Bio-Rad Laboratories, Inc.

Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2018 BioRab Laboratories, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance during the call, please press start and zero on your touch-tone telephone. I would now like to introduce for today's conference Mr. Ron Hutton, Vice President and Treasurer. You may begin.

Thank you. Before we begin the call, I would like to caution everyone that we will be making forward-looking statements about management's goals, plans, and expectations, our future financial performance, and other matters. Because our actual results may differ materially from our plans and expectations, you should not place undue reliance on these forward-looking statements, and I encourage you to review our filings with the SEC, where we discuss in detail our risk factors in our business. The company does not intend to update any forward-looking statements made during the call today. Our remarks today will also include references to non-GAAP income and non-GAAP diluted income per share, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release. With that, I'd like to turn the call over to Christine Singos, Executive Vice President and Chief Financial Officer.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Today, we will review the fourth quarter and full-year financial results for 2018, as well as provide some insight into our thinking for 2019. With me today are Norman Schwartz, our CEO, Annette Tumalo, President of our Life Science Group, and John Herdia, President of our Clinical Diagnostics Group. Today we will review our results on a GAAP basis and then provide some commentary and insight to our results on a non-GAAP basis. Let's start with the top line. Net sales for the fourth quarter of 2018 were $617.5 million and as expected, slightly lower versus the same period last year record sales of $621.3 million. On a currency neutral basis, sales increased 1.9% and higher than our guidance. During the quarter, we experienced good demand across many of our key product lines with particular strength noted in the Americas and Asia Pacific. Life science sales in the fourth quarter were $239.6 million, a slight increase on a reported basis when compared to last year, and growth of 2.3% on a currency neutral basis. It is important to note that this increase was on top of the 12% currency neutral growth in the year-ago period. Much of the growth in the fourth quarter of this year was driven by continued strong demand for our cell biology, western blot, and digital PCR products, as well as higher than market growth for gene expression and antibody products. This growth was somewhat offset by the tough compare and expected decrease in our process media product line, as well as the expected reduction of sales of Raindance products. The combined decline in sales of Raindance and Process Media products totaled more than $8 million in the fourth quarter. On a geographic basis, LifeScience experienced strong currency-neutral sales growth, most particularly in the US and China. Sales of clinical diagnostics products in the quarter were $373.7 million compared to $378.4 million last year, a decline of 1.3% on a reported basis, but growth of 1.7% on a currency neutral basis. During the quarter, we posted solid growth in the U.S., especially for blood typing, quality control, and autoimmune testing products, as well as growth in Asia Pacific. This geographic growth was partially offset by a decline in Europe. The reported gross margin for the fourth quarter was 54% on a GAAP basis and lower than last year, but certainly improved from recent levels experienced in the second and third quarters. The current quarter margin was impacted by a sizable restructuring charge, changes in product mix, higher service costs, as well as additional inventory-related expense in our European operations. Amortization related to prior acquisitions recorded in cost of goods sold for the quarter was $4.2 million, which compares to $4.9 million in the same period last year. SG&A expenses for the fourth quarter were $212.5 million, or 34.4% of sales. When compared to the third quarter of this year, the sequential increase in spend is the result of higher employer-related expenses as well as a significant increase in litigation costs as we vigorously defend our key intellectual property. Total amortization related to acquisitions recorded in SG&A for the quarter was $1.8 million versus $2.1 million in the third quarter of last year. Research and development expense in Q4 was in line at $53.1 million or 8.6% of sales. During the quarter, we impaired approximately $300 million of goodwill and intangible assets related to prior acquisitions, the lion's share being related to the acquisition of Diamed, which was completed in 2007. The dynamics and pricing environment of the global blood typing market has changed significantly compared to 10-plus years ago, leading us to make the appropriate accounting decision regarding the value on our books. And while we have taken the appropriate accounting action, we continue to be optimistic about the business with future growth and margin expansion opportunity. Looking below the operating line, the change in fair market value of our holdings of equity securities resulted in a loss of $814 million in our reported results for the quarter and is substantially related to our holdings of ordinary and preferred shares of Sartorius. Also during the quarter, interest and other income resulted in net expense of $84,000 compared to $10 million of expense last year. This improvement primarily reflects higher investment income as well as lower foreign exchange hedging costs versus last year. The effective tax rate used during the fourth quarter was 20%. This lower than expected rate was driven by the sizable loss related to our sartorius investment and impacted by the benefit from tax reform in the U.S. and the non-deductible goodwill impairment. Now, as we look to our results on a non-GAAP basis, it's important to note that we have excluded certain atypical and unique items that impacted both our growth and operating margins. These items are detailed in the reconciliation chart in our press release. Looking at the non-GAAP results for the fourth quarter, in cost of goods sold, we have excluded amortization of purchase intangibles of $4.2 million, as well as restructuring charges of $5.1 million related to a manufacturing operation in Europe that we will be closing and consolidating into one of our existing facilities in early 2020. This represents another step along the path to optimizing our global supply chain and is expected to result in more than $2 million of annual savings starting in 2020. These adjustments move the growth margin for the fourth quarter from 54% to 55.6%. This non-GAAP margin compares to a non-GAAP margin in the fourth quarter of 2017 of 55%. In SG&A on a non-GAAP basis, we have excluded amortization of purchase intangibles of $1.8 million, legal related expenses of $8.7 million, a small acquisition related benefit, and restructuring costs of $421,000 related to a prior action. In R&D, we have excluded $1.3 million of expense related to restructuring as well as excluded the impairment charge. The cumulative sum of these non-GAAP adjustments result in moving the operating margin for the fourth quarter of 2018 from 11% on a GAAP basis to 14.5% on a non-GAAP basis. This significant improvement compared to the first three quarters of 2018 represents good expense control and early signs of driving operating leverage, especially in SG&A where the margin dropped to 32.7% of sales. We have also excluded the change in fair market value of our equity holdings and a small loss associated with venture investments that are recorded on the equity method of accounting from our non-GAAP results. With all of these various items in mind, we adjusted our tax provision for these exclusions resulting in a non-GAAP effective tax rate of 28%, significantly improved from the third quarter and in line with our guidance given on the last earnings call. And finally, non-GAAP net income and earnings per share for the fourth quarter of 2018 were just over $64 million or 10.4% of sales and $2.13 per share, which compares to $57.3 million and $1.90 per share last year. Looking at the full year results, we are pleased to report annual sales of $2,290,000,000. which represents currency neutral growth of 5% and ahead of our guidance. This growth reflects strength across many product and regions for both life science and diagnostics. Our