Abaxis, Inc. Q4 2008 Earnings Call Transcript

May.30.08 | About: ABAXIS, Inc. (ABAX)

Abaxis, Inc. (NASDAQ:ABAX)

Q4 2008 Earnings Call Transcript

May 1, 2008 4:15 pm ET

Executives

Joe Dorame – IR, Lytham Partners LLC

Clint Severson – Chairman, President and CEO

Martin Mulroy – VP of Marketing and Sales, Veterinary Market

Christopher Bernard – VP of Marketing and Sales, Medical Market

Al Santa Ines – CFO and VP of Finance

Analysts

James Sidoti – Sidoti & Co.

Jonathan Block – SunTrust Robinson Humphrey

Amy Stevens – Susquehanna Financial Group

Ross Taylor – C.L. King & Associates

Bill Gibson – Nollenberger Capital

Tilton Gardner – Mutual Securities

Albert Yemon [ph] – private investor

Operator

Good afternoon. My name is Heather and I will be your conference operator today. At this time, I would like to welcome everyone to the Abaxis fourth quarter 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I would now like to turn the conference over to Mr. Dorame. You may begin.

Joe Dorame

Good afternoon. Thank you for joining us today to review the financial results for Abaxis for the fourth quarter and year end of fiscal year 2008 ended March 31, 2008. As Heather indicated, my name is Joe Dorame. I'm 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. Martin Mulroy, Vice President, Sales and Marketing, Veterinary Market; and Mr. Christopher Bernard, Vice President, Sales and Marketing, Medical Market. At the conclusion of today's prepared remarks we will open the call for a Q&A session

Before we begin, we would like to remind everyone this call includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Abaxis claims the protection of the Safe Harbor for forward-looking statements contained in the Reform Act. These forward-looking statements often characterized by the terms may, believe, projects, expects, or anticipates, and do not reflect historical facts. Specific forward-looking statements contained in this conference call include, but are not limited to, risks and uncertainties related to fluctuations in the company's share price, the market acceptance of the company's products, and 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 involved in carrying of inventory, risks associated with the ability to attract, train, and retain competent sales personnel, general market conditions, competition, and other risks detailed from time to time in the company's periodic reports filed with the SEC. 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

Thank you, Joe, and good afternoon, everybody. I will review the accomplishments and the challenges for Q4 FY08 along with fiscal year FY08, and then some of the goals for FY09. After my short presentation, I will ask Marty Mulroy, our VP of North American Sales and Marketing, and Chris Bernard, our VP of North American Medical Sales and Marketing, to give us an update on their respective businesses. We will then take questions.

Well, we did it. Over $100 million in sales for the year, a milestone for Abaxis. Over the last 12 years, we have grown sales at a compounded annual growth rate of 34%, and over the last seven years since we reached profitability our operating earnings have grown at a compounded annual growth rate of 106%. This has all been accomplished in an environment of stiff competition and doing things no one else has ever successfully done before.

While we are proud of these accomplishments, we had challenges for the quarter and for the year. As many of you know, we entered FY08 with production problems on our new chemistry platform, the VS2 and Piccolo xpress. While we have made many improvements in manufacturing, and have reduced instrument infant mortality field failures by about 62% since June '07, these issues have had a negative effect on our performance for the year. We are on track for cutting in the new parts from our new vendor starting this quarter and ending next quarter. While the impact of these instrument issues continues to decrease, it will be another one to two quarters before they are fully behind us.

The result of these instrument problems was fewer sales of VetScans in FY08. While we made up for some of the shortfall in hematology and Piccolo sales, our overall growth rate was negatively affected with these problems. We expect going into FY09 to see improvements in VetScan instrument sales, especially in the last two quarters. Even though these instrument challenges have haunted us for the last six quarters, we posted another record quarter, finishing Q408 at $26.7 million, up 17% year-over-year and 4% quarter-over-quarter.

For the year, we finished at $100,551,000, up $14,330,000, or 17%. Clearly our soft spot for the year was Vet instruments. Total VetScan sales of 1,355 units was down 258 units, or down 16% year-over-year. While part of this was due to a change in the responsibilities of our Vet sales team from instrument sales only to both consumables and instruments, the bulk of the problems were due to field failures. Now the improvements we have made over the last three quarters have led to quarter-over-quarter VetScan sales increases in FY08, with Q2 sales of VetScans of 297 units; Q3 sales of VetScan 341 units; and Q4 sales of 385 units. We need to finish the scale-up project to get the growth in Vet instrument sales back to historical levels.

