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Reimbursement Issues, NMTC Bankruptcy among Luminex's Challenges in Q3

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Luminex hit a number of "unexpected speed bumps" in the third quarter that caused the company to miss both its internal and Wall Street's projections, and to lower its 2013 revenue guidance.

While the Austin, Texas-based company posted 1 percent growth for the three months ended Sept. 30, largely due to a 17 percent jump in royalty revenues, Luminex saw both its assay and system sales decline in the quarter.

CEO Patrick Balthrop addressed the company's "mixed performance" in an earnings call this week, noting that Luminex is facing multiple challenges, but assuaging investors that these headwinds are temporary in nature and that the company is well-positioned for future growth.

Balthrop presented uncertainty related to changes in the way tests are reimbursed in the US as one of the main culprits for dragging the firm's revenues down in the quarter. Specifically, he said these issues caused an "unexpected speed bump by delaying a large order by [the company's] largest assay customer." He did not name the customer.

Had Luminex booked and shipped that order during the quarter, it would have reported assay revenue growth of about 16 percent, Balthrop said. Instead, its assay revenues were down slightly in Q3.

The company has previously said that some of its customers have been experiencing delays in receiving reimbursement, or lower reimbursement, for tests this year after the US Centers for Medicare & Medicaid Services moved to the gap-fill process for pricing new codes for molecular diagnostics (BAN 7/30/2013).

Balthrop reiterated on the call that dealing with the US reimbursement situation has been a "somewhat surreal experience" for Luminex. "A lot of the tests that our customers have been experiencing difficulties getting reimbursed for have historically been reimbursed," said Balthrop. "And so I don’t think anybody really saw the events of 2013 coming as it were."

The issue for Luminex is not that its assays are not getting reimbursed eventually, but that its customers are less predictable in their spending habits, he noted. These customers are "managing their supply chain more closely and more rigorously than they previously had," Balthrop said. "I think you would do the same thing if you had a cash flow challenge associated from the source of your cash, which in this case would be reimbursement authority."

Still, Balthrop portrayed the problems related to reimbursement as a "transient issue" that should be resolved next year with the publication of new reimbursement rates.

Another issue affecting Luminex's assay revenue comparison was that the company shipped $2 million in advanced assay purchases to its distributors during the third quarter of 2012, prior to moving to a direct sales model for its molecular diagnostics business in January 2013.

Factoring in the order delay and adjustments related to that $2 million shipment, Balthrop said that assay revenues actually grew 20 percent in Q3 compared to the year-ago period.

NMTC's bankruptcy

Natural Molecular Testing, or NMTC, a Seattle-based testing company, announced in June that it would convert its pharmacogenetic test services to a new panel based on Luminex's xMAP multiplex bead array technology. Luminex, which is courting companies that offer laboratory-developed tests, had touted the deal on several occasions as an example of the success of its LDT strategy (BAN 6/18/2013).

However, as Balthrop noted on the call, NMTC filed for Chapter 11 bankruptcy protection on Oct. 21, leaving the future of its Luminex-based offering in question. Because of the situation, Luminex elected to take a full allowance against all accounts receivable from NMTC. He stressed that the entire receivable balance for NMTC was related to a sale that occurred prior to NMTC's launch of its personalized medicine panel, and that the allowance represents less than 2 percent of Luminex's total revenue.

On the call, Balthrop seemed to put NMTC's bankruptcy in the context of the US reimbursement climate, saying that while the reimbursement issues had caused some reference labs to delay orders, "the effect has been more severe" for specialty labs such as NMTC.

While NMTC's bankruptcy was "disappointing," Balthrop said that Luminex is "still confident in our competitive position and in the future opportunities ahead of us in the pharmacogenomic segment where interest remains very high among customers."

GPP 'on track'

On the call, Balthrop also provided an update on adoption of the firm's Gastrointestinal Pathogen Panel.

The US Food and Drug Administration cleared the GPP for use on Luminex's higher-throughput LX 200 system in January and for use on its benchtop MagPix system in April (BAN 4/16/2013). Using the GPP, which is based on Luminex's bead array technology, users can detect 15 gastrointestinal pathogens in a single, five-hour assay.

Balthrop said that Luminex is meeting internal metrics for GPP adoption in the US. He said a significant percentage of GPP customers are new adopters of Luminex's technology and said that the company's new direct sales model is "having the positive effect that we had planned."

The GPP is also "on a good trajectory" in Europe, Balthrop said. He acknowledged that the company did not meet its internal projections when it introduced the assay to European customers last year, but said that the company made a number of changes in its European organization since and is pleased with its progress.

Overall, he said that Luminex expects the GPP to be a growth driver in 2014.

Elsewhere in Q3

Luminex's total revenues for the three months ended Sept. 30 were $50.8 million, compared to $50 million in the third quarter of 2012. The firm fell short of analysts' consensus expectations for revenue of $54.7 million.

The company reported third quarter assay revenue of $16.1 million, down from $16.4 million in the year-ago period.

According to Luminex, sales of its assays for infectious disease testing, such as its Respiratory Virus Panel and its Gastrointestinal Pathogen Panel, generated 64 percent of total assay sales in the quarter, while sales of the firm's genetic testing assays contributed the remaining 36 percent.

Sales of Luminex's multiplexing analyzers also decreased in Q3. The company posted Q3 systems sales of $7.6 million, down 11 percent from $8.5 million in Q3 2012. Luminex said it shipped 280 analyzers in the quarter, including 135 MagPix systems, 128 LX systems, and 17 FlexMap 3D systems, with cumulative to date analyzer shipments of 10,410.

Its consumables sales were down slightly to $12.8 million from $12.9 million, but its royalty revenue was up 17 percent year over year at $9 million versus $7.7 million.

Luminex reported net income of $796,000, or $.02 per share, in Q3 compared to net income of $1.6 million, or $.04 per share, in the same period of 2012. On a non-GAAP basis, the firm posted net income of $2.3 million, or $.06 per share, down from $6.4 million, or $.16 per share, from the prior year period. Analysts, on average, had expected EPS of $.11.

Luminex's SG&A costs climbed 14 percent in the quarter to $21.5 million from $19.5 million in Q3 2012, while its R&D costs fell 8 percent to $10.3 million from $11.2 million in Q3 2012. CFO Harriss Currie on the call attributed the rise in SG&A costs in part to the company's decision to move to a direct sales model for its molecular diagnostics business earlier this year.

Luminex ended the quarter with cash and cash equivalents of $57.2 million and short-term investments of $5.5 million.

Currie noted that the company received $9.5 million from an undisclosed third party for its stake in Advanced Liquid Logic. Illumina announced in July that it had acquired Advanced Liquid Logic (BAN 7/30/2013).

The company also revised its 2013 annual revenue guidance to a range of between $212 million and $217 million from earlier guidance of between $220 million and $230 million.

Currie said that the company revised its guidance because it is "cautious about the life science reagents market" given current reimbursement conditions. He said that the "real swing factor" in the company's forecast is its expectations for assay sales from reference laboratory customers, whose heightened management given the reimbursement climate could significantly impact the firm's quarterly results.

Currie reiterated that the reimbursement issues are expected to be temporary, but added that it would be prudent for the firm to revise its financial forecast.

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