ABAXIS' CEO Discusses F3Q 2014 Results - Earnings Call Transcript

Jan.30.14 | About: ABAXIS, Inc. (ABAX)

ABAXIS, Inc. (NASDAQ:ABAX)

F3Q 2014 (Qtr End 12/31/2013) Earnings Call

January 30, 2014, 4:15 PM ET

Executives

Joe Diaz - Lytham Partners

Clinton Severson - Chairman, President and Chief Executive Officer

Alberto Santa Ines - Chief Financial Officer

Donald Wood - Chief Operations Officer

Craig Tockman - Director of Filed Operations, North American Animal Health

Rick Betts - Director of Medical Sales and Marketing, North America

Analysts

Jim Sidoti - Sidoti & Company

Ross Taylor - C.L. King

Erin Wilson - Bank of America Merrill Lynch

David Clair - Piper Jaffray

Operator

Good day, and welcome to the Abaxis' third quarter fiscal year 2014 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Joe Diaz of Lytham Partners. Please go ahead, sir.

Joe Diaz

Thank you. And good afternoon to all of you for joining us today to review the financial results of Abaxis for the third quarter of fiscal year 2014, which ended on December 31, 2013. As the conference call operator indicated, my name is Joe Diaz, I'm with Lytham Partners and we are the Investor Relations consulting firm for Abaxis.

With us today, representing the company, are Mr. Clint Severson, Chairman and Chief Executive Officer; Mr. Al Santa Ines, Chief Financial Officer; Mr. Donald Wood, Chief Operations Officer; Dr. Craig Tockman, Director of Filed Operations, North American Animal Health; and Mr. Rick Betts, Director of North American Medical Sales and Marketing. 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 from the company's website at abaxis.com or numerous financial sites.

Before we begin with prepared remarks, we submit for the record the following statement. This conference call may include statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements related to the company's cash position, financial resources, and potential for future growth, market acceptance of new or planned product offerings, future recurring revenues and results of operations.

Abaxis claims protection of the Safe Harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms, may, believe, projects, expects or anticipates, or words of similar import, and do not reflects historical facts.

Specific forward-looking statements referenced in this conference call may be affected by risks and uncertainties including, but not limited to, those related to transitioning medical sales to Abbott, losses or system failures with respect to the company's facilities or manufacturing operations, fluctuations in quarterly operating results, dependence on sole suppliers, the market acceptance of the company's products, and the continuing development of its products, required FDA clearance and other government approvals, risks associated with manufacturing and distributing its products on a commercial scale free of defects, risks related to the introduction of new instruments manufactured by third-parties, risks associated with competing in the human diagnostic market, risks related to the protection of the company's intellectual property or claims of infringement of intellectual property asserted by third parties, risks associated to the condition of the United States economy and other risks detailed under Risk Factors in the Annual Report on Form 10-K and other periodic reports filed from time to time with the United States Securities and Exchange Commission. Forward-looking statements speak only as of the date statements were made. Abaxis does not undertake and specifically disclaims any obligation to update forward-looking statements.

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

Clinton Severson

Thank you, Joe, and good afternoon, everybody. I'll review the accomplishments and the challenges for Q3 FY 2014 and then some of the goals for Q4. After my short presentation, I'll ask Don Wood, our Chief Operations Officer and Interim Director of North American Animal Health; and Rick Betts, our Director of Sales and Marketing for the North American Medical market, to give an update on their respective businesses. We'll then take questions.

Q3's disappointing results are a direct result of us making the adjustments in our North American vet business we talked about it in our Q2 conference call. One challenge in Q1 and Q2 was our inability to smoothly transition from a direct sales approach to mostly a distributor model.

This caused imbalances in field inventory, mixed performance from some of our smaller distributor partners and disruptions in our field sales organization. This also had a cascading effect that made forecasting more difficult, which caused inefficiencies in our factory, leading to higher factory cost and lower gross margins.

The actions we took in Q3, while painful for the quarter, we're taking to speedup the fixes and position us for our next fiscal year with balance field inventory, trained field sales people that are proficient at working with distributors, clear forecast and expectations from all of our distributor partners with a focus on introducing our instruments and the benefits of using AVRL to all the vet practices that have not yet experienced the advantages of using the state-of-the-art systems and services. While most of the heavy-lifting is complete, we still have more work to do in Q4 to get us positioned back to double-digit growth in FY 2015.

Sales in Q3 finished at $41 million, down both year-over-year and quarter-over-quarter, while disappointing, it does not reflect the performance of sales to our customers. Q3 last year, we had two stocking orders from partners that had no sales to end-users that quarter.

