Luminex Corporation (NASDAQ:LMNX) Q4 2012 Earnings Call February 4, 2013 5:00 PM ET
Matthew Scalo – Senior Director, IR
Pat Balthrop – President and CEO
Harriss Currie – CFO, VP , Finance and Treasurer
Ramesh Donthamsetty – JP Morgan
Shaun Rodriguez – Cowen & Company
Brandon Couillard – Jefferies
Good day, ladies and gentlemen and welcome to Luminex Corporation’s Fourth Quarter and Full Year 2012 Earnings Conference Call. My name is Jeff 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.
I would now like to turn the presentation over to Matthew Scalo, Senior Director of Investor Relations, for opening remarks. Please proceed.
Okay. Thank you, Jeff. Good afternoon and welcome to Luminex Corporation’s conference call for the fourth quarter and full year 2012 financial and operational results. Today, Pat Balthrop, our President and CEO, and Harriss Currie, our CFO, will discuss these results released today after market close, as well as provide our outlook for 2013. In addition to the audio portion of our conference call, we have prepared a slide presentation that is on our website at www.luminexcorp.com and will be available for six months.
I would remind everyone that certain statements made during the course of this presentation may not be purely historical and consequently may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date hereof and are based on our current beliefs and expectations and are subject to known or unknown risks and uncertainties, some of which are beyond the company’s control and 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, 2011, and our quarterly reports on Form 10-Q for subsequent periods, filed with the SEC. We encourage you to review these documents and the cautionary language we have included at the beginning of the slide presentation we are presenting today. We undertake no obligation to update these forward-looking statements.
Also, certain non-GAAP financial measures, as defined by SEC Regulation G may be covered in this presentation. To the extent that any non-GAAP financial measures are covered, a presentation of and reconciliation to the most directly comparable GAAP financial measures will be included in this presentation and/or be available on our website in accordance with Regulation G.
I’ll now turn the call over to our President and CEO, Pat Balthrop.
Thank you, Matt. Welcome to our fourth quarter and full year 2012 earnings call. We’ll take the next 20 minutes or so to review our performance. In our presentation, I’ll summarize the fourth quarter and 2012 corporate highlights. Harriss will review the financial performance and our 2013 guidance. And I’ll conclude with a review of our 2013 priorities, and after that, we’ll open the call for your questions.
We finished 2012 with strong performance, achieving record revenue for the quarter and for the full year. We achieved 16% total revenue growth in the quarter driven by a 45% increase in organic assay sales and 23% growth in consumable revenue. Record fourth quarter assay revenue of about $24 million reflects strong momentum in our infectious disease franchise.
Included in this number is a contribution related to fourth quarter purchases by our two distribution partners as anticipated as part of our planned transition to a direct molecular diagnostic sales effort which took effect January 1. The effect of these distributor purchases were factored into our guidance for 2012. I’ll discuss this transition to a direct selling effort in more detail in a few minutes.
Investors should anticipate that the first quarter of 2013 will be affected by these planned fourth quarter 2012 purchases. We believe that it’s not unreasonable to expect that even with this timing effect, total revenue in the first quarter of 2013 will show growth year-over-year in the range of mid single digits over the prior year period.
Now to other highlights from this quarter’s income statement. They include our gross margins which improved to 71% and reflect a strong mix shift towards higher margin items and GAAP net income of $4.2 million or $0.10 per diluted share. Excluding the impact of integration costs of GenturaDx, our fourth quarter non-GAAP EPS was a strong $0.12.
2012 was another year of progress here at Luminex. Some of our key accomplishments include, we again shipped close to 1,000 multiplexing analyzers in 2012, reaching close to 10,000 total systems sold to-date. In 2012, we saw MAGPIX gain a larger percentage of the overall system mix, consistent with our strategy as we sold 420 MAGPIX systems or 52% growth over 2011. We’re pleased with this increased traction especially its strategic implications and we’re excited about trends for this system headed into 2013.
