美國雅培 (ABT) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to i-Stat Corporation sponsored third quarter earning release conference call. At this time all lines have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Jeff Randall, Chief Financial Officer. Sir, the floor is yours.

Good morning and welcome to the i-Stat Corporation third quarter conference call. I am Jeff Randall, CFO of the company. For this morning's conference call you can expect that Bill Moffitt, President and Chief Executive Officer of the company, Mike Zelin, EVP and Chief Technical Officer, Bruce Basarab, EVP of Commercial Operations, and I will discuss third quarter performance and the company's outlook for the future.

As always after our introductory remarks we will be happy to answer your questions. Certain statements in this presentation and during this question and answer period to follow may relate to future events and expectations, and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve unknown risk and uncertainties and other factors that may cause the actual results, performance of achievements of the company in the future to be materially different from the statements that we make today. Your attention is drawn to the second of i-Stat's Annual Report on for 10-K for the year ended December 31, 2002, entitled, 'factors that may effect future results', and to additional factors that may be listed from time in the company's filing with the Securities and Exchange Commission.

Now here is Bill Moffitt, President and Chief Executive Officer of i-Stat.

Thanks, Jeff, and good morning everyone. Before getting started I want to note once again that this call is being webcast, and can be accessed through the investor information section of the company's website at www.istat.com. This morning we will cover several topics with you. First our solid operating result for the quarter, taking special note of record cartridge shipments and the improvement in our cash position, strengthening our balance sheet in preparation for our transition to direct product distribution in January. Second, the status of the launch of our Prothrombin time and Troponin-I products, as well as the pending launch of our Kaolin ACT test next month. Third, the final steps in our transition to independent product distribution. Completion of training and testing those resources and systems we have implemented to ensure that our customers receive high quality service. And fourth, the four primary drivers of growth in our business, and how we are prepared to execute against each. Continued conversion of the market to I-Stat's point of care testing model, increased utilization within our install base of customers, new products and greater growth in international market.

Overall the results for the third quarter were consistent with our internal expectations. We are pleased to see cartridge volumes move upward to a record. Some 200,000 cartridges higher than our previous quarterly record set in the first quarter of this year. It is important to note that since we are still in the early phases of our new product launches - which we will discuss in more detail in a moment - this record performance did not include significant contribution from these new products. We anticipate that as our new product launches continue we will see additional growth compounding the underlying continued strong growth of our core products.

Our balance sheet was strengthened as our cash balance increased again to over $38m, as we received the $11m prepayment from our partner in Japan, FUSO Pharmaceuticals that we announced in February of this year. This prepayment will be applied to a portion of each purchase of cartridges made by FUSO commencing in January, and continuing throughout the term of our exclusive agreement until it is exhausted, a time timeframe we anticipate to be several years.

We continue to be confident that our capital position is adequate to support our transition to direct product distribution, while meeting the obligations to Abbott created by allowing our exclusive distribution agreement with them to expire at the end of December.

The fourth point will be covered in a bit more detail in a few moments by Bruce, but there are four primary sources of growth in our business that overlay the annuity base inherent in the conversion of the market to point of care testing. First, simply converting more of the market from traditional testing systems to our point of care model. We have seen and continue to demonstrate improvements in patient care and reductions in the cost of care. We feel strongly that point of care testing will become the recognized standard of care as these benefits are aligned with the primary drivers of our healthcare system. Moreover, our market leadership position will be sustained through continued innovation.

Our second opportunity for growth in continued expansion of usage within our install base of customers. As customers realize within their institutions the significant improvement to patient care and staff productivity, we have an opportunity to extend usage to more and more departments within those institutions. For the first time in our history we now have a field sales organization dedicated specifically to this effort.

Our third opportunity for growth is in new products. This year we have released more new products that at any time in our history. The Troponin-I Prothrombin Time, and Kaolin ACT tests all address new market for our business. Perhaps even more significant is the realization that we can now accelerate test menu expansion as the breakthroughs we have made in immunoassay testing with the Troponin-I product, enable us to bring two to three new immunoassays to market each year.

This management team feels strongly that we are well positioned to deliver greater value to our customers and therefore greater shareholder value.

Now let me turn the call back over to Jeff to provide some further detail on our results for the third quarter.

Thank you, Bill. As Bill mentioned, in the third quarter we saw cartridge shipment increase by 15.6% over the prior year, growth shared approximately evenly between the US and international shipments to Abbott. Shipments to our partner covering the veterinary market, Heska Corporation, also increased nicely.

Following last quarter's emergency analyzer sales in response to the SARS epidemic in China, analyzer shipments of 867 units returned to our previous projections of 800 to 1000 units per quarter. Revenue shipments of analyzers may dip below that level in the fourth quarter, as inventory in Abbott's international warehouses are depleted. But we believe that they will return to the projected range in the first quarter and thereafter.

Cartridge gross margin for the quarter was 13.0%, down slightly from 14.9% last quarter. We were successful in implementing and qualifying a number of major cartridge production improvements during the spring and early summer of this year. The significant costs of qualification of these new processes, costs mandated by the FDA's Good Manufacturing processes Regulations, temporarily increased our cartridge costs. Those higher cost cartridges have now been shipped, and those costs have been recognized.

Increased costs caused by the stronger Canadian dollar have increase cartridge costs by 17 cents or about 7% per cartridge this year, and represent a cost element that we anticipate will continue. I might add that in Q4 and next year we anticipate a return to our historic relationship between cartridge cost and volume. Further, many of the design changes now incorporated in the product should yield further cost savings that we hope will mitigate some of the currency impacts on cartridge costs.

