美國雅培 (ABT) 2001 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your I-STAT Corporation fourth quarter 2001 earnings release conference call. At this time, all parties have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, President and Chief Executive Officer, Bill Moffitt. Sir, you may begin.

Thank you. Good morning, everyone, and thank you for joining us for I-STAT's fourth quarter and full year 2001 conference call. I hope that everyone has had a chance to review our news release this morning, covering our fourth quarter and full year results. As always, after my introductory remarks, I'll be happy to answer your questions.

Certain statements in this presentation and during the question-and-answer period to follow may relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of ht Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the company in the future to be materially different from the statements that I may make today.

Your special attention is drawn to the section in I-STAT's annual report on Form 10-K for the year ended December 31, 2001 entitled, "Factors That May Affect Future Results," and to additional factors that may be listed from time to time in the company's filings with the Securities & Exchange Commission.

Today, I'm going to review our fourth quarter and 2001 performance in the context of recapping what we have accomplished to date and where I think this takes us in the future. This morning, there are six critical points that I want to stress that provide a perspective on I-STAT and help paint a picture of the opportunities we have for significant growth in value creation over the coming quarters and years.

First, I-STAT has created the recognized standard of care in critical care blood analysis. Recent independent market research and industry publications confirm this. The market for point-of-care testing products is growing at approximately 25 to 30 percent per year, and industry analysts predict continued strong growth for the next 10 to 15 years and beyond.

Third, I-STAT is the unquestioned leader, with over 50 percent market share, and our products are preferred nearly eight to one over our nearest competitor.

Fourth, our planned new product introductions over the next two years will significantly increase the size and scope of our market opportunity, create an even more compelling rationale for increased utilization and, again, demonstrate the far reaching implications of our technology platform. Simply said, no other company in the world can match the breadth and scope of our test menu on a single instrument, yet alone one the size of a flashlight.

Fifth, while today we have an alliance with Abbott Laboratories (Company: Abbott Laboratories; Ticker: ABT ; URL: http://www.abbott.com/) for sales and marketing, on a pro forma basis our business franchise is profitable and becoming more profitable every day, as volume and productivity improvements continue to reduce production costs. And sixth, perhaps most important, our balance sheet is strong and we are well positioned to execute against our strategic business plan.

Now, let me expand on each of these points for a moment. As evidenced by our performance and substantiated by independent market research, point-of-care testing continues to grow and the market has clearly accepted it as the standard of care in critical care medicine. To quote from an article in the January edition of, "Clinical Lab Products," "Labs love it or live with it, but point-of-care testing for critical care is among the fastest growing segments in the laboratory.

Today, point-of-care blood gas and electrolyte testing is the standard of care." Indeed, industry analysts project that the three primary drivers of the $20 billion in-vitro diagnostics market over the next decade or so will be, one, point-of-care testing, two, molecular diagnostics, and three, high volume mainframe automated laboratory workstations to support more consolidated, core laboratory operations as hospitals further consolidate their central laboratory services for less time critical tests.

Our 2001 performance further underscores this point. We placed 4,570 additional analyzers, 1,485 in the fourth quarter alone. The new I-STAT 1 Analyzer that combines the functionality of I-STAT cartridge testing and Abbott MediSense Glucose Testing increased from approximately 10 percent of placements early in the year to nearly 50 percent in the fourth quarter. Overall, cartridge volume reached nearly 12 million in 2001, an increase of 20 percent over 2000. In the fourth quarter, cartridge volume reached 3.5 million, an increase of 31 percent over the fourth quarter of 2000.

In the domestic market, cartridge volume for the full year increased 23 percent compared to 20000 and 33 percent in the fourth quarter compared to the fourth quarter of 2000. In the international market, we continue to experience solid growth, demonstrating the global applicability of our products. Abbott's shipments to customers in the international market increased 33 percent as compared to last year, both for the full year and for the fourth quarter.

In China, where the best market analogy for the I-STAT System is the cell phone, we are bringing critical blood testing capability to areas where there was none before. As a result, this market is growing rapidly. The Asian market, excluding Japan, is growing at 37 percent and is now the fastest growing market in the world. I-STAT usage in this market will likely surpass the European market in absolute volume this year.

We're proud of our progress and the impact we have had on patient care. As no other blood analyzer in history, the I-STAT System has been put to the test in a variety of settings. With over 26,000 analyzers placed to date, it has been used on Navy ships at sea, on the space stations and on space shuttle missions. It has scaled Mount Everest on more than one occasion and has been used in numerous medical missions in Africa and South America and was used on site during the September 11th tragedy. Even now as we speak, the I-STAT System is the blood analyzer of choice for use at the Olympics and analyzers have been stationed at 20 different medical stations throughout the Olympic venues.

I-STAT is the clear leader in this rapidly growing segment of the IVD market, and our proprietary microfabricated biosensor technology and continued investment in research and development have established a sustainable, competitive advantage. Independent market research confirms that I-STAT has a 54 percent market share, as measured by the number of hospitals reporting at least some usage of point-of-care testing and further confirms this market is growing at approximately 30 percent per year.

