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Trinity Biotech PLC (NASDAQ:TRIB)

Q2 2013 Earnings Conference Call

July 30, 2013 11:00 a.m. ET

Executives

Ronan O’Caoimh – CEO

Kevin Tansley - CFO

Jim Walsh - CSO & Business Development Director

Joe Diaz – Lytham Partners LLC, IR

Analysts

Chris Lewis – Roth Capital Partners

Lawrence Solow – CJS Securities

Paul Nouri – Noble Equity Fund

Ross Taylor – Somerset Capital

Declan Morrissey - Davy Research

Operator

Good day and welcome to the Trinity Biotech Second Quarter 2013 Quarterly Conference Call. (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 Diaz of Lytham Partners. Please go ahead, sir.

Joe Diaz

Thank you Denise and thank all of you for joining us to review the financial results for Trinity Biotech for the second quarter of 2013 which ended June 30, 2013. As the operator indicated, my name is Joe Diaz, I’m with Lytham Partners. We are the financial relations consulting firm for Trinity Biotech.

With us on the call representing the Company today are Mr. Ronan O’Caoimh, Chief Executive Officer; Mr. Kevin Tansley, Chief Financial Officer; and Jim Walsh, Chief Scientific Officer and Business Development Director.

At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today’s call does not have a full text copy of the release, you can retrieve it off the Company’s website at www.trinitybiotech.com or numerous other financial sites on the Internet.

Before we begin with prepared remarks, we submit for the record the following statements. Statements made by the management team of Trinity Biotech during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will, and other similar statements of expectation identify forward-looking statements. The forward-looking statements contained herein are subject to certain risks, uncertainties and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements.

Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, but not limited to, the results of research and development efforts, the effect of regulation by the United States Food and Drug Administration and other agencies, the impact of competitive products, product development, commercialization and technological difficulties and other risks detailed in the Company’s periodic reports filed with the Securities and Exchange Commission.

Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

With that said, let me turn the call over to Kevin Tansley, Chief Financial Officer for review of the results. After that we will hear from Jim Walsh regarding developments of the cardiac business at Fiomi and finally, Ronan will provide his overview of the quarter as well as the acquisitions that were announced in today’s press release.

With that said, Kevin, I will turn it over to you.

Kevin Tansley

Thank you very much Joe. Today I'll take you through our results for quarter two 2013. To begin with our revenues, total revenues for the quarter were just over $21.3 million, this compared to $20.8 million in quarter two of 2012 and thus represents a growth rate of 2.4%. Later in the call, Ronan will provide more details as to the makeup of this growth and in particular the impact Lyme sales have had this quarter.

Before going through the rest of the income statement, I would like to mention quickly the Medical Device Excise Tax or MDET, as I pointed out last quarter this is a new in 2013 and thus for comparability purposes we’ve disclosed it separately.

So, returning to the income statement, the next item is our gross margin as you can see from our press release, this quarter’s gross margin was 49.8%, while this represents a strong gross margin, it was lower than the 51.6% we reported in quarter two last year. This decrease is attributable to two main factors, firstly it reflects the higher instrument placements predominantly sales of our new Premier instruments which had 80 this quarter is the highest in any single quarter. And secondly, is the impact of the lower Lyme sales which historically these products have had higher gross margins.

Moving onto our indirect costs, our R&D expenses are just over $900,000, which represents a slight increase in the $800,000 announced in quarter two of 2012. Meanwhile our SG&A expenses have increased in the quarter from $5.2 million to $5.5 million. This increase is entirely explained by the acquisition expenses related to Immco.

Our operating profit was 3.8 million which is down approximately $500,000 compared to the same quarter last year and again the biggest factor here is the acquisition cost in relation to Immco. And we’re also seeing the impact of the lower gross margin in relation to Lyme sales and Premier instruments which I mentioned earlier on. Before the impact of the acquisition cost we achieved an operating margin of 19% this quarter.

Moving on to our net financial income, this quarter we earned $440,000, which is a decrease of just over $100,000 on the equivalent period last year. This reflects the fall in interest rates available in the marketplace at present.

Meanwhile our tax charge for the quarter was $278,000 this represents an effective tax rate of 6.5%. The net results of all that I have spoken thus far is that profits for the period decreased from $4.3 million to $4 million excluding the Immco acquisition cost this impact would have represented an increase from $4.3 million to $4.4.

Our EPS for the quarter before the medical device tax was 18.5 cents, but again excluding the impact of the acquisition costs this would have been 20.5 cents and thus an increase over the 20 cents we achieved in quarter two, 2012.

Finally, earnings before income, before interest, tax, depreciation, amortization and share option expense for the quarter amounts to $5.1 million.

Now, I will move on and talk about significant balance sheet movements since the end of March 2013. Property, plant and equipment increased by almost $900,000 and this was made up of additions of $1.3 million as offset by a depreciation charge of $400,000.

I'd like to point out that the additions are again quite high this quarter due to the purchase of the capital equipment required for the manufacturing of our new cardiac test. As I mentioned last quarter, this is the sign that we're now moving from the development to the commercialization phase of the project.

During the same period, our intangible assets increased by a net of $3.7 million. This was due to additions of $4.1 million which is consistent with quarter one, 2013 and these additions have been partly offset by an amortization charge of approximately $400,000.

Moving on to inventories, you'll see that a $22.9 million, these are broad in line with the comparable quarter. In fact, there has been a slight reduction of approximately $200,000. On the other hand, trade and other receivables have increased by $2.1 million to $17.4 million. This partially due to the timing factors for example, June was a particularly strong revenue month, but also represents the fact that our trade receivables which stood at 51 days at the end of the quarter one have now increased to more a sustainable and realistic level of 57 days this quarter.

