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Immucor Inc. (NASDAQ:BLUD)

F4Q09 Earnings Call

July 24, 2009 8:30 am ET

Executives

Dr. Gioacchino Eatz De Chirico - President and Chief Executive Officer

Richard A. Flynt - Chief Financial Officer

Analysts

William Quirk - Piper Jaffray

Jim Quentin - Barrett & Co.

Quintin Lai - Robert W. Baird & Co.

Joshua Zable - Natixis Bleichroeder

Daniel Owczarski - Avondale Partners

James Sidoti - Sidoti & Co.

Craig Leighton - Lord Abbett

Bruce Cranna - Leerink Swann

Meryl Witmer - Eagle Capital

Shaun Bevik - Susquehanna Financial Group

Operator

Welcome to the Immucor conference call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce the host for today’s conference, Mr. Rick Flynt, Immucor’s Chief Financial Officer. Mr. Flynt you may begin.

Richard A. Flynt

Good morning and thank you for joining us to discuss our fiscal fourth quarter 2009 results. Participating with me on this call are Dr. Gioacchino De Chirico, our President and CEO and Michele Howard, Vice President of Investor Relations.

Before we begin, I'd like to read the following Safe Harbor statement. Many statements on this conference call constitute forward-looking statements that reflect our judgment about future events and circumstances. However, actual results and events could differ materially from these forward-looking statements.

Forward-looking statements in this call are based on current estimates and risk assumptions, and unanticipated events and circumstances may occur causing these estimates or assumptions to be wrong. The company does not intend to update or revise these forward-looking statements unless required to do so by the Federal Securities laws. For a detailed discussion of factors that could cause actual results to vary from these forward-looking statements, please refer to yesterday's press release and the company's most recent SEC filings.

We'll make some brief comments this morning and then go to Q&A.

I’d now like to turn the call over to Dr. Gioacchino De Chirico.

Dr. Gioacchino Eatz De Chirico

Good morning. I’d like to start the call this morning by giving you a brief update on our situation with the FDA. I’d like to reiterate what we have said many times before. We are committed to not only meeting our regulatory responsibility but developing a world class quality system to our quality process improvement project.

The project which began in early 2009 is progressing well and we are on track for completion by the end of our third fiscal quarter of 2010. We are working closely with the FDA to address the concerns. As you know, the last inspection of our manufacturing facility took place in January 2009. In that inspection, the FDA identified weaknesses in our quality system, some of which were contained in a previously issued warning letter.

By way of background, in January 2008, the FDA conducted a routine inspection in our manufacturing facility. They issued the 483 following the inspection which documented their observation.

In April 2008, we were the nationally recognized external consulting company to improve our quality system. In May 2008, we received a warning letter from the FDA, and then in June we submitted our remediation plan which they accepted. We were implementing our remediation plan with internal resources, using the external consultants in an advisory capacity. In December 2008, we realized we were not making progress fast enough, and began to explore how to restructure our approach to get faster results.

Coincidentally, the FDA came back in January 2009 for a routine followup inspection. They issued another 483 which contained repeat observation from their January 2008 inspection.

Early in 2009, we changed direction and expanded the role of the consultant to run both our quality department and our quality process improvement project while we expanded our internal resources. As I stated, we are making good progress in our projection so far this year. The FDA has not been back for inspection since our restructure project began.

I would like to state that the Notice of Intent to Revoke letter is an administrative notice and gives us the opportunity to demonstrate or achieve compliance before the FDA takes further action. The letter does not place any restriction on us regarding the sale of our product or the license of our facility, and no product recalls were involved in the action.

As we announced last week, we have submitted our formal 10-day response to the FDA. The next step is that we would provide our detailed remediation plan to the FDA by August 11th. The details of the remediation plan will be based on our quality process improvement project.

As start of the process to improve our quality system, we are evaluating our operations and organization to ensure that it surpasses our commitment to establish a world-class quality system. To this end, we recently created the product surveillance and improvement department. With the focus on product quality, this new department would provide a single internal focal point to monitor quality issues whether identified through internal or external sources and to initiate the appropriate corrective actions. The department is led by a 22-year industry veteran who was most recently the Vice President in our organization and brings together individuals from our quality, customer solution, and R&D groups.

Like the investment community, our customers are wondering what the Notice of Intent to Revoke means and what we are doing to improve our quality system.

