Luminex Corporation (LMNX) Q3 Earnings Conference Call Transcript

Luminex Corporation (LMNX)
Q3 2018 Earnings Conference Call
Nov. 5, 2018, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and welcome to Luminex Corporation's Third Quarter 2018 Earnings Conference Call. My name is Sonia and I'll be your coordinator for today. Today's call is being recorded. At this time all participants are in a listen-only mode. Following the prepared remarks, there will be a question and answer session. If you would like to participate in this portion of the call, please press * followed by 1 at the time during the conference. If assistance is needed at any time during the call, please press * followed by 0 and a coordinator will be happy to assist you. I would now like to turn the call over to Harriss Currie, Senior Vice President and Chief Financial Officer for our opening remarks. Please proceed.

Harriss Currie -- Senior Vice President and Chief Financial Officer

Good afternoon and welcome to Luminex Corporation's conference call to discuss our Third Quarter 2018 Financial and Operational Results. On the call with me today is Homi Shamir, President and Chief Executive Officer. We'll be following our standard agenda. Homi will review our corporate highlights. I'll review the financial performance and after that we'll open the call for your questions.

As a reminder, today's conference call is being recorded and a replay will be available for six months on the Investor Relations section of our website.

Certain statements made during the course of today's call may not 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 protections provided by Section 21E of the Securities Exchange Act for such statements. These forward-looking statements speak only as of the day 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 our Form 10K for the year ended December 31 and our quarterly reports on Form 10Q, 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 on 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 will now turn the call over to our President and CEO, Homi Shamir.

Homi Shamir -- President and Chief Executive Officer

Thank you, Harriss. Good afternoon and welcome to our Third Quarter 2018 Earnings Call. I would like to cover three topics in my remarks today. First, the health of our businesses post the LabCorp transition. Second, our recent announcement that we have signed the definitive agreement to portray the flow cytometry asset of MilliporeSigma. And third, some broad-based expectations about our future growth and direction.

Before we get into those topics, I would like to say that we continue to be very pleased with the overall performance of our diversified businesses. However, for the first time under my leadership, we fell just short of our revenue guidance in Q3. This is mainly due to the fact that several Millipore diagnostic order that we had been expected to receive in Q3 were actually received just two days after the quarter end. Had they been received as planned, third quarter revenue would have been in the middle of the range of the expectation that we have previously communicated. With respect to our overall businesses, third quarter revenue was down by about 2%, but when we adjust for the LabCorp departure, revenues grew by 7%. This growth was driven by several factors. Our LTG revenue stream has returned to growth mode as expected, growing by 7% quarter-over-quarter. This was driven by more than 10% growth in both consumable and royalties. Our MDX franchise revenue declined by 10%, but when adjusting for the LabCorp departure, it actually grew by 6%. Sample to answer SA revenue grew by 20% for the quarter and we have contracted an additional 81 systems during the quarter.

As a reminder, a contracted system is usage requirement for three or more years. Utilization of both ARIES and VERIGENE stem per customer increased nicely at 28% and 7%, respectively. At the end of the quarter, we had about 560 active customer and an increase year-over-year of almost 35%. Another exciting development this quarter was a signing of a definitive agreement to acquire the flow cytometry asset of MilliporeSigma. This acquisition of first in life science research space and probably not our last will provide an opportunity for us to sell directly to customers who adopted our XMP technology. We believe that their ability portrays 12:16 additional analytical tool that fit within existing customer workflow from a main that they have trusted for so long will increase their confidence in the Luminex name for production and delivery of state of the art products.

As we mentioned in the call announcing the acquisition, we will accomplish a number of strategic objectives with this transaction. We will diversify our product offering. We will acquire product in attractive growth markets. We will add strong new product development pipeline. And finally and probably most importantly, we will be bringing into Luminex quality people and experience management team.

As an innovator in flow technology, since our inception more than two decades ago, the opportunity to expand our footprint within the flow space is both compelling and exciting. We believe that this acquisition could add between $40 and $50 million of revenue to our top line next year and be accretive.

