Abaxis CEO Discusses F2Q2011 Results - Earnings Call Transcript

Oct.26.10 | About: ABAXIS, Inc. (ABAX)

Abaxis, Inc. (NASDAQ:ABAX)

F2Q2011 Earnings Conference Call

October 26, 2010 4:15 PM ET

Executives

Joe Dorame – Lytham Partners

Clint Severson – Chairman, President and CEO

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

Brenton Hanlon – VP, North American Medical Sales and Marketing

Al Santa Ines – VP, Finance and CFO

Donald Wood – COO

Analysts

James Sidoti – Sidoti & Company

Jonathan Block – SunTrust Robinson Humphrey

Ross Taylor – CL King

Scott Gleeson – Stephens

Scott Gleason – Stephens

David Clair – Piper Jaffray

Daniel Owczarski – Avondale Partners

Operator

Good afternoon and welcome to the Abaxis reports second quarter fiscal year 2011 financial results event. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

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

Joe Dorame

Thank you Amy. Good afternoon and thank all of you for joining us today to review the financial results for Abaxis for the second fiscal quarter of 2011, ended September 30, 2010. Again, my name is Joe Dorame. I am with Lytham Partners and we are the financial 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, Mr. Martin Mulroy, Vice President, North American Animal Health Sales and Marketing and Mr. Brenton Hanlon, Vice President, North American Medical Sales and Marketing. At the conclusion of today’s prepared remarks, we’ll open the call for Q&A session.

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

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 reflect historical facts. Specific forward-looking statements contained in this conference call may be affected by risks and uncertainties, including, but not limited to, those related to 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 entering the human diagnostic market on a larger scale, risks related to the protection of the company’s intellectual property or claims of infringement of intellectual property asserted by third parties, risks related to the condition of the United States economy, risks involved in carrying of inventory and other risks detailed under Risk Factors in the company’s 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 the statement was made. Abaxis does not undertake and specifically disclaims any obligation to update any 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?

Clint Severson

Great, thank you Joe, and good afternoon everybody. I will review the accomplishments and the challenges for Q2 2011 and some of the goals for Q3. After my short presentation, I’ll ask Marty Mulroy, our VP of North American Vet Sales and Marketing and Brenton Hanlon, our VP of North American Medical Sales and Marketing to give an update on their respective businesses, and then we’ll take questions.

Q2 was not only another record sales quarter but also a quarter where we have made significant progress in completing some of our manufacturing improvements with the goal of hitting $2 disc cost. Our first and four new automation lines is in production and we’ll now enter the optimization phase in Q3. The end result will be lower disc cost due to improved quality, due to less handling of the discs and some of the key steps we’re fully automating our priming, staking and deep bidding (ph). Once this is completed, we’ll be fully automated which will lead to reduced costs going forward.

We also completed the design for adding a new larger (inaudible) which will allow us to more than double our capacity for bead production to about $150 million beads per quarter. And due to a surge in our shipping of direct orders, we are adding an automated bar code and freight selection system to only the low cost shipper will be selected for a particular order.

While disinvestment in factory improvements and increased shipping cost was a drag on total gross margins, gross margins on instruments we manufacture the VS2 and the Piccolo Xpress finished Q2 at near – at a near record 61% versus 57% last quarter and this gross margins finished at 68.1% up 13 basis points versus Q1. These improvements are a result of both good cost control and an increase in average selling prices. As I mentioned before, we finished Q2 with record total sales of $35.3 million, up 17% year-over-year and up 1% quarter-over-quarter.

Worldwide Vet sales excluding government sales finished at $26.6 million, up 23% year-over-year and about the same as last quarter. Abaxis’ VetScan were at record levels coming in at $21.6 million, up 27% year-over-year and 4% quarter-over-quarter and more to follow from Marty in a few minutes. Total worldwide medical sales finished at $6.9 million, up 8% year-over-year and 6.5% quarter-over-quarter. North American or domestic sales finished the quarter at a record $29.5 million, up 19% year-over-year and 6% quarter-over-quarter while European sales for the quarter totaled $4.7 million, up 6% year-over-year but down 16% over last quarter’s record level.

Total international sales at $574,900 were up 5% year-over-year but down 20% over last year’s record level. Government sales finished at a very strong $1.3 million, up 27% year-over-year and up 70% quarter-over-quarter mostly, due to deals Randy Knick, our sales and marketing guy has been working on over the last two years finally closed.

We sold a total of 988 instruments in Q2 2011 versus 926 Q2 last year, up 7% or 62 instruments. In dollars, total instrument sales were up 17% finishing at $7.6 million. Quarter-over-quarter the total instrument sales were down about 37 units but were up $317,000. We sold 383 Vet scans versus 363 Q2 last year and 377 last quarter. We sold 225 hematology instruments versus 210 Q2 of last year and 246 last quarter. We sold 198 Piccolos that included 26 sold to the government versus 143 Q2 last year and 163 last quarter.

