with the production of alpha units to be expensed currently are above the expected run rate for the reminder of the year.

We currently expect consolidated R&D expenditures for the full year to be closer to 20% of revenue based on our current revenue guidance range. 72% of our total R&D expenses were attributable to our assays-related product segment as a majority of our R&D investment over the past several years has been in this segment.

We currently expect consolidated R&D expenditures for the year, as I said again, to be a few points lower relative to our current guidance range. SG&A costs were 48% of revenue, up from 35% in the prior year. You'll recall that I mentioned earlier that include a $7 million charge in the current quarter related to the settlement of our distribution arrangements with our molecular distributors.

Exclusive of this charge, SG&A would have been flat as a percentage of revenue quarter-over-quarter and up only 11% from the prior-year period. Of the components of SG&A, general and administrative costs were flat quarter-over-quarter, excluding the settlement expense previously mentioned with sales and marketing constituting the bulk of the SG&A increase as a result of taking full control of our molecular diagnostics channel.

In our comments today we have made and will make additional references to certain non-GAAP operating measures. We believe in adjusting for certain items and their related tax effects reflects operating results that are more indicative of the company's ongoing performance while improving comparability the prior periods. And as such, they provide our investors an enhanced understanding of the company's financial performance.

For the first quarter, GAAP operating margins were a negative 3%, a 15 point decline from the 2012 GAAP results. But non-GAAP operating margin was a positive 17%, down only 2 percentage points from the prior-year period, including the cost of our Aries alpha units.

For purposes of calculating non-GAAP operating margins, we have excluded stock-compensation expense, amortization of acquired intangibles, acquisition costs, severance costs, costs associated with legal proceedings and the previously mentioned costs to settle our molecular distribution agreements of $7 million from GAAP operating profit or loss.

The effective tax rate for the quarter was a negative 58%. Our effective tax rate is significantly affected by the distribution of income across our global jurisdictions. For the first quarter, 90% of our reported income tax expense was attributable to the profitability of our U.S. operations.

In addition, as a result of the allocation, the $7 million expense for resolution of our molecular distribution agreements to our Canadian subsidiary, we incurred both a GAAP and tax loss there, resulting in a reduction of consolidated GAAP income before tax with no corresponding benefit realized, as a result of the valuation allowance on our Canadian income tax assets.

For the quarter, we generated a GAAP net loss of 2.5 million. On a diluted basis, $0.06 per share compared with income of $0.08 a share in the first quarter of 2012. On a non-GAAP basis, we generated net income of 7.7 million, or $0.19 per diluted share, up $0.04 or 27% from $0.15 per diluted share in the prior period.

Now turning to our two core segments. Revenue out of our technology and strategic partnership segment, or TSP, was up by 5% for the quarter, driven by a 24% increase in royalty revenue, slightly offset by declines in system revenue and other revenue. Total operating expenses of our technology and strategic partnership segment exhibited no growth over the prior year, with modest fluctuations categorically.

GAAP operating profit of our technology and strategic partnership segment increased by 6% for the quarter and was flat as a percentage of revenue at 24%. Revenue from our assays and related products segment, or ARP, was up 15%, driven by the increased sales of our assay products and increases in other revenue.

As we mentioned previously, due to the transition away from our molecular assay distributors, we allowed them to purchase assays in the fourth quarter of 2012 so they would be able to provide product through the first quarter in order to provide for an orderly transition of customer relationships. Had these purchases been made in the current quarter, we estimate that assays and related products revenue would have grown in the mid 20%.

GAAP operating profit of our assays and related products segment declined by 7.6 million, driven by several factors. The first was an increase in total GAAP operating expenses of 11.6 million, 7 million of which represented the expense related to the resolution of our distribution agreements. And the remainder of which was primarily attributable to the incremental development costs associated with our next-generation sample-to-answer platform for our MultiCode-RTx technology.

Secondly, costs relating to taking full control of our molecular distribution pipeline. And thirdly, the escalation of the prior quarter purchases mentioned previously. We estimate that adjusting for the $7 million resolution expense and the pre-purchases of our assays by our distributors, that the assays and related products segments would have been approximately breakeven.

We ended the quarter with 60.9 million in cash and investments, up 1.5 million from the December 31th balance. We generated 9.7 million in operating cash flow, net of the excess benefit of stock-based awards and we had share repurchases during the first quarter totaling 5.8 million.

