Luminex Corporation's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Luminex Corporation (LMNX)

Luminex Corporation (NASDAQ:LMNX)

Q1 2014 Earnings Conference Call

April 28, 2014 5:00 PM ET


Harriss Currie – SVP and CFO

Pat Balthrop – President and CEO


Dan Leonard – Leerink

Brian Weinstein – William Blair

Zarak Khurshid – Wedbush Securities

Jordan Justman – JPMorgan

Shaun Rodriguez – Cowen & Company

Drew Jones – Stephens Incorporated

Bill Quirk – Piper Jaffray

Brandon Couillard – Jefferies

Dan Walker – Kalmar Investments


Good day, ladies and gentlemen. And welcome to Luminex Corporation’s First Quarter 2014 Earnings Conference Call. My name is Esteban, and I will be your coordinator for today. Today’s call is being recorded. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the presentation over to Harriss Currie, Senior Vice President and Chief Financial Officer for opening remarks. Please proceed.

Harriss Currie

Thank you Esteban. Good afternoon. And welcome to Luminex Corporation’s conference call for the first quarter 2014 financial and operational results. Today, Pat Balthrop, our President and Chief Executive Officer; and I, will discuss the results that were released today after market close. In addition to the audio portion of our conference call, we’ve prepared a slide presentation that’s on our website at and will be available for six months.

I would remind everyone that certain statements made during the course of this presentation may not be purely historical and consequently may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements speak only as of the date hereof and are based on our current beliefs and expectations, and are subject to known or unknown risks and uncertainties, some of which are beyond the company’s control that could cause actual results or plans to differ materially and adversely from those anticipated in the forward-looking statements.

Factors that could cause or contribute to such differences are detailed in our Form 10-K for the year ended, December 31, 2013, and our quarterly reports on Form 10-Q for subsequent periods, filed with the Securities and Exchange Commission.

We encourage you to review these documents and the cautionary language we’ve included at the beginning of the slide presentation we are presenting today. We undertake no obligation to update these forward-looking statements.

Also, certain non-GAAP financial measures, as defined by SEC Regulation G, maybe covered in this presentation. To the extent any non-GAAP financial measures are covered, a presentation of and reconciliation to the most directly comparable GAAP financial measures will be included in this presentation and will be available on our website in accordance with Regulation G.

I’ll now turn the call over to our President and CEO, Pat Balthrop.

Pat Balthrop

Thank you, Harriss. And welcome to our first quarter 2014 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 priorities for the year. After that we’ll open the call for your questions.

Starting on slide 4, with our financial highlights, we began 2014 with a solid performance, achieving first quarter total revenue of $56.6 million, driven by strong 18% growth in assay sales and continued growth in consumables revenue.

Other highlights from this quarter’s income statement include continued strong growth margins of 71% driven by our strategic focus on cost and favorable product mix from sales of our higher margin items. As you know, we consider the company’s gross margin position to be of significant and sustainable competitive advantage.

GAAP net income was $6 million or $0.14 per diluted share representing a significant increase over the prior year period. In the prior year, we had some one-time items, such as one-time royalty revenues that did not repeat in 2014 and on the expense line, the $7 million payment to a distributor as part of our transition to a direct sales force.

For comparison purposes, on a non-GAAP basis, net income was $9.9 million or $0.24 per diluted share. Finally, we generated positive operating cash flow during the quarter of $11.4 million, ending the period with cash and investments balance of $81.9 million up from $72.4 million at year end.

Transitioning to the corporate highlights. 2014 started off on a very positive note with solid performance in our assay business. First quarter assay growth of 18% year-over-year reflects continued momentum in our infectious disease franchise, including double-digit growth in our respiratory viral panel portfolio and our gastrointestinal pathogen panel.

In addition, in our genetic assay franchise, we experienced a healthy rebound with double-digit growth in our cystic fibrosis line. There were number of contributing factors for our performance in the quarter, perhaps the most important factor is the effect of our direct sales force in our molecular diagnostics business.

A year ago, we had just established our direct sales force and our reps had to concentrate much of their energy on converting customers from their prior distributors and basics like building a sales prospect pipeline.

Now, a year later in 2014, with our sales force now able to focus all of their attention on selling our product, we’re realizing the full benefit of this strategic initiative and we expect to continue to build momentum throughout 2014 with a full year of selling by our direct sales force in the molecular market.

Looking more specifically at the key growth drivers in our assay portfolio, the quarter was affected by the influenza like illness season in RVP sales. In addition, we experienced some key success of displacing RVP competitors.

If you recall on prior quarters, we mentioned some account losses, mostly but not entirely in lower volume accounts. During the current quarter, we were pleased to see our sales force successfully return several larger customers to Luminex as their primary RVP testing solution. Due to performance issues and insufficient throughput that these customers said were acute problems with competitor products.

