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Luminex Corp (DE)  (NASDAQ:LMNX)
Q4 2018 Earnings Conference Call
Feb. 04, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Luminex Corporation's Fourth Quarter and Full-Year 2018 Earning 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. (Operator Instructions) I would now like to turn the call over to Harriss Currie, Senior Vice President and Chief Financial Officer, for opening remarks. Please proceed.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Good afternoon and welcome to Luminex Corporation's conference call to discuss our fourth quarter 2018 and full year financial and operational results. On our call today with me is Homi Shamir, President and Chief Executive Officer. We'll be following our standard standard agenda, Homi will review our corporate highlights, I'll review the financial performance and after that we will 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 maybe 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 date 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 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 directly comparable GAAP financial measures will be included in our earnings release, which is available on our website in accordance with Regulation G.

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

Nachum "Homi" Shamir -- President and Chief Executive Officer

Thank you, Harriss. Good afternoon and welcome to our fourth quarter and full-year 2018 earnings call. We are extremely pleased with the overall performance of our diversified businesses. We achieved the top end of our full year revenue guidance and put some of our cash to use to obtain high-value asset that diversified our businesses even further.

Our 2018 financial performance was strong. Revenue was up by 3% but when we adjust for the losses of approximately $30 (ph) million of LabCorp revenue, our total revenue grew by almost double-digit. This solid growth was driven by several factors. Our LTG revenue stream grew by 5% for the full year and extremely impressive 23% for the fourth quarter. This success was driven by royalty growth in excess of 10% for the full year with double-digit growth in both royalties and consumable in the fourth quarter.

None of that was a surprise as we anticipate substantial quarter-over-quarter consumable growth as our partner end-user sales continue to rise as they secure the target market with our unique technology. In fact, end-user sales reported by our partners totaled approximately $532 million. This is one of the primary advantages of our partnership model, allowing market leaders to carry our products to their customers.

Our MDx franchise revenue was up by 1% overall, but when adjusted for the LabCorp departure of approximately $30 million, it actually grew by 13%. The real highlights continues to come from we sell our sample-to-answer revenue stream in which assay revenue grew by 40% for the quarter and 36% for the full year. We continue expanding our sample-to-answer base with growth in contracted system of approximately 270 units during the year. As a reminder, a contracted system is a contractual minimum use requirements usually for three or more years.

Utilization of both our ARIES and VERIGENE system per customer increased to 53,000 and 109,000, respectively, for the full year. At the end of the year, we had about 600 active sample-to-answer customer, an increase year-over-year of 33%. We begin 2019 with a robust R&D pipeline. We made progress with both the VERIGENE II system in the first two assay, the enteric panel and the respiratory panel. The enteric panel clinical trial is almost complete and our respiratory panel clinical trial was started at the beginning of this year.

Additionally, we are wrapping our clinical trail form MRCA on our ARIES system. Our updated xMAP system SENSIPLEX is approaching partner testing and should be ready for commercial launch by early 2020. It is important to note that our partners will still need to validate the backwards capability of previously developed kits and plan the launches of the new kit that will be able to take advantages of the increased sensitivity of these next-generation xMAP system. And we are very excited about our longer-term product pipeline with both additional assay offerings and system enhancements coming in MDx, LTG and flow cytometry.

Another exciting development that happened on the last day of the year was the closing of the acquisition of the flow cytometry asset of MilliporeSigma. This acquisition, our first in the life science research space, but probably not our last one, will provide an opportunity for us to sell directly to customer who have adopted our xMAP technology, further diversifying our business with complementary products.

With this acquisition, we will be able to take high quality and differentiated flow cytometry with established brand recognition to steadily growing marketplace. One of our primary goals is to develop a biotic (ph) content that can be both support the placement of our imaging base product while involving the flow cytometry revenue stream to generate a much larger recurring component. We believe that this acquisition should add approximately $45 million of revenue to our top line in 2019 and be accretive by year-end.

Finally, I would like to briefly discuss my expectation for 2019. 2019 will be a transitional year for Luminex that lays the groundwork for continued double-digit growth in future years. In 2019, we will adjust the extent of the intense revenue concentration we have had with LabCorp in previously years, execute on both the integration and growth of our recent flow cytometry addition, prepare and launch of VERIGENE II product and make progress toward the launch of SENSIPLEX in 2020. Accomplishing those in both in transition state will give us a solid foundation for growth in 2020 and beyond.

