Trinity Biotech PLC (TRIB) 2005 Q3 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Trinity Biotech's third quarter earnings conference call. (Operator Instructions). It is now my pleasure to introduce your hose Mr. Ronan O'Caoimh, Chairman and Chief Executive Officer of Trinity Biotech. Thank you, Mr. O'Caoimh you may begin.

Thank you. Good afternoon and welcome to the Trinity Biotech third Quarter conference call. I'm joined in Dublin today by Brendan Farrell, President and by Rory Nealon, Chief Financial Officer. First Rory will speak about the results for the quarter and then Brendan will discuss sales and marketing activity for the quarter and finally I will speak about our recent Primus acquisition. At that point we'll hand over back to Jen for a question and answer session.

However, before we commence I'm required to read the safe harbor provision as follows. Forward-looking statements in this release are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including but not limited to the results of research and development efforts; the effect of regulations by the United States Food and Drug Administration and other agencies; the impact of competitive products; product development, commercialization and technilogical difficulties and other risks. Detailed and the company's period reports filed with the Securities and Exchange Commission. So I will hand it to Rory now.

Thank you Ronan and today I propose to give you an overview as usual of the key items in our income statement and in particular I'll highlight the positive trends in recent quarters. I'll then propose to discuss some of the key movements in the balance sheet, this time focusing on the affect of the recent Primus acquisition, and also the ensuing changes in our banking facilities. And finally I'd just like to just touch on some investor relation matters at the end.

Before getting into the detail I will repeat what I've said for the last two quarters. Namely that our 2005 numbers have been prepared in accordance with international financial reporting standards, or otherwise known as IFRS. Previously we've reported in accordance with Irish and UK CAP and for our American investors you should know that IFRS are more akin to what you are used to, US GAAP. And one of the key differences, just to mention at this point, is the treatment of share options and I plan to touch upon that later on when I deal with those investor relation issues and analyst expectations.

To move on to the detail of the numbers and to start with the revenues, you will note that we have once again provided a breakdown of our revenues in the press release between key product areas and also by geographic location, which is a slight difference from the format we previously reported, in that we have split out what was otherwise known as other and which used to contain our clinical chemistry business, which I will remind you we acquired from Sigma in 2002 and the Fitzgerald Stroke RDI business, which we acquired in 2004-2005.

With the recent acquisition of Primus we've decided to combine our Sigma Clinical Chemistry business with Primus under our caption referred to as clinical chemistry. There is an actual fit here in that the products are both filled in the chemistry labs of hospitals. With this move we have also taken our Fitzgerald operation and combined it with our infectious disease division which is also a natural home in that Fitzgerald sells a large range of infection disease antibodies and antigens.

I'm perhaps stating the obvious but obviously in providing the information in the press release we have restated a prior comparison for consistency purposes. Regarding the detail of those tables in the press release Brendan will take you through an analysis of those numbers shortly. But at the top level you will note that our sales for the nine months to date have grown by 22.2% on the same period last year, which is consistent with our historic annual growth rate of 20 to 25%. Also comparing the recent quarter, Quarter 3 with the same period last year, you'll note that those revenues have increased by 25%.

More recently comparing Quarter 3 this year, with the previous quarter, Quarter 2, you will notice our revenues have increased by 18% or $4.1 million. Obviously 18% growth in one quarter is extremely significant and is a combination of organic and Primus-led growth with a split being approximately 50/50. At this point I will leave the rest of the revenue discussion to Brendan, and he will shortly take you through the detail of the key movers and trends.

Moving on to the gross margin you will recall that each conference call I'll remind you of the key drivers of those growth margins and you'll recall me mentioning items such as seasonality, channels to market, and geography. Last quarter I touched on for the first time the influence of instrument placement on our business and it is probably worth expanding a little more of this concept by using Primus as an example. Primus' business model is a package solution of both reagents and instruments upon which to run those reagents. And like Trinity's infectious disease business and coagulation business, standard practice is to sell or place those instruments and to make in truth, a negative margin on them.