We are diligently educating our customers about FDA situation and get them comfortable with our commitment to quality. As I stated earlier, the Notice of Intent to Revoke does not place any restriction on us regarding the sale of our products or no products recalls were involved in the action. The notice does not impact our ability to supply products to our customer.

We have not seen financial impact to the business so far but it’s too early to say if there will be a longer term impact.

I remain personally involved in all aspects of our quality initiatives, and as I said at the beginning of the call, we are committed to establish a world-class quality system as a part of this process.

Turning to the fourth quarter, we had the record year financial with revenue, earnings, and cash flow at all times high. Our results are driven by our automation strategy. We have the newest instrumentation in the market, and unlike the competition, our instrumentation offering is segmented between high volume and lower volume customers to better meet the goals of customers as they automate to gain operational efficiencies, labor savings, and enhance patient safety.

Our results are also driven by the fact that we are a need-based business. Approximately 90% of our revenue is generated from sales of our reagent product which are necessary to ensure the safety of transfusions. Our significant base of recording revenue is evidenced by the stability of our cash flow and earnings even in the current economic environment.

Before I turn the call back over to Rick, I want to say a few words about our new Chief Operating Officer. We announced last week that we added Geoff Crouse as our COO. In this newly created position, Geoff will be responsible for worldwide manufacturing and distribution, worldwide sales, marketing, and customer service, as well as IS. Quality and R&D will continue to report to me. Geoff comes to us from Millipore. He ran their Life Science Strategic Business Unit which is a global laboratory consumable and reagent business similar in size and complexity to ours. Geoff’s background and experience are a good fit with Immucor and we are happy to have him on board.

I would like now to turn the call back to Rick.

Richard A. Flynt

Turning to our instruments for the fourth quarter, we received 85 Echo orders worldwide during the quarter consisting of 65 orders in North America and 20 orders in the rest of the world including distributors. In 2009, our backlog of Echo orders to be installed in North America was approximately 4 months compared with 3 months at the end of our fiscal third quarter and a little more than 5 months at the end of our fiscal first quarter. Our backlog increased sequentially primarily due to the timing of orders received during the fourth quarter. Our fourth quarter orders were backend loaded with more than 80% of the orders received in the last month of the quarter. Additionally, we have IDN orders in backlog which require a greater degree of coordination from an installation and training standpoint.

For fiscal 2009, we had a total of 349 Echo orders worldwide, and into 2 years since Echo’s launch, we have received 603 orders which represent about 10% of our estimated worldwide addressable market.

In the fourth quarter, we received a total of 10 Galileo orders, one order in North America and 9 orders in the rest of the world including distributors. For fiscal 2009, we had a total of 63 Galileo orders worldwide.

Turning to our financials, in our fiscal 2009 fourth quarter, revenue was $79 million, up 15% or $10.4 million compared with the fourth quarter of fiscal 2008. Year-over-year revenue growth was attributable to price contribution of $6.6 million and volume contribution of $6.9 million. Revenue was negatively impacted in the quarter by $3 million due to foreign currency exchange rate fluctuations.

Consolidated gross margin was 69.9% compared with 72% in the prior year quarter. Gross margin in the current year quarter was negatively impacted by costs related to the company’s quality process improvement project totaling approximately $1.8 million. On a year-to-date basis, we have spent $2.4 million on the project.

Operating income was $29.2 million or 36.9% of revenue in the current year quarter compared with $28.2 million or 41.1% of revenue in the prior year quarter. Operating expenses are higher in the current year quarter due to our acquisition of BioArray and our initiative to sell directly to end users in the French and UK markets.

Diluted EPS was $0.27 in the quarter compared with $0.26 for the same period last year. The current year quarter included costs of approximately $0.02 per diluted share net of tax related to the quality process improvement project as well as a full quarter of BioArray expenses which was acquired on August 4, 2008. Cash flow from operations on a year-to-date basis was $79.8 million compared to $75.1 million last year.

As we stated in our release last night, we reaffirmed our financial guidance for fiscal 2010. We expect revenue to be in the range of $322 million to $332 million and gross margins to be in the range of 70% to 71.5%. The expenses related to the quality process improvement project are classified as cost of sales.

We continue to expect fiscal 2010 project cost to be in the range of $4 million to $4.5 million. Including these expenses, we expect our fiscal year 2010 diluted earnings per share to be in the range of $1.10 to $1.17. Fiscal 2010 guidance also includes a full year of BioArray expenses versus 10 months and for each year.