Now, Harriss will review our financial results in more detail.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Thanks, Homi. As Homi mentioned, we had a strong year and strong fourth quarter revenues, absent the effects of the LabCorp departure. Consolidated revenue for the fourth quarter was $81.1 million, up 4% for the quarter and up 22%, excluding LabCorp. For the year, revenue was up 3% or 9%, excluding LabCorp.

Our LTG revenue stream was $41.5 million for the quarter and $149 million for the year, up 23% and 5% for the quarter and year, respectively, driven by double-digit growth in royalty revenue for both the quarter and year, in addition to strong consumable growth with double-digit increases in the quarter. Our molecular diagnostic revenue stream was approximately $39 million for the quarter and $164 million for the year, down 11% for the quarter and up 1% for the year, primarily driven by the LabCorp departure. Excluding LabCorp, this revenue stream was up 21% for the quarter and 13% for the year. Performance here was driven by the continued success of our sample-to-answer franchise, which was up 41% and 34% for the quarter and year, respectively.

For our sample-to-answer products, both the number of active customers and the utilization per customer has continued to increase. For the fourth quarter, the annual utilization rate per customer for our VERIGENE products increased to $109,000, up 10% from the prior year quarter and for our ARIES product line average annual utilization was $53,000, up 14% from the prior year.

Turning to our revenue line items, during the fourth quarter we placed 268 multiplex systems, not including ARIES and VERIGENE systems, within the high end of our communicated expectation of 225 to 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 agreements.

Consumable revenues were up more than 50% for the quarter and 2% for the year, with the quarter increase driven by higher bulk purchases by a few of our large partners compared to the prior year quarter. This phenomenon was not unexpected. As we've indicated a number of times, the consumable revenues for 2018 were expected to be weighted toward the back half of the year relative to 2017 where they were weighted in the front half of the year.

Royalty revenue grew 19% and 10% for the quarter and full year, respectively. This reflected an increase in audit findings, minimum royalty payments and in base end-user sales reported by our partners. Base end-user sales were up 12% and 6% for the quarter and year, not including audit adjustments.

Similar to our molecular diagnostics revenue stream, assay revenues were down 12% for the quarter and up 1% for the year, primarily driven by the reduction in LabCorp. Excluding this impact, assay revenue was up 22% and 14% for the quarter and full year, respectively, predominantly driven by growth in our sample-to-answer assays previously discussed.

Now turning to the income statement, we posted gross margins of 60% and 62% for the quarter and full year, down by 4 percentage points from the fourth quarter of 2017 and 3 percentage points from the prior full year. This decline is primarily attributable to the reduction in LabCorp Women's Health products as these assays typically carry a much higher gross margin than our corporate averages. We continue to focus on improvement of our sample-to-answer margins through both volume increase and cost efficiency.

We continued to control our operating expenses, (inaudible) decline in both R&D and SG&A expenses for the year as compared to our planned levels. Relative to the prior year, operating expenses were moderately higher to support our research and development initiatives, and sales and marketing efforts. Overall, OpEx was up 4% relative to the prior year, but included approximately $2.7 million of acquisition-related expenses in the current year.

Operating profit declined $9.3 million for the year to $27.8 million or 9% operating margin for the year, primarily due to the aforementioned gross margin compression and operating expense increases. Our effective tax rate for the fourth quarter was 337% as compared to 132% in the fourth quarter of 2017. As a reminder, the quarterly effective tax rate typically represents adjustments necessary to arrive at the appropriate year-to-date rate that reflects current expectations for the year.

As you can see from our financials, the current expectation for our 2018 effective rate was 35%, which incorporated adjustments to one-time impacts of the US tax reform in the current quarter and adjustments to our overall tax expectations based on jurisdictional distribution of revenues and expenses. Included in our one-time impacts for the current quarter are $1.8 million of provisional updates to the transition tax expenses stemming from the Tax Cuts and Jobs Act.

The prior year quarter also included tax expenses driven by the Tax Cuts and Jobs Act of approximately $7 million related to repatriation charges, associated with foreign earnings not previously taxed by the US, $3 million for revaluation of deferred US tax assets and a $3 million adjustment of Canadian deferred tax liabilities, partially offset by tax benefit for the release of valuation allowances on Dutch and acquired US losses.

