QuidelOrtho Corp (QDEL) 2006 Q1 法說會逐字稿

Welcome to the Quidel first quarter 2006 financial results conference call. At this time, all participants are in a listen-only mode. Following Management’s prepared remarks we’ll hold a q and a session. To ask a question please press star, followed by one on your touch-tone phone. If anyone has difficulties hearing the conference, please press star, zero for operator assistance. As a reminder, this conference is being recorded today, April 26th, 2006.

I would now like to turn the conference of to Mr. Don Markley. Please go ahead, sir.

Thank you. This is Don Markley with Lippert/Heilshorn & Associates. Thank you for participating in today’s call. Today’s conference call is hosted by Caren Mason, President and Chief Executive Officer, and Paul Landers, Senior Vice President and Chief Financial Officer.

Earlier this afternoon, Quidel released financial results for the first quarter ended March 31st, 2006. If you have not received this news release or if you would like to be added to the Company’s distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and speak with [Sheryl Park].

Today’s call will begin with prepared remarks by Management, and then we’ll take your questions.

Please note that this conference call will include forward-looking statements within the meaning of Federal Securities Laws. It is possible that actual results could differ materially from those stated expectations. For a discussion of risk factors please review Quidel’s Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q as filed with the SEC.

Furthermore, this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, April 26th, 2006. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

I will now turn the call over to Paul Landers. Paul.

Thanks, Don.

I am very pleased to report record financial results for the first quarter of 2006, as we saw an improvement in nearly all our key performance metrics. Starting with the top line, first quarter total revenues increased 19 percent to $27.1 million from $22.7 million in the first quarter of 2005. Worldwide, product sales were up 24 percent.

You will note that royalty income declined from $1.1 million in the first quarter of 2005 to $.4 million this year. The decrease was primarily related to up front nonrefundable fees we earned during Q1 ’05 in connection with a joint development agreement that terminated during the second quarter of 2005.

In the United States product sales of $22.0 million were up 18 percent from the prior year first quarter. This increase was driven by sales of our core product lines of QuickVue tests for pregnancy, Strep A, and influenza, which totaled $19 million, up an aggregate 17 percent from last year’s first quarter.

International product sales of $4.7 million increased 67 percent compared with the first quarter of 2005, primarily due to shipments of influenza tests to our distributor in Japan. On a worldwide basis sales of our core products of pregnancy, Strep A, and influenza were $22.6 million, representing 85 percent of net product sales. More specifically, comparing Q1 ’06 with Q1 ’05 influenza test sales were up 37 percent. Strep A test sales were up 30 percent, and pregnancy test sales were up 7 percent. Our gross margin was virtually unchanged at 61 percent.

Operating expenses for the first quarter of 2006 were $11.4 million, including approximately $.6 million in non cash stock based compensation expense. This compares with operating expenses of $28.9 million for the first quarter of 2005, which includes the $17 million patent litigation settlement.

The decrease in operating expenses primarily relates to a decrease in legal fees compared to 2005, which were related primarily to the patent settlement litigation. That decrease was partially offset by the non cash stock compensation expense and amortization, as well as the timing of planned R&D activities, clinical trials, and marketing programs

Net earnings for the quarter were $5.3 million or $0.15 per diluted share. This compares with a net loss of $17.9 million or $0.56 per share for the first quarter of 2005. As you know, the net loss for the first quarter of 2005 included the $17 million litigation settlement amount.

The Company did not recognize income tax expense for the first quarter of 2006 as the income tax provision was offset by the recognition of previously reserved deferred tax assets.

Adjusted net earnings for the first quarter was $6 million or $0.17 per diluted share, compared with adjusted net earnings in the first quarter of 2005 of $2.5 million or $0.08 per diluted share. The adjusted net earnings reflect the affect of certain nonrecurring and non cash items.

These items include the stock comp expense for adoption of FAS 123R, the patent litigation settlement, a resulting increase in the Company’s tax provision due to the impact of the settlement on the Company’s assessment of deferred tax assets, and discontinued operations encompassing the Company’s urinalysis and [ultra Sonoma] businesses. A reconciliation of the GAAP and non-GAAP items is provided in the press release.