life science group posted record annual sales of $861.7 million, an increase of 9.7% on a reported basis when compared to 2017, and growth of nearly 9% currency neutral. This impressive growth was driven by continued strong demand for our Droplet Digital PCR product family, as well as solid growth in areas where we are increasing focus and investment, such as cell biology and food safety, all three of these key product areas growing double digits for the year. Equally satisfying is seeing significant increases in sales for our more traditional product areas of gene expression and western blotting. And of course, our process media business came back exceptionally strong in 2018 and finished the year at record levels. From a regional view, life science sales increased in all three geographies, led by double-digit growth in the US and China. For the year, clinical diagnostic sales were $1,412,000,000, an increase of 3.8% on a reported basis and 2.7% currency neutral. This growth was fueled by continued momentum in quality control, blood typing, and autoimmune testing products. During the year, we placed more than 2,000 new instruments around the world. which bodes well for higher consumable sales in the years to come. From a regional view, diagnostic sales increased most notably in the US, China, and Japan, and were partially offset by continued challenges in Europe. We now believe that much of the ERP transition woes in that region are behind us, and we are looking forward to growth returning for diagnostic sales in EMEA in 2019. Looking to the full year operating results on a non-GAAP basis, the 2018 gross margin was 54.6% and compares to a non-GAAP margin of 56.1% in 2017. This 150 basis point decline is attributable to changes in product mix, including pricing pressure, primarily in our diagnostic segment, as well as startup costs associated with our entry into the US blood typing market. We estimate that mix in pricing accounted for approximately 70 basis points of the decline, while startup costs for the US blood typing entry accounted for an additional 25 or so basis points. Also putting pressure on the gross margin during 2018, but not included in our non-GAAP calculation, was more than $10 million of costs associated with the ongoing transition of Europe to a new, more efficient operating model. These costs were primarily related to the write-down of inventory in various locations around Europe. While product mix and market pricing is an ongoing part of doing business, we believe that the European transition-related costs are behind us. And as we build the sales for blood typing products in the US over the coming quarters and years, pressure on the gross margin related to these startup costs will be less of a needle mover. And there's also more good news for the long-term gross margin expansion. And it is important to note that during the year, we made significant progress with building long-term efficiency into the supply chain through the closure of numerous warehouses and the consolidation of both direct and indirect procurement. During 2018, these moves already reduced overall spend by an estimated $10 million and should contribute even more in 2019. Despite the lower than expected gross margin, our non-GAAP operating margin for the full year 2018 expanded 150 basis points from 9.2% in 2017 to 10.7% in 2018. This expansion is substantially the result of lower ERP-related spend of approximately $15 million, coupled with savings of more than $20 million from the shutdown of our new bio and rain-dense operations. I would also highlight that non-GAAP SG&A expense for 2018 was held flat to the 2017 level, garnering a 200 basis point improvement in the SG&A margin and evidencing our ability to harness operating leverage. And finally, non-GAAP net income for 2018 increased more than 35% to $176.7 million, or 7.7% of sales, compared to 127 million or 5.9% of sales in 2017. Non-GAAP earnings per share for the year increased to $5.84 compared to $4.23 in 2017. Moving to the balance sheet, as of December 31st, 2018, total cash and short-term investments were $850 million compared to $760 million at the end of 2017 and $866 million at the end of the third quarter. The decrease on a sequential basis primarily reflects cash used for our share buyback program. During the fourth quarter, we purchased 179,000 shares for approximately $49 million. Additionally, during the quarter, we purchased two buildings for approximately $25 million that will primarily be used to accommodate the planned expansion of our digital biology group. We continue to make excellent progress on improving our cash flow. For the fourth quarter of 2018, net cash generated from operations was just over $105 million, which reflects higher cash generated than in all of 2017. Cash generated from operations for the full year 2018 totals more than $285 million and significantly exceeds the cash flow we have been seeing over the past several years. Moreover, free cash flow for the year is the highest we have recorded since 2011. This positive result reflects improvement in both collections and inventory management as we continue to make progress towards optimizing our global operating model and systems. As an example, our DSOs improved by more than 15 days from the 2017 level, and cash conversion days improved by nearly 30 days for the year, bringing these metrics more in line with the pre-ERP disruption results. The adjusted EBITDA for the fourth quarter was $118.2 million, or 19.1% of sales. Full-year adjusted EBITDA, including the Sartorius dividend paid during our second quarter, is $371.2 million, or 16.2% of sales. This year-to-date adjusted EBITDA margin compares to 15.2% in 2017, 100 basis points, and $43 million of improvement. Net capital expenditures for the quarter were $53.9 million, and that includes the property purchase I just mentioned. Full year CapEx was $125.5 million. Excluding the building, CapEx for the year was in line with our expectations of around $102 million. And finally, depreciation and amortization for the quarter was $34.6 million and $138 million for the full year. Now let's move to the outlook for 2019. Today we are excited to share our thinking for 2019, which anticipates continued sales growth near the top of our stated range, as well as continued expansion in operating and adjusted EBITDA margins. Let's start with the top line. For 2019, we are guiding currency neutral sales growth to be in the 4 to 4.5% range. On a reported basis, using current exchange rates, that growth could look more like 3 to 3.5%, but we will see what the dollar does throughout the year. As we look at the components of the estimated 4 to 4.5% currency neutral growth, We are anticipating both segments to drive that growth through new products as well as geographic expansion. For life science, we see continued momentum as funding for research in our major markets seems to be holding steady. As such, we estimate 2019 growth for life science in the 5% to 6% range, which we would point out is on top of the very strong performance of 9% growth recorded in 2018. This outlook anticipates continued growth in all of our key product market areas and regions and also anticipates a significant year-over-year decline in sales of Raindance products. For diagnostics in 2019, we are targeting currency-neutral growth in the 3% to 4% range. This accelerated growth rate when compared to the 2018 results reflect a return to growth in EMEA as well as continued expansion into the U.S. blood typing market. Looking to the margin profile for 2019 on a non-GAAP basis, we are targeting gross margins to be in the 55.5% to 56% for the full year, with the strongest margins coming later in the year as we recognize more savings from our logistics consolidation in Europe and higher sales from blood typing in the U.S. For the non-GAAP operating margin, we are guiding to the 12.5 to 13% range as we continue to manage expenses and drive operating leverage. Research and development expense is targeted at 9% of sales, and the tax rate is estimated to be 27 to 28%. And finally, we are estimating CapEx of $110 to $120 million. We are pleased with the solid progress we have made in 2018, as well as the incremental progress we are targeting for 2019. The top line growth, coupled with the improved margin profile, will also drive our adjusted EBITDA incrementally higher and still in line to achieve our longer-term target of a 20% EBITDA margin by the end of 2020. And now I'll turn the call over to Norman for a few comments.