For those of you that are following the run rate of non-government Piccolo instrument sales is the change in strategy here it is. Q4 ‘09, 82 units, Q1 2010 88, Q2 2010 116, Q3 2010 130, Q4 2010 144, Q1 2011 147 and Q2 2011 172. More to follow from Brenton in a few minutes. And finally we sold a 182 i-STAT and COAG instruments versus 210 in Q2 last year and 239 last quarter. Total disc sales of 151,800 million units were up 4% year-over-year in units and up 6% in dollars. Vet disc sales had a 118,000 were up 5% in units and 8% in dollars.

Medical disc sales at 500,000 were up 2% in units and 1% in dollars. Other Vet consumable sales that include heartworm, i-STAT and COAG cartridges as well as hematology reagents finished Q2 at a record $6 million, up 116% year-over-year and up 15% quarter-over-quarter. Domestic sales made up 84% of total sales for Q2 2011, while international sales made up 16%. This compares with 82-18 Q2 last year and 80-20 last quarter. 22% of the sales were capital sales while 78% were consumable. This compares with 22-78 Q2 last year and 27-79 last quarter.

19% of sales were medical sales and Vet sales were 76% with 5% other. This compares with 21-72-7 Q2 last year and 18-77-5 last quarter. The disc average selling price missed all time record by only $0.02 finishing at $12.74 up $0.26 or 2% year-over-year and up $0.21 quarter-over-quarter. Disc cost of $4.07 was up $0.03 year-over-year and $0.05 quarter-over-quarter mostly due to higher shipping cost and the cost tied to the improvements in the factory.

As we implement these new efficiency enhance the improvements, we should see disc cost go below $4 in the very near future. While gross profit was up 11% year-over-year and flat quarter-over-quarter gross margin was down three percentage points versus Q2 last year, mostly due to product mix. As I had mentioned before, we had record OEM Vet consumable sales up 116% and they have a lower gross margin products that we make. As we expand our rapid test menu and grow our other OEM product sales, we expect these margins will improve.

Overall gross margins quarter-over-quarter were down about 61 basis points mostly due to mix. Operating expenses for Q2 finished at 40.7% of sales, a significant improvement over the 42.5% of sales Q2 last year mostly due to lower sales in marketing and admin expenses as a percent of sales. quarter-over-quarter operating expenses as percent of sales were up 111 basis point quarter-over-quarter, mostly due to higher R&D costs associated with the rapid test development and higher admin cost due to higher incentive compensation.

Sales and marketing expenses is $8.4 million or 23.8% of the sales were down versus Q2 last year of 25.1% of sales and last quarter’s 24.7% of sales. R&D expenses at $3.3 million or 9.3% of sales were up from 8.6% of sales Q2 last year and 8.8% of sales last quarter. Part of the development cost associated with the 2x2 projects are also in this numbers. Admin, excuse me, admin expenses at $2.7 million or 7.5% of sales were down from Q2 last year’s 8.9% of sales and up from last quarter’s 6.1% of sales.

Operating income of $5.4 million is up 8.2% year-over-year but down 9.3% quarter-over-quarter. Pretax income of $6.2 million was up 16.5% year-over-year and up 5% quarter-over-quarter and includes favorable versus unfavorable foreign exchange. Net income of $374,900 or $0.17 a share was up 17% year-over-year and 5% quarter-over-quarter. On the R&D side of the business, the focus was on the rapid test and the hemoglobin development which are in the latest stages of completion.

We have also completed the development of the Biochemical Panel Plus test panel that includes C-Reactive Protein, the MKM13 (ph) Piccolo family. This will be introduced at MEDICA which is a large trade show in Düsseldorf, Germany in November. On the business development side, we are working with a large university of Vet school to partner with to provide reference lab, specialty testing services for Abaxis customers.

This project has been in the incubating stage at Abaxis for a year.

The goal would be to participate in this large market with a partner that can cover a portion of the overhead costs associated with this business as well as the expertise to provide higher quality results. We are in the latest stages of negotiations to make this a reality but want to remind everybody that until we have an agreement, we are not getting the business. Once we have an agreement, we’ll announce it together with all the details. Goals for Q3 include maintaining our very strong sales momentum, pertain to reduce expenses as a percent of sales, completing the development and submit to the regulatory authorities the new rapid test, complete the negotiations with the parties related to the launch of Abaxis reference lab and to continue to meet the objectives of the 2x2 project.