Finally, I would like to briefly discuss my thoughts on growth as we head toward the end of 2018 and begin 2019. Overall, we are on track to deliver approximately 5% growth in our LTG with a system placement in 2018 exceeding those in 2017. And consumable and royalty are expected to grow just above the market growth rate for the year. We expect our MDX revenue, as well, to be down slightly as a result of the Labco departure, but up in the double-digit when adjusted for the departure of the new swab products 14:19 for approximately $20 million. Sample to answer same sales are expected to finish up almost 40% for the year with approximately 250 new systems contracted during the year, solidifying the foundation for both recurring revenue and growth. As a matter of fact, we anticipate that revenue from our sample to answer portfolio in the fourth quarter will exceed $80 million, up from approximately $30 million in the fourth quarter last year. We remain on track to meet our targeted run rate of $100 million by the end of 2019. And as we have mentioned, the addition of the flow cytometry portfolio of MilliproSigma should add between $40 and $50 million to the top line next year.

We will talk about specific 2019 assumptions and guidance when we announce our 2018 year's end result. Now Harriss will review our financial results in more details.

Harriss Currie -- Senior Vice President and Chief Financial Officer

Thanks, Homi. As Homi mentioned, we had another good quarter with consolidated third quarter revenues absent the effects of the LabCorp departure. Consolidated revenue was 72.4 million, down 2% for the quarter and up 7% when we exclude LabCorp. And for the year-to-date period, revenue was up 3%, or 5% when we exclude LabCorp. Our LTG revenue stream was $36 million for the quarter, up 7% compared to the prior year quarter, driven by double-digit growth both in consumable and royalty revenue. For reference, consumable revenue was up 11% versus the prior year quarter and royalty revenue was up 10% versus the prior year quarter.

Our monitor 16:23 diagnostic revenue stream was $35.7 million for the quarter, down 10%, primarily driven by the LabCorp departure. Excluding LabCorp, this revenue stream was up 6% for the quarter with the performance driven by the continued success of our sample to answer franchise, which was up 15% and 31% for the quarter and year-to-date period, respectively. For our sample to answer products, both the number of active customers and the utilization per customer has continue to increase each quarter. For the third quarter, the annual utilization rate per customer for our VERIGENE products increased to 104,000, up 7% from the prior year quarter. And for our ARIES product line, average annual utilization was 55,000, up 28%.

Turning to our revenue line items, during the third quarter, we sold or placed 284 multiplex systems, which do not include ARIES and VERIGENE system placements, above the high end of our communicated range of between 225 and 275 per quarter. Included in system revenue are 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. Consumable revenue growth was 9% for the quarter, driven primarily by higher bulk purchases by a large HLA partner compared to the prior year quarter. Royalty revenue grew 10% over the prior year, reflecting an increase in royalty minimums, audit findings, and other adjustments. End-user sales reported by our partners and recognized in conjunction with audit findings for the quarter were up 14% and 9% year-to-date. Consistent with our molecular diagnostics revenue stream, assay revenues were down 11% for the quarter, primarily driven by the reduction in LabCorp. Excluding this impact, assay revenue was up 6% for the quarter with a 20% increase in our automated assay products.

As we have communicated previously, LabCorp has confirmed that their last order for their proprietary woman's health panel, the foundation of their woman's health portfolio, was placed in the second quarter after meeting their contractual minimums. Orders for other ancillary products have also declined significantly and currently are expected to continue through the end of 2018 with a de minimis contribution in 2019.

Now turning to the income statement, we posted gross margins of 61% for the quarter, down 1 percentage point from the third quarter of 2017. This decline is primarily attributable to the reduction in LabCorp women's health products, as these assays typically carry a higher gross margin. We continue to focus on improvement of our sample to answer margins through both volume increases and cost efficiency. We also continue to control our operating expenses with declines in both SG&A and R&D in the quarter relative to our planned levels and up only modestly from the prior year. Operating profit declined $2.8 million for the quarter to $3.8 million, or 5%, operating margin primarily because of the aforementioned revenue decline and gross margin compression.