With GPP, we experienced our strongest quarter to date since receiving FDA clearance. In the field we made good progress in optimizing the validation period, and our pipeline of account additions has never been better.

With our recent FDA cleared test in the area of pharmacogenomics, we continue to experience success. At the beginning of 2014, we reorganized our sales force to ensure we were adequately positioned to address the opportunity in this specialized channel.

We continue to see potential for upside within our IBD line of pharmacogenomic test and our lab developed test strategy in this market segment.

Along with other companies in the industry, we continue to monitor the reimbursement landscape closely. On previous occasions, you’ve heard us speak about the reimbursement environment in the U.S. particularly as it relates to our genetic assay portfolio.

You can see on slide 6, the CPT codes that apply to our assay portfolios. In the 2014 clinical laboratory fee schedule rates for these codes have been set, and for Luminex assays, the reimbursement rates are healthy.

Even more important is that the uncertainty which existed for our customers through 2013 appears to be subsiding. We firmly believe that long-term, we’re very well positioned given these trends and these were industry leading low-cost, especially low variable cost of our assay product.

Let’s move on to an update regarding our pipeline. In anticipation of future growth, a key strategic priority for 2014 is preparing for the commercial launch of several new products, in particular the ARIES platform and assay. The timeline for ARIES remains on target as we will complete development for commercialization in Europe in the second half of 2014, with U.S. clearance probably shortly thereafter in early 2015.

The system development work hardware and software is basically complete on schedule. We’re moving into the clinical validation phase and will initiate clinical trials shortly thereafter.

As you know, the company is within 6 months of launch and 12 months of FDA clearance, a crucial metric is the number of systems built and deployed. With this metric in mind, we built and deployed well over 50 systems to date and expect a total of well over 100 by the end of the summer.

These systems are deployed in a variety of critical functions and preparations for launch, such as assay development, reliability, marketing, training, systems integration and customer simulation testing.

We’re convinced that ARIES will be a market winner. The system will offer a number of key differentiated features including true walk-away capability both random and batch testing capability, best-in-class software, the ability to automate lab developed test, also minimizing bench space.

In addition, by coming to market with five different assays, we’ll immediately provide a compelling menu for our customers. We plan to introduce multiple assays per year thereafter.

As a reminder, the market for just the ARIES launch menu represents over $1 billion market opportunity, growing at strong double-digit rates. We estimate the placement opportunity for the ARIES system to be well over 25,000 in total and our product design strong menu and differentiated features will provide a platform that will drive significant highly profitable revenue and profit growth for many years to come.

We’re also excited about another key product in our pipeline, our new multiplexing technology, project named xTAG. The development of this next generation multiplexing technology will deliver one step ease-of-use and a highly simplified workflow to our multiplexing customers.

For those high volume labs who are main customers with our current xTAG family of products, this new technology and product line will provide very high quality results with elegant simplicity in a highly streamlined format.

We continue to make progress on the strategic program and we expect to have a product for evaluation in customers SANS very soon.

As we engage with customers regarding our plans for this product and technology, we continue to be convinced that it will be highly attractive to the market. I will count one specific story for you.

Earlier, I mentioned some customers who switched back to Luminex for their RVP testing. One of these, our customer in the Midwest had been experiencing performance and throughput problems with a competitive product, which became acute during a period when they received a bonus of samples in the recent influenza like illness season.

Because of their experience with Luminex and after learning of our plans with this new multiplexing technology, the customer reversed their previous decision and agreed to a long-term commitment to Luminex. This is one of several examples that it confirms for us that we’re uniquely positioned to serve our customer’s needs in ease-of-use and higher testing volume requirement that our direct sales force approach is working and the customer’s value, the breadth of our products, the capabilities of our core technologies and the strength of our pipeline.

To move into slide 9, we’re up to a strong start for 2014 executing on all our key strategic initiatives for the year. We’ll continue to build momentum with a full year of a direct sales force in the molecular market. We’ll also continue to penetrate the market with our multiplexing products and take advantage of opportunities in specialized markets such as pharmacogenomics.

In addition, we’re nearing completion of a number of development programs in the pipeline, including areas in xTAG and we’re excited about the future. We remain focused on final preparations to ensure successful commercial launches of these products.

Building on our solid foundation with our existing portfolio, we’re optimistic about the growth opportunities that these pipeline products represent for the company in the very near future.

Now, I’ll turn it over to Harriss, to review the financial data. And afterwards, I’ll return to discuss our 2014 outlook and guidance.

Harriss Currie

Thanks, Pat. Let’s begin the financial review with a look at revenue. As Pat mentioned previously, total revenue for the first grew by 6% over the prior year period. The quarterly growth was predominantly attributable with growth in our assay product portfolio, which grew 18% for the quarter and growth in consumable sales grew by 7%.

