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Cepheid (NASDAQ:CPHD)

Q1 2008 Earnings Call

May 1, 2007 4:30 pm ET

Executives

Jason Spark - Porter Novelli Life Sciences, IR

John Bishop - CEO

Andrew Miller - SVP and CFO

David Persing - EVP, Chief MTO

Robert Koska - SVP, Worldwide Commercial Operations

Analysts

Peter Lawson - Thomas Weisel Partners

Bill Quirk - Piper Jaffray

Quintin Lai - Robert Baird

Dan Leonard - First Analysis

Zarak Khurshid - Caris and Company

Derik De Bruin - UBS

Brian Weinstein - William Blair

Amrou Almanaseer - 36 Capital

Andrea Bici - Schroder

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to Cepheid's First Quarter 2008 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, May 1st, 2008. I would now like to turn the call over to Mr. Jason Spark of Porter Novelli Life Sciences. Please go ahead.

Jason Spark

Good afternoon. Thank you for joining us as Cepheid reports results for the first quarter of fiscal 2008. On the call today are John Bishop, Chief Executive Officer, and Andrew Miller, Senior Vice President and Chief Financial Officer. In addition, joining for the Q&A portion of the call are Dr. David Persing, Executive Vice President and Chief Medical and Technology Officer and Rob Koska, Senior Vice President of Worldwide Commercial Operations.

Today's conference call is being broadcast live through an audio web cast and a replay of the call will be available online today at www.cepheid.com.

During the course of this call Cepheid will make forward-looking statements. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Cepheid's annual report on Form 10-K and other filings with the U.S. Securities and Exchange Commission and in today's press release. Cepheid assumes no obligation to update any such forward-looking statements.

In compliance with Regulation FD, Cepheid will provide quarterly information and forward-looking guidance in its quarterly financial results, press release and its publicly announced financial results conference call.

Cepheid will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. Unless otherwise expressly stated, any future references to our announced guidance will only refer to the guidance provided as of this date and should not be construed as an affirmation or update to this guidance.

During the call, Cepheid will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principals.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in today's press release made available on our website at www.cepheid.com.

In addition, Cepheid will quote a number of percentage increases, as we discuss our financial performance. Unless other wise noted, each percentage represents the growth rate of the first quarter of the fiscal 2008 as compared to the first quarter of fiscal 2007.

It is now my pleasure to turn the call over to John Bishop.

John Bishop

Good afternoon, everyone, and thank you for joining us. First off, I'd like to welcome Andy Miller, our new Chief Financial Officer, to his first call with the Company. Today, Cepheid reported another strong quarter of outstanding results.

Quarterly revenue was $44.8 million, a 76% increase over last year. On a GAAP basis, our loss per share was $0.03. However, on a non-GAAP basis, we reported our first profitable quarter with diluted net income per share of $0.03.

As a result of the continued expansion of the healthcare associated infection or HAI market, and the success of our expert MRSA test and GeneXpert system, we've experienced tremendous growth in the clinical market.

Our clinical product sales grew almost 250% and now represent approximately 61% of total product sales. Our continued transition to the clinical market offers a substantially larger, higher growth, and higher margin opportunity for us and we are committed to meeting the expanding HAI market need for surveillance, diagnostic, and pre-surgical testing products.

Within our clinical business, MRSA continues to be our key growth driver. While our Xpert MRSA test has only been on the market for just under a year in the U.S. We have rapidly taken the leadership position in the market. Worldwide, Xpert MRSA sales were more than $8 million in the first quarter, representing a 78% sequential increase from the fourth quarter '07.

Our successful GeneXpert system placements over the past several quarters are clearly beginning to drive our test pull through revenue as our customers develop and ramp their surveillance programs.

Based upon our strong results in the first quarter, we believe we are on track to achieve our Xpert MRSA test revenue guidance of $52 million to $55 million for our fiscal 2008. Clinical sales for our GeneXpert systems increased approximately 400% as general hospital adoption continues to drive our MRSA business. As of the end of the quarter, we have 3,134 GeneXpert modules in 609 GeneXpert systems worldwide primarily in North America and Europe.

In the first quarter of 2008 we placed a total of 126 systems and 565 modules worldwide. Cumulative average modules per system in the U.S. were once again approximately 8.1 and cumulative average modules per system in Europe were approximately 2.3. As of the end of the first quarter, almost 60% of our U.S. MRSA accounts and almost 70% of our cumulative U.S. GeneXpert system placements are now from the broader general hospital market.

Our corporate accounts growth continued in the first quarter. We signed new preferred vendor agreements for our GeneXpert system and Xpert MRSA tests with leading integrated health delivery networks, or IDNs, including agreements with Connecticut Hospitals Association representing 164 acute care hospitals, and the Southern Atlantic Healthcare Alliance representing an additional 18 acute care hospitals.

Under these agreements, each organization member can purchase under pre-negotiated terms and conditions, enabling institutions of any size to implement a comprehensive MRSA surveillance program.

The market for MRSA and other HAI tests continues to develop rapidly driven by continued progress on the legislative front and further releases of relevant scientific studies. Now currently 29 states have enacted mandatory HAI reporting and 19 states have legislation pending. Four states have passed mandatory surveillance mandates and six states have similar legislation pending for mandatory surveillance.

An additional six states have pending legislation which will require their State Departments of Health to implement HAI Prevention and Control Programs. Specifically, bills are moving forward in both California and Tennessee that would require mandatory surveillance testing of patients for MRSA.

West Virginia enacted legislation in April directing the State Department of Health to implement an Infection and Prevention Control Program. And just yesterday, similar legislation was signed by the Governor of Connecticut. And last week the Arizona Legislature passed a similar HAI prevention and control bill that has been sent to the Governor for consideration. Nationally, six bills have been introduced in Congress including measures to implement universal standards and guidelines as well as mandatory reporting of healthcare facilities.

Also at the federal level, on April 14th the Centers of Medicare and Medicaid Services, or CMS, proposed eliminating payments to hospitals for costs to treat various conditions caused by healthcare acquired infections including MRSA.

There was substantial confusion and misinformation within the investor community following the release of the CMS proposal as it did not specifically call out MRSA. However, it should be noted that elimination of hospital reimbursement for selected conditions is specific to the condition and not to the causative infectious agent.

As MRSA is a leading causative agent for a number of the conditions cited, it will be important that hospitals have effective hygiene and surveillance programs to reduce the potential rate of MRSA infections. Therefore, we believe that the recent CMS proposal eliminating reimbursement beginning in October, 2008, will provide hospitals additional incentive to implement surveillance and infection control programs for MRSA and potentially for other hospital acquired pathogens.

