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Trinity Biotech plc (NASDAQ:TRIB)

Q3 2013 Earnings Conference Call

October 17, 2013 11:00 AM ET

Executives

Joe Diaz – Lytham Partners

Kevin Tansley – Chief Financial Officer

James Walsh – Chief Scientific Officer and Executive Director

Ronan O’Caoimh – Chairman and Chief Executive Officer

Analysts

Larry S. Solow – CJS Securities, Inc.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Chris W. Lewis – ROTH Capital Partners LLC

Ross Taylor – Somerset Capital Advisers LLC

Operator

Hello and welcome to the Trinity Biotech Third Quarter 2013 Financial Results Conference Call. All parties will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead.

Joe Diaz

Thank you, Aimee, and I thank all of you for joining us today to review the financial results of Trinity Biotech for the third quarter of 2013, which ended on September 30, 2013. As Aimee indicated, my name is Joe Diaz. I am with Lytham Partners. We are the financial relations consulting firm for Trinity Biotech.

With us on the call today representing the company are Mr. Ronan O’Caoimh, Chief Executive Officer; Rory Nealon, Chief Operating Officer; 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 copy of today’s release, you can retrieve it off the company’s website at trinitybiotech.com or numerous financial sites on the Internet.

Before we begin with prepared remarks, we submit for the record the following statement. 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 those forward-looking statements. These 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, but are 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 identified and 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 of the date hereof. The company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements, which maybe made to reflect events or circumstances after the date hereof.

With that said, let me turn the call over to Kevin Tansley, Chief Financial Officer for reviewing the financial results. After that, we will hear from Jim Walsh regarding the developments at Fiomi, and finally Ronan will provide his overview of the quarter. Kevin?

Kevin Tansley

Thank you very much, Joe. Today, I will take you through our results for quarter three 2013, including the income statements for the quarter, our review of the major balance sheet movements between June 30 and September 30, and the cash flows for the quarter. Beginning with our revenues. Total revenues for the quarter were just over $24.1 million, which compared to $20.9 million in quarter three 2012, and thus represents a growth rate of 15.7%. This includes approximately $1.8 million of acquisition revenue and excluding this revenue growth for the quarter would have been 7%. Later in the call, Ronan will provide more details on this quarter’s revenues.

I will now move on to gross margin. As you can see from our press release, this quarter’s gross margin was 50.3%, which is a little lower than the 51% that we reported in quarter three of last year. This reduction was expected and is the result of the impact of the significantly higher level of placements of Premier instruments, which at 81 this quarter is the highest in a single quarter to-date. I’d also like to point out this quarter’s margin represents an improvement on the 49.8% achieved in quarter two this year.

Moving on to our indirect costs, our R&D expenses were $876,000, which represents a slight increase from the $767,000 announced in quarter three 2012. Meanwhile, our SG&A expenses have increased in the quarter from $5.1 million to $5.9 million. Both of these increases were due to the impact of the Immco acquisition and represents the first two months’ expenditure post acquisition.

Our operating profit for the quarter was $4.9 million, up almost $600,000 compared to the same quarter last year representing an increase of 14%. Our operating margin of 20.5% this quarter was similar to the 20.9% in quarter three. However, as in the case of the gross margin, it represents an improvement on the 19.5% reported in quarter two of this year. Overall, this level of operating margin demonstrates the strength of the company’s profitability and will serve to convert future revenue growth into significantly enhanced profits.

In terms of our net financial income, this quarter we earned $203,000, which is a decrease of nearly $400,000 on the equivalent period last year. This reflects the fall in deposit interest rates, which are now available in the markets as well as a decrease in the level of funds on deposits following acquisition expenditure and our recent dividend payment. I would also like to point out that this reduction in interest income represents approximately $0.02 in earnings, and this is relevant when considering the overall profit for the quarter.

Our tax charge for the quarter was $509,000 and this represents an effective rate of 9.9%, which is similar to the same period last year. The net results of all that I’ve spoken of so far is that profits for the period increased from $4.5 million to $4.6 million; meanwhile, our EPS for the quarter was $0.211, which represents an increase over the $0.207 cents achieved in quarter three 2012.

However, as I mentioned earlier, this increase in earnings was achieved notwithstanding a decline in interest income of close to $0.02. So on a like-for-like basis, earnings have actually increased by over $0.02 this quarter or by 13%, which is more in line with our growth in operating profits. Earnings before interest, tax, depreciation, amortization and share option expense for the quarter amounted to $6.4 million and this compares very favorably to the $5.6 million recorded in quarter three 2013.

This period, we are also recognizing two once-off charges. Firstly, there is a charge of $5.7 million in relation to a once-off license fee incurred in relation to HIV-2, and secondly there is a charge of $2.5 million in relation to the Blood Bank Screening acquisition. This charge covers the cost of closing two plants in the UK and the associated redundancies, also included here are the acquisition costs associated with the deal. I’d also like to point out that the profitability that I mentioned earlier is before the impact of such once-off charges and as was the case in previous quarters before the impact of the medical device tax in both cases, this is in the interest of comparability.

I will now move on to talk about significant balance sheet movements since the end of June 2013. We’ll point out that a lot of the movements will be impacted by the Immco acquisition. Property, plants, and equipments increased by $1.9 million. This increase was made up of additions of $1 million in the quarter as offset by depreciation charge of approximately $400,000. The remaining movement of $1.3 million relates to acquisition assets.