Vet hematology instrument sales totaled 212 units for Q4. This is down from Q3 sales of 301, but up slightly from Q407 sales of 207. For the year we sold 977 hematology instruments, up 105 units, or 12%. Total Vet sales for the quarter finished at a record $18.6 million, up 10% year-over-year. VetScan instrument sales of 385 units were flat versus Q4 or last year's performance of 382.

Vet disc sales for the quarter finished at $12,400,000, up 17.3% year-over-year, and 9% quarter-over-quarter. In units, Vet disc sales for the quarter finished at just under 1 million units or 977,000. For the year, Vet disc sales totaled $46,320,000, up 23% or about 3,643,000 units.

For the year, worldwide Vet sales finished at $71.1 million, up 11%. Consumables sales of $50.1 million were up 21% for the year, while Vet instrument sales of $20 million, or 2,332 units, were down about 6%.

Record total medical sales of $6,309,000 were up 27% year-over-year and beat last quarter's record by 5%. Medical disc sales of $369,451 were also a record, up 31% year-over-year and 17% quarter-over-quarter. For the year, medical disc sales totaled $1,298,000, up 27%. Excluding the government, worldwide medical disc unit sales for the quarter were up 45% year-over-year and up 24% quarter-over-quarter. For the year, excluding the government sales or military sales, worldwide medical disc sales were up 39%, finishing at 1,116,000 units.

We sold a total of 218 Piccolos last quarter, up 19%, or 35 units versus Q4 last year. This was in addition to the installation of over 100 units sold in the last month of Q3. For the year, we sold 811 Piccolos, up 26%, or 167 units versus FY07.

For FY08, total medical sales of $22.8 million, a record and a milestone, first time over $20 million, were up 30%. Excluding the military, total medical sales FY08 was up 35%.

North American sales totaled $22 million for Q4, up 13% year-over-year and 1.5% quarter-over-quarter. Flat Vet instrument sales both year-over-year and quarter-over-quarter slowed our growth in this region. For FY08, North American sales finished at $83.8 million, up 16% or about 83% of our total sales for the year.

International sales of $4.8 million, also a record, were up 39% year-over-year and up 18% quarter-over-quarter. European sales of $3.8 million were up 36% year-over-year and up 13% quarter-over-quarter. For the year, European sales totaled $13,470,000, up 30%. Sales in the Pac Rim finished Q4 at $935,000, up 51% year-over-year and 41% quarter-over-quarter. Sales in Q4 included an order from Japan for about $402,000. For the year, international sales totaled $16,700,000, up about 18% or about 17% of our total worldwide sales.

Military or government sales of $1,062,000 were up a strong 61% year-over-year and up 16% quarter-over-quarter. For the year, government sales of $3,776,000 were up 15% or about 3.8% of our total business. Capital sales for the quarter made up about 29% of the total sales, and consumables finished at 71%. This compares with 32%, 68% for Q4 last year, and 33%, 67% last quarter.

Medical sales were about 24% of total sales for this quarter; Vet sales about 70%; and others 6%. This compares with 22%, 74%, 6% Q4 of last year, and 23%, 77% last quarter.

Total disc sales finished the quarter at a record 1,347,000 units, up 17% year-over-year and 11% quarter-over-quarter. For the year, we sold 4,941,000 discs, up 20%. Disc average selling price for the year finished at $11.78, up $0.34, or 2.9%. Average disc cost for the year finished at $4.34, down $0.14 versus FY07, or down about 3.1%. We had a price increase on domestic Vet discs of about 7% effective April 1, 2008.

For the quarter, we sold a total of 815 instruments, up 43 units, year-over-year, or up about 6%. Quarter-over-quarter instrument sales were down about 65 units. Q3 is usually a stronger instrument quarter than Q4. For the year, we sold a total of 3,143 instruments, up only 14 units compared to FY07. And as I mentioned before, Vet instrument sales were negatively affected by the manufacturing problems; and within the next quarter or two we should have the scale-up project completed.

Gross profit for the quarter finished at a record of $14,600,000, up 19% year-over-year and 7% quarter-over-quarter, or 54.5% of sales, up 150 basis points quarter-over-quarter and up 60 basis points year-over-year. For the year, gross profit of $55 million was up 17% or 54.7% of sales, up 40 basis points versus FY '07. Again, instrument manufacturing problems negatively affected our performance in this area.

Operating expenses for the year met our goal of decreasing as a percent of sales year-over-year. For the quarter, operating expenses at $9.8 million finished at 36.7% of sales versus 36% of sales Q4 last year. For the year, operating expenses as a percent of sales were 37.1%, compared with 37.7% of sales FY07.