Our focus for fiscal 2010 is on creating a world-class quality system as well as capitalizing on the market opportunities that our innovative instrumentation and approach to the market provides.

At this point, I’ll give the call back to the operator to begin our Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from William Quirk - Piper Jaffray.

William Quirk - Piper Jaffray

First question is over to Rick, of the 80% of the Echo orders that you received in May month, how does this compare with previous quarters?

Richard A. Flynt

Bill, it varies; I mean, instrument orders are rather lumpy, sometimes they’re spread evenly over quarters, but in our fourth quarter, they just happened to come in the last month of the quarter.

William Quirk - Piper Jaffray

And then just a quick question on the manufacturing correction, outside of the publicly stated dollars that you’ve committed to the corrective action, what should we be thinking about in terms of ongoing expenses? Obviously you guys shifted some resources internally but still created a new department.

Dr. Gioacchino Eatz De Chirico

Yes, we’ve allocated some of the people in this new department, they were already in our organization but they were not focused on this product surveillance department. In our original forecast, we already included some additional headcounts that were to address this quality project; the number already included our original number, already included some additional ongoing expenses. We are adding additional people, but overall, the impact of this expenses will not change our guidance.

William Quirk - Piper Jaffray

And then lastly, again another manufacturing question; of the discrepancies that were identified by the FDA in either or one of the letters you received, anything in particular that you expect to take more time than anything else, or said another way, are you planning to shut down production at all to implement some of the corrections?

Dr. Gioacchino Eatz De Chirico

No, there is no implication of any shutdown. I don’t want to go much more in detail about the corrections we are taking; we are looking at our overall quality system, not just what the FDA suggested in their letters. We are looking at all the components of the system like design control, kappa system, and we are doing a truly gap analysis of all the systems, and from there we will go where the system should be basically; and it’s a much more bigger project to address the things that were in the warning letters.

Operator

Our next question is from Jim Quentin - Barrett & Co.

Jim Quentin - Barrett & Co.

Just had one question regarding where you started talking about the FDA at the beginning of the call, I know that still the investigation is going on and so forth, but did you mention anything about the FDA looking into the price increases in reagents 5 or 6 years ago or is that part of the ongoing investigation?

Richard A. Flynt

Jim, I think what you’re referring to is actually the DOJ subpoena and the FTC matter that we previously disclosed rather than the FDA. We did get a document subpoena from the DOJ back in April, we have been accumulating and working to get those documents submitted to the DOJ, there’s been no real further developments at this time that we can update to you all.

Operator

Our next question is from Quintin Lai - Robert W. Baird & Co.

Quintin Lai - Robert W. Baird & Co.

Congratulations on a nice May end. One more question on the FDA site visit in January ’08 and January ’09, is the next one potentially January 2010?

Dr. Gioacchino Eatz De Chirico

We don’t know that, Quintin; usually FDA does not tell us when they come in; in the last case, it took one year for them to come back; we don’t know yet.

Quintin Lai - Robert W. Baird & Co.

And then, could you talk a little bit about another strong quarter of Echo placements; previously, about half of them were competitive take-aways; give us a little color on how those placements were going, and then now, with all of the things that are going on, how are you doing on head-to-head bake-offs?

Dr. Gioacchino Eatz De Chirico

First of all, the results of the overall confirm our assumptions that competitive take-away were between 50% to 60% and around 75% or a little higher than that were rental programs. Like Rick said in the beginning, some of these customers are IDN, integrated delivery networks, where multiple hospitals buy equipment to standardize the results, and of course, when you have this kind of networks, you have to organize the installation quite well because they would like to have the instrument installed at the same time in all the hospitals, and that’s what we’re dealing now. In terms of dealing with the customer, as I said before, we’re very open in talking to customer about the FDA letter, and talk to them, explain to them what the letter means, there is no restriction in private supply like I said. We’re talking to them, keeping them informed, and I think that’s the most important thing in our partnership between us and the customers.

Quintin Lai - Robert W. Baird & Co.

With respect to larger things like the IDN, do you think it’s a competitive advantage to have a breath of medium and high throughput because you could have a network of high and medium hospitals?