During the same period, our intangible assets increased by $45.8 million, and this was primarily due to acquisition-related intangible assets, including goodwill, amounting to $40.9 million in the quarter, plus normal additions were approximately $4.9 million. These additions have been partly offset by an amortization charge of $400,000.

Moving on to inventories, you would see that at $27.4 million, these have increased from $22.9 million in quarter two. Again, the principal reason for this is the inventories acquired in acquisition from Immco, but Trinity’s owning inventory has also increased somewhat reflecting increased throughput particularly relating to Premier. Trade and other receivables have increased by $5.7 million to $23.1 million, and of this increase $3.8 million is acquisition-related. However, second factor was an increase in normal trade receivables. This was partially due to timing factors, for example, September was a particularly strong revenue month, and this in conjunction with higher overall revenues contributed to the increase.

Meanwhile, our trade and other receivables, including both current and non-current, have increased from $15.7 million to $27.6 million. Acquisition-related payables accounted for $4.1 million of this movement, and the remaining movement is predominantly due to the HIV-2 license fees and UK restructuring charges that I mentioned earlier.

Finally, I will discuss our cash flows for the quarter. Cash generated from the business was over $3.5 million in the quarter. This was offset by capital expenditure of $4.6 million. Interest received amounted to approximately $40,000, and this was more than offset by tax payments of $160,000. The net result of this is cash outflows of just over $1.2 million.

However, the principal cash movement this quarter in relation to the acquisitions was totaled $39.2 million including costs. Meanwhile, net cash acquired from Immco upon acquisition amounted to $1.1 million. The net result of this is that at the end of the September, our cash balances totaled $26.8 million.

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

James Walsh

Thank you, Kevin. I’ll take a few moments now to update you on our cardiac market development program at Fiomi in Uppsala, and I’ll also be happy to take any specific questions you may have in our question-and-answer session at the end of the call.

By way of background, you will note that Trinity acquired the Uppsala-based Fiomi Diagnostics a little over a year and a half ago for a consideration of $13.1 million. Fiomi had developed a high sensitivity, precise, quantitative immunoassay platform. Trinity is now developing a range of high sensitivity point-of-care cardiac marker products on this platform, and in the first wave, we are developing a high sensitivity Troponin I product for the detection of acute myocardial infarction and a BNP product for detection of heart failure. The competitors in this space are Alere, Roche, and Abbott.

The aim of Trinity’s development program is to develop a point-of-care Troponin product capable of meeting the new FDA guidelines, a level of performance that has to-date not been achieved on any point-of-care diagnostic platform. In short, I am happy to report that our Troponin product is meeting this high performance threshold and that we are making excellent progress in reaching our goal to have our Troponin product CE marked before the end of 2013 and consequently available for sale in Europe beginning 2014. Moreover, we expect to commence clinical trials for U.S. approval as planned before the end of this year.

I’ll now provide you with a more detailed update on our CE marking project. CE, as you know, is the regulatory standard required to market a product on the European and other selective markets. In general, there are three aspects to the clinical trials necessary to obtain CE certification; namely a normal population study to determine the upper reference level are 99 percentile of a normal patient population; a chest pain study in the intended use population; and an analytical performance trial to determine such taxes, limit of detection, cross-reactivity, interfering substances, stability, shelf life, et cetera. I am happy to report that we are making excellent progress on all three of these fronts.

Our normals trial to determine the upper reference level of the normal population is now complete. We have collected blood samples from 500 apparently healthy normal people, which were gender matched and with an age distribution in the range of 18 to 75 years. A preliminary estimate of our whole blood 99 percentile are upper reference limit is 42 picograms of Troponin per mil of blood. The normals database now will be fully QC-ed in the coming days where an exact 99 percentile will be finally calculated. However, I don’t expect reasonable different grades from the number I just mentioned. Moreover, I think our 42 picograms is completely in line with what we expected.

Our analytical performance studies are approximating quarters were true and should be fully completed in the next two to three weeks. To-date no anomalies have been observed and the data is coming out as expected. And finally with regards to our chest pain study, this trial has been run on a combination of both bio banks, clinically adjudicated plasma samples and on threshold blood samples from suspected MI patients. The bank samples have been provided by Professor Per Venge, a cardiology expert at his Uppsala General Hospital. And the threshold blood samples from suspected MI patients are being collected as part of two separate clinical trails.

Firstly, we are participating in the Swedish FASTEST Trial, which is being run by Professor Bertil Lindahl across six emergency room sites in Scandinavia. This trial is designed as a method for the rapid rule out of myocardial infarction in the emergency room and is perfectly ideal for our needs. We also have a chest pain study underway with Professor Apple at Hennepin County Medical Center in the U.S.

Enrollment in our chest pain studies – chest pain trials is progressing according to plan and we expect enrollment to be complete by mid – early to mid November. This data when complemented with the bank samples from Professor Venge will be more than sufficient to support our CE claim.

In summary therefore, our CE trials are progressing well. and at this stage, it is reasonable to believe that our POC Troponin products will be CE marked before the end of 2013 and available for sale in Europe beginning 2014.

Moving on then to our U.S. approval plans. Unfortunately, the European generated data may not be used to support an FDA submission. All data must be generated in the U.S. – on our U.S. patient population, and therefore, separate U.S. clinical trials are necessary. We are happy that Professor Fred Apple, Director of Laboratory Medicine at Hennepin County Medical in Minneapolis has agreed to take the role of principal investigator to oversee the running of our U.S. trials. The format of the U.S. trials are very similar to that of the CE trials; namely a normals study, a chest pain study and a clinical program to determine analytical performance characteristics.