Sales and marketing expenses of $6 million, or 22.5% of sales were down from 23.1% of sales Q4 last year and down from 23.6% of sales last quarter. R&D expenses of $1,862,000, or 7% of sales were up year-over-year by 61 basis points and up 62 basis points quarter-over-quarter. Admin expenses of $1,920,000, or 7.2% of sales were higher year-over-year and quarter-over-quarter due to the implementation cost of our new ERP system. Year-over-year, they were up 59 basis points and quarter-over-quarter they were up 106 basis points.

Despite our instrument manufacturing issues and the disruption and upfront costs associated with the implementation of a new ERP computer system, our operating earnings hit a new record, coming in at $4,756,000, or 17.8% of sales, up 17% year-over-year and up 9% quarter-over-quarter, or $0.21 a share. For the year, operating income finished at 17,708,000, up 23% or $0.80 a share.

Pretax income for the quarter at $5,272,000 was up 13% or $0.24 a share. For the year, pretax income totaled $19,804,000 or about $0.89 a share. Net income for the quarter finished at a record $3,312,000, up 19% or $0.15 a share. For the year, net income totaled $12,503,000, up 24% or $0.56 a share.

On the R&D side of the business, the focus continues to be on optimizing the manufacturing process of the VS2 and Piccolo xpress. We expect the new and improved parts from our vendors to be cut in this quarter and next quarter. Our goal over the next few months is to have bulletproof instruments with a capacity of thousands of units per quarter. The last four tests for CLIA-waiver status are at the FDA, and we expect to hear any day on the three that were submitted in Q3. The heartworm project is just about completed, and the clinical trials are scheduled for this quarter. We hope to have this important product ready for USDA submission in June or July.

The C-reactive protein test is also close to completion, with clinical trials scheduled for the end of Q1 or the beginning of Q2. Goals for FY '09 include completing the instrument scale-up project by the end of Q2, expanding the sales and marketing coverage in both the Vet and medical markets, reducing operating expense as a percent of sales, expanding our gross margins, completing the development and launch of our heartworm and CRP tests, and to continue to make progress in hitting our dollar a share in earnings.

So with that, I would like to introduce Marty Mulroy, our VP of North American Sales and Marketing. Marty?

Martin Mulroy

Thank you, Clint. Good afternoon. The North American veterinary business finished the fourth-quarter FY08 with $14.4 million in revenue, up only 4% year-over-year due to fewer chemistry instruments sold year-over-year. Revenue continues to be impacted by the VS2 manufacturing problems experienced over the past six quarters, resulting in field failures and impacting field sales productivity. Additionally, we made changes this fiscal year to the responsibilities of the field sales team where there is accountability for both capital equipment and consumable sales. While we have seen a big improvement in infant mortality on the VS2, we are still doing multiple site visits, trainings, and installations in 10% to 15% of new customers. The loss of field sales productivity has been a drag on our performance for both the quarter and the fiscal year.

In Q4, we sold 443 Vet instruments, 10 fewer than Q4 last year; and for the year we sold 1,742 Vet instruments, down 40 units from the prior year. For fiscal year 2008, North American veterinary sales were a record $56.3 million, up 11% or $5.6 million. Consumable sales for the quarter finished at a record $10.7 million, up 9% year-over-year and up 3% quarter-over-quarter. For the year, consumable sales were a record of $40.9 million, up 20% or $6.7 million versus FY07. Again, our holding the Abaxis field sales force and field sales management team this past fiscal year accountable also for consumable sales and customer care has met the goal of increasing sales, despite the limited market coverage of our distribution.

For the coming fiscal year with more VS2 volume quality improvements being rapidly implemented and the infant mortality rates declining, we are confident we can get the capital equipment segment of our business back to historical growth levels. Goals for FY '09 include optimizing our distribution through a program whereby we have increased incentives to distributors that surpass aggressive sales goals and are reducing margins where minimum performance requirements are not met. Goals for FY09 include also continued increased market penetration in geographic areas with limited or no distribution through our moving instruments on a direct basis exclusively with our own sales force and further expansion of the field sales and sales management teams in these areas.

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

Clint Severson

Great, thank you, Marty. Okay, now we will hear from Chris Bernard, our VP of North American Medical Sales and Marketing. Chris, you are on.

Christopher Bernard

Thanks, Clint. Afternoon, folks. Strong performance on the medical side despite some of the earlier challenges that Clint had mentioned. First, the fiscal year numbers were as follows. Annual US medical sales, minus the military, increased 31% to $16.5 million versus $12.1 million in FY07. Piccolo sales FY08 $7.1 million, were up 24% or $1.4 million compared to FY07. That's 489 Piccolos versus 573 in FY08. In FY08 we surpassed the 1,000 placement milestone for Piccolos, and presently we are just under 1,500 placements to-date. Disc sales for FY08 were up 35% or $2.3 million over FY07. We finished FY08 just shy of a total of 1 million discs at 983,000. This was in spite of some flatness Q2 to Q3 in FY08.