The balance sheet remains strong with solid DSOs on accounts receivable and over $76 million in cash and investments, after absorbing the recent purchase of the flow cytometry business from Millipore for $65.4 million net of cash received and additional payments for remaining inventory at a future time. We generated approximately $50 million of cash in the year before the acquisition and inclusive of the payments of dividends of $10.6 million during the year.

As we've indicated previously, for 2019, we expect total Luminex revenue to be between $337 million and $343 million, an approximate 8% increase over 2018 total revenue, that includes a loss of approximately $35 million of LabCorp revenue. Excluding the loss of LabCorp revenue, our base business was approximately $280 million in 2018 as we expected to grow to approximately $295 million with all of the growth coming from the MDx revenue streams as we expect our partner business to be flat to down slightly for the year.

Additionally, we expect our sample-to-answer franchise, which contributed $62.5 million of revenue in 2018 to grow by approximately 35% in 2019 and end the year at or close to the $100 million run rate we've targeted. It's interesting to note that we anticipate our sample-to-answer revenue stream to be approximately $20 million in the first quarter of this year in spite of a relatively weak flu season.

From a line item standpoint, we expect system sales to be down by up to $5 million as a result of the completion of the One Lambda FLEXMAP 3D replacement. Our xMAP system placement expectations remain between 225 and 275 per quarter. Consumables are also expected to be down slightly from the prior year as a result of some large partner purchases in 2018 that won't repeat the same level in 2019. Base royalty revenue is expected to be up by approximately 5%, reflecting continued expansion of utilization of our technology in the marketplace, in line with the growth rates of the markets in which our partners participate.

And finally, assay revenue across all of our sample-to-answer and non-automated product lines, not including the LabCorp departure, is expected to be up in the double-digits. We expect our flow cytometry business to contribute approximately $45 million this year with system sales and service accounting for about 90% of the total. As we've mentioned, ultimate expansion of the recurring revenue within the flow space is a strategic priority.

For the first quarter, we expect to deliver total revenue of between $82 million and 84 million, with 10% to 15% coming from our new flow revenue stream. Relative to the fourth quarter of 2018, we expect system revenue to be up with the base business down slightly but elevated by the contribution from the flow revenue stream. Consumable should be down from the fourth quarter as we had a very good fourth quarter for consumable revenue and the quarter-to-quarter volatility remains with us.

Base royalties will be up, but total royalty should be down slightly as a result of audit findings included in fourth quarter royalty revenue and total assay revenue up about $1 million for the fourth quarter across the entire portfolio. As I mentioned previously, the impact of the current flu season is nominal. There were some final LabCorp buys totaling approximately $1 million included in fourth quarter revenue.

With respect to profitability, we could see gross margins fall into the higher 50s during the quarter as a result of several factors. First and most obvious is the LabCorp departure. Second, as the growth is derived primarily from our sample-to-answer franchise and the presence of the new flow revenues, both of which have gross margins below our recent corporate averages, it could account for over half of our total revenue for the quarter. And thirdly, as a result of accounting rules, all acquired flow inventory has been mark-to-market, so the gross margins on the flow revenues will be artificially low until we have exhausted all the acquired inventory.

Obviously this margin compression affects overall profitability and although we expect to remain cash flow positive for the year, we could experience several quarters of breakeven or a loss until such time as the volumes and margins of the flow business have returned to a steady state, integration activity has been completed and overall volumes across the business rise further, giving us the benefit of economies of scale.

One thing to keep in mind is that mix is still a significant driver to our ultimate reported gross margins and that we still experience quarter-to-quarter volatility in mix which can push gross margins up or down depending on the relative line item contributions. We have a lot of clinical trial activity scheduled during 2019, and as a result R&D expenses will be elevated from 2018, further affecting current profitability. We do not take this lightly and are committed to returning to sustainable and growing profitability by the end of the year. Finally, and as Homi mentioned, I want to reiterate that we plan to return to double-digit revenue growth in 2020 and beyond with acceleration of profitability and cash flow.

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

Nachum "Homi" Shamir -- President and Chief Executive Officer

Thanks, Harriss. In closing, Luminex continued to demonstrate the power of its diversified businesses. Our model continues to drive meaningful growth as we remain committed to investing wisely in our product pipeline development across our entire businesses.