We continue to expand our clinical assay menu, having recently received FDA clearance for our innovative Gastrointestinal Pathogen Panel. We just completed our global sales meeting with our expanded sales force last week and I can tell you that our sales reps are excited, motivated and are already selling this novel test. In addition, we anticipate FDA clearance for our four-target 6:14) immunoassay called NeoPlex4 in the late first half of 2013. We’re making good progress in select markets outside the United States at present, but to be conservative, our 2013 guidance factors little contribution from this assay.
At our investor event in early December, we discussed both Project ARIES, the internal name for our next-generation sample-to-answer integrated molecular diagnostics system that’s the result of our two latest acquisitions EraGen and GenturaDx. We also expressed our excitement regarding the opportunities in the fast-growing, well-developed laboratory-developed test market using our technologies and proprietary chemistry. Our platform technologies provide labs the flexibility to develop innovative diagnostic solutions based on the latest genetic discoveries using xTAG and MultiCode chemistry. Over the past few years, we’ve been extremely pleased with the contribution from this segment which gained momentum in 2012 and we believe additional growth opportunities lay ahead.
Luminex has also made significant progress on our long-term strategic initiatives. As I mentioned, through our acquisitions of EraGen and GenturaDx, we’ve initiated Project ARIES a sample-in, answer-out platform technology that will work seamlessly with our MultiCode-RTx chemistry. 2013 should be a year of significant progress for Project ARIES and we plan to provide additional clarity regarding this system and the initial launch menu later this year. Lastly, in December we announced our plans to take control of the molecular diagnostics channel with a direct sales model. More on this exciting development in a moment.
As I mentioned, we’re excited about the unique position we have regarding LDTs. First, we find the majority of higher volume molecular labs to be struggling to handle the ever increasing number of assays they’re expected to perform, so they are searching for platform technologies that offer a combination of flexibility and throughput, they can give them the ability to incorporate these emerging assays into a validated, affordable, flexible diagnostic tool. A critical factor for these customers is that once the test is up and running, the platform they validate that test on needs to be able to keep up with increasing future volumes.
Our proprietary technologies and platforms offer this unique combination, as our system’s market penetration, open architecture, software and standard protocols allow the lab the flexibility to use our proprietary reagents to validate and verify a new test while being able to scale testing using the same system to handle increasing volumes once the assay is commercialized. Second, once the platform technology is incorporated in a lab’s LDT strategy, we find the business to be quite sticky, as the lab is often satisfied with that LDT even when an assay receives clearance. We’ve been extremely pleased with the contribution from this segment in 2012 and believe additional growth opportunities lay ahead.
We’re very pleased and excited about the recent transition to selling our molecular diagnostic products directly. In 2012, assays, almost all of which are molecular-based, represented about 40% of the company’s total revenue and this business grew at a rate that was over 50%. The portion of that molecular assay business that flow through distributors was less than 25% so the transition of our assay business to a direct model does not involve a huge portion of our revenue.
More important to this part of our growth strategy is the opportunity to represent our first mover products more effectively and to manage the customer relationships more directly.
We have exciting products, such as GPP, which we’re launching now, as well as our expanding LDT programs, existing franchises with existing customers and other products in the pipeline that we’ll be launching soon. Being able to do all this with a dedicated sales force is the right move at the right time.
And the financial benefits over the longer term can be significant, including the benefit of capturing 100% of the end customer dollar and in 2013, we expect to fund this incremental effort via ongoing growth of gross profit dollars, and we anticipate that once the final results are in that this will prove to have been neutral to accretive in nature.
For 2013, the areas of priority for the company include continuing to execute our platform product line strategy which focuses on driving continued adoption of our MAGPIX platform in the marketplace and furthering our progress in the development of our next-generation sample-to-answer system Project ARIES, executing our assay launches, including driving market penetration of our GPP panel in Europe and now in the U.S. after having received FDA clearance in January, the continued market development activities for NeoPlex4, our newborn screening assay, and the expansion of our LDT market opportunities.
