Luminex Corporation's (LMNX) CEO Homi Shamir on Q1 2018 Results - Earnings Call Transcript

Luminex Corporation (NASDAQ:LMNX) Q1 2018 Results Earnings Conference Call May 7, 2018 4:30 PM ET
Executives
Homi Shamir - President and CEO
Harriss Currie - SVP and CFO
Analysts
Dan Arias - Citigroup
Dan Leonard - Deutsche Bank
Sung Ji Nam - BTIG
Tycho Peterson - JPMorgan
Bill Quirk - Piper Jaffray
Brandon Couillard - Jefferies
Operator
Good day, ladies and gentlemen, and welcome to the Luminex Corporation First Quarter 2018 Earnings Conference Call. My name is Carmen and I will be your coordinator for today. Today's call is being recorded. [Operator Instructions]
I would now like to turn the call over to Harriss Currie, Senior Vice President and Chief Financial Officer for opening remarks. Please proceed.
Harriss Currie
Good afternoon and welcome to Luminex Corporation's conference call to discuss our first quarter 2018 financial and operational results. On our call today are Homi Shamir, President and Chief Executive Officer; and me, Harriss Currie, Senior Vice President and Chief Financial Officer.
We’ll be following our standard agenda today. Homi will review our corporate highlights, I'll review the financial performance. This call is being recorded and a replay will be available for six months on the Investor Relations section of our website.
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 for 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, and our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. 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 measure will be included in our earnings release, which is available on our website in accordance with Regulation G.
I’ll now turn the call over to our President and CEO, Homi Shamir.
Homi Shamir
Thank you, Harriss. Good afternoon and welcome to our first quarter 2018 earnings call.
Today, we announce solid results for the first quarter of 2018. Our strong performance in Q1 was driven by the continued success of our molecular diagnostic franchise. Our sample-to-answer portfolio which grew by nearly 50% in the quarter led the way. Our respiratory product result exceeded our expectations due to this ill severe flu season and went just beyond what we have included in our guidance assumption.
In the aggregate, each of our MDx portfolio platform, nonautomated xMAP, ARIES and VERIGENE grew at a double-digit rates. The growth rate of our blood culture and EP panel also grew by more than 30% and 40% respectively.
Finally, we are very pleased that we have closed contract on 16 new sample-to-answer system during the quarter, which will support our continued growth trajectory and that bring our active customer base to just under 500.
Based on our track record over the last two years and the continued momentum during Q1, we are well on our way to achieving our goal of $100 million annual sample-to-answer run rate by the end of 2019. We mentioned in our previous earning call, that we expected clinical trials for our VERIGENE 2 system to commence by the end of the second quarter of 2018.
I'm happy to say that preclinical trial testing for the system and it's fair to say the enteric or GI panel has begun and we are ready to start formal trial this month. We anticipate submission to the FDA by late this year or early 2019. We have over 10 sites participating in our initial VERIGENE 2 enteric trial.
The enteric clinical trial will be followed by a respiratory panel trial beginning during the 2018 flu season as we have said previously, we plan to launch those two panels as close together as possible to generate maximum market impact.
We are very excited about our current product pipeline, which we believe will reposition Luminex at the forefront of innovation in our industry. We have communicated our commitment to introduce a next-generation xMAP platform. We continue to make good progress on this front and intend them to commercialize a new platform in the second half of 2019.
It is important that we provide a system, that we not only believe will increase sensitivity, throughput and automation but continues to provide all the feature and benefits that have made xMAP technology a market leader in the life science industry for the last 20 years.
One of Luminex’s many strength is our ability to provide both low-plex targeted solution with our risk platform and higher-plex Syndromic solution with our VERIGENE system. Now, the VERIGENE 2 is about to start clinical trial. We are shifting our R&D resources to combine these two technology and leverage the best feature of both. VERIGENE 2 is a higher-plex instrument that can run complex assays of more than 50 pathogens in less than two hours. Each VERIGENE 2 instrument can have up to six unit in a system, allowing for up to six independent assay to be performed at once.