Our effective tax rate for the third quarter 2018 was 54% as compared to a benefit of 170% in the third quarter 2017. The 54% is impacted mainly by the Tax Act provision of foreign and tangible income and our mix of earnings in the US and Canada. This compares to the prior year, which included a discrete benefit item of $12.4 million related to the release of our Canadian valuation allowance. Our estimated full-year consolidated tax rate for 2018 is 25% to 30%, including the new 21% federal rate and GILTI, or Global and Tangible Low Taxed Income. But this full-year rate is expected to be approximately 23% to 25% after incorporating other discreet items related to Quarter 4, 2017 tax reform updates.

Our balance sheet remains strong with no debt and $147 million in cash and investments. We generated nearly $8 million of cash in the quarter even with the payment of dividends of $2.7 million. As communicated previously, our DSO increased relative to the prior year due to the adoption of the new revenue recognition standard, which required us to record an estimated receivable for unbilled royalties each quarter to more closely coincide with the timing of the end-user sale by the partner. Prior to the revenue recognition changes, we had no royalties in our accounts receivable, as they were recognized when paid. DSO was 54 days for Quarter 3. Excluding the royalty accrual, it would have been about 40 days, comparable with prior periods to the revenue recognition change.

Looking into the Fourth Quarter 2018, we currently expect fourth quarter revenues to be between $77 million and $79 million and expect to fall in the middle of our guidance range of $310 million to $316 million for the full year. Three factors have settled us in the midrange of our guidance. The first, a more modest flu season than expected, contributing to lower than planned respiratory-related revenue. Second, is the underperformance of our VERIGENE product in Japan as a result of reimbursement challenges. And three, slightly lower than expected consumable growth.

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

Homi Shamir -- President and Chief Executive Officer

Thanks, Harriss. In closing, Luminex continues to demonstrate the power of its diversified businesses. Our mobile 22:50 continues to drive meaningful growth and we remain committed to investing wisely in product pipeline development across our entire businesses. As I have said many times, continued growth will be achieved through both organic and inorganic means, while never losing focus on the bottom line. I believe the announcement of our deal with MilliporeSigma supports this.

In addition to our exciting and robust R&D pipeline, our balance sheet remains strong and we will continue to search for additional, attractive, and synergistic M&A opportunity to further accelerate our current organic growth projection.

This ends our formal comments. Operator, please open the line for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press * then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated.

Our first question comes from Dan Arias of Citigroup. Your line is now open

Dan Arias -- Citigroup -- Analyst

Good afternoon, guys. Thanks. I wanted to start, if I could, on -- hey, Harris -- pull-through rate for the VERIGENE, I believe, is 104,000, which is up quite a bit from a few quarters ago, but down a touch from last quarter, which I think was a pretty light respiratory quarter. So just wondering how you think we should model pull-through for the next coming quarters, there? Does it pick back up with the respiratory season or is there some dynamic that would keep that from happening?

Harriss Currie -- Senior Vice President and Chief Financial Officer

Well, as you know, we're -- not in the midst -- but we're beginning a rather light respiratory season. So any pickup you might see relative to respiratory season on a per customer basis, it actually year-over-year will be a little lighter this year than it was last year because of the extent of the flu season. I recognize the flu season last year really didn't pick up until the January, February, March months, but it was a lot heavier then than it is right now. Now, I don't know what's going to happen over the next couple months, but to be honest, my expectation would be that it would be flattish relative to the prior year number of customers -- active customers that we've added has increased. But because we measure this on an average per customer, I think the likelihood is that it's flat or modestly down a little bit in the fourth quarter. Hope that helps.

Dan Arias -- Citigroup -- Analyst

Yep, it does. Okay. And then on Millipore, I know you guys want to talk about assumptions there when you eyed the 2019, but I just want to go back to the outlook there, if I could. You said on the call a few weeks ago that the acquired asset sales were 40 million Euro, which is about 45 million USD and that the outlook of next year is 40 to 50 USD. So just wondering if you can clarify what the growth expectations are that you have in 2019, there, either dollar-wise or percentage-wise?