On that note, Clostridium difficile, or C-diff as we'll refer to it later, infections were included on the nonpayment list which should provide further incentive for additional initiatives directed at reducing potential C-diff infections.

We expect to release our C-diff test as an aid in the diagnosis and differential detection of the more versus less virulent strains of C-diff in Europe later this year and in the U.S. in 2009.

Recent scientific publications have also highlighted the importance of surveillance testing and time to result. A recent study published in the Annals of Internal Medicine by Dr. Lance Peterson's group at Evanston Northwestern in Chicago illustrated the reduction in infection rates that can be achieved through universal surveillance testing with results in 16 hours when combined with a comprehensive hand hygiene and contact precaution program in place.

Evanston Northwestern reduced its MRSA infection rate by 69% and estimated that universal screening was associated with 85 fewer MRSA infections at three hospitals in the study.

Another recent and controversial study appearing in the March, 2008 issue of the Journal of American Medical Association, or JAMA, demonstrated that rapid time to test result is a critical component of a comprehensive surveillance program.

The JAMA study suggested that MRSA screening with an average 22.5 hour turnaround time, did not reduce node socomial infections in patients admitted to a surgical department. However, a more careful analysis of the study highlights that results in 22.5 hours do not likely provide the optimum ability to reduce infection rates.

During the 22. 5 hours to obtain results, MRSA colonized patients were placed in the general patient population serving as a possible and even likely source of infection of 53 patients who were tested and found not to be colonized on admission.

The importance of turnaround time becomes further apparent when considering that MRSA positive results for 31% of the patients in the JAMA study were not available until after their surgeries were completed due to the number of emergency surgeries and basic delays in the notification of results. Thus, for nearly a third of the patients, established methods to reduce interoperative transmission of MRSA could not be implemented.

With U.S. hospital infection rates averaging 3% to 4%, rapid time to result is essential to achieve optimal results. Our customers are already seeing the benefits of rapid current 2 hour turnaround time that only the GeneXpert system can provide with our existing 72 minute time to result. We expect to further reduce the time to result for our Xpert MRSA test from 72 to 52 minutes by the end of the year.

Now, I would like to turn the call over to Andy for a detailed discussion of our financial results.

Andrew Miller

Thank you, John. Total revenues grew 76% to $44.8 million. Product sales increased 90% to $41.9 million with robust growth in both systems and reagents and disposables. System product sales grew 110% to $14.3 million. Reagent and disposable product sales grew 81% to $27.6 million. Other revenue, consisting of contracts, grants and research was $2.9 million.

As John mentioned, our momentum in leadership position in the clinical market continues to drive our overall strong revenue results. Clinical product sales grew 246% to $25.8 million and now represent 61% of total product sales driven by placements of GeneXpert systems and utilization of Xpert MRSA tests.

Biothreat product sales were $12.6 million and now represent only 30% of our revenue. Industrial product sales increased 13% to $3.6 million.

Our performance by geography was strong across the board. North America product sales, excluding the U.S. Postal Service, were $18.5 million, an increase of 191%. And Europe product sales were $10 million, an increase of 150%.

Moving to the rest of the income statement, gross margins on product sales increased to 45% GAAP from 37% in the first quarter last year. On a non-GAAP basis, gross margins on product sales were 47%, an increase of more than 700 basis points from the first quarter of last year. This increase is primarily due to the implementation of our automated test cartridge manufacturing line, ROBAL, or Reagents On Board Automated Line, as well as a product mix shift toward the higher margin clinical market.

Operating expenses were $25.3 million GAAP and $22.4 million non-GAAP. Our GAAP operating loss was $3.5 million. On a non-GAAP basis, excluding stock compensation and intangible amortization, we had positive operating income of $75,000, our first quarter of positive operating income.

During the quarter, we recorded a tax benefit of $340,000 on both a GAAP and non-GAAP basis. This tax benefit was driven by the recognition of a discreet R&D tax credit in the quarter. GAAP net loss was $1.9 million. Non-GAAP net income was $1.7 million. GAAP loss per share was $0.03. Non-GAAP diluted net income per share was a positive $0.03.

Turning to the balance sheet, cash, cash equivalents, and investments were $42.9 million, a decrease of $1.2 million from December 31, 2007. This decrease is primarily due to a write-down of $2.1 million we recorded related to our auction rate securities, or ARSs.

We have $25 million par value of auction rate securities. Our ARSs have no exposure to subprime mortgages, collateralized debt obligations, or other similar securities related to the credit crunch. However, due to the current lack of liquidity within the broader ARS market, the auctions have failed since February, 2008.

As a result, in the first quarter we reclassified our auction rate securities to non-current assets in our balance sheet and we recorded a write-down of $2.1 million as a temporary impairment. This write-down is reflected in other comprehensive income in the equity section of our balance sheet. We believe that our cash and cash provided by operations are sufficient to meet our anticipate operating needs.

Inventory turns were 3.4 and DSO was 53 days. We are very pleased with our overall results for the quarter. As we look forward to the remainder of fiscal 2008, we are mindful of the concerns about the health of the U.S. economy. However, we are not currently seeing any changes in our customers' buying habits or in the overall dynamics in our markets. We remain confident in our market position and optimistic about our opportunities.

Now let's talk about guidance. With strong first quarter results behind us, we are raising our revenue guidance for fiscal 2008. We now expect fiscal 2008 total revenue in the range of $183 million to $190 million. Product sales are expected to be in the range of $176 million to $181 million.

Xpert MRSA test sales, which are included in product sales, are expected to be in the range of $52 million to $55 million.

Full year GAAP net loss is expected to be in the range of $10 million to $12 million or a loss per share of $0.18 to $0.21. Full year non-GAAP net income is expected to be in the range of $3 million to $5 million or income per share of $0.05 to $0.08.

Non-GAAP expected results exclude approximately $14 million related to stock compensation and $1 million related to the amortization of acquired intangibles. Now, let me turn the call back to John.

John Bishop

Thanks, Andy. As noted, our results for this quarter demonstrate the momentum we have achieved in the MRSA market. We see that the market is evolving into three distinct segments, Surveillance testing, diagnostic testing of symptomatic patients, and testing of pre-surgical patients.

A growing menu of tests is expected to address each of these segments in 2009 through nasal, skin and soft tissue or SSTI, and blood culture applications. We believe our multiplex MRSA combination SA products for SSTI and blood culture, which are expected to provide the ability to differentiate between methicillin-resistant and methicillin-sensitive Staph infections will enable healthcare practitioners to initiate appropriate treatment measures more rapidly for symptomatic patients. We expect FDA clearance for both of these tests before the end of 2008.

