Trinity Biotech PLC (TRIB) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Trinity Biotech second quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ronan O'Caoimh, Chairman and Chief Executive Officer of Trinity Biotech. Thank you, Mr. O'Caoimh, you may begin.

Thank you, Tina.

Welcome to the second quarter results conference call of Trinity Biotech. I'm joined by Rory Nealon, our Chief Financial Officer; and by Brendan Farrell, our President. Firstly, Rory will present the results for the quarter, then Brendan will give a sales and marketing update and speak about our recent bioMerieux haemostasis acquisition, then I'll speak about the settlement of our litigation with Inverness Medical, before finally opening the conference call to a question-and-answer session.

Before we commence, however, I'm required to draw your attention to the Safe Harbor provisions 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 certainties including but not limited to the results of research and development efforts, effect of regulation by the United States Food and Drug Administration and other agencies, the impact of competitive products, product development, commercialization and technological difficulties, and other risks detailed in the Company's periodic reports filed with the Securities and Exchange Commission.

So if I could ask Rory now to -- to talk about the results.

Thanks, Ronan.

As our press release intimated, we've had a busy second quarter. So I have a lot to get through today. As usual, I will initially give you an overview of the key items in the income statement in particular, comparing quarter two with the equivalent period last year and also with the most recent quarter one. I will also take you through an overview of the recent June balance sheet versus our December balance sheet, and in covering both of these topics I will also point out the impact the various major transactions have had on the quarter such as the bioMerieux acquisition and the related financings.

Moving on to the detail of the numbers and to start, as usual, with the revenues, as normal will you note in the press release an analysis of the key product areas and also by geographic location. At a summary level, you will note that our sales for the quarter have grown by 20.3% over the same period last year and by 18.8% half-year on half-year. The key movers in the respective periods would have been clinical chemistry, which was largely driven by the acquisition of Primus in July 2005, and our point of care HIV products. It is also worth noting that all of the key product areas and all of the geographic areas are up on the same period last year. At this point, I will move on to the gross margins because Brendan will take you through a more detailed analysis of the revenue shortly.

Before commenting in detail on trends in our gross margin, it is worth briefly reminding you of what we discussed on the bioMerieux acquisition conference call about the once-off inventory write-off. In that press release and on that call, we told you that we would be writing off 5.8 million of -- in inventory as a once-off event. This 5.8 million is predominantly associated with haemostasis instruments and reagents which we're discontinuing following-on from the acquisition of bioMerieux. Specifically, we have an abundance of instruments, the names of which I covered in our slide show presentation on our last conference call. It is not practical to carry this many instruments in our portfolio, and we are discontinuing a number of the older AMAX instruments now. This will lead to benefits in the future such as manufacturing efficiencies in that we can make larger batch sizes of a smaller number of instruments, also purchasing efficiencies, in that each instrument, would you believe, has between 200 and 1000 disparate parts. So by reducing the number of instrument types, we'll be reducing our inventory holding levels and minimizing the purchasing effort, for at least servicing in that it is extremely difficult to cross-train our field service engineers in a multitude of different instrument types and also they physically don't even have enough room in their trunks to carry enough spare parts unless we reduce the number of instrument types. And finally, marketing, in that there would be a more focused marketing effort on a smaller number of instruments. We are also discontinuing some reagent product lines, albeit I the majority of the write-off is associated with the instruments. I should reiterate that this is a once-off event and to the extent that we converge or merge the Biopool, AMAX, and bioMerieux reagent product lines over the coming years we will do so in a more steady or controlled manner and minimize any resulting scrap.

Moving back to our overall discussion on gross margins, as you're all aware -- well aware our gross margin margin percentage can hop around a little, depending on factors such as product mix, channels to market -- and by that I mean direct versus distributor -- geographic mix, and finally the effect of instrument placement. Our margin for this quarter is actually up to 48.2% from 47.2% in the same period last year. For the six months year-to-date it is up from 47.8% last year to 49.3% this year, so an improvement in both counts. And this has obviously been helped by a strong quarter one this year, when our margins exceeded 50%.