There were a number of factors affecting our assay growth in the quarter. First, and as Pat mentioned earlier, in the first quarter of 2014, we experienced a full benefit of our direct sales force initiative. In addition, we experienced mid 20% growth in sales of our infectious disease portfolio, driven by both organic growth and the competitive wins mentioned previously. GPP sales were also a significant contributor to growth for the quarter.

Finally, we experienced growth in our genetic assay portfolio in the high single digits largely due to strong CS sales to our largest customer. We sold a total of 208 multiplexing systems in the first quarter of 2014, plus included 78 MAGPIX systems, 121 LX systems and 9 FLEXMAP 3D, increasing 200 shipments of multiplexing systems to 10,945.

As a reminder, the first quarter of each year is typically our lightest placement quarter. And sequentially, we were coming off a record quarter for system sales in the fourth quarter of 2013. However, we did follow our expected range of quarterly system placements and are pleased with these results.

System revenues were as expected, down modestly for the quarter by 2%, driven by lower sales of automated punching systems from our Australian subsidiary that resulted from the restructuring announced in late 2013. In addition, aggregate changes in system mix and ASPs, also contributed to the decrease over the prior year.

Royalty revenues were relatively flat for the quarter, as a result of increases and reported end-user sales for the prior period being offset by a decrease in minimal royalty and one-time payments.

In the aggregate, our higher margin items, consumables, royalties and assays comprise 79% of current quarter revenue, up from 76% in the prior year. This factor is also a significant contributor to the sequential improvement in gross margins.

Consumable revenues were up 7% for the quarter, largely due to higher purchase volumes from our largest customers. The TSP purchases comprised 81% in total consumable revenue in the quarter totaling $10.3 million.

Looking briefly in our revenue growth by segment, our partnership segment or TSP revenues remained stable, growing slightly by 1% for the quarter. And our assay’s related products segments or ARP revenues grew by 15%.

Within our total assay sales for the quarter, infectious disease sales comprised 65% and genetic testing sales comprised 35%. This compares with 62% and 38% respectively in the first quarter of 2013.

Now, let’s turn to the income statement. As discussed previously, revenues grew 6% for the quarter. Gross margins for the quarter were 71% consistent with the first quarter of 2013, but up sequentially over the fourth quarter of 2013, largely due to favorable product mix and the sale of our higher margin items.

We remain confident in our ability to maintain gross margins in the high 60% to low 70% range on an ongoing basis. And as we have mentioned, CNS has a significant competitive advantage.

GAAP operating expenses decreased 20% for the quarter. However for comparison purposes, you will recall that the first quarter of 2013 included a one-time $7 million charge associated with the resolution of our prior distribution agreements as part of implementing our direct sales strategy.

A couple of other items of note with respect to the composition of our GAAP operating expenses for the current quarter are, R&D expenses decreased 13% over the prior year period and represented 20% of revenue for the quarter, partly due to savings and efficiencies, resulting from the reallocation of resources related to the restructuring we undertook in the third quarter of 2013.

In addition we experienced material savings as part of the shift in ARIES system development from alphas in the prior year to betas in the current year.

We currently expect consolidated R&D expenditures for the full year of 2014 to be in the 20% of revenue range based on our current revenue guidance. SG&A costs decreased 25% over the prior year period and represented 34% of revenue down from 48% in the prior year. However, the prior year quarter included the $7 million charge related to the termination of our distribution agreements.

Exclusive of this charge, SG&A would have been flat as a percentage of revenue year-over-year and up only 4% from the prior year period. Of the components of SG&A, general and administrative costs were down significantly from the prior year on GAAP basis and down approximately 2% when excluding the settlement payment previously mentioned.

With increase to the sales and marketing expenses, resulting from the additional of incremental resource associated with our direct sales initiative.

In our comments today, we referenced certain non-GAAP operating measures. We believe that adjusting for certain items and the related tax effect, reflects operating results that are more indicative to the company’s ongoing performance while improving comparability to prior periods. And as such, may provide our investors and enhance understanding for the company’s financial performance.

For the first quarter, GAAP operating margin was 14%, a 17 percentage point increase from the 2013 GAAP results. Non-GAAP operating margin was 22% representing a 4 percentage point increase over the 2013 non-GAAP results.

For purposes of calculating non-GAAP operating margins, we have excluded stock compensation expense, amortization of acquired intangibles, restructuring costs, severance costs, costs associated with legal proceedings and the resolution of our molecular diagnostic distribution agreements in the prior year quarter from GAAP operating profit or loss.

The effective tax rate for the first quarter was 27% compared to a negative 58% in the prior year period. This reflects a reduction in losses in our foreign jurisdictions primarily in our Canadian and Australian subsidiaries.

