Luminex Corporation (NASDAQ:LMNX) Q3 2020 Earnings Conference Call November 5, 2020 5:00 PM ET
Homi Shamir – Chairman, President and Chief Executive Officer
Harriss Currie – Chief Financial Officer, Senior Vice President, Finance and Treasurer
Good afternoon and thank you for joining us. With me today is Homi Shamir, our Chairman, President and CEO. Following our comments, we’ll take your questions. As a reminder, today’s conference call is being recorded and a replay will be available for six months on Investor Relations section of our website.
Certain statements made during the course of today’s call may not be purely historical and consequently maybe 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 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 maybe 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 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 Chairman, President and CEO, Homi Shamir.
Thank you, and welcome to our third quarter earnings call. We are very pleased with our performance in the quarter. We delivered more than $106 million in revenue with healthy gross margin that help us to generate a strong operating margin and cash flow. Luminex continued to perform extremely well and ahead of our plan as robust, diversified businesses. As a reminder, approximately 60% of our total sales come from our molecular diagnostics businesses and the other 40% comes from our Life Science and Clinical Tools businesses.
Prior to COVID-19, our molecular diagnostic businesses was growing at 35%. Since the pandemic begun, we have enjoyed a tailwind with our PCR-based MDx businesses, which can be seen with [indiscernible] 100% growth during the quarter. This growth was slightly offset by the continued headwind in our Life Science and Clinical Tools businesses. We believe that PCR-based testing is gold standard for correctly identifying COVID-19 and the most common respiratory viruses, and that PCR testing will continue for the foreseeable future within our targeted market segment.
Just as a reminder, our approximately 750 customers are primarily hospital and reference labs. The majority of those customer work with us under reagent rental agreement with a long-term commitment that lasts up to five years. Given the tremendous growth in the system placed this year, we are confident that our molecular diagnostic businesses will remain strong for years to come.
In order to meet the anticipated demand for ongoing growth in PCR testing, let me give you a few highlights on our expansion plan for our PCR-based products, which include Assay with the SARS-CoV-2 target. For ARIES, we are currently at maximum capacity, but anticipate that our capacity expansion for this line will be completed by year end, allowing us to build up to five million tests per year for all our ARIES assay offers combined. We have had greater than the 400% growth in ARIES assay shipment to our customers this year, including almost one million tests being shipped through the end of Q3.
In addition, we anticipate, we will ship approximately 400,000 ARIES tests in the fourth quarter. We are eager for our capacity expansion to be completed by the end of December, so we can catch up as quickly as possible in our backlogs of order early in Q1. As the matter of fact at the end of the third quarter, we had approximately nine million of ARIES COVID-19-related sale, that we were unable to ship as a result of capacity constraint. But anticipate that all of these specific order will be filled in the current quarter. As a reminder, our system are typically on five-year rental agreement and we have also seen a significant increase in the numbers of ARIES [ph] system installed this year.
For NxTAG assay in Q3, we shipped a total of 2.1 million NxTAG test during the quarter, while also building up our manufacturing capacity to meet this increased demand. For NxTAG respiratory assay including COVID-19, we have seen an almost 300% increase in demand. We have already scaled up so much with this product that we anticipate having the ability to satisfy further increases in demand when our NxTAG RPP assay that includes the SARS-CoV-2 target is clear for Emergency Use Authorization. We expected to have this in place already and eagerly awaiting clearances.
For VERIGENE, currently we have no clear COVID-19 related products on our VERIGENE system and are still waiting for our EUA for standalone SARS-CoV-2 VERIGENE I assay and are working very hard on the EUA submission for our VERIGENE II RSP flex assay that will include the SARS-CoV-2 target. We currently had enough capacity to meet the demand for almost two million tests per year between VERIGENE I and VERIGENE II product line, and we’ll continue to evaluate our capacity, we saw VERIGENE portfolio after we are able to launch our new VERIGENE assays, which bring us to our current situation with the FDA.
