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Edited Transcript of LMNX earnings conference call or presentation 10-Feb-20 10:00pm GMT

Q4 2019 Luminex Corp Earnings Call

AUSTIN Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Luminex Corp earnings conference call or presentation Monday, February 10, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harriss T. Currie

Luminex Corporation - CFO, Senior VP of Finance & Treasurer

* Jeff Christensen

Luminex Corporation - Senior Director of IR

* Nachum Shamir

Luminex Corporation - CEO, President & Director

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Conference Call Participants

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* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Luminex Corporation's Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Dilem, and I'll be your conference coordinator for today. Today's call is being recorded. (Operator Instructions)

I would now like to turn the call over to Jeff Christensen, Senior Director of Investor Relations for opening remarks. Please proceed.

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Jeff Christensen, Luminex Corporation - Senior Director of IR [2]

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Good afternoon and thank you for joining us. With me today are Homi Shamir, President and CEO; and Harriss Currie, Senior Vice President and CFO. Following their comments, we'll take your questions. As a reminder, today's conference call is being recorded, and a replay will be available for 6 months on the Investor Relations section of our website.

Certain statements made during the course of today's call may 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 projections provided by Section 21E of the Securities Exchange Act of 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 and unknown risk 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 direct comparable GAAP financial measures is included in our earnings release, which is available on our website in accordance with Regulation G.

I'll turn the call over to our President and CEO, Homi Shamir.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [3]

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Thanks, Jeff. Welcome, everyone, to our call to discuss our fourth quarter and full year operation and results.

As we suggested on our last earning call, we delivered a strong fourth quarter by growing revenue both sequentially and year-over-year, with a return to profitability. As expected, our LTG revenue stream finished the year unchanged with the prior year at $149 million, supported by a strong growth in our royalty stream, which is the primary indicator of our partners' success in the marketplace. We estimate that our partnership revenue will grow in the mid- and high-single-digit in 2020.

Our flow cytometry revenue grew in line with expectation, closing out the year with more than 10% growth and with a similar outlook for growth in 2020. Total molecular diagnostic revenue was down, but was directly affected by the departure of LabCorp women's health and other related products with flow's revenue totaling $32 million for the year. Adjusting for the LabCorp departure, molecular revenues were up 4% for the year, and sample-to-answer revenue was up 21% for the year.

As we move into 2020, with the launch of the VERIGENE II product expected midyear, we estimate that sample-to-answer revenues will be up approximately 25% for the year. 2020 will be a transformative year for Luminex, with 3 new product launches supporting a return to accelerated growth.

As I mentioned, the first new product is our VERIGENE II system. Currently, the VERIGENE II system and our GI flex assay are being reviewed by the FDA. We plan to submit respiratory assay next week and then commercially launch the system and both assays soon after the clearances. The many improvements that come with the VERIGENE II system should make for compelling offering over both the current system and competitive products.

The new system provides a fully automated solution, featuring room temperature storage with significantly reduced footprint achieving equivalent throughput to the current VERIGENE system. Assays are being designed to take advantage of our flex approach, which allow lab to pay only for what they need.

All these new features, coupled with feedback from early users, give us confidence that our current growth trajectory in sample-to-answer solution will continue to be strong.

The second exciting new product is our next-generation xMAP system, previously referred to as a SENSIPLEX, which we'll be launching under the official name xMAP INTELLIFLEX. This new system provides modeling announcement for what is widely considered today to be the gold standard platform for multiplexing. With cumulative xMAP shipments to date of approximately 17,000 systems, this new system provides a significant upgrade opportunity. INTELLIFLEX will initially be focused on the protein research market. It truly represents a modernization of technology that the market is trusted for us for the past 20 years. Development of the system had been completed, and we're currently working through the process of putting the system in our partner hands for validation of the revised future sets, and we are looking forward to rolling it out to the market midyear.

Finally, we've seen our flow cytometry grow as the Guava easyCyte next-generation system. The goal with this system is to strengthen our position as a leader in the benchtop flow cytometry space. With software enhancements to augment the easy-of-use rebranding to align with our global portfolio of products and numerous other walkway enhancement, we look forward to continue to grow our newly acquired flow cytometry revenue stream.

Following this exciting new addition to our portfolio will be additional VERIGENE II assay, including blood culture gram-positive, gram-negative in yeast as well as meningitis and numerous other opportunities still in evaluation, but with excellent promise.

