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Abaxis, Inc. (NASDAQ:ABAX)

Q3 2013 Earnings Conference Call

January 31, 2013 4:15 p.m. ET

Executives

Joe Dorame – Lytham Partners

Clint Severson – Chairman and CEO

Martin Mulroy – VP, Veterinary Sales and Marketing, North America

Al Santa Ines – VP, Finance & CFO

Rick Betts – Director of North American Medical Marketing

Analysts

James Sidoti – Sidoti & Company

Ross Taylor – CL King

David Clair – Piper Jaffray

Ben Hayner – Felton Company

Jonathan Block – Stifel Nicolaus

Erin Wilson – Bank of America Merrill Lynch

Jeff Frelick – Canaccord

Operator

Good afternoon and welcome to the Abaxis Third Quarter and Fiscal Year 2013 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Joe Dorame of Lytham Partners.

Joe Dorame

Thank you, Denise. Good afternoon and thank you for joining us today to review the financial results for Abaxis for the third quarter of fiscal 2013 ended December 31, 2012. As Denise indicated, my name is Joe Dorame. I’m with Lytham Partners and we are the Investor Relations consulting firm for Abaxis.

With us today, representing the company are Mr. Clint Severson, Chairman and Chief Executive Officer, Mr. Al Santa Ines, Chief Financial Officer, Mr. Donald Wood, Chief Operations Officer, and Mr. Martin Mulroy, Chief Commercial Officer, North American Animal Health Sales. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session.

Before we begin, I would like to remind everyone this conference call includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements related to the company’s cash position, financial resources and potential for future growth, market acceptance of new or planned product offerings, future recurring revenues and results of operations.

Abaxis claims the protection of the Safe Harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms may, believe, projects, expects or anticipates or words of similar import and do not reflect historical facts. Specific forward-looking statements contained in this conference call may be affected by risks and uncertainties, including, but not limited to, those related to losses or system failures with respect to the company’s facilities or manufacturing operations, fluctuation in quarterly operating results, dependents on soul suppliers, the market acceptance of the company’s products or the continuing development of its products, required FDA clearance and other government approvals, risks associated with manufacturing and distributing its products on a commercial scale free of defects, risks related to the introduction of new instruments manufactured by third parties, risks associated with competing in the human diagnostic market, risks related to the protection of the company’s intellectual property or claims of infringement of intellectual property asserted by third parties, risks related to the condition of the United States economy and other risks detailed under Risk Factors in the Annual Report on Form 10-K for fiscal year ended March 31, 2012 and other periodic reports filed from time to time with the United States Securities and Exchange Commission.

Forward-looking statements speak only as of the date of statements were made. Abaxis does not undertake and specifically disclaims any obligation to update any forward-looking statements.

With that having been said, I’d like to turn the call over to Mr. Clint Severson, Chairman and Chief Executive Officer of Abaxis. Clint?

Clint Severson

Great, thank you Joe, and good afternoon everybody. I’ll review the accomplishments and the challenges for Q3 2013 and then some of the goals for Q4. After my short presentation, I’ll ask Marty Mulroy, our Chief Commercial Officer of North American Vet Sales and Marketing and Rick Betts, our Director of North American Medical Marketing to give an update on their respective businesses, and then we will take questions.

Our operating challenges for Q3 were fewer than last year but included lower government sales, which finished Q3 2013 at just under $400,000, down about 49% year-over-year and down 35% quarter-over-quarter.

Going forward, Abbott will be responsible for the majority of our government revenues as they pickup our medical business in the U.S. We will still focus on the Vet portion which was about 19% of the total government sales so far this fiscal year.

Another challenge for Q3 was lower rapid task sales compared to last year and last quarter which lowered gross margins due to the minimum royalty payment we meant with later (ph). Our focus on instruments, disks, the training of our new distribution and the seasonality of this business are the main reasons for the shortfall.

While we continue to lose money to AVRL, the total loss was reduced this quarter by about $218,000 but was still a drag on gross margins. With AVRL sales up by more than 28% quarter-over-quarter, and losses down about 13% I think we’re on the right track that we’ll hear more from Marty in a few minutes.

Even though we had challenges, we set many records in Q3 FY13. First we had record sales at just under $50 million finishing the quarter with total sales at $49.8 million, up 32% year-over-year and up 13% quarter-over-quarter. Worldwide Vet sales for Q3 also set a record and totaled $39.9 million, up 40% versus Q3 last year. And North America Vet sales were also up 40% versus Q3 last year finishing the quarter at $33.6 million also a new record and more from Marty in a few minutes.

North American total revenue finished at a record at $41.8 million, up 31% year-over-year and up 16% quarter-over-quarter with double-digit growth from both medical and Vet growth. International sales finished Q3 2013 very strong at $8 million, up 33% over Q3 last year. European sales totaled $6.2 million, up 37% year-over-year and the PAC-RIM sales finished at $1.8 million, up 22% over Q3 last year.

Worldwide medical sales finished at a record level even though the medical sales to the government were done almost 49% to finish at $9 million, up 10% year-over-year and 14% quarter-over-quarter. Domestic medical sales were also at record levels finishing at $6.7 million, up 18% year-over-year and 29% quarter-over-quarter and included our first order from Abbott and a strong instrument quarter from our sales team, more from Rick in a few minutes.