The new VERIGENE 2 Plus component that increases the power and flexibility of the VERIGENE 2 instrument would be incorporated into the VERIGENE 2 system and would allow for faster turnaround times, offer expended real time chemistry option. Obviously, be backward compatible with our VERIGENE 2 menu and enable quantitative assay to be performed.
The VERIGENE 2 Plus component will be interchangeable with the standard VERIGENE 2 component. We plan to provide additional details about this innovative platform, as we progress and we will be demonstrating this breakthrough technology at ACC in late July.
Our LTG revenue stream was healthy. The result exceeded our initial expectation, which were incorporated into our Q1 guidance assumption, but declined compared to Q1 of 2017 due to a challenging consumable comparison with the first quarter of 2017. However, we remain confident in our ability to grow the LTG revenue stream in the mid-single digits for the full year.
As a result of the performance it caused our portfolio, we remain confident in our 2018 revenue guidance of between $310 million to $360 million. This take into account the departure of LabCorp NuSwab which they have confirmed is still on track for the end of this quarter.
Now Harriss will review the financial data and afterwards I will return with some final thoughts.
Harriss Currie
Thanks Homi.
As Homi mentioned, we began the year well with consolidated first quarter revenues up 6% over the prior year. Our molecular diagnostic revenue stream was $47.1 million for the quarter, up 21%. Performance here was driven by the continued success of our sample-to-answer franchise, which was up 49% for the quarter.
Sales on our VERIGENE platform grew by approximately 40% and sales on our ARIES platform nearly tripled versus the prior year quarter. In addition our non-automated xMAP platform grew by a little over 10%.
Another exciting development is the continued increase in the utilization per customer of our sample-to-answer products. For the first quarter, the annual utilization rate per customer for our VERIGENE products has increased to $105,000 up 17%. And for our ARIES product line the average annual utilization was $51,000 up 57%.
Our LTG revenue stream was $34.7 million for the quarter up against our internal plan. However, down 9% for the quarter driven by select order timing of consumables that favored Q1 of 2017.
A couple of very important items to keep in mind when thinking about LTG revenues, first you'll recall that in 2017 we got into a higher concentration of revenue in the first half as a result of the concentrated consumable purchases. What resulted was exactly that. We closed at 55% of LTG revenue coming in the first half of 2017.
This factor resulted in our challenging comparison for the first quarter of this year. In the current year, we expect that LTG revenues will be weighted towards the second half of the year with approximately 55% of the total coming in the back half of this year, a more normalized presentation. Finally LTG revenues were up 3% sequentially from the fourth quarter of 2017.
Turning to our revenue line items. During the first quarter we sold and replace 218 multiplex systems, which do not include ARIES and VERIGENE system placements just below the low end of our communicated range of between 225 to 275 per quarter.
Another factor to keep in mind that Q1 is historically been our lowest system placement quarter each year. We are on track to deliver similar or higher xMAP system sales for 2018 relative to last year.
Included in system revenue were sales of our xMAP systems, sales of both our ARIES and VERIGENE systems and the Reagent rental allocation for those place under Reagent rental contracts. In line with our prior communication, consumable revenues were down 23% for the quarter driven primarily by lower bulk purchases by a large HLA partner compared to the prior year quarter.
Royalty revenue grew 6% over the prior year reflecting an increase in base royalties partially offset by lower royalty minimums in audit findings and other adjustments. End user sales reported by our partners for the quarter were up 9%. As a reminder, growth of end user sales is the primary indicator of use in adoption of our technology in the marketplace.
Assay revenues were up 23% for the quarter with a 49% increase in our automated products and a 13% increase in our non-automated products. We received a number of questions regarding the impact of the recent flu season on our first quarter results. We incorporated a benefit into our first quarter guidance, but experienced additional benefit as the season worsen into the worst flu season of the past decade.