For the quarter, we generated GAAP net income of $6 million on a diluted basis, this amounts for $0.14 per share compared with the net loss of $0.06 per share on a fully diluted basis in the first quarter of 2013.

On a non-GAAP basis, we generated net income of $9.9 million or $0.24 per diluted share, up 26% from $7.9 million or $0.19 per diluted share in the prior period.

Now, turning to our two core segments. GAAP operating profit of our Technology and Strategic Partnership segment was a healthy 31% of TSP revenue for the quarter, an increase of 7 percentage points from the prior year.

The increase in TSP GAAP operating profit is primarily due to the favorable gross margin impact and the increase in consumable sales, and an incremental shift in resources previously focused on TSP segment R&D activities towards ARP segment development activities, primarily development of our new ARIES platform.

GAAP operating loss of our ARP segment improved for the quarter to 7% of ARP segment revenue from a loss of 43% in the prior year. The improvement or loss position can be attributed to higher assay sales in the current quarter, coupled with the elimination of the $7 million of expense included in the prior year results for the termination of our distribution agreements.

The development resources reallocated to the ARP from the TSP, were compensated for by the reductions realized from prior year’s restructuring actions.

We ended the quarter with $81.9 million in cash and investments, up $9.5 million from the December 31 balance. We generated $11.4 million in operating cash flow, and $1.1 million in proceeds from stock issuances related to our ESPP and stock option exercises offset by capital expenditures of $3.1 million. We had no share repurchases during the period.

At March 31, both DSO on accounts receivable and days payables outstanding had decreased compared to year end, to a DSO of 43 days and days payable of 46 days. And finally, we had 1.9 forward quarters of inventory on hand at March 31.

This slide summarizes our cash investment flow for the first quarter 2014. The takeaway here is that we continued our historical trend of generating strong quarterly operating cash flows, which served to fund our capital expenditure requirements and other items, ending with $81.9 million in cash and investments.

Based on the leverage presence, our current operations, we expect to generate incremental cash and investments on a quarterly basis and significant strategic investments for operational initiatives.

Now on to 2014 revenue guidance. We reaffirm our 2014 annual revenue guidance of between $225 million and $240 million. From a macro perspective, we remain reasonably cautious but optimistic about the life science research market, while experiencing continued favorable trends with respect to overall demand from our clinical customers.

In addition, we remain optimistic regarding the continued improvement in the reimbursement landscape for 2014. With respect to assays, we anticipate growth in our GPP, CF and PGS product lines along with continued positive momentum in our LBT strategy.

We believe that the benefit of having a direct molecular diagnostic sales force in place for the entire year, we’ll continue providing significant momentum throughout 2014.

How we manage the business for the long-term and ask investors to judge our performance over that period, we understand the quarterly performance is important. To address this issue, slide 19 provides detail as to how our total revenue was distributed by quarter over the last four years.

Occasionally, Luminex experienced as a year such as 2011 for the distribution of revenue in prior year is less typical. Additionally, timing of large customer orders can be a factor, it results from quarter-to-quarter.

However, looking at 2014, we expect the quarterly revenue distribution that is similar somewhat typical year and with the second quarter falling within the historical range of 23% to 25% of full year expectations.

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

Pat Balthrop

In 2014, we’re off to continue to win in the marketplace with our robust portfolio of platforms and proprietary assays. Our pipeline has never been stronger and remains on track for commercial launch of a number of new products in the near future.

Financially, in 2014, we expect to continue to build on the momentum achieved in the first quarter and to deliver a solid revenue growth year, all while maintaining our industry leading gross margins.

And in an environment where downward cost pressure is expected to be present for the longer term, we expect our high gross margins to be a major sustainable competitive advantage.

With all that said, we’ll continue to manage the business with an eye to our strong financial position and our responsibility to our shareholders.

This ends our formal remarks. Esteban, please open the line for questions.

Question-and-Answer Session


(Operator Instructions). Our first question comes from Dan Leonard with Leerink.

Dan Leonard – Leerink

Great, thank you. Was there anything in the Q1 royalty line that’s non-run rate or anything one-time, or was it all run rate performance?

Harriss Currie

Well, Dan, they are on an annual basis, there are one-time royalty payments as a result of audits. There are minimum royalty payments that are submitted at the beginning of each calendar year. And then there are some variance between submissions and customers milestone payments show year-over-year.

But for the most part, the run-rate portion as we indicated increased and that wasn’t offset by a reduction in those minimum and one-time type payments.

Pat Balthrop

Dan, this is Pat. I’ll just add to Harriss’ comments by saying that, if you look at the end-user sales contribution from our top four or five partners, that number was in the double digit. And so, the year-over-year comparison was primarily some one-time payments that did not recur this year.