We continue to make progress with our Biosurveillance programs and, of course, our direct sales activities having kicked off in January, which correlate with expanding opportunities in our growing portfolio of proprietary assays. We’re busy investing resources in each of these strategic initiatives and we’re excited about the growth opportunities going forward.
Now, Harriss will review the financial data and discuss 2013 guidance. And afterwards, I’ll return to discuss our 2013 priorities.
Thanks, Pat. Let’s begin the financial review with a look at revenue. As Pat mentioned previously, total revenue for the fourth quarter grew by 16% over the prior year period and by 10% for the full year. Both the quarterly and year-to-date growth was predominantly attributable to growth in our assay product portfolio, which grew by 45% for the quarter and by 54% for the full year.
For the fourth quarter, growth of our infectious disease product line was a primary contributor to assay expansion and grew as a percentage of total assay revenue from 64% of total assay revenue in the prior year to 68% of total assay revenue in the current period.
Our Luminex Madison product line and the GPP and RVP franchises fall within the infectious disease category. For the year-to-date period, growth of our infectious disease product line was again the primary contributor to assay expansion and grew as a percentage of total assay revenue from 55% of total assay revenue in the prior year to 67% of total assay revenue in the current year. This growth was primarily the result of the presence of Luminex Madison for four quarters versus two quarters in 2011 and growth in the aggregate sales of our other infectious disease products.
We sold a total of 226 multiplexing systems in the fourth quarter of 2012 and 981 for the full year of 2012, increasing cumulative shipments of multiplexing systems by 11% to 9,660. We continue to experience some fluctuation in quarterly systems shipments resulting from the timing of contractual minimums in the current year from the economic uncertainty present in the life science research marketplace and our customers’ desire to minimize inventory on hand.
We fell within or above our expected range of system placements for each quarter of 2012 but experienced an expected shift in the distribution of systems between LX and MAGPIX systems. In 2011 LX and MAGPIX systems represented 65% and 28% respectively of total multiplexing systems placements. As expected and planned LX and MAGPIX systems represented 52% and 43% respectively of total multiplexing system placements in 2012.
System revenues were down for the quarter, primarily as a result of the number of multiplexing system placed and the shift from LX system to the MAGPIX system which has a lower price point. System revenues for the year were down primarily as a result of the percentage shift from LX to MAGPIX systems coupled with the lack of recurring events associated with our automated punching systems.
Consumable revenues were up for the quarter by 23% driven by growth among the majority of our top partners and the return to favorable comparisons on a quarterly basis as a result of moving past the significant single partner concentration present in the first half of 2011. Consumable revenues for the year-to-date period in the aggregate were down by 13%, primarily as a result of the aforementioned single partner concentration in 2011. Absent that customer’s activity, consumable revenues were up by approximately 5% year-over-year.
Royalty revenues were up for the quarter and year-to-date periods by 6% and 7% respectively, representing total end user sales on xMAP technology of $99.6 million and $397.8 million respectively. In the aggregate, our higher margin items, consumables, royalties and assays comprised 76% of total 2012 revenue, up from 72% in 2011. This is the highest annual concentration of these higher margin components in our history and are significant contributor to the more stable gross margin percentages we’ve displayed and I’ll discuss in just a second.
Now let’s turn to the income statement. I discussed previously revenues grew at 16% and 10% for the quarter and year-to-date periods. Gross margins for the quarter and year-to-date periods were solid with both showing improvement primarily as a result of the elimination of the burden in the prior year periods related to the fair evaluation of EraGen inventory at acquisition. The remainder of the changes in gross margins were related to changes in mix. We remain confident in our ability to maintain gross margins in the 70% range.