You'll recall that our share repurchase program was intended to offset dilution from our equity plans and weighted average shares outstanding, which as you can see from our operating statements, are slightly down from prior-year levels. The $7 million charge reflected in our current quarter financial statements will be paid in the second quarter.

Now onto our 2013 revenue guidance. We reaffirm our 2013 revenue guidance of between $220 million and $230 million. From a macro-level perspective, we continue to remain cautious but optimistic about the life science research market, while experiencing continued favorable trends with respect to overall demand from our clinical customers.

With respect to assays, we anticipate a positive contribution from our molecular assay portfolio and continuing positive momentum in our LDT strategy. We believe having a direct molecular diagnostic sales force to take advantage of our novel innovative assays will be a significant step forward for the remainder of 2013.

While we manage the business for the long term and ask investors to judge our performance over that period, we understand that quarterly performance is important. To address this issue, this slide provides detail as to how our total revenue was distributed by quarter over the last four years.

Occasionally, Luminex experiences a year such as 2011 where the distribution of revenue [intra-year] is less typical. However, looking at 2013, we expect a quarterly revenue distribution that is similar to a more typical year and with the first quarter falling within the historical range.

I'll now turn the call back over to Pat for some final comments.

Patrick J. Balthrop Sr.

In 2013, our focus is on driving strong financial results through the execution of our long-term strategic plan. This involves leveraging our profitable partnership model to enter large and fast-growing market opportunities, such as molecular diagnostics. Within our expanding proprietary assay portfolio, we received FDA clearance for our GPP assay in January, and I'm very pleased with the positive early-user feedback to date. In addition, we see excellent growth opportunities within our LDT strategy as our proprietary technology offers a unique solution to our customers' needs.

Lastly, we made very good progress with Project Aries and look forward to providing further updates throughout the year. With our expanding assay menu, the timing is ideal to take control of our molecular diagnostic channel and drive results to build the Luminex message and brand to our customers. With all that said, we'll continue to manage our business with an eye to our strong financial position and our strong responsibility to our shareholders.

This ends our formal comments. Keith, please open the line for questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). Your first question is from the line of Dan Leonard with Leerink Swann. Please go ahead.

Daniel Leonard - Leerink Swann

Thank you. A couple of questions. First off, on the royalty growth in the quarter, you backed out some one-timers and still called it an 18% growth number. I'm curious if that – how you view the sustainability of that 18% number, because that is a little bit different than we've seen in recent quarters.

Patrick J. Balthrop Sr.

Dan, this is Pat. Thanks for the question. I would say that we expect that kind of mid-teens rate to be sustainable, is the short answer.

Daniel Leonard - Leerink Swann

Okay. And then my…

Patrick J. Balthrop Sr.

And the support for that is really the end-user assay growth number that Harriss mentioned.

Daniel Leonard - Leerink Swann

Sure. And then my follow-up, Pat, could you offer some more color on the GPP launch? You mentioned it met your expectations but trying to better understand what that means. And also trying to understand, it sounded from your prepared remarks like you're using GPP to some degree to defend your RVP business. Is that accurate? And if so, could you help us understand those dynamics? Thank you.

Patrick J. Balthrop Sr.

Sure. The first thing to understand is that our assay business is kind of a portfolio approach, of course, and we're pleased with, as I mentioned in my remarks, our internal targets regarding GPP as it relates to the number of new customers we expected to have closed through the first quarter and as of the end of April, et cetera. And so as we track all that, Dan, we're ahead of schedule, if you will. And as you know, we don't provide a lot of detail regarding number of customers or line item revenue per product, but I can tell you that we're very pleased with the progress we're making particularly in the United States. Of the customers that we're gaining, as I mentioned in my formal remarks, half of them are new adopters. That is, they're not previous Luminex users. And when I have visited those customers myself, what they are – the message they're sending is the compelling clinical need that GPP addresses, the ability to differentially diagnose a patient that has those gastroenteritis like symptoms and identify the causative agent, as well as identify the – rule out the ones that are not causing the infection and then be able to intervene clinically. The other half of our customers that we've added are RVP users. I think that that's a reasonable or understandable approach for us to take. You go to your existing customers who are familiar with the product and are buying an infectious disease product. So that's what we did. And in those cases, those customers when they contract for GPP, they also contract for a long-term commitment for RVP, which we think is also good news. And so that's about a 50-50 split as we sit here, and I can't really comment about how that will unfold throughout the year, but we like the trend.