We broke all past records with our instruments sales in Q3 FY13, with total unit sales of 1,818 instruments, up 623 instruments and 52% year-over-year and up 251 instruments or 16% quarter-over-quarter. In dollars, instrument sales finished up 54% year-over-year and 20% quarter-over-quarter.

We sold 545 Vet scans versus 438 Q3 last year and 572 last quarter. 395 hematology instruments versus 245 Q3 last year and 372 last quarter. 306 Piccolos versus 226 Q3 last year and 259 last quarter. And finally, we sold 572 i-STAT and COAG instruments versus 286 last year and 364 last quarter. Total disc sales at 2.1 million units finished the quarter at a record and were up 29% versus Q3 last year and up 25% versus last quarter. In dollars, total disc sales were up 31% versus Q3 last year. Piccolo disc sales finished at a record 764,000 units, up 17% year-over-year and 32% quarter-over-quarter. Total Vet disc sales at 1.3 million units also a new record were up 37% year-over-year and 22% quarter-over-quarter.

Other Vet consumable revenues that include i-STAT and COAG cartridges, rapid tests and hematology packs finished Q3 FY13 at $6 million and we’re down 6% versus Q3 last year, mostly due to lower rapid test sales. 18% of our sales this quarter were medical sales while 80% were Vet and 2% other. This compares to with 22/75/3 Q3 last year and 18/79/3 last quarter.

28% of total sales were capital sales were up 72% for consumable. This compares with 24/76 last year and 26/74 last quarter. 16% of sales were international while 84% were domestic. This compares with 16/84 Q3 last year and 19/81 last quarter.

Disc average selling price finished Q3 at $12.83, up $0.27 versus Q3 last year but down about $0.37 versus last quarter. The reason for the decline quarter-over-quarter is the mix. Disc cost at $3.77 was up $0.05 year-over-year but down $0.10 quarter-over-quarter. Disc margin finished the quarter at 71%.

Now the gross margin was adversely affected by the continued negative gross margin of AVRL and our mix of higher instrument sales as a percent of total sales and finished at 52.4%, down 170 basis points year-over-year. Quarter-over-quarter, however, margins were up 20 basis points. Now if you exclude AVRL, the investment we’re making there, gross margins would have finished Q3 at 55.6%.

As we near our breakeven at AVRL and continue to reduce disc costs, we should see margins continue to expand throughout the rest of this calendar year.

Operating expenses for Q3 FY13 finished at $18.4 million or 36.9% of sales, which is down from 41.9% of sales Q3 last year and down from 38.3% of sales last quarter, which was adjusted for the Cepheid legal settlement. Operating expenses for AVRL decreased $230,000 or about 28% versus last quarter.

Sales and marketing expenses totaled $12.4 million or 24.8% of sales, which is down from 26.2% of sales Q3 last year and included the severance costs for the seven medical sales folks who are leaving due to the Abbott deal and the extra training costs associated with the addition of MWI and Abbott as new distribution partners and it was up slightly from the 24.7% of sales last quarter.

R&D expenses of $3.8 million or 7.6% of sales were up from 7% of sales Q3 last year and down from 8.1% of sales last quarter. Admin expenses totaled $2.2 million or 4.4% of sales and we’re down from 8.7% of sales Q3 last year and down from 6% of sales last quarter, after the adjustments related to the Cepheid settlement.

We also have record operating earnings for Q3 2013, which totaled $7.7 million up 66% year-over-year and up 23% quarter-over-quarter after adjusting for the Cepheid settlement in Q2. Net income of $5 million also a record, excluding the adjustments for the Cepheid in Q2 and it was up 75% versus Q3 last year and up 21% versus last quarter, again after the adjustments for the Cepheid lawsuit settlement. And we finished at $0.22 a share, up from the adjusted $0.18 a share last quarter or up 22%.

Now on the R&D side of the business, the focus is on completing the menu of Abaxis rapid test. Once should we submit at this quarter and the rest on various stages of development. These new products are key to growing this product line with a goal set to have all these test developed by the end of September this year.

Q4 goals include, keeping the sales momentum going in the bet market especially with our MWI partnership. We’ve invested and now we believe our future return will be significant. AVRL sales growth and the reduction of the operating loss is also a key success factor for Q4.

On the medical side of our business, we are focusing with Abbott to make sure the lose ends on the transfer of our U.S. business that started in January, get tied up and they get the support they need to meet their aggressive targets.

We have two senior sales managers working on the clinical research opportunity with two potential projects in the works. In addition, we now have a full-time senior sales manager responsible from Canada, which is an area with good potential that has not been covered in the past. Europe is another area where we continue to get good growth in both Vet and medical markets and that’ll also be a priority in Q4.

Disc costs of the 2x2 project continue to show results, so keeping this project on track will be important for meeting Q4 financial goals.

With that, Marty, you’re on.

Martin Mulroy

Thank you, Clint. In my prepared remarks I will provide some additional details surrounding the North American Animal Health business. In our third quarter fiscal year 2013, North American Animal Health recorded record revenues of $33.6 million, up 18% from our prior quarter or $5.1 million and year-over-year up 40%, an increase of $9.6 million.

As Clint mentioned, AVRL contributed just under $1.4 million to revenue, up 28% from our prior quarter. Our reference laboratory segment is rapidly approaching now a $6 million business. 237 customers last quarter purchased or leased Abaxis instruments combined with one or more AVRL programs, accounting for 444 instruments and $3.8 million in revenue.

