|Shares Out. (in M):||45||P/E||300||48|
|Market Cap (in $M):||900||P/FCF||30||25|
|Net Debt (in $M):||-38||EBIT||7||22|
Luminex is a well run biotechnology business with real revenues and real earnings that has faced a major loss of a customer that has temporarily depressed earnings. I do not think this issue is structural and the business is otherwise a good one, which is why i believe it to be a good investment candidate over the long term.
The share price has dropped from $ 34 per share to $ 20 per share in the last months, which in my opinion have reduced the risk of the several more legitimate concerns for the business around competition and margins.
1. Business Background.
Luminex is a biotechnology business that had its origins in the 2000s as a bioassay/diagnostics business. In fact the story is that company started with a discussion by the founders in a bar in Dallas based on the idea that you can do multiplex using a laser to measure beads for clinical diagnostics. They have since built upon this foundation to incorporate some other technologies including with signalling processing, imaging, and drug discovery.
Two of their core technologies are xMAP, which allows simultaneous analysis of many bioassays on a machine developed by the company, and MAGPIX, which allows them to use LED to analyze microbeeds i.e. using light and color for detection.
I will not write in detail about the technology, but much more detail can be found on their website:
The company has been improving operating cashflow and profitability for the last 10 years. I has been self-sufficient with good cash flows almost since being public company, so what is impressive is its ability to grow consistently and with good profitabilty even though it is a biotechnolgy company with significant investments in R&D.
The two main streams of revenue for Luminex has been
(a) Lincese fees
A couple years ago, Luminex developed the Luminex 100 system. The business model was licensing their technology to the likes of BioRad, Milipore, and OneLambda, who pushed their sales forces to get revenue. Luminex enabled their liscense partners to save time not doing 10 tests separetely, but enabling them to do it on an integrated test.
Our average the royalty fee has been about 8% of revenues. So for end-revenues of about $ 500 million, Luminex has royaltee fees in a year of just about $ 40 million. One in long term sales phase, there are approximately 7 years terms to these agreements with autorenewals and Luminex has auditing rights of royalties. For new agreements, there is a commercialization period of 4-years. There is also autorenewals, but Luminex usually sees their partners commercialize in that time frame. A non-refundable license fee, which is taken off royalty is often negotiated. R&D fees are put against this, but not a lot, so profitability is very high on this.
Scientifically, a lot of work Luminex does is finding relevant biomarkers – and then moving it onto their system whether its proteomic based or DNA based.
(b) Molecular diagnostic revenues
Besides licensing their technologies, Luminex has built out a very signficant own molecular diagnostic business based on their own platform and biomarker know-how. This accounts for about half the business now.
This is a solid business with razor razorblade economics and has been growing top line in the teens for several years now.
They are one of the leaders in the areas of allergy testing, infectious disease including respitory and GI, as well as several areas of molecular such as gene deletion, cystic fibrosis.
The basis for this business is that Luminex has its own platform which it places in diagnostic labs/clinics and which are focused on several areas of diagnostics. The instruments are provided without too high a profitablity, but the tests, which are consumables are sold for good margins, assuming utilization of their platform is good.
2. Loss of Labcorp as a Customer
Luminex provided Labcorb raw reagents to be used on another (non-Luminex) system. Labcorp used the Cobas system. Essentially what happened is that Labcorp had contracted Luminex for reagents to be used on one of their own co-developed systems, but then decided after a while that they were going to use someone else for those reagents. That Luminex was able to sell reagents to Labcorp even though it wasnt even for their own system speaks for Luminex' manufacturing capabilities.
It should be noted that this is not part of their own diagnostics business nor is it part of license fees business. As such, while it was very profitable business, and large enough to hurt, it shouldn't be seen as a core part of Luminex's business. From my understanding, there also isnt another comparable revenue stream that presents a future similar risk.
Financially, the loss of Labcorp had the effect of about $ 50 million in revenues lost vs. previously expected. About $ 15 million in 2018 and $ 30 million in 2019. This hit profitability especially hard because, those raw reagents had more than 70% gross margins, which is even higher than the group average.
Luminex has stated that they expect to replace this revenue from their other businesses, but as the gross margin is lower (around 50%), it wont completely make u for the lost profitability.
I find this a unique opportunity, as it is a fairly clear case of an actual one time effect/cost.
Luminex does face competition in their diagnostics business - amongst the competitor BioFire is the most significant one.
However, if you look at the areas where Luminex is focusing in terms of disease conditions as well as the underlying technology, they tend not to compete head on.
Also in some areas of newly developing diagnostic areas, having one of two competitiors actually helps to build the understanding of the market and in that sense is not necessarily negative.
Luminex has historically been a company that has a solid track record of growing their core business. Their technology which focuses on symptomatic testing rather than blanket testing is both more cost effective and should be easier to justify in terms of reimbursement as medical necessities compared to most of their peers.
Their higher gross and EBIT margins historically compared to their peers supports this. The company has no net debt and is profitable.
One time drop in revenues masks underlying growth in revenues and profitability of licensing and molecular diagnostic business.