Currently, five U.S. clinical trial sites have agreed to participate in our FDA studies. These are, as mentioned to Fred Apple at Hennepin County Medical Center, Dr. Alan Wu at San Francisco General Hospital, Dr. Dag Shapshak from Medical County – Medical University Hospital South Carolina; Dr. Frank Peacock at Baylor College of Medicine and Dr. Judd Hollander, Medical Director at University of Pennsylvania. We are delighted that such a distinguished group of cardiologist specialists have agreed to participate in our U.S. trials. It hopefully bodes well for a successful outcome to our FDA application and I believe that our participation underpins the clinical need for a true point-of-care, high sensitivity Troponin assay. We expect U.S. clinical studies commence before the end of 2013 and depending on enrollments rates, we expect the studies [indiscernible] five months.

Finally, though we tend not to talk about it too much on our conference calls, product development on our BNP assay is doing very well. Our assay performance is excellent and we have now moved the assay into the final stage of our product development protocols. The goods news concerning BNP is that unlike Troponin it’s not certainly to the same level of technical complexity. Also the regulatory hurdles pertaining to BNP are less rigorous and more keen to a regular 510(k) process. Therefore, the clinical trials necessary for an FDA approval will be significantly less onerous, less expensive and less time consuming. We currently expect to have the BNP product CE marked in the first half of 2014 and our FDA application submitted at roughly the same time.

In summary therefore, we are pleased with progress at Fiomi. The development programs are challenging, but are progressing generally according to our plan. Both CE approval of Troponin and commencement of the FDA trials will occur before year-end and BNP will follow-up fairly quickly behind that.

So with that, I’ll hand back to Ronan, and I’ll be happy to take any questions you have at the – in the question-and-answer session. Thank you.

Ronan O’Caoimh

Thank you, Jim. I am going to discuss our HIV-2 approval from the FDA, then I’ll review revenues for the quarter and business developments, and finally the acquisition of Lab 21 before opening the call to a question-and-answer session. [Indiscernible] FDA approval of a claim for HIV-2. For two years now, Trinity has been actively seeking a HIV-2 claim for its Uni-Gold Recombigen HIV rapid product, which is sold in the USA. This exercise involves sourcing significant numbers of HIV-2 samples and carrying out extensive comparative trials for incorporation to a detailed submission to the FDA. We are now delighted to announce that the FDA have approved our HIV-2 claim and we’ve now renamed the product as renamed Uni-Gold Recombigen HIV-1/2. Previously, the product was approved for the detection of HIV-1 only.

Prior to this approval, the market size available to Trinity was restricted as some public health bodies require HIV-2 claim as a pre-qualifier for participation in their testing programs. Furthermore in the hospital market, Trinity was at a competitive disadvantage due to the more favorable reimbursement rates paid in respect of HIV-1/2, which is $19 testing compared with HIV-1 only, which is $11. Clearly, the hospitals had an incentive to buy our competitors’ test.

More recently the CDC has been informally recommending that testing is carried out for both HIV-1 and HIV-2, raising the possibility that in the near future, it will become a formal guideline that all rapid HIV tests detect both HIV-1 and HIV-2. Consequently, this approval for HIV-2 has protected our existing HIV business in the USA, and also provided significant growth opportunity in the U.S. given Trinity can now participate in certain public health programs previously not open to us and compete more effectively in the hospital market.

And as it’d be well known within the industry, it is difficult to participate in the HIV-2 business and take advantage of our recent FDA approval without taking a license to a significant HIV-2 patent portfolio. Trinity has negotiated such a license and the company is taking a once off charge in the third quarter for the license and associated legal costs in the amount of $5.7 million. The license fee will be paid in five equal annual installments commencing in quarter four of this year.

We believe this represents a very good deal in context of our existing business, the growth prospects for this business under standard conditions that would certainly be applied to such a license. Over the past two years, Trinity’s HIV revenues have fallen by between 5% and 6% each year due to lower federal and states funding. In addition and also because of the lack of a HIV-2 license, management now believes that the HIV-1/2 will provide a major boost to our U.S. HIV business and if we can reverse this decline and achieve double-digit U.S. HIV revenues growth in 2014. In fact, we are hopeful that we can achieve in excess of 20% growth once the headwinds that apply to state funding subside.

Now moving on just to a review of the quarter. Our revenues for the quarter were $24.1 million, up from $20.8 million, but when the impact of the Immco acquisition is eliminated, the organic growth rate was 7%. Our HIV sales for the quarter were $5.3 million, up from $4.7 million, which is a 12% increase. African sales continued to improve and increased 23% over prior year, with Mozambique and Zambian sales growing strongly.

However, sales in the U.S. were down 8% compared with the prior quarter and this reflects the trend, our business has been down 6% this year and last year as we just discussed. This is due to the lack of HIV license and the reduced – the HIV-2 license and the reduced public health spend by individual states. Now that we have a HIV-2 product, we are confident growing this business in double-digit terms year-on-year and at point of public health HIV spend returning to previous levels, we would be confident of a 20% annual growth revenue rate increase as I mentioned. Our clinical laboratory revenues excluding Immco increased from $16.1 million to $17 million, an increase of 6%. Revenues at our life science business, Fitzgerald were flat, while infectious disease revenues increased 4% with the U.S. performing satisfactorily and China continuing to perform very strongly.