Now as I’ve mentioned over the last few quarters, I exercised a 70,000 share stock option that was close to expiring about two years ago. And because the price of Abaxis stock was so unattractive, I borrowed the cash from a bank to exercise the option and pay the taxes. Because of this obligation I may sell some Abaxis stock over the next few months to pay back the bank. In addition, because of the new tax law changes in 2011, and may also exercise other vested options in this calendar year and if I do, I may need to sell some shares to pay the auction price and the tax.

With that out of the way, Marty you’re on.

Martin Mulroy

Thank you Clint and good afternoon everyone. In my remarks, that will hear some detail regarding the North American Animal Health business. I am very pleased to report the business grew for the tenth consecutive quarter. Our second quarter of fiscal year 2011 generated once again record revenues, $21.6 million. The business grew 27% year-over-year or $4.6 million compared to last quarter where we reported a year-over-year comparison of 23%. So the business growth is accelerating.

Quarter-over-quarter, the business increased $800,000 or 4%. The year-over-year increase was led by consumables up 30% while our instrument revenue was up 16%. Highlights include our flagship product VS2, our hematology product line and the VSpro each was up versus the prior quarter. With more than 221 new customers accounting for 392 of the 596 instruments purchased at the clinic level. We anticipate launching at the American Association of Equine Practitioners meeting on December 5, the first fully automated quantitative fibrinogen test. Run on the Abaxis Vetscan VSpro, it is a rapid and reliable assay that can be before – that can be performed in the clinic or patient side in the field.

Fibrinogen is an excellent marker for inflammation in the horse and we expect high demand for the VSpro instrument and the associated new cartridges in this marketplace. There are almost 8,000 veterinarians that care for horses of which 4,000 are exclusively Equine. There are also almost 10 million horses in United states again cared for. I’d like you once again thank and congratulate the North American Animal Health Group and the entire Abaxis organization for a job very, very well done. It was once again a very productive quarter in terms of revenue, margins and expanse management.

The team here is excited about the current quarter and the opportunity for continued increasing instrument placements and growing revenue. Back to Clint.

Clint Severson

Great, thank you very much Marty. Okay, next on board is Brenton. So Brenton, you’re on.

Brenton Hanlon

Thanks Clint, good afternoon everyone. In Q2 2011, the US medical team continued to implement repeatable unscalable approaches to expanding our customer base. And we added 114 new customers which was similar to Q2 of last year. However instrument revenue showed an increase of 40% year-over-year and a 66% quarter-over-quarter increase for total of $1.3 million. All discrete segments accounted for about 75% of our new customers in Q2.

24% of the Piccolos are sold, we sold went into the urgent care centers, 23% went to family practice offices, 19% to internal medicine practices and 10% to oncology centers. We have a larger medical systems accounts continued to Piccolos in Q2. And urgent care chain increased a number of Piccolos to 19 and so far purchased eight additional instruments in Q3 for total of 27. This customer plans to open 50 more clinics in calendar year 2011. (inaudible) medical training increased at number the 20 and already in Q3 have purchased 10 more for total of 30.

And our hospital system increased the number from 25% to 30% in Q2 under reagent rental agreement. We remain encouraged that when we get our foot in the door with these large organizations, we can anticipate growth from within as they enjoy the benefit particular brings the their clinic.

Turning to the consumable side about business, Q2 revenues were $3.3 million or 96% compared to Q2 2011 and flat compared to Q2 2010. Since our customer retention is very high, we attribute the smaller than expected router growth to fewer patient visits due to high unemployment rate and to general economic conditions.

So despite the confusion and uncertainty in the healthcare marketplace, our overall sales grew 7% year-over-year and 8% quarter-over-quarter. I’m very pleased with the way our sales organization is developing. We’ve invested heavily in sales training and we’ve not experienced any turnover for 13 months.

Our customers are also pleased with our sales organization. 90% have responded to our most recent customer satisfaction survey indicated that our sales people were very helpful.

Going forward, we will further scale up those elements of our strategy that are yielding the best results from the POL segment, and continuing to expand our presence within the high-risk, high-reward medical systems segment.

Thank you. And back to you Clint.

Clint Severson

Great, thank you, Brenton. Okay, with that, we’re opened for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from James Sidoti at Sidoti & Company.

James Sidoti – Sidoti & Company

Good afternoon, Clint.

Clint Severson

Good afternoon.

James Sidoti – Sidoti & Company

Couple of questions on the VetScan, I’m sorry didn’t hear the number. What were the prices during the quarter?

Clint Severson

Okay. We sold 383 VetScans.

James Sidoti – Sidoti & Company

Okay. And what was the year-ago?