Just as a reminder, when I joined Luminex in the end of 2014, we reported revenue of $227 million with LabCorp accounting for more than 20% of our total revenue. As we enter 2019, with the midpoint of our guidance at $340 million, LabCorp will likely account for approximately $12 million of our total revenue. I would call it an amazing transformation and execution of our strategic direction. Not including the LabCorp contribution, Luminex revenue by the end of 2019 will have grown by more than 20%, fueled by strong organic growth and successful acquisition.

2019 will be a challenging year for our bottom line as a result of the departure of LabCorp and our strong ongoing commitment to R&D and clinical trial expenditure. However, I'm quite confident that as we look beyond 2019, we will see Luminex returning to double-digit growth, improve our earning and gross margin back toward the level we have consistently delivered.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Dan Arias of Citigroup. Your line is now open.

Daniel Arias -- Citi Investment Research -- Analyst

Good afternoon guys. Thanks. Harriss, what's the 2018 revenue base for the Millipore product that you acquired, I know you said it was around $40 million, but I'm just curious if you're looking for double-digit growth off of $40 million or is something more like 5% to 7%, off of $42 million or $43 million?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

So the expectation for the flow business is that based on the base it will grow at double digits. The number actually is a little less than $40 million, growing to the mid-40s that we talked about in the call.

Daniel Arias -- Citi Investment Research -- Analyst

Okay. And if I just think about your $100 million target for sample-to-answer, I don't want to split hairs here, but I believe in San Francisco you said that you were very confident in the run rate to get there and the comment just now was at or close to $100 million by the end of the year. So, just curious if there's anything moving around in the forecast there at all or whether that's just a couple of different words in the language?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Yes. I don't want to split hairs either but at would be right at $100 million, close to would be $102 million or $97 million, right. So, maybe I should have said at or around $100 million. We're confident based on our current trajectory that we're at very good shape there.

Nachum "Homi" Shamir -- President and Chief Executive Officer

As a matter of fact, we will be around $20 million running rate -- or $20 million not running rate for Q1 and we will climb from there. And when we talk in Q1, that there is no a flu season whatsoever, obviously compared to Q1 last year that we enjoyed a strong flu season. I think we are really on track to achieve the running rate of the $100 million.

Daniel Arias -- Citi Investment Research -- Analyst

Okay, just checking on that, and maybe if I could sneak one more in. On the sample-to-answer utilization, I don't know if you have the exact numbers there, but I'm just curious what percentage of the customers at this point are near that $109,000 average that you talked about, is it a fairly broad base of labs at that level or do you have a handful of really high volume users that are doing the heavy lifting, so to speak?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

So let me give you some data that it's interesting but it tells you the danger of averages. I've said many times averages are dangerous thing, right. So for VERIGENE, we mentioned the average VERIGENE customer at the end of the year at about $109,000 over the past 12 months, the net average runs from an per customer number, adds from in excess of $0.5 million down to less than $10,000. So it's a very wide swath of utilization across our customer base that averages in at the $109,000s and slowly been inching up because all of our customers have been inching up as they annualize.

VERIGENE is the same way, an average of $53,000, but a very wide area -- sorry, a very wide and breadth of utilization from an excess of a $0.25 million a year, again down in that $5,000 to $10,000 range depending on the volumes within the hospitals. It's one of the again dangers of using averages, but the averages has been indicative because the average over time has slowly inched up as the overall utilization of all of our customers has creeped up as they annualize their utilization of our products.

Daniel Arias -- Citi Investment Research -- Analyst

Yes. Okay, that's helpful. Thank you, Harriss.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

You bet.

Operator

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

Daniel Leonard -- Deutsche Bank -- Analyst

Thank you. So first off, just trying to better understand some of the variables in the bridge between Q4 and Q1, and Harriss, I know you went over this in your prepared remarks. But it does seem like for the base Luminex business, it's a meaningful sequential step down versus what we've seen historically. And trying to understand the biggest parts of that, is it primarily consumables from Q4 to Q1, and would you classify the consumables bump in Q4 as year-end stocking or were there different dynamics?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

So there's three big pieces. The first is we mentioned the One Lambda completion of FLEXMAP 3D replacement of previously installed LUMINEX 100/200 systems. So, One Lambda is essentially complete with buying FLEXMAP 3D systems as they had every quarter for the past three years. And so those purchases don't happen as we move into the end of the first quarter.