Historically, our collections rates and recoverability from [data] [ph] has been excellent and I expect this to continue going forward. Meanwhile, our trade and other payables including both current and non-current have decreased slightly from $16.3 million to $15.7 million.

Finally, I will discuss our cash flows for the quarter. Cash from operations this quarter were $4.9 million this was partly offset by working capital movements of $2.7 million mainly attributable to the increase in receivables and other working capital movements that I had mentioned earlier on.

Meanwhile, capital expenditure in the quarter increased to $5 million versus $2.8 million in quarter two, 2012. And again, as I mentioned earlier, this is due to additional expenditure on the development of our new cardiac products Furthermore expenditure is currently running at a significant higher level on this project now that we are in clinical trials and also making preparation for full scale production in our facility in Uppsala in Sweden.

The net result of this, we had cash out flows for the quarter of $2.6 million. The other main cash movement in the quarter was the payment of our annual dividend which is 20 cents per ADR translated into a total payment of $4 million.

I will now hand over to Jim, who will take you through the latest developments with regard to cardiac.

Jim Walsh

Thank you, Kevin. I will take a few moments to provide a brief update on our cardiac marker development program at Fiomi in Uppsala. Very briefly for the very few of you who by now may not know about Fiomi I will just take a few seconds to recap on the background here.

About 16 months ago Trinity acquired a Swedish company, Fiomi Diagnostics for a consideration of $13.1 million. Fiomi had developed a high sensitivity precise quantitative immuno-assay platform on which Trinity is now developing a range of high sensitivity cardiac marker products, namely high sensitivity Troponin for the detection of acute myocardial infarction and BNP for the detection of heart failure.

Again, by way of a reminder, the point-of-care cardiac marker market is large, is growing rapidly and is served only by three real players namely Alere, Roche and Abbott. It is also the case however that none of the point-of-care Troponin products offered by either Alere, Roche or Abbott meet the current FDA guidelines. There is therefore enormous opportunity, market opportunity for a guideline compliant Troponin product and that is what Trinity is developing at Fiomi in Uppsala.

I mentioned on the conference call of April 25 last, that we had just reached design phase of our Troponin product at that stage in our hands this Troponin products fully met all aspects of the FDA guidelines. I also mentioned on the call that the product had just commenced clinical trials required to obtain CE marking and allow European sales commence.

I am happy to report today that these trials are progressing well and that we remain on track to have Troponin product CE marked in late Q4 of this year and available for sale in or immediately thereafter.

In general there are two aspects to the European CE trial, the first phase is to determine the upper reference limit for a normal population. This trial is now running for three months and we are currently recruiting 500 matched normal healthy people between the ages of 25 and 65 on which Troponin levels will be measured on both the Fiomi platform and on a central lab system. The data from this trial will essentially provide us with a definitive 99 percentile value for our product. To help in this task we’ve taken on a contract research organization called Scandinavian CRO AB to evaluate and recruit volunteers, collect blood samples and run the Troponin I test.

Today, so we’re within 100 to 150 specimens have been collected and measured. And now as a Northern European holiday season is rapidly coming to an end we believe that the remaining 250 samples can be obtained and tested before the end of September and that will complete that phase of the clinical trial.

The second part of the European trial is to run an actual chest pain study. This trial has been run on a combination of both bio bank and clinically adjudicated samples, sorry is being run on both the combination of bio bank clinically adjudicated samples and on fresh hold got samples from suspected MI patients. The bio bank samples have been provided by Professor Per Venge, a cardiology expert from the University, general hospital in Uppsala.

With regard to the threshold blood portion of this trial, Trinity is participating in what is known as the FASTEST Trial for the rapid rule out of myocardial infection and ER. This trial, which is being sponsored and led by Professor Bertil Lindahl, one of Europe’s foremost key opinion leaders in cardiac markers has been running five large hospital emergency room sites and will need a significant – and will use significant patient numbers in a reasonably short period of time.

This trial is now running for approximately two months. However, it will be the end of September or early October when the first set of adjudicator data is available for review. In summary, therefore, the CE trials are well underway, will run through Q3 and probably into early Q4 and will remain on target of a fully CE marked Troponin product by December of this year.

Moving on, then to our US approval plans. Unfortunately, European generated data may not be used to support an FDA submission. All data must be generated in the USA on a US patient population. Therefore, separate US clinical trials are necessary. I mentioned on the last call that Professor Fred Apple, Director of Laboratory Medicine at Hennepin County Medical Center in Minneapolis had agreed to take on the role of principal investigator to oversee the running of our US clinical trials. Dr. Apple is widely acknowledged as one of the key opinion leaders on cardiac biomarkers and was instrumental in shaping the new FDA guidelines for Troponin measurement for the diagnoses of MI.

The clinical trial protocols have now been signed off by Dr. Apple and five US nationwide trial sites have been selected and we’re currently completing the necessary contractual and ethical approval at the sites. The trials, again, will consist of the determination of an upper reference limit for Troponin in a normal population and, of course, a formal adjudicated chest pain study across the different geographic locations in the United States. These trials remain on target to commence in October or early November of this year with our FDA submission plan for the end of Q1 2014.

Then finally, a word on our BNP product, our BNP product development program is progressing well. Fortunately, this product does not present the same level of technical difficulty as the Troponin I product. Also, clinical trials, both CE and FDA will be much more straightforward as BNP will follow the norm of 510K profit.

Our product is demonstrating excellent performance characteristics right now. This product shadows Troponin approximately one quarter later, but the FDA trial and approval process should be considerably less onerous, which should mean that both Troponin and BNP should be available to the market at or about the same time.