Clint Severson

363. And last quarter, 377.

James Sidoti – Sidoti & Company

Okay. So really the big uptick this quarter was in Piccolo placements if you look at POL businesses?

Clint Severson

Yes, I mean, we had a very good growth in Piccolo instrument sales. We have excellent growth in other vet consumables, up a 116%. We had strong router sales on the vet side over a million units and on the medical side 500,000 units, with strong pricings, especially on the vet side. And then strong pricing on the instruments as well with the average selling prices of our instruments up. Yes, so it was – in this environment, it was really a very, very good quarter.

James Sidoti – Sidoti & Company

Right. And I’m sorry if I – compared to the quarter that ended in June though that big difference between that quarter and this quarter was Piccolo placements.

Clint Severson

Yes.

James Sidoti – Sidoti & Company

Now which is kind of unusual, because you would think Piccolo placements would slowdown during the summer. Are you seeing your sales force toward an increased leads. I mean can you explain why you picked up sales in a seasonally slow quarter?

Clint Severson

Okay, so I’ll comment on it, then I’ll turn it over to Brenton for his comments. I think what’s happening is – has been six quarters now since we implemented this new strategy where we focus our sales and marketing efforts on three segments.

And overtime what happens as you get to know the market signature selling into, you are building a base of happy customers which you get referrals and all that creates momentum and that allows you to grow your business faster. And so I think the strong instrument sales are a result of that.

And, of course, Brenton, he commented on how many larger accounts started with one or two and now have 18 or 20. So that’s what I would attribute it to. Brenton, you can add your comments.

Brenton Hanlon

Well, one of the – our first goal a year ago was to stabilize the sales force, which we have done, and to fill all the empty territories, so that’s made a big difference. We’ve also invested a great deal in sales training and now people are just getting better and better every day of what they do. And they’re becoming more productive and more efficient and now it’s starting to show up in the placement rates.

James Sidoti – Sidoti & Company

So is there any reason to think that that number is not going to be up again in the December quarter?

Clint Severson

I would say – if I were to guess, I would say the number is going to go up.

James Sidoti – Sidoti & Company

Okay. All right, then a couple of quick questions. On Cepheid has [ph] already updated on the negotiation fare or regarding the royalty?

Clint Severson

Yes, so I guess the only update is, is that we terminated our licensing agreement with Cepheid on October 1st and so we no longer have a licensing agreement with them. And we do believe that we have a case here, so we are following the track to, yes, deal with this in court. And –

James Sidoti – Sidoti & Company

Okay. So should we expect the royalty income to step down then in the fourth quarter because of that license agreement being terminated?

Clint Severson

We should.

James Sidoti – Sidoti & Company

And other royalties in the quarter that ended in September from Cepheid?

Al Santa Ines

It’s $389,000.

James Sidoti – Sidoti & Company

So that will go away, go forward.

Al Santa Ines

Not completely. There is a portion of that that’s – I will say $350,000 for Cepheid, the balance being GE, okay?

James Sidoti – Sidoti & Company

Yes, okay. So but the $350,000 goes away over the next – over the balance of the year.

Al Santa Ines

That’s correct.

James Sidoti – Sidoti & Company

Okay. And then on the reference lab, the negotiations you’re working on their, can you just give us some sense on what do you think the near-term impact on the top and bottom line would be if you – if you work out a deal?

Clint Severson

Yes, so we – so Al has put together some numbers along with input from the sales and marketing team and the group that we’re working with. And so we have some estimates as to what the investment is going to be and what effect it will have on future quarters, and we’ll be prepared to discuss those things after we reach an agreement if we reach an agreement. So if it’s significant enough, we’ll then maybe schedule a conference call for those people interested in hearing about that.

James Sidoti – Sidoti & Company

Okay, all right, thank you.

Clint Severson

Great, thank you.

Operator

The next question comes from Jonathan Block at SunTrust Robinson Humphrey.

Jonathan Block – SunTrust Robinson Humphrey

Thanks guys and good afternoon.

Clint Severson

Good afternoon.

Jonathan Block – SunTrust Robinson Humphrey

Maybe just a handful of little ones, if I can just follow-up on James questions, just to make I’m clear on Cepheid. Al, that was about $350,000 from Cepheid in the quarter, right? And that’s what goes the way on the quarterly run rate, is that correct?

Al Santa Ines

That is correct.

Jonathan Block – SunTrust Robinson Humphrey

Okay, so over a year that’s about $1.4 million coming out of you would.

Al Santa Ines

That is correct.

Jonathan Block – SunTrust Robinson Humphrey

Okay, just want to make sure. And then, Clint, you mentioned a little bit on the gross margins, which hung in there, but down year-over-year. Al can you comment, did you draw down any bit on the warranty reserve, because I know last year same period a year ago, you brought down the warranty reserve, was that touched in the quarter?