The real margin is made from the reagents which are effectively pulled through once the instrument is in place. Think of it as the equivalent of a long term contract. In fact a useful analogy is the razor blade scenario you've heard me refer to before with the profits obviously being made on the blade. In a situation where a business is ramping up as Primus is, and where it's placing - or it's selling its instruments it obviously grows the revenues or top line of the business. But in reality it does little for the growth profit line and in fact would reduce the growth margin line. But obviously in the longer run this reverses as reagent pull through starts to incur. In fact, it's a very, very good indication of the future medium term growth of the business.

Trinity has been experiencing this phenomenon in recent years with the introduction of instruments for our coag business in late 2002 and more recently the Adaltus(ph) line for our infectious disease business in early 2004. Specifically coming back to Primus, in the last three months instrument sales have represented just shy of 40% of total sales, whereas in previous years instruments would be of the order 10 to 15% of total sales. This is obviously a very strong of future growth and where the company is going and is in fact one of the key reasons why Trinity acquired Primus.

That said, it will take just a little while yet for the reagent pull through to come through in those instruments and to feed through to the bottom line. Before concluding on the gross margin I should point out that at a top level our growth margin is marginally higher than last quarter at 48.9% as compared to 48.2% in the previous quarter, Quarter 2.

Moving on to our administrative expenses, our total expenses increased from $7.6 million in Quarter 3 last year, to $8 million last quarter and $9.4 million in the current quarter. The increases over the same period are obviously due to a number of factors. Specifically the RDI acquisition we did in March this year, the Primus acquisition in July of this year and also you'll recall the ramp of the U.S. sales force which was happening throughout last year. In other words the full run rate of administrative expense is associated with that sales force would not have been there in the prior comparative.

There has also been some cost in the recent quarter associated with the shut down of our St. Louis facility which happened at the end of September. You'll recall me mentioning on the last call that we've combined our customer service center, which was previously located in St. Louis with our sales and marketing function in New Jersey, the goal being to reduce our annual cost by about $0.25 million. And those savings should start to kick in towards the end of the current quarter.

Moving on to the balance sheet, and just to summarize the key movers, I will cover those off but in the process I plan to elude to the effect that the Primus acquisition has had on those numbers and to touch on our cash and our gearing first. In acquiring Primus we did so without taking on any debt or cash and accordingly Primus itself has had no effect on the cash or the gearing of the company except to the extent that we borrowed money to fund the actual acquisition. Regarding our actual cash position this has increased on the June balance from $17.9 million to $19.3 million or an increase of 1.4.

The cash level itself is down somewhat on December, or the start of the year, which is obviously due to the impact I'll remind you of the RDI acquisition which we acquired at the end of March. Our total financial liabilities meanwhile have moved from $24 million at the start of the year to $25.9 million now. And that's an increase of only $1.9 million, despite the fact that we have recently raised $9 million to fund the acquisition of Primus. Other key movers, or reductions if you like, during the period include a reduction or converted debentures of $5.5 million and our payment of bank debt of approximately $2 million. Going forward I will reiterate that it is our preference where possible and practical to utilize our cash balances or to raise new debt to form future acquisitions. In fact our last two acquisitions, RDI and Primus, have in fact demonstrated this point.

Just to cover some of the other key balance sheet items our accounts receivable and prepayment balance has increased somewhat in the last quarter from $17.8 million to $19.6 million. And this movement is made up of two factors, one being $2.4 million relating to the Primus balance sheet and the counter - an opposite balance of $600,000 relating to the rest of our business. That reduction of the rest of our business is obviously resulting from our previously stated objective of reducing our working capital levels although I would state at this point our accounts receivable levels are getting close to optimal levels.

Moving on to our inventory, we do get a lot of observations about our levels of inventory and we would accept that historically they have been too high. The levels are driven by somewhat unique circumstances in our business, for example we have to hold up to one year finished goods by lot number for individual customers. We also hold one year worth of raw materials, and so on and so forth. You've heard me give all those reasons before. But it is worth noting that we have been very successful over the past two years at getting our relative levels of inventory down.

