Harriss Currie – CFO, SVP, Finance and Treasurer
Pat Balthrop – President and CEO
Jeremy Bridge-Cook – SVP, Research and Development
Russell Bradley – SVP, Corporate Development and Global Marketing
Luminex Corporation (LMNX) Fall of 2013 Investor Event Call November 13, 2013 7:30 PM ET
Greetings. Welcome to Luminex Corporation Fall of 2013 Investor Event. I’m Harriss Currie, Senior Vice President and Chief Financial Officer of Luminex. For those of you here in Phoenix we have a USB storage device available for you at the end of the presentation, so you can take our presentation we show today with you. For those on the webcast the presentation as usual will be available on our Investor Relations site on www. Luminexcorp.com.
I’d like to point out our Safe Harbor statement I’m not going to read it to you as we will be making forward-looking statements today please refer to our SEC filings for more information regarding the risks and uncertainties with respect to these forward-looking statements.
Now let me take a minute to review the agenda and introduce the members of our management team that are here today. We’ll begin the presentation with a strategic overview by our President and CEO, Pat Balthrop. Pat will be followed by Dr. Jeremy Bridge-Cook, Senior Vice President of R&D who will be unveiling our project ARIES system, including a discussion regarding our initial assay menu for that product. Russell Bradley, Senior Vice President of Corporate Development and Global Marketing will provide overview of where project ARIES fits in the molecular diagnostic market then Pat will close with final comments and take your questions.
Following your question-and-answer session we’ll start dinner and we’ll provide you with additional opportunities to ask questions of management. I’d also like to mention that in attendance today we’re joined by Mike Pintek, Senior Vice President of Operations; Dr. Chuck Collins, Vice President Systems R&D; Dr. Scott Johnson, Vice President of Product Development and Manufacturing in Austin and Wally Loewenbaum, our Chairman.
With that let me turn over the podium to our CEO, Pat Balthrop.
Thank you, Harriss. To all those here in Phoenix as well as those joining us via webcast, welcome and thank you for attending. All of us are extremely excited to be with you this evening and to tell you about the very exciting future that we have at Luminex.
Before I get into the meat of my remarks today first I’d like to tell you what we hope to accomplish. We hope to explain how Luminex has a unique position in the market; we hope to show you how we span the laboratory customers multiplexing needs, not just with products but with high value solutions. That word solutions I think you would agree that’s turned into a bit of a buzz world and like other buzz words overtime it lost its meaning. But in our company it still carries a lot of weight because we take our commitment to solve customers’ problems seriously and we hope to demonstrate how these products, these solutions our unique and indeed and differentiated and how they will drive our financial results long-term as we work with our customer to fulfill their very serious mission of delivering laboratory results that are faster, better and have highest quality, all as cost effectively is possible.
For the next few minutes I’d like to begin by framing the company’s position in the market and our very bright future by summarizing our investment thesis. The foundation of what we are and what we do is our differentiated and unique platforms and technologies. Luminex has established track record of leveraging our technologies and our intellectual property to develop a series of strategically strong products and product lines, whether those product lines are systems, consumables or assay products.
With this approach we built an extremely valuable asset, our installed base of systems that are driving high margin revenue every single day. When Luminex enters a market we’re most often the first mover, the market maker. When we enter a market we restate the way laboratory testing is performed which establishes the company as a leader in every market segment where we compete.
The reason why that leadership has been achieved is because of our history of innovation combined with execution, a combination has delivered new products to drive ongoing growth. Our future is bright because of our pipeline, including the planned assay menu for our new ARIES system that we’ll talk to you about this evening.
The near term catalyst that we’ll review with you include our next generation multiplexing technology, our extremely exciting real time multiplex molecular diagnostic system, project ARIES as well as to give you an advance look at the follow on versions of ARIES all of which we expect will be truly revolutionary. Because of the ongoing pressure on healthcare cost in our markets in the U.S. and across the developed world a key issue for companies in our industry is to be responsive to market conditions and remain profitable and competitive long term we believe will be increasingly be low manufacturing cost. And therefore a key metric that we believe will become increasingly important for investor to consider is gross margin. This is important in our market especially in the molecular diagnostic market reimbursement has historically been high on a relative basis but as we’ve seen recently it’s reasonable to assume that reimbursement will continue to be under pressure. This is the undeniable trend and will continue to be for the foreseeable future.
Luminex is the leader in the market today of low manufacturing cost and the leader in gross margin and we believe we will continue to lead because we have a consistent long-term double digit revenue growth of course but also because we always consider low manufacturing cost leadership to be a strategic priority. A company who has not thought its strategic issues through cannot get their high manufacturing cost genie back in the bottle. Either you set low cost as a strategic priority years ago or you didn’t other companies haven’t, Luminex always has.
As I mentioned a key strategic asset for the company continues to be our large growing installed base of systems. Since 2006 when we introduced the LX200 and had a base of 3400 systems through the introduction FLEXMAP 3D in the 2008 timeframe which allowed us to enter a higher volume labs with our multiplexing technology and the launch of MAGPIX in late 2010 which opened up a very large segment of laboratory to Luminex and our partners we’ve consistently grown our installed base in the range of mid teams to the 20% compounded.
The main reason why that’s important is because of the resulting steady stream of high margin revenue which is not only highly valuable but it’s also been a crucial part our strategy and our financial progress. The profitability and the cash flow from this business has fueled and funded our growth initiatives into the molecular diagnostic segment over the past several years. The reason why the installed base and the partnership business is so important is because as I just said it’s how we set about building the company and funding our growth. The partnership business which is and remains a crucial part of our current portfolio and our future growth plans is classic razor blade business driven by that growing installed base.