Daniel Leonard - Leerink Swann

But is it fair to say when somebody – is it fair to say you're bundling to those – that half that has RVP, you're bundling to some degree GPP with that product and offering, maybe a discount on the bundle or somehow using one to boost the other. Is that fair or no?

Patrick J. Balthrop Sr.

I would say not necessarily. I would say we're seizing the opportunity to provide the customer with the ability to commit to RVP over the longer term.

Daniel Leonard - Leerink Swann

Okay, thank you.

Operator

Your next question is from the line of Doug Schenkel with Cowen and Company. Please go ahead.

Doug Schenkel - Cowen and Company

Good afternoon, guys. Thanks for taking the questions. My first question is really just an update on RVP competitive dynamics. Back in December, you mentioned that you still had about, I think, 200 labs running RVP, and on the Q4 call, you talked about some market research that you did that suggested your share had been pretty steady. You lost a few labs, but you had some gains as well. Can you provide us an update on this? And as we look over the course of 2013, what's your expectation for the number of labs that will be running RVP exiting the year, again keeping in mind that I believe you said it was around 200 exiting 2012?

Patrick J. Balthrop Sr.

Yes, I don't recall the specific number that I quoted on the prior call, Dan, but I believe that number was a triple-digit number rather than a specific number like 200. But the RVP competitive dynamic is as follows. The most significant competitor we run into today continues to be culture and DFA that customers are converting to a multiplex molecular method. However, that's changed somewhat over the last couple of years. Some of those multiplex molecular competitors have increased their level of activity. A couple years ago, we saw a lot of activity from Prodesse, which, as you know, is now Hologic's company, and others entering the market, most recently, I would say, BioFire. Our market share is stable today. We base that based on a detailed analysis of our account base and what those customers are buying from us, et cetera. We see GPP as a powerful competitive tool, as I mentioned in response to Dan Leonard's question just a second ago. Within the multiplex molecular diagnostics competitive area, there are really only two companies that we ever get asked about. And of those companies, I would say, as I mentioned a second ago, we see activity in the marketplace from BioFire. We know that company pretty well as Idaho. Obviously, we've both been active in the biothreat space for a number of years. Their product offering is a low-volume, easy-to-use molecular diagnostic system. And so we don't compete with them much because most of the time we serve the higher volume labs where their system would have a difficult time meeting the throughput requirements of those customers. But it is true that we do co-exist in some cases. Sometimes the customer will use our product for really high-volume situations, such as a high flu season and then run the BioFire system when they have the oddball request that comes in on the 11 to 7 shift. The other multiplex molecular competitor that we also get asked about is GenMark. As you know, GenMark, most of their business is in two or three customers in non-infectious disease areas. The rest of their business is mostly also non-infectious disease and the clotting tests, like Factor II, Factor V and so on. So we don't really encounter them as serious competitors in RVP. They're more kind of on a one-off basis.

Doug Schenkel - Cowen and Company

Okay, that's helpful. So I guess it's fair to say that what's baked into your guidance is the assumption that your market share stays stable in this market?

Patrick J. Balthrop Sr.

Yes.

Doug Schenkel - Cowen and Company

Okay. And then turning to reimbursement, there's been a lot of focus recently about the transition to, as you know, new reimbursement structures for molecular tests. Can you talk about any impact this is having on your customers specifically in cystic fibrosis, and whether you think this will impact your mix of cystic fibrosis tests in terms of those that are – say the 23-variant panel versus some of the more comprehensive panels?

Patrick J. Balthrop Sr.

Well, first of all, I think the – for our business, reimbursement affects us differently than other companies, in part because across all of our diagnostic portfolio, a significant portion of our revenue is generated on in-patient samples rather than outpatient samples. CF, as you mentioned, is an exception to that, of course. So it's important to understand when you're evaluating the impact of reimbursement on different products to keep in mind that a test that's done on an in-patient is not really subjected to the reimbursement changes as much as a test that would be on an outpatient basis. With that said, as you know, the AMA adopted new codes and for CF testing that happened in the early part of 2011. And specifically as it relates to CF, the reimbursement rates there are quite favorable. It's – depending on whether it's the 81220 code or up to 221, et cetera, the reimbursement there is very favorable, and is I would call it robust compared to – particularly compared to the cost of our assay. As you remember, that market's concentrated, very concentrated in two significant customers. And one of those two customers, of course, is our customer. So as it relates to CF, because of the healthy reimbursement rate we don't expect there to be any significant impact on the competitive dynamic.