MWI ordered about $6 million worth of Abaxis products and prepared for January 2013 launch. Abbott ordered about $2.3 million in Abaxis medical products for a launch in January 2013. While we shipped and recorded these sales, none of these products were sold to our end-users in Q3 FY '13.

Q3 this year, we focused on curing the imbalances in our distributor inventories, which resulted in sales to end-users Q3 '14 that were recorded by Abaxis in previous quarters. Prior to signing the MWI and Abbott deal, our sales to end-users track more closely with reported revenues. But since Q3 FY 2013 has changed, our goal for the next fiscal year is to manage inventory build to sales to end-users.

If we adjust Q3 FY '13 sales to exclude the stocking orders that we received that quarter, we would subtract $8.3 million from our reported $49.8 million, which will give us adjusted sales to end-user of about $41.5 million. We took out about $6.3 million out of our U.S. vet distributor inventory in Q3 this year, so our adjusted sales to end-users totaled about $47.1 million or up about 13% year-over-year. We had a very strong instrument placements in our domestic vet market for Q3 2014 with more than 1,000 instruments sold with about a 23% reduction in sales and marketing cost. More from Don in a few minutes.

AVRL sales finished Q3 2014 at $2.5 million, up 80% year-over-year and 8% quarter-over-quarter, with losses down $200,000 versus last quarter and down $700,000 versus Q3 last year. Our goal is to get AVRL back to double-digit sales growth quarter-over-quarter, with a focus on accounts that link our point-of-care solution with lab services.

Worldwide vet sales finished Q3 '14 at $32.2 million, down 19% year-over-year and down 15% quarter-over-quarter. If you adjust for the stocking order Q3 last year and the $6.3 million sold to end-users that came on in distributors' inventories, sales to end-users totaled about $38.5 million in Q3 this year versus about $33.8 million sold to end-users in Q3 last year or up about 14%. Adjusted quarter-over-quarter vet sales were up about 2%.

Worldwide medical sales closed Q3 FY '14 at $7.9 million, down 13% year-over-year. When adjusted for the stocking order from Abbott in Q3 last year, worldwide medical sales finished up 18%. Quarter-over-quarter, worldwide medical sales were up 9% due to sales increases in Europe and the U.S. More to follow from Rick in a few minutes.

Domestic sales for Q3 totaled $31.8 million, down 24% year-over-year and down 15% quarter-over-quarter. If you adjust for the stocking orders placed in Q3 last year and add the sales to end-users from distributor inventories Q3 this year, domestic sales to end-users were about $38.1 million, up about 14% year-over-year, 2% quarter-over-quarter.

International sales finished strong at a record $9 million, up 13% year-over-year and up 6% quarter-over-quarter. European sales at record levels totaled $7.2 million in Q3 FY '14, up 16% year-over-year and up 11% quarter-over-quarter. Sales to the Pac Rim totaled $1.8 million, up 2% year-over-year, but down 12% quarter-over-quarter.

Vet disc sales at 1 million units were down 21% versus Q3 last year. However, vet disc sales to end-users were approximately $1.2 million units. If you adjust vet disc sales for the 165,000 unit stocking order for MWI, which we received in Q3 last year and compare Q3 2014 end-user sales with the adjusted number for Q3 last year, the disc sales to end-users were up about 3%. Quarter-over-quarter on adjusted, vet disc sales finished up 3%. If you adjust for the reduction in U.S. distribution inventory, vet disc sales to end-users is at about 1.2 million units or flat versus last quarter.

Medical disc sales for Q3 totaled 726,000 units, down 5% year-over-year, but up 14% quarter-over-quarter. If you adjust for the Abbott stocking order of 252,000 medical disc placed in Q3 last year, disc sales and units were up 42% year-over-year.

Total disc sales of 1.8 million units were down 15% year-over-year, but up 8% quarter-over-quarter. If you adjust Q3 FY '13 disc sales from stocking orders and the Q3 FY '14, for what was sold to end-users, total disc sales in Q3 FY '13 would total 1.7 million units and Q3 '14 would total 1.9 million units, up about 15% year-over-year.

Other vet consumable sales include i-STAT and coag cartridges, hematology reagents and rapid tests, total $5.3 million, down 6% year-over-year and 26% quarter-over-quarter. We expect other vet consumable sales to grow with the reduction of our new rapid test and the correction of the imbalances in our distributor inventory, which should be accomplished in Q4 this year.