Moreover, our market share is increasing. In short, I-STAT has achieved a significant strategic milestone, the creation of a new standard of care. Moreover, we are the leader in the market. And our technology and product platform will sustain our competitive advantage well into the future.

In spite of the natural inertia in the market and resistance to change, over the past few years we have increased the rate of incremental cartridge volume generation on an annualized basis from approximately one million cartridges per year to two million cartridges per year. In our primary target market, the U.S. critical care market, this rate of addition of incremental cartridge volume has grown from approximately 900,000 cartridges per year to 1.5 million, and this rate of growth has been steadily increasing.

The vast majority of this growth has come from new high volume customers where I-STAT resources continue to provide a significant portion of the momentum and from growth and expansion within our install base of customers. We believe this expansion within the install base is driven principally by the realization of patient care benefits, such as shorter length of stay in the ICU, quicker and faster weaning times from ventilators and reduced transfusions in the neonatal intensive care, not to mention lower operating costs and improvements in the productivity of the clinical staff.

As a result, we are continuing to add resources in this area to further promote I-STAT System for point-of-care testing and accelerate the addition of high volume customers. Moreover, this growth has come from our basic test menu of blood gases, electrolytes and chemistry tests.

Over the coming quarters, we will expand the size of our market opportunity by launching three important new products. During the summer, we plan to release two new coagulation products that we believe will have a significant impact on our market opportunity. The first is the Kaolin ACT, the companion product to the Celite ACT we introduced about a year ago. Without the Kaolin version of the ACT product, we have been somewhat hampered in our ability to penetrate this specific market niche. We believe the introduction of the Kaolin ACT will now give us the opportunity to more aggressively pursue both the cardiovascular surgery market and the cath lab.

The prothrombin time test, or PT as it is called, used to monitor patients on Coumadin therapy, is an even greater expansion of the market opportunity. Currently, the market for the PT test is approximately 75 million tests worldwide with approximately 42 million tests per year in the U.S. market alone. We have just recently submitted a five 10-K application to the FDA and we are on schedule to release this product in late June.

This market is growing rapidly, as more and more studies confirm the importance of tighter therapeutic control, just as happened in the glucose test market for diabetes. Today, these tests are run in outpatient clinics in hospitals and in physicians' offices. Our initial target market will be the outpatient clinics and hospitals, with expansion into the physician's office market as we establish the product in the market and gain further experience. At the same time, we continue to monitor the development of the home care self-test market. While not nearly as well established or as large as the glucose self-test market for diabetes, the PT test market for Coumadin monitoring does hold promise.

The dynamics of this market are reminiscent of the early days of the diabetes self-test market. Reimbursement for home self-testing is approved, as the efficacy of such testing is demonstrated. For example, recently CMS, or HCFA as we used to know it, approved reimbursement for home testing for PT -- for patients with heart valves.

We believe that as further studies increasingly demonstrate the clinical value of more stringent control this 75 million test market will expand rapidly. Today, the average patient on Coumadin is monitored with a PT test about every three to four weeks. With per test revenue of approximately $5 to $6 for tests performed at the point-of-care, this could translate into a $350 million to $400 million market.

However, recent studies have shown that the most effective test frequency to maintain target therapeutic range is on the order of every four to five days, not three to four weeks. If this regimen were universally adopted, the market would increase by more than four fold. Given the amount of revenue generated per test, the market would be approximately $1.4 billion in size. It is interesting to note that the coagulation segment is already the fastest growing segment of the point-of-care testing market, led by the PT test.

Also last month we commenced our first external alpha site clinicals for our first cardiac marker test, the Troponin I. Initial data confirms that we have what is likely the first point-of-care cardiac marker test of laboratory quality. Other point-of-care tests on the market today do not achieve the level of sensitivity and precision of central laboratory systems. We believe this is the primary reason such tests have not achieved the level of market penetration that would otherwise be expected, given the level of demand for such a rapid test to assess myocardial infarct.

We are on schedule to release this product in the first half of 2003, and we intend to follow it with additional tests to support the field of cardiology. Market research indicates that the cardiac marker test market will likely migrate to the point-of-care very rapidly once the right product hits the market. The demand for timely test results is no more evident anywhere than in the diagnosis of a heart attack patient. Today, the cardiac marker test market is approximately 25 million tests and growing very rapidly.

With the addition of Kaolin ACT, the prothrombin time test and Troponin I, the I-STAT System will offer a breadth of tests and functionality unmatched in the industry. Our technology enables a product design, ease of use, reliability and breadth of test menu unmatched in this industry. It is precisely those features that have made us the preferred choice in point-of-care testing nearly eight to one over our nearest competitor and that have allowed us to achieve over 50 percent market share.

As you know, over the past couple of years we have made significant investments in cartridge operations to reconfigure our manufacturing facility in Canada to give us maximum capacity. We have reconfigured the physical layout of the facility for maximum utilization and have moved all chip processes from four inch to five-inch wafers, thereby significantly increasing output capacity and further delaying the need for additional facilities until later in this decade.

