Luminex Corporation (NASDAQ:LMNX)
Q4 2015 Earnings Conference Call
February 01, 2016 04:30 PM ET
Matthew Scalo - Senior Director, IR
Homi Shamir - President and CEO
Harriss Currie - SVP and CFO
Dan Leonard - Leerink Partners
Tycho Peterson - JPMorgan
Brandon Couillard - Jefferies
Matt Larew - William Blair
Bill Quirk - Piper Jaffray
Good day, ladies and gentlemen, and welcome to the Luminex Corporation's Fourth Quarter and Full Year 2015 Earnings Conference Call. My name is Vince and I'll be your coordinator for today. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the call over to Matthew Scalo, Senior Director of Investor Relations for opening remarks. Please proceed.
Thanks Vince, and good afternoon, and welcome to Luminex Corporation's conference call for the fourth quarter and full year 2015 financial and operational results. On the call today are Homi Shamir, President and Chief Executive Officer; and Harriss Currie, Senior Vice President and Chief Financial Officer.
We'll be following our standard agenda today. Homi will review our fourth quarter and 2015 corporate highlights, and provide an update on our pipeline products. Harriss will review the financial performance and 2016 guidance. And after that we will open the call for your questions. As a reminder, today's conference call is being recorded and a replay will be available for six months on the Investor Relations' section of our Web site.
Certain statements made during the course of today's call may not be purely historical and consequently may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and the Company claims the protections provided by Section 21E of the Securities Exchange Act for such statements. 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, 2014 and our quarterly reports on Form 10-Q filed with the SEC. We encourage you to review these documents and we undertake no obligation to update these forward-looking statements.
Also certain non-GAAP financial measures as defined by SEC Regulation G may be covered in this call. To the extent that any non-GAAP financial measures are covered, a presentation of and reconciliation to the most directly comparable GAAP financial measures is included in our earning release, which is available on our Web site in accordance with Regulation G.
I'll now turn the call over to our President and CEO, Homi Shamir.
Thank you, Matt. Good afternoon and welcome to our fourth quarter and full 2015 earnings call. We finished 2015 generating record revenue of 238 million for the full year, at the high-end of our guidance range. We generated strong gross margin at 71% in 2016 due to favorable product mix and improving manufacturing yields. Our focus on results of prioritization is reflected on the bottom-line, as we generated strong earnings of $0.86 per diluted share in 2015, while Harriss will discuss our financial results in more detail in his prepared remarks later, our strong overall performance reflected Luminex’s balanced business model, which we are calling the four pillars of growth. We believe this business model provides better stability through diversification.
As we outlined a year ago, we remained focused on executing on our goals. I believe, we delivered a strong year as follows. We met all our financial goals as we raised our revenue guidance in 2015, keep in mind that if you adjust total revenue for the impact of the inventory management issue at our largest partner, total 2015 revenue would have gone approximately 9% over 2014. I'm very pleased with our ability to execute on our financial goals from revenue, all the way through strong profitability and cash flow.
We achieved most of our major product development milestones in 2015, resulting in FDA clearances of the ARIES system and the ARIES HSV assay, as well as NxTAG RPP assay. And lastly, we achieved our initial goal of placing 30 ARIES systems. Last year, we provided you with some of our main goals for 2015, and we are determined to [Audio Gap] first pillar of growth, our partner business. We expect revenue from our partners excluding the inventory management issues at our larger partner to grow 6% to 9% going forward. We estimate a $5 million headwind in 2016, but we anticipate that they will return to more normalized purchasing behavior adding into 2017. I would also highlight our expectation for an improving contribution from system revenue in 2016 as a result of the overall replacement cycle and higher demand in our life science end-markets.