We sold 1,249 instruments in Q2 2014 versus 1,818 in Q3 last year or down 31%. End-user instrument sales totaled 1,585 units, as about 336 instruments were taken out of the distributor inventory. Stocking orders Q3 last year totaled approximately 419 instruments. We sold 377 VetScans from our inventory and additional 166 VetScans from distributor inventory for a total of about 543 units going to end-users. This is versus 545 VetScans sold in Q3 last year and 577 in last quarter.

We sold 204 hematology instruments from our inventory and additional 62 units from distributor inventory for a total of 266 units to end-users versus 395 sold in Q3 last year and 480 sold in last quarter. We sold 238 Piccolos versus 306 in Q3 last year and 242 in last quarter. And finally, we sold 430 i-STAT and coag instruments from our inventory and 108 out of distributor inventory for a total of 538 versus 572 sold in Q3 last year and 469 sold in last quarter.

19% of total sales were medical sales, while 79% were vet sales and 2% other. This compares with 18%, 82% and 2% in Q3 last year and 16%, 83% and 1% last quarter. 78% of sales in Q3 '14 were domestic, while 22% were international. This compares with 84%, 16% in Q3 last year and 81%, 19% in last quarter. 20% of total sales in Q3 '14 were capital sales, while 80% were consumable. This compares with 28%, 72% in Q3 last year and 29%, 71% in last quarter.

The disc average selling price finished Q3 at $12.69, down $0.14 year-over-year and $0.11 quarter-over-quarter, and the reason for this decline in ASP is due to our mix. Disc cost for Q3 '14 finished at $4.11, up $0.28 year-over-year and $0.19 quarter-over-quarter. The reason for this cost going up include failure of a process improvement experiment that caused scrap to increase and inefficiencies due to forecasting, due to problems already discussed. Disc margin finished in Q3 at 68%.

Total gross margins were negatively affected by the issues discussed earlier and finished at 47.4%, down 30 basis points quarter-over-quarter and down 5 percentage points year-over-year. Higher disc costs along with lower average selling prices as well as high minimum royalties on rapid test are the main reason for this dismal performance.

With the launching of additional rapid test and improvement in the performance of our North American vet market, we expect margins to improve going forward. The only upside to this disappointing quarter is that operating expenses were under control, finishing the quarter at $14.7 million, down $3.7 million or 20% year-over-year and down $1.5 million or 9% quarter-over-quarter to finish at 36% of sales above the same as Q3 last year.

Sales and marketing expenses for Q3 '14 totaled $8.7 million or 21.3% of sales and this is versus 24.8% of sales in Q3 last year, and 21.6% of sales last quarter. R&D expenses for Q3 finished at $3.6 million or 8.8% of sales, up from 7.6% of sales in Q3 last year and 7.5% of sales last quarter. Admin expenses in Q3 '14 totaled $2.4 million or 5.9% of sales, up from 4.4% of sales in Q3 last year, but down from 6.2% of sales last quarter.

Operating earnings finished Q3 2014 at $4.6 million, another dismal performance, down 40% year-over-year, down 19% quarter-over-quarter, affected by products coming off of distributor shelves versus Abaxis shelves and lower gross margins. Net income for Q3 '14 totaled $3.2 million, down 35% year-over-year and down 19% quarter-over-quarter. Q3 earnings per share finished at $0.14, down from $0.22 in Q2 last year and $0.18 last quarter.

On the R&D side of the business, the focus is on submitting the three additional rapid tests to USDA and gaining approval on the four rapid tests this quarter. We continue to focus on the feasibility of the high sensitivity immunoassay project with LamdaGen, and if successful, we'll start development of our target analytes some time this calendar year.

Roles for Q4 include, completing the final phase of our corrective action to eliminate all the inventory imbalances in our vet distribution channel. We'll also be working with a distributor on their plans and forecasts for FY 2015. Our goal is to optimize our selling practices through our distribution channel with a fully trained sales team with goals, forecasts and programs, that will position us to get back to the double-digit sales and earnings growth our next fiscal year.

AVRL continues to be a priority, increasing sales growth and reducing the loss through targeting customers, mostly likely to benefit from our approach of splitting the sample and running routine test in-house on our point-of-care equipment and utilizing AVRL for their specialty test needs. We continue to work with our retail customers as they complete their on-site validation study of the Piccolo, and more to follow-up from Rick in a few minute. We also are working with clinical research organizations to identify trials where point-of-care testing will reduce complexity of time.

Last quarter we repurchased about 86,000 shares of Abaxis stock for a cost of about $3 million, and we have about $37 million still allotted for a stock repurchase plan.

With that, Don, you're on.