Secondly, consumables fall off. We had a very good consumable quarter in the fourth quarter and we -- the volatility remains, right, the bulk purchase phenomenon that we talk about over and over again continues. And so the expectations are that consumables drop. And thirdly, within royalties, there were some audit findings that were included in our fourth quarter royalties, that obviously don't repeat -- the run rate increase on the customers for which we found audit issues because what we found were products that -- that previously hadn't been tagged as a royalty bearing item and now they are tagged as royalty bearing, so that's why the base continues to rise. But overall, royalty revenue would dip a little bit.

So those are really the three big chunks that gets you to a decline from the fourth quarter to the first quarter in the base business. And then obviously we have the flow cytometry business and that lifts us back up.

Daniel Leonard -- Deutsche Bank -- Analyst

Okay, that's helpful. And then again using the fourth quarter as a base, but this time on gross margins, the 59.6% (ph) in gross margin for the quarter, as we think about what 2019 could look like, I appreciate all the qualitative variables, but given that Q4 had some LabCorp revenue in it that won't exist in 2019 and given the lower margin Millipore products, presumably we should think about modeling gross margin to be down from that fourth quarter run rate? And -- would you expect it to be down meaningfully or any finer point you can put on that on what a reasonable plan would look?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

So, it definitely should be down and there's a couple -- again there's a couple of factors that play here on the consolidated gross margins. Number one is the reduction of LabCorp revenue. It's obviously not $35 million in a quarter, but it's a decent size number that carries margins at significantly higher than our corporate averages. So it pulls you down. There has been the addition of the flow business that effectively has gross margins approaching zero because of the fair value of the inventory until you work that inventory through your financials, you have what amounts to very, very low margin on the acquired business. But the same bucket of operating expenses and integration expenses go with and all the rest. So, you end up with both compression of gross margin and compression in the bottom line that flows through. So I don't know if that helps but...

Daniel Leonard -- Deutsche Bank -- Analyst

Well -- and you wouldn't plan to step out -- sorry, to back out the step-up related to purchase accounting on the Millipore inventory, you wouldn't plan to back that out as it was some kind of a non-GAAP reconciliation?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

We'll sure -- we'll talk about it. We'll tell you what -- ultimately where margins would be on a pro forma basis without that included, certainly.

Daniel Leonard -- Deutsche Bank -- Analyst

Okay, thank you.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

I can't give it to you right now, obviously.

Operator

Thank you. And our next question comes from Tycho Peterson of JPMorgan. Your line is now open.

Tycho Peterson -- JPMorgan -- Analyst

Hi, thanks. Couple of follow-ups. Harriss, I hate to ask this again, but can you quantify the stocking impact in the quarter, I know that was one of three things you called out, but can you quantify the stocking component?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Stocking for our sample-to-answer franchise?

Tycho Peterson -- JPMorgan -- Analyst

Yes.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Really not significant because the flu season -- we haven't seen significant demand as a result of the flu season coming in. We had some success with our sample-to-answer franchise. We continue to place systems. Homi mentioned the number of systems that we contracted during the quarter, the number of active customers continues to rise. So the stocking impact in the fourth quarter was minimal.

Tycho Peterson -- JPMorgan -- Analyst

And then on flow-through for VERIGENE and ARIES, I understand the challenges of averages but are you assuming that average does increase in 2019 and can you give us a rough sense of how you're thinking about annualized flow-through for both systems?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Sure. So the flow-through is a function of two things, obviously. Number one, the rate at which you add new customers because a new customer in the math is a customer that although you're looking at an annual figure is only in the number for at most three months, right, in a quarter. And so, you have customers of those 600 active customers that are counted in the number for both VERIGENE and ARIES that have been there for 12 months. Yes, while others have been there for nine months, for six months, for three months. We don't annualize those for the math. We look at all ordering customers and what they have ordered in the past 12 months.

And so for new customers, they've only ordered for a very short period of time. So as those customers annualize or get a full 12 months under their belt, we certainly would expect that number to continue to drift upwards. Now, if you add new customers quickly that certainly can mitigate the rate at which that number goes up. But fortunately, we have more customers annualizing than we do adding in a particular quarter and so thus the expectation that it drifts up.

Tycho Peterson -- JPMorgan -- Analyst

Okay. And the trend toward narrower panels and kind of flex, you don't see that as any headwinds in the near term?