The partnership business has allowed us to fund the long-term growth plans to enter new segments and lead in the high value molecular diagnostics market. We’ve been able to achieve the funding of the strategic programs either by way of P&L as a balance sheet without diluting our shareholders. Since the molecular diagnostic segment will drive much of our future growth over the next few years we’re going to emphasize it this evening.
Due to our platform product line we can offer the multiplexing customer a variety of alternative including throughput choices and the ability to multiplex up to 500 targets, a capability that’s emerging as critical in categories such as transplants, oncology and the lab developed test segment.
For a high volume lab the scalability of our platforms and assays allow these customers to process high volumes of samples in a much shorter period. There is point I’d like to emphasize, I believe there is common misperception about the competitive dynamics in the multiplexing molecular segments. This perception is perpetuated by some of competitors who would like you to believe they have better products that generate significant revenue for customer which is something just about any company would tell you.
The segment I’m referring to the one where Luminex has been most successful is the high volume segment where customer will generate significant reagent revenue per year per system for a single asset. Now to be clear, the reason why we’re successful in that particular segment is not because our products are the easiest to use, although the development programs we’re going to discuss with you this evening we think will successfully address that need, rather Luminex has the leadership position because competitors simply can’t meet these high volume customers’ throughput needs.
Strategically Luminex is very well positioned because of our low cost high gross margin position and because we’ll be able to offer the customer additional choice with the introduction of our future platforms. First ARIES and soon thereafter follow-on versions of this platform consistent with the platform product line strategy that we have executed historically and we will discuss all these plans with you this evening.
This slide graphically illustrate our competitive position, for higher volume molecular diagnostics labs who have a need that multiplexing can address Luminex can meet those needs easily across our product platforms. The competitors as you see here are bunched together and are much more likely to compete with each other and we counter most of these competitors on the fringes of customer base rather than in the accounts with a vast majority of our businesses.
Now that doesn’t mean that these competitors don’t try to tell the story that they’re beating Luminex. We have respect for all of competitors and their products and we think we know why they tell the story this way we’re not going to spend a lot of time talking about that this evening. But since we’re the first mover in the same we’re most often the market share leader because we have an impressive installed base and a track record of new product introduction. So these are all good reasons to compare yourself to Luminex. And as many of our investors will tell you yes, we know they can some time exaggerate maybe even worse. But what we’re staying focused on day-to-day and what we’re going to focus on this evening is what has made our company successful, innovating new products and delivering them to the market.
We’ve made consistent steady long term progress with that strategy. Our historical growth and our future growth are reliant on our investment in new product development. These investments have been constant and have yielded impressive results. If you look at this slide in a slightly different way there are few items I’d like to draw your attention to because they frame what we’re talking to you about this evening.
Starting a couple of years ago we set out to once again be the first mover in the molecular segment by expanding our position so, that we would not just be a multiplexing company. Our multiplexing technology remains the undisputed market leader and our customers realize the power of multiplexing but those customers also do a lot of non-multiplexing testing. So we deliberately and methodically, and decisively executed a strategic plan that would position Luminex as the only company with a multiplexing offering as well as a compelling lower-plex real time offering giving a significant synergies and the strategic advantage.
We address the lower-plex real time segment with the acquisition of the low cost chemistry and the assay development capabilities when we acquired EraGen. We then acquired the system to deliver those real time assays with acquisition of GenturaDx. We successfully transitioned from a distribution model to a direct sales force and now we’re poised to lock project ARIES with five assays in 2014 quickly followed by product line extensions including what we call ARIES 2 which will once again for the first time combine multiplexing and real time PCR assays on the same platform all at market leading cost positions.
The results are staying as a company with a 100% market share in any business. So the question is how to build and maintain critical mass. Among the keys to success are to be the first mover whenever possible and then leverage that position overtime by expanding your menu. Customers will be unwilling in the molecular lab of the future to adopt a platform for just one assay. This is especially true in the labs where much of our business is today in larger higher volume accounts. These higher volume labs are more likely to be Luminex customers because they’re more likely to be multiplexing users. These customers are also very likely to run a significant number of lab develop tests. And it’s in these higher volume accounts where the bulk of market opportunity is today and will be tomorrow.
Clearly automation and ease of use are crucial but in our view any company who operates with the assumption that the path to success is ease of use and automation delivered by adding to one’s manufacturing cost is in a risky position. I think you’d agree that reimbursement trends are clear and you would also agree that customers across healthcare, including in the laboratory have never been under more pressure to reduce cost than they are today. Customers need ease of use but we’re convinced that the technologies to improve ease of use have to be delivered in such a way as to address that customer need without significantly increasing one’s cost of goods sold because customers are less likely to have the ability to pay a premium because of downward pressure on cost of reimbursement or less likely to have the willingness to pay a premium because of good old fashioned competition.
In addition, since ongoing innovation is an absolute competitive necessity, achieving and maintaining high gross margins is crucial for a company to have the P&L structure to be able to fund future growth while also delivering earnings and shareholder value. Today’s labs are faced with the highest challenge they’ve ever encountered as it relates to operating with increasingly scarce resources. Industry has to solve these problems by helping our customers meet the needs these conditions create.
As we have seen in the past in our industry in assay categories like immune assay and clinical chemistry ease of use, automation and platform consolidation are inevitable. But in molecular labs there are two additional underappreciated but highly acute problems. The first of these is the burden of lab developed tests. Russ will show you a data here in a few minutes. But in a typical molecular lab today 50 to as high as 90% of the tests they do today are validated lab developed tests.