For our molecular diagnostic business, our second pillar of growth, we forecast about 12% growth in 2016, which excluded ARIES. These is driven by our infectious disease and genetic test portfolios. This growth rate factor in our most [Audio Gap] for the full year 2016, but at a slightly reduced volume level compared to 2015. And so our third pillar growth ARIES, we continue to listen to our customers and align content development with this feedback. As such, we prioritize ASR development ahead of certain IVD assay in the immediate pipeline. At present, we have 10 ASR and one IVD assay that could be run on the ARIES system. We anticipate ARIES revenue for 2016 of approximately 2 million to 3 million, of which the majority is assay revenue. This figure is more heavily-weighted on the second half of 2016. By the end of 2016, we are targeting approximately 100 commercial units.
As an update to our ARIES FDA submissions, our GBS submission was filed in late 2015 and is under current review with the FDA. However, the FDA has responded with questions, at this stage we anticipate approval in mid-2016. Due to weak flu season so far, trial environment for our Flu A&B/RSV assay has been slower than expected. Therefore, we are planning to submit our flu A&B/RSV assay to the FDA at the end of March or beginning of April with FDA clearance before the flu season of 2016. C. diff will be submitted by August due to changes in our menu prioritization. Longer-term, by the end of 2017, we anticipate extended IVD and ASR assay selections and expect to reach about 8 to 11 IVD clearance assay, including MRCA [ph] which we expect to start clinical trial by early 2017.
We are also in development stage for our first assay on the RNA [ph] multiplex ARIES chemistry. We will start clinical trials for this assay in the second half of 2017. We are very excited about this opportunity as we believe it is a significant step forward and a unique and innovative technology.
And on to the fourth pillar of growth, our strong financial position, we have $148 million in cash, now that in a business model that generates significant cash flow. This enable us the ability to take advantage of strategic M&A opportunities.
Now Harriss will review the financial data and afterwards I will return with some closing comments.
Thanks Homi. To get our financial review, we'll look at revenue. Total revenue for the fourth quarter increased from the prior year period by 4%, while full year revenue was up 5%, both driven by solid growth in assay and system revenue, but offset somewhat by headwinds in consumable revenue due to the discreet partner event that we talked about throughout 2015. As Homi mentioned earlier, if we excluded this one partner, total revenue growth in 2015 would've been approximately 9%. Notably, assay performance for both the quarter and full year was characterized by balanced growth across all of our major assay product lines. We continue to see solid growth in our pharmacogenomics portfolio, women's health portfolio and GPP.
For the quarter, infectious disease assay sales comprised approximately 69% of total assay sales with genetic testing sales comprising 31%. Royalty revenues were down 7% for the quarter, but up 5% for the full year. This decline in the fourth quarter is purely a function of timing that our aggregate longer term royalty members and related end-user sales continue to grow in the high single-digits. Consumable revenues were down slightly, 2% for the quarter and 10% for the year, primarily due to the inventory challenges experienced by our largest partner that we've discussed throughout 2015.
If we include the consumable contribution from this partner, consumable revenues would be up approximately 10%. In the aggregate, our higher margin items consumables, royalties and assays comprised 78% of total 2015 revenue and played a significant role in maintaining our corporate gross margins in the low 70% range. System revenues were up 24% for the quarter and 5% for the year. In the second half of 2015, we shook a record number of systems due to a combination of new demand and the underlying replacement cycle.
Now let's turn to the income statement. Gross margin for the quarter was an impressive 72%, primarily due to continued concentration of our higher margin items consumables, royalties and assays. For the full year, gross margin was 71%. As a result of our revenue mix and manufacturing yield improvements, we remain confident in our ability to sustain gross margins in the strategic range of high 60% to low 70%. Operating expenses increased 9% for the quarter, but were flat for the full year and reflect the results of our continuing focus on efficiency of operating expense, while growing the business. Just to remind you, during 2015, we expanded our salesforce, added assay development resources, conducted a higher number of clinical trials and prepared for the launch of ARIES.