In terms of our sales and marketing efforts; during the quarter, the company hired Mr. Tom Parenteau to head our cardiovascular sales division. Tom has more than 20 years’ commercial experience in the diagnostics industry. Most recently, Tom worked for Alere/Biosite as their Senior Director of Global Marketing, for Alere’s Cardiovascular Division, which included the products from Biosite, Celeste, and Hemosense.

Tom feels the particular knowledge gap with internally and for us brings the requisite knowledge and experience of the cardiovascular market required for a successful launch of Trinity Troponin and BNP products.

The company is now into process of selecting distributors to handle the sales of cardiac micro products across Europe while in the United States, of course, products sales will be handled through Trinity's own sales force.

In summary therefore, we are pleased with the progress of Fiomi. The Fiomi team is working hard and dedicated to producing the world's first true point-of-care cardiac platform meeting the new FDA guidelines. Product development programs are progressing well and generally according to plan. CE trials are well underway and more importantly we have assembled the right team of people to make sure that our trials are carried out in an efficient and cost effective manner.

And we are on track to our Troponin product approved for sale in Europe in Q4 of this year and in US by Q4, 2014, and with that I will hand over to Ronan.

Ronan O’Caoimh

Thank you, Jim. I will review revenues for the quarter and discuss business developments and I will then discuss the acquisition of Immco before finally opening up the call for your question and answer session.

Our revenues for the quarter were $21.3 million up from $20.8 million in corresponding quarter last year which is an increase of 2.4%. Clinical laboratory revenues increased from $16.4 million to $16.7 million which is an increase of only 2%. However, Lyme confirmatory sales in the USA, we have 97% market share or $750,000 less than last quarter then the same quarter last years as mentioned by Kevin.

This arouse due to an unusually cold and prolonged winter in the north east of the United States resulting in a greatly reduced incidents of Lyme disease infections in the early summer months of this year. During the first days of quarter three, our Lyme sales have recovered the same level of previous years.

The balance of our infection disease business recorded growth over the prior year of 7% of the prior quarter. The US performed strongly while Chinese sales hit a new record. The rollout of our new point-of-care rapid test is gaining momentum with European approval now granted to our herpes, giardia, cryptosporidium, Clostridium difficile to A and B, Clostridium difficile GDH and our syphilis test, therefore full enteric Lyme plus the syphilis test.

The European approved of our h-pylori antigen and strep pneumonia tests will come before year end. Distribution is in place throughout Europe for these products with exception of the U.K. probably we sell through our own sales force. Approvals in the United State are progressing well, but at the slower pace due to the more stringent FDA requirements.

Moving on to diabetes, we grew the business 12% this quarter compared with last year. And the number of Premier instrument continues to grow and this quarter we placed 80 instruments up from 67 in quarter one. A big development for us this quarter was the approval in China and we placed over 20 instruments there during quarter two. We believe that we can maintain a run rate of 100 instruments per year in China.

Meanwhile, Menarini is performing well and we have now completed the development of the ion exchange version of the Premier, which is essential to Menarini for Italy and Spain, in particular. Trials for CE mark are now underway and we are confident of launching the instrument by year end with the result that Menarini instrument placements will increase significantly in 2014.

The launch of Premier is progressing around the world with Scandinavia, Philippines, and Malaysia launched during quarter two and Indonesia launching during this quarter.

Our HIV sales meanwhile, for the quarter were $4.6 million, up from $4.4 million, which is an increase of 4%. Sales in the USA were down 5%, while African sales continued to perform strongly with 10% growth.

I now move onto our acquisition of Immco, which we completed last Friday after the close of business for consideration of $32.75 million in cash. The company is based in Buffalo and employs 90 people. It has a very strong management team led by Bill Maggio, CEO and Kevin Lawson, COO and they have built a fine business, which is now poised for substantial growth.

I say this particularly because the USA is blank canvas with virtually no sales, but with monstrous sales potential. Given that over the past three years, the management have reconfigured and standardized the entire product range and have gained FDA approvals on the full IFA and ELISA range of products over the past 18 months.

In the close position is in the $215 million high-growth, which is over 10%, low throughput specialty autoimmune segment where the competition is limited to a small number of key players, principally Bio-Rad, INOVA, which was acquired by Werfen Group, and Fadia. The principal autoimmune conditions in this segment are Rheumatoid Arthritis, Vasculitis, Lupus, Celiac And Crohn’s Disease, Ulcerative Colitis, Neuropathy, Hashimoto's and Graves diseases.

Meanwhile, the two key technologies employed are Immunoflourescence referred to IFA and Immunoassay which is EIA, which as you know were intimately involved in, in infectious disease. Immco offers a comprehensive range of more than 120 products across all the main autoimmune segments whereas EIA product range running on the DSX and DS2 Instruments, which is, you know, our proprietary instruments and we have 200 of those instruments placed around the United States. While the IFA products are capable of being read manually or on Immco’s proprietary IFA reading system, which is called iSight.

In terms of range check and technical performance the Immco IFA range we believe firmly is the best in the market, the best in the world. The EIA range is at the highest quality and competitive with the market leaders. So, it’s basically same as they had built up. Immco currently sell its product through a network of distributors with virtually no U.S. sales. In Europe Immco’s main distributing partner is Menarini accompanying with which Trinity already has deep distribution ties. The broad new relation between Menarini and Trinity through additional distribution of Immco’s products is used very positively by all parties. Menarini are significant player in European autoimmunity and for many years were the distributor of Innova in Europe prior to the acquisition of Innova by the Werfen Group.