Three factors will transform our infectious disease business; the Immco acquisition, the Lab 21 acquisition, which I’ll speak about in a moment, and third is the launch of our 10 new points-of-care products around the world. We have now received CE marking on Clostridium difficile, Giardia, Cryptosporidium, GDH, syphilis, herpes, Legionella Urinary Antigen, dengue, strep pneumonia and for the tenth product, h-pylori antigen we expect to CE mark in the next two months. As an example, the potential of these products we have just won the three-year tender in Indonesia worth $500,000 annually for our new dengue point-of-care test.

Moving on to diabetes, our business grew 11% this quarter and the number of Premier placements was 81 compared with 54 in the comparable quarter. On a cumulative basis, year-to-date placements are 228, which is 66% higher than the 137 instruments placed last year. We are confident of meeting our target of 320 instruments for the year.

We placed 25 instruments in China during the quarter and are confident that we can maintain that rate of placement going forward, resulting in 100 Premier placements per year in China. Menarini is performing well and we completed the development of the Ion Exchange version of the Premier instrument in June, 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 results that Menarini instrument placements will increase significantly.

Moving on to Immco, which we acquired at the end of July, it contributed $1.8 million to revenues during August and September and performed well. The business is poised for substantial growth particularly, because the U.S. is a 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.

Now, our existing sales force are placing this product range onto our existing installed instrument base across the U.S. As we have already stated, we are confident of growing this business 20% annually. And I’m just going to move onto our acquisition of Lab 21. We are pleased to announce the acquisition of Blood Bank Screening Business of the UK-based diagnostics company, Lab 21 for a $7.5 million consideration including cost. Lab 21 is a private company with multiple diagnostic businesses, which has recently been engaged in a bank-driven process to sell part of its business.

Trinity identified the Blood Bank Screening Business within Lab 21 as the most attractive part and has concluded a deal to acquire this business in the face of competition from other strategic players with Trinity being obviously the successfully party.

In fact, Trinity was successful, despite having a significantly lower bid as unlike other bidders; we made things simple for the bank by taking on all employees and building these as relation to the syphilis business. The acquired business generates annual revenues of approximately $4 million of which $3.5 million is generated from syphilis blood banking and the remainder from malaria products.

The business comprises very high quality TPHA and ELISA products for Blood Bank Screening. These products are best-in-class with an excellent balance between sensitivity and specificity and compete in an end market, which has limited competition with Fujirebio and Biokit, which is the subsidiary of Werfen and I think the other players, participants. These syphilis products have a market share of greater than 75% in each of the key European blood bank markets of the UK, France, Germany, Netherlands, Switzerland, Austria and Belgium.

It is our plan to take this success in Europe and replicate it in other countries that outside of Europe. In particular, we are seriously targeting the U.S., where the business has not been able to access the significant U.S. blood bank screening market to date.

We are now commencing negotiations with a number of sizable market participants in the U.S. blood banking market with a view to replicating the success in Europe and we intend on immediately submitting the products for FDA approval.

The acquired business also contains blood bank and routine diagnostic malaria test. These partners are well positioned to avail of the increase in malaria blood bank testing in the developed world; traditionally malaria testing has been associated with certain malaria-endemic regions of the world. However, this is no longer the case of the preference of malaria has spread geographically with increased foreign travel.

As a result, the UK and Australia using Lab 21 products have recently introduced a nationwide malaria Blood Bank Screening program. Other European countries are considering, replicating the UK full screening program or a reduced sample base to testing approach based on how donors will fill in their questionnaire relating to travel.

This represents a significant growth opportunity for Trinity in both European and other developed markets. Due to so many difficulties being experienced by its former parents company and the force to disclose the process, the business currently has very low inventory level and the significant backorder position.

In the near-term, our main focus is on increasing production and meeting customer demand as soon as possible. However, due to the lead times involved in training new employees, acquiring raw materials and manufacturing finished products, sales for the remainder of 2013 are going to be limited with a return to normal sales levels being achieved in quarter one of 2014. In the meantime, our customers are running down safety stocks that they would have been holding prior to the acquisition and we are satisfied that we will not lose any contracts with customers.

The business we have acquired is located in both Cambridge and Newmarket in the UK and employs approximately 45 people between the two sites. Over the next nine months, Trinity plans to transition the production activities of the business to its existing manufacturing facilities in Ireland and in Jamestown, New York.

This will result in significant operational synergies and efficiencies. A number of key employees, principally in sales and marketing, will be retained in the UK. The company is recognizing a charge of $2.5 million in the quarter three income statement to cover reorganization and redundancy costs associated with the closure of the UK manufacturing operations and loyalty bonuses for staff to ensure that they’ve transferred the technology on a timely basis. The business will then be earnings accretive in 2014.

Although, Trinity is in no way seeking acquisitions, the Lab 21 opportunity was compelling. given the price at which it was available, it’s significant growth history and prospects, particularly in the USA and its excellent fit with the Trinity’s existing infectious disease business.

In particular, we believe that this acquisition combined with the recent Immco acquisition will serve to reinvigorate our existing infectious disease business both in the blood blank market and in the routine diagnostic market.

Thank you, if I could hand back now to the operator for question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Larry Solow at CJS Securities.

Larry S. Solow – CJS Securities, Inc.

Great, thank you very much. Ronan, just on the – just to confirm on the HIV-expanded label or the new approval, is the – I realize it’s certainly a big thing to at least steady the market, stop your declines, and it sounds like you’re going to get always some initial growth from it. Is this something that you can meet a sustainable growth in the U.S., as you look out beyond 2014 over the next several years?