Dr. Gioacchino Eatz De Chirico

Exactly. There are some networks where we deliver 10 Echo and maybe 2 Galileos because the largest hospital in the IDN wants to have a live throughput instrument and a small hospital wants to have an Echo and sometimes it is a very very small hospital in the same IDN who wants to have a manual workstation that we also offer. I think that is our major competitive advantage like I said in the beginning of the call, the competitive advantage we have is that we can tailor our solution to the size and the need of the customer, and this is a major difference from the competition where they have most of the time a first-generation instrument and only one instrument and they have to try to find a solution. I think we’re far away from our competition, we’re much better.

Quintin Lai - Robert W. Baird & Co.

Last question and I’ll jump back into the queue; uses of cash, any share buyback activity in the May quarter or since then?

Richard A. Flynt

We did have some share repurchase in our fiscal fourth quarter, Quintin; about 95,000 shares around $2 million; uses of cash, I think we’ll look to opportunistically buy back shares. We have about 846,000 shares that have been approved. We look at other opportunities as well, we’re always going to keep cash on our balance sheet because we don’t have any debt facilities, so we have to use our cash to fund our working capital needs.

Operator

Our next question is from Joshua Zable - Natixis Bleichroeder.

Joshua Zable - Natixis Bleichroeder

Congrats on a strong quarter. Just a couple of followups; obviously most of my questions have been asked, but just on the expense side, I know Bill asked earlier in the call about ongoing expenses, and I know you guys reiterated your outlook for next year related to even though you added, still within your outlook; but I guess, two questions; one, given that you put the quality control program in place and then you had the FDA come back to you after the fact, I am just wondering if there aren’t any additional expenses or why aren’t there any additional expenses maybe to get it done quicker; that’s part A of the question, and part B is that recognizing that you maintained your outlook for the upcoming year, going forward obviously spending about $5 million, how much of that should we think about is a real ongoing cost and how much is a one-time that will go away in 2011?

Dr. Gioacchino Eatz De Chirico

It’s a very complex question, but let’s talk about the first question which is about the cost of the project. We said this since April way before all of this happened that we had a plan to address the FDA concern, but not only to address the FDA concern, but to improve our quality system. We recognized even way before one of this happened that we had some weaknesses there, and the project was something like it is with them and that was the cost outside what we told you investors, what we told to consider as one-time cost basically, and it was mostly the outside consultant cost. Of course, along with that cost there are costs that are embedded in our P&L that are additional people in the quality department, additional people in the manufacturing department, that were, like I said in the beginning, were already included in our P&L. Your question is you received now an Intent to Revoke letter why you don’t speed up the process, and when you deal with problems of such complexities or mostly when you deal with quality system issues, it’s not to easy to speed up the process. Speeding up the process can also not be a good idea if you want to have a good result. We have to make sure of what the plan is to implant the plan. Of course, the point that FDA pointed out in their Intent to Revoke letter were already, most of it, were already in the 483 letter, and we knew which were the weaknesses that the FDA was focusing way before the Intent to Revoke letter. What was the second question, Josh?

Joshua Zable - Natixis Bleichroeder

You kind of answered it, but just to be clear about it; with your ongoing operating plan you obviously continue to add people as you grow. So, when those people on the manufacturing and quality control side, when you look out to 2011 and we X out this $5 million, is that the right way to think about it; the $5 million is really one time or let’s say $1 million out of the $5 million is going to be ongoing and $4 million goes away; I am just trying to gauge how much is really one-time project related and how much has to be a part of the permanent P&L?

Richard A. Flynt

Josh, let me try to explain that. Before we actually gave our guidance we had already done the project costs as well as what our budget was and what our headcount increases were going to need to be. So, the project was already started. The $4 million to $4.5 million that we’re talking about is related to the consultants which will not be continuing. Everything else is in the base numbers for our 2010 guidance. So, those costs, you should continue with going into 2011 and forward.

Joshua Zable - Natixis Bleichroeder

On the communication side, I understand what happens; I understand the FDA is a bureaucracy probably more so today than it has been for a long time, but can you just help us understand what the dialogue was with the FDA going into this, was there not a formal plan submitted and now it’s really a matter of paperwork; I am trying to understand, I know you guys publicly said you recognize your shortcomings on the quality control side, you also publicly told us that you were spending a lot of money to fix it; did nobody give them a heads-up, did you give them a heads-up and this was a matter of paperwork that they had to sort of serve to you; I just think all of us are trying to understand where they disconnect was between you guys taking action and then after the fact them issuing something; I assume when you submit your plan, it’s going to be the same thing you’ve just submitted to us months ago. So, can you just help us understand that disconnect?