Specifically if you look at inventory by quarter, relative to the annualized revenues for those quarters, you'll see that it has reduced from 51% at the start of 2004 to 36% now. In other words, as our business has grown significantly during that period we've kept the level of inventory relatively flat at a dollar level and in fact they have declined significantly relative to the value of sales or by about 30%. Regarding the most recent movement in inventory $36 million at the end of the year to $38.6 million now, that movement primarily relates to the $2 million of inventories we acquired with Primus and there's also has been a small increase primarily in our finished goods bounds given our increase in our overall business levels. And also because we probably have been cutting it a little bit fine in some of our key product areas.

In summary, our share holders equity and net assets are now standing at $132 million or interestingly, approximately $8.59 per ADR, which is worth noting once again is greater then the current share price of the stock.

In conclusion to wrap up my part of the call I have a couple of key points to make. First, our tops and our bottom line performance continue to improve quarter on quarter. Specifically we've grown the business 18% in the space of one quarter of which is approximately half was organic and half acquisition lead. From an organic perspective that is an annual increase significantly in excess of our annual target of 12%. Secondly, the trend in our operating margin is very healthy this year from 6.8% in Q1 to 7.4% in Q2 and 8% in Q3. Currently we've concluded another acquisition during the quarter which will be earnings accretive before the end of the year and which did not necessitate any dilution. Finally, we remain in a healthy balance sheet position with cash of $19 million post the recent acquisition and net assets of $132 million or I'll reiterate $8.59 per ADR.

Before handing over to Brendan there's just a couple of observations I'd like to make about our analyst coverage. The analysts currently covering us are Rodman & Renshaw, Davy Stockbrokers, Dublin & Associates and Goodbodies. In considering those forecasts that I suggest you pay particular attention to the treatment of share options in order that you're comparing like with like. We've had a number of questions on this. For example, in one of the set of forecasts there before share option expenses in order that the numbers be more comparable with our industry peers in America. And accordingly if you're taking EPF forecast from those numbers, just be conscious it will be somewhat different from the reported numbers. Thank you. Brendan.

Thank you Rory. I'd like to provide you with more details around the revenue numbers for the first three quarters of 2005. Before I do that let me reiterate what Rory has already said that we're now viewing and managing our business in four units; infectious disease, coagulation, point of care testing and clinical chemistry. And this is different to the way that we would have reported to you in Quarter 2 of this year.

We start with infectious disease. this category now contains the Fitzgerald and RDI business, As a raw materials sold by these entities are almost entirely used in a manufacture of infectious disease diagnostic products. The growth in our infectious disease business for the nine months ended September 30, '05 over the same period of '04 was 30.2%. During Quarter 3 specifically we have seen a very strong performance from Fitzgerald particularly due to the sale of influenza antibodies to the manufacturers of diagnostic test kits.

In the United States our sales force continues to enjoy success with a system sales strategy which basically provides an instrument and reagent solution to our customers. This strategy has enabled us to win back market share from our former exclusive distributor Wampold and we now have a base of over 300 infectious disease instrument platforms in the United States market. This number includes 15 placements of the latest large analyzer from our instrumentation partner, Adaltus called the NextGen. And we are confident of continued success with this exciting instrument.

Again in the U.S. in the Third Quarter of 2005 we had very strong sales of our line suite of products of over $2.5 million during the quarter. Turning to our coagulation business which had revenues of over $21 million in the first three quarters of '05, we are very pleased with the launch of our Destiny instrumentation platform with over 30 placements worldwide during Quarter 3 of 2005. Again, our approach in this market segment is a system sell approach where we bundle our reagents and consumables together with the Destiny platform. When successful this leads to contracts with customers of a minimum of three years and generally five or even seven years.