Nachum "Homi" Shamir -- President and Chief Executive Officer

No, I mean basically we are planning to launch VERIGENE II in the second part of the year and I don't see any -- except maybe additional new customer, I don't see any headwind there. So we are in the direction there. And as we keep saying, we all the time we would like to minimize the impact of our existing customer and we would like to bring both the launch of the EP and the launch of the RP close together so they have more utilization on the system. So that's our strategy. As a matter of fact we have started training our sales force in a kick off meeting in about a week time and getting ready for the second part of the year to launch the product.

Tycho Peterson -- JPMorgan -- Analyst

All right. And then just one last one on the flow business, curious to what degree you're baking in kind of revenue synergies between LTG and flow? I know you've talked in the past about leveraging the sales force to go direct in the market with LTG and then combining (inaudible) imaging technology to enhance workflow. So are there things you're doing to kind of drive revenue synergies between the two businesses that kind of capture the guidance?

Nachum "Homi" Shamir -- President and Chief Executive Officer

No, not at all, Tycho. We are working now on the road map for the R&D and the product lines and the priority in the flow cytometry product line. We will be obviously seeing how we can leverage more than unity business either to using our big (inaudible) an example and working on that, but it will take us another quarter or two, not a quarter or two, or a quarter at least till we identify (ph) it and start moving the right resources into the right product. So at this stage we do not really anticipate any increase beyond the normal 10% we thought it will be increasing the flow cytometry business.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Another thing to think about, Tycho is on the LTG side, the super majority of the systems and assays and beats (ph) and such that go to those end user customers flow through our partners because we will be in front of those customers. When we get in front of a customer that maybe hasn't yet adopted Luminex technology, we have the opportunity to help our partners place their systems in those environments and as a result the effect is more -- it's indirect, it's a driver of beats and royalties through our partners that we feel the effect of unless and until Luminex was selling something directly through that same channel, which obviously we don't do today because we haven't wanted to compete with our partners.

Tycho Peterson -- JPMorgan -- Analyst

Okay, thank you.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

You bet.

Operator

Thank you. Our next question comes from Sung Ji Nam of BTIG. Your line is now open.

Sung Ji Nam -- BTIG -- Analyst

Hi, thanks for taking the question. Homi, I'm not sure if I heard this correctly, but it sounds like that customers are already testing or it be the SENSIPLEX platform or looking to evaluate them in the near term. And was curious as to if that might be across the entire installed base of LX 200, FLEXMAP and MAGPIX et cetera or is there kind of the higher throughput system where you seen kind of...

Nachum "Homi" Shamir -- President and Chief Executive Officer

Yes. So, thanks. Sung ji. No, what I said in -- that we are planning to bring during the second quarter, our partner here to start testing the system. Okay? Our major partner, not every partner and mainly the partner in life science -- in basically in research area. And, really the SENSIPLEX is targeting the LX200 and the FLEXMAP 3D. That's really where we are targeting. The MAGPIX is a little bit different base in the capability compared to where the LX200 and the SENSIPLEX can provide. And we are targeting what we said all along that we would like them to come, test, give us the feedback. Based on their feedback, we might or not adjust the system.

I'm hoping that before the end of the year some of our partner will start buying internally a couple of system, each of them and they will test -- start testing their backward capability and then they will set up a lunching date for the system. We will know much more about it by the end of the second quarter when we will sit with all of them and get their feedback in understanding how they want to take it to the market.

Sung Ji Nam -- BTIG -- Analyst

Okay, great. And then is there -- could you remind us again if there is seasonality associated with the flow business, flow cytometry business and also kind of going back to Tycho's question with regards to synergies, et cetera, do you still expect the business to be accretive overall?

Nachum "Homi" Shamir -- President and Chief Executive Officer

Yes. We still believe the business will be accretive by year end. There is no -- that's what we are working. As we're saying, initially we might have to invest and we are investing, obviously just matter of our argument. We're (inaudible) TSA (ph). So, those are the transactional service agreement we have with them. They cost us a lot of money during the first and second quarter. Most of them will face by this time, and then we probably will have few more TSA on (inaudible). But as we phase out of that, the basement become more profitable and we believe will be by the end of year we will make money out of the business. Yes, as there any other capital business, it tends to be a Q4 a business, that's the nature of -- unfortunately the capital business. So yes, we will have more revenue anticipate coming in the fourth quarter than the rest of the year.