Moving on to our administrative expenses, on the face of it, our total admin expenses increased by 19% from 7.8 million last year to 9.3 million in the current year, and this is largely due to the impact of the Primus acquisition in July '05. Of more relevance, however, is that they are static at 9.3 million when compared to the recent quarter one. Within this there are a few pluses and minuses, however, such as increased cost associated with Sox work, significant legal costs associated with the the Inverness litigation, and also the compensation for Inverness. To conclude on the analysis of indirect cost, our R&D costs have increased marginally on the comparable period last year and the recent quarter one, and the share option expense has actually decreased slightly following the lapsing of certain options.

Moving on to our net financial costs, there have been significant changes during the quarter with the equity fund-raising and the resulting cash that came in, and also with the new debt facility towards the end of the quarter. You will recall that on the 6th of April we announced a 25 million fund-raising which was approximately 24 million net of expenses and that our CEO, Ronan O'Caoimh, participated to the extent of $2 million. Obviously this net 24 million has enhanced our financial income line for the period in that the cash was on deposit before being invested into the bioMerieux acquisition. In relation to the financial expense line, you will have noted from the press release associated with the bioMerieux acquisition that we increased our banking facilities by $30 million to fund the acquisition. This new facility would have been in place for a few days at the end of quarter two, thereby explaining the small increase in the financial expense line from quarter one to quarter two. Taxation. Obviously, the specific inventory provision of 5.8 million, which I alluded to earlier, has a sizable impact on the tax number. In fact, approximately 1.6 million of the total tax credit of 1.7 million is directly attributable to the once-off inventory write-off of 5.8 million. The net impact of this once-off write-off therefore being about 4.2 million.

Before moving on to our balance sheet, it is worth reverting to our operating margin, which is the most important metric that we track. You will have heard us say on many, many occasions now that our goal is to get our operating margin before share options cost back above 12% where we were before we launched our direct sales force in the U.S.A. and which I have also told you was the industry standard. The margin for the quarter was 8.6% which is higher than the 7.4% equivalent in quarter two last year and the 7.9% in the most recent quarter one. Finally, it is worth reiterating what we mentioned at the bioMerieux acquisition conference call, namely, that we anticipate that the bioMerieux acquisition will in itself deliver incremental revenues in 2007 of approximately 40 million, of which we will add an incremental 5 to $6 million of operating profit, or approximately 14% operating margin. Obviously, this combined with an ongoing improvement in the performance of the existing business will push us towards our goal of exceeding the 12%.

Now to talk about our balance sheet. Due to the scale of the bioMerieux deal, the equity fund-raising, and the new debt facility, there obviously has been a lot of changes to our balance sheet since the end of March, so I'll take you through it in a bit of detail. Before taking you through the key changes, it is also -- it is worth noting that the acquisition accounting for the bioMerieux deal is still being finalized, and by that I mean the fair value exercise to correctly split out the value of assets acquired between goodwill and other intangible and tangible assets. This fair value exercise is normal in the months post an acquisition, and will be finalized in the coming quarters.

Starting with our property, plant, and equipment you will note it has increased by 2.5 million since December and this is a combination of bioMerieux fixed assets of 2.3 million, day-to-day additions of [1.6] sic 1.7 million, rather, in the six months and as offset by depreciation of 1.5 million. Our goodwill and intangible assets line has obviously increased significantly from 85 million at the end of December to 119 million at the end of June, and the vast majority of this increase of 34 million is attributable to the recent bioMerieux acquisition. Our deferred tax assets have also increased in large part due to the tax associated with the 5.8 million write-off I just alluded to. As for our inventory, there's been a number of significant changes since the end of December. There was the previously mentioned 5.8 million once-off write-off, and secondly, there was the impact of the bioMerieux acquisition, which caused an increase of 4.5 million. There were also some increases in the rest of the group such as a buildup of [lime] products for the lime season which we're just going into and also a build up of haemostasis instruments given the levels of orders on book for these instruments.