Subsequent to this, Menarini having sourcing their autoimmune products from multiple suppliers one of whom is Immco, it is expected that the value of business with Menarini will grow substantially and significantly as they consolidate supply on Immco.

To-date Immco has very, very low sales in the United States due to lack of FDA positive approvals and due to lack of sales force. However, they have already mentioned over the past 24 months Immco have been successful in harmonizing its complete IFA and EIA product ranges virtually all of which have been FDA 510K cleared.

Through Trinity Biotech assisting USA sales force and we already have sales approximately 2 million of our own autoimmune products and through our installed base of over 200 EIA instruments, Trinity expects to immediately launch Immco’s products in the United States. Moreover as the Immco autoimmune product range compliments Trinity’s existing infectious disease EIA range, we intend that our large arrangements installed at DSX and DS2 instruments which currently run our infectious disease product Lyme would now all through on the entire Immco autoimmunity EIA range. So, broadly what I am saying is, we’ve got 200 instruments at the moment in the United States which run in most instances about 40 of our infectious disease viral products.

What we now will be neatly doing is offering what we believe is the best in world offering to those laboratories on an existing and installed base and we believe that we can be very successful in doing that. We believe that this in turn will help drive growth in both ranges of products due to the synergies, it’s a defect of the broader product menu offering.

So, in summary Trinity expects to grow Immco’s revenues by harnessing the breath, quality and uniqueness of Immco’s product range in the context of only recently having obtained FDA approval. We hope to go up by leveraging Trinity’s sales force and in particular our 200 installed instruments in the United States. We hope to grow by leveraging Trinity’s international distributor network, we hope to grow by introducing new innovative autoimmune products which are now beginning to emerge from the development phase and also lastly by exploiting the synergies that existed in Trinity's existing infectious diseases and Immco’s autoimmune product ranges. Based on all of these factors, we believe that we can grow this business in excess of 20% annually moving forward.

Autoimmune product revenues are $8.5 million for this business, but in addition there are $4 million of revenues from a reference laboratory, which is based in Buffalo. The laboratory is a specialist lab in autoimmunity and receives samples from all over the United States, with significant business from Quest and LabCorp and the biggest labs in the country.

All autoimmune samples are run on Immco manufactured autoimmune tests. Testing volumes have been growing at a rate of 10% annually. Gross margins exceed 50%. A big advantage of owning the laboratory is that by offering a reference laboratory service, Trinity now has access to a large number of clinical samples which may be used for clinical trials and as a source of reference material in new product development.

Another advantage of owning a reference laboratory is that, given that the lab is certified by the New York State Department of Health, this means that a test developed by Immco can be run commercially in the laboratory without an FDA approval. As an example, 10 tests for Shoguns disease were recently developed by Immco, but have not yet been submitted to the FDA, and are currently being run in the lab following approval by the New York State Department of Health. We got that approval four weeks ago.

Following that we closed an agreement with an ophthalmology company early this month and it is expected that this year it will result in incremental reference lab revenues of $750,000 over the next 12 months by way of an example.

So, at this point I’m going to hand back to the operator for a question and answer session.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions)

The first question will come from Chris Lewis of Roth Capital Partners, please go ahead.

Chris Lewis – Roth Capital Partners

Hi guys, thanks for taking the questions.

Ronan O’Caoimh

No problem, Chris.

Chris Lewis – Roth Capital Partners

I just wanted to confirm with the Immco acquisition. Can you say that it closed on July 26? I just wanted to make sure.

Ronan O’Caoimh

It closed after hours on – essentially closed after hours on Friday, last Friday. There were some minor filings that still had to be done yesterday and certain parts of the consideration were still moving. So, in essence, officially, sort of, ink was put on documents, albeit if not everything executed in time for close of business on Friday. So, it was still working through yesterday.

Chris Lewis – Roth Capital Partners

Okay, and then maybe, I was hoping you could just provide some more color on the history on how the acquisition really came to be, is it something that you looked at for a while now or it's something that you recently taken a look at and then just in terms of timing, your Fiomi kind of ramping up and seems like some of your focus, a lot of your focus is around that. So, why do you think now is the right time for this acquisition?

Ronan O’Caoimh

Well, I think that we had been aware of the company for a long time given that we have been a very big player in autoimmunity with $2 million worth of revenue and but basically for their own reasons, the venture capital were closing the fund and put it up for sale. So with that, it was put out to bidders and because we were approached as we’re indeed the bigger players in the process and the bigger players in autoimmunity and we came through that process successfully.

But I mean, I think, I have already outlined all of the reasons that I thought would make sense. So, I won't repeat them all. But, it doesn't say that to automate compelling sense for us, in sense that we had actually three options. We have money sitting on deposit earning at about 1%. We could give it back to shareholders which would obviously improve our earnings per share. But for example, you will take off, say for the environment if we say that we are running 80 cents a share, 80 cents EPS, we could basically put the money in the bank that’s already $2 million and earn $700,000 a year.

We could basically buy back the stock which would bring our earnings up 85 cents or we could make this acquisition which we believe would probably get our earning up to 95 cents.

So basically, from the earnings per share, it perfected, it made compelling sense and of course, is not just 2014 numbers that we were looking at, but we are looking at the prospect of running this business 20% annually moving forward, so that the advantages of making the acquisition hopefully will increase in time, so fairly compelling stuff and if you add to the fact that it basically reinvigorates our whole infectious disease line in the United States and indeed worldwide and say this, it presents this blank canvas in the USA with such a huge opportunity for us. It was certainly compelling. So, I think that they were the principal reasons. I won't repeat all the other reasons I have already outlined.

Chris Lewis – Roth Capital Partners

Okay. Thanks it's helpful. And then, can you just remind us what's the Immco’s current operating margin profile looks like?

