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We reiterate our Neutral recommendation on Luminex Corporation (LMNX - Analyst Report) following its second quarter results. In the reported quarter, adjusted (excluding one-time charges) earnings of 7 cents per share were in line with the Zacks Consensus Estimate. Profit generated was $3 million, down 36.4% from the prior-year quarter mainly due to higher operating expenses associated with the EraGen and GenturaDx acquisitions.

However, revenues rose 1.3% in the reported quarter to $48.3 million, slightly below the Zacks Consensus Estimate of $49 million. Overall increase in revenue was primarily driven by solid growth in the Assay business, partially offset by lower System and Consumable sales. Sluggish growth in its core markets is a challenge being faced by Luminex.

Luminex’s strong international presence has helped it to expand its product portfolio and customer base. The company’s current success in the global market can be ascribed to its Gastrointestinal Pathogen Panel (GPP) product line. The products have already received excellent international reviews for setting new standards in gastrointestinal diagnostic patient care.

Moreover, Luminex possesses a healthy pipeline and is working on developing several new assays. The company is currently seeking the Food and Drug Administration (FDA) approval for both NeoPlex4 and the GPP assay and plans to launch the devices in the U.S. around year-end 2012 and early 2013, respectively.

In April 2012, on the back of the growing assay business, the company decided to develop strategies to ramp up its market development activities and dedicated the next few quarters to the identification of potential targeted markets that will prove to be beneficial in the long term. In this connection, Luminex announced its plans to expand its Life Science and Biodefense Groups, as these offer significant growth opportunities to leverage technology as well as assay sales. The BioWatch project is a major growth driver for this business segment.

Luminex’s buyout of privately-held diagnostic testing company EraGen Biosciences represents an attractive prospect. The acquisition provides Luminex with a highly complementary portfolio of molecular diagnostic tests based on the MultiCode platform. Besides, it enables the company to tap new markets, leveraging EraGen’s innovative technologies.

Recently, in July 2012, the company announced a definitive deal to buy U.S.-based diagnostic testing company, GenturaDx. Luminex plans to launch a number of assays, which can be used along with GenturaDx’s innovative platform by 2014.

However, the GenturaDx deal is expected to be dilutive to 2012 earnings. Apart from acquisition charges, the deal will add roughly $6 million to the company’s operating expenses in 2012. Luminex intends to pursue acquisitions in the coming years to drive growth, a strategy which has inherent risks. The company needs to successfully integrate its acquisitions to avoid resource wastage.

Furthermore, Luminex is susceptible to regulatory delays and demand for research and diagnostics applications is expected to remain weak given the soft macroeconomic backdrop. Moreover, sluggish growth in its core markets may weigh on the company’s performance moving forward.

Luminex operates in the highly competitive life sciences industry. The company competes with Affymetrix (AFFX - Analyst Report) and Sequenom (SQNM - Snapshot Report), among others. We are currently Neutral on the stock, which carries a Zacks #3 Rank (short-term Hold rating).

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