Moving on to our point of care business which had revenues of $9.5 million in the first three quarters of this year and which is up 31% over the same period last year. Most of these revenues came from our Uni-Gold HIV product and the sales growth came from both from Subsahara in Africa and the United States markets. You may recall that in recognition of National HIV Testing Day Trinity Biotech made a donation of $1 million worth of Uni-Gold HIV tests. We received applications from 77 community based organizations and public health facilities for this free of charge product and have agreed to provide products to 36 of these sites. So this has been a very successful program indeed.

In the United States we now estimate that our share of the laboratory market for rapid HIV testing is close to 20% which is an excellent performance in the relatively short time that the product has been available. We continue to market our Uni-Gold HIV into the public health arena where we are particularly focused on the one-third of that market which exclusively utilizes blood samples which is in sexually transmitted disease clinics. We're also pleased to report that independent studies conducted in the United States clearly show that Uni-Gold has a sensitivity and statistically significantly better than any of our competitors. This superior performance is particularly relevant against the background where the FDA is giving consideration to the possibility of HIV testing becoming available OTC. We continue to watch that development with interest.

The fourth category is a new category on a film which is clinical chemistry and this product category contains the products from Primus Corporation which we acquired in July of this year and also the clinical chemistry suite of products which we acquired from Sigma Diagnostics in 2002. Growth in this segment over the same period was 25.6% and we're particularly excited with the Primus acquisition as the market for hemoglobin A-1C testing and the incidents of diabetes continues to expand worldwide.

Looking at our business from a geographic standpoint our revenue growth in the Americas was 22.6% in '05 verses the same period in '04. Even allowing for the impact of Primus in that period this was strong performance and justifies the investment we made in 2004 in building up our U.S. sales and marketing capability. In Europe the revenue growth in the period was 8.9% and in the Asia-Africa region we had excellent performance with revenue growth above 40%. Overall when you strip out the impact of acquisitions during the first three quarters of 2005, the organic growth was over 14% and this when set against an overall diagnostic market growing at approximately 6% is an excellent performance. Back to you Ronan.

Thank you Brendan. Before handing back to questions I'm just going to briefly talk about Primus. As you know we acquired the company on the 21st of July and Primus is involved diabetes hemoglobin A-1C testing and manufactures both instruments and reagents. This is a strong intellectual property position through it's exclusive patents on foreign agent instrument methodology. There are over 18 million American diabetics and it is recommended that each have four A-1C tests per year. In sole base of instruments drive sales, as Rory was mentioning, and at the point of acquisition there were approximately 300 instruments placed around the world. We're extremely pleased to have placed 25 additional instruments during Quarter 3. This exceeded our expectations significantly.

As we said before Primus has achieved compound sales growth of 30% since 2001 and we believe that we can maintain or indeed exceed that momentum. We're also extremely excited about the new Primus Rapid Gel product which is currently awaiting FDA approval. We expect that we will be FDA approved and clear waived by the end of Quarter 2 next year. The product will compete in the doctor's office and point of care market which is estimated to be as high as $200 million. Given the excellence of the product and the inexpensive and easy to use instrument on which the product runs, we are greatly excited about its prospects in the market. And at this point in time I'll hand the conference back to Jen for questions.

Thank you. (Operator Instructions). Our fist question comes from Jack Gorman with Davies.

Hello Jack?

Hi --

One moment.

We're not getting it.

Jen do you want maybe to take another question and go back to Jack later?

Mr. Gorman could you repeat your question?

Hi can you hear me?

Yes.

Ronan you can hear me, yes?

Yes, hello Jack.

Sorry, hi how are. Sorry about that. I have a couple of quick questions, two housekeeping and one more general one. The two housekeeping ones may be for Rory. I see that margins are up Q on Q and down year on year, but if you exclude acquisitions what would the underlying margin progression be year on year and indeed Q on Q if possible? The second housekeeping question relates to what Brendan talked about in regards to the 20% share in the labs market. Is that Brendan based on revenues, units or on lab facilities? And my third question, which I suppose is a more general question really relating to the kind of significant purchase by the management teams and the shares in more recent months. I was just wondering if you could provide a little bit more flavor as to the thought process behind that please.