Ronan O’Caoimh

Absolutely, yes, I think the reality is that we’ve been very seriously constrained by the lack of HIV-2 license over the past number of years. It’s something we’ve not talked about very much, but we’ve been very, very busy now for over two years in trying to get the HIV-2 approval, so this is a major positive for us. I think the other factor just from a purely defensive perspective we have to be realistic is that the FDA were –CDC were beginning to recommend HIV-2 testing, although they actually are the tiny incidence of HIV-2. and in reality, it’s a huge cross, the activity between 1 and 2. But in any event, they were beginning to do that, and of course, the danger of the guideline from the CDC lurked. And of course, that would have been catastrophic for our business.

But when you combine that then with the reimbursement factor, which is fairly comparing the $11 versus $19, it really meant that it was very, very difficult for us to grow us business, in deed to retain our business in the hospital market, and meanwhile then more and more individual states were actually – were looking for HIV-2 claim.

So all in all, it was a necessity for us. But I mean I think that’s the defensive side. From the positive side moving forward, I think that we have a wonderful, wonderful product that had a market share lower than it ought to have had, and I think that we are going to address that, and I think we built our hospital and our public health business very significantly.

As I said, certainly comfortably in double-digits, and I think in the absence of kind of negative headwinds on individual state spends, I believe that we can go – we can exceed 20% with this eventuality with this circumstance. Of course, the bad news was that in order to – the price of poker to play in this territory wise that you needed the requisite licenses, and I think that we’ve actually done a good job there in terms of the one-off payments of 5.7 that we’ve discussed we don’t like doing it, but it’s a price of poker. It might have been a lot more, I think, it worked out reasonably well.

Larry S. Solow – CJS Securities, Inc.

So inevitably, not only it descends the franchise, but as you can get back to your historic rates where you’re currently, where you were a couple of years ago and then incremental growth on that it sounds like?

Ronan O’Caoimh

Yes, absolutely. We’re very, very confident of growing this business now. We have been operating with our hands tied behind our backs in this market for the last number of years.

Larry S. Solow – CJS Securities, Inc.

Great. And then just on the Premier, can you just give us an update, just a couple of things, it sounds like things are progressing on plan? Are you still comfortable with reaching 500 placements next year and then can you also just talk about what you’re seeing in terms of utilization rates out in the field and in our trends and the royalties?

Kevin Tansley

As we mentioned, we’re going to do 320 this year. We’re comfortable that we’ll do that. We’ve done most of it already. In terms of next year, I wouldn’t hang my hat on 500, but I’d be disappointed, but if I did not get very close to us. I think that the positives are that we’ll have a full year in China where it’s certainly only got approved sort of in June in China, and we will have the Ion Exchange operating for Menarini in Europe, which means they’ll be setting in Spain and Italy, which are their primary markets.

We will be setting in Brazil, and we’re very confident of what we can do in Brazil, and meanwhile, then we are rolling out the product range across Indonesia and the Philippines of this world, gradually doing that. All of that I think should culminate in something we haven’t – we’re not indicating a number at this moment, but it would be in and around the 500 mark, it would be very close to it or in deed, it could exceed it, but just a little bit coy about indicating exactly what we do there.

And then just in terms of usage, just to mention the one thing is the actual amount of reagent that each individual instrument is running is probably is slightly in excess of what we had expected, but what I would caution one thing is that there is probably a slightly bigger gap.

There is actually a longer gap between the moment that we ship the instruments out of Kansas City and that it ends up actually operating in China running 20,000 tests per annum. And certainly that on average is probably about seven months across the entire world just because it goes through distributors and it takes such a time for it to be installed and put et cetera. So probably about seven months, and that is probably somewhat longer than we’ve expected. I think that’s just a one-off impact that, that will only have the one-off impact.

Larry S. Solow – CJS Securities, Inc.

So, it’s actually the ramp in utilization maybe a little slower, but ultimately is at or ahead of time?

Ronan O’Caoimh

Absolutely, I mean, our instrument placements and the number of tests that each instrument are running are equal or exceeding our expectations, and we envisage you’re a great year, next year in Brazil, which is a new territory for us. We think, we’ll get close to the 500 – the only negative and it’s a minor negative is this one-off thing that it seems to taking or we have been thinking about three months, it seems on average, it takes about seven months between the time an instrument leaves our premises and actually it’s up and running fully activated in a laboratory.

Larry S. Solow – CJS Securities, Inc.

Okay. And just two real housekeeping questions, I just would have missed. Did you give the Lyme disease, the Lyme diagnostic sales? I just stepped off for two seconds on the call, did you give that number?

Ronan O’Caoimh

We didn’t and we don’t tend to. But what I would say is that, our quarter three Lyme sales were leveled with quarter three of last year. So, the suffering that we did in quarter one and two had passed, and so Lyme is basically where it was before.

Larry S. Solow – CJS Securities, Inc.

And then just on the higher share count sequentially, is that basically all options more in the money options as the stock price has risen?

Ronan O’Caoimh

Yeah. Exactly you have called it in one there, Larry, so we have no – obviously we haven’t been issuing shares or anything like that, security option movements in the money obviously is the factor there, yes.

Larry S. Solow – CJS Securities, Inc.

Okay, great. Thank you very much.

Operator

The next question comes from Bill Bonello, Craig-Hallum.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Good morning or afternoon or whatever it is for everybody. Few follow-ups on the Troponin, you mentioned that the 99 percentile appears to be about 42 picograms. Can you detect at that level with a 10% CV, and how low can you detect with a 10% CV?