Ronan O’Caoimh

The company, at present, it's currently rolling an EBITDA of in around $3 million, I suppose in the context of just over $12 million of revenues, we are talking about 25% EBITDA margin.

Chris Lewis – Roth Capital Partners

Okay. Thank you.

Operator

The next question will come from Larry Solow of CJS Securities, please go ahead.

Lawrence Solow – CJS Securities

Just a quick follow-up on the Immco. Is the expectations for accretion – I know you talked about a period of transition. Is that just sort of last quarter, obviously, you had some acquisition charges, but looking out over the next couple of quarters, do you expect that to be accretive pretty much immediately? Are there cost-cutting opportunities or is it more increased economies of scale and revenue synergies?

Ronan O’Caoimh

I think the costs that would arise other than the acquisition costs are very modest. We’re talking about under a couple of hundred thousand dollars of integration costs. It would be immediately accretive, I think, very marginally so in quarter three, because we’ve only got two months of it, but certainly a quarter four it should be earning $500,000, $600,000, $700,000 for us. In terms of rationalization there would have been none really. I mean, there would be absolutely no rationalization within the actual manufacturing organization.

As I mentioned, the fact that it’s a strong management team, [inaudible] full of confidence and I think – actually going back to the last question you referred that do with us. We don’t see this as being a huge drag on management time. We’re very much wanting to concentrate on the – on our primary focus is the strategy. It’s one of, obviously, [one of which is Troponin] [ph] at this time. So, we don’t think this will be a drag in that sense because of just how competent the management team is.

I think where Trinity is really going to make a big difference will be not in the manufacturing side of things at all, there will be no changes, but rather in the marketing side, where basically in the United States we’re going to basically get our sales force to work. There will be other advantages, obviously, with our international distributors in the sense that they would have some, but not as broad a distribution network as us.

So, maybe that answered the question.

Lawrence Solow – CJS Securities

You know, it sounds like you’re basically dropping into sort of built-in network and haven’t really been – and the U.S. for sure where they haven’t really been utilizing – you know, marking too much. Is the – so the $8 million in sales, I guess, are pretty much all from the European side, is that fair to say?

Ronan O’Caoimh

No, they’re not. There are actually fairly robust sales right across the world in Asia-Pacific.

Lawrence Solow – CJS Securities

And Asia as well?

Ronan O’Caoimh

Yeah, in the Middle East –

Lawrence Solow – CJS Securities

And is the market, the $250 million market is that sort of $100 million U.S., $150 international. Is that sort of a ballpark split or…?

Ronan O’Caoimh

That’s reasonable, maybe slightly more, maybe $110 million, $115 million and remember the big dollars in this area are in thyroid, TT4, TSH thyroid stimulating hormone, but they run on the big instruments. And so our segment is dominated by BIO-RAD, I know which is bought by Werfen, Phadia and [inaudible], but the two big ones are BIO-RAD and Werfen.

Lawrence Solow – CJS Securities

Okay. Just switching gears to Premier, can you maybe just talk about how the instruments that have already been installed base, what their yields are running, I think initially you guys were targeting approximately $10,000 per machine in consumables. How has the utilization been running? Is it sort of running at, below, above that number?

Ronan O’Caoimh

It’s probably running at [better] [ph] , but marginally ahead of [inaudible], what we have found is that instruments are - certainly in Menarini instruments are running more tests than we have anticipated. And there’s probably an element of consolidation at some extent in Europe than they claim that but certainly. In general terms, we are getting bigger volumes of instruments than we would have originally expected. It’s [inaudible] more than $10,000 for instruments.

Lawrence Solow – CJS Securities

Right. And maybe overtime, that does improve or is that something that pretty much gets up the speed, you know and then later machine pretty fast?

Ronan O’Caoimh

Well, it gets up to speed almost immediately with the exception of China where we think that the market itself is growing very, very quickly, so I think, I would hope that a Chinese instrument in three years time would be running, maybe, triple the volumes that it runs today and that remember we have only commenced operation in China literally in last couple of weeks with the Premier. But whereas in with Menarini our deal with replacements in the United States, you would be right up to normal volumes on this instantly.

Lawrence Solow – CJS Securities

And just last question. You sort of reaffirmed your outlook for 320 placements this year, has the components of that being, China, US, or Menarini switch around at all. You’re wondering why I said, because I think the ion exchange was initially I think, start of the year, you thought it was going to be launched sometime in the summer. So, has that delayed? What’s the reason for that delay and does that maybe impact Menarini a little bit this year and you are making up for another parts of the world?

Ronan O’Caoimh

Well I don't believe that – we always thought it to be complete development of the instruments in June and we actually managed to meet that the headline ironically when usually for – we got there by the exact due date and I am not sure that we have expected more quickly. We always expected it would take Menarini a bit of time to put it through that system and of course, Menarini had to get CE mark which we are doing right now.

So, I think we always had that really earmarked for first of January. So, anyway, just in general, the dynamics are that Menarini is performing all that FDA expected has an obligation to buy 120. It will buy 120, and maybe next year it will buy lot more when the ion exchange comes through.

I think that China has come through and should run at about 25 instruments per quarter. And the big potential to move forward is Brazil, which you know, hasn’t been turned on yet, but we’re getting really, really close and I think that can do 60 instruments a year once we start. The United States is performing probably marginally less than we would have hoped. It’s looking like maybe 50 to 60 instruments a year. Hoped it might have gotten to 70 to 80, which may be marginally light. And then, the rest of the world is performing very well, but we’re just basically rolling it out.