We are confident in our ability to achieve our guidance range of $352 million to $362 million base on both the new products that I have mentioned and the effective execution we have shown with respect to the current portfolio.

Now I will turn over to Harriss for the financial update and our 2020 guidance and then return with some closing comments.

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [4]

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Thanks, Homi. As Homi mentioned, we had a strong fourth quarter with growing revenues and a return to profitability. Consolidated revenue for the fourth quarter was $90.5 million, up approximately 12% for the quarter and up 6% for the year. Excluding LabCorp, revenue was up 13% for the quarter and 19% for the year, inclusive of flow cytometry revenues.

Our LTG revenue stream was approximately $39 million for the quarter and $149 million for the year, down 7% for the quarter and flat respective to the prior year.

Quarterly consumable revenue was impacted by the timing of purchases from certain partners. The timing of consumable purchases by our partners provides the largest level of variability of our LTG revenue stream. However, for the year, we experienced strong growth in royalty revenue, with double-digit growth from the prior year, which indicates that our partners are having success with our technology in the marketplace.

For the first time ever, royalty revenue has surpassed consumable revenue. And we have every reason to believe that trend will continue as more and more of the consumables we sell to our partners are being used in commercial applications.

Flow cytometry revenue was up over 10% for the year, as expected, in comparison to the revenue reported in the Merck financials in the prior year. As a reminder, our image-based flow cytometers are big-ticket items. And as a result, we frequently experienced revenue volatility associated with the sales of these systems.

Our molecular diagnostic revenue stream was approximately $39 million for the quarter and $137 million for the year, flat for the quarter and down 16% for the year, primarily driven by the LabCorp departure, which impacted the year by $32 million. Excluding LabCorp, this revenue stream was up 1% for the quarter and 4% for the year. Performance here was driven by the continued success of our sample-to-answer franchise, which was up 15% for the quarter and 21% for the year.

For our sample-to-answer products, both the active customers and the utilization per customer have continued to increase. For the fourth quarter, the annual utilization rate per customer for our VERIGENE products increased to $122,000, up 12% from the prior year quarter. And for our ARIES product line, average annual utilization was $57,000, up 7% from the prior year.

Turning to our revenue line items. System revenue more than doubled in the fourth quarter of 2019 and grew more than 75% for the full year, driven by the acquisition of the flow cytometry business.

During the fourth quarter, we placed 306 multiplex systems, not including ARIES and VERIGENE systems, above the high end of our communicated expectation of 225 to 275 per quarter. Included in system revenue, our sales of our xMAP systems, sales of both our ARIES and VERIGENE systems and a reagent rental allocation for those systems placed under reagent rental agreements.

Consumable revenues were down 25% for the quarter and 3% for the full year, as this revenue stream was impacted by the timing of purchases from our partners.

Royalty revenue was relatively unchanged for the quarter, however, was up 8% for the full year. This reflected an increase in base end-user sales reported by our partners and a favorable mix of royalty rates. These increases were partially offset by lower audit findings and adjustments in the current year. Base end-user sales were up more than 10% for both the quarter and year, not including audit adjustments.

Similar to our molecular diagnostics revenue stream, assay revenues were down 2% for the quarter and 16% for the year, primarily driven by the reduction in LabCorp. Excluding this impact, assay revenue was up modestly for the quarter and up 6% for the full year, inclusive of flow cytometry revenue, growth that was predominantly driven by our sample-to-answer assays, as previously discussed.

Now turning to the income statement. We posted gross margins of 55% for the quarter and full year, down 5 percentage points from the fourth quarter of 2019 and 7 percentage points from the prior full year. This decline is primarily attributable to the reduction in LabCorp assay sales and a change in sales mix weighted heavier towards lower gross margin item. As we continue to focus on improving our sample-to-answer margins through both volume and cost efficiency, we anticipate margins will improve in 2020.

Excluding the amortization of intangibles, OpEx was down 3% for the quarter, primarily due to acquisition-related expenses in the prior year. On a full year basis, OpEx was up 15%, predominantly due to the absorption of ongoing flow cytometry expenses not present in prior year figures.

Operating profit for the quarter was $3 million, up $2 million relative to the prior year quarter. For the year, we incurred operating losses of $12 million, primarily due to the aforementioned gross margin compression and absorption of flow cytometry expenses. However, our profitability in the fourth quarter is a good indication of the revenue levels required to achieve profitability in 2020.