James Walsh

Bill, so I’ll take that. The answer is yes, 42 picograms is our 99 percentile. We have – we haven’t totally completed the analytical studies, but yes, we do seem to be able to detect as or below that number with a 10% CV, okay. So as we stand at the moment, our limit of detection, your first question, how far – how low can we go per se, is about 6 or 7 picograms, okay? So we can see as low as 6 or 7 picograms. We are able to measure, it would seem in the normal population, we are – we do seem to be able to measure greater than 50% of all patients. I actually give them a reading, if you like okay, between about 5 picograms and the 42 picogram 99 percentile, so that’s quite encouraging. And so yeah, we’re within a picogram or 2 below the 99 percentile where we have a 10% CV, but I expect that that will even go lower, as we tidy up the dataset.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Okay. And will even go lower in other words, the level at which you could read with a 10% CV is what you are…

James Walsh

I am not suggesting we’re going to go very much lower, but we’ll certainly be lower than the 42 picograms.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Okay. And then the significance of the…

Ronan O’Caoimh

I…

Bill B. Bonello – Craig-Hallum Capital Group LLC

Go ahead.

Ronan O’Caoimh

Ronan here, the other thing is that, of course, is that the 42 picograms is the Swedish reading. It’s likely that the U.S. 99 percentile will be somewhat higher giving us a greater – and a greater scope and freedom to operate, basically giving us a greater safety in that, is likely that the U.S. population will be higher than 42.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Okay. I’m not sure…

Ronan O’Caoimh

The Swedish tend to be very, very [indiscernible].

Bill B. Bonello – Craig-Hallum Capital Group LLC

Got it, okay. I get that. And then the significance of the being able to read and greater than 50% performance is that hits the second criteria for being labeled a high sensitivity Troponin test, is that right?

Unidentified Company Representative

No other test has been even close to achieving that Bill, okay. And I’m not just saying yet that we have actually achieved it, to really go through the data with a fine-tooth comb, but it looks like certainly from the 500 normals that we have read in Sweden that we are detecting slightly over the 50%, okay, so that – if that holds through, it will turn us into the – a true high sensitivity assay.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Right. Okay. And then just when we think about sort of the data itself, what kind of data will you actually make public and what was sort of the format of that data being made public. So as you’re around the CE marking, how will we actually know the performance?

Unidentified Company Representative

It will be absolutely clearly put out in our – in instructions for use package insert, Bill, that will go with the kit. So the data that you’ll actually see you will see from the analytical studies, you will – well, first of all, from the normal studies, you will see the actual final 99 percentile of the normal population in both whole blood and plasma, okay. You will then see within that package insert, you will see the LOQ at 10% for – as determined in plan in the analytical studies for both whole blood and plasma, so that will give you the – essentially the confidence that the product meets, if you like, the new FDA guidelines. You will then be able to see calculative sensitivity and specificity of the product, okay, which is different to the sort of analytical performance. The 99 percentile is all very fine, but how good is the product at actually ruling in or ruling out sort of MI.

So it will be – there’ll actually will be sensitivity and specificity data within the pack insert that will show you versus the clinically adjudicated samples, where three cardiologists say yes or no that patient did or didn’t have a heart attack. We’ll then be comparing our results against that to see how sensitive and specific our test is. So that will be published. You’ll also see data on interfering substances, if any; the threshold at which substances interfere. You’ll see shelf life data. You’ll see – it will actually all be published, Bill, in the instructions for use that will roll with the kit as it’s put on to the market in late this year, early next year.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Okay, and is there anything that we’d see in advance of that? For instance, do you put anything out on the normal studies? Is there anything that you put out or is there anything that you put out in a press release along with CE marking or really everything comes sort of in a bundle with the instruction for use?

Unidentified Company Representative

I don’t know if we have – I don’t know if we had [indiscernible] Bill. The data will – the data set will be available put it that way okay. The data set will be available certainly late November, early December okay. The CE marking process – so theoretically, we could make that data public at that stage. The CE marking process itself takes probably three or four weeks. So okay, so that – I would suggest it would be more prudent perhaps to wait to get the CE mark before you’re public – before you publish the results formally. But the difference is a matter of two or three weeks between having the data and then actually getting the CE mark itself.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Yes, okay, great. Thank you very much.

Operator

(Operator Instructions) Our next question comes from Chris Lewis at ROTH Capital Partners.

Chris W. Lewis – ROTH Capital Partners LLC

Hey, guys. Good afternoon.

Ronan O’Caoimh

Hi, Chris.

Chris W. Lewis – ROTH Capital Partners LLC

And first just on the Lab 21 acquisition, I guess you talked a little bit about the backorder position and your focus on ramping that manufacturing in the fourth quarter there. So can you just give us a little history of that, I guess, how long that backorder has been there and how long do you think, it will really take to get that manufacturing ramped up and of the speed to kind of fill the orders out there? And then to follow-on to that, what gives you the confidence that no customers have been lost from that backorder situation.

Rory Nealon

Hi, Chris, it’s Rory here. The backorder has been lingering, that’s the best word for between one and two quarters, in part driven by the difficulties that the previous owners had. From a financial perspective, it led to lack of supplied raw materials, a few less topics, et cetera, et cetera. and we believe we’ll have a turnaround for the majority of the products by about December and so one of our top products in particular, probably into January, February kind of timeframe.

It’s not like there is zero supply, in the meantime, there will be limited supply as a result of which customers will get partial orders and also remember customers typically, in fact, really much all of them tend to store a level of safety stock within their own sites to keep them going into that, and any norm, any issue whether it’s shipping or technical or whatever. So those customers are effectively running those docks down as we speak, we’re also – I’m going to start supplying them the partial orders. So we’re pretty confident, we’ll get to December through January and get through this with little or no effect on the business.