In dollars, records were set for i-STAT instruments, VSpro instruments, VSpro cartridges and rotor sales with the rotor revenue in Q3 for the U.S. and Canada at $17 million. In units, records were set in VSpro instruments, i-STAT instruments, VSpro cartridges and again rotors at over 1 million units purchased in the U.S. and Canada in our Q3.

ASP in-roads continue to be made with the i-STAT cartridges and our line of rapid diagnostic tests. Our instrument business continued to be very strong. We shipped a record 1,264 instruments, up 29% versus last quarter’s record instrument sales of 983. Additionally, the ASP on hematology year-over-year improved 15% and the VetScan VS2 chemistry ASP improved 9% year-over-year.

Much of the success we attribute to the impacts of our AVRL and some combined with continued investment in the U.S. and Canada field sales and field sales support. The MWI initial stocking order also had an impact. The MWI partnership is often running sales through and with MWI commencing January 2nd and early signs are very promising. We are excited about the mutual opportunity to continue to grow our respected businesses and additionally I would like to congratulate and thank the North American Animal Health team for yet another quarter of strong revenue growth. And we look forward to the continued momentum and future contributions from the entire organization.

And with that, I’ll turn it back over to the boss.

Clint Severson

Thank you very much Marty. Okay, for all of you that might not have met Rick Betts before, Rick has been with us for about five years as Director of Marketing for the Medical team. And Rick will be the person responsible for managing the Abbott relationship and so I think he’s been on conference calls before but it’s been a while. So I would like to introduce Rick Betts, you’re on now.

Rick Betts

Thank you, Clint and good afternoon all. I’m proud to report that the U.S. Medical team set a host of new records in Q3. As Clint mentioned, record domestic medical revenues of $6.7 million were up 29% quarter-over-quarter and up 18% year-over-year. Piccolo placements of 172 instruments topped previous best and our sales team averaged 15.6 placements per headcount which was almost 50% higher than the old mark.

In addition to the placements, we also sold 103 instruments to distributors which included the initial Abbott stocking order, more on Abbott later. U.S. Medical disc sales were up 21% at a record 646,000 units versus 536,000 units a year ago and they were also up 41% quarter-over-quarter. Q3 disc sales also include the initial Abbott inventory stock.

The breakdown of Piccolo placements for Q3 is as follows, 56 to general practitioners, 49 to urgent care, 26 to internal medicine, 15 to large clinics and hospitals and 26 to various other specialties. Catapult Health also employed another 10 instruments in their occupational health offering.

There are several reasons for the sales growth we experienced. First, the election ended and while the jury may still be out on the impact of health care, it did eliminate a lot of uncertainty that was causing physicians to delay purchases for their practices. Secondly, since the physicians didn’t buy many things in 2012, the year-end section 179 tax benefits were more prevalent than in previous years creating more purchasing opportunities. And lastly, being the competitive as they are, our sales team wanted to set the bar very high for the incoming Abbott team and they did exactly that.

With regards to the Abbott transition, I’m also proud to report that in just 12 weeks since the announcement, Abbott is now mission ready to support the piccolo customer base and existing channel partners. A mountain of work was completed in a very short time and both the Abaxis and Abbott transition teams are collaborating closely to ensure that there is minimal impact to the customers.

With any transition of this magnitude, there is still a great deal of work to do in order to ensure success. But if it passes any indication of the future, Abbott is well on its way to exceeding expectations.

As for me and the rest of my remaining teammates we will be focusing no ensuring Abbott’s success through training and ongoing consultative collaboration, in addition, we will also be working on building new medical business and revenues through some exciting carve outs including the clinical trials, retail, Canada, Catapult Health and the merchant marine.

Thank you. And now I’ll turn it back over to Clint.

Clint Severson

Great. Thank you very much Rick. And now we’re open for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from Jim Sidoti of Sidoti & Company. Please go ahead sir.

James Sidoti – Sidoti & Company

Good afternoon. Can you hear me?

Clint Severson

We can hear you fine Jim.

James Sidoti – Sidoti & Company

Great. A lot of stuff to talk about today, a lots going on. And still MWI, Marty, can you give us some sense on what sales to that channel were and how repeatable you think they will be?

Martin Mulroy

MWI disclosed with their agreement a commitment of $15 million which was a combination of the initial stocking order and then subsequent replenishment the following quarter. They did not break it out any further than that and I prefer to leave it as they disclosed.

Clint Severson

Yeah, I think, Jim, clearly we have competitors out there that are interested in how well MWI is doing with Abaxis stuff. We believe if that’s MWI’s progress to share that, should they decide to share it. And I think when you analyze the numbers clearly the company grew 30% some last quarter, the domestic business was up, I think 31% year-over-year North American business. But the international business, they had nothing to do with MWI or Abbott, especially in Europe, international was 33%, Europe was 37% that had nothing to do with Abbott or had nothing to do with MWI. So yeah, but they were off to a good start. And our goal is that they increase their orders with us this quarter as they sell everything out.

James Sidoti – Sidoti & Company

Right. and I’m just trying to get expectations properly because I went through the 8-K and it said that there were minimums in the first two quarters of the relationship and I’m just trying to get a sense will the business continue at the same pace or will they be a slow down as we get out into that third and fourth quarter?