The implication for the customer is that their most highly trained personnel are tasked with performing these tests and those personnel are becoming scarcer by the day. So industry has to address this acute need by making the performance of LDTs much easier. I want to emphasize however that just having LDT capability on a platform is simply not enough. For that capability to have real value to the customer, the adoption validation and performance of those LDTs has to be every bit as easy as adopting and performing an IVD assay.
We believe that Luminex will be the first company to successfully address this need. The other acute need for customer is believe it or not space on lab benches. Jeremy will show you this in just a few minutes. The dozens of customers who have provided feedback to us on ARIES have often mentioned its power and simplicity relative to its footprint as something they are very excited about. The bench space problem is in fact most acute in molecular labs because the systems they have available were designed in such a way that the typical customers ratio of tests performed to systems installed is often one-to-one. Compare to that to those other segments that I mentioned like immunoassay and clinical chemistry, where the ratio is more like 20 or 30 to 1.
We believe that we understand these issues exceedingly well and that we have incorporated these critical factors into our design and development plans. The output of these plans would be long term growth for the company. Delivering consistent growth across the long term is critical. At Luminex, we strive for consistency. As you can see across any period, Luminex is a market leader in growth, in comparison to companies equivalent to us in size as well as larger companies.
As we look towards the future, we are convinced that it’s a sustainable competitive advantage to operate from a position of low cost manufacturer. As you can see the data show that we operate today at gross margins of 70% and we have consistently maintained that range over a period of time. As we look over the next five years, based on our pipeline products, it’s important for investors to know, that we expect each of these pipeline products to be 70% gross margin businesses as well. We expect them of them individually and collectively. And note, there our gross margins are a full 12 points higher than the average of the firms that I’ve showed you on the prior slide. And in comparison to the Molecular Diagnostics only companies the data confirmed that we are a full 20 points higher if not more. The strategic advantage of this position cannot be over emphasized.
Let’s move to earnings growth. Even with the investments we have made in R&D and sales and marketing our EBIT growth profile has also trended very well. While we have made strategic investments we still operated above the average EBIT margin of those comparable companies. And since many of our infrastructure investments are indeed behind us as we scale the company we expect this metric to improve in the short term.
How that happened? Years ago, we developed and since then we have executed a strategic plan to use our leadership position in multiplexing to build our installed base which would drive higher margin revenue. That higher margin revenue would expand gross margin and allow for strong investment in the high value Molecular Diagnostics market. Those investments in Molecular Diagnostics products and the investment in the direct sales force to sell them to the customer were designed to drive revenue growth and earnings.
You can see the results of this strategy on this slide, with three quarter of our revenue today coming from the high margin line items of consumables royalties and our proprietary molecular assays and much of this revenue comes from products and line extensions that did not exist five years ago.
We will spend the lot of our time today discussing our pipeline as we believe that to appropriately value Luminex one has to understand the value not just the business we have today but also the business that we will have in the future. For our high value multiplexing customers we will commercialize what we have previously referred to a project mix, which is our next generation multiplexing technology. This project will provide high volume labs, who perform multiplexing for assays like infectious disease panels, a simple easy to use method, highly streamlined with minimal hands on time and rapid turnaround.
In 2014 we will also introduce our first entrance into the real time segment with the platform that we referred to as project ARIES which we will unveil to customers at AMP tomorrow. Laboratory customers in this large and growing segment have several unmet needs that ARIES will address. When we launch the system next year we will have an impressive assay menu available which is a key customer requirement as market studies confirmed that customers are extremely frustrated that they run an average fewer than two assays per system today that one-to-one ratio I talked you about a minute ago. And these same customers are very excited about the opportunity to automate their vast portfolio of current and future in-house lab developed tests an acute problem which ARIES will address in truly unique ways, including with elegant software tools to manage their workflow and their data output. And ARIES system will do all that with a minimal lab bench footprint of only 15 linear inches.
But that’s not all, we have initiated development on future ARIES line extensions including our next generation ARIES system. Luminex will again set the standard with the first of its kind products. The next generation ARIES platform will combine all the elegance and simplicity of ARIES with the power of multiplexing, using proven technologies, developed assay methods, developed chemistries from the Luminex technology portfolio including our existing assay chemistries as well as our proprietary detection technologies.
For the first time the customer will be able to run a low FLEX real time assay while at the same time perform a validated lab developed test while at the same time run a large multiplexed assay all simultaneously and with true simple to answer easy to use automation.
Luminex has built our company by striving to solve customer’s problems in the laboratory in a way that no one else has before. This portfolio of innovative products along with our current book of business and low cost position will allow Luminex to grow and to succeed for years to come. To tell you about how we will go about doing this, please welcome Dr. Jeremy Bridge-Cook, Senior VP of Research and Development.
Thanks, Pat. Good evening everyone. It’s a pleasure to be here with you tonight to provide you with an update on some of our exciting new product developments particularly the new system that we are unveiling tonight, the ARIES platform. In order to kick things off I would like to start by playing a short video that illustrates some of the advantages of the ARIES system that I am going to be discussing in more detail during my presentation. So let’s play the video.
All right, let’s unveil the star of the show here, thanks Russ. And there it is. So in a few minutes we are going to do a live demonstration of how to run an ARIES assay but first I would like to summarize a few key points about the ARIES platform. Shown on the right of this slide, is a picture of a new ARIES system. The reason that I am so excited about the upcoming launch of this platform is that I am absolutely convinced that this system is going to surprise and delight our customers, both existing and new.