Okay Jack why don't I take your first question. I won't go into too much of the specifics but the Primus margins tend to be a little bit less then the group margin, not significantly but a little bit in the mid to maybe high-ish 40s. And a large part of that is driven, at the moment at least, by the significant level of placement of instruments, which I reiterate is fine from a dollar line but obviously the percentage doesn't quite work in your favor because it's done off a higher revenue line. So if you're placing instruments at low margins it tends to pull down the overall margins.

Yes.

Obviously over time we would like that, if the business ever stands still, we see that getting significantly better but obviously we hope it keeps growing. So I would say to you not significantly less then the rest but just marginally less then the rest of the group. So it's had a small effect in terms of pulling it down but not significant.

Jack, just to answer your question on the HIV market share, is by test site. We don't have data which gives us dollar market share breakout, but we do have by test site. And you might conclude that they are fairly similar to one another I would suspect.

Okay. Great.

And this would reflect the question on share purchases and we'd anticipated such a question and I'm glad that it was asked in the context of some of the speculation that we kind of bought shares and sold them straight back into the market and profited and that kind of thing. So I have the numbers here, in September we acquired--the Director of this company acquired 4,501,675 ordinary shares, of which 1,954,800 shares were purchased in the open market for cash and 2,546,875 share options were exercised.

The company was paid a total of $2,617,590 for the exercise of the 5,400 -- or the 2,546,875 options which worked out at an average of $1.03 per share. As all of the options exercised were exercised by the four Executive Directors who are resident in Ireland, each of these Directors had to pay Irish income tax at a rate of 42% on the difference between the market price on the date of exercise and the option price. So for example if the market price on the day of exercise was $1.70 which I think it was approximately at the time, $1.70 and the option price is an average of $1.03 then the notional gain, and I'm talking notional gain not natural gain, of $0.67 being the difference, was subject to Irish income tax of 42% which is $0.28 per share. And this tax was payable within 30 days of the exercise of the options by each of the individual Directors.

If ever -- the total spend by the Directors, excluding tax paid, was in excess of $6 million. And just again, I'd say all the shares purchased in the open market and all of the exercised options were held by the Directors. And clearly any sale of any of these shares would be subject to an SEC filing which would be publicly available.

Maybe Jen, could you go to the next question?

Our next question is from Ian Hunter, with Goodbody Stock Brokers.

Good afternoon gentlemen. I had a number of questions, but quite a lot of them have actually been answered by your presentation. Maybe just on the Primus integration though, and the numbers going forward. As you say it's quite impressive there. You've got -- 40% of your total sales were actually on instrument placements and you're saying there Rory that the Regent pull through will be sometime in the future.

I'm just wondering is that pull through going to be coming through in 2006 and if so what the impact will be on the top line and margins as we go through '06?

The answer is it should come through in 2006, obviously staggered as you-- it gets better as you go through the year, Ian. Just -- it obviously all depends upon the route to which those instruments are sold into the market. If they're sold direct into the market they'll obviously start pulling through pretty much immediately.

If they're sold via distributors the distributors then have to sell them on again before they start pulling through reagent. And in fact, the majority of those would have been through distributors. So yes, in 2006 you will see that starting to pull through reagent.

In terms of the impact that will have on the margin, in isolation it would drive it up. I would say however that their forecast for next year for instrument placements are even higher than this year. So that will pull it back down a little bit. But that's all good news because it's all an indicator of medium-term growth.

Okay. That's great then. Seeing your cash balances there, I presume you're maybe out in the market there looking for other acquisitions. I'm just wondering if you can give us a flavor of what areas you're looking in in terms of test, kind of test areas et cetera? And if you have any geographic preferences. I know it always used to be the U.S., but are you looking further a field now?

Well in terms of geographical preference our preference actually would be for Europe because then -- because clearly we suffer as a consequence of the fact that we've got a large dollar revenue base and a very large euro cost base. And of course the recent movement in the dollar has crucified us, and I think we outlined the impact of that.