Overall, we believe we’ve benefited from the extent of the flu season by about $2 million. But keep in mind, that the remainder of our infectious disease testing menu grew nicely as well. Our respiratory business tends to be less volatile than the point of care flu testing business. So we don't see the boom-or-bust-type performances driven by fluctuations in the flu season.
We posted gross margins of 65% for the quarter, down 3 percentage points from the first quarter of 2017, and up 1 percentage point from the fourth quarter of 2017. The primary reason for this year-over-year decrease can be attributed to product mix, with a decline in consumable revenue as discussed before.
We continue to focus on improvement of our sample-to-answer margins through both volume increases and cost efficiency. For example, our VERIGENE margins that at the time of the acquisition were in the mid-teens, have exceeded 50% for the first time. We continue to control our operating expenses, displaying a decline in R&D expense of $2 million primarily attributable to the timing of clinical trials. R&D expenses represented 12% of revenue.
Overall OpEx was down 1% over the prior-year quarter. Operating profit was a healthy $15.3 million or 18% operating margin, driven by revenue growth and operating expense control as discussed previously. Our effective tax rate for the first quarter of 2018 was 15%, as compared to 34% in the first quarter of 2017. The 15% includes a discrete benefit item related to our Canadian subsidiary.
Our estimated full year consolidated tax rate for 2018 is 28% to 32% including the new 21% federal rate and GILTI or global intangible low taxed income. But this full year rate is expected to be approximately 19% to 21% after incorporating other discrete items related to the quarter four 2017 tax reform.
Our balance sheet remains strong with, no debt and up $128 million in cash investments. As Homi mentioned, we have begun to deploy resources for licensing agreements and made investments in technologies that can help enhance our portfolio of products. Year-to-date, we have made investments or obtained new technology license of over $5 million.
You'll note an increase in our DSO due to the adoption of the new revenue recognition standards which required us to record an estimated receivable for unbilled royalties each quarter to more closely coincide with the timing of the end user sale by the partner.
As noted in our 2017 10-K, we anticipated this can contribute to an increase days sales outstanding by approximately 10 days solely as a result of the timing of when revenue is recorded, not due to any changes in when payments are received. It actually increased our DSO from 38 days to 50 days this quarter and our accounts receivable by over $11 million.
Prior to the revenue recognition changes, we had no royalties in our accounts receivable. We generated $1.5 million of cash in the quarter inclusive of the payment of year-end bonuses and commissions that occur in quarter one and dividends paid in quarter one $2.6 million.
Finally, a little visibility in the second quarter of 2018. Second quarter revenues are currently expected to be between $78.5 million and $80 million, and we reaffirm our full-year guidance of between $310 million and $316 million.
Now, I'd like to turn it back over to Homi for some final comments.
Homi Shamir
Thanks Harriss.
In closing, Luminex is transformed into a solid diversified business. Since I arrived in late 2014, we have grown our revenue from $226 million to $307 million. Our model continues to drive meaningful growth, and we remain committed to investing wisely in other pipeline development that cost our entire businesses. As I have said many times, this will be done through both organic and inorganic means, while never losing focus on the bottom line.
In addition to an exciting R&D pipeline, we maintained a strong balance sheet that allows us to search for attractive and synergetic M&A opportunities as we have demonstrated with the Nanosphere acquisition.
Recently, we have allocated some of our strong cash flow to strategic investment in technology that helps fill out our future innovative roadmap. In summary, we are very excited about of core growth driver while we continue to search for M&A opportunity to further accelerate our solid organic growth projections.
This end our formal comments. Operator, please open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question is from the line of Dan Arias with Citigroup.
Dan Arias
Homi, can you just add a little color to the pull through increase on the sample to answer side? Where is the improvement most evident? And then, Harriss, do we model acceleration from the 105 and the 51,000 this quarter? Or is this sort of a good run rate for the coming quarters as things level off a bit?
Homi Shamir
So let me answer both of those. The increase in the pull through on ARIES is a function of having a more comprehensive menu over the past 12 months than we did in previous periods, when you look back on 12 months for those ordering customers.