However, the HAI opportunity extends well beyond MRSA. Also by the end of 2008, we expect to have tests on the market in Europe for C-diff and VRE which is vancomycin resistant enterococcus, with U.S. market clearance expected in 2009. By the end of 2009, we expect to have the most robust HAI test menu on the market for single platform.

Our customers have already begun to prepare for increased testing volume in the future with some accounts adding GeneXpert modules to their existing systems. The GeneXpert system allows for random access testing meaning that the system can run different tests at the same time as long as the module is available. For example, accounts in Europe with a GeneXpert 16 could run GBS, EV, BCR/ABL, MRSA, MRSA SSTI, MRSA blood culture and factor 2 and factor 5 tests and by the end of the year C-diff and VRE all at the same time with no waiting or instrument attention between types of tests.

This is a paradigm shift from the aging batch test modalities in which an entire instrument or platform dedicated to a single batch of one type of test is tied up for up to a full shift. The GeneXpert system with its faster time to result, round the clock utility, and ease of use is providing hospitals with the unparalleled ability to either initiate molecular testing or to more efficiently expand their existing molecular testing capabilities.

We are on track to introduce our GeneXpert Infinity 48 system at this year's American Association of Clinical Chemistry Conference, or AACC, in Washington , D.C. in July. Shipment of the Infinity 48 is expected to begin at the end of 2008 followed by expected shipment of our Infinity 72 by March of 2009.

Now in addition, during 2009, we expect to release in Europe a first in class test for multi drug resistant tuberculosis or as its known, MDRTB. As you may know from recent news, MDRTB is emerging, is a worldwide threat, and TB in general is a major infection control challenge in hospitals.

We firmly believe that GeneXpert systems technology is changing the way healthcare practitioners provide patient care with molecular testing. Clearly, our opportunities are significant and we are committed to providing the platform of choice along with a broad and growing test menu. With that, I'll turn it back over to the Operator so that we can take your questions.

Question-and Answer-Session

Operator

(Operator Instructions) And your first question comes from Peter Lawson of Thomas Weisel Partners.

Peter Lawson - Thomas Weisel Partners

Hi, John.

John Bishop

Hi, Pete.

Peter Lawson - Thomas Weisel Partners

What accounted for the acceleration of [GeneXpert] placements in Europe?

John Bishop

Well, there are a number of initiatives and I'll have Rob comment on this additionally. I mean, as we've indicated, in Europe we have seen good activity in Germany. We've had within the Netherlands, as we've indicated on our last call, good uptake of the systems. They found that by implementing the GeneXpert in the Netherlands that they could reduce their costs associated with quarantine by up to 80%. Rob, you want to comment additionally?

Robert Koska

Yes, you know, we've traditionally commented that the European market was a little bit behind that of the U.S. We believe that it has currently caught up. As you know, Q3 last year represented pretty much a lull because of the holidays. We had a strong Q4 and even better Q1. There is no international mandate in Germany, but Germany represents the strongest market for MRSA testing in Europe. We currently have over 50 accounts up operating in Germany.

In the Netherlands, our success continues to grow there. We have 13 MRSA accounts there including the Academic Medical Center in Amsterdam, which is the largest and most prestigious medical center over there with over 25,000 admissions annually.

Also in Belgium they are adopting the Dutch model currently. We left the year with only two accounts in Belgium. We now have ten systems in place at fairly large medical centers there that are implementing testing of all admissions. We have continued to make great progress in Portugal, Poland, France, Italy, Spain where we have a number of systems in place and we're working very closely with a number of Health Ministries and Ministers of Public Health to be able to help craft their MRSA surveillance strategies in their respective countries. So, we feel very good about our European progress.

Peter Lawson - Thomas Weisel Partners

Are you expecting a similar kind of ratio of U.S. placements and European placements going forward? This kind of 2 to 3 kind of ratio?

Robert Koska

It's going to ebb and flow. They have different seasonality in Europe than we do here in the U.S. Our U.S. placements were in line with our expectations coming off of the end of the fiscal year for most institutions. Here in the United States, and I would expect things to once again in Europe slowdown as we approach the third quarter, where most of the key countries are on holiday and it's very difficult to validate new procedures.

Peter Lawson - Thomas Weisel Partners

Okay, that's very helpful. Thank you. And then just finally, John, or maybe Andy, on the guidance, you beat by it looks like $3 million and up guidance by $1 million. What's the dynamic there?

Andrew Miller

Well, we hadn't previously guided quarterly, we're not providing quarterly guidance. So we didn't beat our Q1 guidance for the quarter, we didn't provide Q1 guidance. We feel really good about the strength of the business in Q1 and as a result, based upon that we raised our guidance for the full year.

Peter Lawson - Thomas Weisel Partners

Okay, thank you so much.

Operator

And your next question comes from Bill Quirk of Piper Jaffray. You may proceed.

Bill Quirk - Piper Jaffray

Thanks. Good afternoon.

John Bishop

Good afternoon Bill.

Bill Quirk - Piper Jaffray

John, a couple of questions. I think you, I believe you alluded to in your prepared remarks, but were there any VA placements in the quarter?

John Bishop

Rob, did we?

Robert Koska

We had an additional two systems placed within the VA for the quarter.

Bill Quirk - Piper Jaffray

Very good. And then not to nitpick on the MRSA reagent number, John, obviously it's very nice to see the big sequential move here. Was that, was it closer to 9 or was it closer to 8 in terms of wins for MRSA?

John Bishop

It was closer to 8.

Bill Quirk - Piper Jaffray

Okay. All right, very good. And then let's see, this last question for me is, if we're looking at -- and you correct me if I heard you guys wrong last quarter, but we're looking at about a two quarter lag between a placement and validation study so we get on an ordering cycle. And we have seen, using that metric, we did see a nice rise in utilizations sequentially. Is this a pattern, John, that we should continue to expect to climb here or where do you think we are frankly in terms of system placements and validations? People get these things up and running and leave them flat or are you seeing same store sales growth, if you will?

John Bishop

Okay, Bill, so you've asked actually a couple of questions there. So first off, we believe that at this point we're getting enough history that we would expect this to be an ongoing pattern. So now we're falling into the pattern that one would expect to see with the "razor/razorblade" business model.