Okay, thank you, Christine. So I thought I'd take a few minutes to give you a little bit of a sense of where we are today, a little bit echoing what Christine has already mentioned, but first on our results. As most of you know, we laid out some mid-term targets at our investor day at the end of 2017. If I think about 2018, this was the first year of the plan, and it's certainly clear we're making progress. Not only were we able to increase the trajectory of our sales growth, but we're able to begin a steady return to our historical profit margins. I think strong demand for our products, especially in life science, as Christine mentioned, was a key driver, coupled with good, disciplined expense control. When I look back at the year, and especially if I look back at, say, 2017, you know, 2017, which was when we implemented SAP in Europe, it did bring with it some challenges, challenges with customers. I think in 2018, we managed to regain that customer confidence, which was so important for us. And I think this also helped the results. You know, from a sales perspective, allowing us to really spend more time on offense versus defense. As a measure of the progress we've realized over the past year in Europe, our net promoter scores, a measurement of customer satisfaction, have rebounded dramatically. As Christine mentioned, over the last several months, the last 12 months, we've also seen good progress on our longer-term goal to realize savings from a consolidated supply chain organization. The creation of a global procurement function to get at supply costs and also rationalized warehousing and distribution in Europe allow us to realize some near-term margin improvements. We do expect to continue to make progress in 2019 on our mid-term goals, not only from continued efforts in supply chain, but in many other areas around the company where we can leverage the organization and advantages of a data rich environment, partly enabled by our new IT systems. As usual, we also have a few important new products lined up for introduction this year. Starting off the new year, I think we're very pleased to have gotten FDA clearance to be able to market our Droplet Digital BCR-ABLE kit in the clinical market for monitoring leukemia. I think this is, we're pretty excited about that. I also expect to continue to make progress in a number of market areas outside of digital biology, including the research market for cell biology, food safety, and the U.S. market for blood typing, all areas that we've been investing in. As Christine has mentioned, while in the short term, growing our position in the US blood typing market has created some gross margin headwinds, it is a critically important market for us longer term. I'm also pleased to say, and I'm sure this is a question on your mind, that we've got a good field of candidates for both the open chief operating officer position and for Christine's position. As Christine mentioned, our financial outlook for 2019 does signal continued growth on the top line, coupled with increased margin expansion. This will be another important step for us toward achieving our targeted 20% EBITDA margin by the end of 2020. I guess all of this is to say that we feel pretty good about where we are. and the opportunities that we have for the year ahead. So I think maybe with that, we'll open it up for questions. Sounds good.