Dr. Gioacchino Eatz De Chirico

I don’t know if there is a disconnect; like you can read also what FDA sent us since January 22nd, and we stuck to send them an FDA response and plan to improve, and we send plans on a monthly basis, you can read in the letter, I think we sent something like five or six updates on the plans. What FDA states in their letter is that they lost faith in what we were saying basically and that’s the reason they sent us the letter. What I want to say is that we’re keeping our dialogue open with FDA, we’re talking to them, I don’t think there is a disconnect; it’s just a question that we failed because they found repeat observations basically, and that’s what they said in the letter that it’s a question of a trust issue and we understand it.

Joshua Zable - Natixis Bleichroeder

Just going to the product side here, getting away from the FDA for a second; Galileo II, you said 2010; question one, I am assuming that’s calendar 2010?

Dr. Gioacchino Eatz De Chirico

Yes, it is.

Joshua Zable - Natixis Bleichroeder

Any details you can give us about this at all; I am wondering Galileo orders in the US obviously were weak, but obviously the product has been on for a couple of years, I am wondering if people are waiting for it and that’s affecting Galileo orders now, so building up a backlog because you had talked about it publicly; I know it’s a tough capital environment; I am wondering if you guys are using a capital or rental model? Can you just give us any more details related to Galileo II?

Dr. Gioacchino Eatz De Chirico

First of all, we call it Galileo Neo and not anymore Galileo II like we said in the press release. All what you said is true. The capital environment is very tough and Galileo is usually bought and not goes on rental because it’s an expensive piece of equipment when compared to the Echo, and the other thing is that Galileo Neo will have many new features that will make the instrument much more appealing and I would assume also that for us announcing that there is a new generation of an instrument coming in the market that has put some restraint, the customer will wait for the new instrument instead of buying the old model. All of this happened and we believe that Galileo Neo with the new fast turnaround time for small batches, maintaining the high throughput like it was with the ideal instrument for large-volume; we make attractive this point also to the medium-high volume instead of the old Galileo model for medium-high volume was not ideal.

Joshua Zable - Natixis Bleichroeder

Two more; one housekeeping on Echo; can you give us breakdown of rentals and purchases in the quarter of the orders?

Richard A. Flynt

About 75% overall, or a little over 75% actually.

Joshua Zable - Natixis Bleichroeder

Then on BioArray, you guys haven’t talked too much about it. We usually only get updates on these calls; any ideas of timing when that’s coming, just a general update on what’s going on there; I know you have the machine at ACC, so I assume it’s going well.

Dr. Gioacchino Eatz De Chirico

What we have at ACC is the current equipment basically. We said in the last call in June that we have signed an agreement with an outside company to develop a modular system for the molecular immunohematologic lab front, and we said that we plan to have research on this product and the equipment available to the market in the second quarter of calendar year 2011.

Joshua Zable - Natixis Bleichroeder

So, timing is still right with that?

Dr. Gioacchino Eatz De Chirico

Yes.

Operator

Our next question is from Daniel Owczarski - Avondale Partners.

Daniel Owczarski - Avondale Partners

A couple of quick followups. You started talking about the Galileo Neo; could there be delays at the FDA on the approval process with the warning letter or with the quality issues still out there or are those two completely separately items in the FDA’s eyes?

Dr. Gioacchino Eatz De Chirico

The equipment is the 510K and it does not follow under the same FDA branch that is sending us the Intent to Revoke letter; it’s a completely separate thing.

Daniel Owczarski - Avondale Partners

Just to go back to the question on the site inspection; is there a checklist of items that they want you to do or that you have to do before they come back down, maybe not for the routine visit, but for the next visit, and do you have to request them to come down?

Dr. Gioacchino Eatz De Chirico

I cannot go in this detail, but I can just tell you that we have spoken with the FDA, we’re talking to them, continuing to talk to them, and we will do whatever it needs.

Operator

Our next question is from James Sidoti - Sidoti & Co.

James Sidoti - Sidoti & Co.

Just a quick question on Echo; at current staffing levels, what’s the maximum number of Echo units you think you can place this quarter?

Dr. Gioacchino Eatz De Chirico

Our installation capacity is 30 Echo per month in the United States.