Clint Severson

Yeah, well we expect it to grow. We’ve got high expectations for this. There is lots of opportunity with a lot of the market opening up to us. Marty has got about 100 people in the field supporting this effort and we are for the first time going to be getting involved in the front end of the sale rather than the back end of the sale. So we expect the numbers to go up, but again, of course there is no guarantee until it’s done.

James Sidoti – Sidoti & Company

All right. So there might be quarter-over-quarter variations, but you think on an annual basis that your sales would be up next year more than they were this year. Is that accurate?

Martin Mulroy

We do, yeah.

James Sidoti – Sidoti & Company

Okay. As far as the severance costs and the training expense in the quarter, can you quantify that at all?

Clint Severson

Well, the severance cost was more than $200,000 less than $300,000. And of course the training cost we haven’t added all that up because a lot of it goes into travel, the travel budget and the hotels and all that kind of thing. But clearly Rick was meeting with Abbott people, I don’t know how many meeting you had and Marty and his team were back and forth the bossy Idaho and all over the country. So it was probably in the $200,000 to $500,000 range I would guess.

James Sidoti – Sidoti & Company

Okay. So if you assume that with your share count that you probably had a couple pennies of expense related to the training in severance in this quarter that you won’t have next quarter.

Clint Severson

Yeah, probably.

Martin Mulroy

And Jim if I could add, we probably had some opportunity cost as well. We were very committed to getting MWI off on the right foot and now there is a lot time that was spent collaborating and training and meeting that could have been time spent selling.

James Sidoti – Sidoti & Company

Okay. All right. How about legal expenses? Are they completely gone at this point?

Clint Severson

Well they’re never completely gone, but this last quarter legal was at…

Al Santa Ines

Yeah it’s so minute that I am embarrassed to tell you that. Okay, it’s nothing.

Clint Severson

Yeah, it’s pretty close. We’re back to standard legal right now.

James Sidoti – Sidoti & Company

Okay. All right, good. Now if we go to AVRL, it sounds like you’re still loosening about $1.5 million a quarter on that business. Is that sound about right?

Clint Severson

About $1.4 million.

James Sidoti – Sidoti & Company

$1.4 million a quarter. All right. What’s your expectation at this point as when do you get the breakeven? Is that three quarters away, four quarters away, sooner or further? Can you give us some sense?

Clint Severson

Okay. So I’ll give you my opinion and then turn it over to Marty who probably knows more about it than I do. Clearly our expectations when we got into AVRL, was that it would breakeven a lot faster than it is, which is probably pretty typically of a startup company. Every startup company have been involved with took twice as much money and took twice as long as everybody thought it when we started.

And so our goal now this next fiscal year is to break AVRL even. And we’re going to have people’s paid high to this goal. I think the sales growth of course is key because a lot of the costs are fixed. And getting the number of samples from about two per acquisition to three, six per acquisition is also critical. So going after some of these larger accounts will be important to that effort.

And then managing expenses, so in the early days you have to add infrastructure as your volume builds and K-State was supporting some of the lower volume stuff, but it was cumbersome to get the samples from our lab to K-State and then reporting and all that kind of stuff. So we did add some of that infrastructure ahead of our sales. We’re not doing that anymore. So we’re waiting for the sales to get to a point where it makes sense to have the infrastructure.

We made good head weight. The losses were down about 13% something like that. And so I think we have a good shot at breaking at even this next fiscal year. With that comments, Marty you add too.

Martin Mulroy

Yeah, sure. Part of the AVRL strategy was to help us grow the core business. Well first let me say Jim that we absolutely anticipate AVRL to breakeven next fiscal year and start generating income year, but I want to remind you that we did again sell 444 instruments accounting for $3.8 million in revenue associated with AVRL programs and promotions.

And then those 444 instruments come just last quarter is going to have a residual business that again we can tie back to the existence of AVRL. So AVRL will contribute to the bottom line here at some point next year as a standalone, but in the meantime, it is absolutely contributing to the business on a daily basis.

Clint Severson

Great, very good. Thank you, Marty.

James Sidoti – Sidoti & Company

All right. And then, well, MWI would be promoting those AVRL programs?

Clint Severson

So MWI does not have responsibility for AVRL, but clearly when MWI introduces us to a potential account that might benefit from buying Abaxis instruments. We lead with the VatScan and we end with AVRL. So everybody gets introduced to AVRL in our sales calls.

James Sidoti – Sidoti & Company

Okay. And it sounds like when it has breakeven, you should see at least the bottom line of about $0.03 or $0.04 a quarter from where you are now.

Clint Severson

I think so, yeah.

James Sidoti – Sidoti & Company

Okay. All right.

Clint Severson

Thank you.

Operator

Our next question will come from Ross Taylor of CL King. Please go ahead.

Ross Taylor – CL King

Hi, I wanted to start by asking some additional questions about the MWI relationship. Can you comment about what the sell through might be like, you’re in the month of January and now that they’re able actually go out and actively sell things for you?

Clint Severson

So, if the question where our sales in January?

Ross Taylor – CL King

Well I guess I’m just trying to get maybe just some comments that’s, right.

Al Santa Ines

Well let me give that for you.

Ross Taylor – CL King

Right.

Clint Severson

Okay. So let me try to get you a little color on that. We’re not going to disclose January sales. Even though I think Marty is probably proud of his January sales so far, it’s probably fairly meaningless when it comes to the whole quarter. But my expectation is that distributors especially sophisticated distributors like Abbott and MWI. These are the sophisticated business people that run these companies. They don’t order things to stop the show. It doesn’t make any sense? It drives up their costs.