Donald Wood

Good afternoon. In my remarks, I will provide some additional information surrounding North American Animal Health business and then turn it over to Dr. Craig Tockman, our new Head of Veterinary Sales. As you recall, our new management team assume responsibility and leadership for North American Animal Health in early October and work tirelessly in October to assess every aspect of our business, including selling programs and our field sales compensation plan as we felt it was necessary after our performance in Q2 of only 701 clinic placements.

We also placed a renewed emphasis on our distributor partner relationships. Our focus for that change was reorganizing our sales team under new leadership with strong potential to redesign our sales program to sell more instruments and to help our distributors to rebalance their inventory. To refocus our sales team via our improved compensation plans to deliver the desired results and growth to create a target list of perspective customers to collaborate our efforts and create a large pipeline and to user AVRL as a key closing tool for a complete laboratory solution.

To improve the management of our business and distributor inventories, we now are receiving weekly out-sales and inventory updates from our distributors and will eventually move to daily updates. With the renewed cooperation of our distributor partners, we introduced these new selling initiatives on November 1.This however, provided only eight weeks of selling these new programs, including a significant holiday shutdown period. We also recognized that Abaxis sales revenue would not be impacted by these aggressive sales placements program as we focused on balancing our current distributor inventory to get pass this issue.

With that, I will turn it over to Dr. Craig Tockman to discuss the Q3 results of all this change.

Craig Tockman

By the end of our Q3, our energized sales force has set every meaningful sales record for clinic placement in history of Abaxis. In addition to breaking all these records in eight weeks of selling, we feel we are rolling into Q4 with strong momentum behind us and we have even more improvements to add to our sales programs.

Our revenue expectations have been tempered by the programs we have offered and the work we've been doing with all our distributor partners to rebalance inventory, while heavily investing in new sales programs and training. Q3 fiscal year '14 revenue of $25.06 million was down 25% or $8.4 million year-over-year and down 19% or $5.8 million quarter-over-quarter.

As Clinton, Don have both states, these results are completely consistent with our plan to balance the distributor balance issues. We spent a lot of time with all of our distributor partners to obtain their feedback and create a comprehensive and coordinated plan to move our performance back to our historical double-digit growth model.

Our new sales programs are designed to meet the needs of the customer and provide a more consistent tool for our field sales team as well as our coordinated target list project have created a corporative effort not seen for years.

We've met multiple times with all of our very loyal regional distributors and with our new national partner and work with them very closely to attack the marketplace and see how our improved sales programs would energize perspective customers, again realizing that Abaxis sales revenue would not see the gains of all this hard work this quarter.

However, we committed to our distributors that we would turn our inventory into receivables for them and thus create a much healthier inventory pipeline and working relationship.

As stated earlier, our field sales teams set records in total analyzer placements, VS2 placements and i-STAT placements. Instrument placements were a record 1,042, a 49% increase quarter-over-quarter a 7% increase year-over-year. Our performance in Q3 almost doubled the average placements per field sales representative demonstrating strong potential for the future.

Also records were 380 VS2 placements, an increase of 67% quarter-over-quarter and 16% year-over-year. A record number of i-STAT placements at 287 was 60% increase quarter-over-quarter and 37% year-over-year. We added 221 new customers with instant revenues of $3.6 million. Hematology instruments were up 22% quarter-over-quarter, but down 13% year-over-year.

Our national accounts revenue continues to trend nicely and is up 11% quarter-over-quarter and 54% year-over-year, demonstrating the hard work is paying off into this segment of the market. We expect further good news as we explore additional opportunities.

AVRL with net revenue of $2.5 million was up 8% or $183,000 from the prior quarter and up 80% versus a year ago. Additionally, last quarter, 236 facilities combined instrument purchases with one of our AVRL programs, accounting for 381 instruments sold and $3 million in instrument revenue.

The combination of continued cost controls and increasing revenue continues to make a positive impact in the net revenue loss with profitability just around the corner. We've also created new sales initiatives, marketing protocols and targeted focus to create a new ability to leverage this business with our point-of-care analyzers.

AVRL also continues to lead the industry with innovative product offering such as our recently implemented pictures on psychology reports, allowing the doctor to better understand the patient's illness, learn from every case they see and provide a greater value for the pet owner.

I'm extremely proud of the entire Abaxis field sales organization and its ability to help us plan and execute the new ideas and programs brought to them. We've also made tremendous strides in better understanding our distributor relationship and creating a model of cooperation that drives success with our partners and our customers. It's now our job to maintain the exceptional momentum and productivity that was achieved this quarter as we continue to add new programs and products to our portfolio for Q4 and beyond.

Back to you Clint.

Clinton Severson

Thank you, Craig. Rick, you're next.