R&D expenses for the quarter were up 5% over the prior year. For the full year, R&D expenses were down 1% and represented 18% of revenue. The modest savings over the prior year were primarily the result of reduced material spending associated with the advancement of the ARIES development phases, offset by the commencement of clinical trials and expansion of assay development capabilities. SG&A costs were up 10% for the quarter from the fourth quarter of 2014. For the full year, SG&A expenses increased 2% and represented 36% of total revenue, flat with 2014.
Of the components of SG&A, sales and marketing costs increased 1% for the year as a result of incremental resource investment associated with our direct sales activities. G&A costs increased 4% primarily from foreign exchange impacts and increased personnel costs offset by lower cost associated with ligation which has been resolved. For the fourth quarter, operating margin was 13%, while on a year-to-date basis operating margin reached 16%, driven by the increase in revenue, the margin benefit from the growth and our higher margin revenue streams and additional operating leverage realized through efficient management of our expenses.
The full year 2015 had an income tax benefit of approximately 12%. The favorable effective tax rate for 2015 reflects an income tax benefit recorded in the fourth quarter due to the partial release of the Canadian deferred tax assets valuation allowance, as well as benefits received from net cash reductions as a result of litigation settlements. The tax benefit of these items totaled 13.3 million, giving us the pro-forma effective tax rate of 29%. We will report income tax expense on profits generated in our Canadian subsidiary over the near-term and as a result expect our consolidated effective tax rate to be around 30% for the next several years, absent any other significant discreet items.
For the year we achieved net income of 37.9 million or $0.86 per diluted share, compared with income of 39 million or $0.93 per diluted share in the prior period. On a non-GAAP basis, we generated net income of 54.5 million or $1.28 per diluted share for the year.
Now turning to balance sheet, we ended the year with 148 million cash and investments, generated approximately 40 million in cash and investments for the year, at December 31st, DSO on accounts receivable was a respectable 44 days. Today, we announced our 2016 revenue guidance of between $245 million and $255 million. I’d like to provide some factors to keep in mind of considering this range that our focus on our four pillars of growth, partnership derived revenues, our adjusting molecular assay portfolio, our new ARIES offering and our strong financial position and profitability.
Our first pillar of growth is revenues derived from the activity of our partners, which are primarily consumables, royalties and sales of our multiplexing systems. With respect to consumables, during 2016 we expect the contraction of approximately 5 million from our largest partner, as a result of the inventory challenges we have disclosed previously. We expect 2016 will be the last year we faced headwinds from this particular partner, and by 2017 they will return towards a more normalized purchasing pattern. We believe that our relationship with this partner remains strong and that they are continuing to investment in our technology.
The royalty shrink from them has gone steadily indicating further penetration and use of our technology within their market. Taking these factors under consideration, we expect consumables overall to be down in the mid single-digits for 2016. We expect royalties to grow on the high single-digits and roughly mirror the aggregate growth rates in the markets in which our partners currently sell our products. For systems, we expect the quarterly placement rate of our multiplexing systems to be slightly up from our previous expectations of 200 to 250 per quarter. For modeling purposes, please be aware that the typical seasonality in hardware sales and historically first quarter system sales has been the weakest quarter of the year.
Our second pillar of growth is assay revenue from our existing portfolio of molecular diagnostic products. We expect assay revenue to grow at low double-digit rates in 2016. This includes our current expectation the LabCorp CF will be with us for the entirety of 2016, but down several million dollars as they prepare for their ultimate switch to NGS at the end of the year. If you recall that initially we notified you they would be transitioning their CF business to NGS by mid-2015. And subsequently have notified our investors of several extensions. This is an active situation and as you have seen previously the situation can change quickly and we commit to keeping you fully informed. Absent this effect on our CF business, we expect the remainder of our assay portfolio to grow 12% to 15%. This growth is driven by continued adoption of our GPP products, continued to expansion of our PGS franchise and further expansion of our respiratory franchise.