Dan Leonard – Leerink

Got it. Thank you. And to answer my follow-up question, can you give us some sense about how much of the assay performance in the quarter was seasonal versus not, it would be helpful to think about modeling as we model the balance of them for the year.

Pat Balthrop

Well, let me give you some directional comments Dan, I’m not sure how precise I can be. The RVP number is always affected the course by the seasonality issue. And so, in the RVP number, we had kind of a seasonal effect but also some of those competitive wins.

If I were to estimate the seasonal effect of the growth, I would say 40% or so of the growth was seasonal in nature. The other, the remainder of it was kind of sales force execution stuff.

Dan Leonard – Leerink

Got it. Thank you.


Our next question comes from Brian Weinstein with William Blair

Brian Weinstein – William Blair

Hi, taking for the question, sorry for the background noise here. Can you talk a little bit about GPP and where that product stands? I know you guys were talking initially about really targeting RVP users. Can you give us any kind of statistics about kind of penetration of that product, customers using multiple products at this point out of your assay portfolio, anything like that? Thanks.

Pat Balthrop

Well, Brian, the GPP market is one that is in terms of the typical volume per customer, the typical customer will have a more significant GPP volume than RVP volume. Just look at the nature of the disease stage that they test for. It remains a priority for us to go to Luminex customers as you might imagine. And we’ve had some I would say the majority of our successes have been in those customers.

I don’t have the data in front of me, so I’ll just give you a sense that two thirds of the accounts that we’ve gained, with GPP have been those types of customers with the others being customers that were newer to XMAP.

Brian Weinstein – William Blair

Okay, that’s helpful. And then I’m sure you’ve given this before, but I think I heard you say there’s about 25,000 potential systems for ARIES. Can you kind of break down how those 25,000 fall in terms of categories? Thanks.

Pat Balthrop

Well, of course Brian, as you already know from your experience in the industry. The market in the molecular space is concentrated in a relatively small number of laboratories. Let’s call it, 1,000 to 1,500 laboratories in the U.S. and Western Europe primarily. Within each of those, if you break those down further, about the public data shows that about 45% or so of the molecular market is in the reference lab space today.

It’s our belief that that will change over time. In those large accounts there will be multiple instruments placed per account as part of that total available market analysis. And as you move from larger accounts down to smaller accounts, so then the total placement per customer decreases.

And based on some third party data that we purchased and then some research we’ve done on our own, we believe that over the longer term that the molecular market will go in the same direction as other market segments in the diagnostics industry have gone and where you have a total placement panel of about 25,000.

So, and that’s accounting great accuracy, it’s a forecast. But the point that we’re trying to emphasize is that we believe that there is significant placement opportunities for ARIES and other systems like ARIES in the market that just because of its growth rate and the expected menu expansion and the testing moving into a variety of different laboratories particularly those that are smaller in nature.

Brian Weinstein – William Blair

Great. Thank you very much.


Our next question comes from Zarak Khurshid with Wedbush Securities.

Zarak Khurshid – Wedbush Securities

Hi, guys, good afternoon. Thanks for taking the questions. I guess first one just on the reimbursement side, I’m wondering if you could elaborate on what your customers are experiencing and essentially is the worst behind you there?

Harriss Currie

Well, obviously the reimbursement landscape has been something that’s been difficult to predict over the last year. It’s obviously been a critical issue for us and other diagnostic companies. And we’ve been working through those challenges with our customers.

What I can tell you is that if you look at the CPT codes for the test that we manufacture, that are run by our customers, the one, the CPT codes that I had one of the slides during our official deck.

The highest average reimbursement rate for the tests on that slide is $650, the lowest is $240. And so, as we look at that and the prevailing ASPs, those reimbursement rates and the prevailing ASPs in the space, they are significant motivation on the part of customers to run those types of tests.

The biggest issues that our customers encountered last year as you recall was the uncertainty associated with the administrative process where those reimbursement rates were kind of up in the air. And if you, now just add to that that we believe that most of it is behind us.

On the other hand, there are some situations where in a reference lab space, we’re individual carriers are still presenting a difficult situation to some of our laboratory customers. But that’s more the exception than the rule these days. And so, for those reasons, we feel comfortable and more optimistic as we look towards the future than we would have say a year ago.

Zarak Khurshid – Wedbush Securities

Great. That’s very helpful. Thank you for that. And then you mentioned the win backs in the RVP business. Is that versus sample enhancer out players out there or more of the higher throughput open platforms, I know CF had made some comments the other day that they were the number one player in molecular fluid. I’m just wondering if you had some thoughts there. Thanks.

Harriss Currie

Well, that was – my comments were related to competitive wins versus other multiplexing companies. And I would not put CF in that category.

Zarak Khurshid – Wedbush Securities

Got it. Thanks.


Our next question comes from Tycho Peterson with JPMorgan.