For the quarter, US medical sales, minus the military, were up 24% at $4.5 million year-over-year and up 7% quarter-over-quarter. US medical disc sales, minus the military, were up 35% at 291,000 versus 207,000 year-over-year and up 25% quarter-over-quarter. With continued focus on the higher volume accounts, the average daily rotor usage Yemongst customers continues to eke up. We now estimate the average rotor usage per day to be around 5.3 rotors per day.

In the US, we sold 143 Piccolos and had a total placement of 115 systems in Q4 versus 138 Piccolos sold a year ago. Placements by segment were 44 FP/GP internal medicine; 13 multi-specialties; 18 hematology/oncology; 9 radiology; 7 urgent care; and 10 domestic government sales.

For the year, top new customers were as follows. 185 new FP and GPs; 96 new accounts in FY07 -- versus 96 new accounts in FY07; 54 radiology; 47 urgent care; and 28 new hematology-oncology accounts. Top distributor for the quarter went to PSS with 46 placements. Overall, I was extremely pleased with the revenue strategy and the performance of the medical sales team in FY08. Despite the instrument challenges we achieved a number of milestones this past year.

Some quick highlights. Launch of the first-ever point-of-care waived chemistry analyzer, surpassing the 1,000 Piccolo customer barrier; surpassing the quarter-million mark in rotors Q4, and narrowly missing the 1 million rotors for the year; the addition of McKesson, Cardinal, and NDC to the distributor channel; the first distributor to pass $1 million in revenue reagents in a single quarter; and of course the launch of our kidney check panel specific for imaging centers in Q2 of this past year.

As mentioned in the January earnings call, Q4, due to reimbursement hurdles, was to be a challenging quarter. Instrument challenge coupled with the delay in the Medicare loading of the QW modifier to the existing CPT codes resulted in the expected shortfall in the instrument sales in Q4. As of April 1, these codes are now officially loaded, and Medicare is in the process of notifying its regional carriers.

Aligning growth expectations with our distributor partners has proved to be challenging as well. We will be aggressively working with each of them these next few quarters to maximize not only market coverage but sales potential. Our goal is to obtain consistent exposure to the respective sales forces throughout the year versus quarterly programs.

An initial look into FY '09 reveals continued headcount expansion heading towards 18; continued execution of our URL program specifically targeting market segmentation; media [ph] exploration and expansion into the health screening, health promotion, occupational health and mobile screening markets; anticipation of final three panels becoming CLIA-waived -- the renal, hepatic, and Metlyte 8; positive price adjustments to certain well-reimbursed panels; and lastly, the addition of a strategic business director to hunt and cultivate all the markets outside of the physician office lab.

With that I will pass it back to you, Clint.

Clint Severson

Great, thank you, Chris. With that, we are open for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of James Sidoti with Sidoti and Co.

James Sidoti -- Sidoti & Co.

Good afternoon, Clint. Good afternoon, Al.

Al Santa Ines

Hello.

Clint Severson

Good afternoon, Jim.

James Sidoti -- Sidoti & Co.

Okay, a couple questions. First, any way you can quantify what the ERP costs were in the quarter?

Clint Severson

Al?

Al Santa Ines

Could you repeat that?

Clint Severson

The ERP cost.

Al Santa Ines

Oh, the ERP cost, yes. That is about $200,000 for the quarter or half a penny EPS. Okay?

James Sidoti -- Sidoti & Co.

And going forward, does it stay at that level or--?

Al Santa Ines

No, it will be lower. Just to explain, we successfully implemented the ERP this fourth quarter. It's start-up, the bulk of the expense was absorbed in this quarter.

James Sidoti -- Sidoti & Co.

All right. Now, the next question might be a little more difficult to quantify. But any (inaudible) about how much R&D is being spent to support the machines?

Al Santa Ines

Actually, we are probably about 25% of our R&D expenses are probably on the equipment side, because we are past the critical stages more related to vendors' problems now that we are looking. Okay?

James Sidoti -- Sidoti & Co.

But how many more quarters do you think spending will remain at that high, just to keep the machines getting out the door?

Al Santa Ines

My guesstimate, probably very minor going forward, probably about two more quarters.

James Sidoti -- Sidoti & Co.

Okay. And then, on the -- a question for Chris -- on the Piccolo placements, have you seen any immediate impact of getting that last round of panels waived?

Christopher Bernard

The ones that are pending, Jim?

James Sidoti -- Sidoti & Co.