During my talk this evening I hope to show you why that’s the case both with the live demonstration of the platform and with the summary of its differentiating features and benefits. Before we start the live demo let me make a few important points. ARIES will be the first platform to satisfy a major unmet need in the Molecular Diagnostics market. It will make both FDA cleared and laboratory developed testing accessible to all labs regardless of size or level of sophistication.
Second, the IVD assays cleared on ARIES will be approved as moderate complexity devices, meaning that they can be run by technicians with no specialized molecular training. Third, laboratory developed tests created with ARIES can be developed by molecular trained staff but run by any lab technician which addresses the major human resources issue faced by all labs today. And finally, because many central labs operate satellite labs in their hospital network ARIES will enable them to run both IVD and LDT assays throughout their network, improving turnaround time for their physicians and patients.
Of course what really matters is what customers think about areas. We have had detailed discussions and feedback as well as hands on testing of ARIES with dozens of customers. Some of the responses we’ve heard from them are shown on this slide. We’ve heard over and over again that the shortage of skilled laboratory personnel combined with ever rising testing volumes is a major challenge for our customers.
The industry leading simplicity of running ARIES assays will provide customers a major advantage in dealing with this shortage. We’ve also heard them that the ability to create LDTs that can then be run by unskilled staff throughout their network will be of great benefit. The overwhelmingly positive feedback we’ve received from customers has encouraged and convinced us that we are on track with our design, our menu and our launch plans.
Okay. So it’s time for the live demo to show just how revolutionary and easy to use the ARIES system is I would like to walk you through the processing of a test order in a typical lab with the help of our lab technicians Jermaine. Hey, Jermaine. As we walk through running a test you will be able to visualize how seamlessly ARIES will integrate into customers’ laboratories. We’ll be showing you to how to run both an IVD assay and an LDT assay. You will be able to see how similar the process will be for either type of assay. I have to warn you this demo will be pretty brief because ARIES assays are very quick and easy to run.
LDTs can be created by scientists and run by less trained technicians. To create an LDT Cassette the master mix would simply be pipette into the PCR tube. The LDT Cassette would be snapped down into the PCR tube on the provided guide trail. Just like that the LDT Cassette is ready to be stored for later use or to have a patient sample loaded and used right away.
Okay, now let’s go through the three easy steps needed to run an ARIES assay. Once an order comes into the lab the technician would pipette the associated samples into each cassette to be run. You will notice that the sample doesn’t require any pre-processing steps and can be pipetted directly into the cassette for either the LDT or the IVD assay. Once the samples have been loaded the technician would place the cassettes into a magazine because LDTs and IVDs can both be run using the same universal assay conditions both can be run in the same magazine. And the final step is for the technician to insert the magazine into the instrument.
The instrument scans the cassettes in the magazine when it has found all the associated orders it will automatically begin to run. For the purpose of this demonstration this particular run was programed to last only 15 seconds. For normal run when complete the results will be analyzed and automatically reported out to the lab information system. The technician has an option to review the patient results prior to reporting them out. And that’s how you run an ARIES assay it’s that easy. Thanks, Jermaine.
As you can see ARIES has been designed to minimize the hands on time required making the system easy enough for technicians with any level of training to run safely and efficiently. In addition the transfer of patient results is done electronically eliminating the risk of incorrect data entry which is one of the largest causes of incorrect patient results being reported out. As you saw IVDs and LDTs can both be run very easily. This demonstration shows why we truly believe that ARIES represents the next generation in sample to answer molecular diagnostics. If anyone in the audience would like to learn more about ARIES and the software functionalities we built in you can come to the front after our presentation or visit the Luminex booth during the conference.
Okay. Now I would like to return to our presentation with the summary of some of the ways in which ARIES is unlike anything on the market today. One thing that we hear from our customers is that space is always at a premium in their labs. With testing volumes going up and the proliferation of different methods and technologies required from today’s hospital labs one very real challenge with introducing a new platform in the market is whether customers can find space to fit it in.
In this respect ARIES has a major advantage over competitive platforms. You can see on the top of this slide a graphic showing the width of the ARIES platform compared to other systems available. Coming in at a very slender 15 inches the ARIES platform takes up far less bench space than the other systems. This is achieved because of the vertical architectural of the system combined with the fact that the touch screen monitor has been incorporated right into the system itself. And if customers want to have higher throughput they can place multiple instrument side-by-side and run them through a single server NLL and LIS interface.
Of course when a customer buys a new platform they don’t make the decision based solely on how the system works or how fits into their lab. They also make the decision based on what test they can run on the platform. We are currently hard at work on the development and clinical validation of five IVD assays that we intend to bring out at launch. This is an ambitious goal the one which we are confident we can achieve. I’ll discuss a few of these assays in depth later in my talk. We’re also committed to launching multiple IVD assays every year thereafter. However, what is even more remarkable is that the ARIES platform menu will literally include hundreds of assays from day one of launch.
This is the case because hundreds of real time PCR LDT assays run by customers today will be compatible with the ARIES systems. And we also have many multi core RTX analyze specific agents commercially available today which can be run on the platform. So from day one customers will have an industry leading IVD and LDT menu with many assays to choose from and many reasons to have a system installed in their labs.
We believe this LDT capability will be an attractive feature and we also think it will be a feature that’s hard for our competitors to offer because the system has to be built from the ground up with this capability in mind. It can’t be retrofitted on to an existing system without a complete redesign. So this will be a sustainable advantage for the ARIES system.
A third key differentiator for ARIES is laboratory efficiency. As you saw during the demo ARIES is incredibly easy to operate. This seamless integration into laboratory information system further increases efficiency. In addition we’ve implemented all of our assays with a universal PCR protocol that allows any assay to be run with any other assay in the same magazine.