So, for example, Indonesia and Malaysia have huge potential. I think you’re going to see those numbers more. You know, it’s just sort of – it’s in evaluations and all that happening right now. So, it’s probably next year before you see decent volumes there. So, again, we’re just comfortable with our 320 and in terms of 2014, you know, it’s just all in front of mid-400s comfortably.

Lawrence Solow – CJS Securities

Okay. Great, thanks so much.

Operator

Our next question will come from Paul Nouri of Noble Equity Fund. Please go ahead.

Paul Nouri – Noble Equity Fund

Do you have a revenue number for the year?

Kevin Tansley

Just in that context, I’m going to just mention and approximately we should have mentioned it earlier on, anticipate that next quarter we’ll earn an additional $2 million of revenues from Immco because we only have about two months there and the equivalent then about three months of revenue to be $3 million in quarter more. So, we’ll have an additional $5 million of revenues coming in the next five months or so. Then, in terms of our underlying business, we would expect growth over what we’re seeing in this quarter. We have – Ronan has mentioned that the Lyme business has come back on stream.

So, I’d be expecting – and its hard if it’s removed to be exactly sure, but we’re probably going to be talking somewhere in the sort of the 22s that sort of number for each of those two quarters. Again, given the variability and things like Lyme and HIV you never know, but it couldn’t be a bit higher than that, depending on those. So, the extent to which Lyme continues to show, its promise to showing at the moment, I think we’ll go north of 22 in each of those.

So, 22 plus 2 plus a bit maybe for quarter three, 22 plus a bit again plus 3 in quarter four, so we may be up around sort of 25, 26 million for each of those quarters.

Paul Nouri – Noble Equity Fund

And what is the company you purchased, what does the operating margin look like for them?

Kevin Tansley

For Immco, there currently making about $3 million of EBITDA. So, and Op revenue is about $12.5 million, so it’s sort of about 23%, 24% of EBITDA and margin.

Paul Nouri – Noble Equity Fund

And does your tax rate change at all with the purchase?

Kevin Tansley

I don't think it will be influenced hugely. My calls is little bit, but in terms of how we are structuring it I think we will still be able sort of maintain a very favorable ratio and you can see that it’s between 6% to 7% this quarter and I don’t see a significant move of that.

Paul Nouri – Noble Equity Fund

Are you going to use the lab to develop any other, kind of lap develop test or are you going to leave it to the specialty that it has right now?

Jim Walsh

Jim here, absolutely. That's one of the key things about having the lab is, it is the source of a whole new panel of test. Like for instance, this year, Immco produced a proprietary patent protected outfit for disease called sorghum disease and they also produced a panel of tests for syndrome called chronic rhino sinusitis.

Those came directly from research they took that in the lab and they have a program of eight or ten of those relatively esoteric diseases with very prevalent disease in the United States. So, I would expect we can see at least two or three of those at least two or three of those type projects could turn into actual testing service revenue every year for the next number of years. The pipeline is very strong.

Ronan O’Caoimh

So, one other thing that we haven't mentioned and that is that just under 40% of the revenue is the lab related actually to transplant the testing. So, there is a lot of transplant samples going in there. And clearly there are opportunities there also potentially, but not that we have extraordinary details at this time.

Paul Nouri – Noble Equity Fund

And does the lab have its own sales force or does it mostly go out to the quest and lab to the world and, kind of, have the markets, the test for them?

Ronan O’Caoimh

Well, the lab actually had recently just put in place for people in the United States and who are out marketing the products to the bigger labs. And we intend to be integrating that with our own existing sales force. So, they had recently commenced doing some of that. Our intention is to probably, is to integrate those because we have deep relationships with quest and lab corporate for example.

Paul Nouri – Noble Equity Fund

Yeah. And the life sciences business is shifting to that was that down year-over-year I assume?

Kevin Tansley

Sorry, could you repeat that question?

Paul Nouri – Noble Equity Fund

Your organic life sciences business.

Kevin Tansley

Sure it was flat. Absolutely flat inverted to the dollar.

Paul Nouri – Noble Equity Fund

And there were a couple of the new point-of-care tests approved in the second quarter. Is that correct?

Ronan O’Caoimh

Yeah. And I dealt with that. Yeah, we have had quite a number of approvals, but the approvals have been principally in Europe rather than the United States, but we now have an entire enteric range available in Europe. So, due to IHT essay and Biologic crypto and so basically, they’re all available in the United States, sorry, excuse me, in Europe and being sold as we speak through that whole – we have been working with that – with our distributor network there.

Paul Nouri – Noble Equity Fund

Okay. Thanks.

Kevin Tansley

Thank you.

Ronan O’Caoimh

Thank you.

Operator

Our next question will come from Ross Taylor of Somerset Capital, please go ahead.

Ross Taylor – Somerset Capital

Thanks for the chance to ask some questions. On the Premier, currently you have what, just under 500 instruments in the field?

Kevin Tansley

202 – no, about 400 Ross, just under 400.

Ross Taylor – Somerset Capital

There are over 400 and you are getting what, on average, reagent sales and like about $20,000 per machine?

Kevin Tansley

No, about $10,000.

Ross Taylor – Somerset Capital

At the CJS Conference, I think, the number was given out was substantially higher than that of not what you’re projecting, but actually what you’re seeing.

Kevin Tansley

No, I don’t think so. I mean we’d be doing – no, I don’t think so, I know neither was there, but – no, about $10,000 on average per instrument.

Ross Taylor – Somerset Capital

Okay.

Kevin Tansley

And the sales price of the instrument is about $20,000. The $10,000 is the correct number per instrument.

Ross Taylor – Somerset Capital

Okay. And so what we’re looking at having is by the end of 2014, we’ll chat about that at another point Ron. I can kind of, we can get on the same page because my notes on that are very different than what – the $10,000 number.