Our third pillar of growth is our new ARIES product offering and as Homi mentioned previously, we expect 2 million to 3 million from ARIES systems and consumables in 2016, primarily in the form of consumables, since we believe a majority of our initial placements will be under reagent rentals. And our final pillar of growth is our financial strength and current focus on identifying opportunities in the marketplace. We have assumed no contribution from acquisition-related activity in our current guidance range. As we have done previously, we also want to provide revenue guidance for the first quarter of 2016 of between 60 million and 62 million.
I'll now turn the call back over to Homi for some final comments.
Thanks, Harriss. In summary, 2015 was a great year for Luminex and we're all well-positioned to take advantage of growth opportunities ahead. Moving forward, we're focused on executing our four pillars of growth strategy, which should return us to double-digit revenue growth over the next few years. We look forward seeing you at the Leerink Healthcare Conference in New York February 11th.
This ends our formal comments. Operator, please open the line for questions.
Thank you. [Operator Instructions] Our first question is from Dan Leonard of Leerink. Your line is now open.
So first off to clarify on the ARIES menu, Homi did you say 8 to 11 IVD tests by the end of 2017 or tests in total?
No, no IVD tests, and we keep saying all the time that will be around 10 and that's a more accurate number between 8 to 11 when we look at the pipeline, and we would like to bring more complex assays into this menu.
And can you elaborate more on your reprioritization of the assay pipeline there?
Yes, I mean, we're getting a lot of positive comments from our customers, especially on the ASRs area. And when we put all our resources into that and resources here is not only R&D, it is the clinical trials and the marketing things, we're looking for prioritization based on what we can develop, how long it takes us for development or verification stage, the clinical, the submission to the FDA and then taking to the market, we're looking to the prioritization over there. Obviously, we would like also to accelerate and bring to the market what we call our V1-Plus [ph] that's not the name yet on the system, but the V1-Plus which is most differentiated technology as soon as we can, so we need to give this prioritization. And as we keep saying all the time, a lot of personalization we need to the ASR, because we're getting and I have seen couple of customers in the last couple of weeks. We're really getting a nice demand and request for more ASR in our portfolio to remind you. I think we have 10 or 12 ASRs that we already released earlier this year, but we're putting more effort to release more ASR in this portfolio.
And my final question for Harriss, Harriss any comments on the margin outlook for 2016?
Really, the 2016 should be similar to 2015 because the ARIES burden if you will on the margin shouldn't even be material as a result of the -- for the ARIES revenue that we have mentioned $2 million to $3 million relative to the whole, so it is just not any really substantive drain on margins. So 2016 should be similar to 2015.
Thank you. Our next question is from Tycho Peterson of JPMorgan. Your line is now open.
As it relates to your partner bids, there were some customer consolidation with Thermo acquiring Affy, obviously they own One Lambda as well, can you maybe just talk as to whether this changes the outlook at all on the partner side?
I don't think Tycho that it is changing at all, as a matter of fact we believe that under Thermo, we maybe Thermo has a better distributions capability in this segment. So, maybe we will see better than originally expected with Affymetrix. I also -- the team here at Luminex keeps saying to me that’s additional, when there was an acquisition of one of our small partner by -- one of our larger partner, we have seen an uptick there. Now again, we're talking here not in major-major numbers, I mean we were expecting the few million dollars from Affymetrix and Bio-Techne during 2016. So we're seeing some maybe better numbers, but it's not going to be on the same equivalent as our five major partners.
And Tycho you think about it historically, every acquisition of a partner that we've had by what is typically a larger partner has resulted in the purchasing partner realizing the synergies anticipated in that acquisition, and as a result we've benefited every time so far. There is no reason to believe that with the acquisition of Affy that that won't continue.
And then Homi, if we think about the funnel and the order funnel for ARIES, can you maybe just talk on mix between the moderately complex labs and those with no molecular capabilities?