Doug Schenkel - Cowen and Company

Okay, that's great. And I guess two quick ones for Harriss real quick. I think other income spiked up a little bit this quarter. I think the Merck – anything from Merck was actually in the royalty number, so I apologize if I missed that. But could you just provide a little more detail on why that spiked up a little bit, including services?

Harriss T. Currie

Yeah, actually the Merck payment is in other revenue.

Doug Schenkel - Cowen and Company

It is, okay.

Harriss T. Currie

It's a milestone payment.

Doug Schenkel - Cowen and Company

Okay.

Harriss T. Currie

So that's one of the biggest components of the increase there. There's also some grant revenue that's in there as well that helped increase that number.

Doug Schenkel - Cowen and Company

Okay, all right. That's great. That was the big one. Thanks for taking the questions.

Harriss T. Currie

You bet.

Operator

Your next question is from the line of Daniel Arias with UBS. Please go ahead.

Daniel Arias - UBS

Hi, guys. Thanks. Pat, on the MAGPIX clearance for GPP, how much of the lab base that you're targeting with that assay do you think would find the MAGPIX to be the instrument of choice there?

Patrick J. Balthrop Sr.

I would say – first of all, we see MAGPIX as more of a strategic play than kind of a short-term driver, meaning that we expect to build our portfolio on MAGPIX over the longer term. And so – of the customers who would be adopting the product in the short term, I would say there would be some of them, maybe 25% would be a good kind of rule of thumb that would adopt the product using a MAGPIX system. The reason for that, Dan, may not be what immediately springs to mind. It's often lab bench space related. If you go to these really large medical centers, and I visit them all the time, with some of them it seems like you need a shoehorn to get another piece of equipment on their lab bench. And so anything we can do to reduce the need that they have to use up additional lab bench space, they like it. So MAGPIX, obviously, is very attractive in that regard.

Daniel Arias - UBS

Okay. So it's a factor in future sales, but it's also going to presumably drive revenue in the near term as...

Patrick J. Balthrop Sr.

That's why it's always better – it's always better to give the customer the choice, right? So if they have an LX200 and they're validated and they want to go that way, then we can accommodate that. If they're interested in – or would prefer a smaller, sleeker kind of instrument platform, we can accommodate that as well.

Daniel Arias - UBS

Got it, okay. And then on consumables, can you just comment on the growth through and maybe for the year? You have the tougher year-over-year comp in the back half. So I guess, how do you think about consumables growth for the year?

Patrick J. Balthrop Sr.

Well, as we look at consumables for the quarter and I'll get to the year in a second, they were roughly flat year-over-year. If you look at the longer term trends, excluding our largest consumables purchasing partner and one-time participants and so on, year-to-date is growing in – for the quarter was kind of a double-digit number. As we think about it, we look at the growth of the installed base being in the low-double digits. We look at the royalty number, as I mentioned in response to a prior question, as growing on a sustainable basis in the mid to high teens. We would expect consumables to be kind of in that range.

Daniel Arias - UBS

Got it, okay. And then, Harriss, sorry, did the percentage of placements for MAGPIX that you gave equal 75 systems for the year – sorry, for the quarter?

Harriss T. Currie

72 for the quarter, this quarter, 35%.

Daniel Arias - UBS

Thanks very much.

Operator

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

Zarak Khurshid - Wedbush Securities

Good afternoon, everyone. Thanks for taking the questions and thanks for the color on the LDT business. I was wondering if you could more precisely quantify your growth versus the growth of the overall LDT market. It seems like maybe you're taking some share there. Can you talk about what types of platforms you might be displacing?

Patrick J. Balthrop Sr.