Al Santa Ines

Yes, it did help a little, but you’re looking at $130,000 reduction of [inaudible] this quarter. We sold more compared to the total revenue of $35 million, okay? And that’s what we said. The warranty reduction is a demonstration that the unit – the units apparently created at that [inaudible], okay?

Jonathan Block – SunTrust Robinson Humphrey

Sure, no I understand. I guess, what I’m trying to get at it is I think on an apples-to-apples basis, and Clint you sort of hinted at this, but you really weren’t down as much as 300 bps, because last year you had the benefit more from the warranty reserve.

Al Santa Ines

That’s true.

Clint Severson

Yes, that’s true.

Jonathan Block – SunTrust Robinson Humphrey

Okay, great. And then, Clint, what are you willing to give and I know you just said you may hold a conference call when you get there. But maybe just to give us a broad view what would be your go-to-market strategy at the lab? In other words, would be it a more competitive pricing off or how would you structure at again with what you can give us today?

Clint Severson

Yes, so like I mentioned before, we don’t have this firmed up the asset at all. But we know in the reference lab market, there are two things that are critical to the customer. The number one, of course is high-quality reserves. And so you make sure that the results are run accurately the first time and they’re delivered to the customer at a time where you set your expectations, so we know that is critical. And then the second clinical part clearly is the cost – the cost of delivering that result.

So, yes, so should we be successful in negotiating something that we can enter the market, differentiate it, high quality at a better price? That would be our goal. And, because we know those are the drivers in that business. So – but until we have a deal done, it’s all talk. It’s all talk until the deal is signed. So we would suspect in a few weeks or months, we will have something one way or the other and then we’ll let everybody know once we do.

Jonathan Block – SunTrust Robinson Humphrey

Okay, very helpful. Maybe last one or two if I may. First just housekeeping item. Could you give us the number of reps on both at vet and medical side sales reps?

Clint Severson

Yes, on the medical side, we have 16 sales territories. And on the vet side, I believe we have 59 people in field. Is that right Marty?

Martin Mulroy

We are at 60.

Clint Severson

60 people on the field on the vet side.

Jonathan Block – SunTrust Robinson Humphrey

Okay, great. And then last one is – Brenton for you, I mean I really do commend you. It seems like you’ve done a nice job since you came in of bringing up the number of Piccolos every single quarter. I guess just trying to take a step back here and looking out at modeling.

Is this how you see the business progressing over the next four to eight quarters as a continual somewhat gradual uptick or are they a very large deals that obviously take a while to close that you’re working on that we may see materialize over the next three to 12 months, which would cause a big upswing in the Piccolo number? Thanks guys.

Brenton Hanlon

On our traditional business, which physician office lab business which is somewhat predictable and forecastable. I would expect that to continue to grow. And as we close some of these big deals that we’re working on I would expect some chunks to come in, so – but they’re very difficult to predict. So I think you’ve got it right when you say, steady consistent growth on one side of the business and upticks on the other side of the business, but very difficult to predict.

Jonathan Block – SunTrust Robinson Humphrey

Thanks guys, nice quarter.

Clint Severson

Thank you, thank you.

Operator

The next question comes from Ross Taylor at CL King.

Ross Taylor – CL King

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

Clint Severson

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

Ross Taylor – CL King

Okay.

Clint Severson

[inaudible] Q2 last year and 239 last quarter.

Ross Taylor – CL King

Okay. And Marty referred to 221 new customers I think in the US vet market. And does that refer to customers that aren’t buying any Abaxis product whatsoever including say the i-STAT or that maybe included i-STAT customers that bought VetScans for the first time.

Martin Mulroy

The 221 may include some i-STAT customers, but generally speaking, they’re all new chemistry customers. And for the most part, we did no business with them at all in the past.

Ross Taylor – CL King

Okay. And another numerical question, in the 198 Piccolos that you mentioned, are there any reagent renal instruments that you are not included in that number? And can you also break out international versus US? And you did give us a government number. But your international versus US Piccolo placements.

Clint Severson

Okay. So Brenton how many reagent renals did you do last quarter?

Brenton Hanlon

Five, everything else was a revenue unit.

Ross Taylor – CL King

Okay. And do you have the breakdown of international?

Al Santa Ines

Yes, reagent renal is not included in the 198 user break down. Domestic medicals 119, Europe is 48, Asia is five, and the government is 26.

Ross Taylor – CL King

Okay. And just one or two other questions. I wonder if you can give any commentary about kind of how pricing of instruments is in the US vet market, whether it’s more competitive or about the same?