With a substantial portion of this work behind us, we are well positioned to derive maximum capacity about 40 million to 50 million cartridges per year from our existing facility with only the addition of process equipment and staff. As a result, our annual capital expenditures have decreased from approximately $7 million in 2000 to $4.5 million in 2001 and we project expenditures in 2002 of only about $3 million. Moreover, we project our total overhead spending in manufacturing during 2002 to remain essentially flat with 2001, despite increases in production volume.

My last point this morning concerns the profitability of our business. While we currently have an alliance with Abbott Laboratories for sales and marketing, on a pro forma basis our business franchise is profitable. And we believe that we are capable of even greater acceleration.

Therefore, we believe it is vital that we maintain a strong balance sheet to ensure that we can execute against our strategic business plan and take I-STAT to the next level. To that end, during the latter half of 2001 we completed a financing that we believe will sustain our value creation proposition well into the future. The investments we've made and will continue to make in promoting point-of-care testing and increasing both the market opportunity and demand for our products through expansion of test menu and improvements in product functionality will generate significant long term shareholder value, as we leverage our leadership position in this rapidly growing market.

Before concluding my remarks this morning, let me comment on our alliance with Abbott, specifically the three-year growth performance milestone in our contract. It is unclear as to whether Abbott has made this milestone, and this is still under review. Specifically, we have concerns that aggressive Abbott sales programs may have moved what would have been normal first or second quarter sales into the fourth quarter of 2001. It is likely that this will take another couple of quarters to clarify, as we more fully understand the impact of those sales programs.

Now, in conclusion, let me reiterate the six points I made earlier. I-STAT has created the standard of care in critical care blood analysis. The market is growing at approximately 25 to 30 percent per year and it is recognized as one of only three significant growth opportunities in the $20 billion diagnostics market.

We are the unquestioned leader, with over 50 percent market share, and our products are preferred nearly eight to one over the competition. Our planned new product introductions over the next two years significantly increase the size and scope of our market opportunity, create an even more compelling rationale for increased utilization and, again, demonstrate the far reaching implications of this technology platform. No other company in the world can match the breadth and scope of our test menu on a single instrument.

While today we have an alliance with Abbott Laboratories for sales and marketing on a pro forma consolidated basis, this business franchise is profitable. And perhaps most important, our balance sheet is strong and we are well positioned to execute against our strategic business plan.

Now, I'll be happy to answer any questions you may have. And I'll turn it back over to you,

.

Thank you, Mr. Moffitt. At this time, the floor is now open for questions. If you have a question or a comment, please feel free to press one followed by four on your touch-tone phone.

If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. Once again, if you do have a question or a comment, that is one followed by four on your touch-tone phone.

Our first question is coming from Benner Ulrich. Please state your affiliation.

Good morning, guys. Congratulations on the quarter.

Good morning, Benner. Thank you.

I had a question. The price per cartridge of $3.28, obviously down a bit from $3.64. Was that only a result of the mix shifts towards Abbott, or was there also some price promotions in there on the Abbott end?

Yeah. Benner, there were definitely price promotions from Abbott in the fourth quarter to customers that had an effect on that ASP. And there is also a component of that that is just a shift to the incremental volume as well. If you look at the U.S. average sale price, because frankly that's where the promotions existed, if you look at it for the four quarters of the year you'll see back in the first quarter it was $3.67.

In the second quarter there was some additional discount programs put in place by Abbott. It dropped to $3.48. The third quarter it climbed back up to $3.87 and then, of course, back down to its lowest of $3.39 in the fourth quarter, and obviously, I think, a significant component of that attributable to those discount programs.

So, we could see that come up a little bit in the first quarter?

I would say that's possible.

OK. OK. And then along the lines with the comments that you made about Abbott's potential movement of some sales from the first half of 2002 into the fourth quarter, I guess do you have a -- and obviously cartridge sales and analyzer sales were very strong this quarter. Assuming they are not going to be as strong in the first quarter, do you have a sense as to where those might come in?

Well, given the fact that we don't make projections and ...

Right.

... forecasts, let me just -- let me try to give you a little guidance -- little help if I can. First of all, analyzer sales in the first six weeks of this quarter actually continue to be strong. Hard to say what the last half of the quarter will hold, but the first half of the quarter the analyzer sales are still strong.

If you look at cartridge volume, typically and historically we see cartridge volume in the first quarter that's usually about flat to the fourth quarter, maybe down just a tick. It is difficult thus far to say how we're going to come out. Obviously, we'd expect -- if it were a normal year, we'd expect it to be about flat, if you will. If in fact cartridge business has been moved, if you will, out of the first quarter into the fourth quarter, then obviously I would expect to see it tick down, not remain flat.

Right. OK. And then one last question and I'll get back in the queue. In terms of future opportunities, I guess the PT test specifically you mentioned other markets such as physician's office, home self care market, is there anything you'd have to do from a regulatory standpoint with the instrument, or is that something that can be sold to those markets currently?

A good question, Benner. The prothrombin time market today exists about 98 percent of it is in the professional attended market.

It is? OK.

So, it is in the hospital-based clinic or it's in the physician's office. The home test market in the United States is extremely small. It's a bit larger -- in fact, I'd say the best market so far for home-based testing is actually in Germany.