So expect to see that going forward. The other question is that we're also tracking dynamic, although I don't want to get into the details on that. But as we look at our accounts right now, many of them will enter the market targeting their high risk population. What we are seeing is that with accounts bringing the tests routinely on line, that a number of them are now starting to migrate and expand their definition of the high risk patient population. And others of them are further along in the spectrum and they're moving toward an all admissions program.

So I think within the pattern, you are going to see two areas of movement there. One, the routine of just accounts coming on line. Two, within that spectrum, some of the older accounts also shifting and expanding their patient population of the definition of high risk and potentially all admission.

Bill Quirk - Piper Jaffray

So, last question for me and I'll jump in the queue, but suffice it to say, John, we're in the early days of this shift from either expanding what's called the high risk population or for that matter making the decision to test all admissions.

John Bishop

We would agree with that. I mean, we're still, I mean, if you look at an S curve scenario, we're clearly on the very beginning of the S curve situation.

Bill Quirk - Piper Jaffray

Very good. Thank you.

John Bishop

You are welcome.

Operator

Your next question comes from Quintin Lai of Robert Baird. You may proceed.

Quintin Lai - Robert Baird

Hi, good afternoon.

John Bishop

Good afternoon Quin.

Quintin Lai - Robert Baird

Could you give us a little update on the competitive landscape? How are you faring with the other competitor out there and with traditional culture out there as well? And then, as a follow up to that, the customers, especially in the United States that are adopting, are they adopting -- this is a question I asked last quarter, are they from states that have mandates or pending legislation? Or are they just some of the early adopters being proactive and saying, hey, we need to reduce the amount of infection in our hospitals?

John Bishop

Okay, Rob do you want to take a couple of those?

Robert Koska

All right. Well, looking at Becton Dickinson and what they announced on their most recent conference call, I believe for their total genome business they went from $8.8 million to roughly $10 million. Their financial fiscal Q1 to Q2 representing maybe 13% growth and that includes instrumentation, GVS as well as MRSA. And I think our numbers speak for themselves as we've just given MRSA guidance.

What we're seeing from an account conversion standpoint is a predominance of customers that are using culture methods moving to molecular methods. Those are the customers that understand the importance of doing screening. They understand what their infection rates are and they're looking for the added benefit and value to be able to drive that down. It's a much longer sales cycle in accounts that have yet to be able to make a determination of whether or not they need a surveillance program at all.

There is no doubt that legislation drives our sales. For instance, as you're aware, the state of California has some pending legislation that's been bandying about for the past several months. And it has made it out of committee and is expected to be able to go up for a vote. Now in response to that, we see for instance our greatest number of proposals now coming out of the state of California which is very interesting.

Just from a hierarchical standpoint, once again Illinois is leading the country with GeneXpert placements and that's based on the strength of the legislation they have there. It's followed by Florida, Pennsylvania, California, New York, Michigan and Ohio, just to be able to give you a clustering of the top states there. Okay?

Quintin Lai - Robert Baird

That's great color. Thank you so much, Rob.

John Bishop

Let me, Quintin, before you go on, let me just add a couple of additional points to your questions. First off, with regard to culture, I would agree I've seen some reports that right now say that the largest on a percent market basis that the larger percent may go to culture. And we would tend to agree with that.

However, I view that as good news, not bad news because the bigger issue is getting hospitals to implement surveillance testing at all. And what we're continuing to see is an acceleration in the awareness and implementation of surveillance programs, so frankly it makes it easier to convert from a culture going to molecular once you've made the basic decision. The other thing is that we are seeing clear impact on the recognition and need for time to result which is out there which we provide clear superiority over the existing and frankly the new competition citing to come into the market.

So a number of people are announcing new products particularly in the blood culture area and we see our products holding up extremely well for several reasons. One, don't forget that with the GeneXpert that you're getting a highly multiplexed product. It's not a singular target.

So as you look at blood culture definitively we've got multiple targets confirming that you're dealing with an MRSA or a Staph versus singular targets which some of the competitor products are talking about coming up with in blood culture. The other issue is that we don't see the competition with a complete portfolio of products. And as you're aware, we're talking a portfolio of seven different products by the end of next year to completely address the market. And right not I don't see anybody else with that scope of positioning capability. Sorry, you had another question?

Quintin Lai - Robert Baird

So, my last question, and I'll jump back into the queue, for some of your early adopters that have had it for awhile, have you gotten any anecdotal data on how fast their turnaround time, their average turnaround time is including nights and weekends? And are they seeing a drop in infection rate?

David Persing

Yeah, Quin, this is David Persing. We just had a conversation with Dr. Paul Schreckenberger of Loyola. They've been instituting testing on the GeneXpert since November of last year. And they did a program starting off with ICU admissions and then moving to all admissions now. In the Chicago papers they have announced very substantial success with that program in reducing MRSA bacteraemias. They have been seeing about four hour, all in, four hour turnaround time including analytical time, transport time, and reporting time. And they're moving to make that faster with the introduction of the laboratory information system interface that will report the results automatically upon completion of the assay.

So, they're seeing the impact. They're seeing a direct connection of the turnaround time, the random access availability of the modules and the results and the efficacy of their program. They feel that the turnaround time has had a big impact on their operations. And I would add that it's very interesting, a lot of hospitals don't have private room setups. They have shared room setups. And so when they get a result back from a patient who's colonized two days after they've been admitted, and they're already sharing a room with a patient, they've been sharing the bathroom, sharing the beds, or touching each other's bedrails, etc., the bottom line is that the, it's politically very difficult to move a patient out once they've been identified as a carrier because it obviously is of great concern to the person who is a roommate who is not a carrier. And so it's much better to recognize carriers upfront before admitting them to a shared room situation.

John Bishop

The last one, Quintin, this is John, I would just give you a comment on, on the business side, we have heard anecdotally from accounts that the time to result is also extremely important because they are wanting to segregate those patients. So, some accounts that have looked to set up programs were concerned with the long time to result, they were not getting maximum utility out of their available beds. With a short time to result, they're getting maximum utility and availability of their beds. So, economically relative to available beds, there's a real benefit here.

Quintin Lai - Robert Baird

Thank you, guys, I appreciate it.

John Bishop

You are welcome.

Operator

And your next question comes from Dan Leonard of First Analysts. You may proceed.

Dan Leonard - First Analysis

Hi, good afternoon.

Andrew Miller

Good afternoon, Dan.

Dan Leonard - First Analysis

Start with a housekeeping question. What was your industrial and your biothreat revenue in the quarter?

Andrew Miller

So biothreat was $12.6 million and industrial was $3.6 million.