Our balance sheet continues to be very solid. DSOs for the quarter were 47 days. The quality of our accounts receivable as expressed as a percentage of receivables greater than 60 days out is excellent. Inventory turns for the 2006 first quarter were five times or approximately every 73 days. Capital expenditures during the fourth quarter were approximately $1.1 million.

Our cash and cash equivalents as of March 31, 2006 totaled $39.8 million compared with $34.9 million as of December 31, 2005.

In summary, I am very pleased with the financial results for the quarter and with our strong start to 2006. Our performance reflects the strength of the QuickVue brand and our commitment to delivering value to our customers.

And, now, I will turn the call over to Caren for a review of the key strategic accomplishments and developments in the quarter. Caren.

Thank you, Paul.

I’m very pleased with our first quarter’s financial results which were notably strong despite a very late flu season in the United States, which still has not ended but is winding down. We posted strong revenue growth, solid gross margins, prudent spending, and a strong bottom line. [Medical care] diagnostics is a very good market to be in right now. Healthcare providers increasingly recognize that early and accurate detection of illness results in improved outcomes at a significantly lower cost as greater resources are being allocated to products, like ours.

This afternoon I’ll briefly describe a few important developments and accomplishments that illustrate our leadership position. The latest U.S. market data confirms that our core products continue to increase their share of the professional [rapid] POC diagnostic market.

Specifically at yearend 2005 we are at an estimated 56 percent share for influenza, a 50 percent share for pregnancy, and a 46 percent share for Strep A. Those figures are all [the major] data, and given our results in the first quarter we believe our share continues to grow.

We believe with the market share numbers indicated a minimum is that QuickVue brand is widely recognized and highly respected, and this is something we will most certainly look to leverage in future product introductions.

As I discussed during our last conference call in January, we introduced our [amino acid blood test] for the early detection of colon cancer. Our product has several important advantages over the traditional guaiac test, and the initial response to our product is very favorable.

Our launch has proceeded according to plan, and we are ramping up marketing activities in the second quarter, including some unique promotions. Our goal is to convert the market from a widely used standards so that will require sustained effort over time, but the opportunity is very large and it’s worth the investments we are making.

The other key product in our pipeline, the RSV diagnostic test, completed clinical trials in the first quarter and we are very pleased with the results. We should also benefit from an analytical study by a major university that favorably compared our tests to other tests for detecting this illness.

We’re unable to discuss the specifics of the study data at this point, and until we have received FDA clearance for the test. Nonetheless, however, we’re really excited about the data we’ve seen to date.

We continue to measure our success in improving and building our partner and distributor relationships since this is one of our strategic imperatives. As you may have seen, we recently announced a partnership with Church & Dwight in the area of over-the-counter testing for women’s health. We believe the long-term potential of this relationship is most promising.

I’m also pleased to report that earlier this month Quidel was presented with the ‘Manufacturer of the Year Award’ at the NDC AVCO Dealers Annual Sales Convention. The award is determined by the AVCO Dealers and recognized as outstanding support of their medical product distribution programs. This was not a popularity contest. Our QuickVue and Strep A and influenza test kits represented the highest unit sales of all the products offered by NDC which includes high volume commodity items like gloves, syringes, and needles.

The strength of our current products and the opportunity presented by new products, partnerships, and technologies gives us confidence in our outlook for the year.

Operator, we’re now ready to open up the call for questions.

[OPERATOR INSTRUCTIONS.]

Your first question comes from Nate Cornell with Pacific Growth.

Hello, congratulations on the progress you’ve made.

Thank you, Nate.

Appreciate that Nate.

Yes, had a question on the – if you look at your bottom line on a non-GAAP basis and you take out the deferred tax asset, what will your normalized tax rate be?

Well, let me just say, Nate, that for this year while we will continue throughout the year to do a very careful assessment, we believe that our current expectation is absent any unusual or extraordinary development that the, that we will continue to offset any future tax provision or benefit through the impact of previously reserved deferred tax assets.