Ronan O’Caoimh

Ross, to give you a flavor for that, what happens is in 12 with zero set in Premier in 13, 2013 we did $4 million, nearly to the dollar, and I think this year we’ll do $10 million.

Ross Taylor – Somerset Capital

Okay.

Ronan O’Caoimh

Now, obviously and initially that’s skewed mostly towards instruments and then over time, I would say, you have more reagents. The reagents were on at about 90% margin. The instruments were on there like 15% or in the case of China 0% margins. So, that’s the dynamic. The number of ACB is I think is – it was $4 million last year and $9.9 million, we’ll probably do $10 million this year, but I’m afraid the reagent principle is actually $10,000. Now, it’s about – it’s over $20,000 in the United States because or course we’re selling direct, but – and in – but anyways, it’s – so it’s $20,000 – it’s $10,000 anyway per instruments.

Ross Taylor – Somerset Capital

Okay. And so we are looking at, therefore, having – by the end of 2014 you would expect something in the neighborhood of about 1,000 instruments in the field?

Ronan O’Caoimh

Well, with the 202 in 2012, we’re going to do 320 in 2013, and I think 400 – yeah, so it would be very close to – yeah, just under 1,000. Yes.

Ross Taylor – Somerset Capital

Okay. And so,…

Ronan O’Caoimh

Which will be $10 million reagent at that point in time, at an 85-90% margin.

Ross Taylor – Somerset Capital

Right. That’s how I was getting into. So, basically, that – we’d be looking at something in the neighborhood of $0.40, $0.45 out of – like a free cash flow number out of the reagent sales by the end of 2014 per share?

Ronan O’Caoimh

Yeah. Right. That’s spot on, yeah.

Ross Taylor – Somerset Capital

Okay, and then it grows from there. So, where do you think you expect to have in the – and, obviously, we go to mid 400s and then you think you go what 500 or 550 or so and there’s – you kind of get a run rate of about that many machines annually going forward?

Ronan O’Caoimh

I think Ross, I think we can probably get to 600. Where would that come from? Let’s say if I put in Menarini at 200, China is 100, I put the States at say 75, I’m adding up here, just so as I go along. I’ve put Brazil actually at 75, and so that’s 450 and then basically, I’d do 150 around the rest of the world. Does that make sense?

Ross Taylor – Somerset Capital

Yeah. And so, basically – and pretty rapidly, therefore, in the next two or three years we should be looking at that business being able to generate something in the neighborhood of close to $1 a share in pre-tax earnings I would think.

Kevin Tansley

Yes, and I think that’s absolutely correct.

Ross Taylor – Somerset Capital

Okay.

Ronan O’Caoimh

Because I think that after four years – after five years of placing 600 instruments you have – you know you have 3000 instruments in the market, averaging $30 million at 90% margin is comfortably more than $1 a share.

Ross Taylor – Somerset Capital

Yes. Okay, and then so – and also, looking at this acquisition, you’re talking about seeing – you think you can go about 20%. You paid about 12 – 11 times EBITDA for it. Is – how right – is that – it seems to me that 20% might be a kind of a cautious estimate on your part?

Kevin Tansley

It is because – it was very unusual circumstance where the United States company is selling – purchasing nothing in the United States and it’s got leading-edge products and I think they’re going to do very, very well. So, the timing of the acquisition, the timing of the disposal of the company related just to, you know, the closing of a particular fund by venture capitalists. So, there was a lot of competition and the main players that we talked about, the leading players competed right till the end on this one. So, a very attractive opportunity we believe. I think, very importantly, you know, we have a big business in infectious disease in the United States and this deal that we’ve done, I mean to say this, it reinvigorates it is to understate the reality. It’s a big opportunity for us. It’s not just that our reps would go to the same laboratory, it’s that they can actually put all these products on the same instrument that we already have sitting in the lab. Furthermore, there’s an awful lot more unique about these autoimmune products.

Then there about our existing infectious disease Lyme which actually isn’t that particularly unique. We have made it attractive by adding esoteric products sort of undersize, but inherently, it's not that exciting and ironically this autoimmune, it autoimmune acquisition, makes it exciting.

Because I think a key thing to remember here, maybe something I should have said in the prepared notes is that autoimmunity is going nowhere in terms of – it's not going to Abbott, there is no way that Abbott are going to put it on their huge architect instrument because the volume aren't big enough.

Autoimmunity is going to stay with ELISA and with IFA and ironically, IFA which is going to be, you know, a dying trade will never die in autoimmunity because autoimmunity it's still difficult to detect and we all know people who had Crohn’s disease that’s sort of difficult you have actually diagnosing it. So, in many instances, it gets down to the experience of the technicians that can actually read the slide. They will margin the positives, the positives will go for individual review by an experienced technician. And that's why IFA is there to stay in this area worldwide. We firmly believe that I know the best IFA immune soriatane product range. In the work –how did I say?

So, we find to believe Immco has both or BIO-RAD has the best IFA product range in the world. So, we think it will do very, very well.

Ross Taylor – Somerset Capital

And how big can that market be?

Ronan O’Caoimh

Well, the market is $250 million as we have said. I mean, the two market leaders who probably be doing just over 100 million between them we believe and so the potential for Trinity over a period of years will be to grow $50 million business here some of that kind of order of magnitude which constitutes 20% of the market at its present size. But bear in mind also that we believe the market growing at around 10% annually because again, it's an age, because of the aging population factor.

Ross Taylor – Somerset Capital

And as you get towards that 50 million, I would expect that you sell more tests and do less lab work like in relative to the overall? I would think the margin should go – I mean your test margins generally are substantially higher than their current margins. So one would expect your margin should move substantially in line with the rest of the company?