Dan Leonard - First Analysis

And then, John, you mentioned in your prepared remarks during the portion where you were talking about the gathering storm, that there are 29 states that require mandatory reporting. Do you have any feel for how many of those states actually provide that information to the public?

John Bishop

Actually the majority of those. It's actually all but a few of them that it's not available to the public. I think it's something in the area of three or four that it goes actually into the state healthcare agency or so. Most of them it's available.

Dan Leonard - First Analysis

Okay. And then finally, have you taken any orders for the Infinity 48 yet?

John Bishop

Have we, Rob?

Robert Koska

No, we haven't but we have a great deal of interest and I expect that everything will come together at the American Association of Clinical Chemistry meeting where we will have a unit on display and demonstrating it and I think that we'll pretty much galvanize some of the decisions that are being considered currently.

Dan Leonard - First Analysis

So you think you'll be shipping orders by the end of the year or you'll just be ready to ship orders by the end of the year?

John Bishop

No, we expect to be actually shipping units by December, in the December timeframe.

Dan Leonard - First Analysis

Okay. Thank you very much.

Operator

And your next question comes from Zarak of Caris and Company.

Zarak Khurshid - Caris and Company

Hi, guys, this is Zarak from Caris and Company.

John Bishop

Hi, Zarak.

Zarak Khurshid - Caris and Company

Thanks for taking my questions. Can you guys hear me okay?

John Bishop

Yes, we can hear you just fine.

Zarak Khurshid - Caris and Company

Great, thanks. So, I'm trying to just back into your instrument revenue number in my model. So with the sequential decrease in module placements, it looks like either SmartCycler was very strong in the quarter or the average price per module went up pretty significantly. Any color on that would be helpful.

Andrew Miller

So, we don't disclose revenue by type of system. We had a very strong quarter for GeneXpert, as we pointed out with 400% growth over last year. And system placements of 126 was actually right at our expectations for the quarter.

Zarak Khurshid - Caris and Company

So, as far as pricing goes, has there been any changes there?

Robert Koska

Our ASPs remain firm, but of course you've seen a decrease in the number of modules per system.

John Bishop

And I would comment on that, Zarak, don't forget, I mean we're doing and have done real well on the larger account penetration. As we start to spread that base certainly within the U.S. market into smaller accounts, that you'll tend to see fewer modules per. Now what's an interesting stat though that we'll give you, is that we have indicated previously that on the ratio in the U.S. accounts, of the placements, about 61% of those were the GeneXpert 16 cabinet configuration. And interestingly enough, in the first quarter, we still see that ratio holding up. So the accounts are, smaller accounts are going with the GeneXpert 16 cabinet with fewer modules.

Zarak Khurshid - Caris and Company

Okay, that's interesting. Great. And then with respect to the biothreat business, it looked pretty healthy in the quarter. I know it's been lumpy in the past. How should we be thinking about that for the remainder of the year? And then maybe if you could just remind us whatever happened to that flats canceller program at USPS?

John Bishop

Certainly. So, as we indicated in the past, expect that business to be lumpy with their seasonality program. This year it's going to be a little bit different versus what we've seen in prior years. I mean generally the fourth quarter for us tends to be strongest for the post office. It's their first quarter of their fiscal year, but also correlates with the holiday season. So you have a lot of mail processing, you tend to have high volume. We had some product that they didn't take in the fourth that shifted into the first quarter this year. Then you'll see some seasonality decrease particularly in the summertime where you see less mail going through the system.

Now what's different in the fourth quarter and this is related to your question on the flats canceller program for this year, so the fourth quarter this year may step down a bit versus what we've seen historically. The reason for that is yes, they are going forward with the flats canceller program, so what that is, the program right now that's currently running uses a standard envelope system.

They're expanding the application to large envelopes which are what's called the flats cancellers. In order to do that, what they've done is to come up with a program where they run two of the prior lines for standard envelopes into one biohazard detection system or BDS unit. So they pulled a number of the systems offline which will cut the volumes. As they go into deployment, this is really going to get underway more in our fourth quarter of this year and will carry through '09. And then they're start to redeploy those on the flats canceller program which will see volumes then step up.

So, I would look for number one, continued seasonality. Two, a step down because of the flats canceller program, but particularly impacting more 2009 versus '08 with volumes then to start to step up as the Post Office enters their 2010 fiscal year.

Zarak Khurshid - Caris and Company

Understood. Then lastly, a couple more questions. What, just curious, what fraction of your MRSA consumables are going to those four states with the mandated screening?

Robert Koska

We haven't done a breakout.

John Bishop

We haven't disclosed or indicated that. We do, no surprise, you do tend to see a concentration going into the states with mandates. And I think the impact, really you want to think of it like this and that's what one of the other questions that was asked earlier focuses on, standard. You've got the market broken down into pioneers and settlers. And we're seeing the pioneers setting up testing across the U.S. on a broad basis. The issue is, is how you start to penetrate what's what we refer to as the settler population of the market. And of course that tends to be stronger where you have a mandate.

Now I think that could start to change as you see the CMS regulations really kicking in October and you see the curtailment of these various conditions. Because as you know there were eight conditions cited for CMS, where they're not going to receive reimbursement. And among those were catheter associated UTI, vascular catheter associated infections, SSI or specifically infection after cardiac surgery. And within those, take those examples, you have a lot of involvement there of MRSA. And we have some data on that.

In addition to that, there's been an additional nine conditions added to that list which may be implemented and in that one are additional infections involving total knee replacement, laparoscopic gastric bypass situations, stripping of varicose veins. Also ventilator assisted pneumonia.

By the way, to give you a quick bit of data there, ventilator assisted pneumonia, 24% of those are caused by Staph, and of the Staph infections, 56% of those are MRSA. And then of course was cited for Staph septicemia and then C-diff. So, I think with those things clearly coming on, it's a clear indication that unless the hospitals are going to be able to cut their infections, they're going to be losing money, and it will be big money.

Zarak Khurshid - Caris and Company

Yes. With respect to the new studies and potential publications to support these aggressive screening initiatives, where and kind of when should we expect the next I guess tronch of papers? And is the VA actively working on some of these supportive evidence as well?

John Bishop

Well Dave is actually pretty close to that, so Dave, you want to --?

David Persing

Yes, Zarak, I think -- is it Zarak we're talking to still?

John Bishop

Yes.

David Persing

Yes, Zarak, yes, we're certainly aware of some studies that are going to be presented at the American Society for Microbiology meeting in early June. There are -- these are early studies, really just demonstrating and talking about the initiation of these programs. We know that the VA system is compiling data and I think you'll begin to see data presented over the next six months to a year from various sources, probably beginning with a few of the integrated service networks that have banded together to pool their data and show a multi center effect. And then of course with individual hospitals studies that are going on, we expect to see that data rolling out starting with ASM and really moving out through the next year.