Rick Betts

Thank you, Clint. Good afternoon all. For the quarter the domestic medical division finished with revenues of $5.38 million, up 6% from $5.07 million in the previous quarter, but down 19% from last year. Excluding Abbott's initial stocking order in Q3 '13, revenues were up 23% year-over-year.

We sold 181 Piccolos and 578,000 reagent discs in North America, including Abbott clinical trials, Canada retail health and the other markets we serve directly. More on those with respect to [technical difficult]. The Piccolo placement total includes 122 that was sold by Abbott to end-users in the United States, mostly in the urgent care small hospital and internal medicine markets.

January marked the anniversary of our exclusive distribution agreement with Abbott for the Piccolo products. For the calendar year, Abbott placed 429 instruments and sold nearly 2 million reagent discs, which equates to nearly 2 million patients tested in 2013. This is a significant milestone for the utility of our technology in the U.S. medical market. In calendar year 2014 with the burdens of education and preparation behind them, we look for Abbott to accelerate Piccolo placements dramatically, as their sales and marketing engine shifts into high gear.

In Canada, we are working with our two distribution partners on preparing the country for the launch of the Piccolo in all market segments, once we receive Class 3 approval. Our two existing distribution partners are very well-positioned to cover the hospital market up north, and we are actively pursuing a partner to help us market and sell our technology to the physician office market.

In the clinical trials market, we successfully concluded the second phase of our important pilot with our global partner. In Phase III of this initiative, a real world expansion will be implemented to solidify the data transfer requirement of clinical trials, so that staff decisions can be made and relayed to the trial sites instantaneously.

We are very pleased with the results that Piccolo has delivered for this new and exciting market thus far. While it will still take some more time, patients and executional excellence to bear fruit, the potential for the Piccolo and the clinical trials world is looking brighter with each passing day.

On the retail health front, our pilot with the major pharmacy chain is progressing nicely. No issues have been reported. Sites are going through their normal reorder cycle. And the Piccolo has been assimilated into their clinical operation. Walk-in traffic at these sites is picking up, as the drug store begins to market their new patient services.

The upcoming pilot expansion, which is focused on a different clinical protocol is in the final planning stages and should begin within the next couple of months. Additionally, we are encouraged with the level of partnership we are enjoying with the drug store chain and are supporting them in their wish to do this right. Thank you.

And with that, I'll turn it back over to Clint.

Clinton Severson

Thank you, Rick. And with that, we're open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question will come from Jim Sidoti of Sidoti & Company.

Jim Sidoti - Sidoti & Company

I guess the first question that probably most people are thinking about is where are inventory levels now? And do you think you still have another quarter or two to get them down to reasonable levels or do you think that inventories are close to that now and you should start seeing some growth in the next quarter?

Clinton Severson

So we've got a little more work to do left in Q4, and our estimate is that inventories are probably higher than $2 million, but lower than $4 million.

Jim Sidoti - Sidoti & Company

So do you think by the end of Q4, you'll reach a point where your sales to your distributors will match your distributor sales to your end-users?

Clinton Severson

By the end of Q4 we'll have, right.

Jim Sidoti - Sidoti & Company

So by fiscal '15 your sales should match your distributor sales.

Clinton Severson

Yes. Like I mentioned in my prepared remarks most of the heavy lifting was done this quarter. So we would expect that in Q4 now quarter-over-quarter we'll see growth, and even though you never know until the final orders are in, but most of the heavy lifting has been done, it's probably more than $2 million, but it's probably less than $4 million. So depending on how strong the end-user sales are this quarter, it will depend whether there really is an excess inventory levels.

So if we continue this great momentum that we've seen and our sales growth to end-users goes up as much in Q4 as in did in Q3, the level of excess inventory is pretty small. On the other side of the coin, if the sales slow down, then the excess inventory would be within that range of $2 million to $4 million. So it really depends on the performance.

Jim Sidoti - Sidoti & Company

But as we look out into fiscal 2015, you would assume you're going to get back to year-over-year growth?

Clinton Severson

We are. We'll be clean at the end of Q4 this year.

Jim Sidoti - Sidoti & Company

Can you tell us what your sales to MWI were in the quarter or if at least to let us know if they were up from $6 million last year?

Clinton Severson

We'll leave that to MWI, but I can tell you that the sales to MWI were lower this year in Q3 than last year. And we'll leave up to them to disclose that.

Jim Sidoti - Sidoti & Company

And are there inventory levels also close to where they need to be so that your sales to them will match the end-user sales?