Clint Severson

Yes, I think in an environment like this, pricing is always very competitive. And your ability to maintain or maybe even increase your average selling price is tied to the sales person’s ability to translate the value of the purchase. And so I know all the sales teams at Abaxis, both the medical and the vet worked very hard at maintaining their skills at communicating our value. And I think recognition of that or the results of that was the fact that our instrument sales in dollars were up double digits.

Brenton Hanlon

I can add a little bit more color there if you like. As far as the VetScan chemistry, the ASP grew year-over-year and quarter-over-quarter. The hematology product line, the ASP grew from prior quarter and from year-ago. The i-STAT ASP grew both versus prior quarter and versus year-ago. And our VSpro coagulation soon to be fibrinogen instruments, that ASP grew versus prior quarter and year-ago.

Ross Taylor – CL King

Okay very good. And, last question, I’m not sure I heard specifically the timing of your expectation for the regulatory submissions for some of the rapid assay products, and I don’t know if you’ve given any indications as to exactly how many products you expect to submit in the near term.

Clint Severson

So our goal is to have them – the development completed and submitted by the end of the calendar year. So clearly that’s pretty tight, that’s really two months. And while we believe that we can do that, we don’t think we have any extra time. So it’s possible it could slip a little bit. And we have four tasks on the table that we’re working on. Our goal is to get all four of them in. But again you never know until it’s done, but that’s our role.

Ross Taylor – CL King

Okay. All right that’s all I have, thanks very much.

Clint Severson

Great, thank you.

Operator

The next question comes from Scott Gleeson at Stephens.

Scott Gleeson – Stephens

Hi Clint, thanks for taking my questions, and congratulations on a good quarter.

Clint Severson

Thanks Scott.

Scott Gleeson – Stephens

I guess the first question I have is when you look at the vet disposable that were not vet discs that was up sequentially quite a bit. Maybe, I know you guys don’t give a breakdown there. But can you maybe give us a little bit more color on terms of what drove that sequential growth whether it was mainly coming from the i-STAT side, whether it was coming from coag disposable, hematology disposable?

Clint Severson

Okay. So what we can say is that clearly the Rapid Test Heartworm is doing very well, so that is a product that, because we don’t have the large distributor selling our products, we only have the smaller distributors that we have to sell our Heartworm to one customer at a time with maybe fewer sales reps than our big competitor has. So that means that builds overtime, because you had – first quarter you had probably a lot of your customers and then you’re going after all the other customers, and so that’s done very well.

Also, the hematology has grown as well, and the i-STAT was probably down a little bit quarter-over-quarter. So even though that’s a very, very nice business, in the summertime, July and August the volumes go down a lot and then compared to the first two months of the previous quarter. And then, of course, September everything picks up really fast. So that’s not unusual to see consumables drop a little bit quarter-over-quarter in the summer quarter.

And then, in Europe where we sell i-STAT as well, clearly they all go to sleep in July and August and everything happens in September. So I think the combination of the hematology, the coags picking up steam and the Heartworms keep picking up steam, they’re all kind of picking up steam. And, yes, I think we’re in very good position with these products. And, Marty, you want to comment?

Martin Mulroy

Yes, year-over-year, every consumable product group grew, every one of them.

Scott Gleeson – Stephens

Okay, great. So that $6.5 million or so that’s a good run rate going forward Marty is what you’re saying.

Martin Mulroy

That was a worldwide number.

Clint Severson

That’s worldwide number, but you’re most of it.

Brenton Hanlon

We anticipate continued growth across all our instruments and consumables.

Scott Gleeson – Stephens

And then, Clint, if you look at the international piece, the US was very strong this quarter. International, both Europe and Japan were a little bit lighter than we saw in the first quarter. Can you just talk a little bit about in more detail what was going on there? I guess, was it the timing of the distributor orders? How should we think about those numbers I guess when you look forward to the second half of the year?

Clint Severson

Yes, I think what happens in Europe in particular, July and August are very slow, and then everything is got to happen in September. And, what we don’t get sold in September usually gets sold in October. And so we would expect that our Q3 or calendar Q4 sales would pick up again.

Scott Gleeson – Stephens

Okay, great. And Clint I know you’ve talked a little bit on the call here about what you guys are going it in terms of plastic injection molding, with the discs, and I guess the timeline in terms of automating some of those prophecies. Can you maybe give us a better idea of – I think you said that one of the four lines will be up and running, when there will be kind of full capacity, and I guess, maybe give us a little bit of an idea of what can mean on the absolute cost in terms of reduction and disk price?

Clint Severson

Okay. So Don – and so maybe Don you want to comment on that.