Our effective tax rate for the fourth quarter of 2019 was 40% as compared to a whopping 337% in the fourth quarter of 2018, which incorporated adjustments to the onetime impacts of the U.S. tax reform in the prior year quarter.

Our balance sheet remains strong with over $59 million in cash and investments after absorbing the $75 million purchase of the flow cytometry business. We generated over $13 million of cash from operations in 2019, while absorbing dividend expenditures and initial losses from the flow cytometry business. This continued generation of cash in the face of modest losses, is a great indicator of the residual strength of our business after LabCorp and shows our capacity to adapt and to continue to fund operations and our dividend on an organic basis.

As we disclosed in early January, we expect revenues for 2020 to be between $352 million and $362 million. We expect our partnership revenue stream to grow in the mid- to high single digits. Additionally, we expect our flow revenues to grow by about 10% for the year, resulting in mid- to high single-digit growth for the full year for our total life science and clinical tools. Additionally, we expect our MDx solutions to grow in the mid- to high single digits, with the sample-to-answer component growing in the mid-20s and incorporating the launch of VERIGENE II at or around midyear.

We also believe that for the full year 2020, our operating expenses should be roughly flat with 2019 and gross margins should remain in the mid-50s, obviously, affected on a quarterly basis by mix.

For the full year, we expect revenues to be between $165 million and $175 million in the first half of the year and $185 million to $195 million in the back half of the year, about a 45-55 split. The growth in the back half of the year results from both our new product launches and the purchase timing of our partners.

Currently, first quarter revenues are expected to be between $82 million and $84 million, which includes a reduction from the prior year in LabCorp revenue of approximately $4.5 million, $2.5 million from women's health and another $2 million coming from CF. This will be the last quarter that LabCorp women's health has a negative impact on our quarterly revenue, but we will continue to be affected by CF declines of approximately $2 million per quarter until the end of the year. The CF declines are purely the result of the timing of contractual commitments, but we anticipate LabCorp CF revenues will increase in 2021 compared to 2020.

We expect 2020 to be a profitable year for Luminex as a whole, but estimate that we require revenues in excess of $87 million to be consistently profitable on a quarterly basis. We also expect to be cash flow positive for the year.

Now I'd like to turn it back over to Homi for some final comments.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [5]

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Thanks, Harriss. I'd like to end by highlighting again the significant transformation Luminex has accomplished in the past several years. During my first full year at Luminex, in 2015, our revenue was about $240 million annually, split about 50-50 between MDx and our partnership businesses.

We face tremendous revenue concentration risk as Labco and our PGx and biodefense products, which were nonstrategic and together totaled over 30% of our revenue. Today, we are out of those businesses. And even without them, the company has grown total revenue by an average of 8% annually.

We are much more strategically focused with 3 growing revenue stream, each with unique features that give us confidence in our ability to achieve our goal of $500 million in the next few years.

Operator, please open the lines for questions.

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Operator [6]

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Thank you, sir. Before we go into the Q&A session, I would like to turn the call back to the President and CEO, Homi Shamir for some few remarks.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [7]

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Good afternoon, everybody. In the last couple of days, we've been asked a lot about the coronavirus, so I wanted kind of before we open to Q&A to provide a quick update on Luminex activity on the coronavirus.

So first in China, last week, we submitted the NxTAG RPP to the Chinese FDA for emergency use authorization approval. And currently, we are waiting to their respond and approval. Additionally, a few weeks ago, we completed a large clinical trial in China for this product and had planned to submit it to the Chinese FDA soon.

NxTAG RPP has 20 targets, of which 4 are coronavirus, however, none of the new Wuhan corona version is there. But the benefit of this product is currently, it can help rule out respiratory infection that are not the new coronavirus. Behind that, the Chinese CDC asked us to create a small panel based on the same chemistry of NxTAG RPP, and we are developing a new multiplex test confirming the new coronavirus also SARS and MERS to run in parallel to our NxTAG RPP. As far as I know, that's probably will be the only multiplex solution in the market.

The lead time of this panel on a full 96 plate will be approximately 45 minutes, and we can run up till 48 patient or 96 plates well. We believe that this test -- we'll ship it to CDC in China within 2 weeks. Just to remind you, NxTAG RPP has been FDA-clear product for many years. It's become the workhorse of the industry when you need high-volume tests at a low cost.