Operating expenses increased 12% for the quarter and 18% for the year-to-date period. Included in 2012 OpEx were approximately $3.4 million and $7.9 million of acquisition costs, integration costs and ongoing operating costs associated with the acquisition of GenturaDx for the fourth quarter and year-to-date period respectively. Absent these costs, total OpEx for the quarter was essentially flat for the fourth quarter of 2011 and the year-to-date period was up by 10%.
As a reminder, 2012 OpEx includes four quarters of LMA activity and contains the effects of the GenturaDx acquisition whereas the prior year only includes two quarters of Luminex Madison activity. Of the $18.2 million increase in OpEx year-to-date, approximately 43% was attributable to the GenturaDx acquisition, integration and ongoing operating cost.
For the fourth quarter, operating margins improved by five percentage points and declined by two percentage points year-to-date. The quarterly improvement of our existing business, net of GenturaDx costs would have been an approximate 11 percentage point improvement of operating profit to approximately 19% of revenue, and year-to-date, we have shown a modest two percentage point increase to approximately 15% of revenue.
The effective tax rate for the full year 2012 was 46% and included a $735,000 valuation allowance placed on the NOLs at our Australian subsidiary. Absent this valuation allowance, our effective tax rate would have been 42%.
For the quarter, we generated net income of $4.3 million or $0.10 per share and EBITDA of $10.9 million. When we adjust for the acquisition and integration cost of GenturaDx that are included in our fourth quarter results, we would have net income of $5.1 million or $0.12 per diluted share and EBITDA of $12.2 million. For the year-to-date period, we generated net income of $12.4 million or $0.30 a share and EBITDA of $37.1 million. When again we adjust for the acquisition and integration cost of GenturaDx that are included in our full year results, we would have had net income of $15.5 million or $0.37 per share and EBITDA of $41.3 million.
Now turning to our core segments. Revenue of our Technology & Strategic Partnership segment or TSP was flat for the quarter, but declined by 5% on a year-to-date basis. Revenue flatness in the current period can be attributed to growth in consumable revenue resulting from an increase in bulk purchases from one of our partners, offset by the decline in system revenue.
For the year-to-date period, the decline was driven primarily by two factors. First was the anticipated decline in consumable revenues of 13%, primarily as a result of the single customer concentration in the prior-year period that didn’t repeat. Second was the shift in systems sold from LX to MAGPIX resulting in lower TSP system revenue from prior year.
Revenue of our assays and related products segment, or ARP, increased by 42% for the quarter and by 44% on a year-to-date basis. The primary driver to the quarterly revenue increase was the increase in our assay portfolio of 45% discussed previously. This increase was modestly offset by the decline in system placements by our Australian subsidiary, also discussed previously. For the year-to-date period, the primary drivers of the increase were the presence of LMA previously EraGen for the entire year versus only two quarters of activity in 2011 and the related expansion of our infectious disease product portfolio.
Operating profit of our TSP segment declined by 45% for the quarter and by 50% on a year-to-date basis. For the quarter, TSP operating expenses increased by 13% or $2.1 million, driven by infrastructure enhancements within SG&A, modest expansion of R&D related to maintenance of our patent portfolio and increased expenses due to timing of our global marketing and tradeshow events relative to the prior year. For the year-to-date period, TSP operating expenses increased by 12% driven by infrastructure enhancements and product development.
Operating profit of our ARP segment increased significantly as a percentage of revenue for both the quarter and year-to-date periods. For the quarter, ARP operating expenses increased by 11%, driven by operating costs of the acquired GenturaDx entity, which closed in July 2012, offset by decreased clinical trial costs due to the timing of our FDA submissions relative to the prior year. For the year-to-date period, operating expenses of the ARP segment increased by 27% or $11.1 million, driven by both the acquisition of GenturaDx and having a full year of LMA activity versus two quarters in the prior period.