Clinton Severson

I think the consumables are pretty close on the instruments. It's going to be depended on their performance this quarter. Based on the programs that we've outlined, we expect that they might even give orders for instruments this quarter. If they're successful in the programs they've outlined.

Jim Sidoti - Sidoti & Company

And as far as consumables, do you think those should be up by the fourth quarter or do you think that also will take another quarter to work itself out?

Clinton Severson

So our Q4 last year was a really strong quarter. It was bolstered by an additional $9 million order from MWI and I think a lot of that was based on a forecast that we had where we had thought, we knew what we were doing in working with distributors. So I think the Q4 numbers that they ordered last year were too high. That caused part of this imbalance. So whether they'll be up to where they were Q4 last year totally depends on their ability to closely look out this year.

We believe that most of the taking from one distributor to another distributor is over, and that's done, so our smaller distributor partners are doing much better job of protecting their business and making sure their customers are getting taking care of. And so we don't see any more of that shift going on. But I think we've got another quarter of correction.

Jim Sidoti - Sidoti & Company

That's kind of what you said three months ago, is that you thought it would take till the end of the year to work it out?

Clinton Severson

Say, two quarters.

Jim Sidoti - Sidoti & Company

As far as China goes, is there any update on finding a distribution partner?

Clinton Severson

So we're interviewing distribution partners. We have one potential distributor that's indicated that they are willing to buy 100 Piccolos. And so we've negotiated the price and the terms, clearly part of that needs to be paid up-front. When we do business in China, we ask for a substantial up-front payment and we're waiting for the up-front payment. When the up-front payment comes, I'll consider this a deal. Until the up-front payment is received, I do not consider the deal. So we're in the process of working with this small group that believes that they can sell 100 Piccolos in a period of less than a year. And, we'll see.

Jim Sidoti - Sidoti & Company

And regulatory agency, everything is clear there?

Clinton Severson

Yes, so everything is clear with the consumable products. On the instruments we have made some improvements to the Piccolo and to the VS2 with a larger screen, a fewer parts and a few other minor improvements. And so we need to get that clear now in China. But our current VetScan and Piccolo is cleared, but the new one that we'll be launching probably in a quarter or two, we're in the process of getting that cleared.

Jim Sidoti - Sidoti & Company

So you have a new Piccolo coming out in the next three months, is that what I'm hearing?

Clinton Severson

Yes, there is some small improvements. It's not really a new Piccolo. It's got a bigger screen and it better looks the same.

Jim Sidoti - Sidoti & Company

In terms of our relationship with Abbott, it sounds like you gave them a year or so to get up to speed, but I assume you have orders in place for calendar 2014. What's your minimum order level? What's your confidence that they're going to actually be able to hit those minimum orders in '14?

Clinton Severson

So we are now entering our Q4, which is Abbott's Q1 and we're in the process right now of determining the forecast for their next fiscal year, which is the calendar year. And we actually have a meeting with the Abbott team, March 6, to review the plans and the forecasts for the next calendar year. And once that meeting is complete, we'll have a better idea of where they expect to be.

Our Q2 and our Q3, they stepped up, did a very nice job. And now we got to see what it looks like for the next four quarters. As I've said before, my major interest is what this business with Abbott's going to look like three to five years out and so we'll be focusing on that as well. But right now, that's kind of where we're at.

Jim Sidoti - Sidoti & Company

And then my last question on AVRL. It sounds like you're close to breakeven, but weren't quite there yet, can you tell us what the losses were for the quarter?

Clinton Severson

$700,000.

Operator

The next question will come from Ross Taylor of C.L. King.

Ross Taylor - C.L. King

You gave a lot of details and I apologize if you covered some of this. But just to give up the small veterinary distributors versus the larger ones, how are inventory levels at those two groups in comparison to one another. Are they kind of about the same in terms of excess inventories or is one better than the other?

Clinton Severson

Most of them are in pretty good shape. Like I mentioned before, we did a lot of heavy lifting in Q3. And we have, one of them is probably a little heavy on some consumables, like probably a 30 days more than we would be comfortable with. But overall, I would say there our smaller guys have really stepped up.

Don and Craig and his team visited all these folks in Q3, starting in November. And I think the response is actually pretty remarkable, when it's only been a couple of months. I think they really stepped up. They clearly understand that we have a requirement that the business has to grow. And by business growing, we don't mean that they a bunch of stuff from us. We mean they sell a bunch of stuff, and so that whole process of the focus on selling is where things are at.

And Don and Craig and his team are working on incentive plans that have nothing to do with what they purchase, they have to do with what they sell. And so I think the emphasis on the selling versus repurchasing, while not completely new, the purchasing kind of got and the selling kind of got lost in the translation over time. And so now we've made that very clear. And so we are assisting these guys as we profile, the next 100 likely VetScan customers per territory.