So, I mean, our preference will be to acquisition European-based acquisitions and clearly that would serve to give a more natural balance to our current exposures. In terms of the areas that we're involved in, we don't really see ourselves going much beyond where we are which is infectious disease, coag on to current care. So therefore that's where we would be looking and that's where we do continue to look. Just to make the point of nothing particularly imminent at the moment, but we're always looking. And as Rory has stated in his presentation, we have the resources to do so without a re-course to the shareholders.

In terms of actually, the width of products you know certainly in coag we have the complete range of both instruments and reagents so there are no tests that we badly need to add to our armory. That doesn't apply to the same extent, clearly, in the infectious disease. There's almost infinite numbers of tests potentially available, but again we've a very broad suite.

So I think we don't have any particular, well I'm sorry -- I'll go back to clinical chemistry. Clinical chemistry where apart from the hemoglobin A1C market where we're a significant player, in the balance of the market we're just kind of really, we're just selling esoteric products so we're not a mainline there. So basically we see ourselves in point of care, adding through our own research and development efforts.

And in the other areas we don't see any glaring weaknesses or such. We've broad ranges of product, but we would basically acquire, depending on what came available.

Okay. Thanks very much.

Our next question is from Brett Hollard with Newman Securities.

Hi, I just wanted to ask a couple of questions around the Primus acquisition. When you say 40% of sales do you actually mean from the $2 million or so that you recorded in this quarter, and for how many weeks were you actually consolidating that contribution?

And then the second part was just really to understand a bit more about the ratio of placing and outright sales and how you see the life cycle of those products, if you are placing them, fitting on to the balance sheet and how you write them down off there?

Hello Brett, its Roy here. The 40%, well the 35, 40% was from that $2 million as you alluded to and it was on the books for -- in fact the majority of the quarter, mid-July, actually almost bang in the middle of July, so about two weeks was on the books for the whole quarter.

Okay.

In terms of the placing and the outright sales, I mean it depends--I'm going to complicate it a little bit now. But it only goes -- you alluded to instruments being on the balance sheet in the period over which we amortize them. That only happens if we place the instruments, and use that word carefully.

There are two ways basically of getting instruments in the field and what I say now applies to our Primus business, our infectious disease business or our coag business. One is you sell the instrument, and you typically sell it at a negligible margin. That's just a straight sale, it's gone, it's off the books, end of story. The other is a placement where you place the instrument effectively for free with the customer -- of course nothing is for free in life. It remains your instrument, it goes on to your balance sheet and it gets written off over the period of the contract, typically, somewhere between three and five years.

Like I said nothing is for free. Typically the customer pays a higher price on the reagents to make up for the fact that they got the instrument for free. So that's effectively -- or that's what we'd call a reagent rental agreement. In terms of Primus' mix going forward, there's an element of an international ramp up going on this year and next year which is bringing it to about the order of 35 to 40% for the last few months.

I'd see the continuing for the next year, year and a half, but ultimately it will out and those instrument placements will probably get back more to where they were in the past about the order of say 10 to 20% of sales. And obviously that within itself will drive a lot more margin to the bottom line.

Does that answer your question Brett?

Is this a seasonal business, because we've not seen Primus's--would it follow the pattern of seasonality that you've had historically?

No, no. Primus is not seasonal whatsoever. We do have other product ranges that are seasonal, for example Lyme Disease is a summer disease. Our Bartells range is largely driven by flu testing in the winter. Fitzgerald would sell a lot of flu antibodies around Q2, Q3 in anticipation of building flu tests into Q4. But other than those particular products, I think Brett it's not -- our business isn't seasonal.

And may we have another question please?

Our next question is from Ron Slaw with Rodman & Renshaw.

Hello?

Hello?

Hello. Thanks very much for going over the numbers for us and I just had a couple of questions relating to mainly financial items. Could you comment again on where you see SG&A expenditures going for the rest of the year and for 2006. I believe what you've stated earlier, you just believe a great deal of these expenditures, the increase that we saw to 9.4 million, is mainly exceptional activities. So, if you could perhaps comment on that?