From VERIGENE, there’s a combination of total VERIGENE revenue increase from adding new customers, but the pull through per system increases because we have more ordering customers that have been customers for the full-year, as opposed to three, six, or nine-month period.
So we don’t annualize the customer purchases over the 12 months. We look and say who's bought from us in the 12 months and how much did they buy? And the average of those is 105 for VERIGENE and 51,000 for ARIES.
As far as in increasing, you certainly would expect some modest increases as well. There's additional accounts that we've added, continued to flow in the 12-month period and a higher percentage of the total aggregate accounts are full 12-month accounts activity, as opposed to a lesser amount.
Harriss Currie
And Dan, let me add one more thing. And I keep saying it’s a few - in the last couple of years, we are looking only at customer that we can make money. So the 60 system that we have under contract, is not a loan system, it’s not something that you give to somebody to try. Our customer that signed an agreement with us either to buy or commit a rental agreement with us with a minimum purchase on a quarterly and then it’s an - tend to be couple of years agreement.
So, all of that is playing into where we wanted. And we would like to have more and more customer obviously and we continue to do amazing job there but we are also focusing on growing the utilization of those system. And I think a year ago those system were more on the 75, 80 and now they are close to 105. So, we keep seeing a continued momentum in that as well.
Dan Arias
Then maybe on the VERIGENE side. New entrants into the market these days [indiscernible] a product in Europe. One of the features that’s gotten some attention is just the quantitative capability of one platform versus the next. How important is that in your eyes so you can do on this panel testing? How much of a differentiator do you see that being pull out then looking for a loss?
Homi Shamir
I don’t think it’s a big differential but on the same time, I’d just say announced that we have also the VERIGENE 2 Plus. The VERIGENE 2 Plus one of the main - one of the feature will be quant as well.
And obviously we will have a fast turnaround time close to 30 minutes in some of that, say better than - from competitive reason, I don’t want to talk about that but we will unveil and talk about that more in AACC, so you’re most welcome to come and we’ll show you all the feature and what we have done there.
But a lot of our company talked about revenue they see for sample-to-answer in Europe, not all of them materialized to deliver. Mainly I think this is because of reimbursement and other things. So to be safe let's put it like this, I'm more focusing on delivering to Luminex and less worried about some feature or not that people claim can be a potential.
Dan Arias
If I could sneak one more in for Harriss. Harriss on the $20 million for new broaden, it seems you guys are looking forward to talk and I don’t want to talk about this anymore. But at this point how are you thinking about the weighting for 3Q versus 4Q in terms impact there?
Harriss Currie
Well, as you know we provide quarterly guidance but there is the expectation that pull out will be roughly evenly spaced across the third and fourth quarter. Working under the assumption and they've essentially confirmed that with us that they'll be gone by the end of June.
Operator
Our next question comes from Dan Leonard with Deutsche Bank.
Dan Leonard
Can you offer an update on the progression of the clinical trials on ARIES?
Homi Shamir
We are working on the MRCA. We are in preclinical. But again, and that's one of trial, we have another one in the pipeline that we are ready to go. But I must tell you Dan, we are currently focusing to make sure the Enteric is starting before the end of this month; and then the respiratory to start in the fall; and then the blood culture.
So Rita is doing what we expect them to do. And the MRCA clinical trial will keep this year and we’ll start working. But we are really shifting the resources depend on the opening we have and the priority with that. So that's really to answer in this respect, but we have couple of site in preclinical in MRCA.
Dan Leonard
So, Homi, we shouldn’t expect four trials in ARIES this year anymore?
Homi Shamir
No, I think we were talking all the time about around six roughly clinical trial this year. Three around the system of the VERIGENE then the EPRP, and blood culture following that. And then we’re talking about two to three clinical trial with the rest of – and this probably will be two MRCA and another clinical trial.
The third one there, we’ve decided that from resources point of view and market opportunity, we decided not to go ahead with that.
Dan Leonard
And then…
Homi Shamir
And it was a small unique opportunity that we decided not to continue.