Robert Koska

So from a European perspective as well, we're awaiting the publication of the pivotal Netherlands study which we've eluded to several times. That sole data is expected to be published within the next several months as they wrap that up.

In addition, we've completed our study that we sponsored at the Birmingham hospital with the NHF there. And that is going to look at the application of the GeneXpert within the admissions department versus the laboratory. And we've been given a preview of those findings and it is extremely encouraging as to what we've found and we're very optimistic about applying those results to other institutions within the UK.

John Bishop

So that's, so Rob's point there is a very interesting one because as we said in the early days with this, we said well actually you could end up placing units right in admissions and really cutting your time and proactively testing these patients and that's what they did with the Birmingham study. And the rate of correlation with the results taken right at admissions to the laboratory was extremely high. So, very interesting development in the UK.

Zarak Khurshid - Caris and Company

Sounds good. Nice quarter, guys.

John Bishop

Thank you.

Operator

And your next question comes from Derik De Bruin of UBS. You may proceed.

Derik De Bruin - UBS

Hi, good afternoon.

John Bishop

Good afternoon Derik

Derik De Bruin - UBS

I guess -- when you start looking at -- there's some confusion about the whole reimbursement and questions have popped up in some of the CMS data, i.e., about MRSA not potentially being a code able indication. Could you just go, could you just clarify that a little bit more? And I guess just speaking of broader reimbursement environment, for the hospitals that are now running the tests, it's like what is the average reimbursement that they're getting for this I guess? And who's the primary payer on these cases? Just a little bit more clarity on the whole reimbursement question.

John Bishop

Okay, with regard to the CMS situation, first off, we've known, in fact we were talking about this for over a year, that the proposal and the guideline that is coming out was not going to specifically call out as yet MRSA. Now the confusion revolves around patients with colonization which is of course not preventable. And that's where there were some reports actually that were issued subsequent to the proposal being posted that said, oh, MRSA is not included and MRSA can't be prevented. And that was totally and blatantly incorrect.

What they left out was, MRSA colonization cannot be prevented, the infection can be prevented. And relative to the CPP code, there was not a code established yet relative to MRSA infection. Now that is being looked at and I would expect that down the road that we would see a CPP code for MRSA infection. The colonization is another issue and of course that's what added to the confusion on the colonization side.

So, the key thing is, as we're saying here, that MRSA is amongst a number of organisms that cause infection. The condition involving an MRSA infection will not be reimbursed. So therefore the hospitals are going to need to take active measures to reduce their rates of MRSA infection. Otherwise, they'll be paying the consequences going forward.

Now, as one looks at payment relative to the next portion of your question, currently the infectious disease rates as a common nonspecific code that can be utilized and Rob, it's what -- 4986?

Robert Koska

Approximately.

John Bishop

4986 or something like that?

Robert Koska

And that will vary by state.

John Bishop

Right. Well what happens is, what Rob is talking about, it does vary by state. So what you'll see, we can spend the rest of the day talking about reimbursement. But your Medicare codes are about 4986 or so that come out of there. Then what happens, it's up to each individual state, will give you different rates of reimbursement on a state by state basis and then you have your third party payers who will come in and third party reimbursement can generally run about 1.5 times what you see relative to Medicare rates of reimbursement.

We're not hearing, and here's the other issue, that there's confusion with regard to MRSA surveillance versus MRSA diagnostics. Now with regard to surveillance, there never has been reimbursement associated with that It's a cost reduction issue from a hospital initiative standpoint. Now separately as we've discussed in prior calls, we are seeing some third party payers providing incentives to individual hospitals to initiate a surveillance program because those third party payers have recognized it will curtail the overall cost of their healthcare programs. Now, we've been trying to get specifics. We still have not been able to get the specifics on that area because they're playing that very close to the vest.

Now as we come with our MRSA, SA, SSTI and blood culture products, those are diagnostic products. So, for those products specifically, the immediate reimbursement of the 4986 or so that I was talking about will immediately apply and reimbursement is available against those products within Medicare and then third party payers. Dave is also reminding me, and that's absolutely right, that with the multiplex product that we have, you bill per target. So, in a case of our MRSA SA product, that would be times two. So, very good reimbursement available for that multiplex product.

Derik De Bruin - UBS

Okay, just asking the question again, is that 4986 rate, that reimbursement rate, is that a fixed rate regardless of molecular versus culture based tests?

John Bishop

That is a -- no, that's a fixed rate for molecular. That's a generic molecular rate.

Derik De Bruin - UBS

What's the rate for culture?

John Bishop

For culture it's substantially less. I don't have that as top of mind to give you, but it's much less than that number.

Derik De Bruin - UBS

I guess the question I'm getting at is like do hospitals make more money if they get reimbursed on molecular tests or they get more reimbursed on a culture test?

John Bishop

Well, if you're talking about a diagnostic, frankly in my opinion they're going to make substantially more money on the molecular test than they will with a culture test because you have two issues. You've got your rate of reimbursement, you've got your overall cost of effective patient management.

And when you're talking about a diagnostic, now you're dealing with a symptomatic patient. You're looking at potentially rapid progress of disease. As the disease, particularly with MRSA, and depending upon where they have it, progresses, you can get in trouble very, very quickly and your cost will go up dramatically on a per patient basis. So frankly, you don't have the time to wait around with a culture. I mean you can have the debate on surveillance and we see benefits time to result there.

On diagnostic, no way. That needs to be molecular and you need that results as fast as you can get it. And that's even further amplified as you look at blood culture. Blood culture you're dealing with a septic patient, that's why they're getting blood culture. So what you're looking at right there, as fast as the bottle goes positive, you want to get a result as quickly as you can with the MRSA so minutes count with regard to a sepsis patient.

Derik De Bruin - UBS

Great. And then a couple, a housekeeping question or two. So, the interest expense was up pretty much, pretty significantly from the fourth quarter. Why was that?

Andrew Miller

There was also a currency gain in there. It won't continue at that level throughout the rest of the year.

Derik De Bruin - UBS

That's where I'm going, it won't continue at that level. Okay. On the -- when you look at the biothreat, so you have a five year contract with the USPS. With that you don't have to renegotiate the rates on that, correct?

John Bishop

Yes, the answer to that is correct. Remember, the five year contract has multiple parameters to it. So one, there is a volume purchase matrix, so as volume goes down, price goes up. There are also annual minimums and there's a gross total minimum for the five-year agreement.