Jordan Justman – JPMorgan

Hi, this is Jordan on for Tycho. A couple of questions. How should we think about your investment priorities and R&D post the ARIES launch? And are you expecting any lumpiness into quarter from here?

Pat Balthrop

Well, regarding investment priorities, we believe that the key to success for our company is to develop product lines that are meaningful to the customer. So once we launch the ARIES system, which is in a very near term, we will continue to emphasize our research and development on expanding the ARIES menu. And that will continue for several years to come.

And in our multiplexing space, we’ll continue to invest in multiplexing related technology starting with xTAG. And then as you may remember from our industrial event in Phoenix back in November, to be able to be the first company to put both real-time and multiplexing capabilities on a single instrument platform which we will refer to as ARIES B2, which is in feasibility with the – for the company now. And that will obviously incorporate both real-time PCR as well as multiplexing types of assay development. So, in summary, over the next several years, that’s where our R&D priorities will reside.

Jordan Justman – JPMorgan

Okay. And then one on genetic testing. I mean, can you speak to the growth you’re seeing there. It looks like you have 25% of your assays in last quarter versus 35% this quarter. I mean, I know you spoke of double-digit growth in some of those tests, but I mean, does this kind of reflect market share gains, or is this a fluctuation in demand, or how are you thinking about that?

Pat Balthrop

Well, in the genetic assay category, when we refer to genetic assays, in that category, it’s primarily a cystic fibrosis product line and our pharmacogenomics product lines. In contrast to the infectious disease categories, it includes our women’s health products as well as our respiratory viral panel and our gastrointestinal pathogen panel.

So when you look at our improvement in sequential quarters in the genetic assay category, it’s a combination as Harriss mentioned in his remarks, significant contribution from our – in our CF area with our large customers. And that is I think an indication of the subsiding reimbursement uncertainty because that was a headwind for us in CF last year. And then, continued penetration in the specialty PGX category, which we reorganized our sales force to address as of the first of 2014.

Jordan Justman – JPMorgan

Okay. Thanks.


Our next question comes from Shaun Rodriguez with Cowen & Company.

Shaun Rodriguez – Cowen & Company

Hi, good afternoon. Thanks for taking the questions. So I’m trying to understand the infectious disease assay performance a bit better. So the growth rates you provided there, were they normalized for the impact of switching to the direct sales force that you called out on the first-quarter call of last year?

Because I think at the time you noted a couple million dollars that pulled back into Q4, I believe, of 2012. So just trying to get a sense for kind of what the normalized figure was with regard to dynamics in the comp quarter?

Pat Balthrop

So, that was the numbers that we mentioned on the quarter were GAAP. So, it was first quarter 2014 actions versus first quarter 2013 actions.

Shaun Rodriguez – Cowen & Company

Okay, okay. That’s very helpful. Thank you. And then second, on the – I was hoping you could speak to the LDT opportunity, clearly something you sounded pretty optimistic about in previous quarters.

So I was hoping for some commentary perhaps on how much of a contributor this was to growth in the quarter and maybe just give us a sense for kind of the annualized revenue opportunity that you’re seeing from some of these customers as I think all of us are trying to get a handle on kind of how to characterize the opportunity from the LDT segment.

Pat Balthrop

Well, we share your feelings as it relates to the ability to characterize the size and critical success factors in the lab developed test market. And the reason for that is because it’s moving so far.

As you may remember from our presentation in Phoenix in November, just in the real-time PCR segment, low plex type of applications where our ARIES platform will reside, the opportunity in lab developed tests, segment for that platform based on third party data is estimated at $650 million in the developed world and growing at 30%.

A lot of absent infectious disease some of them in oncology and in other areas. And the reason why we’re particularly pleased with the capability that every task as our customers are telling us very loudly that that’s a significant unmet need for them because a lot of those tests are difficult for them to perform on a day-in day-out basis. And they’re looking for opportunities to automate it.

On the multiplexing side, we currently are a significant player in the lab developed test segment, with a number of different categories, which includes women’s health as well as some of our genetic disease products. And so, we believe that we understand the lab developed test market, incrementally better than others, it’s because we’re operating there significantly today.

However, the application as we move into the low-plex real-time PCR segment is one where we think the more significant opportunity resides.

So if I could summarize, we know the LDT market pretty well with the technologies we have, we’re working hard to understand it. For products like ARIES, we know from customers very clearly that this is a significant unmet need that they have and they’re looking for ways to streamline it, automate it and make it easy for many more people allowed to do than what is the state of the unit today, where they can only have one or two people that have the capital expertise to do the testing.

And so, we think it’s a significant growth opportunity and we think we have the right products and the right technology at the right time.

Shaun Rodriguez – Cowen & Company

Thank you.


Our next question comes from Drew Jones with Stephens Incorporated.