Skylar? Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Brandon Coulard with Jefferies. Your line is now open.

Thanks, good afternoon. Norman, Christine, appreciate all the detail in your prepared comments. As we look at 2019, could you help us with some of the bridge components, the puts and takes around the margin expansion that you anticipate? You know, you had absorbed quite a number of headwinds from mix and inventory charges through most of 2018. Are those firmly behind you now? Would you expect those to carry over to some extent into the first half? of the year. And did I hear you right in that you expect another $10 million plus of incremental savings from supply chain benefits in 2019?

So thanks for your question, Brandon. So I'll start with the latter. Yes, I think you did hear that right. And with each year, we start to get the cumulative impact of of progress we've made on the logistics front in terms of these warehouses, but also looking more efficiently in our shipping methods and things like that. We gain more leverage on our procurement side and then over time, probably beyond the 2020 timeframe, we'll continue to look at our manufacturing footprint and that could add to more savings. savings there as well. And then to the other question, yes, I think some of the transition woes that have translated into costs for us during 17 and certainly during 18 as well, I believe those are mostly behind us now and don't anticipate those following us into 19, at least certainly not to the extent that we've been experiencing over the last 18 plus months. Finally, as we look to the margin expansion going forward, you asked about mix. That's the one thing where you can't really say it's ahead of us or behind us. What happens with mix and pricing in any given quarter you know, really is harder to predict in the short term and can be, you know, up or down in any particular quarter. Over the long term, you know, we continue to launch new products, which help the margins. We continue to push for a higher consumable mix, which would help the margins. But I can't really say, oh, it's something that's, you know, behind us or in front of it. It's just kind of a fact of doing business.