We ended the year with $59.4 million in cash and investments, up $11.8 million from the September 30 balance. For the quarter, we generated $14.5 million in operating cash flow net of the excess benefit of stock-based awards. We had no share repurchases during the fourth quarter, as we completed our plan in the prior quarter. You will recall that our share repurchase program was intended to offset dilution from our equity plans and weighted shares outstanding which as you can see from our operating statements are slightly down from prior-year levels. On December 31, both DSOs and DPOs stood at 55 days and finally we had 1.9 forward quarters in inventory on hand at December 31.
This slide summarizes our 2012 cash investment flow. The takeaway here is that we had strong operating cash flow, which funded both our share repurchase program and purchases of PP&E, with the decline from the prior year primarily attributable to the purchase of GenturaDx this past summer.
Now onto 2013 revenue guidance. We announced our 2013 revenue guidance of between $220 million and $230 million. From a macro level perspective, we will 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.
With respect to assays, we anticipate a positive contribution from our U.S. launch of our GPP assay along with continuing positive momentum in our LDT strategy. While we anticipate U.S. FDA clearance of our NeoPlex4 assay in the first half of 2013, we do not factor in a material contribution in our 2013 guidance. We believe having a direct molecular diagnostic sales force to take advantage of these novel, innovative assays will be a significant step forward in 2013, but our guidance factors in conservative assumptions regarding their contribution for the year.
On consumable revenue, based on our partner’s forecast and our own internal analysis, we expect to see a return to double-digit growth in 2013. Our consumable revenue over the long term is healthy and we believe should prove to be less volatile due to the 2012 acquisition of one of our key partners, One Lambda by Thermo Fisher.
With respect to systems, we expect MAGPIX will account for a growing percentage of total number of multiplex analyzers as we move through 2013. Balancing current trends in the life science research market, we believe our quarterly range for multiplexing analyzers of 200 to 250 per quarter remains reasonable.
For modeling purposes, please be aware of the typical seasonality in hardware sales. In other words, historically, first quarter systems sales have been the weakest quarter of the year. As a reminder, when formulating your assumptions on 2013 gross margins, consider revenue segment growth trends and how margins on our assays are good, but below those of our consumables.
Major factors affecting our guidance range include the unpredictability of the 2013 – 2014 influenza season and the trends of the current season tempered by our distribution channel changes. We have reflected the relative weakness in the life science research market, opportunities for further weakness and the potential effects of the U.S. debt and sequestration situations could have on our system placements and related recurring pull-through. We’ve also factored in the effects of the launch of our GPP product in the U.S. and further expansion in Western Europe, considering both expected and slower than expected adoption. And finally, as mentioned previously, we’ve included a contribution from our LDT strategy at the upper end of the range.
While we manage the business for the long term and ask investors to judge our performance over that period, we understand that quarterly performance is important. To address this issue, slide 17 provides details to how our total revenue was distributed by quarter over the last four years. Occasionally, Luminex experiences a year such as 2011 where the distribution of revenue in tri-year is less typical. However, looking at 2013, we expect a quarterly revenue distribution that is similar to a more typical year and with the first quarter falling within the historical range.
Finally, one item of note is a charge that will be recorded in the first quarter of 2013 OpEx related to the successful transition and resolution of our molecular distribution agreements in the amount of $7 million.
I’ll now turn the call back over to Pat for some final comments.
As we enter 2013 with significant growth opportunities in front of us, the entire management team and I are excited about executing on our priorities to execute on our robust pipeline. For Luminex, that means providing our proprietary technology in a format that best suits the customer’s needs. In the case of hardware, we continue to see momentum build for our MAGPIX system and are very excited about the current state of development for Project ARIES, which we continue to expect to commercialize in 2014.
Within Assays, we’re pleased to have received FDA clearance for our GPP assay in January and we are launching that assay immediately. We anticipate receiving FDA clearance for our NeoPlex4 assay in the first half of 2013 and continue to see growth opportunities within our LDT strategy. And with this expanding proprietary assay menu, now is an excellent time to take control of the molecular diagnostic channel and drive the Luminex message and brand to our end customers.