Homi Shamir -- President and Chief Executive Officer

Again, then, it's Homi. It's a good question because one of the things we would like is we would like to understand better the portfolio when we get it into a range. And we have to remember one thing, and that 40 or 41 million Euro that we're expecting to do this year, there is about $3 million that is not going to recur. So it's actually taking it from 37 to whatever we are thinking. Also, I would like to make sure that within the portfolio, there is no items that maybe we as Luminex don't want to carry the poor block 26:31 to our customer. I can tell you that two-thirds of the business which is the ARIES, and it's basically the imaging flow cytometer is growing very nicely, growing in double-digit numbers. So we need to really spend more time and understand the Guava and which one in the product line on the Guava, especially on the low-end, the mules, it makes sense to us to continue with that.

Also, they are launching a new product and revamping the Guava product line. So we need a little bit more time to understand it and that's where we are trying to guide the run between the 40 to the 50. But as I said, two-thirds of the business is growing double-digit, which is the imaging business.

Dan Arias -- Citigroup -- Analyst

Okay, I appreciate that. And maybe if I could just sneak one more in, Harriss, the SG&A decline versus planned, is there anything there that was, sort of, timing related and that will have the number up again in 4Q, or are you just sort of managing tighter than you thought you would earlier in the year?

Harriss Currie -- Senior Vice President and Chief Financial Officer

Well, we're managing pretty tight as a result of the departure of the higher margin LabCorp revenues. So we're squeezing it any place that we can to protect profitability to the extent we can. So the fact that we're a little less than planned is important. I think what's more important is, relative year-over-year, we're pretty much flat. So that on a bigger revenue base, year-over-year, even including the departure of LabCorp is, I think, what is most important to pay attention to.

Dan Arias -- Citigroup -- Analyst

Okay, thanks a bunch.

Harriss Currie -- Senior Vice President and Chief Financial Officer

You bet.

Operator

Thank you. Our next question comes from Sun G Nom of VTIG. Your line is now open.

Sun G Nom -- VTIG -- Analyst

Hi, thanks for taking the question. Maybe a couple of clarifications for Harriss, and then one for Homi. Harriss, could you clarify in terms of the LabCorp business that's remaining, you talked about that being de minimis next year. Is that also pretty small this year? Are you further managing that away next year? Is that what you were referring to?

Harriss Currie -- Senior Vice President and Chief Financial Officer

So let me tell you how to think about it, Sun G, is that in 2017, LabCorp did about $61 million of revenue. In the current year, the expectation is that total LabCorp contribution to Luminex is going to decline by $15 to $20 million. It's going to drop by a lot. In the next year, there's going to be an additional loss of about $35 million, or so, next year, leaving the $10 million or so of CF only revenue in 2019 with a de minimis contribution in those ancillary products that we were talking about. So the overall LabCorp contribution itself, you know, $10 million on $300+ million itself is not de minimis, but the ancillary products that will be purchased will definitely be de minimis as we're left with LabCorp in 2019 or really nothing but the CF products.

Sun G Nom -- VTIG -- Analyst

Okay, that makes sense. And then for reporting purposes next year for the flow cytometry business, are you going to be breaking that out separately or will it be incorporated into the LTG business?

Harriss Currie -- Senior Vice President and Chief Financial Officer

Most likely, the flow cytometry business will be its separate revenue line items, but it won't be a reportable segment. It'll be integrated significantly in order to avoid segment reporting as we use a lot of the back office functions and others to support the business. Certainly, it'll have its own sales force generating revenue. Likely, a lot of the field service folks will be devoted to those instruments. But besides that, we won't provide visibility all the way down to what's like a business unit level. So I would tell you that revenue will certainly be carved out separately.

Sun G Nom -- VTIG -- Analyst

Okay, and then, Homi, with the recent Palmetto decision, could you talk about what percentage of recent joining kennels might be exposed to that and what you're hearing from your end market, your customers, in terms of how they're preparing for that? Thank you.