The electrolytes. No, the ones that you got waived in the fourth quarter.

Christopher Bernard

Absolutely. I mean certainly to have the first-ever waived comprehensive metabolic panel is a major event in the industry. Certainly the challenge we faced January through April is not having those codes loaded by Medicare, which means the trickle-down effect to Blue Cross, United, or any other payors was unable to reach them until after the April 1 deadline.

James Sidoti -- Sidoti & Co.

So now that we are past that deadline, does it get easier again at this point?

Christopher Bernard

Well, certainly now I mean our folks were running around January through March with all the waived documentation, all the letters from FDA and Medicare. The reality of it is if the code isn't loaded there isn't much you can do about billing and getting reimbursed for it. You have to wait. So now that we are past that April 1 date, we have got some folks from last quarter that actually hung on to bills, and that is fairly painful, to hang on to bills for 30 or 60 days and then submit them, and wait another 30 or 60 days to get reimbursed. But that's behind us, coming out of last quarter. And certainly the impact now is -- it's up on the FDA website, it's up on Medicare's CPT code list, and we expect smoother sailing here going into this quarter.

James Sidoti -- Sidoti & Co.

Okay. And with the staff you have on board now, what is the maximum number of Piccolos you think you can install in a quarter?

Christopher Bernard

Install?

James Sidoti -- Sidoti & Co.

Right.

Christopher Bernard

Certainly, we look at -- and it has been a little bit geography driven. We have got some individuals that consistently move 15 to 20 Piccolos a quarter. There are different markets and different acceptance levels across the country. Those individuals we are making sure that they have install support or help. Certainly the month following any quarter has been heavy for us from an installation standpoint. To try and get a number of Piccolos installed two weeks after a quarter is always a challenge. We continue to work on better solutions for that, and we will do that moving forward as we identify more consistent selling by geography.

James Sidoti -- Sidoti & Co.

So, do you think it is reasonable to assume you can install over 300 a quarter?

Christopher Bernard

Well, certainly, as I mentioned before, our regional sales managers do all the installations today. Now, we have a pilot program going on in Texas with an installer. We also utilize our expert service and our tech service to assist with installs. As we get a better understanding of what the sales volume is going to be month-to-month, as opposed to quarter-to-quarter, we will start putting resources in place to ensure that they have the necessary backups to make sure those installs get done.

James Sidoti -- Sidoti & Co.

Okay. And then just a final question for Marty. If you listen to some of the other vet companies report, there's been, I guess, some rumblings that because the economy is slowing down a little bit, it's been getting harder and harder to sell capital equipment to some of the vet hospitals. Are you seeing that?

Martin Mulroy

There is a little bit of concern out there. But there also are some upsides to with the economy question marks out there to bring the testing in-house in order to save money and be more efficient.

James Sidoti -- Sidoti & Co.

Okay. And it sounds like IDEXX placed a handful of their latest version box during the quarter. Have any of your customers had any comments on it?

Martin Mulroy

You know, we have not seen a whole lot out there yet. I do know they are being delivered, but we don't have a whole lot of feedback at this point. They just started a couple of weeks back.

James Sidoti -- Sidoti & Co.

Right, it sounds that way.

Martin Mulroy

Yes, no feedback at this point.

James Sidoti -- Sidoti & Co.

Okay, all right. Thank you.

Martin Mulroy

Great. Thank you, Jim.

Operator

Our next question comes from the line of Jonathan Block with SunTrust.

Jonathan Block – SunTrust Robinson Humphrey

Hey guys, good afternoon.

Clint Severson

Hi Jonathan.

Jonathan Block – SunTrust Robinson Humphrey

Just to start with, Clint, can you maybe walk us through the timeline left with heartworm? I think if I heard you correctly, I believe you mentioned submission around June or July; and then where do we go from there?

Clint Severson

Okay, so the development is just about completed. Our goal is to get the clinical trials done this quarter, get this submitted sometime in June or early July; and then we wait for the USDA to clear it; and then we sell.

Jonathan Block – SunTrust Robinson Humphrey

And I believe maybe in the past did you allude to – this three or four months sound about right for the USDA?

Clint Severson

Well, we don't know. We have never worked with the USDA before. So we are not really sure how long it will take. I think after our submission has been completed and it is into those guys, hopefully they will give us a timeline when they expect it to clear.

Jonathan Block – SunTrust Robinson Humphrey

Okay, great. Chris, for you, the disc seemed pretty solid; especially like you mentioned with the electrolytes not being loaded until April 1. Maybe if you can help us out, I just want to make sure I am thinking about it correctly. When you get the next tranche of analytes waived, do we see a further increase in utilization? Or is this something where you are broadening your reach and you are able to sell into new markets, so it's more of a Piccolo question at the same utilization; or is it more of just increased utilization Yemongst the current installed base?