So that it is highly likely that you will continue to see no tax, you know, for the subsequent quarters of this year. We’ll continue to look at the effective tax rate once we become a normal taxpayer, and at that point, you know, one should expect something in the mid 30 percent range.

Okay, great. Okay, and what kind of feedback are you getting on the iFOB product from physicians who have started using it?

Our feedback, Nate, has been really terrific. There is a lot of comfort with patients using the tests appropriately in the home setting and returning the tests to the doctor, as they’ve committed to do.

The difference really between what they do today and the office based test versus sending a patient home with a test that is required to be used at home, and then a tube sent back to the doctor’s office for the test to be run in terms of a positive or negative result is one of the areas the doctors were most concerned with.

The way we have positioned the product, the way we have done the instructions for the patients, the way we have provided the doctor with an agreement notification to work through with the patient if a patient will, in fact, return the test in an appropriate timeframe, and some steps for the patients upon returning the tests, they’ve all worked in our favor.

Okay, great. Congratulations on your quarter.

Thank you very much, Nate.

Thanks.

Your next question comes from Zarak Khurshid with Caris & Company.

Hey, guys, congrats on a solid quarter. Zarak Khurshid here with Caris & Company.

Hi, Zarak.

Thanks. Just some housekeeping here quickly. You know, it looks like the amortization kind of ticked up a little bit. What’s going on there? And can we assume similar levels for the remainder of ’06?

Zarak, you probably have looked into the details that are comprised in our 10-K, and at yearend we entered into some licensing arrangements that have a life that would require amortization through the midpoint of 2006. So, you would see the same level of amortization occurring next quarter, as well, and then it will tail-off. But I think if you look at the detail in the 10-K you’ll be able to get that clarity and level of detail for your comfort.

Perfect, thank you. And then going back to the tax issue, can you just clarify, so the effective tax rate in ’06 is going to be essentially zero and then ‘07 do you think it’s safe to assume something like 10 percent or 15 percent?

Let me provide as much clarity without, you know, getting into the realm of guidance and everything.

Sure.

Because it’s so difficult, but, you know, the belief is right now absent, again, any unusual or extraordinary development that we will prudently be able to use our previously reserved tax assets to offset any provision or benefit, you know, at least in the second and third quarters.

As you know, from an historical perspective, that a great portion of our earnings are achieved in the last fiscal quarter of the year, and we will use that opportunity again to look at all the underlying assumptions with respect to our valuation allowances that support our deferred tax assets.

And, you know, given what would occur in Q4 would have the opportunity to either increase or decrease that valuation allowance accordingly, so at least for the second and third quarter I think I gave you enough color with respect with what to look for. In the fourth quarter we have the opportunity to continue to improve upon our deferred tax assets through the valuation allowance.

Okay. Another couple of follow-up questions here. So, the RSV is going to submitted – when is the RSV going to be submitted to FDA for approval?

It has been.

Oh, it has been?

it has been. Yes, they’ve done the successful clinical trials that support the FDA submissions.

Okay, great. And then, Paul, could you break-out quickly as a percentage of Q1 revenues pregnancy, Strep, flu, and FOB, if you could?

What I will do is, as we typically do, give you the core product break-down. The pregnancy represented 17 percent of the total. Strep A 22 percent. And influenza 46. Given the recent launch and everything I think I would prefer to allow traction to occur and to get at a future point that we’d be able to provide that, but I refrain from providing that level at this point.

Great, that’s understandable. And then, you know, can you just sort of characterize the flu season in general? You know, it seems that the quarter’s results may have benefited from kind of the later peaking season and some strength in Japan, you know, some color on that would be helpful?

And then, you know, kind of generally with regards to the strength of the flu franchise is it more due to current docs, ramping up their use of the test, or is it, you know, penetration. More docs using the test?

The flu season this year was very late and really was an end of February, most heavy in the first few weeks through the end of March, and tailing off now in April, but there is still widespread flu in five states and there’s regional spread in over 13 states. So, we’re having a really interesting respiratory infectious year in terms of the kinds of infections.