Dan Leonard
And then for my follow-up, can you tell us how much of the growth from $12.9 million in sample-to-answer revenue in the fourth quarter to the $16.5 million you just reported, how much of that increase in revenue was seasonal flu versus just having customers and more business?
Homi Shamir
I think that we really did not went down the calculation, but I believe that you can say there is $1 million-plus contribute from the additional flu season. And as I said in my remark, we have a strong also quarter with blood culture in EP.
And again, it's very hard to look at that because when you continue to add more and more customer, and they continue to increase better utilization, but we assume it was a $1 million, a $1.5 million coming out of the respiratory on the automated system.
Operator
Our next question is from Sung Ji Nam with BTIG.
Sung Ji Nam
I just have a few clarification questions maybe starting with the VERIGENE, VERIGENE 2 Plus. I know you're going to talk more about that at AACC but I was wondering what the actual value proposition is of combining the ARIES to low flex as well as the multiplex for your customers? Then, do you expect, expect kind of evolution of the ARIES and VERIGENE to be towards the combined system like…
Homi Shamir
That’s correct. It’s actually based on the VERIGENE 2 technology but can - and you have seen the VERIGENE 2. But now you can put for example - the VERIGENE 2 can have six bay or six slope that you can fit there.
Now, I can put four the high flex which mean VERIGENE 2 and two low flex which mean ARIES chemistry running there. It’s enabled us to grow very faster total turnaround time, give us a quote if we needed. It’s giving us menu consolidation, flow space, et cetera to our customer.
And by the way, it will be the only system in the marketplace that can do low flex, high flex, mid flex in all in one system. I think it’s from my point of view, this is will be a complete game changer to the industry. You’re putting here a low-plex in Syndromic panel on the same device, and the same times all of them running relative very quick at a low price.
I think Harriss mentioned before, where the VERIGENE 1 alone, we had a gross margin of over 50% gross margin. Now imagine what that can do in a system like that. So I think we really bring in here the most innovative solution into the market in order to - we keep talking about $100 million achieved by 2019 and thinking how to achieve a couple of hundred more million dollar by a few years from now.
So I think by introducing this technology and relative, we have the technology, we have a couple of prototype working here, that’s why we are going to share it with you. We’re feeling very confident that we are going to build for Luminex, a very strong footprint in the sample to answer solution and doesn’t really matter what our competitor thinking to buying a company or not. Luminex is going to be a strong player for a long time.
Sung Ji Nam
And then, Harriss, maybe for the non-sample to answer molecular diagnostics. The double-digit growth there, was that also driven by the flu season? The strong flu season or were there other drivers there as well?
Harriss Currie
Well, there was growth in flu, obviously. There is - I don’t want to call it flu, I want to call it the respiratory issues because we’re not a flu company, because I mentioned it. And so our fluctuation is sort of a heavy-flu season, obviously, is that - we're all less volatile than other companies that are flu-only-type companies are. So what we saw there, increases in gastro, increases in CF, increases in respiratory, in the non-automated.
That whole portfolio I mentioned increased over 10%. Was respiratory a component of that? Yes. But there is a respiratory season last year. It wasn’t quite as dramatic as this year, but it certainly was a contributor. Overall, that entire portfolio was healthy.
And that's why I mentioned every line item sans the PGx testing that we've mentioned is going backwards anyway grew. And then every one of our platforms, Non-automated, VERIGENE and ARIES all grew as well and all grew at double digit rates. So it was overall a wonderful assay quarter for us that we are extremely proud of.
Sung Ji Nam
And then finally on the technology acquisitions you talked about. Would you be able to comment on whether or not that's more for the xMAP side of the business or the molecular diagnostics side? Thank you.
Homi Shamir
Both sides, let's put it like that. And there is some competitive reason. I don't want to talk about that, but it’s in both sides of the businesses.
Harriss Currie
And at this point Sung Ji, recognize their technology, you say, acquisitions, we didn’t go out and acquire another company. These are licensing deals or investments in companies that can help us lever our existing technology.