And, interestingly, Germany is the country where a couple of these studies have been done to show that much more frequent testing leads to better therapeutic control and better outcomes. I think as that spreads you're going to see that have an effect here in the U.S. But today, that market is in the professionally attended market, not in the homecare, pretty much on a global basis.

But to answer the second part of your question, we have filed our

10-K application for use of our prothrombin time test in the professionally attended market. If we want to subsequently sell this product into the homecare market, we will need to do an additional

10-K application for that intended use.

And obviously, we believe that we would want to do -- not that it's a regulatory requirement, but just a marketing requirement. We'd want to take some of the cost out of our current analyzer. And when I say cost, some of the sophistication out of it. It wouldn't be necessary for a single home use product.

Right. So, on approval of the

10-K that you have already filed, you could immediately sell to both the hospital and physician's office?

That is correct.

Great. Thanks.

That is correct.

Appreciate it.

Thank you.

Thank you, Mr. Ulrich. Our next question is coming from Al Kildani. Please state your affiliation.

Pacific Growth Equities. Good morning.

Morning, Al. How are you?

Good, thanks. How are you?

Good.

Can you help me understand how the -- with regard to the Abbott milestone how it came to be that you have enough information to report Q4 but not to make -- not enough to make the determination? I think on the last conference call you indicated that some time in the February timeframe was your expectation as to when you would know that.

Right, I did. Sure. The -- let me just restate your question for clarity. What you're really asking is how can we possibly know what our sales are if we don't know what Abbott's sales are. Is that fair?

In a manner of speaking.

Yeah. In other words, how can we report ours if we don't know in fact what theirs are? Two issues. First of all, Abbott has given us -- back to the February timeframe I mentioned on the last call, Abbott has given us their sales results for the fourth quarter and the full year and so forth.

And Abbott has said to us they believe, based on those sales results, they have made the milestone. We have yet to analyze and audit those sales results. We also have questions, as I said in my comments, about the nature of sales programs and how they may have moved sales from one quarter to another.

Having said that, let me specifically answer your question about how we might know what sales are but not know what their sales are. The sales that are absolutely linked, if you will, are cartridge sales because we sell cartridges to Abbott. Abbott sells them to customer. We share the revenue.

Therefore, in the year in reconciliation to know what our cartridge sales are or quarterly reconciliations, we have to know what Abbott's were and record them as such. On analyzers, that's not the case. On analyzers we sell them and all the other peripheral equipment. We sell it on a cost plus basis. So, while we know what our sales are because they were sold at cost plus, we don't yet know what Abbott's sales were until obviously we've had a chance to analyze and audit their sales numbers they've given us.

OK. Well, given that, there's mention in the press release of $5 million in deferred revenues that I take it would assume that they did not meet the milestone.

Actually no. That $5 million, Al, is yet different. If you'll recall, the Abbott contract and our agreements with them were structured such that Abbott made certain prepayments to the company through the first three years of the contract.

That's a fourth year of prepayments then?

No, no, no. Actually, it is -- when they made those prepayments and they totaled $25 million, they were to be applied by us at the rate of $2 per cartridge on incremental cartridge volume through the course of those three years, with the proviso that if Abbott didn't sell enough cartridge volume -- incremental cartridge volume across those three years I-STAT would book any excess payment made. There sits today about $5 million in excess payment, in other words, unabsorbed by Abbott, if you will

I see.

Now, if we were -- if we, I-STAT, at the end of the five year term of this agreement canceled the agreement, then we are obligated to repay that to them. If they miss the milestone, we're not. So, you can see the treatment is such that if they've missed the milestone we will book the $5 million as revenue immediately upon assessment of their having missed the milestone. But for now, since we have not completed that assessment, it'd be inappropriate for us to book it. So, we keep it out on the balance sheet as deferred revenue.

OK. That's helpful. Now, back to this Abbott sales growth milestone, I think you'd mentioned previously that it was a three-year compound annual growth rate.

That's correct.

I know this is probably -- or is a simplistic way to look at it, but if we look at your revenues over that period of time and where they ended up in 2001, I get to compound annual growth rate of below 15 percent. That doesn't seem like it would -- at least by my opinion, it doesn't seem like it would measure up to anything that would be viewed as an aggressive sales target. Could you help us reconcile how we might look at the growth rate in that context?

Well, yeah. There's a couple things -- a couple things that interfere from that approach. First of all, I'll go back and point out analyzers again. The three-year milestone is based on Abbott's revenue. And so, we sell analyzer on a cost plus basis. If Abbott then in turn marks those up significantly so, then it is possible their revenues grow at a faster rate than ours. That's one point. The second point is the milestone is also predicated only upon certain products, not all products. So, there's a subset of numbers, if you will, at work here, not just the total you see on us.

OK. And then on a pro forma basis, you mentioned that the business is profitable. Could you give us a little more color as to what those numbers would look like in 2001?

Well, yeah. Obviously, of course, it depends on how you -- it depends on how you -- what assumptions you're going to make about how you recombine this business. But essentially you can look at it as if you pull the Abbott component of the revenue back into I-STAT.