And what’s really going on is there’s a lot of Strep this year, and patients are presenting at the doctor’s office with influenza like illness symptoms, and doctors are administering our flu tests, they’re administering Strep tests, and trying to make a determination obviously at the appropriate treatment methodology for the patient.

In terms of our strength, our strength this year is especially significant because if you look at our competitors’ results some of them have already reported they are reporting significantly declining influenza sales as a result of this late and mild flu season. We, on the other hand, have taken, we believe, more share and penetrated in accounts that have not previously used our tests.

A lot of this has to do with what we refer to as ‘our value build,’ which is really translated to mean ‘clinical superiority and economic proof,’ and the validation of test capability. And when you have sensitivity levels on our last clinical study that are now on our label that support mid 90s sensitivity, especially for type A, which is 85 to 90 percent minimum of every flu season’s prevalence, we are benefiting as we should benefit from more doctors adopting our tests.

Okay, great. That’s helpful. And then, I may have missed it but, any specific updates on the Church & Dwight consumer deal? And the company’s talks with the two other potential partners in that area? And I’ll jump back into queue. Thanks.

Thank you very much, Zarak.

The situation with Church & Dwight is very promising. We are working with them, but our relationship, the structure of our agreement is that when we are ready to announce a product that’s when we will begin reporting on the agreement.

In terms of other OTC opportunities, absolutely. Our Chief Operating Officer, Mark Paiz, has taken on responsibilities for what we call ‘new ventures.’ That new ventures is specific to the OTC area, and so we are definitely focused on expanding our capability and our presence on the OTC with really great partners, so consumer branded, marketing, advertising, promotion companies/pharma OTC the companies.

Your next question comes from Michael Feldman with HST Capital.

Hi, guys. Great story, it has been for awhile now. I just – a couple quick questions. One on competitors. I know a couple of the companies we follow, one being Trinity Biotech, and another being a response by a medical out of Canada, are either – I think – I don’t know if [10B] has launched. But, actually, responses are what I’m more interested in because they’ve been talking about having a platform that allowed for higher sensitivity. I wonder if you have comments on either of those, if they’re sort of relevant at this point?

Okay. I think that when you talk about the sensitivity required for, especially influenza A, we have reached a pinnacle of very high sensitivity. And when we talk about the ability to detect at low levels of virus, obviously everyone can continue to improve their tests. I think with regard to where we are, we’re very satisfied but continue to strive to even do better over time.

I mean looking at the marketplace is there a point at which the incremental benefit from having an extra, being a 98 versus 97 percent isn’t all that important? And your brand and comfort position is built-up remains, if you know what I mean?

Yes, absolutely. But, you know, you never quit trying to get better.

Yes, of course. Right, of course. But at the level you are you don’t – that doesn’t strike you that someone leapfrogs you by 1 percent?

No, no. And the other thing to remember is theirs is an instrument based system, ours is not.

Right, right, okay. And just could you give the update on LTF and to the extent that we might in the next few quarters see any impact on margins from that?

Our latest in stone technology is being used today for a few of our reproductive health test formats. We are also looking at branching out into other areas in reproductive health with LTF.

For Strep and flu we are currently in analysis with the validation of the equipment, and so today we are not producing tests in the respiratory area in infectious disease other than in women’s health.

Okay, is there something in the nature of the flu test that makes it more difficult, or is it simply second in line?

Yes, I think you’re right on both counts. I mean it is definitely a more difficult translation and transition, and we also have to decide, you know, over time whether or not the format gives us benefit over and beyond royalty release, in that, you know, we are doing continued study of the test, we’re doing continued study in focus groups with customers to make a determination.

We have such satisfaction where we are today that if we were to move to a different format it’s got to really be an appealing story, it’s got to make economic sense, and it’s got to be clinically far more relevant.

You mean simply from a, well, economics might be better, I mean you might just be reluctant to change, and you don’t want to rock the boat.

Yes, so but we think it’s got great relevance in reproductive health, but in infectious disease. We’re going to make our final decision come summer.

Right. Thank you.

You’re welcome.

Your next question comes from [Andrew McPherson] with [Infineon Securities].

Hey, guys. Nice quarter.

Thank you.

