August 21, 2001
Tales of the Tape
Luminex Strings Beads
Into Company Profits
By BETH M. MANTZ
Dow Jones Newswires
NEW YORK -- Luminex Corp. has a lot riding on a single string of beads.
Not the plastic baubles hawked at five-and-dime stores. Microscopic, colored beads that could prove invaluable in medical research offer a steady stream of revenue for Luminex.
Nearly 18 months old as a public company and a few quarters away from being profitable, Luminex has developed a fancy technology called Laboratory Multi-Analyte Profiling, or LabMAP, that uses these beads to perform hundreds of biologic and genomic tests at one time on a single lab specimen.
The speed, cost-effectiveness and adaptability of this technology has made some observers bullish about the Austin, Texas, company's prospects in competing with other biotechnology tool makers for the several billions of dollars spent on drug-discovery research each year.
Shares have been as high as $42 last August, and as low as $11.95 on April 17. Recently, they've been trading around $18, down with the rest of the biotechnology sector.
But what really separates Luminex from rivals is the promise the LabMAP holds out for use in clinical diagnostics, a market worth $20 billion.
"The beauty of the technology is that it can do 100 different tests at one time on a single sample at the cost of 1 to 3 cents, while competitors charge several hundreds of dollars to run one test on a drop of blood," said Sandy Villere, III, portfolio manager at St. Dennis J. Villere & Co., a New Orleans investment firm which manages $1.1 billion in assets and owns 2.5 million Luminex shares.
The LabMAP identifies and measures molecular reactions between blood or tissue samples with tiny beads called microspheres, which are color-coded for each test. A scientist combines the polystyrene beads with the biologic specimen and pours the mixture into Luminex's system where internal lasers will light up the beads' colors when a reaction occurs. The instrument then reads these reactions.
Using the LabMAP machine, each of which costs about $37,500, a scientist could simultaneously run up to 100 different types of experiments, be it gene expression, genetic diversity, drug markers, protein, blood chemistry, allergies, or HIV viral load levels. Other instruments, like those made by Affymetrix Inc. that can cost up to $200,000, are only able to conduct one or two such tests at a time.
Luminex makes money by selling its LabMAP system directly to pharmaceutical and biotechnology companies for conducting drug discovery research or gene analysis. After reaping the one-time sale of the instrument, the company receives a recurring stream of revenue from the sale of the beads. The company's largest account is GlaxoSmithKline PLC, which is using the technology for single nucleotide polymorphism analysis.
"What we love about [Luminex's] business model is it is like a Gillette razor blade. Once you buy the machinery, you need to keep on buying replacement blades," said Mr. Villere. "Once a customer buys the LabMAP, they need to continue buying the beads, which achieve 95% margins. This is an extremely profitable business."
The tool maker also makes money through its strategic alliances. It teams up with partners who use the beads to develop clinical and molecular diagnostics, which run on the LabMAP. The partner is entirely responsible for developing and selling the test kits and replaceable beads. Luminex receives royalties, amounting to 6% to 10% of kit sales.
As of July 31, Luminex had aligned itself with 30 partners, including Bio-Rad Labs Inc., Qiagen NV, Orchid BioSciences Inc., and Dynacare Inc.; 18 of these partners are clinical diagnostic test makers. It hopes to sign up another four to six partners by the end of the year, said Chief Financial Officer Frank Reeves. Tweaking The System
Because the basic LabMAP system already has been developed and isn't expected to be revamped any time soon, Luminex isn't forced to plow significant investments into research and development, except for tweaking the system to include improved optics or better fluorescent dyes, said analysts.
Seeking out the clinical diagnostic industry is an attractive business strategy, according to First Union Securities Inc. analyst Anna Kazanchyan, M.D.
The biotech tool makers, including Luminex, Affymetrix, Third Wave Technologies Inc., and Sequenom Inc., compete for a piece of $4 billion to $6 billion spent on drug-discovery or genomic research. Luminex is drumming up business, but drug discovery comprises a small portion of Luminex's overall market opportunity, said Dr. Kazanchyan.
Analysts think Luminex's LabMAP, unlike other "for-research-only" technologies, is ideally suited for the $20 billion clinical diagnostics market. Laboratories perform hundreds of medical experiments on biologic specimens of blood, urine and tissue; each test often requires its own measuring instrument and technician.
"While Luminex is not developing a new test per se, it is enabling the existing diagnostic to be conducted in a faster, cheaper and more accurate fashion," said Dr. Kazanchyan. Instead of 50 tests each requiring 50 separate instruments and 50 lab technicians, a laboratory can quickly run a single LabMAP-based diagnostic kit, she added.
This labor- and time-saving appeal attracted Inova Diagnostics, a privately-held, San Diego-based maker of blood test kits for diagnosing autoimmune diseases, to team up with Luminex, said Brys Myers, Inova's vice president of sales and marketing. Earlier this month, the Food and Drug Administration approved Inova's Quanta Plex ENA Profile 4, which uses the LabMAP to detect antibodies to certain autoimmune diseases.
"We at Inova are scientists and recognize the need to do panels [of tests] in a short period of time," said Mr. Myers, adding that Inova plans to apply the LabMAP to its other diagnostic kits.
In clinical trials testing the Quanta, the standard method for detecting these antibodies in several hundreds of patients took about three weeks while the LabMAP-based kit arrived at the same results after two days, said Mr. Myers.
Luminex's full realization of its business strategy into clinical diagnostics will take time, but supporters are confident about the potential. They direct naysayers' attention to the end of the year when 19 partners are expected to have launched molecular and clinical diagnostic tests based on the LabMAP.
"If we go forward a year, the pharmaceutical industry will still remain our main customers," said Michael Spain, Luminex's vice president of clinical affairs. "It will take awhile to build a good menu of tests for the medical world. So probably in two years, the medical diagnostic world will begin to dominate our revenues."
Luminex currently derives 79% of its revenue from instrument sales, 3% from bead sales and 18% from royalties. However, the more partnerships negotiated, the more assays developed, the more beads sold and royalties collected.
In 2002, Mr. Villere projects instrument sales to comprise 55% of revenue; bead sales, 6%; and royalties, 39%; pushing gross margins out to 62% from his expectation of 47% this year. He and Dr. Kazanchyan estimate earnings at 25 cents a share in 2002, almost doubling Thomson Financial/First Call's analyst consensus of 13 cents.
Mr. Reeves, however, wouldn't forecast the financial outlook for 2002 and beyond. However, he said he estimates a loss between 58 cents and 62 cents a share on revenue between $25 million and $30 million this year. He expects Luminex will reach profitability in the second quarter of next year.
Free of any long-term debts or credit-line worries, Luminex has about $61 million in cash and short-term investments, sufficient to fund operations to profitability without a need to return to the capital markets for financing, said Mr. Reeves. |