Our trade and other receivables balances also had some dramatic changes, largely due to the impact of the gain of the bioMerieux deal. Specifically, it has increased by 71% from 21 million at the end of December to 35 million now, and the specific bioMerieux factors are predominantly related to inventory. It's worth explaining this. Specifically, the terms of the deal with bioMerieux are such that they will undertake certain services for Trinity as part of the handover process such as they -- the transition services agreement over the next 12 months when they will be manufacturing product. We have effectively paid for the raw materials and [wits affiliated] with manufacturing and at the end of that 12-month period we will collect that unused inventory so that is effectively a prepayment for now. And similarly, they're also servicing instruments for us in various countries around the world, and as such they have kept the parts to do that. So accordingly, it represents a prepayment for us today until we connect those parts at the time of hand over from bioMerieux.

Before moving off this accounts receivable and prepayment caption, I would also like to make just a couple of other points which are worth observing in the coming months. Firstly, you should expect a number of different movements, such as initially the balance is going to increase as we start to build up an accounts receivable base associated with the recent acquisition. You'll recall, we did not acquire any accounts receivable balances from bioMerieux, and this will be offset by the hand-over of the various inventory items from bioMerieux to Trinity, which I just mentioned and which will result in reduction in prepayments and obviously an increase in inventory. Now, before concluding, just one other point to make on account receivable, and that is that this balance incorporates both trade receivables as due from customers and prepayments which can fluctuate quarter-to-quarter, as we have just seen. I know there's been some confusion amongst investors on that particular point.

Moving on to our cash balance, as you can see, our combined cash balance has been more or less static since December. That has increased from 18.9 million at December to 20 million now. Obviously, within this, there have been significant movements, such as 30 million of additional borrowings, the 24 million from the recent equity placing, 40 million going out to bioMerieux for the acquisition of the business, 3 million repaid to the Primus shareholders as the earn-out adjustment I alluded to last quarter, similarly 1.1 million in earn-out repayments to the Fitzgerald shareholder, debt repayments of 1.3 million and convertible debenture repayments of 3.6 million, and the difference being various other working capital and fixed asset additions during the period. On the [gearing] side, you'll note from the balance sheet an increase in the current and non current interest bearing liabilities of 28.3 million, and this is obviously made up by the new 30 million debt facility as offset by repayments to banks during the six-month period. You will also note the convertible debentures have reduced by 3.6 million, being a further two tranches of the convertible repaid on the 1st of January and 1st of April, and at this point three further tranches remain.

Finally, you will note that the other financial liabilities line on the balance sheet has -- appears to be relatively static. However, as at December, this amount represented the earn-out consideration, which I've just told you has been repaid, and as at the end of June, it now represents the deferred consideration -- the current portion now due to bioMerieux. Similarly, the long-term portion of this deferred consideration is now included in other payables in the non current liability section. So in summary, a lot of changes to our balance sheet. Just to wrap up, I'd like to reiterate a few key points. Firstly, our top and our bottom line performance is, once again, better than the equivalent period last year and also quarter one, and our operating margin of 8.6% is continuing to trend in the right direction. Finally, we further strengthened our balance sheet during the quarter with an increase in total assets to $241 million and a net assets to 158 million, or actually almost about $9 per ADR.

Brendan?

Thank you, Rory.

Good day, everyone. I'd like to provide with you more details around the revenue numbers for quarter two '06 and for the first half of the year. As always I'll provide this information for each of our four business units; namely, clinical chemistry, haemostasis, infectious diseases, and finally, point of care.

Starting with clinical chemistry. Sales in the first half of 2006 were 7.5 million. As Primus was acquired in July of 2005, the '05 and '06 numbers are not directly comparable. The point of care haemoglobin A1c product from Primus, Rapid Gel, was not launched in quarter two as we had anticipated. Following feedback from trial sites, we decided to incorporate a number of improvements into the product, including the ability to analyze three samples simultaneously where as the original product was designed to perform one sample at a time. The improved point of care product, now named [Tristat], was on show last month at the American Association of Clinical Chemistry Exhibition in Chicago. And will be launched in international markets this quarter, quarter three. FDA clearance of the improved product is anticipated for quarter four of this year.