A question on the influenza market. I know you had done a study down under in Australia awhile back. Is there a potential opportunity to expand your presence in the southern hemisphere to help smooth out some of the northern hemisphere influenza seasonality?

Absolutely, we are definitely focused on the southern hemisphere this season. We are – we had plans to do that study in Australia as a result of not only the fact that it was good timing for an introduction for the ’05, ’06 influenza season, but because we wanted to make sure we had key opinion leaders, we had the health authorities, and we had the practitioners who used the tests in the clinical study to support entering that market with key distribution partners. So, that is definitely part of our strategy.

The southern hemisphere is split in terms of the way they buy, there are some opportunities for tender, as well as opportunities for direct distribution. We are exploring and finalizing those plans so that we really have seasonal flu sales. I should say year round flu sales rather than just seasonal.

Is the intent to follow a parallel path with Strep A, as well?

Yes, as a matter of fact, Strep, we talk about that often. Strep is kind of moving to a year-round phenomenon. It tends to mirror the school year, but we’re seeing summer Strep, we’re seeing a very late season with Strep.

We’re seeing a lot more upper respiratory distress this year of unknown origin, and it causes physicians to do the right thing before they prescribe antivirals or antibiotics to test to make a determination of what they’re really seeing, especially in children three years and under.

With the addition of RSV you’re going to see even more of that, so and over time moving to panels of testing where we’re also doing some real development work. So, I think when we start looking at infectious disease, upper respiratory, we’re really going to be talking about year-round emphasis.

Got you. Great, thanks.

You’re welcome.

Your next question comes from John Riley with ACK Asset Partners.

Good afternoon.

Hi, John.

Hey, John.

Stock based comp, what is the annual expense it’s going to be?

We had annual expense for the quarter of $700,000, and I think that you should expect that to continue for a total of about $2.8 million.

So, it’ll be $2.8 in the year. And just hate to beat on the tax, but normalized tax rate is 35 percent, about that?

We’ve been historically booking at 40 percent.

40, okay.

But we have looked at ways to reduce and minimize that, and we’re hopeful that when we get into actually becoming a taxpayer, Uncle Sam, that it will be something different than the booking rate at 40 percent, but time will tell.

That’s fine, so the book rate, 40, maybe we can get that down to 35?

Correct.

Got it. Okay. And then, lastly, you mentioned that you want to ramp-up marketing for the colon cancer test in the second quarter. How do much do you think those expenses could be, incremental?

They’re really in terms of the clinical trials that we have underway, we’ve got a lot of market research that’s going on, as well as the direct marketing to the end user, as well as promotions through the distributor. I would say that, you know, we’re probably going up 10 percent for that particular product in the quarter over what we already sent in preparation in Q1.

Got it, so there will be an incremental for this specific product launch in Q2?

Right, everything is smoothed out over the year.

Right. All right, that’s great. Thank you.

You’re welcome.

Your next question comes from [Robert Olan] with [Deerfield].

Hi, thanks for taking my question. Do you, given the weak or late flu season, both here and in Japan, do you have a sense of what kind of inventory your customers hold? And what is the typical shelf life for say a flu product? Could they hold it through next season?

Yes, the shelf life on our flu products is 24 months, and our distributors, as you can well imagine, are buying what they can move within two seasons. What I can tell you that is in May we’re going to not only have our market share data but a finalization, since the flu season is still going on from the May, June timeframe, for our next conference call we’ll be able to report on the distributor inventories in the Untied States, as well as in Japan and other markets that are growing for us in Europe.

Okay.

But I can tell you just from what we see right now the distributors in the ’04, ’05 season who are buying because of the vaccine shortage learned their lesson, so to speak, and as a result of that they were cautious in buying.

And so we had a flurry of activity when the influenza season really picked up, and our belief is that especially in the U.S. channels that our distributors have been very conservative. So, even in light of these great numbers we’re expecting some real low inventory levels, and we’ll report more definitively come the May timeframe.

Okay, so for instance, in Q4, your distributors didn’t have a heavier season, just particularly addressing, for instance, [Dickinson] had a much heavier Q4 load than they did Q1. You’re saying that your experience is different?