Oh sure, it's Rory here again. I wouldn't refer to them as exceptional. In fact the majority of the increase quarter-on-quarter was down to Primus. And the majority of the increase quarter on the same quarter last year was Primus and RDI.

We've been reasonably successful at keeping our costs constant over the last 12 to 18 months. Obviously there's increases with inflation and obviously what -- each quarter or three-month period is a relatively short window of time and there can be sort of temporary ups and downs, but on the whole we've been reasonably successful and most of the increase you've seen this quarter was like I said, down to Primus.

There was also some costs associated with shutting down our St. Louis facility and that we would have had basically staff on hand in St. Louis and new staff on hand in New Jersey, a bit of overlap, but that's on a one-off nature, that is down by the end of October and then going forward obviously Sarbanes-Oxley is also something that has an effect on us. Those costs have been ramping up over the course of the year and in truth will continue to some extent into next year. And we have to report by the end of next year in accordance with Section 404, as you're probably aware.

So I wouldn't refer to them as exceptional, I'd refer to them as anticipated and highlighted in advance and I don't think there was anything major, other than that to say.

Could you just comment on where you think the levels would be for 2006? Would they be around this level that you saw in the most recent quarter or would they be expected to drop off a little bit?

Typically you'd add 3 to 5% for inflation and then there's one or two costs in there you might take out like the shutdown of the St. Louis facility. So on the whole, maybe up 3 to 5%, no significant movement.

Thank you.

Thank you.

Our next question is from Elmer Piros with Rodman & Renshaw.

Yes. Thank you very much. I missed the beginning of the call, Rory, so I have to apologize if you explained or what do you expect or whether you expect this mild sequential growth to continue into the fourth quarter or, and/or into 2006, or the seasonality of the flu antibodies had a large impact here which may come back in coming quarters.

Hi Elmer. No, we didn't cover that one before. It's probably fair to say that our historic organic growth levels have been in or around 12%. And that hasn't fluctuated that significantly. Yes there's temporary aberrations, within each quarter on quarter, but like I said, three months is not a long period of time. And you will have seen that this quarter and in fact you also saw it last quarter where we did 3.5% in one quarter alone.

So I think on the long run, Elmer, I'd still be forecasting around 12% organic growth levels which is, I might reiterate, double the market growth levels.

Yes.

And there is within that period, it's like you said, within the period we've just come through there's been an exceptionally strong Lyme season and also an exceptionally long flu antibody season.

I know you might not have heard this, but our organic growth in the third quarter was 8%. Our organic growth, I've got Q2 compared to Q3, and our organic growth for the first three quarters has been compounded 14%. So basically we've had about 3% Quarter 1, 3% Quarter 2 and 8% Quarter 3. And clearly another 8% is unlikely, but we're still seeing, I think, a movement in our organic growth for the better. And I think that probably reflects the fact that we're placing instruments in the three categories infectious disease, coag and clin-chem and that we're doing very well in point-of-care as well.

Yes. And in margins, do you expect them for next year. I know you have the -- a pretty good overview of recent acquisitions and how they shape up. Do you expect margins to be in this sort of range or maybe improve slightly?

Well let's differentiate between gross margins and operating margins.

Gross margins first if you could.

In terms of gross margins they've typically been in the range of 48 to 51%. Do I see those increasing dramatically in the near future? No, because we're aggressively placing instruments in all three areas -- I'll reiterate again, coag, infectious disease and chem-can. And that, like I said, does pull the percentage and it is only a percentage it's not a dollar number, it pulls the percentage back down. So in terms of the percentage I don't see a significant increase because there is significant placement continuing into the future.

In terms of the operating margin, do I see that improving? Yes. If you look at our latest corporate presentation on the Web site you'll see our stated objective is to get that operating margin above 12% which is the industry norm. And I'll just remind you that back in, I think it was 2003 or 2002, sorry, I'm getting my years mixed up, we came in at about 13.4%. So it's very much an achievable objective for us. It has been down, just to reiterate, because of the huge investment in the U.S. sales force. But what we've seen this quarter is a steady, constant improvement from 6., I think it was 8% in quarter one up to 8% in quarter three.