Let's assume I-STAT were to return to independent operations and I-STAT puts in the infrastructure necessary to do that. We add a few sales folks and that sort of thing. Frankly, for the most part, we have a lot of that infrastructure in place today because we do a lot of that work. For example, we do all the direct shipping and the distribution in the U.S. market. We ship to international distribution locations. We do all the training -- customer training, implementation work and so forth.

We do have some consultants in the field, as you know, that help with these high volume closes. We run a customer service. We do all telephone technical services today. So, there's only a little bit of infrastructure to be put back. If you look at the -- look at this, basically you're going to see a business that's $80 million plus in size. And with the appropriate amount of infrastructure rebill it still is putting a respectable percentage pre-taxed to the bottom line. I think it would be inappropriate for me to probably give you anything more specific than that right now because there are a lot of assumptions in that.

OK. Well, the top line number is certainly helpful. One last question and then I will get back in the queue. With regard, again, to the Abbott relationships, are there any milestones -- if we assume for the moment that the relationship continues, are there any milestones tied to year-end 2004? Or I think you've stated in the past is the next one simply 2005? And if that's the case, are there any incentives for Abbott in 2004?

No. Just for a minute, let me -- let's assume for a moment that Abbott made the milestone. So, now the question is what's left in the relationship in the contract with Abbott. This contract expires automatically at the end of 2003, not '04. It expires at the end of '03 and is then, as an evergreen contract, can be renewed by mutual agreement of the parties on a one-year basis thereafter. But it does expire at the end of '03. Contract further stipulates that if either of us are going to cancel this agreement we must give the other a one-year notice.

So, the one-year notice period on the end of '03, if you will, is the end of '02, this year. But there are no further performance milestones.

OK. I guess what I'm getting at is I'm trying to understand it what -- if there is any motivation for Abbott to really continue the sales effort or whether they'll be taking the foot off the pedal, if you will.

Well, I would say this, if you look again at the contract you'll see that if I-STAT cancels the agreement there are payments that we make. If you'll recall, there's a trailing royalty scheme in the contract that we would pay to Abbott. That trailing royalty is based on the year '03 revenue. So, one would expect that if we were to plan to return to independent operations, Abbott, of course, would probably want to maximize that trailing royalty. And, therefore, I would expect there to be a significant push in business between here and the end of '03.

Great. Thank you.

Thank you.

Thank you, Mr. Kildani. Our next question is coming from Fred Toney. Please state your affiliation.

Mecap Partners. Hello, Bill.

Hello, Fred. How are you?

Good. How are you?

Good.

Let's see, I got a series of questions. Just in terms of average selling price and the trends that you're seeing, if we looked out -- I'm trying to figure out where your pricing is likely to be at the point of which an Abbott contract might end or a couple years out. Do you expect to continue to see sort of a 10 percent price decline in the marketplace over the next, say, eight quarters?

Well, first of all, Fred, let me be really clear about this. The price in the market, the customer price, is not coming down at all. That's not decreasing. Our ASP -- and I'm going to go back and comment on the discount structure I made a moment ago. But let me just say that the routine prices that are in place in the marketplace are not coming down. In fact, if anything, over the next couple of years, Fred, I would expect to see them rise.

So, the 10 percent decline or so is really just Abbott taking more of the pie?

That's correct. Because, if you'll recall, there was a set base where we get all the revenue and then everything incremental is a split revenue with Abbott. So, as that incremental becomes a bigger piece of the pie, the ASP at I-STAT declines.

Now, the other thing I would add is that the drop that you've seen this from, let's say, the first quarter, second quarter down through the fourth quarter, has been impacted by these discount programs that Abbott has been running to accelerate sales. So ...

I understand.

... that's been effective, to some degree, at least by that.

The ...

So, I don't -- I would tell you that I would not expect to see the ASP that low, for example even in the first quarter, because those discount programs, I don't think, will be there. Secondly, I would expect to see prices rise over the next two years as the ACT test, the prothrombin time test and certainly the cardiac marker test come to market because all of those will be priced at or above -- and in the case of the Troponin, perhaps significantly above -- the current average selling price in the market.

OK. And the current average selling price to the customer, what do you think that is?

In the U.S., Fred, it's about $4.35, $4.40. And I believe that incorporates some of that discounting. I believe without it it's probably 10, 15, maybe as much as 20 cents higher.

OK. And then in the -- of the devices that are out in the marketplace now, the handhelds, how many are combination devices with the MediSense test? And if there were a breakup in the future, what happens to those devices? And how dependent, going forward, are you on maintaining those? What kind of impact would that have?

Well, right now, Fred, I think -- I'm going to give you an approximate number. I don't have the exact number here in front of me. But there's about 3,500, 4,000 of that new version out in the marketplace. And I would say that -- let's assume that the two companies, I-STAT and Abbott, part company at the end of the agreement.

I would expect that it is in both our interests to continue to keep that product in the marketplace. In fact, I would dare say that's a strong probability, simply because it gives the customer what the customer wants -- one platform to run all tests, including the strip-based glucose work that's done. So, I would expect to see that remain there.