Operating expense in R&D was down for the third quarter over the third quarter of 2002 because of reduced material usage in product development. G&A costs increased slightly due to increased business development activity. Sales and marketing spending rose sharply to $3.5m from $2.4m in 2002. These costs are projected to rise to approximately $4.5m in the fourth quarter, and more than $5m per quarter in 2004 as the full cost of the company's direct product distribution and marketing programs are recognized. Keep in mind that these increased sales and marketing expenses will be more than offset by our shift to end user revenues upon termination of the Abbott agreement at year end. We are continuing to project that R&D and G&A costs will remain essentially flat through 2004.

The amount reported as dividends on our Series-D preferred stock may warrant some additional explanation. The company has the option to pay these dividends either in cash or in kind, and to date has elected to conserve cash and make these payments in kind. This results in an increase in the liquidation value of the shares, and in the number of common shares available upon conversion at $8 per share. The value of the dividend reported in our financial statements is determined by multiplying that increased number of shares available upon conversion by the company's share price on the date of the dividend, $13.37 for the third quarter.

As a result increases in share price result in increases in the reported value of the "in kind" dividend. This can be graphically seen by comparing the dividend of $183,000 reported in the third quarter of last year, with the $1,134,000 dividend reported this year. The Series-D preferred stock dividend rate will drop from 8% per year to 2% per year in the event that company's shares trade at or above $15 for more than 45 trading days. The Board of directors does periodically review the dividend payment policy for preferred stock.

Now, let me turn the call over to Mike Zelin.

Thanks, Jeff. This morning I will review activities in our three new product programs for 2003, Troponin-I, Prothrombin Time and Kaolin ACT, and also provide a few comments on future direction.

As you know we did receive clearance from the FDA to market the Troponin-I product in early September, and commence customer evaluations a few weeks later. We have received an [indiscernible] perception in the marketplace; in fact for the first time in our history customers have been calling our sales representatives to schedule appointments. We believe we have a tremendous opportunity as ours is the first point of care Troponin product on the market, with the laboratory grade performance demanded by the application. This 10-minute test will for the first time enable hospitals to implement the preferred chest pain protocol outlined by the American College of Cardiology without incurring significant additional cost.

Our initial target list has over 100 current i-Stat customers. To date we currently have nine customers that have committed to purchase the product pending the results of performance evaluations representing an annualized volume of over 80,000 cartridges. We have an additional group of about seven customers representing an additional 100,000 cartridges annualized, that we believe will soon commit. And of course at $9.50 the selling price is at a substantial premium to our current products.

Moving on to Prothrombin Timer PT. as you may recall the finger-stick version of our PT cartridge was released in March. This product is targeted to Coumadin clinics, and is essentially a product for placement sale as point of care whole blood PT testing is already well established in these clinics. As we have said in the past, two key strengths of our product are proving to be as powerful as we'd expected.

First, we've experienced strong interest in the product from current i-Stat customers drawn by the desire to consolidate their point of care PT onto a single platform along with current i-Stat tests. Interestingly this input actually comes from the laboratories as they are the ones that manage the hospital's point of care program, they're one that have the greatest stake in getting it simplified. Secondly, our cartridge design has now proven to be very easy to use relative to competitive products, and some of our key closes, including our largest to date, has been driven primarily by that factor.

To date we've closed about thirty accounts representing an annual run rate of close to 200,000 cartridges per year, with about two-thirds of those accounts up and running. We have an additional group of approximately 30 accounts that are in the formal evaluation phase, representing an addition 200,000 cartridges of annualized volume. The product is performing well both in evaluation as well as day-to-day use, and is a popular product with our sales force as they consider it to be a very straightforward sale.

Finally, we also received clearance for our Kaolin ACT cartridge from the FDA, and expect to ship product for evaluations in November. As you know ACT is used to monitor heparin therapy, which is used to thin the blood during certain invasive procedures. Our Celite ACT cartridge has received good reception in the catheterization laboratory, but limited reception in the cardiovascular OR suite without the availability of Kaolin ACT product, which is required for some patients. The availability of Kaolin will now allow us to expend our ACT franchise into that area.

As we indicated in the past, and detailed in our press release this morning, we are very bullish about our ability to develop additional immunoassay tests on this platform at the rate of two to three tests per year. Our focus for 2004 will continue in the cardiac arena, with tests such as the naturietic peptides, BNP and proBNP and CKMB. We believe there are also a significant opportunity for our high quality point of care immunoassay platform in the areas of sepsis, pregnancy markers, thyroid and cancer markers, and these are areas we are exploring for future development.

We also have a series of products enhancement programs in place as we look to further entrench out platform in the market. We look forward next year to extending both our room temperature storage time and product lifetimes of certain products. We are about to begin shipments of our next generation creatinine cartridge that we believe will fuel growth in the radiology application, as well as enable introduction of a combined chemistry creatinine cartridge later in 2004.

Back in the coagulation area, we have plans to develop the first of its kind combination [PTAPTT] cartridge that we are targeting for 2005. And finally, in the area of early exploration work we have been exploring our ability to produce an inexpensive instrument that can enable us to enter the self test Coumadin market in the future, and also continue to make good progress on demonstrating the capability of our platform to be extended into the areas of molecular diagnostics for DNA testing.

Now I'd like to hand the call over to Bruce.