A lot of our products have dating on them. So that means they’re perishable. So a good businessman would not want load up a bunch of perishable stuff that’s going to sit on the shelf. So I think that these purchases and forecast that they talk about are numbers that they believe they’re going to sell through. And if they didn’t think they would sell them through, they wouldn’t be ordering them.

And so while everybody would love to know how much MWI is going to displace competitive stuff in the marketplace with Abaxis products, you have to wait and see. You just have to wait and see. And we believe that we’re off to a very good start. We believe that these people did not order this order stuff to sit on the shelf, but they expect to move it through. And yeah we have high expectations here. That answers your questions?

Ross Taylor – CL King

Yeah, that’s good color. I’ll follow-up just by asking on your back in the September quarter, some of your smaller distributors kind of pulled back on orders. And I just wonder what kind of behavior or more feedback or commentary you’re hearing from them, as you add this large MWI distribution?

Clint Severson

I’ll comment and then I’ll give it to Marty. I don’t have the exact numbers right in front of me, Marty probably does, but I think most of that business came back because of the fact that MWI was not selling in the marketplace in our Q3 and we have pretty healthy sales growth. So I think mostly came back, but Marty you can comment.

Martin Mulroy

Yeah. Often manufacturers will add more distribution than they need and what happens is then margins are adversely impacted and ultimately nobody sells your product. Then you’ve got the other extreme where we were where our roster distribution had only 8% market share. And they essentially had, in their marketing areas they had exclusive with this product line.

So although our roster distributors prior to MWI certainly was not happy with or adding this national distributor initially. I think that they do see the opportunity with this product line moving forward and are continuing to support the product line and put emphasis on the product line. And in several cases what I’m seeing lately is more emphasis and more focus than we had in the past. So we’re working through this. We’ve got very good relationships with our former roster distributors and we maintained those relationships.

And to your earlier question, I would characterize to relationship with MWI also is very, very good. They two are a world-class company, first class company and I believe the Animal Health organization is as well a very professional world-class organization and we’re getting along very well and it’s a real partnership.

Ross Taylor – CL King

Okay. Maybe just turning to the medical side. It sounds like Abbott had maybe a relatively small start or haven’t you done the computations yet, but how can you see that business ramping up during the course of this calendar year?

Clint Severson

Yeah, I think we have forecast from Abbott and they’re committed to hitting up forecast and its I’d say a very reasonable forecast. Anytime you’re working with a large organization, it’s hard to predict how quick the start will be. And I think that’s pretty hard to predict, but through the next fiscal year, I think the medical business will grow very nicely. And Rick, do you have anything to add to that?

Rick Betts

Yeah, I can just say that the meetings that we’ve had and the trainings that we had with the Abbott sales reps and sales team have been very productive. Their team has assimilated the information very well and they were all given tests on the information. So they do the product knowledge required to go out into the marketplace and we expect their sales to grow exponentially from here on now.

Ross Taylor – CL King

Okay. And last two questions. I was just curious as to why the rapid assay sales were down in the quarter. I would have thought that would be different since you had a new distributor. And why exactly were the COAG and i-STAT instrument placements up so much year-over-year?

Clint Severson

Well, we do have a focus on instruments in our Q3. So there is an incentive for the customer to buy in December because of the tax treatment and so our sales people tend to focus on instruments. Also, rapid test truly are more of distributor product than they are direct sales product. And yeah, so, and there are seasonality to it. So the winter time, you don’t sell as many rapid test to end users.

And but I think the rapid test business will come back next quarter and yeah there is just fluctuations in this kind of a market. Marty, do you want to comment further?

Martin Mulroy

No, you’ve hit it.

Clint Severson

Yeah.

Ross Taylor – CL King

Okay, that’s very helpful. Thank you.

Clint Severson

Okay, great. Thank you.

Operator

Our next question will come from David Clair of Piper Jaffray. Please go ahead.

David Clair – Piper Jaffray

Hi, just a couple of questions. To start off, I missed the number of i-STAT and COAG instruments that Clint mentioned you also during the quarter.

Clint Severson

Okay. So we’ll pull out the exact number here, so we don’t confuse anybody. We sold 182 i-STAT and COAG instruments.

David Clair – Piper Jaffray

Hi, good afternoon everybody.

Clint Severson

Hi, David.

David Clair – Piper Jaffray

Hi. So Clint, maybe just another MWI question here from me. I know you do want to get me any details on what sell through has been like but how much was the initial stocking order from that. I know they’ve committed 15, how much of that did they put through in the quarter?

Clint Severson

Right, so, yeah. So that’s confidential as well. It’s confidential because we don’t want to be sharing with our competitors what our new distributor is doing for us. Now clearly MWI has the option of disclosing that and but I’ll stand by my other comments that these people do not order things, they don’t think they can sell I think the expectations that the optimistic folks have out there on how much MWI is going to help us. I think they’re accurate.

David Clair – Piper Jaffray

Okay. And then maybe just a couple of medical questions. So mentioned in the transcript, you have some CRO deals in the works. How big are these – how big could these be like compared to the big one that you landed couple of quarters ago?