Would you expect that you would continue to sell those with the MediSense test in it?

Obviously, that's -- I can't make a commitment today for what Abbott may feel about that or how they may feel about it. But I would think that's likely to happen.

OK. And then of the $43 million in cash on your balance sheet, what are the anticipated non-operating cash uses this year, understanding that there are some contingencies based on what you figure out with the milestones for Abbott?

Right. There is a -- there are basically two things. First of all the easy one, cap ex. Capital expenditure is about, as I said, $3 million this year and in total for the company. Also, here coming up very shortly a payment to Abbott of $10.2 million go back to the prepayment issue I discussed a moment ago.

Those prepayments that come in are basically paid back to Abbott in the form of $2 per incremental cartridge. During the course of the year we don't actually make the cash payment. We actually set a receivable when we sell product to Abbott. Abbott pays us that full receivable. So, if you want to think of it this way, they've actually paid the cash twice, and then we reconcile that at the end of each year. This is the last year of that reconciliation. And that payment back is $10.2 million.

So, the non-operating component is the $10.2 million plus the $3 million. And, of course, obviously you want to compare that off against EBITDA, not against the operating line because our capital expenditures this year are less than the depreciation in our P&L.

Got it. And the $10.2 million represents last year?

The $10.2 million represents last year, correct.

OK. And then when do you expect your year-end audit to be completed?

Are you talking about I-STAT's internal audit?

Yes.

That has, for the most part, will be completed by about the end of March.

OK. And for that audit, do you have to have the final reconciliation of the Abbott numbers?

No.

OK. And would you expect to have them by then?

Not necessarily. As I said, I think it's going to take us a couple of quarters to see how the effects of those sales programs in the fourth quarter of last year have affected the numbers. Keep in mind the cartridge numbers are pretty straightforward in terms of how we split the revenue. The analyzers are not because it's all sold on a cost plus basis.

OK. And then a couple other quick ones. Assuming -- how will you determine what to do with that deferred revenue? What are you using -- you've got to obviously analyze the data. And then based on the outcome, how will it be reported if they met the milestones and if they didn't meet the milestones?

If they did not meet the milestone, it will be taken and recorded on the P&L as revenue when that determination is made.

Just a one-time revenue hit?

One-time revenue hit of $5 million.

OK. And ...

And if they have determined a milestone, it will remain on the balance because -- and there will be a potential pending liability, if you will, which is the repayment of that, if we were to cancel the contract and return to business to independent operations.

And the $5 million would just show up in the quarter? Or would ...

It'll show up on the balance sheet as a deferred revenue asset. It'll show up as a liability pending the payment back.

But if it's booked as revenue, though, it would be in the quarter you determine that it should be booked as revenue, or would you go back and book it in the fourth quarter?

No. We'll do it in the quarter that we make the determination.

OK. And then the last question. Fully diluted shares outstanding based on the recent financings and with and without warrants.

OK. If I put -- let me put everything in for you and give you the full number, both the common, the preferred D, the warrants associated with the preferred C -- series C preferred, the warrants associated with the D, and all the outstanding options and the options in the pool. Everything all loaded in it's 28 million shares.

OK. And do you have a treasury method calculation based on today?

No.

How many of the 28 million are warrants?

Roughly 1.8 million.

OK. Great. Thank you.

Thank you, Fred.

Thank you, Mr. Toney. Our next question is coming from Gary Markoff. Please state your affiliation.

Salomon Smith Barney. Hi, Bill.

Hi, Gary. How are you today?

It's nice to hear Fred on the call.

Yes, wasn't it?

Bill, can you describe how you're going to be able to, from the stat side, drive high volume business?

Well, our consultants in the field, as you know, have been working sort of hand in globe with the Abbott folks to promote an increased or an accelerated closure of these high volume accounts. And we have shown a strong one to one correlation between the number of these consultants we have in the field and the rate of high volume closures.

As you know, we had seven of these folks up until about a year or so ago -- year and a quarter ago, and we lost four of them over the course of six or eight months there. We have added back two. We are now at five of these folks. And we will continue to make additions throughout the rest of this year in support of that program because there's such a strong one to one correlation there.

Up to what number?

Well, we don't have a specific target number in mind right now, but I would tell you that we are headed back towards -- I say a specific target number for a given schedule, if you will. But we're headed back toward somewhere on the order of 10 to 12 of these folks. I believe that -- we had seven. And the number of high volume closes ran in the 50 to 60 range per year.

This past year when we were basically with three people for the most part of the year, high volume closes dropped off to 30. And obviously, that is the source of a strong component of the growth of this company. So, we're not only going to go back up to the seven we had, but given the fact that there is just more and more evidence in the market that the market has -- is adopting this as a standard of care, I believe it's prudent to go on beyond that number. And we'll have to see as we go what kind of number makes sense, but we're headed back to at least 10 to 12 of these folks.

And, Bill, can any of your implementation coordinators help to reconfigure the way a hospital is using their tests so that they can go from, let's say, a 30 to 50 range up to a 70 to 100 range?