Thanks a lot, Mike. Our success in increasing the growth of our company depends on success in four areas. We have developed and implemented a plan to succeed in each of those areas, and will begin to drive that success beginning in January, when we return to independent distribution of our products.

First, we will continue to increase the number of new customers that adopt our point of care testing systems. In the US our team of senior consultants, who we began to recruit early last year, and who are now fully trained and experienced, have developed strong sales funnels, and are actively engaged with prospective customers to drive the decision process. This is the largest team of sales folks we have ever had focused on the conversion of customers from traditional testing processes to point of care. I am extremely confident that we will begin to see the returns on their efforts in the first half of next year.

Second, we will increase current customers' utilization of our existing products. In the US we have several hundred customers that have implemented the i-Stat system and are experience the positive benefits of use. There now exists an opportunity to further penetrate these accounts as most do not use our products to the fullest possible extent.

Beyond just further expansion of usage, there are also opportunities for new applications of our existing products. For example, earlier this year we reviewed the results of a clinical trial at Miami Children's Hospital that demonstrated the value of using i-Stat's lactate test to monitor post operative pediatric cardiovascular surgery patients. That study showed a 70% reduction in mortality, when goal directed therapy is focused on point of care lactate measurement.

Similarly, the use of our creatinine, one of the routine chemistry tests, helps CAT scan departments improve throughput and productivity resulting in fewer disruptions to their schedules and enhanced revenue opportunities.

Our team of sales specialists, who we began to recruit early this year, and who are now fully trained and experienced, are focused on these opportunities for growth.

The third area of growth is new products. As Bill mentioned earlier, never before in our history have we had so many products in the launch bays at one time, these three new products alone targeting market opportunity in excess of $600m. Our entire field organization is focused on these opportunities. These new products represent opportunities as door openers for conversion of new customers, and expanded utilization within our installed base of customers.

The Prothrombin Time test launched earlier this year continues to receive high marks from current and new customers alike for ease of use. Laboratory directors and point of care coordinators like the fact that they now have access to an important point of care test that is on the most consolidated platform in the world. This equates to lower training costs, easier implementation, and better system monitoring.

Our Troponin-I test, just approved this quarter is already shipping. Moreover, we have a substantial and growing backlog of customers who are awaiting the opportunity to evaluate this product. I believe the excitement around this product is borne out of the fact that it is the only Troponin-I test in the world that permits hospitals to implement the Triage protocol for chest pain patients that is preferred by the American College of Cardiology and the American Heart Association. Never before has this market had a test capable of delivering the required level of sensitivity and precision at the point of care on a single drop of blood with results in 10 minutes. Our customers are truly excited about this product, and I believe it will generate significant growth for our company over the coming quarters and year.

Next month we will see the launch of our Kaolin ACT test. Along with its companion, the Celite ACT, this product will further consolidate testing onto a single platform for the cardiovascular surgery unit, and the catheterization lab.

Our fourth opportunity for increased growth lies in the international market. Frankly our sales in certain international markets lag the norm. Slightly over one half of the worldwide in vitro diagnostic market is outside the US, and today only 25% of our sales are made there. In response to this opportunity we have established a direct sales presence in Europe, staffed with both senior sales consultants and technical specialists. These teams are currently undergoing training and will be ready to deliver new customers and increased utilization in existing customer sites in the UK, the Benelux countries, Germany and Sweden.

We have reviewed existing relationships with key marketing partners in markets such as China. In many of these key markets our distributors are increasing investment in dedicated resources to sell and market the i-Stat system. International markets represent a significant opportunity for growth, and we have increased our home resources in this regard. Apart from building a direct presence in Europe, we are also increasing our staff to better provide training and management of our distributors around the world.

Today, distribution of our products continues to be managed exclusively by Abbott Laboratories. Our sales personnel work and train in parallel and occasionally as a team with their Abbott counterparts. We believe that they are making a real impact in the new product area, and are honing their knowledge of their assigned accounts and territories. Each of them is anxious for January to arrive, and the opportunity to accelerate our rate of growth. In short, we are tremendously excited to be regaining control of the customer side of our business, and believe that this change will assure high quality service to our customers and generate greater growth and shareholder value.

Now I'd like to turn the call back over to Bill.

Thanks, Bruce. Before moving on to take your questions, let me recap the key points that we have made this morning. First, we have posted record cartridge sales and have created a strong capital position to fund our growth and meet our future obligations. Second, our work to set up a product distribution network is nearly complete, and is on target to fully support our customers worldwide on January 1.

We are poised on the verge of extraordinary new product growth opportunities addressing huge markets that rival those we already serve. And we are positioned better to capture these opportunities than we have even been in the past. We are the market leader, and continue to widen the gap on the competition. Our technology creates customer value that is unmatched in this industry. We are confident this will drive increasing shareholder value.

Now Andrea, we will be happy to take question, and I will turn the call back over to you.

Thank you. (Caller Instructions). Our first question is coming from Jason Crawl of Roth Capital. Please pose your question.

Hi, guys good morning.

Good morning.

Just more color on the Troponin-I launch, and maybe if you could break down the customers? I guess the nine accounts or so that you said currently are using the product in terms of are those new customers or current i-Stat customers? And then the seven additional customers, I guess reviewing or potentially set to review the product, can you just give us a little more color on those?

We launched the Troponin product, in fact we've taken the same approach with the PT product. We have such a large base of installed customers that from a pure sales productivity point of view it makes sense to go back into that installed base first. So for both the PT and the Troponin currently the vast majority of our sales activity is into our current install base. There are a few exceptions. So both in terms of the Troponin specifically, I believe eight of the nine customers that have committed to use the product are current i-Stat customers. And I believe the follow on seven are i-Stat customers.