Christopher Bernard

I think it is certainly broadening the market, Jonathan. If you look at those particular panels, which are not in high use today, they are very specific to nephrology practices. Certainly when you talk about pre- and post-dialysis patients, and now you bring that into that arena as a waived test. And so we will certainly see an impact there. As far as the renal or the hepatic being used at the primary care level, that is more of a -- I don't what to say specialty, but it's more of an exception than a rule as far as panels go that are ordered at that type of level.

Jonathan Block – SunTrust Robinson Humphrey

Okay, and I guess I can back into it, but maybe if you can help me. You mentioned 5.3 a day. What is your total installed? Did you say 1,500?

Christopher Bernard

Yes, if we look at the total number of customers versus total number of Piccolo placements, we have a – a large amount of customers have multiple Piccolos. I think our largest customer has seven Piccolos, and that comes all the way down to anywhere from four to five. So the difference between roughly about 962 customers representing right now about 1,409 placements. And so that is with things such as the cruise lines backed out; we have got instruments at NIH they use for backup and for studies. So you kind of back out some of those placements that are not being used on a daily basis.

Jonathan Block – SunTrust Robinson Humphrey

Okay, perfect. And then I guess Clint or Marty, you mentioned the 7% price increase and I'm sorry, I just missed it. Was that on the VetScan or was that on the consumable? Which one is that?

Martin Mulroy

7% price increase on the Vet discs.

Jonathan Block – SunTrust Robinson Humphrey

Okay, on the discs. And so I think you said April 1, here we are only a month post the implementation of the price increase; but maybe what are you hearing from your sales guys? I mean is this a slam dunk? Are you getting any pushback there from some of your customers?

Clint Severson

No, it is still considerably less expensive in terms of operating cost than the competition.

Jonathan Block – SunTrust Robinson Humphrey

Okay. And last one I guess for now. Japan, Clint, what did you say there? All that backlog go out from Japan and is everything finally sort of signed, sealed, and delivered where Japanese MOH has signed off and it's business as usual?

Clint Severson

I believe we have a few more documents left to sign, but they are out there selling now.

Jonathan Block – SunTrust Robinson Humphrey

Okay, guys. I think that does it. Thank you.

Clint Severson

Thank you.

Operator

Our next question comes from the line of Amy Stevens with Susquehanna Financial.

Amy Stevens -- Susquehanna Financial Group

Yes, congratulations, guys. Strong quarter.

Clint Severson

Thank you.

Amy Stevens -- Susquehanna Financial Group

Just wanted to follow up a little bit. One was in terms of raw material costs. The price increases that you put through on the VetScan, did they take it fully into account increases that you might be seeing in raw material costs, for instance, petroleum or any other of your packaging materials? Or are you possibly going to take another price increase (inaudible) in the year that would then allow you to be getting a fair margin? What does that look like?

Clint Severson

Yes, actually, the cost of the disc actually went down in FY --

Amy Stevens -- Susquehanna Financial Group

I heard that, I was surprised. Yes.

Clint Severson

It's actually going down. So we get small price increases on materials here and materials there. But the effect of increasing the volume and efficiency in the factory more than overcomes those. So we expect our unit cost to continue to decline as our volume increases into FY09.

Amy Stevens -- Susquehanna Financial Group

Okay, okay. And in terms of – again, there was mention of the potential trend out there in animal health in terms of capital expenditures. We are seeing and hearing the same thing on the human health side as well. Are you getting any sense that there is this reluctance to make these kinds of investments from customers on the human health side? And I guess how would that compare with the veterinary side?

Clint Severson

Chris, do you want to comment on the medical?

Christopher Bernard

I'm sorry, can you repeat that? I'm sorry.

Clint Severson

How is the economy affecting our ability to sell instruments?

Christopher Bernard

Yes, I mean it's been fairly interesting to watch. I have had the opportunity to meet with our largest distributors here over the last two to three weeks, and looking at different trends that they saw over last calendar year. Of course, capital equipment; more importantly office visits and the ability to measure how many people are staying home or not making those trips to the doctors. And there has been a decline in visits to the office. There is no question about it. I think if we look back to our Q2 to Q3 numbers, there were a lot of manufacturers that experienced a flatness in reagents and/or equipment sales in those two quarters. So I would have to comment and say yes, we have seen the slowdown, but based on our waived status and some other exciting things that have happened here since January, I think it's been kind of in the background for us. But as a whole, the industry is seeing some slowdown.