Concerning the U.S.A. market, we tested several published primary import design on our ARIES platform, and we will publish very shortly a white paper on that. This design can be ordered together with our ARIES extraction cassette and Exo+ master mix to run as an LDT. And we think it's really can be a great solution to customers and hospital because they are using our ARIES system, and they can implement immediately.

One last thing is that we have over 40 employee in China, most of them are in Shanghai and Beijing. For their safety, we -- they are not traveling or coming to the office. Most of them are working at home, and we pray for their safety.

So with that, operator, can you turn the call back to the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) I show our first question comes from Brandon Couillard from Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [2]

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Harriss, in terms of the revenue guidance for the first quarter being flat year-over-year, could you sort of speak to some of the moving parts we should be aware of?

And then secondly, Homi, any sense you can give us in terms of quantifying the contribution from the new product launches to revenues in '20 is a basket overall?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [3]

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So the moving parts that we do expect growth in our electrodiagnostic sample-to-answer products. We expect the partnership business to exhibit some growth, but we are still -- as I mentioned in my comments, we still have a little bit of headwind from LabCorp in this quarter attributed to women's health. It will be the last quarter that we ever have to worry about women's health headwinds and those are about $2.5 million. And there's another $2 million of LabCorp headwinds attributable to purely the timing of contractually obligated CF purchases by LabCorp.

And so it's our estimate that on the current year, based on the total minimums that they're required to buy from us for 2020, in 2021, that the majority of those will be bought next year. So what we'll have is a current year, we have a dip in CF purchases of around $10 million. And then next year, CF purchases will rebound back up to around $10 million. So we're talking about a slip from $16 million to $5 million and back up to $10 million. So it's -- there's some movement there, obviously. We talked about the $2 million a quarter or so of CF headwind that we'll experience for the rest of the year. Otherwise, we're expecting growth across all of our other product lines.

And your other question, I think, was for Homi, that was about what contributions of new products later in the year?

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Nachum Shamir, Luminex Corporation - CEO, President & Director [4]

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Yes. As Harriss stated in his remark, VERIGENE II is -- we are really planning to start pushing into the field in midyear, although we can see some sales as soon as we get approval. Matter of fact, we got some RUO already from a few customer internationally. So -- but really, the -- from revenue planning and et cetera, we are planning from the beginning of the third quarter. Although it's really -- as I said, we are planning to probably get it going earlier.

Concerning the new xMAP technology, we are also planning to launch it in the beginning of the third quarter. It's in the end of the partner. We are in negotiation with them now how they are going to launch it, and we are waiting to their feedback.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [5]

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And then one more, Harriss. So you kind of pointed to mid-50s gross margin for the year kind of on par with where you were in '19. Could you help us just sort of think about some of the positive, negative dynamics that kind of contribute to that bridge for the year, be it in terms of mix and then other things you might be doing internally to try to lift profitability or productivity on the gross margin line?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [6]

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Sure. So as our sample-to-answer portfolio grows, the margins there are improving. But currently, the margins on our sample-to-answer portfolio are slightly below the aggregate corporate reported gross margins. So we see improvement, but those revenues are becoming a larger percentage of total revenue, so you end up with a rough push. Then we have the obvious fluctuation in mix between the concentration of beads and royalties and systems and assays and everything else. And that obviously can provide a 1 or 2-point swing on a quarterly basis.

So what I'm recommending you do is consider the sort of the mid-50s and around that $55 million, give or take a point or 2 as we move throughout the year. And then as we move further into, obviously, 2021 and beyond, VERIGENE II becomes a bigger part. VERIGENE II, obviously, is going to have better margins than does VERIGENE I. As VERIGENE II becomes a much bigger component of total revenue, you would expect the margins to begin to drift upward towards what Homi talked about in our $0.5 billion scenario, and our plan 4, 5 years from now, we think we'll be back close to $60 million.

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Operator [7]

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Our next question comes from Tycho Peterson from JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [8]

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Just want to focus on the molecular business. Up 1%, even excluding LabCorp. Can you maybe just talk about some of the gives and takes in the quarter? And any notable impact? And how should we think about impact in the first quarter as well?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [9]

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So we added a significant number of customers over the course of the year. The utilization per customer increased during the year as well. What we really were faced with was the -- even though the current -- the prior year flu season was not much more than negligible, the current year was almost nonexistent, at least through the end of the fourth quarter. One thing you have to keep in mind is that Luminex, we're not like a classic frontline flu company. Our patients present an emergency room settings, acute care settings and respiratory distress. So we're delayed relative to other people that are frontline testers. So it takes a little longer for us to feel the effects of flu season. We hardly felt anything in the fourth quarter. Moving into the first quarter of this year, even we've -- it's ebbed and flowed, and we haven't seen a lot. We've seen a little bit, but not much.