I did want to correct just one comment. The approach we are taking in the launch is that we're going through the sales process first and asking the customer to commit before we go in and do an evaluation. So where we are with those first nine customers is, those nine have basically committed to us, and all nine of them are either in evaluation, in a formal analytical evaluation phase right now, or will soon enter that phase in the next week or two. I think two of those have completed evaluation, and the data as we expect is fine, and the customer is pleased with the quality of the data and how it correlates to their current method.

Okay. In terms of the PT, the 30 or so additional, is that kind of the same process in terms of the trial? And just maybe going into detail are those current or new customers. And then how long would the conversion cycle take to get those potentially 30 new accounts fully adopted? What's the timing like on that particular test?

The process for the follow on 30 is pretty equivalent to the first 30. I think what we're seeing in PT is, from the time the evaluation is complete and the customer has made commitment, it looks like it takes approximately a couple of months, maybe 10 weeks to get started. And I think those issues relate to the installation of a computer interface, and perhaps the customer depleting the remaining inventory of the current PT system they're using. I think as we said, this is really a replacement product, and the customers we're targeting are customers who have already made the decision that there is value in doing PT testing at the point of care in a Coumadin clinic on whole blood. And they're using a competitive product now.

So once that customer makes the decision there could be a period of time where they deplete the remaining inventory of cartridges from the previous system. So I think our sense is that from the time the commitment is may be about a two month or so process to actually get up and running.

Excellent. Thank you very much.

Our next questions is coming from Benner Ulrik of UBS. Sir, please pose your question.

Morning.

Morning Benner.

I had a couple of questions. The first question, cartridge growth in the quarter, which goes about 16% year-over-year and you said it was primary from the core business. Do you have a sense for how much of that growth was new customers versus integrated utilization at current customers? And then during the quarter did you see any change in Abbott's behavior with respect to pricing or anything else they were doing? And then lastly the 3.7m cartridge level in the quarter is this something that you guys think is sustainable over the next several quarters?

Benner, this is Bill. First of all, the question about do we have a sense for where that cartridge growth came from. It has come from the international market, and I think that does reflect some incremental customer uptake. It also comes out of our Vet market. We know that represents expanded sales into the market. You have to keep in mind most of the distributors we sell through like Heska or Abbott's International stocking locations, for their own business purposes maintain a pretty consistent inventory level. So when we see up-ticks in this that are a couple of quarters in a row, they do represent absolute sustained volume on the other end.

In the case of the Abbot International organization, with a little bit of time lag to they can gather the appropriate international reports; we do see their actual sell through the customer market. So I think the right way to answer your questions, Benner, is I don't think there's anything out of the ordinary dealing with the growth that we saw. It's come from pretty much all phases.

Okay.

With respect to Abbott, have we seen them do anything different with regard to pricing or their behavior, no. Abbott continues to push the product, continues to be very, very active in the field.

With respect to the sustainability, status level, I think we have to look at the fourth quarter as one where we anticipate lower volumes, both in cartridges and in analyzers. And the reason for that is the Abbott international warehouses, they are drawing down their warehouse balances. The ideal of course would be that they would end the quarter with sort of nil inventory. Obviously we will not be restocking that, and therefore that volume will not show up as reported shipments.

I think a different way to look at that better would be that ultimately we will have to look at the sell through to the market in the fourth quarter to really understand the business. Because that aberration of burning down inventory will affect the total out the door.

Okay. That's helpful. And then on the expense side, I think what you have guided next year is that selling and marketing will be $5m or north of $5m on a quarterly basis. I think in this quarter we were $3.5m to $4m. Now you said in the call that you'd finished all of the hires in terms of ramping up the sales and distribution internally. What else needs to be done and where's that money going to be spent? The difference between the $5m or north of $5m and where we are now?

Well I'll let Bruce answer the second part of that question Benner, but let me just say that there was a continuous ramp through Q3. So we will have a sort of full quarter in Q4, and there are some people that just started, for instance, in October. And then there are programs that really have been in the planning stage and we will not see the expenditures on them until beginning at the end of Q4 and then coming on full blast in the first quarter and thereafter. Maybe Bruce can give a little more color on those programs.

Benner, a good portion of the incremental spending you will see next year, that we haven't seen much of this year is in the marketing area. As you know Abbott has been fully responsible for marketing as well as selling of our products. So a lot of the marketing expense, developing collateral materials, advertising, direct mail, user groups, trade show attendance and so on and so forth will have full impact in 2004. So a good portion will be there. As well as incremental training of our distributors that we're using in the lower potential countries around the world, there is certainly expense associated with that as well.

Okay. And then one last question and I'll get back in the queue. Jeff, the R&D costs are expected to be relatively flat I think is what you said. Is there any chance that we will see those begin to ramp up with some of these new product initiatives that you guys have discussed? And then in terms of new product initiatives, is there any update on the intellectual property front with respect to proBNP or BNP?

Okay, well let me -- well I don't know, Mike, do you want to talk about making more with less?

Thanks, it's a nice set up. The R&D expense into 2004 will be up slightly, maybe a $200,000 annualized. But we won't see it increasing anything close to substantially until 2005. And one of the reasons for that is as we are looking to manage our cash in the area of R&D we've chosen to throttle the coagulation program in the way of managing expense. So the combined PTAPTT product for example, that program is moving along nicely. We could move it along faster if we put more money into the program. But through 2004 we're trying to manage our cash, and we're using that as a way of managing our R&D expense. So I don't think you will see any measurable increases until 2005.