Clint Severson

Yeah. So one of them is over 100 piccolos, but less than 200, the other one, I don’t think we’ve really sized it yet. But yeah I think this clinical research market is actually fairly significant. We’ve done some analysis on the market. The dollar size of diagnostic testing in clinical research market is over $3 billion. So it’s a really substantial market.

Out of that $1 billion of it is probably chemistry. So that’s kind of what where our figures came. And out of that about half of it, makes a lot more sense to do point of care that was to do in the central lab. And as these trial go from domestic trials to trials outside the U.S. more of it falls into the point of care area. Most of the big pharma companies aren’t aware that there is a point of care alternatives. They don’t know about Abaxis, they never heard of us before because we haven’t really promoted to the big pharmaceutical companies. Our work has been mostly with the clinical research organizations that it really vendors to the big pharmaceutical companies.

So this is a developing market of substantial size and the margins clearly are better in clinical research because you don’t have reimbursement issues. And there is a little bit more complex because you have a lot of regulatory issues in foreign countries. So if we’re not registered in the foreign country, we have to register to the tickle in. So there complexities that we’re figuring out, but we think it’s a very, very good opportunity with two people focused on this that are working setting up meetings with big pharmaceutical companies, working with consultants to help us give us introduced. And we think its going to be significant. So and Rick, do you have anything to add to that?

Rick Betts

No, that was perfect. Thank you.

Clint Severson

Okay, great.

David Clair – Piper Jaffray

And then, you’ve kind of talked about the substantially large retail customers as well, any update there?

Clint Severson

Yeah, we heard a rumor. Okay, but this is only a rumor now, its only rumor that one of these guys might be interested in setting some up sometime this spring. So yeah that is cooking along. Now I think as Obama Care becomes more clear as to what people are going to get reimburse for this stuff and what the demand is going to be, we get more actions on that side.

David Clair – Piper Jaffray

Okay. And how big is this, Clint, is this big one?

Clint Severson

You don’t know. Like I said, it’s a said you can’t. It’s a rumor but it was a rumor from a fairly good source, but still it’s a rumor.

David Clair – Piper Jaffray

Okay. Nice quarter guys.

Clint Severson

Hey, thank you.

Operator

Our next question will come from Ben Hayner of Felton Company. Please go ahead.

Ben Hayner – Felton Company

Good afternoon gentlemen.

Clint Severson

Hi.

Ben Hayner – Felton Company

So just kind of a color question. How has having both AVRL and MWI in your sales people back pockets impacted opportunities? Is it situation where having the one and one equals more than two in terms of getting into accounts closing the sale etc?

Clint Severson

Yeah, Ben. Both have helped our business enormously and will continue to do so over the coming years. We competed against our main competitor bundling commercial laboratory services with diagnostic equipment for years. We made the decision that there is synergy between the reference lab business and the point of care business. And so we are making that investment and building that business.

And then yes with MWI coming along now, it certainly is exciting and the opportunity working alongside the company such as MWI is going to be health to our business.

Ben Hayner – Felton Company

Great. And then on the, sorry.

Clint Severson

I was going to ask you if that answered your question.

Ben Hayner – Felton Company

Yeah, I mean I’m just kind of wondering it’s easier to get into accounts if you got MWI into and ready to fulfill the orders and then AVRL that combining the two as something that in the sales process make it a lot easier than going out there and just selling the instruments and doing in the traditional fashion that you guys have done.

Clint Severson

Yeah absolutely it does.

Al Santa Ines

I would say one plus one equals three.

Ben Hayner – Felton Company

Okay, that’s right getting that. Okay, great. And then do you feel like on the medical side, the reimbursement whatever we know about now under Obama care actually helps these institutors or these retail clinics make the decision that pushes it more towards the reimbursements better than perhaps people paying out of pocket.

Clint Severson

Yeah. So here is our theory. Our theory is that reimbursement for government Medicaid and Obama care kinds of stuff is not going to be very good. And that it will discourage conventional health care facilities to not be very interested in these patients.

But in a lower cost environment, like a retail operation, with the nurse practitioner, this reimbursement could be attractive because of the much lower overhead costs. And the issue will be, how many things can they do in that clinic. How many things can they do? So if they can have a menu of services that meet the needs of about the 70% of the primary care visits they probably don’t need a doctor, but this is a huge opportunity for these kinds of organizations.

And we believe that we can’t provide enough services to have that critical mass without our piccolo thing. And so that’s what we believe, that’s what we’re working on and I think as Obama care becomes a reality and you have patients out there with this insurance was not a whole lot of places to go that will take it that the demand will be picked up by these non-traditional organizations that can find a way of making a work that’s what we believe.

Ben Hayner – Felton Company

Right. Thank you very much and so I think David it’s a very nice quarter.

Clint Severson

Okay, thank you.

Operator

(Operator Instructions) The next question will come from Jonathan Block of Stifel Nicolaus. Please go ahead.

Jonathan Block – Stifel Nicolaus

Great, thanks guys and good afternoon. Maybe a handful of small ones. The first that, G&A expense, maybe Al this one is for you, it came in certainly below where we were, can you speak to that? Is that a decent number to go, to use going forward? I know it’s sort of legal came out a bit, but can you speak to the sort of $2 million, $2.5 million G&A expense?

Al Santa Ines

Yeah, majority of the reduction of the expenses, Jonathan are related to which I’m happy, absence of legal expenses related to those litigations that we have. And I think the level that we have last quarter, will increase this slightly but not significant. Okay.