James Sidoti - Sidoti & Co.

Do you have any plans to increase staff to move that number up?

Dr. Gioacchino Eatz De Chirico

If you think that in the United States, 30 a month alone will mean, if we do our full capacity, it never happens, but if we do our full capacity, we mean only in United States, 360 a year. I don’t think we need to increase that.

James Sidoti - Sidoti & Co.

Okay, so you think you’re at sufficient level now.

Dr. Gioacchino Eatz De Chirico

I think we have enough capacity; to think about it, we also have a good capacity in Europe to install Echo, in Canada and Japan included in November, and now our guidance for next year is roughly 320 to 360; I don’t think we need to increase our capacity; 320 to 360 is worldwide.

James Sidoti - Sidoti & Co.

That 360 number is the US number?

Richard A. Flynt

360 capacity is the US number, Jim.

James Sidoti - Sidoti & Co.

In your guidance for fiscal 2010, you are assuming that the BioArray revenue will be in that $2 million to $3 million range again?

Dr. Gioacchino Eatz De Chirico

We don’t give guidance specically by product line for BioArray next year.

Operator

Our next question is from Craig Leighton - Lord Abbett.

Craig Leighton - Lord Abbett

On the molecular revenues in the quarter; the last couple of quarters you have broken that out and you’ve seen a steady increase in molecular revenues; is there anyway you could just provide that for this quarter?

Dr. Gioacchino Eatz De Chirico

We revealed that in the 10-K; I don’t have this number; it’s increasing, maybe, we can give this number.

Craig Leighton - Lord Abbett

That would be embedded in the instruments number, I assume?

Dr. Gioacchino Eatz De Chirico

No, it’s not embedded in anything. For the quarter, it was $777,000 for BioArray.

Craig Leighton - Lord Abbett

Okay, just a slight decline. On the pricing, you had another strong quarter; I wanted to ask you about that and maybe the percent of the price increase that came from non-contracted traditional business?

Dr. Gioacchino Eatz De Chirico

We don’t give that kind of information and that kind of split.

Craig Leighton - Lord Abbett

Perhaps just some understanding of the proportion of the traditional business that’s not contracted at this point; I know, periodically you will give that number.

Richard A. Flynt

Overall, about two-thirds of our total business is under contract.

Craig Leighton - Lord Abbett

That’s pretty steady?

Richard A. Flynt

It is relatively steady.

Craig Leighton - Lord Abbett

Lastly, because there was the AACC recently and you had a nice show there; I am just wondering if you might give a little bit of feedback from that conference; maybe customer reviews, customer comments, and perhaps, how June and July are tracking after a very strong May?

Dr. Gioacchino Eatz De Chirico

I was not at AACC because this week we had this call and we were busy to put together this number. The reports I hear, and I also read some reports from analysts, that unusually the AACC was a little bit low key in terms of number of attendees, but of course our booth was always very well attended because like I said at the beginning, what makes the difference between us and the competition is that we have a solution for any customer of any size, the right solution of them instead of one equipment that has to fit everybody, we have many instruments and different generation kind of approach to the market that we have comparing with the competition. That’s what makes our company better than the competitor.

Craig Leighton - Lord Abbett

I know last year’s fiscal first quarter you had a very strong Echo placement quarter or Echo order quarter; I am wondering would you expect that sort of distribution through this year as well.

Dr. Gioacchino Eatz De Chirico

Last year we had the promotion that lasted till the end of July. We are not doing that promotion this year.

Operator

Our next question is from Bruce Cranna - Leerink Swann.

Bruce Cranna - Leerink Swann

A lot of my questions have been answered, but I did want to ask one question on the 2010 revenue guidance; the mid point of the range you’ve given implies something like a 9% or 10% growth rate for the year, and I am just wondering your run rate historically has been I guess well above that level. So, are you guys planning on somewhat of a deceleration in volume or should we be thinking that pricing gains will not be perhaps quite as robust in 2010 as they have been?

Richard A. Flynt

We’ve talked about our price contribution for next year being in the $15 million to $20 million range, and volume contributing to $15 million. In contrast, this year we will have price contribution in the neighborhood of $27 million, and volume contribution in the range of $15 million. Yes, we aren’t expecting the price contribution next year to be as great it was this year.

Bruce Cranna - Leerink Swann

Is that just a function of contracts rolling off or being renegotiated?