Benner, this is Bill. On the intellectual property front, us getting a license to BNP, proBNP, we've said before that we are having active discussion with multiple companies to acquire access to those markets. And I can only tell you that we have made what I would view as very significant progress in the last 30 to 45 days. And we still feel very good about our prospects in that area. And as you know we have said before, once we do secure a license we believe that we can have product on the market in, at or under, one year. So we still feel that's a tremendous opportunity for the company, obviously.

Excellent. Thank you very much.

Thank you. Our next question is coming from Alco Barney (ph) of [indiscernible]. Sir, please pose your question.

Good morning. Still a little bit of a clarification. I may have missed it but what is the general or expected timeframe for Troponin-I from the cycle timeframe for going from clinical evaluations to clinical use?

Because we're in that sale cycle obviously we don't have significant hard data on that yet, so the answer to that question is still somewhat based on our judgment. But one thing about this particular sale is that the evaluation and review of the data is looked at by the laboratory and the cardiologist. And the cardiologist needs to get comfortable with that transition. I don't think we've seen anything to day yet that would suggest that the cycle time from sort of commitment to actually up and running is much different than our current products, which somewhere to PT might be a couple of months or so. But of course we're monitoring that closely.

So a couple of months, maybe three at the high end?

I think that's probably reasonable.

Okay, fair enough. Given, Jeff, your comments about what's expected in Q4 as far as inventory burn down, we should not then I take it expect to see the usual type of seasonal behavior in the revenue line from quarter-to-quarter, is that a fair bet?

As Bill pointed out, I think the end user usage of the products is going to be at that level. It's just that because of the draw down of these international warehouses we will not be reporting sales. So you will have to sort of listen to us report to you what we believe the end user usage is. [indiscernible] off the financial statements.

And then how are you looking at the next couple of quarters from a cartridge production standpoint? It looks like you did have a pretty significant up-tick in terms of the units produced? What do you forecast there for the next couple of quarters?

I would say the answer to that is that we believe that production and shipments will begin to have a more trappable relationship from quarter-to-quarter. The improvements in the cartridges that were put in place late spring, early summer, created a kind of perturbation in terms of the balance between production and inventory and shipments, and we're finished with that. So we would expect to see a kind of stable relationship going forward.

Okay. Would you be able to comment as to where you might expect to end the year in cash, after paying your obligations?

Well we have burned relatively little cash in operations throughout the year, and we believe that Q4 of course, because of the continuing ramp up in sales and marketing expenses, that cash burn from operations would increase slightly. But the major change will be our obligation to make a payment to Abbott on December 31 of $10m.

Okay. But from an operating standpoint the burn should be significantly higher than the $1.8m?

Slightly higher obviously because Bruce is spending more money.

Okay, fair enough. A couple of quick housekeeping. What was the international mix of cartridges?

Hang on just a second I've got it here.

And maybe while you're looking that if you can give us an idea of what veterinary accounted for in the quarter?

Veterinary was about 5% of the total, which is a little better. They had a very nice quarter. International looks like it was about 33% of the volume.

Okay. And then just one last question for Bill, relative to your previous comment about discussions for BNP, proBNP. Multiple discussions going on obviously. It sounds like you're looking at both versions of the test. I wonder if you could give us an update as to your thinking, what you hope to do in terms of would you potentially like to add both tests to the menu at some point, what the likelihood of that would be?

Obviously our belief is that we're not in the business of creating new markers, but we are definitely in the business of creating a standard of care based upon our point of care unit use platform. And so to the extent that our customers see value in any given marker, we obviously want to participate in that value stream. So in this case, this industry is still looking at both BNP and NTproBNP and I think clinically has yet to make a decision, if you will, as to whether or not they are at equal value, or one has greater value than the other. Therefore our efforts have been directed at bringing both onto this platform. And our efforts in the discussion that we are having with multiple companies are directed in that endeavor. So we're trying to get both, yes.

Okay, great. Thank you.

Thank you. Our next question is coming from Fred Tunney of Medcap. Sir, please pose your question.

Good morning, Guys.

Morning, Fred.

I want to drill a little bit into a couple of different aspects of the Troponin-I, and it looks like you've got a nice start with customers and evaluations. I guess first off on the -- maybe for Bruce or Mike, what are you seeing -- obviously ACC and HA have new guidelines, result back in 30 minutes of presentation from the ED. What are customers saying about that? Are they aware of it, are they implementing it, are the looking for solutions, or are you having to educate them about this process? And sort of where is it on their priority list?

Do you want me to take that, Mike?

Sure.

Actually it's a bit of a mix. We’re having to do some education, but with a large number of the customers they are aware of the preferred 30-minutes timeline. And so turnaround time, particularly when you talk to cardiologists and the folks running the ED, turnaround time is a significant issue. Obviously faster is better, but the awareness of the 30-minute turnaround time, which by the way is something that generally is not achievable in today's institutions, and tied in with the 10-minutes for us is giving us a pretty compelling story. And has led to a lot of the enquiries that we are getting that is something new to i-Stat where customers are calling us to ask about a product. So a bit of education, but at the same time the turnaround time, there is an awareness out there that the new guidelines are the guidelines that have been suggested by the ACC and HA, are having an impact.

Is it fair to say you are seeing a little bit more of a sense of urgency on this product because of that than previous product launches?