I mean at the moment we're getting it from almost every direction, and we're trying to go -- really from competitive reason, I cannot share at this stage where we have units, but you see it all across and also we are trying to put some system in what we call more like a academic center in order to have a more KOLs, speaking about the system and them being able to talk about. But at the moment, it’s from all direction. And really what we are trying to do is more going in, getting some account in each of the territories that we have and the state is divided into 23 accounts. So that’s what we are trying to do Tycho.
And then just last one, can you comment on the management change with Jeremy Bridge-Cook leaving, how quickly do you think he can fill that R&D role?
Yes I mean, first we would like to thank Jeremy for all his contribution in the Company since2007, and while we acquired this business. But it looks like we are going to divide part of his responsibility. But I feel that it is based on net yield to have a Chief Medical Officer and as a matter of fact we are currently looking at some candidate in this area. We are more-and-more approaching now end-user compared to partners. We need more people who will know, and we need sole guy, who knows how to help us in the clinical trials and we are talking about tremendous amount of clinical trials going to happen in Luminex in the next couple of years. So we need this position. Obviously we now started the search for a Senior VP of Research & Development as we call it. Internally also, we have strong candidates as well, so it is at the moment we’ll basically -- when we find the right candidate either internally or externally, we’ll replace him and we’ll bring him onboard. But we are focusing our first priority at the moment is Chief Medical Officer.
Thank you. Our next question is from Brandon Couillard of Jefferies. Your line is open.
See Homi just a question on balance sheet capital deployment. Can you just sort of speak to where your priorities are for the year, how do you weigh sort of M&A versus potentially initiating a dividend?
Yes I mean, I think I mentioned it in the big conference earlier this year. That our priority is for M&A, if by the end of the year we find that we cannot achieve or we don’t see potential. We probably will be siting close to $200 million in cash. So I think we can distribute some of that to our shareholder either through buyback or return where we will be able to thanks of the share hopefully. We don’t expect to be there and it will be much higher all by dividend. But yes, I mean we -- Luminex and us we are not bankers okay and we are not tending to see it or we need to use it for M&A and then if you don’t find something we use it for something else at the price of our shares.
And then for either Homi or Harry I mean could you give us any color on what drove the excuse me the spike in the FLEXMAP 3-D placements in the fourth quarter?
So we’ve mentioned quite a few times, the conversion of OneLab to now Thermos product to their high resolution our HLA product. And that product runs on FLEXMAP 3-D and they have begun to take incrementally more FLEXMAP 3-D systems in order to replace ones in the field, so that they can actually run that product. And that’s a primary driver to the lift in FLEXMAP 3-D placements.
Thank you. Our next question is from Brian Weinstein of William Blair. Your line is open.
This is Matt Larew in for Brian today. Just first one I wanted to ask is on area utilization. You said both in the past that 150,000 to 200,000 per test, or per box, and per year and I just wonder if the shifting focused towards ASR, did that change all your expectations about utilization and due to the menu being pushed out here? What timeframe are we thinking that an account can get up to that utilization level?
Yes, so to, so first to be explicitly clear, the level of utilization that we talked about is years off, it’s not in the current year. The shift away ASRs will actually allow us to progress the level of utilization more quickly, because a lot of products on the market more quickly. And in those with the use of Luminex ASRs, on the boxes of the customers either buy or rent from us. They would buy both the cartridge and the ASR mix. Should they run their own LDT on a system without buying a rated from us, that’s where you would be in a situation where the -- that average $30 or so purchase company wouldn’t be able to realize this, so in our case it actually makes it more likely that we can progress to a higher level of utilization by providing our own ASR products as opposed to customers securing their own reagents from elsewhere.
And the second one here, you mentioned that the revenue is expected to be weighed towards the back half for ARIES. But can you give us your thoughts on the actual funnel progression and what have you identified in some of your customer’s funnel and are the placements -- during the 100 placements, are those also expected to be weighted towards the back half or it's just revenue contribution? Thanks.