Operator
Our next question comes from Tycho Peterson with JPMorgan.
Tycho Peterson
I guess on the menu side are you guys expecting revenue contributions from MRSA and C. diff ARIES this year and if so to what degree?
Homi Shamir
No, not at all. We will not get it this year, we didn’t start in the clinical this year, so we really did not take it into account this year, Tycho.
Tycho Peterson
And then does that answer the question on the competitive environment? Have you seen any change in the selling cycle? I mean, somebody mentioned cryogen earlier, but you've got [indiscernible]. I'm just curious as to whether you’re seeing any change in the selling cycle at this point?
Homi Shamir
I think we continue to see what we believe is the selling cycle for us. And that's what - I rather not to comment about the competitors’ selling cycle. But no, nothing’s been changed for us at this stage.
Harriss Currie
So Tycho, let me clarify something for you. If you remember SF AIDS big three, they were Group B Strep, C. diff, and MRSA. Two of our three Group B Strep and C. diff are already generating revenue, its only MRSA that we haven’t submitted and cleared yet. So we are getting revenue from C. diff already.
Tycho Peterson
And then I guess, Harriss, last one for you on - just on the M&A funnel. Just curious if you could provide any color in terms of what you’re looking at it and also how you’re thinking about the repos from other capital deployment?
Harriss Currie
And so obviously capital deployment important given our level of cash generation. We declared a dividend a little more than a year ago. As a result to that, that’s worked out well. We’ve looked at over the past year and a half, Tycho, we probably looked at over 60 opportunities that range from platform opportunities to chemistry assays, content additions.
So we're looking everywhere in addition to markets that are adjacent to the markets in which we play in order to expand the overall footprint of the company. So to be honest, we’re looking everywhere and either our criteria are way too strange which I don't think they are, I think valuations are a little too high, a little too rich for us today.
And so we're going to continue looking. I will say guarantee but certain close to guarantee that we will find something in the not too distant future and be able to utilize some of the cash that we have on hand.
Tycho Peterson
And would you - are you able to comment on whether you take on leverage for a larger deal?
Harriss Currie
There's lot of boxes that we have to check. For a company that was accretive, that we could find a lot of synergies; that was big, could change the dynamics here at the company, could effectively a transformative type of acquisition, sure we take on that, absolutely.
Operator
Our next question comes from Bill Quirk with Piper Jaffray. Your line is open.
Bill Quirk
First question I guess, guys, can you give us a little color in terms of the 60 automated placements, was there a bias there towards VERIGENE versus ARIES?
Harriss Currie
Almost evenly split between the two this quarter.
Homi Shamir
But it tend to be most of the time this quarter was evenly split, but most of the time it tends to be obviously much more VERIGENE than ARIES. But this quarter it turned up to be like that.
Bill Quirk
And then secondly, and not to try to get ahead of ourselves here but just given all the clinical trial activity that you have planned for VERIGENE 2, Homi, can you talk us a little bit strategically how to think about the initial rollout of that system?
I certainly - I guess my gut reaction would be that you’d go after an upgrade cycle in your existing customer base. But certainly the automation kind of perhaps broaden your field as well. So can you just talk to us a little bit about some of the strategic moves that you’re considering once you get that out in the market? Thanks
Homi Shamir
Firstly, we go after new customer and new opportunity to make sure and that's where we are trying to launch together and when we start selling the RP and EP or Flex EP and RP together probably years from now or not a year from now, most of the summer followed by blood culture.
The current customers are extremely happy with VERIGENE 1. I mean, I'm so surprised to hear from them about it. But customer will phase out reagent rental agreement, we will offer them to ship into the VERIGENE 2. We have not decided shall we increase the prices to the VERIGENE 2 on the prices of the cassette. It's all depends on permit and what will be the reinvestment.
If the reinvestment will be as it is, I don't see any reason why VERIGENE 2 will not get some more premium on the assay. If the investment come under pressure, I think we already positioned in a very good spot. All of them will be capable of funding our Flex pricing. And we feel very good about that.