Ronan O’Caoimh

Ross, I am talking about a $50 million opportunity. I am talking about product opportunity. I am not even to – that's excluding the lab altogether.

Ross Taylor – Somerset Capital

Okay. And margins on that, if you do $50 million in revenues what kind of margin would we expect?

Ronan O’Caoimh

It's just about, Kevin, by identical of what we have, about 50%

Kevin Tansley

Yeah of that order, yeah.

Ross Taylor – Somerset Capital

Okay. And other than that, you know that, now that you spend $30 million buying this, I know that Kevin talked to you the number you showed us today, I know that they will be that I don’t do my job if I didn't tell you can now spend $20 million buying stock?

Ronan O’Caoimh

We will see about that. I mean we know we will review. I mean, Ross, we know that you are all kind of subject and I think that – I mean, we may do clearly the price of two week and we go to the market and right at this moment in time, I probably have no intention to go in, but clearly we will have the market suffice in two week. I mean, I think there is that kind of, there is the amount of cash that one would like to keep of the balance sheet, let's say we are quite there. We wouldn't be far away from it.

Ross Taylor – Somerset Capital

I think that a lot of the fee, if you are successful in Premier, we just talk about the ability to generate a dollar share and earnings a couple of years out of that business. We are looking at, in previous calls, you talked about Fiomi and you would be disappointed if it only generated $50 million in the annual sales and by the math that I and others do that another dollar share, you are looking at a company that’s trading $19 a share here and quite honestly three years down the road, it's not hard to imagine that the price would be two or three times that.

So, we would look at it saying that this would be a wonderful opportunity to lever up the returns for your current shareholders. I understand you want to keep cash in the balance sheet, but I think it's an either or situation. Thank you?

Ronan O’Caoimh

I know, put them in, I think I mean I don't want to get involved in too long discussion on this issue but at the same time, for example, I mean, I would say and I think that deals within the response to another question, I do firmly believe for example that the $32 million that we have just spent buying Immco is better spent doing that and it would have been returning to shareholders.

I know that kind of, you can do an academic exercise and we could all turn and divide the earnings of it by the reduce number of shares and get a bigger EPS both or the profit side of it into the number of shares going to go to EPS. But just by example, I think this made such compelling sense that it was better use of funds. I think if we had, for example, gone out and basically pull it back very aggressively, we wouldn't be in the position to do this deal.

Operator

Our next question will come from Declan Morrissey of Davy. Please go ahead.

Declan Morrissey - Davy Research

Hi, I think most of my questions have probably been answered, but just one question on Lyme, you alluded earlier just the pick of the Lyme sale in the beginning of Q3, and I am just wondering do you see the Lyme season being extended or because of the less summer I suppose or do you see spending up a normal stage and just having, I suppose you are taking a hit on Lyme for the year and consequently your gross margin is going to be down. Maybe you can give some color on that.

Ronan O’Caoimh

Well, Declan, I think, firstly, just before I came on the call I saw our sales, our line sales, our line confirmatory sales. So far in July with two days to go they were actually identical to last year’s sales. So, that I know there is more to go, but it got the reason and indicated that we’re back to our normal run rate, although not okay. But certainly competing, I don’t think so much, I think those sales are gone if you mean, basically just the ticks weren’t there and in terms of will it give rise to some of the extended season I don’t think so. I think, the only thing by the way that the line season actually turn into a virtually 12 months season, we just with much bigger highs in quarter two and three, but we do have kind of a residual level of line sales in quarter four and quarter one.

Declan Morrissey - Davy Research

Okay.

Ronan O’Caoimh

Just be caught by the time people get to in for testing and all accounting else. So, it’s not that just sales are completely eliminated, but I don’t know I think these sales are gone basically. You know they are not going to be recovered it’s not a season won’t extend.

Declan Morrissey - Davy Research

Played onto your gross margin kicker and edge two?

Ronan O’Caoimh

And realistically, no, I mean, put it simply $750,000 of sales, $750,000 down this quarter and that comes to $400,000 and profit comes to $0.02 it’s really as simple as that.

Declan Morrissey - Davy Research

Okay, thank you.

Ronan O’Caoimh

Thank you.

Operator

The final question will be a follow up question from Paul Nouri of Noble Equity Funds, please go ahead.

Paul Nouri – Noble Equity Fund

You have managed not to pay a whole lot of tax for few quarters, what kind of tax should we look for a like 14.5%?

Ronan O’Caoimh

We have been successful in terms of our tax rate obviously we’re availing below tax rate here in our end, we also avail certain R&D benefits again here in our end another jurisdiction as well. I think that will continue for some time, we’re doing particularly well this year and I see that if we do increase and it will happen eventually it’ll be in the sort of the low double digit as such, as it’ll be a little wide before that comes here.

Paul Nouri – Noble Equity Fund

Okay. So, you are benefiting from some R&D incentives and we can expect that to continue for the foreseeable future?

Ronan O’Caoimh

Yeah, R&D and so well, I don’t have control over R&D in centers unfortunately, but to the extent which we know they are available scale yes and we’ll be able to see put a lot of work into it and how we structure our tax affairs, so we will continues to work hard in that regard as well.

Paul Nouri – Noble Equity Fund

All right, thanks.

Operator

And ladies and gentlemen this will conclude our question-and-answer session. I would like to turn the conference back over to Ronan O’Caoimh for his closing remarks.

Ronan O’Caoimh

Well, I just like to say thank you to everybody for participating and for your support and interest and we look forward to talking to you next quarter, bye, bye.

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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