We'll be sharing these objectives with all of our distribution partners. And the focus is going to be on the next 6,000 potential VetScan users. And that's where our sales and marketing team are going to be investing their time, working with our distribution partners and identifying what they need to do and then communicating with them what we are going to do and then working together to close the sale. So that's what's happening.

Ross Taylor - C.L. King

And maybe a little bit related to that, I think you reduced the size of your North American your vet sales force, and I just wondered how big that is now compared to where it might have been several quarters ago?

Clinton Severson

I'll let Don handle it.

Donald Wood

Ross, number one, competition is on the line with us, and I certainly don't want to help them. But what I will tell you that we have added seven new reps that are here in the building today. They're being trained, and will be being trained for some time. And we have opened new territories that we're hiring immediately for. So quite honestly, we feel we're going to be right where we should be within this quarter.

Ross Taylor - C.L. King

One other question I had is, how or what kind of strategy are you going to use or how is your sales force going to be working with your distribution going forward in order to kind of ramp up the growth rate of your vet business compared to what it has been historically? I mean what can you do to try to expand your market share now that you have some expanded distribution?

Clinton Severson

So it all started actually in November. And I think that is a direct result of the record domestic instrument placements that we achieved this quarter, it was two months. So the strategy and the plan is as follows, that each sales territory identifies the next 100 potential accounts that they believe are likely to purchase a VetScan in the next 36 months.

And so these accounts are identified in their profile. They are presented to our distributors. And we agree to work together on these particular 6,000 accounts that we targeted. And then our sales people will share with the distributor partner, exactly what they like them to do and what they are going to do and they work together to close the sale.

I think this whole process that we developed over the last couple of months is totally different than what a direct sales does. And of course, that was the challenge that we had over these last three, four quarters of adjusting to the new way of doing things. And of course, the advantage that we have with somebody like MWI is they have access to the whole market. So they have people that call in just about every veterinary practice in the country. But it's up to us to identify those accounts that we believe are potential Abaxis customers. And then share with them why we believe that and the advantage for the MWI rep to work with us and making them Abaxis customer.

And so this whole changed training and all this changed that has taken place over the last couple of months, and clearly the causing effect is it was demonstrated in the performance of the domestic team last quarter. So we need to continue to do this. And we think that as we closed these large number of accounts, it's probably going to add somewhere around a $100 million to $150 million revenue to Abaxis if we're successful in doing it.

Ross Taylor - C.L. King

And my last question, switching over to medical and Abbott, what exactly has to change there to get the pace that which they can place instruments and sell rotors to increase. I mean is it just more training and more experience? Is it better targeting customers, how they bundle it with i-STAT? Just what are the factors that can make things get better there?

Clinton Severson

So I'll answer and then I'll let Rick comment after my comment. It's a learning curve. I mean the Abbott Manager made a decision to go with a Piccolo and they kind of laid it out to their sales people, okay, here is this new product. And some sales people pick up on it right away, and they go, wow, look at this, fantastic. Others are more concerned with the current products they sell and they don't pay as attention to the new stuff.

But as time goes on, and the slower people see the success of the people that gravitated to it quickly, they get more encouraged and they start getting more active. And also I think Abbott has better penetration in the small hospital market with their i-STAT product, even though I'll let Abbott speak to that. That's my opinion. And so we're seeing more Piccolos going into small hospitals where there are more sick people in small hospitals, so they run more discs per unit. And I think that's what it's all about. So Rick, I'll let you comment as well.

Rick Betts

And then to echo what Clint said, I mean the Abbott sales organization is, again a group of seasoned professionals. They are on par with their any professional sales group that we had in our group internally. There is a variety of market conditions that are happening; one, with the implementation of the Affordable Care Act to have consolidation of distribution out in the marketplace that created some uncertainty with some of the distributions sales people. The Abbott learning curve, they have communicated to us that they intend to expand their sales force in the coming calendar year. And that they do intend to focus more marketing budget and more sales incentive, if you will. So we believe that to be encouraging news and that's why we expect growth from them in the future.

Operator

The next question will come from Erin Wilson of Bank of America Merrill Lynch.

Erin Wilson - Bank of America Merrill Lynch

You mentioned an expansion of your CVS pilot, how many MinuteClinic's would you say you're in now and where do you think that goes by the end of the year? I guess what sort of visibility do you have on the ordering patterns on that front?