Sung Ji Nam -- BTIG -- Analyst

Great, thank you.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

You bet.

Operator

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

Andrew Brackmann -- William Blair -- Analyst

Hi guys, this is actually Andrew Brackmann on for Brian.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Hi, Andrew.

Andrew Brackmann -- William Blair -- Analyst

I wonder if you guys could just provide a little bit of commentary on the assay mix for VERIGENE, any change there given the competitive environment or the reimbursement changes couple of months back?

Nachum "Homi" Shamir -- President and Chief Executive Officer

No, Andrew, the same. As we keep saying all along, we're working on the EPU (ph) that we are ramping it up. We started (inaudible) the next one is the blood culture. But beyond that, as I said and that's -- previously we're also saying what assay we would launch -- like to launch on the VERIGENE II plus, but at the moment we are really extremely busy with those two and the MRCA for the release that we also wrapping up the clinical trial. So -- but as soon as we get our head above the water with those lines or at least the MRCA and EP that both are due to be finished, we'll start putting more resources to the rest of the assay.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

The mix in the VERIGENE assays has remained about where it has been, where blood culture has been half of the total and respiratory and gastro had been roughly equal in the other half, absent of a big flu season. So the mix hasn't changed much across the existing assays and Homi mentioned we are working on getting those other ones launched for VERIGENE II so that we can provide a higher quality solution to our customers.

Andrew Brackmann -- William Blair -- Analyst

Got it. Appreciate the color there. And then, Homi, relative to your comments on life science acquisitions, potentially in life sciences, would that meant to signal that there might be something in the hopper and maybe could you provide any additional color on what we should expect in terms of timing and something like that?

Nachum "Homi" Shamir -- President and Chief Executive Officer

We keep looking and we are looking to provide strategic opportunity like we have done with Nanosphere which was extremely good acquisition to us. We are hoping that the flow cytometry will be again a great acquisition, but again as I said, we are in the midst now of integrating it. It's -- each of those acquisition has its pro and con because the Nanosphere we bought a company and we need to make a lot of changes there, but here we bought a (inaudible) business. So we need also to make sure employee getting paid, health insurance and every email and et cetera. So, each of them has a different kind of base, but nevertheless we are very confident with the flow cytometry business, we will make it successful as we have done with the Nanosphere. Now, we will continue to create -- generate cash, even if our profitability will be down, but that's only limited for this part of the year. And we start looking what beyond that, so if there is something that we like, some asset, both in life science, on the LTG or in the molecular diagnostic, we will look at that and hopefully we will be able to afford to do it.

Andrew Brackmann -- William Blair -- Analyst

Got it. Thank you.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

You bet.

Operator

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

Brandon Couillard -- Jefferies & Company, Inc. -- Analyst

Thanks. Just a couple of housekeeping for Homi. Would you expect the Millipore inventory step-up to roll off by the fourth quarter, I think you talked about it being accretive by the fourth quarter, I would imagine that's the case, such that gross margins are actually back above the 60% level exiting the year?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

We would actually expect it -- Brandon, this is Harriss, to roll off by the end of the second quarter.

Brandon Couillard -- Jefferies & Company, Inc. -- Analyst

Perfect. And then we saw CapEx step up a little bit in '18, what do you pencil in for that in '19, and then could you help us with a non-GAAP sort of effective tax rate we should be thinking about for '19?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Yes, so lot of the CapEx expenditures in '18 were improvements for our manufacturing facilities to accommodate significantly higher volume. So we're completing a lot of that, obviously as we move into '19, any incremental changes we have to make relative to movement of Millipore production facilities from places like India to United States will have to be accommodated, but shouldn't be too significant there because space already exists in our facilities today to accommodate that. What was your other question, I don't remember the...

Brandon Couillard -- Jefferies & Company, Inc. -- Analyst

The non-GAAP effective tax rate for the year.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Non-GAAP effective tax rate, yes. So our -- one challenge that we obviously run into is that we have tax exposure in a number of countries, six or seven countries. The US drives our effective tax rate. Effective tax rate in US is just over 30%. The challenge is it, for losses generated in other other entities, drives the consolidated effective tax rate, obviously up a lot higher because it infringes on the profitability of the US operations. So as you look into '19, what I can tell you, is while I would expect the cash tax rate to be is that a very small, like less than 5%, the effective tax rate is a little more complicated than that and I don't want to go into the details of the math. So, I would say that you would you would probably peg the effective tax rate, 30% to 50%, but a very small component of that is actual cash taxes because of utilization of NOLs and R&D tax credits and all the rest that we have available to us.