Our experience is that we start to really sell influenza in the August, September timeframe. And our distributors gear-up for their early, for those parts of the country that have an earlier season. For example, California really started its season in October, November.

And so across the country, if you were to go to the CDC flu map, you can actually key-in on the regions. And if you look at the trend lines, they go up and down throughout the season. They just don’t start at one place and then go up horizontally over time. They really do go up and down during the season.

So, what our distributors try to do is the best they can is to have basic stock in all their warehouses across the United States and our Japanese distributors and European, as well, in their markets to meet some early demand and then the typical big push which has always been especially in the U.S. and in Japan in the February, March timeframe.

So, the answer to your question, I can’t explain the Dickinson situation in Q4, Q1. In our case, we had a very good movement in Q4 of last year and we have strong movement when demand built in Q1 this year.

Okay, thank you.

You’re welcome.

[OPERATOR INSTRUCTIONS.]

Your next question comes from [Steven Friedman] with Wachovia Securities.

HI, Paul and Caren. Congratulations on a solid quarter again.

Thank you.

We appreciate that, Steve.

I have two questions. My first question may have already been somewhat answered by you, Caren, but maybe you could expand a bit more because I recall in one of the previous conference calls you indicated that either this quarter or the next quarter you would have more to comment on expansion into OTC partnerships with I think significant main companies. Is there anything more that you can add, that you haven’t’ already mentioned on the call?

The only other thing that I would mention is that the partners that we’re talking to are doing a lot of consumer research, trying to understand what the FDA guidelines really would be for approval of an OTC test that has the significance, for example, for an upper respiratory disease identification. And the criticality around that.

So, no one who has an interest in working with us is taking this lightly. They’re doing their homework as they should. And so when we have those partnerships solidified we’ll talk to them. I think the relevance is that what we’re finding, why these companies started to talk to us to begin with is certainly that with the heightened interest in influenza that is a byproduct of the Avian Pandemic concern, there is a lot of interest in people taking more ownership for their healthcare and getting a heightened sense of interest, especially around early identification for seasonal influenza, as well as Strep, as well as other types of infectious disease, especially during cold and flu season.

So, I think we’ll have certainly something more to announce yet in 2006. The timing is always really based on when these companies finish their homework and get a real good feel for the size of the market.

One other factor I think would be that they’re really looking at $200 and $300 million point of departure market sizes before they’re even interested in getting involved. These are companies that anything under that isn’t of great interest to them, so that’s why we talk with enthusiasm but we also let you know that the work is still underway.

I understand. One of the reasons I brought that question up is that on April the 7th the USDA announced that they were rushing out guidelines to help companies develop new tests capable of quickly singling out Avian flu in infected humans. And, yes, if this were the case it would be nice to have some partnership already in place or if it could be used OTC, a significant company would be a good partner.

Right. I think that, though, what you’re referring to is the fact that the FDA in partnership with the CDC had a very quick review process supporting an H sub-type detection to support the public health effort to quickly identify in certain regions of the country if, in fact, Avian influenza was present in the populace. It is not an independent test that test at manufacturers would be part of. It was much more a rush to help public health get prepared for their RTP CR capabilities to support detection nationally, as well as regionally.

Yes, that’s what I was referring to.

Okay, right.

I – one other question, and maybe this would be for Paul. Paul, could you expand or give the amount of the tax deferred assets or the net operating loss carry forward? Is that available or?

Well, it’s part of our Annual Report 10-K, but as of 12-31-2005 we had 9.8 of deferred tax assets net of the valuation allowance.

And would that be reduced by what was used this quarter, or was that, is that after this quarter?

There was no change as of this quarter. One other clarifier comment that, you know, goes into the footnote specific to NOLs but as of December 31st, 2005 the Company had $49.6 million of NOL carry forwards.

Okay. Well, I guess the 49 million reconciled to the 9.8 million, maybe you could clear that just a bit for me?

There’s components of the deferred tax asset comprising that $9.8 million, Steve. Of the net operating loss carry forwards represented $17.8 million of it. We also have some capitalized research and tax credit carry forwards, as well as, you know, some valuation allowance put against that.