This means that in a given run customers can run 12 of the same assay or 12 different assays all at the same time. And the random batch aspect of having two magazines that can each run up to six patients sample at the same time which is the batch part. With both magazines operating completely independently which is the random part provides customers with an ideal balance or flexibility, efficiency, capacity and turnaround time. All of these features will combine to make ARIES most efficient molecular sample to answer platform on the market.
The final point I would like to make on what’s unique about ARIES is that it will improve patient care. How we’ll do that. First the simple work flow combined with barcode reading and full LIS integration will reduce the possibility of user error, a major source of patient misdiagnosis. And second the multi code RTX double discrimination provided by both real time PCR detection and melt temperature confirmation will enable us to provide some of the most accurate tests on the market. These advantages translate directly to benefits for patients in the form of timely, accurate diagnosis of disease which ultimately is our customers’ number one consent.
Okay. I would now like to change gears a bit now and talk about the initial ARIES menu of IVD assays. As Russ will describe in more detail during his remarks, the initial portion of the molecular market that we focused our assay development resources on is in the area of infectious disease. This is the largest market in molecular diagnostics projected to exceed $4 billion by 2017. It’s also one of the fastest growing. In addition this market is attractive because the rapid turnaround time of ARIES will translate into direct benefits for patients suffering from an undiagnosed infection. Lastly based on both external market research and our internal estimates the five initial launch assays for ARIES have a combined global market potential of $770 million.
However, infectious disease testing is not the only market to which ARIES can be applied. Oncology companion diagnostics and applied market such as bio-defense and food safety are all markets which are of significant potential for a system like ARIES. Some of these markets will be of direct interest to Luminex in the future and some we may choose to partner through, to address through partnerships with market leaders.
So let me provide some more specifics on our ARIES launch menu and timeline. We expect to launch the ARIES system globally as an IVD platform in the second half of next year. In the first few months of launch we expect to commercialize five IVD assays. The ARIES system will also be compatible at launch with a wide variety of LDT assays and reagents as I stated earlier. The initial launch menu will include a combination of differentiated IVD assays and some work horse IVD assays that are also available from competitors today. All five IVD launch assays will have current CPT codes available and will be supported with strong reimbursement in U.S. and Europe. For competitive reasons we’ve decided to disclose only three of the five assays today. Those three assays are C. difficile, HSB 1 and 2 and a combined FLU, AB and RSV assays. The fourth and fifth assays are on the same timeframe in development as these three but will be discussed at a later day.
I’ll now go into a little bit more detail on each of the three assays that I’ve outlined. First C. difficile ARIES deficit test will be unique in the market. Because unlike competitive products there will be no upfront manual pre-processing steps. In keeping with our strategy of offering best in class ease of use from beginning to end we have developed a C. diff test in such a way that the sample could be introduced directly into the cassette.
Another unique aspect of our C. diff assay test is that we’ll be the only company that can offer both the C. diff standalone rapid assay and a full GPP panel. Why is this important? Not all customers are alike. Some customers have told us they want to use GPP on all diarrheal patients and use a C. diff test to confirm positives. But other customers want to perform a C. diff test upfront on all in patience and use GPP on C. diff negatives on all outpatients.
Other labs may prefer other work flows altogether so our goal is to be the only company on the market which can offer a full range of solutions to me all customers work flow preferences. The second IVD assays HSV 1/2 Luminex was the first company to obtain FDA clearance on a molecular HSV 1/2 assay in 2010. However, there is clearly no HSV assay on the market in the sample to answer format making this assay a menu differentiator for Luminex.
In addition HSV 1/2 will be our first assay in the category of women’s health. And we plan to follow it up with additional women’s health assays in the future. As far as the HSV testing itself is concerned this test is one for which patients feel a high degree of anxiety and concern.
So any test which can provide rapid results to physicians will be highly attractive to laboratories and their physician and patient clients. And lastly this assay will be the first ARIES assay through the door at FDA in order to achieve FDA clearance of ARIES system itself. Our leading position in HSV IVDs will provide us an advantage as we work towards clearing the ARIES system.
The final assay I want to talk about is the Flu A/B and RSV assay. These three viruses are ones that are most important for management of both outpatients during flu season and in patients in critical condition. This assay will be complementary with our RBP product line in the same way I described C. diff being complementary with our GPP.
Some labs have told they want use RVP on inpatients and a flu A/B/RSV on outpatients. Others want to use RVP for their central lab testing but want to more simple flu A/B/RSV test for their satellite labs. With the launch of ARIES Luminex will be the only company able to offer both a comprehensive RVP panel and a sample to answer flu A/B/RSV in order to meet all customers’ needs for their respiratory viral testing.
I would like to transition now from my update on ARIES to two other topics of importance. The first is an update on our development of the new version of our xTAG PCR chemistry. As you see on the lower left portion of this figure the ARIES project addresses the lower flex and lower to medium throughput portion of the molecular diagnosed market. This will be a new market segment for Luminex. Our current diagnostic sales are in the higher flex, higher volumes segment shown in the top right portion of this figure.
At last year’s investor event I introduced a next generation of our xTAG chemistry that we’ve been developing. Initially to be applied to an updated version of our RVP assay. The goal of this program is to maintain the high flex and high throughput nature of our technology but dramatically improve its ease of use. I am happy to report that we have made great progress on achieving this goal. As a reminder the approach we are taking is to incorporate our primers, enzymes, bids and fluorescent reporter all into a single mix drive down in the wells of a pre-sealed 96 well plate as shown on the left of this slide. The customer only has to pipette their nuclei asset sample into the plate and then re-seal it and then put it in the thermal cycler.