Yes, absolutely. There's no question about that. This is a very high profile product and one that we believe, and I think many of our customer believe can have a significant impact on the overall standard of care of patients [indiscernible] adjusting.

I'd just add one more comment to that. We have already heard at least from two customers, perhaps a few more, that they are actually in anticipation of implanting i-Stat, updating their own internal documentation for their chest pain protocols, because they can now take advantage of the quick test results. So If you walk in to ED, how chest pains are cared for in many places goes by strict protocol that are documents. And so it literally is, in those hospitals, an effort actually rewriting that documentation to take advantage of the capabilities that they didn't have before.

So are you seeing some protocol changes. I guess the other question I have is really related to the margin on Troponin-I. And if I use your cost of production on cartridges it looked like $2.46 for the quarter during the third quarter. And if I use that as a proxy, what’s in inventory going forward, is there any higher costs for cartridge, for a Troponin cartridge, than there is for other cartridges on average?

Yes. There is a small premium for the Troponin cartridge. And when Troponin gets scaled up to volume, similar volume, it's probably on the order of 30 cent premium.

Okay, so --

Early on the costs are a little bit higher of course as we scale up.

Fred, across the board, if you look at all of our cartridges, their production cost varies from the average that we report by about plus or minus 10%. Not Troponin would be at the high end of that.

Okay, so that means 25 cents, around $2.46, up or down.

Right. [multiple speakers] in the case of some others.

Okay. So what I am trying to get to is, you said your pricing per cartridge on Troponin is $9.50. So am I doing the math right? If it costs call it $3 a cartridge for Troponin that's $6.50 in margin versus the average you're getting if I use $2.46 for what's in inventory. Your average of about $1.90. So in my order of magnitude am I close, $6.50 on a Troponin cartridge versus a little under $2 margin on a regular cartridge? If I use end user price as you will have next year?

Fred, this is Bill. The only thing I would say is, you are correct, you are absolutely correct in your calculation. However, as we scale this up the cost is a little higher than that still. And that's because we have to move from single and double cavity moulds for the plastic, to four cavity moulds, and the production startup costs associated with it. So you are correct, but through at least the first part of '04 I'd say our costs will be a little bit higher than yet.

Okay, so if I add another 50 cents then -- you're basically three times the margin on a Troponin cartridge?

Yes, think of it as at least, 2, 2.5. Even in the early days.

And as you scale --

And as you scale and get the higher counts then you can absolutely do the math you did earlier, that's bang on.

Let's see, moving to BNP, some of my question have been answered. But there is a statement in your press release that says preliminary development activities are under way in the area of congestive heart failure markers. Can you tell us what that means?

Sure, there are sources of materials that we can use to do development work but we could not commercialize without a license. So we have accessed those sources, we have material, we are doing some early development work there, trying to get ahead of the game. But obviously we can't commercialize anything until we have a license.

Okay, so at the same time you're attempting to finalize licenses you have development underway on products?

That is correct.

Okay. And then I guess my other area of questions relate to just a simple question. What is Abbott's approach in the marketplace currently? What are they telling their sales force and how is their sales force reacting to the transition that's coming?

This is Bruce. Actually to be perfectly honest we have seen very little change in Abbott from prior quarters. Their people are still out there selling product. They are getting compensated commission at a reasonable rate for selling i-Stat product. i-Stat is an important part of their portfolio for achievement of their President Sales Club, and so we are not seeing a significant change or difference in the way they are selling today versus the way they were selling earlier in the year. As far as what they've been told, in talking with management of the Group they tell me they are continuing to send the message to their people that i-Stat is a critical part of their portfolio and to continue to do what they've been doing all along. So I think that's the message coming from management.

Is that through to today as we get into late October, or through the end of the quarter?

That's through today, as we speak.

Okay, and then my last question is, in the BNP and proBNP discussions you have going on, are you attempting -- are these licenses you are trying to get so you can sell point of care tests, or are you looking to get a large analyzer partner that sells to the central lab that could then offer both central lab testing or point of care testing? Are you looking to partner with somebody to augment sales efforts, or are you looking to get a license?

In the area of the NTproBNP obviously we are looking for a direct license. In the area of BNP I think you're probably aware, I think it's fairly commonly known in the industry, there are only three licensees to that product, or to that antibody pair. And those three are -- outside Japan. And those three are Biosite, Abbott and Bayer. In that area you have seen a deal done by Biosite with Beckman that is probably as good a model as any for how one of the three licensees with BNP can work with another company. It's not a direct sub-license, but it is -- you could look at it as a manufacturing and joint venture effort to expand the market access. So on the BNP side obviously if we use that as some guidance we'd be talking to companies about the ability to partner with them, us make the product, probably put their name on it and we collectively sell it. So that is the route that's available to participate in the pure BNP.

But back on the proBNP side, a direct license is available.

Okay. I'll get back in the queue, thanks.

Okay.

Our next question is coming from Gary Moorcroft of Smith Barney. Please pose your question.

Hi, Mike. Can you tell me, what is the fastest turnaround time for Troponin test at the state of the art level without i-Stat's contribution?

Well there are two answers to that question. If the question you are asking if I have an analyzer in a laboratory and I'm sending the sample off to a laboratory, run it on the laboratory machine and get the answer back. I think what we've heard for the most part is an hour is doable, maybe a little bit less than that. But it's really difficult to get much less than an hour. And in some hospitals that could be significantly hour and a half or even more.

So state of the art is an hour?

The state of the art process. Now of course there are less quantitative point of care devices that are available that don't have the laboratory grade performance, and the turnaround time on those, if they are used at the point of care is typically about 15 to 20 minutes.