Well, often when a customer is faced with the decision to make regarding adopting an LDT, it's a startup mode. They're doing it in response to requests they're receiving from their ordering physicians. In other cases, and we've had this experience with one of our largest customers, they had an FDA cleared alternative that was not meeting their expectations as it relates to quality and performance. And so we worked with them to validate an LDT. So they actually, in that case, converted from an FDA cleared method to an LDT because they were looking for better throughput and better technical performance. So we're not really displacing other platforms as often – with that one exception I mentioned a second ago being an example. We're not really displacing other platforms as much as we are allowing customers to upgrade from sometimes single-plex testing to a multiplexed approach, or if their – as their volumes grow dramatically and they may have started on a particular assay on another platform that has limited throughput and limited capacity, the ability to convert to a NEXTMap technology-based LDT gives them for all intents and purposes unlimited headroom as their volumes grow. And so that's – the unmet need that we're meeting there is primarily in response to underlying market growth as volumes grow and as menus expand. The LDT approach is a way to be responsive to an unmet customer need.

Zarak Khurshid - Wedbush Securities

Understood. Thank you for that. And then I was just curious if you could comment on the One Lambda piece of the business and just the strength of that end market, to the extent that you can. And are you expecting that business to reaccelerate this year versus last year? Thanks.

Patrick J. Balthrop Sr.

Well, as you mentioned, our single largest customer in our technology and strategic partnership segment is the One Lambda division, if you will, of Thermo Fisher. And that business continues to progress nicely. It's an extremely valuable relationship for both companies. As part of that transition, we worked out a number of mechanisms that would alleviate some of the choppiness in the – that we'd experienced in the consumable purchases, and we expect those to be less choppy, more smooth, if you will, going forward. The overall – if you were to look at the royalties and their end-user sales that they report and we have another partner in the transplant space as well, and if we look at all the transplant partners that we have, they're end-user sales in the first quarter came in, in the mid-teens year-over-year. And so we're comfortable and confident that that will be a – that trend will continue. We did have expectation for growth in consumables for them in 2013 and as we look at our overall portfolio of partners and what we expect each of those partners to deliver, we do expect consumable growth from that segment in 2013.

Zarak Khurshid - Wedbush Securities

Sounds good. Thank you.

Operator

(Operator Instructions). Your next question is from the line of Tycho Peterson with JPMorgan. Please go ahead.

Tycho Peterson - JPMorgan

Thanks for taking the question. Just first one on the spending, you talked about the 3 million you spent on Aries this quarter. Can you talk a little bit about how that's going to flow for the rest of this year? I know you didn't change your full year R&D spending targets. And then has anything changed in terms of the specs you're thinking about on Aries? I think you talked about four to five assays previously on initial launch.

Patrick J. Balthrop Sr.

Tycho, this is Pat. I'll answer the second question and then Harriss will talk to you about the spending, if that's okay.

Tycho Peterson - JPMorgan

Sure.

Patrick J. Balthrop Sr.

So the expectations that we have regarding the performance of the Aries system, number of tests that could be run simultaneously, a less than two-hour turnaround time per assay. We expect to have I would call it a handful of products at launch or so. None of those expectations have really changed. As I mentioned in my formal remarks, we're validating some of our assumptions with customers at an industry event this week, the CVS in Florida. And so our experience since the last time we talked about it, which was at the investor event we had in December and then as we reported our full year results on our fourth quarter call, we remain more convinced and more confident. To be candid, I wish I had the opportunity to spend an hour or more telling you about how excited we are about that product because we are absolutely rock-solid convinced that there's a significant unmet customer need here as it relates to capacity and throughput. And when you look at the data that I mentioned in my formal remarks where you have these high-end customers that they literally in order to get their work done, they need 8, 10, 12 systems to get their work done only because the systems they're using were developed 6, 8, 10 years ago when volumes were low and numbers of tests that were available were low, it's really frustrating for customers. And we believe that if we deliver the product according to our current specifications, that we're convinced we're going to have a winner here. So we're very excited about that. As far as the spending, I'll now turn it over to Harriss.

Harriss T. Currie

So, Tycho, we mentioned the $3.2 million of costs attributable to the Aries system that obviously weren't present in the prior-year results. Maybe a third of that was attributable to the production and expensing of those alpha units that wouldn't be a recurring cost going forward. However, when we get to beta production, as you know, we'll then begin to expense those beta units over the useful life of those beta units as opposed to immediate expensing of the alpha units. So what I can tell you is that the expectations for Aries are less than $3.2 million a quarter. That number should come down in the second, third and fourth quarters, but could possibly then modestly increase again as beta production begins.