Amy Stevens -- Susquehanna Financial Group

Okay, okay. You know, and in terms of who your end customer is, I think the dynamics you can kind of figure out on the animal health side. Things that might be put off might be put off permanently. On the human health side, less so. And you mention the specific office types that you sold into, and I didn't quite get the growth rates for the different kinds of medical offices. But are you seeing any difference among those? What were the growth rates Yemongst the four types that you mentioned?

Christopher Bernard

That was for me, directed at Chris?

Clint Severson

Yes, that's you, Chris.

Christopher Bernard

Okay, if you look at -- I guess a good measurement would be urgent care. About 18 months ago we saw a tremendous amount of new urgent cares coming onto the market, popping up on strip plazas and on every street corner. Certainly the opening or the building of urgent cares has slowed somewhat. From an oncology, cardiology, to the folks that mostly see the sick patients, to your point, these folks are still continuing to go to the doctors. The well woman or well man visit, checkup, general health checkup, is probably the part that has slowed a little bit. Now certainly from our reagent numbers, Q3 to Q4, there is nothing evident there that directly impacted Abaxis. However, if you look at the overall market, there appears to be a few less people attending -- going into the offices for those normal annual checkups currently.

Amy Stevens -- Susquehanna Financial Group

And do you get access to information like tests per visit?

Christopher Bernard

I mean every time we go into a potential Piccolo sale, certainly one of the qualifying questions we ask them currently is -- how many tests are you currently sending out? Whether that is --

Amy Stevens -- Susquehanna Financial Group

I only asked that question because there has been also talk that with those decreases in office visits that you mentioned that there might be an attempt to kind of make up some of that through higher testing at an individual visit where possible.

Christopher Bernard

Well, I think if you look at the platform of the Piccolo, this is for the most part a general health screening platform.

Amy Stevens -- Susquehanna Financial Group

Yes, right. (inaudible) So you are going to do one period.

Christopher Bernard

Correct, correct. And so – and then when you speak specifically to oncology, there is a very specific reason those folks are going into see the oncologist and a very specific reason they need their labs irrespective of what some of the other specialties may or may not be doing.

Amy Stevens -- Susquehanna Financial Group

Right, right. Okay, well, that's really helpful. Thank you very much.

Clint Severson

Thank you.

Operator

(Operator instructions) And our next question comes from the line of Ross Taylor with C.L. King.

Ross Taylor -- C.L. King & Associates

Hi, just two quick questions. Did you all -- or were you able to gauge whether there was much impact on your (inaudible) disc sales during the quarter because of the comparison against the pet food recall? And second question related to disc utilization on the medical side. Did some of the customers that bought some of the Piccolos in the December quarter, did they defer from using them for some of the panels because the reimbursement wasn't in place?

Clint Severson

Okay, Chris, you want to take the last one?

Christopher Bernard

I will take the last one, sure. So, yes, coming into January, once we found out that we were going to have some challenges with the codes being loaded, we certainly had some customers coming out of December and certainly wanted to continue the momentum into Q4 in selling Piccolos. So we put some programs together to encourage the customers would continue to use the Piccolo, hang on to their bills. They did have the ability to go back and retroactively bill, as painful as it was in some situations. But these folks are also making lease payments, so it was in the best interest of the patient, the office, to get trained, to get installed, to continue to use the Piccolo. Then once we get past the April 1st date, work with them to make sure that they were square coming out of January, February, and March.

Clint Severson

Great, okay. Marty, you want to try [ph] the pet recall question?

Martin Mulroy

Yes, we had an uptick in our rotor business both Q4 of '07 and Q1 of '08 as a result of the pet food recall. The publicity was out there, and there was actually a good four or five-month period of time for which there was some additional testing being done at the clinic level.

Ross Taylor -- C.L. King & Associates

And can you gauge I mean at all as to how much it might have impacted you percentage terms this year versus last year?

Clint Severson

Well, I think we had very strong growth year-over-year on vet consumables, there is no doubt about it. Now in Q4, it was a little bit less. It was 10%. I don't remember exactly what it was Q3, but for the year it was 20%. So certainly we probably saw an uptick in Q4 last year that made the comparison a little bit more difficult.

Ross Taylor -- C.L. King & Associates

Okay.

Clint Severson

I'm not sure how material it really is. I mean we are operating some strong (inaudible) now and as long as we keep selling VetScans we will see our consumables grow.

Ross Taylor -- C.L. King & Associates

Okay, fair enough. Great, thank you.

Clint Severson

Thank you.

Operator

Our next question comes from the line of Bill Gibson with Nollenberger Capital.