When the PCR program is done thy transfer the play to the MAGPIX instrument to read the results, that’s it. The total hands on time is reduced to only a few minutes, the risk of contamination is essentially eliminated because the plate is never unsealed after the sample is added. Our goal is to achieve as closest possible to sample the answer workflow while maintain the throughput advantages of slate based batch processing. And we have achieved this goal.
Our next generation xTAG RVP product is moved through feasibility in early prototyping and is now in advanced development. We’ve achieved our goal of combining the – primers enzymes and thermal stable reporter into a single mix. And we’ve developed an RVP with not only all of the targets in our current RVP but also several new targets including some bacterial pathogens. he products performing well and customer feedback on the benefits of this simple used but batch based approach has been very positive. We’ll be conducting clinical trials in 2014 and submitting to FDA with clearance expected in the first half of 2015.
And the last program I would like to update you on is a very exciting early stage instrument development program that for the moment we are calling ARIES v2. The idea of ARIES v2 is to combine the current capabilities of the ARIES Cassette and add in the ability to do multiplex assays in addition to the standard real time PCR assays. This will enable ARIES v2 to address both the low flex and the high flex portions of the sample to answer market. Importantly we’ve approached this problem in such a way that we will maintain our focus on industry leading cost of good giving us gross margin advantages versus our competitors.
This slide shows a prototype of our ARIES v2 Cassette we’ve already demonstrated proof of principal for our design. On important aspect of this approach is that ARIES v2 will be backwards compatible with ARIES v1 Cassettes. In other words ARIES v2 will be able to run both original ARIES Cassettes and the new ARIES v2 cassettes.
This will enable us to avoid any redevelopment of our ARIES assays and Cassettes when we launch v2. Our development plan makes use of much of the current cassette and instrument design reducing risk and time to market. By combining real time PCR with multiplex we will have a sample to answer platform with a very broad range of assay capabilities.
And the low cost of goods needed to be able to address both low flex and high flex price points. So I would like to conclude my section by reiterating three key points. First in the low flex market segment which will be new for Luminex we are making great progress with ARIES and we look forward to an exciting launch of this system next year with five IVD assays plus LDT capability.
Second for the high flex market we’re developing a next generation of our RVP product and this program is on track for launching 2015. And third we’ve shown proof of principal and have an early development and next generation of the ARIES system which will combine low flex PCR real time PCR and high flex multiplexing all on a single system and cassette.
Hopefully this demonstration and pipeline update have helped to explain why we at Luminex as excited as ever about future growth potential of our company.
I’ll now turn the podium over to Russ Bradley, Senior Vice President and Corporate Development and Global Marketing to talk about the expanding opportunities in molecular diagnostics. Russ?
Thanks Jeremy and good evening. For those of you I haven’t met before I’ve been at Luminex for about eight years but I’ve been in the industry for 25 or so. My role at Luminex was recently expanded beyond corporate development to the leadership of the global marketing team. So now that we’ve seen how easy here it is to use I am going to review how project areas will enable Luminex to provide a more complete set of solutions to our customers and how we will win the molecular diagnostic market.
I’ll review the markets where Luminex is currently present and where are targeting our new sample-to-answer system. These markets are attractive and Luminex is well positioned. I’ll also cover the customer synergy between our current and pipeline products and why ARIES will expand Luminex’s market opportunity significantly. Finally I’ll review how Luminex intends to bring together our expertise proprietary technologies and innovative products to our molecular diagnostic customers with wining solutions that will be highly differentiated and very difficult for our competitors to emulate.
So first let's take a look at the market opportunity. Luminex has a successful partnership business and this is established the company’s xMAP platform as the multiplexing leader in applied testing markets through clinical research applications all the way to patient care. In the R&D market Luminex’s direct business is focused on the fast growing molecular diagnostic segment which is expected to eclipse $7 billion in aggregate value by 2017 and at which time that will represent over 10% of the $63 billion IVD market.
Luminex is already well positioned in the IVD testing space with sustained growth on our xMAP platform provided by the investments made by our partners and by our own IVD business. We are focused on the emerging growth segment such as pharmocogenetics and infectious diseases. Within the global molecular IVD market one of the largest segments is infectious disease testing which is expected to account for $4 billion in total market value by 2017.
This growth is being driven by increased demand for hospital acquired infection testing that is projected to grow at 18% and respiratory infection testing. These two segments in particular where Luminex’s invested and development significant core competencies over the last few years and where we have commercialized innovative first to market test like the xTAG , RVP , and GPP assays. As Jeremy mentioned in his presentation the first way of ARIES assays will also be focused on these same testing segments. To be clear the ARIES system is capable of performing many different types of assays and we have developed an extensive list of assay candidates that we will be developing for the system.
So where is the testing being performed? The answer to this question truly depends on the type of testing. If you survey the 1,500 to 2,000 labs in the country that are capable of running molecular diagnostic test you find the Luminex’s xMAP platform is well represented in those labs at the very top of this pyramid. These 500 or so cool molecular diagnostic labs control approximately 80% of the testing volume. In the U.S. the majority of molecular diagnostic testing is performed at clinical reference labs at large hospital centers because they do have the resources and expertise to offer a broad range of different tests on many different platforms.
It is the reference labs and hospital centers where Luminex’s build our commercial focus and our market presence. As you move down the pyramid the technology requirements move from flexibility and throughput toward ease of use and time to result. It is these additional 6,000 or so labs in the U.S. that will benefit most from the innovation and assay menu delivered by project ARIES and these customers will also significantly expand Luminex’s addressable market.