Derik De Bruin - UBS

Okay. Great. Thank you very much.

John Bishop

You are welcome.

Operator

And your next question comes from Brian Weinstein of William Blair. You may proceed.

Brian Weinstein - William Blair

Hi, good afternoon. Can you tell me, can you update us on where the sales force stands in the U.S. and in Europe and should we expect another round of hiring especially in places like California going forward?

John Bishop

Okay, Rob?

Robert Koska

Things in the United States have pretty much stabilized. We still do have a couple of openings that will be filled shortly. As far as Europe is concerned, I think you saw our strong sales results and our focus on the UK market. As a result of how things are developing in the UK, we are accelerating our hiring in the UK and expect to hire another four individuals by mid year.

Brian Weinstein - William Blair

How many will that give you there?

Robert Koska

Pardon me?

Brian Weinstein - William Blair

How many will that give you in the UK?

Robert Koska

That will give us six sales people and one sales manager that split their time between France and the UK.

John Bishop

So Brian, it's John again. So, what I would add to that, I mean as you saw previously in our presentation, we're talking about 35 sales positions in the U.S. We're thinking that that should be sufficient for this year.

However, depending upon how the market grows, we may elect to add some additional people. Frankly I think we're also going to be adding some additional people on the marketing side. That's going to be increasingly important because of the breadth of the rapidly developing HAI market and our rapidly expanding menu.

So we're going to be doing a balancing act at getting appropriate marketing people so that we have the right strategic and tactical marketing programs in place to give all of the tools to the sales force that we have out there and that we will be further expanding for sure in the '09 timeframe.

Brian Weinstein - William Blair

Okay. Last quarter you told us that you expected instruments to be down sequentially, specifically in the U.S., and they were. It's awfully tough to model such a large potential base. Can you give us some color on how you see instrument placements playing out as the year progresses?

Robert Koska

Instrument placements are going to be first of all driven by legislative activity as states move from committee studies to actual voting on legislation. It will also be driven by our corporate accounts effort in our integrated delivery network contracts as well as our group purchasing contracts.

And then in Europe, as I said, there's a number of initiatives underway in individual countries where they are modeling their surveillance programs and we expect that there will be several of those announced this year. So that's what's going to drive instruments.

John Bishop

So bottom line, Brian, as we've said before, it's a little bit difficult for us because of the momentum that can vary within the market. Generally for non government accounts, fourth quarter would tend to be stronger because that's the end of the business fiscal year. So, I expect that to continue to be the case. You have some variability in Q2 and Q3. Q1 tends to be the weakest of the quarters. But then the issue is with the initiatives like Rob is talking about, we don't have control over when some of those can kick off and go active. And that would tend to shift momentum around on a quarter to quarter basis.

Brian Weinstein - William Blair

Would you feel comfortable saying that Q2 should be up sequentially? Or do you not feel comfortable even giving that kind of --

John Bishop

It's going to be very hard to predict because it depends upon which of these things come on with what kind of timing.

Brian Weinstein - William Blair

Okay. Would you guys be willing to break out the MRSA reagent usage between U.S. and OUS?

John Bishop

I prefer not to got there. I mean I understand where you're going. Clearly just like everyone does, people listen to our conference calls and I don't want to overeducate the whole market. But as you can see, we've got good momentum in the U.S. and significantly growing momentum ex-U.S. at this point. I think more importantly, is we're now giving you the total MRSA number so you can, you have clear visibility there.

Brian Weinstein - William Blair

Thank you very much.

Andrew Miller

Along with full year guidance to that number.

Brian Weinstein - William Blair

Right, thank you.

John Bishop

You are welcome.

Operator

And your next question comes from Amrou Almanaseer of 36 Capital Group. You may proceed.

Amrou Almanaseer - 36 Capital

Hi, guys, good afternoon. Most of my questions have been answered. The only thing I have left is the wet ROBAL, can we expect similar improvement interesting margins as we're seeing from the dry ROBAL?

John Bishop

I don't want to give you exact guidance on that area, but we do expect it to be a significant contributor with the wet ROBAL because as we've indicated in general discussions, getting rid of the extraneous packaging, that tends to be expensive for that program, and there's of course customer user benefits with that.

Amrou Almanaseer - 36 Capital

Okay. And what was the timing on that? The implementation there?

John Bishop

I would expect that from an impact standpoint to impact us in more '09. I would expect to get active on that program late in the year this year but really more impacting '09.

Amrou Almanaseer - 36 Capital

Now would you need to file, basically file again with the FDA for products that are--

John Bishop

No. There's no real change in product. I mean it's just a matter of where the reagents are sitting. But from an FDA perspective, there's no change. It's exactly the same reagents used in exactly the same methodology, so no difference.

Amrou Almanaseer - 36 Capital

Okay, great. Thanks.

John Bishop

You are welcome.

Operator

And your next question comes from Andrea Bici of Schroder. You may proceed.

Andrea Bici - Schroder

Hi. Congratulations. Just a quick housekeeping question. What was cash flow or cash use from operations in the quarter and what was that excluding stock option expense?

Andrew Miller

And what was the second question?

John Bishop

Excluding stock option expense.

Andrew Miller

Okay, well stock option expense has no impact on cash flow from operations. So, cash flow from operations was a usage of cash of $1.9 million.

Andrea Bici - Schroder

Great.

Andrew Miller

Most of that driven by the write-down of the auction rate securities which was a $2.1 million temporary impairment we recorded.

Andrea Bici - Schroder

Okay, so barring that you would have been cash flow positive?

Andrew Miller

Yes.

Andrea Bici - Schroder

And what was that amount again, I'm sorry?

Andrew Miller

The write-down of the auction securities, $2.1 million.

Andrea Bici - Schroder

Okay, thanks so much.

John Bishop

You are welcome.

Operator

And you have a follow-up question from Zarak Khurshid. You may proceed.

Zarak Khurshid - Caris and Company

Hi, thanks for taking the follow up, guys. I'm losing my train of thought here, I wanted to get a sense for the pipeline as we think about C-diff product. What are the advantages that that will have over the current sort of chemical based tests that are out there? Essentially, what is the pitch on why one would want to use that test?

John Bishop

Okay, so I will give you a couple of comments and then I'll turn it over to Dave because he can really give you the run down from a clinician perspective. Big advantage that's going to be immediate is one, it's going to be a very rapid time to result coupled with again, multiplexing. And the big issue with the C-diff in particular is more virulent strains have developed and there is a definitive different therapeutic regimen for the more virulent versus the less virulent strains. So we'll be providing that information immediately. Dave, you want to get in on the clinical?