Homi Shamir -- President and Chief Executive Officer

As I keep saying, I think the Palmetto decision can be an opportunity to Luminex, mainly because of our flex pricing strategy in our current pricing that we are selling. I think, basically, the upset there was, I can say, most of our recommendation into their decision, giving us competitive edge. And obviously, I think we will be able to gain here compared to our competitors, who don't have flex pricing or are selling double at the cost enough. So I think this will demonstrate that we've been part of that entity. Obviously, if you look at the number system, the new contracted system that we placed this quarter, 81, and we are targeting or focusing to be close to 250 systems, our customers adopting our flex pricing and behind that are adopting our offering for them. So we feel, and again, that Palmetto is going to help us in achieving larger market share here.

Sun G Nom -- VTIG -- Analyst

Great, thank you.

Operator

Thank you. Our next question comes from Brian Weinstein of William Blair. Your line is now open.

Brian Weinstein -- William Blair -- Analyst

Hey, guys. Thanks for taking the questions. On the sample to answer business, I just want to make sure that I understand what's going on. So I think we started the year with $70 million as the target. You brought that down to $64 to $66 and it seems like we're going to be, like, $62.5 if I take the $18 million that you talked about there. So I just want to have an understanding of, as we look back at the year on sample to answer, where were we off from the original expectations? And then as a follow-up, the $2 million, roughly, that fell from Q3 to Q4, you said molecular, but could you be more specific about where that fell? Was that also in the sample to answer side?

Homi Shamir -- President and Chief Executive Officer

I'm not sure where you got the $70 million. I more recall around the $65. And again, I think the slight reduction here is our anticipation, as Harriss said earlier, that is going to be below moderate respiratory season. So we are a little bit cautious there. If the moderate season -- let's assume we will have a stronger season, then we will be on track, our modeling showing that would be around the $62 to $63.5 with the sample to answer taken. Lastly, leave a few dollar in. And also, as Harriss mentioned, we had in Japan, we thought we actually we will be achieving a couple of hundred thousand dollar more than what we achieve here due to reimbursement investment is not the best. We say it's in the block culture. And they have some difficulty growing the business there. So that's really where it was the adjustment. But we are taking a very precautious, I think, into the respiratory season on the Q4. But I don't know where you took the $70 million line.

Brian Weinstein -- William Blair -- Analyst

Okay, we'll go back and check the comments on that. As far as some of the pipeline stuff goes, can you give us an update on the Sensiplex product and when you think that that may start to contribute and any updated thoughts on that?

Homi Shamir -- President and Chief Executive Officer

I don't think it will contribute any significant revenue next year, and we talked about that in the guidance. But we are on track to invite our major partner here to Luminex in Q2 to share with them the system, let them start running it on their kits and let's see how that perform. As you actually know, the Sensiplex should be a fully backward compatible, so we would like them to do and run it and confirm it. And then we'll start seeing when they want to introduce it to the market. But it can contribute here and there, but nothing significant during 2019 in our assumption. And when we talked about that in AICC, we all the time talk about contribution in 2020.

Brian Weinstein -- William Blair -- Analyst

Thank you, guys.

Operator

Thank you. Our next question comes from Dan Leonard of Deutsche Bank. Your line is now open.

Dan Leonard -- Deutsche Bank -- Analyst

Actually, Brian asked my question, so I'm all set. Thank you.

Operator

Thank you. Our next question comes from Tycho Peterson of JP Morgan. Your line is now open.

Tycho Peterson -- JP Morgan -- Analyst

Hey, thanks. I want to, maybe, go back to the Palmetto issue for a minute. Can you comment on their LCD on GI? I think, maybe, your comments you've made in the past have been really around RP, but how do we think about the latest LCD on GI panel?