I think it's -- again, to say that, I mean, clearly I think the gross margin should stabilize around 50% or maybe slightly better than that, we aspire to 51 or 2. But you have to bear in mind that you have to look at the mix and the mix here is that we sell direct in three countries in the world being, United States, Germany and the U.K. And we sell through distributors in all of the other countries. And in all of those other countries the distributors are getting, for the sake of argument, an average of 43 or 44%.

I mean clearly if one was selling direct in those countries our margin would suddenly--because they represent another 42 or 40% of our total sales -- our margin would suddenly pop into the 60's if we were to go direct in all those countries. So I mean, that's a fact we have to bear in mind as well. Should we decide at some point in the future to go direct in France and/or Spain, I mean clearly the margins would move and move quickly.

Yes. I think I had one more number-related question and a question about the OTC market for the rapid HIV test. I'll try to remember -- let me ask this OTC question first and then I'll remember what the previous question was. Could you talk about what it may mean if we assume that the FDA would recommend these products to be sold OTC? What would it mean to the pricing, what would it mean to your anticipation or your expectation for the uptake?

Elmer, hi, this is Brendan here. First of all it's very, very early days in the whole discussion about OTC/HIV testing. The Orasure press release concerning OTC testing talks about a meeting which is being held on Thursday of next week, November 3rd of the Blood Products Advisory Committee, just to consider approaches to the over-the-counter home use of HIV kits.

And as you know there are many issues surrounding that, not just the ability of somebody to understand how to test, but how to interpret the results, what quality control might be applied, and all of the psychological and social issues surrounding HIV testing and the whole issue of counseling. So very, very early days yet and those who have been selling home-use HIV kits where the sample is taken at home and sent to a central laboratory for purchasing, have not really been very successful in that market. So it's a little bit premature yet to be talking about pricing and potential market size.

I remind you that the number of HIV-positive people in the U.S. is still 1.2 million. So it's not a very large market when you compare it to Sub-Saharan Africa where 40 million people are infected.

But to say also, that in event of the market opening up, I mean clearly we have an excellent product with the best sensitivity and specificity available. And we'll be in a very strong position to participate and to prosper.

Thank you very much gentlemen, and I just remembered my previous question, but it was already answered.

Thank you for that Elmer.

And Jen, could we have the last question please?

Our last question is from Jack Gorman with Davies.

Thank you. Just one quick follow-up if you don't mind. Just your R&D line obviously is increasing year-on-year. Could you just give us a sense of what you're spending that money on at the moment?

Well Jack, yes, this is Brendan here. And there are projects in each of the areas in which we participate, let's take clinical chemistry for example, it's on the Rapid Gel product. In coagulation it's on a larger instrument platform. It's a larger one than the existing Destiny platform which we launched last year. In the point-of-care we have three tests in development, an influenza test on the same platform as the HIV, on the Unigold platform.

We have a Legionnaires' Disease test for Legionalla and a test for respiratory sensitial virus. And then in the infectious disease category we -- our HIV Western Blood(ph) has had preliminary trial results which are very, very encouraging indeed and that's going to full trial now. And we also have an EBV product for IGA testing. So it's spread over the four business units.

And Brendan, not to kind of put words in your mouth, but of the products that you mentioned and projects that you mentioned there, which ones should the market and investors look out for as kind of high revenue and -- high potential revenue opportunities for yourselves?

Well the HIV Western Blood is a significant market in the United States and indeed outside. And my understanding of the influenza market in the United States alone is that it's now larger than $100 million. And then of course as we mentioned the Rapid Gel product as well, we believe the market there is about $200 million at the point-of-care level.

Maybe they want to [inaudible] some, that's brilliant, thanks Brendan.

Thanks.

I think at this stage we've gone probably on quite a long time, so I think it's time maybe to close the call. So thank everybody for your participation and your interest and your support. We look forward to talking to you again next quarter. Goodbye and thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.