During quarter two, we carried out a review of the Primus distribution channels. In anticipation of the launch of Tristat in the U.S.A., the Primus marketing and sales group will in future focus on the U.S. domestic market. International marketing of Primus products will be the responsibility of the international sales and marketing team which is located in Bray, Ireland. Just prior to Trinity acquiring Primus, DPC were appointed as a Primus distributor in a number of international territories. DPC's sales have not met our expectations; and further more, uncertainty has been created following the acquisition of DPC by Siemens Medical, and indeed the subsequent acquisition of Bayer Diagnostics by Siemens Medical. Our response has been to cancel DPC distribution rights in a number of markets and appoint new distributors. We will continue to review our relationship with DPC on a market-by-market basis.

We continue to be excited about the prospects of our clinical chemistry line. The point of care haemoglobin A1c market in the U.S.A. alone is worth approximately $100 million, and we look forward to competing for a share of this significant market. Very importantly, we remain confident that we can continue to generate double-digit organic growth from this business unit.

Moving now to haemostasis, revenues for the first half of 2006 were just under $15 million. The impact of the bioMerieux acquisition on these numbers was minimal as the completion date was near the end of the quarter. In addition, to ensure continuity of product supply, customers were advised to stock up on product prior to the close. We now have three haemostasis reagent lines post the bioMerieux acquisition- Biopool; AMAX, which was the original Sigma Diagnostics line; and bioMerieux. Going forward we intend to consolidate these lines into one line which will be marketed under the AMAX brand. Indeed, as Rory has alluded to, this process has already commenced. Consequently, going forward, it will not be possible to report revenues by haemostasis brand, as they will merge together into one.

The integration of the bioMerieux business into our direct sales operations in the U.S.A., U.K., and Germany, and into our worldwide distribution channels, has gone smoothly. Over the past seven weeks our focus has been on getting to know our new customers and on ensuring that they get the right products on time. The long-term prospects for our haemostasis business are excellent. We will select the best routine and speciality agents from our three lines to create a best-in-class product offering. Furthermore, the combination of our Destiny instrument platforms with the MDA, MTX, and Thrombolyzer instruments from bioMerieux will provide haemostasis laboratories with a very compelling choice.

Moving on to infectious disease, sales for the first half of 2006 were just over $21 million, which was up 4.2% over the same period last year despite sales of respiratory product being well down over prior year. In North America, we placed 22 automated platforms during the period, and we continue to focus on increasing our share of the infectious disease instrument market. Line sales are increasing and should be at their strongest in the current quarter, quarter three. Fitzgerald continues to perform very well.

The fourth business unit to review is point of care. With sales of $8.7 million in the first half of 2006, this was an excellent result for our rapid HIV products. Revenues were up 42% over prior year. This strong growth was evident both within and outside the U.S.A. Indeed, U.S. sales are up 107% over the same period last year. During quarter two, we announced our agreements with the 340B Prime Vendor Program and with Planned Parenthood. We are continuing our discussions with the FDA regarding the clinical trials to be conducted for approval to sell Unigold HIV in the OTC market. And we'll have a clearer understanding of timelines when these discussions are concluded. In overall terms, our business is in good shape and we're confident we can continue to drive annual organic growth in excess of 10%.

Over to you, Ronan.

Thanks, Brendan.

I'm just going to talk for a couple of minutes about the settlement of the Inverness litigation. As you know in late 2003, we sued Inverness Wampole for breech of contract. In 2002, we had entered into an agreement to supply infectious disease product to Inverness, and in partial return, it had been agreed that we would be granted a license to the many Inverness lateral flow patents, accumulated through various acquisitions, including Wampole and Unipath. And when difficulties arose arose on the supply agreement, Inverness refused to give the license. We sued, they counter sued, and the case proceeded. So under the settlement terms announced yesterday, we have secured the licenses, which are essential to our operating in the point of care market with lateral flow products. Remember, all our products use lateral flow. The terms under which the license has been granted are more favorable than negotiated in 2002. It should also be pointed out that the license we have secured is extremely broad, covering [inaudible] all diagnostic uses with the exceptions of women's health and cardiac. It should further be noted that such a broad license is unprecedented to our knowledge.