We have submitted monthly responses to the FDA to address the issues raised in the warning letter. These responses identified our comprehensive corrective action plan and provided evidence of implementation. As we continue to work through our commitment, we will keep the FDA apprised of the status of implementation in order to close out the warning letter as soon as possible. And while the warning letter is impacting our pending EUA submission, we are working collaboratively with the agency to remotely [ph] address and resolve any further issue to obtain authorization for those submission.
On the R&D front, as I just mentioned, we are planning to submit an EUA for our VERIGENE II RSP flex plus SARS-CoV-2 assay later this quarter. We are also working on a combined ARIES Flu A/B RSV SARS-CoV-2 assay for submission early next year. There is little doubt in our minds; the demand for those kind of multiplex tests will be high for years to come, which is why we are working hard to add the SARS-CoV-2 target to all of our PCR-based multiplex respiratory test. And while the interest level is certainly higher around COVID-19 related test, we continue to move forward with our plan for the commercial launch of our next generation XMP system, xMAP INTELLIFLEX.
In addition to improve sensitivity in wider dynamic rate, one of the most exciting features of the new XMP INTELLIFLEX system using its dual reporting function. With the new system in addition to performing up to 500 test in the single multiplex well, the dual report of feature adds a second reporter’s channel, so that researcher can actually measure two different parameters for each of those 500 tests. This will allow for two reaction to be observed at the same time, which today require twice as much work to get a comparable result. Two of our largest partners have already experienced running tests with the new platform and tell us they are very excited about its full launch in Q1 next year. Several additional partner will be getting the first opportunity to work with this system later this quarter.
With that, I would like to turn over to Harriss to go deeper into our financial results and our guidance for the rest of the year.
Thanks, Homi. As Homi mentioned we had a strong third quarter with revenue near our record high and operating profitability in the double digits as a percentage of revenue. These results were led by significant growth in our molecular diagnostics portfolio, as compared to the prior year quarter. Reported total revenue of $106.1 million up 35% over the third quarter of 2019 with operating profit of $11.5 million, 11% of revenue up approximately 300% over the third quarter of 2019.
Looking at the respective revenue streams, we reported that our molecular diagnostics revenue for the third quarter was $59.9 million up almost 100% over the prior year quarter, mainly driven by increased demand from the COVID-19 pandemic. Non-automated molecular diagnostics revenue was $29 million, up over 120% compared to the third quarter 2019 and sample-to-answer Molecular Diagnostics revenue was $31 million, up 78%.
In contrast, the Clinical Tools and Life Science portion of our business continued to be adversely impacted by the COVID-19 pandemic. However, our Flow Cytometry sales are showing signs of improvement. Tools and Life Science revenue for the quarter was $44.6 million, down 6% versus third quarter of 2019. With revenue in our Licensed Technology group of $34.7 million, which was down 10% for the quarter, in part due to the pandemic and Flow Cytometry revenue of $9.9 million, up 13%, primarily due to higher system and service revenue and a favorable comp to the third quarter of 2019?
As Homi discussed, we ended the quarter with an order book of over $36 million consisting of orders placed for future delivery and orders we were unable to provide by the end of the quarter, which will be filled in the fourth quarter. Looking at our revenue line items system revenue was up $4.2 million or 28% compared to the third quarter of 2019 with higher system placements across all of our system types. Non-automated sample-to-answer and flow cytometry systems. We placed 87 sample-to-answer molecular diagnostic systems in the quarter with more than half via capital sale.
Consumable revenue was $11.8 million, down 12% for the quarter, due to decreases in bulk purchases from several partners. Royalty revenue was $9.6 million down 26% for the quarter, primarily attributable to an expectation of lower aggregate royalties to be reported by our partners. Several of the reports, we have received from our partners on end user sales have indicated declines attributable to COVID-19. As a reminder, total royalty revenue includes base royalties coupled with audit findings, self-reported shortfalls and accrual adjustments.
Total assay revenue was up 89% to $55.6 million with our combined respiratory related products up more than a 100% as a result of our contributions and helping to battle the Coronavirus pandemic. Our respiratory related products comprised more than 60% of our total assay sales. Service revenue was up $6.6 million or 11% and while other revenue was up $1.3 million or 56%. Gross margin rose 7 percentage points to 60%, again reflecting the economies of scale realized from scaled up manufacturing in the third quarter.