With that said, we’ll continue to manage the business with an eye on our strong financial position and our responsibility to build long-term shareholder value. This ends our formal comments. Jeff, please open the line for questions.
Thank you very much. (Operator Instructions) Our first question comes from the line of Tycho Peterson with JPMorgan. Please proceed.
Ramesh Donthamsetty – JP Morgan
Hi, guys. This is Ramesh Donthamsetty sitting in for Tycho. Thanks for taking the question. Congrats on the quarter. Maybe just first on the consumables growth and your outlook on double-digit growth for that business and that franchise longer term. Could you talk a little bit about I guess the details or the contribution that’s coming from the One Lambda agreement? How much of that is kind of baked-in expectations? And then the visibility that you are anticipating, I guess, now that Thermo has taken over to One Lambda?
Sure, Ramesh. So the fourth quarter obviously of $12.4 million delivered growth of 23% that was as expected and consistent with our previous comments. If you look at our largest consumable purchasing partner and some one-time effects and so on and examine the remaining consumables business on a year-to-date basis, it continues to grow at a healthy rate and we were very encouraged by that.
We are still experiencing the bulk purchase phenomenon that you referenced and we expect that to continue although we expect it to mitigate somewhat based on historical trends as a result of the One Lambda Thermo Fisher deal because we have a strong expectation that, that will reduce the volatility although the overall volume and utilization of the technology and purchase of consumables will continue and be consistent with the growth that they expect. And so, all that adds up to, we believe, a pretty healthy business and a pretty healthy business model. There’s maybe some choppiness in – as we proceed from quarter to quarter, but we don’t expect it to be at the same levels as it has been historically.
Ramesh Donthamsetty – JP Morgan
Okay. And maybe just in terms of the assay segment, what – in your view, if you can help us understand what contribution inventory stocking has had, maybe in the fourth quarter and try to help us put some numbers around, maybe what that contribution might be early in the year? Thanks.
Sure. I think I can put some context around that for you. So, first of all, the main product that would be affected by that inventory acquisition in the fourth quarter would be our Respiratory Viral Panel product. The reason for that is because it’s one of our biggest products and the distribution arrangements we had with Thermo Fisher’s Fisher Healthcare division and with Abbott Molecular, we’re very concentrated in RVP because the CF business is also big for us, but we serve a lot of those customers on a direct basis already. And so – and Abbott, of course, only had rights to RVP.
And so, we expect or we believe, based on our analysis, keeping in mind that the – that this is obscured a little bit because of the robustness of the season that the contribution from that distribution partner buy-in in the fourth quarter was in the couple of million range and as we look toward 2013, obviously we expect there be kind of two things to keep in mind. One is that you have that timing effect that might affect the first quarter and I referenced that in the early part of my remarks and, of course, as we, as you heard in Harriss’ comments about the guidance, we think it’s prudent to model a kind of an average season for the flu season a year from now as opposed to the one that we’re coming out of, as we speak.
Ramesh Donthamsetty – JP Morgan
Okay. Thanks, guys.
Our next question comes from the line of Shaun Rodriguez with Cowen & Co. Please proceed.
Shaun Rodriguez – Cowen & Company
Hi, guys. Thanks for taking the question. Harriss, could you – was the royalty bearing sales figure $99.6 million? Did I have that correct?
For the quarter, I believe that’s what it was. I’ll pull this up for you – yeah, $99.6 million.
Shaun Rodriguez – Cowen & Company
So, I guess I’d be curious to hear a little bit more there. I guess this year on a quarterly basis you’ve been sort of in the low-to-mid-single digits on a quarterly year-over-year growth basis which does appear well below the three-year average for that metric. And given that historically this has been highlighted as a pretty important metric for you guys, just wondering what gets you comfortable that this isn’t saying something about end user dynamics? And, I guess, I’m also looking forward to 2013 what’s the expectation for that metric?