Tycho Peterson - JPMorgan

And then you at the analyst day, I think, also mentioned developing a new xTAG chemistry. Can you just update us on that, the easier-to-use chemistry?

Patrick J. Balthrop Sr.

Sure. We mentioned that during the investor event as an example and we neglected to include it here only because we had a lot to talk about. So the work that we're doing there continues to progress and we continue to be optimistic about our ability to deliver that chemistry that will address the higher end, higher volume market as basically being kind of a one-step operation. So, all that work is taking place at our Canadian R&D facility in Toronto and I would say so far, so good.

Tycho Peterson - JPMorgan

Okay. And then can you talk on MAGPIX utilization, where it stands today and where it goes with the GPP launch?

Patrick J. Balthrop Sr.

Sure. Well, GPP – of course, since we just received clearance, GPP is not really affecting the MAGPIX utilization number. The utilization that we're – in this case, utilization defined as consumables plus royalties per installed system is as expected. Of course with GPP, there will be no beads or royalties for MAGPIX GPP placement. So we will continue to talk about MAGPIX utilization in the traditional way. And MAGPIX utilization, therefore, is more consistent with LX200 utilization in the life science research segment, which is running $1,800 to $2,000 or so per quarter. So that $1,800 to $2,000 is royalties plus consumables per installed MAGPIX system.

Tycho Peterson - JPMorgan

Okay. And then last one on – just talk a little bit about how we should think about NeoPlex when it rolls out and what do you need to do from a market development standpoint?

Patrick J. Balthrop Sr.

Well, we've been dealing with this market, as you know, Tycho, for a couple of years. It's a highly concentrated market. There is, I would say, a 150 or so customers worldwide that constitute the 85% or so of the market. And so we've been working with all those customers for the last couple of years understanding when their contracts are up for renewal, what we have to do to work with them to evaluate our product in contrast to the product that they're using today. We've had some success outside the United States with some of those evaluations and we're expecting to generate revenue in 2013. The key to success there is understanding that it's a relatively easy market to serve in that there aren't that many customers to make up the market opportunity. However, many of those customers are contracted for two, three, four years at a time. So we're expecting our growth there to be more gradual in nature as we compete for the business as those contracts come available and displace the incumbent. That's why when we talked about our 2013 guidance, we didn't include a significant contribution for NeoPlex4 this year because we're being cautious.

Tycho Peterson - JPMorgan

Okay, thank you.

Operator

Your next question comes from the line of Dana Walker with Kalmar Investments. Please go ahead.

Dana Walker - Kalmar Investments

Good afternoon.

Patrick J. Balthrop Sr.

Hi, Dana.

Dana Walker - Kalmar Investments

Hey there. What do you need to do to be able to run RVP on MAGPIX in a customer setting, if anything?

Patrick J. Balthrop Sr.

Well, all you really need to do, Dana, is – the assay performs exactly the same way until it's time for the results to be read. And then the tray that contains all the tests go on the MAGPIX. You press a button and the MAGPIX reads the system. So the customer prior to that would've gone through some validation work, but the – because of the nature of the MAGPIX system, there's very little training required. As you may recall from prior discussions, it's a type of system that's designed to be very reliable and robust. Typically, a customer can take it out of the box, plug it in and start running. So we believe it will facilitate – over the longer term facilitate adoption of some of these innovative products like GPP.

Dana Walker - Kalmar Investments

Your approval though from FDA appeared to be GPP specific. Is that factual? And do you need to take another step with FDA so that RVP can be run in the U.S.?

Patrick J. Balthrop Sr.

So I'm about to get a little esoteric on you, Dana. I apologize for that in advance. In order to get a piece of hardware cleared by FDA, the regulatory rules are that you have to submit a piece of hardware with an assay. And once that occurs – in this case we did GPP with MAGPIX for all the strategic reasons that you already understand. Then once we introduce future products, we can if you will point to the clearance of what's called the device master file of MAGPIX so we don't have to submit a two-headed submission for every assay in the future. You have to do that the first time through and then in future submissions you just get products cleared on the – on this case the MAGPIX system. And so the only requirement, of course, is that an assay be MAGPIX compatible and the only thing that's required there is that the beads that are used on the assay are magnetic. And so any assay that we have that uses magnetic beads would be compatible with MAGPIX.