As we indicated in our previous calls, gross margins can fluctuate moderately as a function of mix resulting in a sequential decline from the previous quarter. Operating expenses were up 9% to $51.9 million over the prior year, primarily driven by higher sales and marketing R&D expenses. Sales expense increases were driven by our 35% growth in sales and R&D activity, reflected higher expenses related to our COVID-19 assays and other product development.
Our strong revenue growth and expansion of gross margins over the prior year, contribute to a significant improvement in operating profit, which grew by $17.2 million from the third quarter of 2019 to $11.5 million in the third quarter of 2020 or 11% of revenue. Our effective tax rate can be significantly affected by the distribution of profit and loss across our worldwide subsidiaries.
We expect our consolidated full-year effective tax rate to be between 35% to 45% compared to the 20% to 30% range estimated in the second quarter of 2020, a result of changes in our forecasted mix of earnings in the US and foreign jurisdictions. Our ETR is a function of the aggregate taxable income and loss for each of our entities. Net losses in certain high-volume revenue generating regions can contribute to a consolidated ETR for the financial statements that exceeds the actual rate by jurisdiction, since actual taxes determine the generation of tax credits in relevant jurisdictions, our ETR is not as benefited by such credits although the company does benefit from lower actual tax liability.
Cash and investments for the quarter were up $16.8 million, this reflects cash flow generation from operations of $14.9 million, while also absorbing the payments of dividends and CapEx purchases of $4.1 million and $3.5 million respectively. And finally some visibility and how we expect to finish the year.
When we began 2020, we expected to deliver between $352 million and $362 million of revenue, then COVID took over. After initially communicating that we would exceed the top end of our guidance range. We adjusted our expectations to be above $415 million. This updated expectation anticipated timely clearances from the FDA on our VERIGENE I, SARS-CoV-2, EUA Assay and our NxTAG RPP plus SARS-CoV-2 EUA Assay. As those two products have not yet been cleared. We are adjusting our full year expectations to approximately $410 million. Importantly, we do anticipate clearance eventually.
Finally, as you know our gross margins are highly dependent upon product mix based on the current quarter expectations for mix, gross margin for the fourth quarter should remain comparable to the third quarter and operating expenses are expected to remain roughly flat as well. All of this translates to more than 20% growth for the year and as a result of completing our ARIES capacity expansion activities, we expect to be well positioned for growth heading into 2021.
Given the extraordinary times we find ourselves in, we thought it would be helpful to provide our longer-term expectations for revenue, a little earlier than usual. We expect 2021 to be another strong year for Luminex. We currently anticipate a minimum of [indiscernible] $475 million in revenue. The completion of our ARIES expansion to a capacity of around five million test per year will be the primary enabler here. Obviously, new product launches, including those requiring EUA will be the primary enabler here.
Obviously, new product launches including those requiring EUA approval from the FDA are also key to our success. But we are extremely confident in our ability to execute and deliver on a go-forward basis.
With that I’d like to turn it over to Homi for some final comments.
Thanks, Harriss. As Harriss said earlier, we now expected 2021 revenue to be at above $475 million. This will contribute tremendously to expansion of our bottom line and increased cash flow. We base our updated expectation on three primary factors and three additional expected opportunity. First, we believe that the effect of this Coronavirus will remain with us on a longer-term basis. And as I said at the beginning of this call, the demand for Multiplex PCR-based testing is expected to last for the foreseeable future.
We see this in the news every day and we hear this prediction loud and clear from our customers and it is reflected in the strong demand from our PCR-based product. In particular, our sample-to-answer solution. Second, year-to-date, we placed almost 300 sample-to-answer system at the customer site, most of them under reagent rental agreements, this is approximately 50% higher than all of last year.
We are also seeing higher than historical rates of system installation under long-term agreement. This system placements and installation are expected to contribute significantly to our continued revenue growth. Third, as I mentioned earlier, we are targeting the end of this year for the expansion of our ARIES automated manufacturing capability, which will allow us to sell more customer on an ongoing basis and reach our annual capacity of five million tests per year.