Well, certainly the role of the implementation coordinators is to first and foremost bring up new customers. And that's by effectively training them, helping install the various data management systems, et cetera. And they work in conjunction with some of Abbott's folks, who do supply some of the data management connectivity stuff.

In terms of -- maybe you're thinking about it, Gary, as proactively going back into a hospital and trying to foster and promote more expansion inside the hospital.

Absolutely.

That's really an Abbott activity. And we rely on the Abbott organization to do that. Our ICs today have their hands pretty full with training. Now, let me expand that a bit, though, to tell you that training also includes new products. So, for example, when we released the Kaolin version of the ACT, which we believe will now really give us a great opportunity in the whole ACT arena, as well as when we released the prothrombin time, our ICs are once again going to play a significant role in going back in and introducing the customer to these products vis-à-vis training them and helping them through the evaluation process.

Is there anything in your arrangement with Abbott that prevents you from trying to penetrate more deeply into existing accounts?

Well, let's be clear. Abbott has an exclusive sales and marketing right to our product. Our role is to support them in that effort and to help optimize, maximize our sales activities. Our ICs are there for a given set of responsibilities and roles and our sales consulting guys, I think, significantly help with the high volume. But let's be very clear Abbott has an exclusive right to sell and market this product.

And in your hands, Bill, what kind of potential would be there for these existing accounts?

Well, our existing high volume accounts -- maybe with the exception of a handful or a couple of handfuls of them, are nowhere near fully penetrated. We can name hospitals that we know use I-STAT for 100 percent of these kinds of tests -- critical care tests in the hospital. But I would tell the vast majority of even our high volume customers are probably 30 percent penetrated on average. There's still significant growth opportunity for the products that exist today. And then on top of that comes the new products. So, there's just huge upside, even in our install base.

So, what percentage of your -- of the existing base is currently 100 percent penetrated?

If you look at it on a by hospital count basis, if you will, there are probably 15, maybe 20 hospitals out of the 300 or 400 high volume accounts that are fully penetrated. And I say fully. And that's for the existing products today. And perhaps that's not even taking into account what I believe is an upside in the chemistry area on some of the medical floors, away from the critical care area, if you will. So, those numbers are also against the backdrop of a total U.S. customer population of some 2,300.

Bill, if I take a calculator, I'd take 20 divided by 300. I get six percent.

Yeah.

So, you're saying that six percent of your existing account base is 100 percent penetrated?

That's a good approximation, in the U.S., yes.

So, you could just explode the business here just by getting penetration on your existing accounts.

Yeah, exactly, Gary. And, in fact, if you look back at where our growth has come from in the U.S., you'll see about 40 percent of the incremental cartridge volume has come from the install base. And I mean customers that date back to '96, '97, '98 kind of timeframe even.

So, that underscores the fact you're making, which is a significant portion of the growth can come out of just the customers that have already bought into the concept, so to speak. On top of that, then, you get about another 30, 35 percent of growth is coming out of -- or even close to 40 percent, frankly, coming out of these new high volume customer closes, which say only about 20 percent or so of our growth actually comes from the addition of these small supplemental use kinds of customers.

The core of this business continues to be selling the concept, high volume, utilization and restructuring of traditional processes to stat laboratory medicine and then, once it's installed in the hospital in some meaningful way, expanding that sale. So, you're absolutely right on. We could grow the business tremendously from just the base of install customers we have.

OK. It becomes very clear -- or it's clear to me anyway what Abbott's intention is, which is to just draw the sell for as long as they possibly can, fertilizing the market and then trying to boom the business if it's in their hands. Now, this is also available to you. At the end of this year you get to present back to Abbott your intention as to whether or not you want the business back. Is that correct?

Your latter statement, that's correct.

OK. Could you play for us the consequence to Abbott and the consequence to I-STAT if you present at the end of this year that you want the business back?

Well, I think it'd be inappropriate for me to comment on what the consequence to Abbott would be. I think Abbott would have to comment on that, Gary.

to I-STAT.

The consequence to I-STAT would be, I think, fairly straightforward. We, I-STAT, would have to put back in place the resources that I mentioned earlier to begin to return this business to independent operations. And we would work collaboratively with Abbott through the course of '03.

It's in both of our interests that if we are going to part company, so to speak -- it would be in both of our interests for that to be on an amicable basis, that we not disrupt our mutual businesses in the marketplace. Recall, Abbott does have a significant business in the glucose strip business in hospitals at the point-of-care.

And that's why, I believe, the STAT 1, the instrument that runs both, is still a viable instrument long term. But I think you'd see both of us want to be sure we did this in the right manner so that we didn't disrupt the market and we didn't disrupt the customer, nor the building of both our mutual businesses. It's not in either of our best interests to harm the other.

That's fine. I'm not concerned about ...

The year of '03 ...

Concerned about you harming Abbott.

I can understand that.

I really -- my compassion for them is not relevant. What I'm looking at here is a business that is poised to explode when you add these new test components and as you're driving new hospitals and you're driving more penetration just in this alone you could just have an enormous rate of return on your businesses going converting from six percent up to 25 percent at 100 percent adoption.