Harriss Currie -- Senior Vice President and Chief Financial Officer

Sure, Tycho. So as you know, Palmetto finalized their guidance around GI, as well. There's a limit to 5 bacterial targets for individuals that are otherwise healthy. That coverage expands a little bit for patients suspected of having C. diff, and then obviously, there's full panel coverage for immunocompromised patients, like transplant patients and others that may have some issues. For GI, flex testing, to be honest, is really ideal for addressing all types of patients it covers and we're going to be the only company in this market with a flexible, cost-effective solution for doing GI with our VERIGENE to GI. So it's going to be priced right, it's going to have the right coverage, and a significant number of the affected patients, the offending constituent can oftentimes be found in that base panel.

Now, the one thing to consider is that Palmetto has adopted this now, but there are other macs that are expected to follow. CGS has already adopted similar guidance, Meridian and WPS are expected to adopt the same guidance in the coming months. And then private payers are likely going to issue policy to explicitly cover these panels in the appropriate way.

So we think, overall, that it was actually more positive for us than we anticipate. We acknowledge that it only impacts outpatient testing today, but ultimately, we believe the hospitals are going to want consistent pricing and consistent billing no matter where the patient resides within the hospital. You know, the way they pay for a test. And so we think overall, it should end up being a value driver for us because one size fits all panels are becoming more difficult to sell these days. And so we believe that our alternative offers a really good solution for these patients and we're also in the process of developing some studies on clinical utility to demonstrate, specifically, the impact of the flex testing model on treatment decisions. So I hope that answers your question.

Tycho Peterson -- JP Morgan -- Analyst

Yeah, maybe just a follow-up, then. How do we think about utilization as more migrates to flex and therefore narrower panels? Obviously, there's the share gain story on the other side, but how do we think about utilization?

Homi Shamir -- President and Chief Executive Officer

We made a survey with our customers and 93% of our customers bought our system because of the flex. So obviously, maybe it's a little bit biased, but all of them bought because of the feature of the flex. Obviously, we don't have the flex to offer them now because we are in clinical, but the rationality of them is buying into the flex model. So maybe that's answer the question to you.

Harriss Currie -- Senior Vice President and Chief Financial Officer

Yeah, so there's two components to that, what Homi just said, Tycho. The first is that a significant number of the customers are buying it because of the flex testing, and those that are left are buying it because the pricing is favorable. It's economic value. So we're providing 100% of the customers' effective economic value for those that just want the base or for those that want to have the ability to flex upward and only pay for what they need.

Homi Shamir -- President and Chief Executive Officer

And obviously, you see from the number that we contracted this quarter, obviously, they believe in the flex, they know about the reimbursement challenges of Palmetto, but they contracted. And as we said earlier, normally, a contract is for 3 and 5 years. So they believe that that's the trend that's going to influence the market.

Tycho Peterson -- JP Morgan -- Analyst

Okay, and then just one follow-up shifting over to the flow business. I think two of the opportunities that you've talked about are wanting to go after the mid-tier part of the market and then, two, to obviously, increase the recurring revenue mix in the consumable stream. So can you maybe just touch on those two initiatives, specifically and what strategy is there?

Harriss Currie -- Senior Vice President and Chief Financial Officer

So, the primary focus of our flow cytometer business is going to be expanding the imaging base, the proprietary product to which we own. There's still, obviously, growth opportunities in the lower level flow cytometry systems. And effectively, it's the same approach that we've used with molecular diagnostics, which is the portfolio approach. Right? We can go to the low cost guy all the way up to the high cost guy and everybody in between and offer them what they need. So with respect to growing the business, the idea is to focus on imaging and the applications to which imaging provides.

Obviously -- not obviously, because you haven't seen the data we have -- the recurring revenue, what I'll call flow cytometry assay revenue, is very low today. Now, our percentage of recurring revenue relative to what it is in the market is significantly lower and we think there's opportunity there to grow that, as well, through the additional development of products that can be run on our flow cytometers, most likely focused toward that imaging portion of the product line because it's proprietary. But there is opportunity there because it's almost insignificant today in the revenue mix.

Tycho Peterson -- JP Morgan -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from Brandon Couillard of Jefferies. Your line is now open.