Drew Jones – Stephens Incorporated

Thanks. Harriss, looking at the operating loss in the assay segment, trying to shine a light on those underlying assay operating margins, could you break out the total spend you guys had in the quarter prepping for ARIES launch?

Harriss Currie

We actually don’t break out our specific products, the expenses by product. But what I can tell you is that the majority of our R&D within the assay segment is directed towards the ARIES product line, the majority of those R&D expenses. There are other expenses and ARP associated with the xTAG product that Pat talked about, this general chemistry stabilization and modifications.

So, the majority of the ARP expenses which will be reported in our Q tomorrow, was $9.2 million number are directly associated with ARIES.

Drew Jones – Stephens Incorporated

Thanks, guys.


Our next question comes from Bill Quirk with Piper Jaffray.

Bill Quirk – Piper Jaffray

Great, thanks. Good afternoon everybody. First off, just thinking about GPP, obviously it’s been a nice contributor here in recent quarters. We are going to likely see, I should say, a competitive launch here, call it end of 2Q or early 3Q from BioFire. So guys just help us think a little bit about – you cited this as one of the growth drivers for 2014. And so how are you I guess dialing in the effect of competition, how should we think about GPP trending over the balance of the year? Thanks.

Pat Balthrop

Well, we believe that GPP will continue to be a growth driver. And obviously, as we plan the number for 2014, we fully expected competitive interest during the year based on what we knew at the time. So that was factored into our guidance number as it were.

As you know, BioFire submitted their GPP assay a few months ago. And we expect and to receive clearance sometime soon, I can’t really be more specific than that because I frankly don’t know. It’s unclear at the moment about the number of targets but they’ll get cleared.

But like RVP, we expect them to focus on lower volume accounts, just because of their instrument platform and what their capabilities are regarding throughput. The GPP market we believe will segment the way the RVP market has, where you’ll have higher volume accounts and then lower volume accounts.

We believe that the BioFire, it’s our product offering would be mostly attracted to accounts that we haven’t really focused on in our case because we don’t have the right product for them. It’s my opinion that BioFire doesn’t have the right product for the customers that we have served.

And so, our belief going forward is that GPP will continue to be a growth driver for us. And that the increased awareness that having more than one company in the space around the benefits of a differential diagnosis of gastroenteritis using a multiplex panel will likely be a rising tide that will lift them and lift us.

So, we’re actually – as we look to the coming months, we factored all that into our planning and into our revenue guidance.

Bill Quirk – Piper Jaffray

Okay. That makes a lot of sense. Thanks, Pat, for the explanation there. And then secondly, and I’m afraid this is a bit of a two-part question, but in terms of the relationship you guys have with LabCorp and their announcement which they reiterated this morning regarding using Illumina to go into the HLA space, I guess a two-part question.

So, first is, how do you think about that relative to your relationship with One Lambda, and then secondly, given that LabCorp is a pretty significant customer of yours, how does that, if at all, affect the relationship in those other testing categories? Thanks, Pat.

Pat Balthrop

Well, the HLA market is one that we know reasonably well as you might imagine. And as a reminder, the HLA market is segmented into two primary categories or testing categories. One is nucleic acid base, which is dominated by the net national marrow donor program.

Bone marrow testing, for which there is not a significant turnaround time need for the laboratory because the data goes into a database and then the patient gets called sometime in the future when there are match, which is dramatically different from the solar organ market, where there is a significant turnaround time need, because the organ has a finite life.

And so, based on our conversations with our HLA partners which include the one landed division of Thermo-Fisher as well as Umicore, they are most successful. And a lot of the growth in the market, in the HLA market is coming from that protein testing, anti-body testing segment for solid organs as opposed to the relatively concentrated low-price nucleic acid testing segment.

And so for those reasons, we don’t expect a significant change regarding the adoption of sequencing as a technology in HLA because it’s been adopted in HLA for some time now.

The second part of your question was, does it affect our relationship with LabCorp in a broader context. And we believe the answer to that is not to any significant degree. LabCorp has been doing sequencing for some time. They buy products like CF from us etcetera. You may remember from prior conversations we’ve had regarding the importance of turnaround time and cost and other types of things that is really important in the CF market for them to remain competitive.

And the reimbursement landscape is another factor. And so, for all those reasons, we expect LabCorp to continue to expand their sequencing offering based on everything we know, we don’t expect that to be a significant effect on our CF business.

Bill Quirk – Piper Jaffray

Got it. Thanks, Pat.


Our next question comes from the Brandon Couillard with Jefferies.

Brandon Couillard – Jefferies

Hi, good afternoon. Pat, with respect to the RVP contracts won in the first quarter, could you speak to the pricing of those contracts how that compared? And are these multiple test users outside of just RVP alone?