In addition, we've been granted a license to the U.S. HIV OTC market, over-the-counter market, and this was something to which we previously did not have a license under the disputed 2002 license agreement. We regard this license to the HIV OTC market as extremely valuable, and to our best knowledge, it is the only such license granted. In addition, under the settlement terms, Inverness has agreed to reimburse our litigation costs. So we're -- we're extremely pleased to have put this litigation behind us, particularly because doubts about the potential outcome of the case, however slight, have made it virtually impossible for us to build and invest in our portfolio of point of care products over the past number of years while the uncertainty overhung our ability to operate in the market, given that our products are lateral-flow based. And now the broad licenses I've outlined with a proven platform technology as proven with our best in class HIV test, and with a proven research and development capability, we will confidently build our presence in the rapidly growing point of care market with more and more new products.

And allow me just to say that turned settlement terms Inverness will manufacture our Unigold HIV test for the African market and in its huge new facility in Hangzhou in China. The recombinant antigen for the product will continue to be manufactured by us in Ireland but everything else will be done in China. The technology transfer has already commenced and should be complete in six months' time. And 30 Trinity personnel impacted will be redeployed as part of the bioMerieux transfer -- technology transfer from the United States into Ireland. And as a consequence, the gross margin on these Unigold sales will significantly improve from the point of which the technology transfer is complete, which will be December, January.

So thank you very much for -- I know we went on quite a long time, and at this point if I could hand over to Tara for the question-and-answer session -- Tina, my apologies.

[OPERATOR INSTRUCTIONS]. Matt Dolan, Roth Capital.

Hi, guys. Good afternoon.

Good afternoon, Matt.

Just a couple of questions here. On the sales line, point of care was particularly strong. Asia and Africa as a geography was pretty strong. Is there anything going on there fundamentally that's sustainable, or were there any one-time events in the quarter? Can you just help us characterize that a little bit?

Matt, this is Brendan here. Hi. No, there weren't any significant one-time events in the quarter. This is, as we've said many times, with the funding that's going into place in sub-Sahara and Africa we believe that the growth in HIV testing is sustainable going forward.

Okay. And in terms of -- you mention within point of care U.S. was up 107%. What proportion of sales was related to the U.S. versus the Asian and African market?

Well, as you know, Matt, we do not split out those numbers. We have always said that we will not split out those numbers, so I really can't -- can't go further than that, but I will say that we are very, very pleased with progress in both geographic areas, but very much so in the United States now where we're starting to make strong inroads into the public health market, and you have seen that from the agreements we signed with Planned Parenthood and the 340B Vendor Program.

Okay. Fair enough. And then, Brendan, on the bioMerieux acquisition, I know you mentioned that the integration is progressing. Can you just give us an update in terms of tracking how far along we are, maybe how many customer accounts are now on board with Trinity and how's that integration going in terms of your distribution infrastructure?

Well, pretty much all of the customer accounts are on board with Trinity at this time. If you take the U.S.A., Germany, and the U.K. where our direct sales operations are in place, all of the bioMerieux customers are now ordering directly from the Trinity operations there. So all of those customer accounts are loaded on our customer service computer systems and we are on a daily basis taking orders from them and shipping orders to them. Similarly, in the case of our distribution channels, I would say that about 95% of the customers that are serviced by our distributors are now ordering from our distributors and being supplied by our distributors. There are a couple of exceptions along the way, but nothing very significant. So we're very, very happy with the progress that we've made at the integration of that acquisition.

Okay. Very good. And maybe looking back from the -- from the conference call we had on that acquisition, how would this -- how would the progress you've made to date compare to kind of your expectations for the integration and maybe relate that a little bit to the guidance you provided on an annual basis for the combined entity.

Well, in terms of the logistics and the day-to-day work involved, we're very, very pleased with that. In fact, I would actually characterize it as having gone better than we had anticipated at the time. It has gone more smoothly than we would have thought in terms of the sheer logistics and the logistics were -- were very significant to get all of those customers on board as quickly as possible. In terms of the guidance that we've given, that remains unchanged, both at top line and bottom line.