Brandon Couillard -- Jefferies -- Analyst

Thanks, good afternoon. Harriss, just a clarification. I think you said that LabCorp next year, CF related revenues would be about $10 million for the whole 2019. Did I hear that right? I think that business, I understood, was tracking at about $5 million a quarter. Does that suggest some CF related declines built in to that number for next year?

Harriss Currie -- Senior Vice President and Chief Financial Officer

It was tracking between $12 and $15 million a year.

Homi Shamir -- President and Chief Executive Officer

From LabCorp, but we have additional fixed base that we generate from other customer, OK. But LabCorp business is $10 to $12 million. We have it contracted to end of 2 '19. We believe it might stay with us further beyond this period. But we have additional customer. In CF, if you recall, there was, in the past, some illogic customer, when they stay out of the CF, we got some customer from them.

Harriss Currie -- Senior Vice President and Chief Financial Officer

So let me give you an example, Brandon. And I don't want to be specific, here, but in the quarter, so LabCorp, based on the numbers you're talking about, orders between $2.5 to $3 million of CF a quarter, our total CF revenue in the third quarter was more than twice that. So we had a lot of other CF revenue besides LabCorp in our mix.

Brandon Couillard -- Jefferies -- Analyst

Got you, that's helpful. And then one more. Given that the LabCorp revenue hit will likely be higher in the fourth quarter relative to the third, what should we be penciling in, in terms of the gross margin, Harriss, for the fourth quarter?

Homi Shamir -- President and Chief Executive Officer

No, LabCorp revenue in the fourth quarter are going to be less.

Harriss Currie -- Senior Vice President and Chief Financial Officer

That's what he's asking about.

Homi Shamir -- President and Chief Executive Officer

Yes, yes.

Harriss Currie -- Senior Vice President and Chief Financial Officer

So there likely could be some additional margin compression in the fourth quarter, however, because the volumes of our overall molecular diagnostic revenue, both in the non-automated and the automated for ARIES for the V-based technology and for VERIGENE, for that matter, will likely increase in the quarter with the onset of a flu season, modest nonetheless, and we're expected to have continuing growth in royalties in the fourth quarter, good bead quarter, so those are very high-margin items that offset some of that loss. So I wouldn't expect gross margins to constrict more than a point or two in the fourth quarter.

Brandon Couillard -- Jefferies -- Analyst

Okay, thanks. And then one for Homi. Didn't hear much about the VERIGENE II development. Could you just share with us an update on where some of the timelines stand and whether or not you started the RVP trial at this point? Thank you.

Homi Shamir -- President and Chief Executive Officer

No, we continue with the GPP trial. It's continuing, and hopefully, we'll finish with the trial or the sample part of that very shortly. And we are planning to start somewhere in the beginning of December with the RP trial.

Brandon Couillard -- Jefferies -- Analyst

Very good. Thank you.

Operator

Thank you. And again, ladies and gentlemen, if you do have a question at this time, please press * then 1 on your touchtone telephone. Our next question comes from Daniel Mackick of Piper Jaffray. Your line is now open.

Bill Quirk -- Piper Jaffray -- Analyst

Hey, great. Thanks. It's actually Bill Quirk on. So a couple of questions then I want to go back to the Palmetto one, if I may. So first off, on Japan. Is this a new issue, or is it just that reimbursement is taking longer to get on the multiplex side? And then, Homi, you referenced a potential capital deployment in the form of acquisitions. And I'm just trying to get a better sense of should we think about these as being more tuck-in, somewhat more aligned with the core Luminex business or would you continue to look at new sources of revenue akin to what you did with Millipore? And then, again, I've got a follow-up. Thanks.