Obviously, after that we are working already and R&D is working very hard on additional assay in the multiplexing. And you can assume and you know probably what direction we are going there. Like some of our competitors mainly, BioFire so that's really the direction. But first we’ll be going after a new customer and a new installed base.
Bill Quirk
I appreciate all the colors. Thanks, Homi. And then since you brought it up any news on that draft to OCD?
Homi Shamir
That’s what we know.
Operator
[Operator Instructions] And our next question is from Brandon Couillard with Jefferies.
Brandon Couillard
Homi with respect to the 60 sample-to-answer placements in the first quarter, anything you could share with us in terms of the mix between competitive wins and perhaps new de-novo accounts to molecular?
Homi Shamir
Honestly, I cannot answer to you. I don't have all the data in front of me but I bet that few of them are new accounts and few of them competitive. I can look at it and find it, but it's not something I'm really worried where I’m getting, et cetera, except I wanted to grow the business and the business is growing very nicely.
Harriss Currie
Filling a little more color there Brandon, and there is a lot of these placements refueled by the positive relationships that we have in all the group purchasing organizations. Those are helping us drive placements. And because we've established relationships with so many of those GPOs, it gives us an advantage over other of our competitors. It don't have the broad base of agreements with those organizations.
Brandon Couillard
And then I realized it may be a little early but, Homi, to what extent would you be able to share with us what you see as the VERIGENE 2 sort of gross margin profile at scale relative to the current run rate.
Homi Shamir
I mean there’s no doubt in our mind that if we are in VERIGENE - VERIGENE 1 over 50% and it will continue to improve on the same kind of level we probably we’ll get another 10 point at least in the VERIGENE 2 at the current pricing.
Now if we decided to increase pricing, we probably - it all will go to the bottom line and increase the gross margin. So I mean I think the team has done a terrific job in taking the gross margin on VERIGENE 1 from close to single digit number to over 50% and we think too is - and I'm hoping that this continues to improve as the volume and we putting a lot of money into the facility, automation and et cetera.
But eventually, all the experience we learned there will shift into the VERIGENE 2. VERIGENE 2 cassette have simpler cassette that are easy to enter them so for we will - for sure, there is a gain in the gross margin as well there.
And that's by the way will be going to one of the questions that I believe Bill asked me previously. We will be, in a way, motivated also after we have a new customer that are expiring their contract to upgrade them to the VERIGENE 2 because we will make more money into - out of them.
Brandon Couillard
And then two-part clarification for Harriss. So with respect to the flu and impact or respiratory impact in the first quarter, you said was $2 million. Was that a year-over-year change or relative to your guidance? And the number two, for the tax rates, should we pencil in the 19% to 21% for the year? Is that what you were saying?
Harriss Currie
So the full-year effective tax rate, yes is expected to be in the high-teens, low-20s. That incorporates a number of discrete items that you have to factor into the adjustments. But the effective tax rate without any discrete items would be in the high-20s right at 30%. But when you factor those others in, that rates fall significantly by about a third from where the rate would be without it. What was the other question?
Brandon Couillard
The $2 million flu number this year?
Harriss Currie
The $2 million benefit from flu impact was, there are a numbers of ways to look at. One is year-over-year benefit, one is against guidance, one against plans. So, I guess what we had incorporated in our guidance is that a $1 million was a risk that we get out of our guidance.
Relative to internal plan, we had about $2 million of benefit. Relative to the prior year that number is in the - it’s probably halfway between the two. Overall the lift that we got year-over-year but as we look at it, the benefit in the current quarter for us really you had measured against either guidance or our internal plan. So, $2 million against plan, $1 million against guidance.
Operator
Thank you. And I’m not showing any questions in the queue. I would like to turn the call back to Homi Shamir for his final remark.
Homi Shamir
Thank you, Carmen, and thank you, everyone, for your attendance in our earning calls. We look forward to seeing you in person in the very near future. Have a great day.
Operator
And with that, ladies and gentlemen, we thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.
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