Okay. And one more on the bioMerieux business. You mentioned in your prepared remarks a stock-up prior to the close of the acquisition. And I think I may have just missed the concept there. Was that --

I didn't say a stock-up, Matt. What I said was that we, both Trinity and bioMerieux, were very concerned during the couple of weeks of the transition from bioMerieux to Trinity ensure that all customers, and that includes distributors and end users, would not be at risk of having any stock-ups, so we made sure that they took increased levels of inventory on board prior to us concluding the acquisition.

Okay. So should we see any impact of that in Q3 a little bit on the bioMerieux side?

Yes, it would have a slight impact on our revenues going forward in Q3, but that will level out very, very quickly.

Understand. Okay. And then on the Inverness litigation, can you quantify what the legal expenses were towards this process in the past, and how going forward the manufacturing agreement will impact that point of care business?

Matt, it's Rory here. In terms of the litigation and the legal cost, that's been over the last couple of years and they were is quite significant. Many hundreds of thousands. The compensation is marginally more. You're talking less than six figures more than the total legal costs, so it's as good as covers all of the legal costs. And in relation, are you -- the second part of your question was which --

How -- what's the impact on the point of care business, both from the manufacturing standpoint as well as any impact we should see from this licensing royalty.

Well, I think -- with that mask, as I said earlier, our -- as was our confidence levels in terms of willingness to invest significant amounts of money in researching and developing new products, and was impact by the fact that we didn't know in the unlikely event of the case going against us that we wouldn't have a license at all, and that we'd be prevented from operating in the market. And in those circumstances you can imagine we were -- our ability to operate was impacted and our willingness to take the risk of investing. So in that sense, as a consequence what's happened is despite having wonderful platform technology and wonderful research and development capability as demonstrated and proven by our HIV product, we haven't really broadened our products range. And that's about to change. And that's the real point we're going to make. As you know, point of care is exhibiting 25, 30% annual growth rate compared with maybe 4 or 5% in the traditional conventional diagnostic market, and as a consequence of this litigation we've been, in effect, prevented from playing a real part. And I think now that it's been resolved I think we're going to become very big players. As I pointed out as well, to our knowledge we don't know of any other company with such a broad license, and so we're very optimistic about what we can do. As you know, Inverness has a very, very strong patent portfolio acquired from many acquisitions over a number of years, and it's simply impossible to operate in any effective way in lateral flow without direct licenses and we now those. So I'd say we're very optimistic going forward. Does that deal with the question?

It does. Yes, no. Appreciate that. It just -- on that note in terms of the magnitude of the royalty should we be putting that into our expectations going forward or can --?

As you can imagine the actual detail terms, as it would always be the case in situation as this, are confidential, so I can't throw out what our royalty levels are, but I believe that they are very competitive. There's a favored nation status and all that kind of thing would apply in this situation, so I think they're very -- very commercial.

Okay. Very good. And then, one more and I'll jump off. On the P&L, Rory, looking at the tax rate, can you just kind of describe a little bit more what was going on in the quarter in terms of the tax benefit and maybe what we should be expecting from a modeling perspective going forward?

Sure. Of the 1.7 million, as I -- as I alluded to, about 1.6 million of it is a benefit associated with the once-off write-off, so the net once-off write-off is really 4.2 million after tax. And then within the rest of it, because we have such varying tax rates within the group ranging from 38-odd% in Germany, 33-odd% in the U.S., down as low as 10% in Ireland, depending upon the mix of the business in certain quarters and where it booked, it can cause vagary. So for example, if you have a loss generated in the quarter in a high-tax jurisdiction and profit in a low-tax jurisdiction it can cause swings. And literally, that's -- that's all that's going on. There's also some small quirks associated with the accounting treatment and intercompany stock profit associated with the acquisition that -- I won't bore you on that, but essentially going forward, which is really I think what you're after, Matt, it should be getting back up into the teens percentage-wise as we go through into quarter three and quarter four.

Okay. Very good. Nice quarter, guys. Thanks a lot.

Thanks, Matt.