Jonathan Block – Stifel Nicolaus

Okay, great. That’s very helpful. And the other one like, it’s upper more, but I guess the second question is, in a little bit more big picture for your Marty. You can speak to the environment out there for instrument placements, I think (indiscernible) recently went over to sort of a rental reagent and Idex seem to change their strategy even inter quarter to rental reagent yet. You talk to your instruments, there is a lot going out the door, but even going out the door to higher realized ASPs. So can you speak to the competitive dynamics in what you see in the marketplace?

Martin Mulroy

Sure Jonathan. I believe we still have a lot of pricing power in the marketplace. Now that the distribution plane field has been somewhat leveled, it does give us again more pricing power. I don’t know what else to say.

Clint Severson

Yeah I think Jonathan here is kind of the deal. So if you have a product that kind of looks okay, but you might be able to do without it, you’re more interested in maybe some kind of a plan that you can acquire it without doing a lot, adding a lot of risk to your organization. So then you’re more interested in may be doing a reagent rental or maybe a long-term lease or rental, something to maybe get your risk because you’re not really sure that this is really going to work out at the end.

On the other side of the coin, if you find a product that you are totally sold on that you believe this is going to make your practice more efficient. That you believe this is going to add value. You got no problem putting the money up for it and I think that’s kind of the environment that we’re in.

Martin Mulroy

And Jonathan, as I’ve indicated before, the operating cost for the Vet instrumentation is considerably lower than the competition and that gives us the opportunity to charge a premium price for our equipment.

Jonathan Block – Stifel Nicolaus

Understood, understood. Okay, great. That’s very helpful. And Clint, next one for you. You just maybe switch to gross margin on the desk. I think you mentioned 71% and I go back to my model and you done a great job bringing it up from sort of the high 60s steadily to the low 70s, but over the past maybe, four, five quarters, 71% seems to be the new run rate. Can you get it higher in 2x2 initiative, and do you think about taking price as we enter into next fiscal year?

Clint Severson

Yeah. So we are in the process of kind of discussing whether there is any pricing issues on the table or not. So we have not many decisions there yet. I think that our control right now is on the cost side. Our goal is a $2 rotor and we have $1 something to go to get $2 rotor. The multi-cavity cover and barcode is almost completely cut in now. So that was by $0.20. The next big project is multi-cavity base, okay, so base mold that’s currently a one cupcake mold that you want to take it to up to four cupcake mold that could potentially save us $0.50 on the cost.

And then of course doubling the volume, so if we can get the volume up, to $4 million a quarter from $2 million a quarter that will take probably $1 off the cost. And so that’s where our focus on a 2x2 program is on the cost.

Now on the average selling price, clearly the clinical research market, the retail market, the Canadian market, the European market, we have some pricing power. No doubt about it. With our Abbott’s agreement we’ve kind of agreed on a price for the kind of traditional U.S. medical business. So that’s probably going to see the average selling price of our traditional piccolo business will go down a little bit. But our selling costs will almost go away totally. So our operating margin will go up. So I think our new goal is probably consistent $13 rotor maybe up to $13.50 and then eventually manufacturing cost to $2. That’s kind of where we’re at.

Jonathan Block – Stifel Nicolaus

Perfect. And one last one and I don’t mean a net back, but just when you speak to the (indiscernible) and profitability next year, Clint. Is the thought breakeven full-year fiscal ‘14 or is it the exit quarter. I mean any additional granularity because you talked of building that into competition. Thanks guys.

Clint Severson

Yeah, so we are going to be doing our plan for FY14 on April 5th. So right now everybody is working on their forecast. They’re working on what they’re expenses are going to be, how it’s going to rollout by quarter. So we don’t know the exact quarter yet breakeven, when I say breakeven next fiscal year, I mean by the fourth quarter, but it maybe sooner than that. I think we’ll know more once we go through the whole planning process on April 5th.

Jonathan Block – Stifel Nicolaus

Thank you, guys.

Clint Severson

Thank you.

Operator

Our next question will come from Erin Wilson of Bank of America Merrill Lynch. Please go ahead. Hello Ms. Wilson, is your phone on mute perhaps?

Erin Wilson – Bank of America Merrill Lynch

Hi, sorry. Sorry about that.

Clint Severson

Okay no problem.

Erin Wilson – Bank of America Merrill Lynch

On MWI, how much visibility do you have on an inter-quarter basis as to the quality of either instrument places or consumable utilization trends as it relates to your relationship there? And is this contract I guess progressing better than planned or maybe on par with your initial expectations? Are you already winning accounts?

Clint Severson

We are already winning accounts and I think Marty is getting updates by the day may be not.

Martin Mulroy

We’re getting point of sale data daily from MWI and I would add that my expectations are being met.

Erin Wilson – Bank of America Merrill Lynch

Any idea on the mix of consumables versus instruments related to MWI?

Clint Severson

It’s probably not a material number anyway. I mean it’s only 20 some days in January, but its in dollars its probably mostly a higher instrument, but I don’t have any exact one in front of me, but I would guess the higher dollars should be instruments.

Erin Wilson – Bank of America Merrill Lynch

Great. And then I guess in conjunction with the relationship as well are you implementing any new bundling strategies or promotional activities, I guess to incentivize potential customers to trade and compete in diagnostic platforms?