Well, yes, I mean so the placements will obviously begin to pick up as we get towards the end of the year as the menu progresses. So, this is a business for menu map, so the larger your menu is the more likely you're to be able to place a box and as we fill our ASR menu and get additional IVD clearances the system becomes more useful if you will to more customers. So, the progression of both system placements and that utilization that we addressed just a second ago will all be weighted towards the end of the year. Now some systems will be sold obviously as we've mentioned. So, that revenue from that box comes faster than through your classic reagent rental agreement but the likely is that the super majority we placed in reagent rental and therefore it's the -- again that the menu development is imperative and Homi was talking about the reprioritization of R&D at resources towards the fastest development of the chemistries that we can.
Thanks. Our next question is from Bill Quirk of Piper Jaffray. Your line is open.
First question I guess kind of sticking with the ASRs versus that you've cleared test for a moment is the reason to bring more ASRs forward faster, does that have anything to do with the likely FDA final [indiscernible] is it obviously it is anybody’s guess to when they're going to come out, but I guess latest we're hearing is roughly middle of this year?
No it'll be late -- basically we are listening to our customers. And that is what our customer wants and it's also makes sense to us, it’s opened the door to us to placing system in the fields faster. But basically the main thing is listening to the customer.
And then two quick ones, Harriss you kind of hinted that -- it sounds like most of the ARIES placements would be back half weighted but can you give us a little color as to how to think about maybe the first half versus the second half and then just make sure that we've got a model spread away, can you remind us what the LabCorp's CF contribution was in '15?
Sure. So, let's talk about LabCorp CF first, so we mentioned previously the LabCorp's CF contribution was just a little over 15 million in 2015. That number and as Homi mentioned is expected to, not the number but the business expects to be with us during 2016 with possibly some modest fall-off through the end of the year as they begin to optimize their inventory position, so that when they make their shift they there in theory they want to have zero inventory. So, they run out and we are planning our production so that -- along the same line, so that when they stop ordering we run out, so that we don't have any inventory write- off, and neither do they and so we're both in good shape there.
With respect to ARIES, the 100 system placements that we referred to previously were 100 commercial systems around the 100 commercial systems by the end of 2016. We also mentioned that, as Homi mentioned that the -- at the big conference of two or three weeks ago, and our goal all along was to have those 30 evaluation systems placed around year-end. We got those done. Those 30 evaluation systems are a component most likely. Of those 100, that would placed at the end of the year. So, depending on the time that it takes to turn those customers on and move those from evaluation into commercial, I can tell you some have already transitioned, we have others in play.
So, the assay weighting will still most likely be in the back half of the year because it takes a while to go through the evaluation process and as a result, once the full utilization starts on the menu items that are available and then the available menu items expands, overall utilization per system increases and therefore the weighting's back up. If you think about the 2.5 to or really the this is called 2.5 million, we know the 2 million to 3 million for the year sort of first half, second half, I would think it in the lines of sort of one quarter, three quarters or two firsts, three firsts, split between the first half and back half of the year.
Bill, I just want also to mention there that going back to our customer that is the most important things to ask to concentrate on them and think what they need in order to ask to the systems to be differentiated from the rest. And that's why we're putting a lot of effort in the ASR, that's why we're putting a lot of effort on our, what we call Z1-Plus system and hopefully that will bring us to a good position in the marketplace, we need to either to differentiated offering to win customer. Concerning LabCorp that, Harriss mentioned I just want to emphasize again that that's what they are saying to us, so now we know it’s going to be with us for the full year, is going to be more than we originally now thinking that's really we were now better in the middle of the year and we keep you updated with that.
Thank you. [Operator Instructions] At this time I am showing no other questions in queue, I’d like to turn it back now to Mr. Homi Shamir for any closing comments.
Thank you, Vince, and thank you, all, for your attendance on our earning call today. We look forward to seeing you in person in the very near future. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, you may now disconnect. Everyone have a great day.
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