Sean McMahon, Kennedy Capital.

Hi, guys. Nice quarter. I just had a couple things here. One, can you just talk to me where exactly -- have you moved all the product out of St. Louis here, or how is that working?

There's nothing left in St. Louis at this stage --

Actually, were you talking about -- sorry to cut across you there, Rory, are you talking about bioMerieux, Sean?

Correct.

Okay. So you're talking about Durham, North Carolina.

Sorry. Durham. Where ever.

Rory?

Sorry, Sean. Essentially, the reagents are manufactured -- the bioMerieux reagents are manufactured in Durham, and the bioMerieux instruments are manufactured in St. Louis. Sorry. I thought you were alluding to the old Sigma business which we also had in St. Louis, which has moved at this stage. The reagents will be moved over the next 12 months, so from July1 to 30 June next year. And during that 12-month period, they will make approximately 18 months' worth of inventory and that buys us a bit more time in terms of the product transfer process. So that's the Durham reagents. And once again, that will happen over the next 12 months. The instruments will -- manufactured in St. Louis by bioMerieux will also be -- transferred over the next 12 months to our operation in Jamestown in upstate New York. Does that answer your question, Sean?

Yes, that answers it. Thank you. And then if you could maybe help me understand a little bit on the IMA deal, I think on the -- in your discussion you talked about gross margins significantly improving as they move to China. Should I look at it as a royalty payment to kind of offset each other there, or how does that work? Is that a good way to kind of look at it?

No, no. No. There will be a significant improvement even net of royalty.

Oh, really? Great. Okay. Thank you.

Ian Hunter, Goodbody Stockbrokers.

Good afternoon, gentlemen. Firstly, maybe just a follow-on from Matt's question. I'm just wondering with the Inverness settlement are we going to see a kind of one-off boost to the income with the repayment of the legal fees coming through that you say is going to be no financial implications to yourselves. That's kind of first small question. And then maybe on a broader scale, I'm just wondering if you could maybe again give us an update on the progress of your over-the-counter approval process with the FDA and an idea maybe on the timelines of that getting through the system.

Okay. Ian, I'll take the first part of the question, and I'll take you back to the content of my prepared remarks to start when I said that within our administrative expenses, they have -- were pretty much static at 9.3 million quarter-on-quarter. That's quarter one versus quarter two. And then what I went on to say was that there were a number of movements within that, both plus and minus, such as we had significantly increased cost associated with the Sox work, about 250,000-odd, and then there was also significant costs associated with the Inverness litigation so approximately half of our costs over the last two-odd year period would have been incurred in this quarter. And then those two together more or less, not quite, but more or less offset the revenues or the income, if you like, which we received from Inverness which is also booked in quarter two in those numbers. So there's a marginal benefit but not significant to us in the quarter, when you take account the Sox issues and also the legal costs associated with the Inverness --

[inaudible] we're not in position, again, to disclose the amount and we're not allowed to. And what we're saying is that the P&L impact is neutral -- or virtually neutral.

That's grand. It's neutral at P&L impact. That's really what I was after. Yes.

Ian, the second part of your question related to the OTC approval?

That was it, the progress and --

And as I indicated, we're in very detailed discussions with the FDA about the nature of the trials that we will have to perform. We're discussing those with them. We should finalize those discussions, I would say, within this next 60 days or so, and then we will proceed with setting up trial sites and getting on with the trials. But it's a little bit difficult to give timelines associated with it when we don't know the exact nature of the trials that will be required. So it's a process is of dialogue right now, and when that dialogue is concluded, probably in around 60 days from now, then we'll have a much better idea of the timelines involved.

That's fine. Thanks very much.

Thanks, Ian.

[Michael Feldman], Triathlon Capital.

Hi. Good afternoon. Couple quick questions. In the past I think you had given an organic growth number on top line. Is there -- do you have something similar for this quarter? Either sequentially or year-over-year?

Well, what we are seeing is that overall, in terms of organic growth annualized that we would be getting double-digit growth for the totality of our business.

So second quarter over second quarter is about double-digit?

That is correct.