Chris W. Lewis – ROTH Capital Partners LLC

Okay. And then just what gives you confidence that none of those customers have been lost since the backorder over the past couple of quarters here?

Rory Nealon

Well, the part of our due diligence obviously involved going back and looking at the customer base as it was in 2011, 2012, early 2013, and we’re able to take that and track and see where the business is today and continue to monitor that literally on a week-by-week basis. So we’re pretty confident we will get there by the end of the year.

Chris W. Lewis – ROTH Capital Partners LLC

Okay, great. And then as we look out for that business in the 2014, how should we think about that just in terms of its overall growth outlook and accretion profile. I think you said it was going to be accretive in 2014. Can you kind of give us a little more detail around that along with expectations around the top line growth?

Ronan O’Caoimh

Yeah, Ronan here. In terms of – just in terms of P&L wise, obviously, we’re running two factories and for a period of time until about next April, May, June. and so it’s difficult to make a profit in those circumstances. I think as soon as that happens, this thing becomes decently profitable and earnings accretive. In terms of kind of accruals we can get, we indicated that it’s doing $4 million. And we would be confident growing this 20% annually. we wouldn’t have jumped by it otherwise.

In reality, as if we can make the kind of headway that we hope to make in the USA and thus we can do materially more than that. I would just caution that’s going to take a little bit of time, because to get into the FDA, it’s not just a matter of getting the FDA approval on the product, but also on the system. And so it’s going to take a bit of time and it also involves strategic partners. But in overall terms, this is – in our opinion, it’s the best simplest blood banking test in the world by quite a measure.

And so we think, we can do really, really well with this. And beyond that of course, is the part of the malaria potential. I’m very importantly beyond that, of course, this product is perfectly fitted for standing in the routine diagnostic market. and so clearly, we’ll be making it available to our distributors and to our own sales force et cetera.

So this is a company, which is really just concentrated on Europe and the big world outside of that. So it has concentrated really on blood banking in Europe. So what we want to do is, we want to concentrate on the world for blood banking and also on the world for routine. So I think it provides a real growth opportunity and also we invigorate our existing part of plan.

Chris W. Lewis – ROTH Capital Partners LLC

Okay. And then for the HIV-2 claim, congrats on the approval there. Can you just talk about kind of your expectations on, when we can expect to see the benefit just of that approval related to sales in the field and then I think you mentioned this double-digit HIV growth for the U.S. in 2014, how is that plan to kind of the overall point-of-care sales growth expectations as we move into 2014? And just that – any additional color around kind of your expectations for the African HIV revenue growth outlook as well would be helpful?

Ronan O’Caoimh

So I think just to answer the question in terms of how immediate was the impact of the HIV-2 license fee. I think the answer is fairly immediate, I mean I think we’re going to start winning contracts and new business in new hospitals with immediate effect. So I would be very disappointed if in fact we can’t announce a decent growth in our sales in quarter four. And that probably puts a lot of pressure on our sales reps, but in reality, I think it’s immediate as that. And in the context then of Africa, I mean as you can see clearly, our African business is doing extremely well and I think 23% that it grew this quarter, 23% or 28% is just kind of discount like that, but it is growing very strongly in this quarter as it has done over the past number of quarters, 23% and it reflects success in Mozambique and Zambia.

I think quarter four is going to be strong, because I think we’re having success in Nigeria that we previously didn’t have. We’ve had some problems there. We’re not giving any credits anymore. So that’s opening up for us as well and just in general terms, the picture in Africa is one of solid, very solid and impressive growth. So overall, I think you’re going to see more impressive growth in our HIV than we had in previous years. Of course, what’s really attractive is that you’re not just going to have a HIV business going forward, you’re going to have lots of other rapid products with it, and I mentioned the 10 products, nine of which are approved in Europe, et cetera, et cetera. So I think it’s a very attractive picture moving forward.

Chris W. Lewis – ROTH Capital Partners LLC

Okay. And I’d like to speak one more in here, just in terms of the organic growth outlook, I think you grew excluding the Immco contribution about 7% total or about 6% in the clinical lab segment. So what factors do you expect to contribute in both of those segments in order to sustain and perhaps improve that organic growth profile and I guess how should we think about that trending into the fourth quarter and then longer-term into the 2014? Thank you.

Unidentified Company Representative

All right. Well, in answering that question, of course, the point – quick point is sort of an acquisition become organic growth. But just in general terms, it’s like – I’ll make the point that if you look at our overall business and we’ve had a business, which I think [indiscernible] which has been a laggard and strike on us and haven’t performed well and it’s a work in process. Let’s just imagine that were to remain relatively flat, although that would not exception to us. It benefited our infectious disease business, which has probably struggled too, generally significant growth. What happened there is we’ve added Immco, we’ve added to Lab 21 and we have developed in-house a range of rapid products and the combination of all of that is going to basically give this business very significant growth. If you look at our Premier business, our diabetes business, well, we’ve got a big winner with Premier. Maybe we are about to become 25% of world market and Immco [indiscernible] over the period of next number of years are indeed more than that.

So I think we all recognized that success story, you’ve got obviously cardiac coming through as a new growth business as well. And then your HIV business, which basically has inherent difficulties that are now been corrected and I think it becomes a big growth business moving forward [indiscernible].

Unidentified Company Representative

So, I think if you examine the whole thing, I think what we have done over a period of time is we have transformed our business from one, I think, [indiscernible] growth into a business that every facet of which can grow and grow impressively with a single exception of this trial, which is a work in process. We will be back on that one. And so I’m just closing, Chris.