Clinton Severson

So we have limited visibility. So we have one trial going on now in our potential retail customer, who we have indicated to them, we will not discuss their name in the future. And there are debates going on internally as what is the best way to validate this thing before they make a big investment, which I think makes a lot of sense, because we would not want anybody to buy a bunch of Piccolos only to find out later it didn't workout for them. That would not be good for them or for us.

But we have made some suggestions as to some things they may want to reconsider in that protocol. And so they have indicated that maybe some of those suggestions might make sense to test. And so the trial that Rick mentioned earlier is where they would implement some of our suggestions in a slightly smaller validation trial that they're doing right now. So we believe that has a good chance of getting started maybe some time this quarter or next quarter.

But we believe that for them to achieve, what they've indicated to us that they want to achieve, that they can't do it without the Piccolo. So we're pretty confident they're going to buy the Piccolo, but clearly they've got be comfortable whether it's going to work in their sites with their protocols. And so we're validating that it does. That's where we're at.

Erin Wilson - Bank of America Merrill Lynch

When do you think they would just essentially pull the trigger, yes or no, there?

Clinton Severson

I think here's my feeling. This is just my feeling. I have no information other than what I've disclosed. I think they're going to do something this fiscal year, I'm sorry, this next fiscal year. I think this next fiscal year, we'll either get a deal with CVS or we won't.

Erin Wilson - Bank of America Merrill Lynch

And then on the distributor front, I mean on the veterinary side, do you have fewer distributors today relative to what you've had before the MWI agreement? I mean if you had to estimate also how much in destocking it contributed in the current quarter that would be great?

Clinton Severson

I'll give that one to Craig.

Craig Tockman

No, Erin. There was one merger, otherwise the roster is exactly the same. There's been no change.

Erin Wilson - Bank of America Merrill Lynch

And then distributor destocking, if you had an estimate of what kind of overall impact there, do you have that?

Clinton Severson

So we took $6.3 million out of distributor inventory in Q3 this year.

Erin Wilson - Bank of America Merrill Lynch

And then do you have an idea to what the pattern is for the regional players versus MWI?

Clinton Severson

It's pretty well spread across the board with probably one smaller distributor taking a bigger chunk than the other smaller guys. But everybody had reduction.

Operator

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

David Clair - Piper Jaffray

First one from me, just curious, Clinton and may be Al, can you quantify some of the things that were going on with gross margin? I know you mentioned that there was a scrap charge. Any information you can give us on kind of what a normalized gross margin was in the quarter?

Clinton Severson

So I'll start. So clearly the rotor cost of $4.11 was ridiculous.

Alberto Santa Ines

That rotor cost should have been down in $3.90 range or maybe a little bit less.

Clinton Severson

And the because of that was the difficulty, and for Don and his team, to try to forecast what they're going to build. And if you don't have a clear forecast, at least 30 days, of what the demand is going to be in the marketplace, how do you schedule it efficiently, it's almost impossible.

And then we did it. We have our two-by-two program. We did an experiment on the line for a process improvement and it didn't work. And so clearly, when you're looking at making the kind of gains that we're looking at making, you've got to take some risk. And we took a big risk on this process improvement and it didn't work. So the products that we made had to get back. I mean that's what happened. But we learned a lot. And we think that what we learned from this experiment is going to help us improve the class down the line.

And then the next one is we have minimum royalty payments on our rapid test. And when your rapid test revenue isn't as high, the minimum royalties kill the gross margin. And of course, the cure to that one is to get the four additional rapid tests launched, and then come February next year that royalty goes away. So those were the big factors.

David Clair - Piper Jaffray

And just a quick one on some of the numbers that you threw out at the beginning of the call, sorry, there were a lot of numbers. The total numbers of Piccolo and VS2, and then the rotors for each segment too. Sorry, just want to make sure, I wrote down the right things here.

Clinton Severson

So Piccolo rotors were 726,000; VS2s were 377,000 from our inventory; and Piccolos were 238,000.

David Clair - Piper Jaffray

And then, sorry, the vet rotors.

Clinton Severson

Vet rotors were 1 million.

Operator

I'm showing no additional questions. This will conclude the question-and-answer session. I would like to turn the conference back to Mr. Severson for any closing remarks.

Clinton Severson

Great, thank you. I want to thank you all for tuning in. And clearly Q4 now will be the last quarter of our cleanup, as we look forward to putting our plans together for FY '15. And I want to thank everybody for participating in the call, and I look forward to the next call coming in April. So thank you all very much.

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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ABAXIS, Inc. (ABAX): FQ3 EPS of $0.14 misses by $0.06. Revenue of $40.8M (-18.1% Y/Y) misses by $8.67M.