Donald Wood

Yes, Scott, first of all, the two-by-two program is a total comprehensive program for quality and cost. So it’s not just automation equals reduced dollars. It’s the cost of all of the raw materials that go into, et cetera. So we’ve been slowly improving cost on the router just about every quarter.

And the automation line went on line the first week of this quarter and it will also going to add two key pieces, primer and staking, it’s in the final validation phases, so that will complete in this quarter. So that is one complete line. We have four production lines that were older. One as old as 20 years, one as old as 10 years, one is replacing the 10 years old.

So what it does technically is that the key productivity improvements are about 33% faster, it requires less people to operate, because there are several robots that are on it that will do repetitive positions and it gives us a yield per quarter significantly into thousands of routers faster per employee.

So it’s one of those things that will as we absorb the cost, depreciation is all they get starting on with and it will have a very slow incremental improvement quarter-to-quarter as we put on the second line and then the third line that will actually occur over the next 12 months to 18 months. And then we will be at maximum capacity, because it has a huge capacity increase also. So quality, cost, capacity, and that’s what the automation lines will do for us.

Scott Gleason – Stephens

Right. And then, Clint, I guess just one last housekeeping question. I guess when you look at the current install base of systems on both the medical side and also on the vet side, can you guys maybe give us the updated number there in terms of active units that are actually ordering discs at that time?

Clint Severson

Yes, so, because we sell part of our products through distribution, you never really know what the exact number is. But on the vet side, I’ll let Marty comment how many active VetScan users –

Martin Mulroy

We are now around 8,500 active chemistry customers. And additionally today, we are now doing business across our entire product portfolio, we are now doing business with about 12,000 veterinary clinics in the United States and Canada.

Scott Gleason – Stephens

And then, Brenton, any idea of what your active user base is out there?

Brenton Hanlon

2,598 is our number.

Clint Severson

That’s pretty, that’s pretty tight number.

Scott Gleason – Stephens

Thank you. Okay, thank you, guys. I appreciate you taking my questions.

Clint Severson

Okay, thank you, Scott.

Operator

(Operator Instructions). Our next question comes from David Clair of Piper Jaffray.

David Clair – Piper Jaffray

Hi you guys, congratulations.

Clint Severson

Thank you, David.

David Clair – Piper Jaffray

Yes, Clint, just a quick question on the reference lab side? I know it’s pretty early and it’s not – it’s not for sure if it’s going to go forward or not. But can you maybe discuss is this a regional effort or would it be across the US, and how would we handle logistics just kind of very – any, any details you can provide?

Clint Severson

Yes, so we have a very unique strategy for our Abaxis reference lab. It’s very creative and we are going to cover the whole country. But it’s something that to talk about now will be premature to discuss it, because we don’t have – we don’t know if everything pins down yet, so I don’t know want to talk about something that, yes, I might be talking out of school. So I think we have to wait on that.

But I can tell you that we believed the drivers are as I mentioned before quality of results and cost and then your ability to meet the customer’s expectation on the timing. So we say you’re going to have a result in 72 hours, try to get the result in 70 hours. So Marty, maybe you want to make a comment on it as well.

Martin Mulroy

Yes, sure. We’ve been working at this here for probably a year in terms of doing investigations, doing basic market research, we’ve done a great number of surveys, we’ve done our focus groups, we’ve talked to luminaries.

We have – if this project does move forward, I can assure you that we have a very, very solid strategy. Now that strategy, I’m not going to hear today, but we have a solid strategy, we have plans for execution, we have identified additional people that could help us execute. And if this deal happens, we are very, very committed, very committed.

David Clair – Piper Jaffray

Okay. And then, maybe Marty another one for you. We recently put a vet clinical survey and it sounds like things are – they’re getting better kind of every quarter here. But is this kind of consistent with what you’re seeing out in the market. I mean are there any same-store sales metrics that you can provide or just some general commentary about the domestic vet market?

Martin Mulroy

I read all the reports too and again as far as – as a percentage of veterinary clinics whose traffic has increased and their average transaction increased, there is a percentage that are flat and there is a percentage they are down. I’ve been staying all along here for I guess two years now that here at Abaxis we’ve been very fortunate in that the macro environment does not impact our business.

And we can discuss why, but I think you all know why. But, yes, the impact to some of our competitors – the macro environments impact to some of our competitors has clearly been significant. And I would think I can say that the macro environments towards impact to Abaxis has been clearly insignificant.

David Clair – Piper Jaffray

Okay. And then, maybe Al, if you’re online here, a question for you to just on legal spending, I assume there were some in G&A this quarter, can you maybe break that out and talk about where we should think about that going forward?

Al Santa Ines

I don’t have the exact break down. But the legal expenses that we have that we’re rating to the Cepheid case it is full amount that we spent in the quarter that ended. We don’t have a forecast yet what we anticipate for the next quarter. But as [inaudible] of the quarter.