Chris W. Lewis – ROTH Capital Partners LLC

Yeah. Okay, thank you.

Operator

Our next question comes from Ross Taylor, Somerset Capital.

Ross Taylor – Somerset Capital Advisers LLC

Yes, gentlemen, congratulations on your recent moves. And I had a couple of questions just kind of trying to get my hands around a few things. One, what is the size of the European Troponin market?

Unidentified Company Representative

Right…

Unidentified Company Representative

You have a couple of questions, Ross?

Ross Taylor – Somerset Capital Advisers LLC

Yes. What’s the size of the European Troponin market, testing market?

Unidentified Company Representative

In the slides, it’s probably about $80 million.

Ross Taylor – Somerset Capital Advisers LLC

Eight zero?

Unidentified Company Representative

Eight zero, yes. I would – my estimate will be about eight zero. Troponin, if I had to say, – yes, probably, if I had to say $20 million for Alere, $40 million for Roche, $20 million for Abbott, about $80 million.

Ross Taylor – Somerset Capital Advisers LLC

Okay. And then the BNP market as well in Europe?

Unidentified Company Representative

I would say $20 million there and $30 million Roche and $5 million Abbott.

Ross Taylor – Somerset Capital Advisers LLC

Okay. So – and at this point, neither or none of those players had a product that’s anywhere near as effective as the one you guys are developing, but is this a big an issue there as it is here. I mean, obviously here the FDA is pretty unhappy with the lack of the product meeting its standards?

James Walsh

Ross, this is Jim there. The answer, it is a big issue in Europe. Even though, the regulatory agencies are not per se putting the same technical sort of the classification on Troponin in Europe, the fact of the matter is clinicians themselves will use it, okay, not because of regulatory, because of good medicine. The bottom line of it is that if you have an under-sensitive Troponin test in the ER, it’s just not effective. The chances are people can die from essentially – from not being diagnosed properly.

So if a product is out there, if our sales rep is out there selling a product that is actually substantially more sensitive than the competitor product, the clinicians themselves will make the move. It will have to be a key opinion leader driven. We obviously aren’t very well linked in with the key opinion leaders across the Europe, but those are the guys who we will hope to publish white papers et cetera and who will sort of evangelize their [indiscernible] result. It’s not a regulatory thing. It’s a product performance thing and I think we can be quite successful competing against the inferior products that are out there.

Ross Taylor – Somerset Capital Advisers LLC

Okay. So you would expect that you would see a reasonable – reasonably quick ramp up in Europe for this product given that you aren’t facing a quality competitive threat?

Unidentified Company Representative

And I think it’s going to take sometime, quite frankly, to get the word out there. What you really need is a number, well published papers by key opinion leaders and they can only start generating that data when the product is available for sale. So I don’t know Ronan if you would take up, but I wouldn’t have thought. I would think the lag is going to be longer maybe we might hope.

Ronan O’Caoimh

I think what you need to consider here is you have to be realistic. The adoption of point-of-care product testing, component testing in USA has been much, much greater than in Europe. So in Europe it’s happened to a much lesser degree. In fact, we treated only, Ross that has succeeded to any degree and I think the other countries struggled. And I think also a very important factor is that the FDA hasn’t come out and the EU equivalent hasn’t come out and say, hey listen, all these tests are rubbish. We’re changing the guidelines and want basically a change here. So in that sense there isn’t the awareness in Europe of the deficiencies of these tests to the extent that there is in the USA. So for example, an FDA approval for a component test for that Troponin test in the USA will be a genuinely seismic event and we’re aware of it.

In Europe, it’s not so seismic because there is neither a bigger market nor the same level of R&D, much awareness of the deficiencies of these particular tests. So therefore – what it need is basically it needs the opinion leadership out there and shout and talk about immediately to all of that and we will be doing all of that and we are setting up all of that. We set up distributors and we are ready to roll, but then I think what I don’t want to do is I don’t want to build expectation beyond what we can achieve there. It is going to take a bit of time.

Ross Taylor – Somerset Capital Advisers LLC

Great, great. And also, can you give us some idea of the rate in sales, how they are trending in the Premier machines that have been in the field for a while?

Ronan O’Caoimh

Yes, Ross they are doing very well. In fact and the units rate per instrument, for example, [indiscernible] in China. But even initially in China are looking greater than what we had expected. So the number of tests run per year, per instrument are greater than expected, just more to caution with some is that the bigger time gap between the moments we actually ship an instrument out of Kansas City and it actually ends up operating using our reagent in the field and that has averaged. It seems to be averaging about seven months now, which is longer than we had hoped for. But apart from that one factor I think everything is going extremely well in Premier for us.

Ross Taylor – Somerset Capital Advisers LLC

Okay great. Thank you very much and I’ll see you next week, Ron.

Ronan O’Caoimh

Thanks, Ross. Can I just say one thing by the way? I just need to – actually just clarify one thing here since you have asked me. We have been using the term Lab 21 as if we acquired [indiscernible] very misleading and I apologize for that. We have not acquired Lab 21. We acquired certain assets syphilis, blood banking assets from Lab 21. Lab 21 continues to operate and have many businesses and I apologize profusely for that misleading I’m so sorry guys to the Lab 21 people that was not my intention. So just to clarify, Lab 21 is a business that operates and its significant business that trades very successfully in the U.K. and beyond my apologies.

Are there anymore questions, all right? So at this stage if I could just thank everybody for the attention and the interest and the support and say good afternoon, good bye, thank you very much.

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