We also see at least three additional opportunities that could contribute to a higher rate of growth. First, we expect a rebound of both our partnership and Flow Cytometry revenue streams. Remember, we still expect to have approximately $200 million of Life Science revenue that we anticipate will grow mid-to-high single-digit as the impact of COVID-19 begins to decline. This growth in part will be fueled by successful launch of xMAP INTELLIFLEX.
Second, we are pursuing additional FDA clearances for assay on both ARIES and VERIGENE II over the next several years. Third, we have more than $300 million in cash, we anticipate this continue to grow substantially going forward as we continue to seek meaningful long-term users for this cash, including to potential M&A activity. Just as a reference in the last two quarters, we generated more than $48 million in free cash flow.
In closing, we are very excited about both our near and long-term prospects with three very exciting growth engine in ARIES, VERIGENE and INTELLIFLEX. We are well positioned to continue helping our customers all across our diversified businesses, while also continue to deliver a double-digit growth rate, improved profitability and strong cash flow. With that, I would like to turn it over to the operator for your question.
[Operator Instructions] Our first question comes from Brandon Couillard with Jefferies. Your line is now open.
Thanks, good afternoon. This is Peter on for Brandon. Thanks for taking the question. Could you provide any detail on utilization rates for ARIES and VERIGENE in third quarter? And I guess anything about 2021 and beyond, could you help us maybe shape your thoughts around sustainability. And I guess what we’re getting at is even if utilization comes down a bit, you’re placing a lot of new boxes. So how do we think about sample-to-answer reps as we look out to 2021, any color or thoughts there would be appreciated?
So the utilization rates on both ARIES and VERIGENE were similar to the second quarter, weren’t a lot of changes there. ARIES was just over 80,000.
ARIES make a lot.
121 almost doubled its sales, while VERIGENE remains the same, mainly because when you look at that, as I said in the call in VERIGENE, we don’t have any COVID-19 yet solution. We anticipate to get from the FDA. And ARIES, obviously, we have – if I’m not mistaken, a year ago we were around the 50. Now we are around 121. I’ll let Harriss look for the right number. Going forward, obviously we see a risk to continue to climb. And we’re hoping to get the EUA submission that we submit on the VERIGENE bolt-on and the VERIGENE I and eventually the VERIGENE II by the end of this quarter to able to drive it further.
Yes, ARIES was 114,000 per customer, sorry. VERIGENE was at 125,000. So VERIGENE roughly around where it’s between 120,000, 130,000. ARIES has increased significantly, because of the number of assays and the max out of manufacturing on ARIES that we’ve done over the past several quarters.
Okay, great. And then I guess as you mentioned bit of a step down in the full year guide despite being here in the third quarter. I guess could you just confirm that’s solely based on the EUA delays. And I mean there’s not anything else there you’re seeing causing it be a little bit more cautious coming to this quarter?
Yes, slow. Obviously, when we provide guidance for the 415, it was in our plan that at least NxTAG and also the VERIGENE I will get hit during this time period, especially the NxTAG, okay? Although on VERIGENE I we have a huge base of customer are waiting for that. So at this stage we are waiting to the FDA to approve it. Hopefully not in the too long and as soon as we get it, we are ready to go there. And as I said in the call NxTAG, we upgrade the manufacturing and we are ready to manufacture the product similar in the VERIGENE I.
Okay, any of those that are pending, are those embedded in the 2021 guide then in that case?
None at this stage, really the 2021 is embedded the expansion across the street from where we are of the ARIES.
Okay, so nothing that’s pending so far is embedded in 2021, correct?
Okay, excellent. All right. Very good. Thank you.
That’s what I said, if you look at the script that’s what I said, if you get those one may be the number would be even higher.
Okay, very good. Thank you.
Thank you. [Operator Instructions] because I’m showing no questions in the queue at this time. I’d like to turn the call back to Homi Shamir for any closing remarks.
Thank you, operator, and thank you everyone for your attendance on our earning calls. We look forward to see you or see in Zoom in the very near future.
Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude your program. You may now disconnect.