So the primary contributor to that was a lighter-than-expected flu season in the current year relative to what last year was a light flu season, but nothing near as light as it was this year. And we lost a little bit of the nonautomated business along the way as it has been happening over the past several years as the world moves towards automated testing solutions. I hope that helps?

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [10]

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Yes, that does. And then for Homi, I appreciate your comments on corona. I guess, as we think about the revenue opportunity inside China versus out of China. Can you maybe talk to how you think about those 2 dynamics? It seems like there's a preference for local suppliers within China. And how much revenue contribution do you think you could get this year?

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Nachum Shamir, Luminex Corporation - CEO, President & Director [11]

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I don't know, Tycho. The moment, I'm really concentrating in having that product and trying to save people life, okay? I'm not even thinking what revenue it can create to us. We know that the requirement coming from the CDC -- CDC is a large customer for us across China. We can provide instruments like MAGPIX and the test itself, okay?

Now it's again, we know the next -- we were -- as I said, we were testing the NxTAG RPP, completed a very large clinical trial because we think, in any case, if you have coronavirus or not, it can increase in the future when we get approval in China in a couple of million dollars a year just having this test in the market. But we are waiting for their approval now. And we know, for sure, there is like what I've been told, like 50 or 60 Chinese company that providing coronavirus tests, but all of them are targeted. I mean 1 pathogens. What the CDC ask us is to do with the SARS and MERS and to provide them a broader test. I cannot really, at this stage, giving any indication. And obviously, we need to make sure what we are providing them is meet the requirement. Remind you also that we don't have a live test here. So that's why we have to send it to China. They have to test it, and they have to come back to us and giving us their feedback, how it's fitting so. I have to be careful about here.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [12]

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Understood. And then just one last one. I hate to ask again. I know Brandon asked about new products, but I didn't hear a number from you in terms of what you're actually expecting from SENSIPLEX, the new Guava system in VERIGENE II in terms of contributions this year? Can you help us just think about how meaningful this could be?

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Nachum Shamir, Luminex Corporation - CEO, President & Director [13]

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Yes, I mean -- go ahead.

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [14]

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So yes, Tycho, what we indicated was that given the launch at midyear that VERIGENE II, given the time, validation time and such would have a nominal impact in the year, but it sets us up very well for good growth in 2021. So our core VERIGENE portfolio will grow as expected. The VERIGENE 2 portfolio will be a much bigger contributor in 2021. With respect to what's now called INTELLIFLEX with a midyear launch, as Homi mentioned, the system is already in partners' hands. They're validating the backwards compatibility and some of the other features and with a midyear launch of that, then the replacement cycle will start, and we estimate, again, in the back half of the year. One of the -- it's one of the reasons that our current year projections are a little heavier in the back half than the front half is that there's a modest contribution there of SENSIPLEX. We haven't quantified it in dollars, but there will be a contribution. The expectation would be that total placement figures would drift upwards relative to where they are in the first half.

And then the third new project, the Guava next-gen was primarily a software update, easy-to-use, a bunch of easier-to-use features. We think that will help us further establish ourselves as a player in the mid-level flow cytometry business. But again, the contribution there won't be something that's overly material but it solidifies our position in the marketplace.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [15]

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Yes. But the VERIGENE II is going to give us basically a fully automated system, not semi as we have now. We put us as far as competitor, and we're feeling confident that we'll be in a growth of 25%. Can it be higher? Maybe, depend. I think the first panel that we get approval from or we're expecting to get approval from the FDA, the GI is very unique. All of them, it will be a flex pricing, which is a huge opportunity to us in the space here. So I think we'll gain market share. And we can grow it, hopefully, even faster than that, but at the moment, we estimate it 25%. Let's get it rolling, and then we'll see how to adjust it later on in the year.

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Operator [16]

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(Operator Instructions) I see no questions in the queue at this time. I would like to turn the call back over to the President and CEO, Homi Shamir, for closing remarks.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [17]

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Thank you, operator, and thank you, everyone, for your attendance on our earnings call. We look forward to seeing you in person in the very near future. Thank you.

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Operator [18]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.