One of the main reasons that xMAP has become a reference platform in clinical multiplexing is due to its inherent flexibility. There are currently over 60 FDA cleared assays available for the platform today through both Luminex and their partners. xMAP has also become the multiplexing platform of choice for labs that are engaged in lab develop tests. Third party data put global LDT market at around 650 million and growing in excess of 20% per annum.
Luminex has enjoyed a brisk business and consumables in royalties supporting our current LDT customers. With annual growth in this segment allowing growing you to healthy double digit clip. We are extremely excited about the LDT opportunity for ARIES because some of the largest hospitals have told us what a burden it is to run these assays routinely in their labs. As you can see in the slide the opportunity is significant with the high percentage of LDTS is being run by our customers.
In our survey of major medical centers we find the low end of the range to be 20% to 30% of roll assays up to as many as 90% to 95% of all assays being performed as lab develop test. Performing LDT’s is typically a labor intensive affair requiring manual sample prep and access to multiple technology platforms with technology that is challenging in analysis. These LDT assay’s generally lack the standardization inherent in an IBD assay and this is one of the benefits of project ARIES will provide by our fully automated closed cassette system and the standardize sample prep photo call for LDT’s that can be repeated in any lab by any ARIES operator.
It is clear from the market data that there is a very strong correlation between whether or not a lab develop test is offered via lab and the availability of an IVD cleared alternatives. We expected having this LDT capability on ARIES will immediately benefit our customers but will also provide Luminex with a vantage point into emerging IVD assay candidates.
As a recap our established business model for LDT’s developed on the xMAP systems is all straight at the top left of this slide. We call this approach a virtuous cycle because after the customer purchases any xMAP system and our proprietary xMAP consumables the customer can then develop their particular assay or choose from many IVD cleared assay or ASAS available from Luminex and their partners.
Once the customers developed assays offered for commercial sale typically by our testing servicing Luminex receives a royalty on the sale of the service and a customer reorders xMAP consumables from Luminex to continually manufacture the assay. So you might ask what is different in the case of an ARIES LDT. In the case of ARIES and LDT’s the customer can simply order the ARIES cassette from Luminex at their preferred assay reagents and run the LDT assay. Luminex has developed a specific LDT cassette for this precise purpose.
And this cassette will enable our customers to standardize the creation and performance of automated lab test on the ARIES system. With respect to lab developed tests there is a significant unmet need for standardized easy to use sample-to-answer platform that can facilitate our target customers’ lab developed tests. This market opportunity is significant and is growing at over 20% annually. Luminex has experience in supporting LDT customers and has healthy business in place with these customers today.
Our experience indicates that customers who develop LDT’s on an instrument platform have made an investment that creates gravity attracting additional incremental investment in that system and some inertia against change. ARIES will enter the market next year with this sample to answer LDT capability and we expect this capability to provide a differentiated benefit to our customers at a high margin sustainable advantage to Luminex.
With the addition of ARIES Luminex will now have four instrument systems that can cover a broad testing menu from lower plex or closed assays all the way up to highly customized BETA ray systems that are capable of performing thousands of samples per day. This range of systems allows our commercial teams to select the technology and tailor it to the throughput needs and expertise of the molecular diagnostic customer.
The ARIES system combined with our proprietary multicode RTX chemistry will expand the addressable markets that Luminex can access by over four fold. The system will provide access to both new customers and new assay applications in the very same market segments we serve today with our xMAP and xTAG products. As we touched on briefly Luminex has already established leadership positions in two primary market segments with the xMAP platform.
In the commercial reference lab market the high throughput requirements of centralized testing facilities demand efficiency, flexibility and our role performance that are uniquely provided by xMAP. This customer segment drives the majority of the demand for our xTAG hereditary disease assays and our xTAG pharmacogenetic assays. In addition the flexibility efficiency of the xMAP platform makes it an ideal choice for reference labs performing or considering lab develop test.
In the hospital labs where time to result in clinical performance of paramount our xTAG RVP and xTAG GPP assays have driven adoption of the platform. We believe it is this customer segment that will benefit most from the innovation delivered our project ARIES. The small footprint sample to result automation the IVD menu and the ability to automate and standardize LDT assays are capabilities that make this system highly attractive to this customer segment.
Luminex will continue to invest in serving both these customer segments with innovative products and services across the globe. We’ve already covered Luminex’s impressive history of innovation leading up to the present time with our clearance this year of the GPP assay by the U.S. FDA. So what kind of innovation can you expect from Luminex as we look towards the future. We are expecting project ARIES to launch next year with the European focused initially while we submit the first clinical assays to the FDA for clearance in the U.S.
In early 2015 we expect to obtain FDA clearances on our initial assays while our following assays are well to development. In addition we’ve already begun development on two platform product line extensions of the ARIES system. The first of these is a lower cost lower throughput system that we expect will be ready for commercial launch as early as 2015. This will give Luminex’s system capable of supporting the distribution of molecular testing in the satellite labs.
This instrument will use the very same technologies as ARIES including the same cassettes in order to preserve the consistency of test results. This consistency and standardization of testing across multiple sites is extremely important to our customers. The second of these two platform line extensions is a true game changer. As Jeremy reviewed in his presentation in ARIES V2 we’ve established a path to highly multiplex assays utilizing a similar cassette design to our existing instrument technology.