Homi Shamir -- President and Chief Executive Officer

Thanks, but, no, Japan is not new. Japan, we got about a year-and-a-half ago, reimbursement of that culture. And we've been walking that with Hitachi. We have just not been able to bring it to the level that we anticipate initially, mainly because the reinvestment itself is -- again, I don't want to get to all the point there -- but it's not a reimburse item compared to what the Japanese are used to. And it's taking time to take. We have 10 or 15 active customers. We thought by this time we would have more than that. And it's taking more time than we anticipated. And again, Hitachi was here this week, and we talked with them at length. But they claim that they need to apply again and try to increase their investment because, as you know, in Japan, they buy the capital equipment. It's different than what we are doing here, the [inaudible]. And when you put the capital equipment, it's everybody wants to make money, also, in Japan, and etc. It's really become a tough thing to find how to get the reimbursement in the right level. But again, it's not in the millions. It's affecting in the hundreds of thousand dollars, but again, that was included in some of our assumptions. So that's concerning the first question.

The second one, we continue, really, to seek after acquisition. I think, honestly, it was very successful. We believe the Millipore acquisition was also a very good acquisition for us, both from price and eventually from earning and how we position our self in this space. So we continue to look at things that can make us a more diversified company either in the molecular diagnostic, where we are operating, or in our traditional life science. So we don't have anything in particular that I can say to you we are going to do it tomorrow or the next couple of days, but we keep seeking and we keep looking. We have done a couple of licensing agreements earlier this year, and we continue to need some cash sometimes to those acquisition.

Bill Quirk -- Piper Jaffray -- Analyst

Okay, got it. Thank you. And then I just wanted to go back to Palmetto, and certainly appreciate your flex pricing and potential for some market share gained. Can you just elaborate on, from what you're assuming for pricing? And the reason I'm asking is because our due diligence does suggest that your competitors may be looking at a flex priced model, albeit maybe not that term, but certainly following that approach. And it strikes out that given the changes here, which I appreciate that are likely to spread into the commercial pay world, it seems fairly logical that we're going to see downward pressure overall. And again, I appreciate that you're on the lower end here, so maybe you see less contraction. But help, kind of, put that piece of it together for us. Thank you.

Harriss Currie -- Senior Vice President and Chief Financial Officer

So, based on the expected compression of reimbursement for panels like ours, which ranges from high 500s to low 600s to down into the 200s, the overall reimbursement, our base panel that we sell today is less than $100.00 relative to others that are in excess, if not well in excess of $100.00 for the products they offer. So when you think about top line price compression, in our case, especially with respiratory, since we already sell it in the flex manner and only charge patients for flexing upward, there would be no material effect on our revenues, other than growth as we place more assays to be sold under flex.

Certainly, in GI, there would be some modest exposure to starting at a lower level and flexing up in the event of [inaudible]. But the beauty with us is that our products were designed to accommodate that low base price, whether others were designed to accommodate, I don't know, you talk about 120, 130, all the way up to a couple hundred dollars. Our base price is about 60 bucks, and we make money at $60.00. So I don't know whether others, at $60.00 are going to make significant profit, if any.

Homi Shamir -- President and Chief Executive Officer

Now, one more thing to add to that, Bill, when you are looking at the overall revenue of our sample to answer coming from the VERIGENE, there's still substantial amount coming from blood culture. And we continue to grow in blood culture. It's a really good assay for us. And on top of that, we have respiratory and the GPP that will come up as a flex thing. As a matter of fact, in blood culture, also, if you can call it, we have flex pricing because we're selling the gram-positive, gram-negative, each of them separately. So, so far, it's working for us.

Bill Quirk -- Piper Jaffray -- Analyst

Got it. Thanks, guys.

Operator

Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Homi Shamir for any closing remarks.

Homi Shamir -- President and Chief Executive Officer

Thank you, Sonia. And thank you, everyone for your attendance on our earning call today. We look forward to seeing you in person in the very near future. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

Duration: 47 minutes

Call participants:

Harriss Currie -- Senior Vice President and Chief Financial Officer

Homi Shamir -- President and Chief Executive Officer

Dan Arias -- Citigroup -- Analyst

Sun G Nom -- VTIG -- Analyst

Brian Weinstein -- William Blair -- Analyst

Dan Leonard -- Deutsche Bank -- Analyst

Tycho Peterson -- JP Morgan -- Analyst

Brandon Couillard -- Jefferies -- Analyst

Bill Quirk -- Piper Jaffray -- Analyst

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