And this might be a question better for John Herdia, but could you just speak to your level of confidence that diagnostics can return to growth in EMEA next year? And is that a function of demand, maybe some of the new products or actual pricing environment getting somewhat more favorable?

A combination of things. I think Christine mentioned some of the transition woes. I think diagnostics was particularly hit hard in 2017 and 2018 with some of the The ERP transition, we do believe that's behind us. There was some softness in the market, and I think that's been improving. And there was some lumpiness with distributors that I think are behind us, too. So I think that in combination with, again, the U.S. traction for the blood typing products has been incredibly strong. We got IH24 FDA approved. We submitted in Q4 for IH500 approval to the FDA, and we're anticipating that in 2019. I think a combination of those two bodes well for 2019.

A question for Annette on the DD-PCR business. Could you quantify the size of the market opportunity for the BCR-ABL test? What are your next plans following that first FDA clearance? And now that you have the first FDA approval for the CML indication, how quickly do you think we can see this technology kind of move into the solid tumor space?

Well, Brandon, I think you know we're focused on liquid biopsy, so this is our first test, and it's really the first important step in building our oncology menu and also moving towards having a system that people can develop lab-developed tests on as well. So as far as, you know, there's a market uptake, so we don't expect immediately really large results from the BCR-ABL test because it's got to be validated in everybody's labs. But we expect really a big follow-on for people adopting the platform, putting their own content on it while we develop our own oncology menu.

Thanks. And last one for Norman. Understanding the CFO search is a little bit earlier stage, but could you give us a little bit more specifics about exactly where you stand with the COO search and when you might expect to have someone on board that you could announce publicly?

Yeah, we've identified several very good candidates, and we're working very hard to get that filled as soon as we can.

Super. Thanks so much.

Our next question comes from Patrick Donnelly with Goldman Sachs. Your line is now open.

Great. Thanks, guys. Christine, maybe just on the gross margins, nice to see those bounce back. Now that we're a couple quarters removed from the initial reagent rental system placements that kind of diluted gross margins a bit, how much are you seeing some of those higher margin consumables start to flow through and positively impact margins? And then to the level you're able to break it out, how much of an inflection there are you calling for next year?

So just to clarify, inflection in that particular part of the gross margin?

Yeah, just the consumable pull through on those.

Sure. So I think as you're referring to some of the headwinds that we faced, particularly with bringing the blood typing IH1000 into the U.S., we have had higher placements than we originally anticipated. But it's not like those placements that happened several quarters ago and now it's just all consumable. We continue to have really good placements of new instruments. And so what will happen, Patrick, over time, all of those instruments will be producing a consumable stream and that'll build to a sizable enough bullets of revenue, if you will, to absorb what is always kind of startup costs when you're placing new instruments. These costs are a little higher with bringing this to the U.S. than we've experienced with other products and other geographies. So I think for us it's really about the next few quarters I think we'll continue to feel a little bit of it, although with each passing quarter it becomes less of an impact. And that's why we mentioned the margins kind of building toward the end of the year. In terms of the overall mix between instruments and consumables, we have a very high consumable mix today and we continue to try and drive that higher each year, but quarter to quarter it's always difficult to predict.

Okay, thanks. And then on the capital allocation side, you know, very encouraging to see the repurchases get started in the quarter with the $50 million. How should we be thinking about the cadence of repurchase activity going forward? And then how are you guys balancing preference for that versus M&A, et cetera?

Sure. So, you know, I think given our balance sheet profile, our cash flow profile, profile and are anticipated in even increasing that further, we continue to believe that we have the capability to have capital allocation along multiple lines. Our number one preference continues to be acquisition, both on the tuck-in side and always looking for something more transformational. But with that being said, I think our, our, you know, capital capacity will allow us to continue the, the buyback program, you know, as well, uh, while we're continuing to pursue acquisitions.