Bill Gibson -- Nollenberger Capital

Hi, I have just got one financial question. I noticed that a lot of the short-term investments slipped out into the long-term category. I am assuming those are failed auction rate securities. Any issues there we need to be aware of?

Al Santa Ines

No, I don't think so. That is -- yes, you are right. Your observation and analysis of my financials is very accurate. Okay, we are holding about $37 million worth of auction rate securities. And it is not a surprise to everyone that those auction rates have been feeling. Okay? At the end of this quarter, I am obligated reclassify that from a short-term investment, which used to be very liquid, now into a long-term. There are also some -- a lot of activities related to those auction rate securities presently, so I am very positive, knock on wood, that those things will be cashed in some time this calendar year. Okay?

Bill Gibson -- Nollenberger Capital

Good. Thanks, Al.

Al Santa Ines

Thank you.

Operator

Our next question comes from the line of Tilton Gardner with Mutual Securities.

Tilton Gardner -- Mutual Securities

Yes, hi, Clint. Good numbers there. See, I had questions about the heartworm program again. When is that being introduced did you think?

Clint Severson

Okay, so we have the development just about completed. Will be going into clinical trials here in June, and hopefully we will have the FDA submission ready to go in June or early July. And then the USDA takes whatever time they take. We are not sure yet because we have never done a project with them before. But when they clear it, we will start selling.

Tilton Gardner -- Mutual Securities

Yes, how big is the overall market again in heartworm?

Clint Severson

Well, the overall market is, yes, hundreds -- tens of millions of dollars, so it's a very large market. And we expect to expand the market as well once it can be done with the chemistries on the same disc. It is a relatively large market.

Tilton Gardner -- Mutual Securities

Do you see IDEXX preparing any kind of defensive maneuver here to try to interrupt what you can do?

Clint Severson

Of course. I mean they are doing defensive moves all the time. In fact, they are probably on the call here listening to what our offensive moves are so they can plan their defensive moves.

Tilton Gardner -- Mutual Securities

Okay, well, do you have some percentage of the market that you have as a target?

Clint Severson

We don't. Our marketing folks are actually analyzing that now. Our objective is to provide a more efficient heartworm test, especially for those veterinarians that do large volumes and make it easier for them to run it. And so we are also working on -- because of our instrument and our ability to measure at low volumes, low sensitivity, having an improvement on the product as well. So I think we have a good chance here of making a very, very positive impact for our customers and future customers of this product.

Tilton Gardner -- Mutual Securities

Okay, great. Thanks a lot.

Clint Severson

Thank you.

Operator

(Operator instructions) Our next question comes from the line of Albert Yemon [ph], private investor.

Albert Yemon

Hi, Clint.

Clint Severson

How are you doing?

Albert Yemon

I think you -- good work. Just in one of your presentations recently you had mentioned that one of the hurdles your salespeople have to overcome is when you approach a prospective client that they have never heard of you folks. And I know a lot of companies overcome that problem by increasing advertising in trade magazines. Are you doing much of that now?

Clint Severson

Well, of course we are doing most of our advertising in a targeted fashion. On the medical side, we do a lot on the Internet and our website where we tie in direct-mail, direct mailings to our Internet site. And on the veterinary side, they probably do a little bit more general advertising. But mostly the best effect that we have seen is word-of-mouth. So customer referrals are the best leads. Because when somebody refers their friend to Abaxis, that's the best introduction you can get, much better than advertising or anything else. So as we continue to build our market position, more people will know about Abaxis and our name recognition will be greater.

Albert Yemon

Yes. I have been in sales many years, and you are right, your satisfied customers do the job for you. One other question. With the softening US economy and the low dollar, are you increasing your efforts to penetrate foreign markets?

Clint Severson

Yes. Abaxis today is primarily a domestic company. So our objectives here are to complete the CLIA waiver project here, so we can introduce a full line of CLIA-waived blood chemistry tests to the US market, which is the largest worldwide market. We do, however, have positions outside the US. Our international business grew very aggressively this last fiscal year. Europe was almost 40%. Certainly the lower dollar helps us in that our distributors as well as Abaxis has a better margin when the dollar is sitting the way it is. But our primary objective here now is to really focus on the US market; and once we get that all figured out, then we will start expanding outside the US.

Albert Yemon

Very good. Thank you.

Clint Severson

Thank you.

Operator

(Operator instructions) There are no further questions at this time. Mr. Severson, are there any closing remarks?

Clint Severson

Yes, I want to thank everybody for tuning in to our year-end and fourth-quarter conference call. And we look forward to talking with everybody at the completion of our Q1. So, again, thank you for tuning in.

Operator

Thank you. This concludes today's Abaxis fourth quarter 2008 financial results conference call. You may now disconnect.

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