Clint Severson

I think we have programs going on all the time and my favorite one and then Marty can tell you what the people are presenting mostly. So my favorite one is that after you do the demo of all the equipment, you ask the veterinarian that there is a possibility depending on your volume and depending on your mix. There is a possibility you could say the total cost of this instrumentation for everything based on switching your lab. So going from whoever you work with now to have Abaxis. And so if you give us few months of what you’re doing and how much is costing you, we’ll do an analysis for you and we might be able to save you enough money to cover all these instruments. That’s my favorite one. Marty you can expand on that.

Martin Mulroy

Well we’ve got about three or four new programs that we’ve launched in the past couple of months here and nationwide, not specifically with our new partners, but nationwide. And though, Erin, I prefer not to detail them for my competitors, let them find out in the street.

Erin Wilson – Bank of America Merrill Lynch

Okay. All right, thanks so much.

Martin Mulroy

Thank you, Erin.

Operator

Our next question will come from Jeff Frelick of Canaccord. Please go ahead.

Jeff Frelick – Canaccord

Yeah, good afternoon folks. Marty I missed it, could you give us the rental reagent sales number and VetScan sales number please?

Martin Mulroy

Yeah, I’ve got it here. So we sold 545 VetScans versus 438 Q3 last year and 572 last quarter. And Vet discs or rotors were 1.3 million this quarter versus 966,000 last year and 1.85 million last quarter.

Jeff Frelick – Canaccord

And so the VetScan revenue number?

Al Santa Ines

Its $4.72 million this quarter, last year is $3.441 million last quarter is $4.2 million.

Jeff Frelick – Canaccord

Great, thank you. And then hey Clint one more question. So if another way of looking at it is, I don’t want to break out the MWI stocking or Abbott, but just if you combine it the stocking with those guys both Abbott and MWI what was the revenue growth for the quarter excluding those?

Clint Severson

So it was clearly double-digit. I’ll tell you that it’s double-digit.

Jeff Frelick – Canaccord

And then just one more question for Rick. You talked about the Abbott transaction, looks like its on track for expectations. Can you share just kind of what the expectations are for the next year or two with respect to Abbott? Thanks.

Rick Betts

We expect them to hit their number, which right now is confidential number and once Abbott gives us green light to disclose it, we’d be happy to disclose it, right now, its confidential.

Jeff Frelick – Canaccord

Okay, thanks much.

Clint Severson

Okay thank you.

Operator

And our next will be a follow-up from Jim Sidoti of Sidoti & Company. Please go ahead.

James Sidoti – Sidoti & Company

Hi, Clint. The last question I had was related to the retail opportunity. Over the past couple of calls you’ve talked about the one thing you needed to prove was to get the lens, I guess clear waved. So they could actually try with Abbott where are you with that?

Clint Severson

Yeah so we submitted the collateral (ph) in for clear waver now. Now remember we have more 50% of these tests regulatory approved for finger-stick, venipuncture, CRM plasma, okay. There is only a few of them that don’t have “finger-stick” data submitted along with our venipuncture our whole blood. And so we’re in the process of doing those one at time. We have discs out there where there is only like one or maybe two and lights on them that don’t have finger-stick data. And if they want to report finger-stick data, they can do a study in-house, a validation study to show that in their facility finger-stick and venipuncture produce the same results.

James Sidoti – Sidoti & Company

Okay, I guess I was getting the…

Clint Severson

So (indiscernible) of getting, there is a regulatory way of meeting the requirements. And so it is up to the customer to decide that they want to wait for the FDA to clear all of our stuff or they want to go ahead and validate the finger-stick and venipuncture data in their clinic or their office to use it, okay. So there is multiple options for this.

James Sidoti – Sidoti & Company

And I assume that’s what your current customers are doing now. They’re validating that finger-stick on their own.

Clint Severson

They are.

James Sidoti – Sidoti & Company

All right. And then just one another follow-up. The subject of rental reagent programs came up and two of your competitors have switched to that. Do you have any plans to go that direction or are you going to continue to charge the analyzers?

Clint Severson

Okay. So we have programs in place where the customer can finance their instrumentation with the consumables where they actually make a deal with the bank, is that right Marty?

Martin Mulroy

It’s actually a leasing program.

Clint Severson

Yeah. They make a deal with the bank and so what happens is, they may pay $0.50 or $1 more for consumable and that extra they pay goes to the bank to cover the lease payment. So we do those things now. And I don’t exactly know how many we do but we do a few of those. I don’t think we have any intention of doing any deals where we’re actually doing the financing, but I’ll leave that open to Marty.

Martin Mulroy

Yeah, we – Jim we occasionally will do reagent rentals don’t get me wrong, but we also have some creative programs whereby we do capture the revenue and again as I said we’ve got pricing power and in terms of instrument to instrument and we’ve got the lower operating costs so that we can, the clinic could very often pay the lease payments and still be cash neutral or be ahead.

James Sidoti – Sidoti & Company

Okay. All right thanks.

Clint Severson

Thank you.

Operator

Ladies and gentlemen that will conclude our question-and-answer session today. I would like to turn the conference back over to Mr. Severson for his closing remarks.

Clint Severson

Okay, I want to thank everybody for tuning in and I clearly want to thank the Vet’s team here for fantastic job this quarter. With all the records that we set clearly everybody was working at 110% effort to get all this done and I want to thank all of our employees for making this happen this quarter. And we look forward to the call in April and we look forward to setting more records in quarters to come. So thank you very much for tuning in.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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