Okay. And then maybe this last one for me, you know, it was nice to hear you guys reaffirm the 2020 EBITDA target. Can you just talk through the confidence level hitting that number? You know, now that 2018 is done, you guys showed nice progress, maybe came in a little lower than you were expecting when the guidance was initially provided. And then just the key levers over the two years to get there, any change in your thoughts as to where the expansion is coming from, you know, gross margins versus OPEX as to when you initially gave it to now?

Yeah, you know, that's a pretty good question. I think overall the answer is probably not much change in our thoughts. You know, it is not as – accessible as maybe we thought it was initially, but still very doable. And when you think back to our investor day presentation, Patrick, you probably remember the chart when we were outlining the 600 basis point improvement, if you will, and about 150 of that was expected to come from the gross margin and another 75 to 100 on the R&D side. and really the vast majority was in SG&A. And I think we'll still kind of see that balance, that in SG&A is where we can gain quite a bit of traction, and we continue to be focused on that. And that has proved very beneficial in 2018 while the gross margin came under pressure. But I still think we stand behind that 150 basis point balance. opportunity in the gross margin as well.

Okay, very helpful. Thanks, Christine, and congrats on the retirement.

Thank you.

Our next question comes from Dan Leonard with Deutsche Bank. Your line is now open.

Thank you. So first a question on the tax rate. Christine, when do you think that you'll be able to gain a more material reduction in your tax rate?

Yeah, great question. I share a little of your frustration. We still anticipate the tax rate coming down over time to the mid-20s, and who knows where we might be able to take it longer term from there. In the short run, Dan, when you think about our profile in Europe where we've had all of these these challenges, both in terms of the additional expenses and other charges, the restructuring we're doing, et cetera, all of that obviously has led to dampening the profitability in Europe, and therefore we're not gaining that benefit from our new European headquarters structure as we'd hoped. But I think that's more situational than systemic. And maybe our benefit of moving the tax rate down to the mid-20s is delayed a little, but I think the opportunity for us still exists. And as we look to 2027 to 28 for 2019, then we'll continue to work to improve that, not just through the European profile, but also through other tax planning measures that we're evaluating.

Okay, thank you. And then a couple of questions on diagnostics. First one, how are you thinking about the impact of reimbursement pressure on your customers in the U.S. market? Do you feel like you've got that factored into guidance for 2019?

Yeah, I mean, we've seen, I mean, certainly our customers have seen some impact. We've had some residual trickle down, but not so much in 2018. And I think our forecast in 2019 reflects sort of the the reality of the reimbursement rates in the U.S.

Okay. And then finally, John, can you bring us up to speed, just given the goodwill right down on Diomed, can you bring us up to speed what has happened outside the U.S. in the blood typing market and how that's changed or differed from your initial outlook?

Well, let's see. The Asia part of it, I'd say our performance in Asia has gone very well. The price pressure that came with maybe a conversion of a largely manual and semi-automated market to a highly automated market affected the gross margins for us and I would say pretty much everybody in the industry. That didn't exist in 2007 and 2008 and it's gone through a transformation since then. And probably the largest part of it has just been the reality of some slowness and and the realities of the European market. Diomed was largely a European-based company. Its largest expansion potential was both in North America and in Asia, and it took us, for a lot of technical and intellectual property reasons, a while to get there. We're now making good progress in both, but I think that reality of the The distance between where we started in 27 and how fast we thought we could get to the U.S. market and make penetration in Asia was a large part of it. And then this conversion from largely a sort of a manual, semi-automated market to a very highly automated market, similar to clinical chemistry and immunochemistry, I think affected the business overall.

I think the other big change is the dynamics of the U.S. market over that time period and the pricing. Back when we acquired Dymed, the pricing in the U.S. market was almost double that of Europe, and now we've seen it pretty much come down and equalize throughout the world.

Interesting color. Thank you.

Our next question comes from Jack Meehan with Barclays. Your line is now open.

Thanks, and congrats on the progress you guys have been showing. keep going on the diagnostics business. Maybe, you know, one of the areas you called out was the autoimmune business. So I was wondering if you could give us what your outlook for that business is in 2019, whether there's any new menu you expect to add during the year, and then have there been any changes in the competitive environment with companies like Euroimmune entering the U.S.?