Richard A. Flynt

To a certain extent that’s correct. It depends on when the contracts renew and how long they are, etc.

Bruce Cranna - Leerink Swann

I think you mentioned, Rick, the shares left on the authorization; I missed that number.

Richard A. Flynt

It is around 846,000 shares that have been authorized.

Operator

Our next question is from Meryl Witmer - Eagle Capital.

Meryl Witmer - Eagle Capital

I am just wondering with the NOIR letter, does that affect what happens with the salesman on a visit or is it just that your industry is so used to these types of things, it’s no big deal?

Dr. Gioacchino Eatz De Chirico

Like I said in the beginning, we’re keeping open the communication; like the average investor, we tell our customers dealing with them what that means, what the letter or Intent to Revoke means. There is no restriction to supply our product of course, but we need to make sure that we work with our customer to make sure that they understand what the process is. We have not seen a financial impact like I said to the business so far.

Meryl Witmer - Eagle Capital

I understand that your customers like you and that they wouldn’t change, etc., etc., you have that business somewhat locked in, but I am just wondering to get new customers, to get someone to switch from who is doing a manual gel system to yours or just to switch and go through all the work to install an Echo machine; what do you see with that sale cycle, that’s for the competitive take-aways?

Dr. Gioacchino Eatz De Chirico

It takes usually six months or two quarters from the installation to the time that the customer starts to go live, and that’s mainly because the timing is longer if you are dealing with a competitive take-away situation because the customer has not only to adopt a new equipment, but also has to convert the reagents they used to use and use a new reagent, and the time of changing and the cost of changing basically is very high in our industry, and because that cost of changing is very high, the only reason why customers change only for technology; if there’s a great jump in technology then the customers change. The customers are reluctant to change for a small jump in technology; and that’s what our advantage is, we can offer our customer a jump in technology with the Galileo Echo, and I think the customers recognize that, and that’s the reason we have such a high percentage of competitive takeaway.

Meryl Witmer - Eagle Capital

I just thought the risk profile would be increased with the June 26th letter, and I don’t know, I guess, if it were me, I’d say, okay, I’ll look at you or I’ll consider it, but I really won’t do anything in terms of changing until this threat has been taken away.

Dr. Gioacchino Eatz De Chirico

Yes, I understand; it’s too early to tell what impact on the instrument all this would be basically. We are working like I said diligently to educate the customers and get them comfortable with our commitment, but it’s too early to say what the impact on instrument will be.

Operator

Our last question comes from Shaun Bevik - Susquehanna Financial Group.

Shaun Bevik - Susquehanna Financial Group

Wanted to get some input on traditional reagents, they were pretty strong in the quarter, was there any particular reason there and can you quantify with regards to the reagents the contributions to the revenue increase from price and volume in the quarter?

Richard A. Flynt

Well, yes, we did have a strong quarter with respect to the traditional revenues. Part of that was due to some large orders from few of our European customers, unusually large orders, and then we had also a large one-time order out of Japan that we don’t expect to repeat, and in total I think that would account for almost a million dollars of the revenue that we’re talking about here. We don’t really give the price contribution and volume contribution separately for our reagents, so can’t provide a lot of information to you on that.

Shaun Bevik - Susquehanna Financial Group

With regard to the Galileo Neo, you guys anticipate showcasing that instrument before the launch in 2010 at any point?

Dr. Gioacchino Eatz De Chirico

Yes, we are assuming we’ll show at the AABB.

Shaun Bevik - Susquehanna Financial Group

And what would you say in terms of your current Galileo customers, what percentage of those do you believe are due for an upgrade and would be willing to jump on the new Neo cycle in addition to new customers that don’t have that system yet?

Dr. Gioacchino Eatz De Chirico

We are in the middle of analyzing that. Of course, our customers in Europe, the old generation of instruments is now 7 years old and these are customers who we are sure that are going to look for an upgrade or a change, and this is the analysis we’re doing now. In the United States, we launched the Galileo in 2004, and there could be some customers that are looking for an upgrade, but in North America there is less pressure because, like I said, all these instruments would be 5 years.

Operator

I’ll now turn the meeting back over to the speakers for any closing remarks.

Richard A. Flynt

Thank you for joining us today and we look forward to speaking to you again in our next quarter.

Operator

Thank you, this does conclude the call.

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