Pat Balthrop

Yes, there is a bit of an urban myth regarding our pricing strategy with RVP. It might be clustered by people who don’t work for our company. We don’t and never have offered our VP at anything other than a price premium and we deserve that price premium we believe.

So, I will tell you that as it relates to say BioFire, what we typically offer is their RVP products at very high prices, primarily triple digit prices, which is a function of their cost position we believe. We don’t really compete with them on price and they don’t compete with us on price. It’s more a throughput and ease of use type of question for those customers.

So, the main problem that customers I was referring to had for performance related and throughput limitation related, performance related meaning the quality of the results they were able to generate were frustrating for them. And so, the reason why we want them back was primarily because of performance and throughput, not because of price.

Brandon Couillard – Jefferies

Thanks and then, one for Harriss here. The operating expenses on a non-GAAP basis have been down modestly year-over-year the past two quarters. Can you help us think through the ramp in OpEx whether you expect any incremental outlays of significant size related to the ARIES launch later this year, and the R&D for the trials upcoming and how we should think about sort of the quarterly progression through the balance of the year?

Harriss Currie

Yes, so that actually answers a portion of the question that was asked earlier and I’ll just help you out by repeating part of that. Number one, we do still expect some choppiness within R&D expenditures going forward as a result of the timing of clinical trials and expenses as we approach launch.

However, we also expect and I indicated in my comments from the call, that we’d expect R&D expenses for the year to be in the neighborhood of that 20% of revenue range based on our current guidance.

And so, yes there will be some choppiness, yes, there will be some incremental costs associated with things like clinical trials and readiness for launch and stuff like that in R&D line. However, we expect our expenses to be in that 20% range.

One of the reasons that we did the restructuring in the prior year was a pretty significant contributor to the decreasing and the total expenses in the near-term coming up because to us, profit is very important.

And so, being able to maintain our profit position, appropriately manage our costs, appropriately allocate our resources towards the items that can yield the best return. It is something that has been important and will be important going forward. So, hope that answers your question.

Brandon Couillard – Jefferies

Super. Thank you.


Our next question comes from Dana Walker, and before we take her question. (Operator Instructions). All right, Dana Walker, I’m opening your line.

Pat Balthrop

Well, she is right here.

Dan Walker – Kalmar Investments

It’s Dan. Good afternoon to you both. Can you talk about the number of systems that you said were in test or in some state of use? I think you referenced the number 50 that would go up to 100. Is that at the company sites, or is that also at some customer sites?

Pat Balthrop

Well, at the moment, Dan I had said, they’re deployed throughout the company. But as I mentioned in my formal remarks, we are about to launch in the clinical trials so some of those 50 systems will go into customer site. And then, of course some of the – the ones that we will be manufacturing in the weeks and months to come will also go into customer sites. It’s a typical clinical trial structure is, you have at least three customers.

And if you’re launching five assays, at or near launch, and you’re doing all that in a relatively short period then obviously you need the systems to do that. We also need them for all the functional groups that I mentioned during my formal remarks, we got training, reliability and customer simulation testing and all the other things that we have underway.

So, in summary, the 50 that I mentioned are all today inside the company. Many of them are about to move out, out of the company as we move into clinical. And then, as we expand our clinical trials in the very near term, we’ll need additional systems to do that.

Dan Walker – Kalmar Investments

And then finally, could you talk about the sequence of events that were likely to see transpire that you’re more likely to see transpiring? You’ll share some insights with us about related to the ARIES in-market development clinical process? And then in turn, what your sales group is doing to enable a very satisfactory launch once cleared by Europe and U.S.?

Harriss Currie

Well, our go-to-market approach was with ARIES as you might imagine Dana has been planned out in some detail. Today, as an example, we are – we have ARIES systems at the what’s called CVS, which is the Clinical Virology Symposium, which happens to be held in Florida every year, right about this time.

And based on a report I got from the team that we have on the ground there, it’s been very well received. We’ve had four or five people deep in the demonstrations and all that kind of stuff. And at CVS, and so, we’re very pleased with the reception so far. We will do the same another future events, which include other infectious disease, advance there is an event called ECCMID which is in Barcelona, which is the European infectious disease symposium. ARIES would be prominently featured there and obviously at other trade shows.

Simultaneously we have a lot of launch planning underway, which includes the appropriate market segmentation, positioning, beginning the training process, the sales training process and all those types of things. And so, as I mentioned, it’s been very well planned. And we believe appropriately resourced. And based on everything we know, we’re optimistic that we’re going to be able to execute.

Dan Walker – Kalmar Investments

Good to hear, thank you.


That concludes our question-and-answer session. I would now like to turn the call back to our President and CEO, Pat Balthrop for final remarks.

Pat Balthrop

Thank you, Esteban. And thank you for your attendance on our earnings call. We look forward to seeing you in person in the very near future and for the rest of 2014. Thanks very much.

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