Okay. Now when ACOD (ph) came out and made their guidelines, what did they have in mind when they pressed the time window to such a level below where the industry is?

Yes, you read the guidelines, they are carefully constructed to address just that issue. They say that the turnaround time should be 60 minutes but 30 minutes is preferred. So the interpretation of that is they recognize it is a technology limitation to achieve the 30 minutes, so even 30 minutes is preferred they say 60 minutes is the minimum standard. And those guidelines go back -- the last version of that guidance goes back to 1999 I believe. They also in that guideline specifically point out the fact that point of care technology is coming. But they also specifically say that the point of care technology that is currently available when the guideline was written does not have the performance -- the required laboratory grade performance. They also point out it could be very expensive. So they kind of are looking into the future and saying, point of care technology is interesting but the technology is not there yet.

Therefore, we think that i-Stat is situated into that paragraph. This is now the first product that puts the cap on that paragraph. Now there is point of care technology available.

Okay, and then i-Stat's test is laboratory, quality, correct?

That's correctly.

And it can be done in less than 10 minutes, correct?

Well 10 minutes. The analytical time on the instrument is 10 minutes. To cross the sample and so forth may be 13 or 14.

So you have lab quality test that can be done in 10 minutes versus one hour, and you have an ACOD guideline that says we want it under 30 minutes. If you are in a hospital that you're addressing, what is the plausible - given that construct scenario - for any hospital under any circumstance other than a children's hospital to say, no, we want to float the guidelines, we want to stay on the other side of an hour, on the longer side of an hour. We want to put patients at risk for potential death. How does anyone say no to this opportunity?

That's a good question isn't it?

How does someone say, no?

Yes, it's a very legitimate question and I would ask the same question. I mean the market is what the market is. Healthcare at times can be slow to move, but in this case I would say the one thing that I think is very different about this product from any other product we've brought to the market, is we've got customers calling us. And they're calling us, we've got to get this in, we've got to evaluate it, we've got to get it implemented. Our turnaround time is not good. And most of the lab you talk to will tell you that even to get an hour of turnaround time in the lab is quite problematic for them. I mean there would have to be dedicated resources assigned to that. You've got to interrupt one of these big automated analyzers and put through stat samples and that sort of stuff. So this is an area where there's a lot of problems and difficulty in the market. And the advances that are being made on the therapeutic side are driving the need for greater and greater diagnostic information a whole lot faster, as you point out.

This is Bruce. I'd like to interject one more comment there as well. As Mike mentioned earlier, we're going after customers right now, we're targeting customers that are current i-Stat users. When you look at the number of i-Stat products that are being used in emergency departments around the country, it's relatively small. So getting it at your question, those EDs that have never seen or used an i-Stat product before have to be shown. And that process is going to take some time to demonstrate to them that in fact the turnaround time, the laboratory quality of the test is what we claim it is. So how can they say, no? I guess my answer to that is, I think when the facts are fully presented to these customers and they fully understand that it does work and it does provide the 10-minute turnaround time, it will be very difficult for a lot of these people to say no.

So reality is, yes. And the only place anyone could stand in a no is some level of disbelief that you could actually be giving lab quality results in 10 minutes.

That's it. What this industry has seen, Gary, is Two or three companies before us, come to the market with a point of care Troponin only to be very disappointed in the performance of those products. Because they did not offer the sensitivity and the precision required to be able to risk stratify patients. So here comes the fourth in that series, does it really work? And so I think the issue here obviously is that the more the market sees this product - and we've already had customers evaluate it and say, you bet it works, it works as good as or better than what's in my central lab - when they get their hands on that, see that performance, see it 10 minutes, one drop of blood bedside, I think there are going to be a whole lot more people saying, yes.

Okay, so your sales guys have got to be completely pumped as well as management in this opportunity. How quickly could you ramp up manufacturing if all of a sudden you get overwhelmed with demand?

Well that's in fact what we work on here day in day out, which is the ability to ramp this and be able to meet customer demand. Mike, you might want to comment on just some of the effort there.

Yes, as Bill said that is job number one right now. Currently our current production lines are not quite as automated as our production line for other products. So there are sort of two jobs going on. We are hiring shifts and we have work going on to add the automation to get it to a level of automation that we enjoy with our standard products. In general sort of high level number, if we go flat out and sales continue to ramp up, we're bringing on a second machine and we're hiring shifts, round about the end of next year we believe we could achieve a run rate in excess of 2m annualized, and ramping from there into 2005.

Now quickly, what would it take to go from 2 to 4, to 6?

Once we get sort of past that 2, 2.5 hurdle it's easier to add -- then the replication is easier. And when you're going from a standing start -- don't get me wrong the cartridge is similar to our current cartridge, so a lot of the technology is the same. But there are differences in it. But we are going from a standing start, so it's more difficult to go from a standing start to 2m that it is to go from 2 to 4. So our challenge is really in the next year, year and a quarter, if we hit those rates then scaling from there is really just more of a question of renting more facility space.

[multiple speakers] the larger size wafers?

Actually it's interesting, this product, unlike our other products, the chip component is relatively simple. The complexity in this product has more to do with the assembly of the cartridge. In fact that's true of our [Coag] products as well. The sensors are fairly straightforward, just the fluidic in and the cartridge are a little more complex. So the challenges are more in the assembly and the automation associated with that. And that's good news because those technologies -- mechanical technologies for assembly are fairly straightforward, and there's a lot of expertise that we could tap into to [salivate] automation.