This system will allow unprecedented menu consolidation on a single system with all the automated sample-to-answer benefits offered by ARIES. This unified capability is something our customers have been asking for and will be extremely difficult for our competitors to emulate. As we review the competitive landscape in clinical multiplexing technologies it's certainly true there are more competitors active in the space than just a few years ago. What is clear from the comparisons of the available systems is that xMAP is unmatched in flexibility including the ability to support LDTs of up to 500 distinct analytes in a single assay.
xMAP is also unmatched in sample throughput producing 100 results on a single system at a rate that is five times greater than our nearest competitors and xMAP is supremely unmatched in global installation. When we line up ARIES against the logical competitors we believe this metrics tells some but not the entire story. It is relatively straight-forward to measure attributes such as linear bench space, sample throughput and the number of sample hands on steps required and listed in the customers or company’s assay product inserts.
In our bench marking analysis ARIES is superior to currently available systems and also compares favorably to even those systems not yet available but anticipated in the market by public disclosure. For example we expect ARIES to be highly productive per unit of linear bench space which is one of the most important efficiency metrics with critical bench space in our customer labs becoming increasingly scarce. This lab bench crowding and technology proliferation is also driving the desire for instrument platform consolidation in our target customer accounts.
Customers can no longer afford to buy or house a single instrument for a single test. This is why ARIES has been designed with the unprecedented ability to consolidated assays onto a single instrument. It will be power of this comprehensive menu on ARIES that would truly set it apart from the herd this is the molecular diagnostic lab of the future. Utilizing lean lab principles ARIES is designed as a corner stone workstation that can immediately and seamlessly integrate into this vision.
With project ARIES we believe we’ve developed a winning system that will immediately expand our addressable market opportunities more than fourfold. ARIES will enable Luminex to win both customers we currently serve as well as new customers because of the innovation incorporated into the system. When we combine the unique features of AREIS with our ability to quickly grow the available menu and then harness our global commercial channel investments over the last two years we believe we are well placed to drive significant incremental growth in the most dynamic IVD market molecular diagnostics.
We also believe that by combining our demonstrated leadership in clinical multiplex testing with the substantial workflow and performance benefits of the ARIES system that Luminex can build and maintain the distinctly differentiated franchise that will facilitate both platform and menu consolidation in our favor. This combination of people and expertise technology financial strength and market position will be very hard to beat.
Thank you very much for your time attention and your interest in Luminex. I will turn it over to Pat now to close the presentation and begin the Q&A.
Thanks Russ. I’ll wrap up our comments today over the next few slides. By sharing with you how we evaluate Luminex as a public company in the overall market. As I mentioned in my opening remarks that Luminex strived for consistency. Over the past few years we’ve delivered strong growth compared to a number of comparable companies, large and small, and if we look toward the future using public data this growth trend is forecasted to continue. So over any period Luminex is shown consistent long term growth.
You can also see on the slide that using the same group of companies for comparison again based on data in the public domain how enterprise value to revenue ratio is in the bottom half of this group. And when we look at these types of data we conclude that we have to do a better job of explaining our position and our future prospects. So I’d like to share with you how we think of Luminex and share with you our thoughts about valuation.
Based on the data that I just showed here is how we examine the company’s valuation. Let's first look at our partnership business. This business has different characteristics than our assay business our molecular diagnostics business. The partnership business has shown good steady growth over the years but it doesn’t have the same level of high growth prospects and it doesn’t have the direct sales channel of the molecular diagnostic segment.
In addition this business operates at operating margins fully burdened at about 25% , so as we examine this piece of our business we believe it will be reasonable at least we think so to evaluate based on the blended sales multiple or an EBITDA multiple in the range that you see here. Our assay business on the other hand has its own characteristics for example it's in a high grow segment with significant momentum and major penetration opportunities Russ just mentioned the fourfold increase in the market opportunity.
This business is more in its early stages with a much higher growth profile and we are investing heavily here and have a differentiated position with a direct sales presence. Other companies in the molecular space as I just showed you on the prior slide are valued that revenue multiples of 8, 10, or more. I am not sure that multiple make sense, for them for frankly for us but based on our current portfolio even if we value our molecular business at the low end or below where comparable companies are valued say six times revenue or so this business could reasonably be valued in the $600 million range.
Our goal here is only to share with you our perspective, to explain how we think of our company. We manage the company in the way that you see here and we are investing heavily in the segments that will generate our future growth. And as you know given our current stock price today the combined business is valued up between $700 million and $800 million. So it's our view from this analysis that there seems to be little to know value being placed on our strategic initiatives that we’ve just reviewed with you this evening. We are excited about these products we are excited about solving unmet customer needs. We are excited about our direct sales presence, about our differentiated portfolio.
We are excited about our future line extensions and about being the leader in a large and growing market. And we are convinced that we can maintain 70% gross margins giving us the flexibility to fund our future and to deliver real value to our shareholder. And based on all that we know we believe that we can fund all these efforts without additional dilution. We strongly believe that we’ll drive significant value in the company in the near and longer term.
In closing Luminex has delivered first mover products across many years across assays systems software, hardware and consumables. We have strong high margin annuity businesses which are crucial to our financial strength and our future as a first mover we establish market leadership positions in a high growth segments. We’ve consistently delivered above market growth and maintained the strategically power position with 70% gross margin. We reviewed with you today a compelling pipeline of products, including project ARIES and our next generation multiplexing technology program all these will serve as near term catalyst.
Included in our discussion today was a look at what’s beyond 2014 and future versions of the ARIES product line versions that will continue the Luminex tradition of being the first mover with another highly differentiated product, combining high level multiplexing and real time PCR capabilities all on the same platform. As a management team we believe that we’ve executed well and we built a great company. But we’ve not adequately communicated our position, our potential and our value. Hopefully we made some progress doing that this evening.
At Luminex our company is never been strong and our future has never been brighter. Thank you for your attendance today and we now be glad to take your questions.
[No Q&A session for this event]
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