There's no question about that.

Once you've gotten six percent done, you have a profile in the market to illustrate it can be done.

Right. We have a profile on the market ...

.

... so it can be done. It is obviously not without effort, not without applying resources, but it can be done. And so, we really have three strong underlying components of growth for the next several years. One, we're nowhere near, as you point out, penetrated in our install base.

Two, our install base doesn't even represent a huge portion of the available market that's there. We have 300 or 400 hospitals buying at what we could call high volume. There's 2,000 of those hospitals in the U.S. and thousands and thousands more around the world. And then the third element, of course, is new products.

So, you're right, we are poised for high -- the market has accepted this as a standard of care. We obviously feel quite excited about the opportunity and energetic about it, if you will. We're adding resource where we think it makes sense. We get to the end of this year. We will, I believe, make a decision that will be in the best interests of our shareholders to optimize long-term value here.

I can't tell you what that decision is yet. Obviously we're still doing the analysis and still working on it. But nonetheless, fundamentally this business is poised for high growth. And I'm sorry to repeat myself, but the fact is we run 54 percent market share today. We have, in essence, created this market. And I believe that our technology platform is a very unique product design and that enables is what's gotten us to where we are and it is what we will ride for the foreseeable future.

Bill, one last question. Have you ever had any hospital that's gotten to 100 percent utilization turn around and given it up?

No. Never.

Thank you.

Thanks, Gary.

Thank you. Our next question is coming from Ed Bindseil. Sir, please state your affiliation.

Bindseil|ED|BINDSEIL||BINDSEIL ADVISORS|m: Hello, Bill?

Yes, Ed. How are you?

Most of my questions were already answered. I do have -- on that last point that Gary just raised, he stressed, of course, those who are 100 percent converted. Could you elaborate just a bit on your experience in terms of customer perception of product, quality and satisfaction, n other words, those customers who stopped using I-STAT once they've become an established user? Maybe they aren't using 100 percent. But what is your experience?

Well, our experience, Ed, for the most part, is once customers have in some way restructured their operations -- and by that, I mean they've closed at least one stat lab or maybe more and have gone over to using I-STAT in place of that -- I cannot recall any customer we've ever lost there.

There are customers who will buy our product, put it in a very supplemental way -- and by that, Ed, I mean maybe stick it in the emergency room for just certain kinds of cases and that sort of thing. And that kind of usage, first of all, is very low volume, it is hard to track and it's really hard to understand what the customer's intentions are. And, sure, there are customers there that sort of come and go.

So, customers, however, that are established and have restructured their internal operations for it, you haven't had those customers drop for, let's say, a competitive approach or something or another like that?

No, we have not. And I'll even tell you this, Ed, we have had -- I don't know -- maybe four or five high volume customers where the entire management structure of the hospital has turned over as well as the laboratory management. And the new management has come in and said, "Does this make sense what we're doing?"

And I know of at least four -- five, I'm going to say, hospitals that in the last year-and-a-half, two years or so have gone through the process of asking themselves are they doing the right thing. And every one of those hospitals has come to the conclusion not only yes we're doing the right thing, but frankly we need to be doing it in the rest of the hospital.

OK. And, Bill ...

And so -- and they are either have gone to full utilization through the entire hospital as a result of revisiting their decision or are in the process of doing it today.

And, Bill, do you perceive any stepped up interest in the part of the customers because of the 9-11 experience and the interest in expanding the emergency response capabilities and so on?

You know, I can't tell you, Ed, whether first hand we've seen a significant step up in business as a result of that. I do know for the normal community hospitals and that sort of thing there has obviously been stepped up interest on the part of the military. We have sold a significant number of analyzers and supporting cartridges to the military over the last -- well, since 9-11, a significant number. And I think we will continue to get more orders from them.

Thank you, Bill.

OK.

, I think we have perhaps time for one more question.

Yes, sir. Our last question is coming from -- it's -- actually, it's a follow-up question coming from Benner Ulrich.

Hey, guys. Just one follow-up. Now, if you were to take the business back from Abbott, obviously you would make an indication of that towards the end of the year. Wondering if you have a sense in terms of the timeframe when you would make that decision internally and, as a result, when you may begin to ramp up on the selling and marketing side. I know the infrastructure is mostly there, but probably adding some additional people to the sales force, et cetera.

Yeah. I would say, Benner, you can internally -- we will -- we'll conduct our analyses. And I think this is a decision that we'll make some time obviously toward the latter part of the year.

OK. So, if you were going to make that decision, we could see some additional expense even in the back half of the year or third or fourth quarter?

You could, yes.

OK.

I'm not sure how significant that expense would be, but you could some ramp.

OK.

Keep in mind, in answering the question a while ago, we're already adding back some of those sales consultants that we lost.

Right.

So, I'm not sure it'd be appreciably different from the ramp you'd see there.

Right. Right. OK. Thank you.

Thank you, Benner, and thanks, everyone, for joining us for our conference call today.

Thank you. That does conclude today's fourth quarter 2001 earnings release conference call. You may disconnect your lines at this time. Have a safe day. Thank you for participating.