What do you guys estimate are the amount of tests that are happening in Troponin in the United States alone, currently?

Market size today on a worldwide basis, Gary, is about 35m tests.

US?

US probably half maybe a little more than half of that.

So 20m?

Near 18 to 20 probably.

So call it 20m. Is there any reason why you can't get 20% of that market?

Well I think it's going to be determined by what the product does in the market and how well the customers receive it and the value they place on it.

Well based on what we've just -- the conversion we've just had, [indiscernible] to get 100% of the market.

Yes, it would be speculating to --

Well let me speculate then? Let me speculate. If you were to generate 20% of that market you're talking about doing about 4m tests.

That's right, 20% of the market today would be about 4m tests.

And you're doing 4m tests at $10 a test that's how much revenues? $40, right?

That's right.

And that's about -- that's nearly half of what the combined business is doing currently.

That's right.

So you're talking a huge lever here if all of a sudden this starts to come on stream?

And we believe this product has significant upside potential for the company, obviously. Yes.

And the margins, as Fred pointed out are multiples of the existing base.

That is correct.

If you get an explosion of revenues, an explosion of margin an explosion of net income, all this seems to be the critical juncture for the company.

Well we certainly believe this is one significant opportunity for us and a tremendous addition to our product line, but keep in mind, as Mike said, we will continue to invest in this cardiology area and continue to add additional tests and markers that we believe will only provide even further growth in the future. Thanks Gary, I appreciate it.

Andrea let's say just maybe two more questions.

Okay. The next question is coming from Alco Barney of [indiscernible]. Sir, please pose your question.

Thanks, you actually answered my question in that last discussion.

Okay, great, so we will take maybe one last question then Andrea.

Our next question is coming from David Zimbalist of Blaylock and Partners. Sir, please pose your question.

Thanks. I'm just curious to know if you'd talk a little bit more about your R&D process that gives you confidence that you can bring on a test like BNP within 12 months of license, to continue to play out two three [infarcts] a year? Have you kind of honed the process of getting the chemistry, the fluidics, they protocol to get sustained level of performance as you are looking for in terms of being able to compete with laboratory quality testing.

Let me make a couple of comments, it's a great question, but there are a couple of elements to that. First I would deal with the lab bit first. For the most part if you look at some of what those assays we're looking at, Troponin is the most challenging from a sort of specification sensitivity point of view. That's not to say that we can't achieve that same performance in other products, but the required hurdle for the marketplace won't be quite as high, or nearly as high for some those products as it is for Troponin.

In terms of the R&D process, what we're very confident about, and we've already done proof of principle work on three assays other than Troponin, is that the cartridge design and the fluidics and all that stuff is basically the same from one test to the next. I mean one test might be [indiscernible] to 10 minutes, but the cartridge construction, the stuff that we had to design and perfect over three or four years that allows us to do immunoassay, and do it well under instrument control is pretty much going to be the same from cartridge to cartridge. So the major difference from one assay to the next is laying down the immobilizing the antibodies onto the cartridge. And there may be some differences from one chemistry to the next, but when we talk about one-year commercialization time, that allows for the ability to have sufficient amount of time to work out those differences, those subtle differences from ones test to the next.

But different [indiscernible] times, isn't that really the function of the software?

Oh yes, the software is very flexible, and in fact that's one of the more straightforward portions of the project.

Thank you.

Thank you. Andrea, perhaps one last question and then we will close the call.

Our last question is coming from Fred Tunney of Medcap. Sir, please pose your question.

Yes, a quick follow-up guys. Sort of a different question to be asking i-Stat. But you've now got a fair amount of cash on your balance sheet, and understanding you've got some obligations, but expecting that capturing the gross profit going to Abbott will flip to you January 1, what are your plans for use of cash?

I'm not certain exactly what you mean, Fred.

What do you plan to do with the cash?

What are we going to do with it? I mean we invest it temporarily in highly liquid low risk government obligation.

Pending getting 3% on your money, what -- you've now got $38m in cash and obviously would some payments coming up, you'll still have a substantial amount of cash. Expecting that you will move to cash flow positive beginning '04, would you pay a dividend, would you look for technology or product acquisitions, or would you just let it sit there?

The point where we have cash balances which are not needed to meet future obligations probably does not arrive until 2005 or 2006. And at that point my personal strong belief is that we will have some very, very interesting business investment opportunities, certainly in the current tax environment paying a dividend is an attractive thing for shareholders. But we would believe that we would have opportunities to invest that money and provide a higher return.

Okay, and with the obligations obviously to Abbott, are you going to be conservative with the cash until you've got the cash on hand to pay out through the full five years? Is that what I'm hearing you say?

I think conservative is a very, very, good word to use, and certainly until out projections show that we are unquestionably in a stable and accumulating position going forward, we are going to be very, very careful with our cash balance.

Assuming you do get to cash flow positive, obviously the opportunity increases to expand your bank -- do you have any current bank lines?

We have no debt. I mean the only debt that we really have is, if you look at our balance sheet obviously our obligations to Abbott appear like long term debt.

Right, and you would -- would you then move to expand the -- not necessarily draw down, but get in place a traditional bank line?

Only if we needed it, and presently our plans would not indicate that that would be necessary.

Okay. Thanks a lot, guys.

Okay. Let me thank everyone for joining us this morning, and we look forward to your continued support. Thanks a lot for joining us.

I'd like to thank everyone for their participation and have a wonderful day. This does conclude today's teleconference.