David Persing

Yes, it's a good question because I just got back from a meeting in which this subject was discussed about the relative efficacy of the existing diagnostic products and the need for improved ones.

Right now, most labs use enzyme immunoassay products which are batch tests usually performed once a day. And they may or may not include a cell based cytotoxicity assay in follow up to that. If they do that, that whole diagnostic, sequential diagnostic equation takes about three days. And of course if the patient is sitting in the hospital room incognito for that period of time shedding C-difficile spores, if indeed they have a case, without appropriate infection control practice in place.

So, everybody acknowledges the need for rapid diagnostics in this area to institute appropriate infection control practices. The problem is, that when they move to the so-called rapid diagnostic format, the so-called point of care test for C-difficile, some of which are available, they take a huge hit on the sensitivity and specificity side.

So, what's really neat is, in this field it's a highly accurate test. It doesn't have to be run multiple times, that can be definitive and yet still very rapid available on demand around the clock. Because these cases appear all times of the day or night and they need to be worked up quickly.

So, the bottom line is that the impact of the technology we think is going to be huge. Someone referred to this approach as a category killer approach. The idea of having a really rapid, on demand, definitive approach that can deliver the results without the uncertainty that's currently found with the other diagnostic tests which are increasingly acknowledged to be inadequate.

John Bishop

So, Zarak, you're getting the idea actually what we're seeing is that we think that the C-diff test is potentially a big impact item and could drive incremental placements in and of itself going forward.

Zarak Khurshid - Caris and Company

Got it. And lastly, can you give us an update on Sangtec and how we should think about that for 2008? Thank you.

John Bishop

Yes. We didn't -- we're moving away from breaking that out. As we mentioned, we've fully absorbed that and it's integrated into the business and where we're going. And there the line of products are primarily the immunocompromised products which are reflected in our sales.

We're in line with the expectations that we had for that business with the acquisition and of course the other big benefit to Sangtec and you're seeing that already, is that they stepped in and they're aggressively developing the C-diff and the VRE product. So those products are currently being developed and will be manufactured in Stockholm going forward. So, we're in good shape there. We're expecting to have an operating ROBAL line there by the first of next year and we're currently producing product over there at this point in time.

Operator

And you have a follow-up question from Derik De Bruin of UBS. You may proceed.

Derik De Bruin - UBS

Hi, thank you, John, I just want to go back to some of the questions that were talked about in terms of some of the module placements earlier on. And more along the lines, I guess, of when you look at systems that were placed in let's say 2Q/3Q last year, and I'm trying to get to the range of pull through in the cartridge usage of the instruments. Have you seen -- once somebody gets a system that you think is fully installed, have you seen an acceleration of cartridge use from the customers that have been there, that have had the instruments in place longer?

John Bishop

So, Rob, do you want to --

Robert Koska

Absolutely. It has to do with the full implementation of their infection control strategies and practices and being able to fully utilize the systems. And then individually within institutions it has to do with increasing their definitions of high risk patients. As you know, that can be something as simple as patients transferred from a nursing home. They can then go ahead and sweep in ICU patients, particular surgical ICU patients, dialysis patients. And they grow starting from a base need to that.

Now beyond that, we're also seeing institutions primarily within the VA now, but not totally excluding other institutions, where they are now moving to all admissions. And we've been able to track that at a number of accounts and we've set the cutoff at 30% of admissions and any time that they move beyond that, we feel that they're starting to track towards all admissions and we have a number of institutions where if you look at their AHA or AHD, American Hospital Directory data for admissions, you can see that they're purchasing on a run rate to cover every documented admission they have in that directory. So it's very reassuring from a run rate standpoint for us.

Derik De Bruin - UBS

I guess the -- so the discussion about who you're going to control, what you're going to control, it's still for most hospitals, it's still a very fluid discussion in terms of what to do and how to do it? There still are no fixed, really no fixed protocols? I guess I'm saying, once a hospital starts something, can they change their mind?

Robert Koska

What they do is they change their mind to be able to sweep in more patients. Of course if you want to be able to implement a policy, the most chaotic approach would be to start day one all admissions. You want to be able to open off Broadway in these situations. You want to be able to target a population. So if they have a 10 to 20 bed intensive care unit, that quite often will be the first place that they will go. It will be one of the more impactful places they can go and then they expand from there. And that's primarily what we're seeing.

So, they might start at 10%, move to 15%, 20%, and then beyond that from a percent testing standpoint and we see that grow over time as they bring more and more patients into that protocol that they have.

John Bishop

So, Derik, this is John. If where you're going is that your question is once accounts start a surveillance program, have we seen anybody discontinue their surveillance program, the answer to that is emphatically no.

All of the debate that's underway, I mean that's why I say where you actually see the market, if you look at the overall dynamic right now, you see that market broadly growing. And I think what you're going to see is that their surveillance market, the benefits are clearly being demonstrated. You get a few people that are out there going, well, no, wait, we think we can hold off and we can handle it with hygiene and barrier protection.

And frankly that's amazing because don't forget there was the Brigham women's study that was a nine-year study that exactly went thorough all the stages to prove those points and they never had success until they simultaneously did surveillance coupled with hygiene and barrier protection programs.

So, what we see happening is we see surveillance being broadly adopted throughout the markets programs. It will vary depending upon an institution. There's no set formula for any one institution and we agree with that because you also need to understand your patient demographics, your colonization rates coming into the individual institution, and then we believe and we are seeing the movement as Rob has already walked you through on the definition of what's high risk versus going to all admissions.

And we're going to see the dynamic of those that say, okay, fine, but we understand we're going to start with culture and then maybe shift over to molecular. Now that's true with the large accounts. Don't forget, as we get into some of these smaller accounts and we're seeing data, we've had calls on that one from users. These people have been sending out their micro work, they don't have a culture laboratory. So, now they can do molecular immediately and not have to worry about even messing around with sending out even a culture result.

Derik De Bruin - UBS

Great. Thank you very much.

John Bishop

You are welcome.

Operator

(Operator Instructions) Thank you. And there are no further questions at this time. We will turn the call back over to Jason Spark of Porter Novelli Life Sciences.

Jason Spark

Thank you. This concludes today's call. As a reminder, a telephone replay of this call will be available for 7 days beginning at 6:30 P.M. ET today. The web cast of today's call will also be available on company's web site at www.cepheid.com for 90 days. Please refer to today's press release for details for accessing the replay. Thank you for joining us today. Good bye.

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