David Clair – Piper Jaffray

Okay.

Clint Severson

So, yes, so at this point in time, there’s not a lot of activity going on. There is some filings that go back and forth and clearly there are meetings with the attorneys to try to identify where we are relative to our claims and all that kind of thing.

But the heavy duty legal activities with all the discovery and that kind of stuff, probably we won’t happen for another couple of months, three or four months. So probably minimal impact this quarter, but maybe more the quarter after.

David Clair – Piper Jaffray

Okay. And then just a quick one for Brenton here. You talked about five Piccolos being reagent renals in the quarter. Is this a strategy that that you’ve thought a little bit harder about maybe rolling out on a wider scale like offering potential customers, the actions for reagent rental?

Brenton Hanlon

Yes, we have – we have some reagent rent accounts and of course it’s all situational. We don’t – I don’t anticipate that we would do reagent rental deals for small groups or small customers.

But when it gets to larger customers where capital is a big issue and they would rather cover the capital costs through the operating budget which is a premium on the reagents, that’s how – that’s when we would tailor a reagent rental program.

But it would be big customers, not a kind of a across the board reagent rental program, because our customer can rent a Piccolo, I mean they can lease a Piccolo for less than $300 a month, so it’s not that big of a deal.

David Clair – Piper Jaffray

Okay, great. Thanks a lot, guys.

Clint Severson

Great, thank you.

Operator

(Operator Instructions). And our next question comes from Daniel Owczarski.

Daniel Owczarski – Avondale Partners

Yes, thanks, good afternoon. I just had a couple of quick follow-ups. First on the automation, Don, I think you talked about that you’re going to get an increase in capacity. Could you give us some kind of order of magnitude what post automation does versus pre-automation and should we assume that minimal headcount additions to get there?

Donald Wood

Now, actually first of all, as far as per capacity is about 8 million and the interim capacity that these lines will give us will take us to 15 million. And with that in second and third shifts at all lines, we can go to 30. On some of the lines we are already working the second shift and what we will do is that allows us to run the most efficient line, the new line, line B, with two shifts; so we will get a double shift out of that each day and as soon as line C is converted, we will have the same thing there, we will have four efficient shifts and that’s what I need to run today. Previously Abaxis ran four single lines at one shift. And so, headcount today is probably at its peak and there will be marginal improvements as time goes on as the robots are doing some of the repetitive. But we are staffed at the four shift line right now and so we will have four shifts and this will be on two different shifts. So we will be maintaining pretty much our headcount. It won’t go up but it could be down just a couple of positions.

Daniel Owczarski – Avondale Partners

Bren, you talked about or it sounded like there is four targeted customers for the Piccolos, the urgent care, the family practice, oncology and, I think, internal medicine. Are you able to get a grasp on utilization amongst those four groups? Is it urgent care that’s going to be the heavy users or is utilization per system going to be equal amongst all those, for those types of customers?

Brenton Hanlon

For those types of customers, I think the utilization is pretty consistent across the board. Where the high utilization occurs is with possible systems, where a hospital and we are seeing more and more of this, we will set up satellite clinics and we have a couple of those accounts and they are very high volume accounts. So that the smaller practices and the individual physician offices, they are pretty consistent. But the big volumes and the big volume upticks are going to be with these complex medical systems. As we speak on the New Orleans at the Medical Management Association meeting and there is a very significant trend that most hospitals to set up satellite clinics to compete with the urgent care centers with a popping up all over the country. They have a typically a higher throughput of customers of patients.

Daniel Owczarski – Avondale Partners

Okay. Clint, you talked about the rapid, are getting those, I think, to the USDA by the end of the year. Do you have a typical turnaround time to get these approved or cleared so you can start selling them?

Clint Severson

There is no statutory time, we are estimating about 90 days. But that’s just our estimate, we don’t know for sure.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Severson for any closing remark.

Clint Severson

Great, thank you very much. Yes, I just want to make a comment. Everybody knows the economic environment out here is very difficult and even though Marty and his team have effectively figured out how to grow that business, Brenton as well, even in a tough environment. Really what makes the difference here are all the people working together to make sure our products are cost effective, they perform better than anybody else’s stuff and that’s what really makes this a winning company and that’s why we had a really winning quarter this quarter with topline up 17% and net income up 17%, there aren’t many companies out there doing that.

So I want to thank all of the employees that pulled together to make this happen and clearly I want to thank all the people on the call that are taking the interest in Abaxis to listen to us. So thank you all, I look forward to another great call in January. Thank you very much.

Operator

The conference has now concluded. Thanks for attending today’s presentation, you may now disconnect.

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