Dana Walker - Kalmar Investments

Perhaps an esoteric response, and yet I'm – does that mean that you now have a magnetic bead-based RVP test?

Patrick J. Balthrop Sr.

As we sit here today, we do not but I would just ask you to stay tuned on that.

Dana Walker - Kalmar Investments

That would need approval though. That wouldn't be…

Patrick J. Balthrop Sr.

Yes, yes, it would have to go through submission.

Dana Walker - Kalmar Investments

Okay. When you use the phrase ongoing in describing your deliberations with FDA on NeoPlex, does that suggest complexity or does that suggest that it just happens to be topical?

Patrick J. Balthrop Sr.

It just suggests that it's ongoing I guess. I mean the interaction with FDA – at least Luminex's interaction with FDA has always been constant in nature, meaning that the way that we manage our relationship with the agency is one where we're typically in communication with them on a submission like this one regularly. I would say several times a week. And so when I refer to ongoing, what I really mean is we don't have the product cleared yet and we continue to talk to FDA about – answer their questions about how the data is constructed and so on. So that's what I mean when I use the term ongoing.

Dana Walker - Kalmar Investments

On royalties and end-market development, last year the end-market comparables were not as strong as they appear to be moving into this year. It helps to have your biggest end market growing faster, which will help drive the total. But your confidence that the end market and thus your royalty momentum are at some higher level of rate of gain is undeniable. So perhaps you could connect the two thoughts where we're only a quarter or two distant from when those numbers weren't quite as strong?

Patrick J. Balthrop Sr.

Sure. Let me try it this way. Maybe I can be a little more clear. As you heard in Harriss' remarks, the royalties once you make the adjustment for one-time kind of events and you look at end-user assay sales, which are the sustainable rate, right, those numbers are in the mid to high teens. So I think in response to Dan Arias' question about consumables, what I said was we should expect over the longer term consumables royalties to kind of track together, if you will. And that's why we expect consumables to be in that range and we would expect royalties to be in that range. The support for that is if we look at the data, the two factors that really are an indication of end-user sales are continued placement of systems consistent with the razor/razorblade model, and the place where that affects us the most is in the life science research segment where we have our larger partners, companies like EMD Millipore and Bio-Rad, and we look at their xMAP-based instrument placements last year, they grew by 20% over 2011. And in the first quarter, those partners – our large life science research partners' placements over the first quarter last year grew by 22%. So for that very important segment, that indicates to us kind of a pretty healthy trend. The other significant segment is the transplant market in the diagnostics segment. I think I mentioned that earlier. We have a couple, three partners in that particular space. And the way that market is trending in that case is favorable to our technology because the size of the multiplex continues to grow. The growth driver for the transplant market is the protein space, as opposed to the nucleic acid DNA market segment within transplant and our technology is favorably positioned there. So the data seemed to suggest that we should expect to have that kind of solid growth going forward. And we may get some fluctuations from one quarter to the next, but over the longer term we feel pretty comfortable with that.

Dana Walker - Kalmar Investments

One last question. You talk about lab-developed tests, you talk about infectious disease. I believe the original EraGen portfolio had some products that might have – that would've fallen in one, but not necessarily in the other, herpes simplex amongst potentially others. Is your short form by describing how infectious disease was up mid teen and how lab-developed tests were comparably up nicely a suggestion that that portfolio of products performed well in the quarter, the old EraGen?

Patrick J. Balthrop Sr.

Yes. I mean I didn't say that specifically, but yes they did.

Dana Walker - Kalmar Investments

Nice to see the good results. Thank you.

Patrick J. Balthrop Sr.

Thank you.

Operator

Ladies and gentlemen, we have no other questions now. So I'd like to turn it back over to Mr. Pat Balthrop for some final remarks.

Patrick J. Balthrop Sr.

Thank you, Keith, and thank you for attending our earnings call today and for your continued interest in Luminex. As you hopefully heard from us, we look forward to another strong year and we look forward to seeing you in person later this year. Thanks very much.

Operator

Ladies and gentlemen, that will conclude today's earnings call. Thank you very much for joining and you may now disconnect. Have a great day.

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Luminex (LMNX): Q1 EPS of $0.19 beats by $0.11. Revenue of $53.2M (+9% Y/Y) beats by $1.26M. (PR)