Yeah. So – this is Pat. I think I’ll take a first crack at it and then if Harriss has anything to add. So the way to think about royalties we believe is to understand what’s happening in the aggregate, but also if you look at the individual pieces. And so that is the contribution from the various partners. So if you look at our top ten partners, for example, the range there of royalty contribution is from basically a flat number to a 50% growth range. Now the different contributions obviously vary. One of the things that happened in this most recent year is our single largest royalty paying partner went through some transitions that affected, as will always occur during an acquisition, that affected their individual revenue and we feel quite comfortable with the way that has gotten back on track.
If you look at the longer-term things like the performance of our largest life science partners EMD Millipore, Bio-Rad and the investments that they’ve continued to make, they collectively or individually perhaps increase their xMAP-based instrument placements year-over-year by about 20%. And so, we expect the royalty revenue to be at a double-digit growth range this year and we have the data we believe to support that.
Shaun Rodriguez – Cowen & Company
Okay, thanks. That’s very helpful. And then, let’s see, you introduced the new xTAG chemistry at your investor event in December. When can we expect to see some more detail on this in terms of publications, presentations or beta experiences from labs?
Well, as we proceed through the year for all of our products that we talked about publicly including that one, we’ll kind of unveil things as it makes sense to do so. And so, I can’t really add any specifics to that but at various investor events and trade events and so on we’ll obviously be talking about that more publicly. As you may remember from the investor event we did in December the objective that we have and we feel highly confident we’ll be able to deliver that will be a highly streamlined chemistry that will reduce the hands on time for operating our xTAG chemistry significantly and kind of turn it into for all intents and purposes a one-step operation. So that’s underway, we’re very optimistic. But additional details will follow as the year progresses.
Shaun Rodriguez – Cowen & Company
Okay, thanks. And just one more. Is there any notable pacing in spending that we should be considering given on the R&D side you’re advancing the Gentura or ARIES projects, and I know although you’ve said been investing towards the direct sales channel for some time, and any SG&A pacing that we should be considering in our models?
Well, the historical spending in R&D that we’ve had has been in high teens, 20% range. And we expect that to continue this year. We did, as you mentioned, take on additional – take on the GenturaDx acquisition and we have accelerated the spending that we have there but we also did significant reallocations of our research and development spending in order to do that. And so, we don’t expect 2013 R&D spending to be significantly higher than what it has been historically.
Shaun Rodriguez – Cowen & Company
Great. Thank you, guys.
Our next question comes from the line of Jon Wood with Jefferies. Please proceed.
Brandon Couillard – Jefferies
Thanks. This is Brandon Couillard in for Jon. Harriss, I guess, a bit of a follow-up on that last question, but could you elaborate on how we should be thinking about the OpEx line items for next year between R&D, SG&A, in terms of some of the investments you’re making in a full year of GenturaDx impact?
Yeah, I mean, the way to think about it – I mean, obviously we don’t guide down in the bottom half of the income statement but the way to think about it is as Pat mentioned, is that R&D will remain in the high teens for the course – expected to for the course of 2013 and overall, we expect some improvement in operating profit as a percentage of revenue which suggests the SG&A as a percentage of revenue will decline modestly on reasonably consistent gross margins that I referred to in my remarks.
So think about in big picture chunks like that, you would expect a decline in the percentage contribution of SG&A, a rough flatness in percentage contribution of R&D and as a result improvement at the operating profit line or profit before tax.
Brandon Couillard – Jefferies
All right. That’s helpful. And then, how should we be thinking about the working capital implications of you shifting to a direct selling model for Molecular, if there are any? And then in terms of your guidance next year, are you assuming any incremental share repurchases to offset dilution? And then a CapEx outlook would be helpful.
Yeah. So, CapEx was pretty significant in the current year. Estimates in 2013 are less than we’ve done in 2012. With respect to share repurchase program, that’s something that the board visits on regularly and should the board decide that another share repurchase is deemed in order to again hold our weighted average shares outstanding roughly flat, you certainly could see that.