And it's Jack, this is John here. It's largely a function of the BioPlex business, so I'd say systems placement in that business has been very strong. 2018 was another record year for system placements. The growth this year has come a lot from autoimmune, but also from some of our recent tests in syphilis and HIV and vitamin D, so we're seeing good growth there. We are planning some new assay introductions in 2019. We filed them with the FDA, and we're not in a position to announce which which ones to air at this point, but I think you'll see some menu expansion in the first and second quarter of 2019. And I'd say the outlook overall for that business, both in the U.S. and outside the U.S. is strong.

Great. And then maybe just conversely, I know one of the headwinds has been the blood virus business for a while. I'm curious what the outlook, you know, how that's been performing, what the outlook is. Do you think, you know, there's a point where that can start to stabilize or is that still further out on the horizon?

It's still declining. It's not at the trajectory. It was declining in 2017. It was pretty steep then. It's slowed. Some of the businesses, just historical microplate, and that's an older product later in its life cycle. We're looking at a lot of new areas in microbiology. It's an area that is sort of ripe for transition. Those won't hit in in 2019, but I think as we start getting into 2020 and 2021, you'll begin to see a little bit of a trajectory change.

Great. And then maybe just the last one was that I just wanted to make sure I had the numbers right. Christine, I think I heard you say on the life science side an $8 million headwind. Was that right collectively between process median and brain density? Can you break those out, the size?

Yeah. In the fourth quarter.

Okay. And how much, what was the size of each?

About half and half.

Okay. Thank you for the color.

Our next question comes from Mitchell Peterson with Barclays. Your line is now open.

Thank you. Yeah, I was hoping you could provide an update just on your new product initiatives, specifically in Droplet Digital. And, you know, just to talk a little bit more about those applications, whether there's anything coming in single cell or any of the other applications there. Thanks.

Okay. So I think we've talked a little bit about our next generation platform where we're integrating the full workflow inside of one instrument. And we are on track to get that product released and available for sales by the fourth quarter of this year. We're all looking forward to that. We are working on next-generation single-cell products. about to launch a new application in single-cell called AttackSeq. And so we've got a couple of new products coming out in 2019, one in the first half of the year and hopefully one towards the end of the year or early in 2020. So we have an intense focus in that area as well. And I think I mentioned that with the... CEIVD marked platform and now the FDA cleared platform for BCR-ABL. We're looking to expand our oncology menu as well for solid tumor via liquid biopsy.

Got it. And then maybe similarly, I was hoping you could provide an update on the litigation with 10X. I'd be most curious about the current trial, the one that's in post-trial motions. And then if you were awarded an injunction, I guess what would the strategy be to take advantage of that opportunity and fill in the gap in the market?

So I'm just going to say I'm going to channel my inner general counsel here. We can't really talk about ongoing litigation, so I can't really say much except what you've seen in press releases.

Okay, fair enough.

And we have a follow-up question from Brandon Goulart with Jefferies. Your line's now open.

Thanks. Christine, just a clarification on 2019. Any chance you could quantify the RainDance revenue headwind? And then, John, I believe you exited the QuickStep HLA market in the U.S. Is that a material number to perhaps call out as a drag on diagnostics?

So, Brandon, the headwind for RainDance is about $9 million. Largely from the exit of our Myriad business. Yeah, yeah, but the anticipated decline, 19 versus 18, is about 9 million. That's correct. And what was the second half?

Brandon, can you repeat the second question on blood typing?

Yeah, the second part, you discontinued the QuickStep HLA product in the donor screening market. Just curious if that's a headwind worth calling out.

No, not at all. It is very, very small.

Okay, and then, Christine, just on the balance sheet, you clearly made some good progress on the working capital front. Should we expect that to continue into 2019, and do you think there's a chance that inventories can continue to come down on an absolute basis?

That's certainly a focus that we have for 2019.

So, I think, yeah, I think we're anticipating some incremental working capital improvement. I don't know that we get the big step function as we did this year, but certainly continued improvement there. And as Norman mentioned, there's a very sizable focus on inventory this year.

Very good. Thank you.

At this time, I'm sure no further questions. I'd like to turn the call back over.

Tyler, can you pull one more time, please?

Yes. Again, if you have a question, please press star and then 1. Okay. I'm not seeing any questions.

Great. Well, thank you, everyone, for joining us today on the call, and we really appreciate your interest and support as we close 2018 and look forward to 2019, and hopefully we'll be seeing you soon. Thanks. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does include the program. You may not disconnect. Everyone have a great day.