Brandon Couillard -- Jefferies & Company, Inc. -- Analyst

Very good. Thank you.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

You bet.

Operator

Thank you. (Operator Instructions) Our next question comes from Bill Quirk of Piper Jaffray. Your line is now open.

William Quirk -- Piper Jaffray -- Analyst

Great. Thanks, good afternoon everybody. So I guess, Homi, first question, recognizing that the acquired Millipore business is little under $40 million, could you just talk a little bit about I guess the composition of the sales team, what sort of plans you have to increase that here in '19 and '20 or are you pretty happy with the size of it as it is now?

Nachum "Homi" Shamir -- President and Chief Executive Officer

Yes. Thanks, Bill. It's a good question. First, when we -- as I said earlier, when we got the business from Millipore (inaudible) it was a carve out. So to the carve out, I think we got about 10% less of the total people we anticipated, from a lot reason, some of them we obtained. So we are going to fill up those position, it's not sales -- the overall 10% was less in surveys and other aspects of the business. So first, we need to recruit it to the level that we are down (ph), which mainly is in Europe. In the USA, we are planning to increase the sales force in about three people, there where I think just before we acquired them, there was down (ph) one or two people. So we are going to fill up those position as fast as we can, and keep moving them. Hopefully that answers the question.

William Quirk -- Piper Jaffray -- Analyst

Yes, it does. Thank you very much. And then I just have a bigger picture question for Harriss and it goes back to the earlier question about the effective tax rate and the fact you've got losses outside the US that make your effective rate a lot higher because of higher setup in the US. Any long-term thoughts guys, you've got a huge royalty business sitting on the income statement, which is obviously got to be coming in pretty high margin, but yet getting taxed at fairly high rate. I mean, are there any longer-term implication here to try to reduce your overall effective tax rate? I appreciate that you have NOLs for your cash taxes are fairly low. But I don't know -- and then maybe I just answered my question but just..

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Yes, so let me help you with just giving you an example, right. And this is not Luminex because I am not looking at the table with all the multiple countries in front of me, but in a situation where Luminex makes $20 million at the pre-tax line and Luminex pays the corporate tax rate of let's say 25%. Then in the next case Luminex is going to have $5,000 in taxes and the effective tax rate is going to be 25%. But when that $20,000 of income gets offset by losing $2,000 in one country or no taxes involved and a $1,000 in another country, another -- so you peal $5 million off of the total consolidated taxable income and suddenly $20 million of profit becomes $50 million of profit, but you still pay $5 million in taxes.

So now suddenly you have 33% effective tax rate even though your US earnings were taxed at the appropriate rate. So as math when you combine the multiple countries as opposed to us actually paying and using NOLs through that. The NOLs handle the cash portion of the taxes due in countries where there is a profit position that we can use those NOLs to offset it. So unfortunately it's a mathematical issue that drives our effective tax rate high. But in the US, our tax rates are exactly where we expect them to be, absent changes in the Trump tax structure and all the rest of that have come through. So we're pretty comfortable with our tax set up, what would help it most would be to, for instance, generate sales in foreign countries and turn those countries just right at the margin of profitability toward zero. And now you find yourself back with either equivalent or more income with no tax due, so the effective tax rate would drop in that case. Does that answer your question?

William Quirk -- Piper Jaffray -- Analyst

Yes, that's fine. I may follow up you offline. Thanks.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

That's fine.

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.

Nachum "Homi" Shamir -- President and Chief Executive Officer

Thank you, Sonia, 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.

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: 53 minutes

Call participants:

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Nachum "Homi" Shamir -- President and Chief Executive Officer

Daniel Arias -- Citi Investment Research -- Analyst

Daniel Leonard -- Deutsche Bank -- Analyst

Tycho Peterson -- JPMorgan -- Analyst

Sung Ji Nam -- BTIG -- Analyst

Andrew Brackmann -- William Blair -- Analyst

Brandon Couillard -- Jefferies & Company, Inc. -- Analyst

William Quirk -- Piper Jaffray -- Analyst

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