Organic growth. Okay. Great. And on the -- the HIV sales in the U.S., could you just give a little more color on how that is now breaking out between the hospital and the public health? Sounds like it's moving -- you're getting more of the public health business.

Yes, we certainly are. And, again, Planned Parenthood and the 340B Prime Vendor program would both but in the public health arena, and those agreements which we announced in quarter two will start to impact as we go forward, and therefore the proportionality of our sales which will be in the public health arena will start to be greater, vis-a-vis those sales which are in the hospital area. So -- and I have said before, and will continue to say that we don't specifically give numbers for our Unigold HIV sales in the United States.

Right.

But to answer your question, the proportion of sales in public health is increasing versus those in the hospital arena.

And would you say at Planned Parenthood, for instance, that the trend is towards using both OraSure and the Unigold test, or is Unigold replacing OraSure?

Well, not if we can help it, but Unigold will certainly be replacing OraSure if our sales people are doing their job right.

And you are -- you are seeing that in some cases in the -- in the public health?

Yes, we are. Yes, it is a replacement, not a dual usage.

Okay. And then just on SG&A, I just wanted to get clear what the -- the impact of the legal on some of the one-time costs were in terms of, should I be backing those out to get more of a going forward number on the SG&A?

Well, obviously there'll be no more legal costs associated with the Inverness litigation. That's done and gone. To the extent there are Sarbanes-Oxley costs there of a few hundred thousand, they will continue into quarter three and quarter four. That will be the majority of the work done in the sense that's when -- just for your background information, this is the first year the firm and company that Trinity has is subject to this. So it's when most of the spend is incurred. So, yes, will you consider to see Sox-type costs going forward in quarter three and quarter four, but obviously going into next year they will be lower as would not be the norm -- normally be the case under the historic pattern that's been experienced by U.S. domestic companies which have been going through this for over a year now.

Okay. Great. Thanks a lot.

[Mark Lipton], [Lipton & Lipton Pension Plan].

Thank you. Good morning, everybody. And like everybody else, it was a great quarter. Congratulations. Two easy questions. One is, is the western blot sort of going to be sidelined indefinitely at this point with all the other activity going on, or is anything happening with the western blot test -- the HIV western blot? That's my first question. The second question, is the average weighted shares were about 72 million this last quarter. Is that what we're looking at next quarter or is the weighting going to increase? Next quarter will it be somewhat higher than the 72 million?

Just to deal now with the western blot question. This is Ronan. No, no. By no means, we're absolutely committed to western blot, and the trials are ongoing and we hope to have a product in the market sometime in either quarter one or quarter two of 2007. We're absolutely committed to it. I can't imagine how you could have felt that we had had any change there. And then --

In relation to the shares -- in relation to the shares, that is weighted average but bear in mind, I think it was, from memory, the 6th or the 8th of April when we did the fund-raising, which is when those shares were raised, as a result, in the weighting, they're there pretty much for the full quarter. So you shouldn't see that increase too significantly going forward into the future. That is the basic number of shares. Obviously the diluted number of shares is a slightly higher number. Somebody asked me that earlier on. Actually, I said I'd give it out on the conference call. It was 76.2 million shares, or [19 million 80 ors] was the diluted number of shares.

Just, Tina, maybe one last question?

Michael Feldman, Triathlon Capital.

Yes. One quick question. Is - do you have any contracts that -- big contracts that are coming up in the next 6 to 12 months that we should be thinking about?

Big supply agreements, large customer agreements?

Exactly.

No, we have nothing coming up in the next 6 to 12 months.

I just -- today would add the only major situation where that would arise would be in the case of Quest in the United States and something did come up recently and in fact was retained for another three-year period.

Okay. Right. So the Quest contract has been renewed.

Yes, it has.

Great. Okay. Thanks a lot.

And at this point, maybe, I hope anybody who wanted to ask a question got to do so but I'm conscious of the call is maybe 45 minutes long, so if we could say thank you very much indeed, and appreciate your interest and your support and look forward to talking to you next quarter. Good-bye and thank you.

Thank you, sir. This concludes today's conference call. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.