But, you know, the deferred tax assets net of the valuation of 9.8 and then some deferred tax liabilities of almost $1 million that netted down to the $8.9 million that sits on our balance sheet. Again, I would refer you to note 4 of the income taxes in the 10-K for all the clarity and detail of that.

All right. This may get into an area where I’d be best talking with you offline on it, but I thank you for that explanation.

No problem.

Your next question comes from [Louis Corrigan] with [Kingsford Capital].

Hi. Could I get the accounts receivable and debt level at the quarter?

One sec. Accounts receivable as of March was $13.5 million, and total current liabilities of 12.5 of which less than $1 million represent the current debt portion.

Okay, and the long-term debt?

The long-term debt was $8.3 million.

Okay, and you may have talked a little bit, but what do you see going forward over the next few quarters from Japan? You said the season, the flu season was a little bit late? Would you expect additional spillover orders there in the second quarter?

Well, I think the Strep season continues. I think influenza is winding down in Japan and in North America, but I think you’re going to see a continuation of Strep for awhile based on our ordering patterns.

Okay, so it looks like it’s going to be a little bit better than seasonal, but at least a year should essentially follow seasonal pattern?

Well, we have some offsets to seasonality. We have some new product introductions coming along, so we expect a little – we do expect a variance from previous years. We think we’re working toward a non-seasonal profile of the Company. We’re going to make some progress this year.

Okay, great. Thanks very much.

You’re welcome.

Your next question is a follow-up question form Zarak Khrushid with Caris & Company.

Hey, guys. Hey, Paul, what was the 1.1 million in CapEx spent on? And then you spoke briefly about panels, can we take that to mean you’re currently working on some sort of say influenza Strep, RSV combo test? And is that technologically feasible in the current platform? Thanks.

Primarily, the CapEx was spent on routine purchasing of machinery and equipment and the restoration to make sure that, you know, our manufacturing processes are in good operating orders at all times.

And with regard to panels, absolutely we’re looking at panel testing for the future. We especially see opportunities in accute care, in that area. And we’ll be talking about that probably as we enter 2007 more definitively.

Thanks.

You’re welcome.

Your next question is a follow-up question from Robert Olan with Deerfield.

Hi, thanks. Just following up on one of the previous questioner’s questions. In terms of your test ability to specifically identify bird flu, do your tests have that capability?

Our tests identify type A, they do not sub-type Avian flu as referred to as [H5 and 1]. We can detect type A which H5 and 1 is part of the type A classification. However, just to make absolutely certain if you’re new to the Company story, is that Avian influenza has not yet, and we hope it doesn’t, have human-to-human transmission. Until the mutation of the virus, the human species from another human we will not be able to comment on detectability.

Okay, and the second follow-up is can you elaborate on your expectation of an OTC flu test?

Well, we think it’s got definitely a hurdle rate, as does any test that has some significance in terms of the patient’s reaction. Does the patient go to the doctor and get the appropriate care, does the patient try to self-medicate?

I think when we talk about OTC there’s great opportunity but I think it definitely requires the appropriate company that has the expertise in development, which we believe we do, paired with a company that understands the criticality of OTC marketing, that has either a pharma or a very strong consumer background in personal health products to support the kind of expansive clinical studies required, economic studies required, and patient use requirements and patient reactivity requirements.

You may be seeing some of the reactions. There’s a high positive hope for some communicable diseases, such as HIV going OTC, but there’s a lot of real critical work before [comfort] itself by FDA and by the companies that support the testing. So, the answer to your question is absolutely we believe we can get there but it’s got to be done the right way.

Okay, so it’s not probably a one year…

No.

Okay.

You know, unless the Government says, ‘hey, we may relax some of our concerns because of the greater good.’ So, you never know.

Okay.

Thank you.

Thank you.

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

I’d like to thank everyone again for joining us this afternoon. I hope our discussion gives you a good picture of what’s behind our strong results and why we’re enthusiastic about the opportunities that are ahead of us. I look forward to updating you on our progress again in about three months. Thank you for joining us today.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.