From a working capital investment standpoint, the one thing to keep in mind is that, and Pat mentioned this in his remarks, is that only less than 25% of our total assay revenue was handled by our former distributors. As a result, the sales force necessary to support that reasonably small amount isn’t as significant as it would be had our target assay portfolio been through distributors and we had to make an investment in a non-existent sales force. DSOs today stand at 55 days. It’s our estimation that we can maintain those in that same neighborhood, and so as a result from a working capital standpoint, there shouldn’t be significant changes in working capital as a result of going direct.
Brandon Couillard – Jefferies
Great. Thank you.
(Operator Instructions) Up next we have Brian Weinstein with William Blair. Please proceed.
Hi, guys. This is actually Matt in for Brian. Thanks for taking my question. If you can just comment on RVP market dynamics and the competitive situation in the high volume segment after what we saw an early and intense flu season?
Sure. This is Pat. I can address that. The Respiratory Viral Panel competitive market is one that is changing a little bit. The most significant competitor we deal with continues to be culture and DFA, but there are as you indicate or imply other competitors that are emerging. We’re obviously very close to what’s happening there. Our market share is quite stable and we’ve done a detailed analysis of, for example, the same-store sales in effect year-over-year and we believe that the third quarter of last year is kind of the most relevant and the reason for that is because it was before the season that kicked in.
You can ignore the effect of distributor buy-in and so on. And all competitors were of course available. These emerging competitors were available at the time. So and the third quarter is the time period when those customers make their choice regarding what product to use. So to summarize our findings there from the base of customers that we have, which as you know from prior discussions is well into the triple digits, the number of customers that changed hands year-over-year was about ten to the two prevailing competitors. And we added some customers as well and the net of that is we actually ended up with more customers than we had when we started although there were some customers that did choose to switch to another method. But they were primarily in the lower volume range of the customers that we serve.
One of the things that we’ve found is that there are circumstances where some of our competitors will make the claim that they’ve closed a customer and what they end up taking credit for is a remote location for a brand name hospital that’s doing relatively few tests while the main lab ends up being a Luminex customer. But Johns Hopkins is Johns Hopkins even if it’s Johns Hopkins remote location and so I think that there might be some confusion among some of the analysts and investors regarding those dynamics. I don’t want to minimize the fact that it’s a more competitive market today than it was say two years ago. But we also believe that with particularly in the segment of the market where we sell our products that the availability of our GPP assay is extremely important because a lot of those customers that are RVP customers will become GPP customers and we believe having both products to sell them gives us a significant competitive advantage.
Thanks, Pat. That’s very helpful and actually leads into a quick follow-up here. If you could just quantify the pipeline of accounts for GPP in the U.S. and if you could help us think about the sales cycle for this product here relative to Europe? Thanks.
Well, I’m not at liberty to talk about the pipeline of customers in the United States except to say that, as I mentioned during my formal remarks, we had our global sales meeting last week and that included as you might imagine, excessive activity around GPP launch in the United States. That went very well. Our sales force is engaged. They’re actively selling that product literally as we speak and the response is something that we find very encouraging.
And so, as we evaluate our ability to achieve our guidance this year, that gives us additional confidence that we’ll be able to do so. One of the things that we benefited from is our experience in Europe, where as you know from prior discussions, we experienced some learning last year about what it takes to get a customer started. We’ve addressed a lot of that with having the appropriate field scientists in the field to assist the customer in startup. We have a sample bank that we have active that makes samples available to customers to accelerate that period, the time period for evaluation and validation. So we believe we have all the necessary leverage pulled and invariables addressed. Now we just have to execute and we’re feeling pretty good about it.
Ladies and gentlemen, that’ll conclude the time we have for questions. I’d now like to turn the presentation back over to Mr. Pat Balthrop for closing remarks.
Thank you, Jeff, and thank you for attending our earnings call today, and for your interest in Luminex. My colleagues and I look forward to another strong year and to see you in person during 2013. Thanks again.
Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.
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