Trinity Biotech PLC (TRIB) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Trinity Biotech third 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, Ronan O'Caiomh, chairman and chief executive officer of Trinity Biotech. Thank you, Mr. O'Caiomh, you may begin.

Thank you, and welcome to the third quarter and results conference call. I'm joined by Rory Nealon, our chief financial officer, and by Brendan Farrell, our president. Firstly, Rory will speak about the results, and then Brendan will give a marketing update and speak about our recent bioMerieux acquisition, and then I will speak about the bioMerieux acquisition and the recent acquisition of [indiscernible] distributor before finally opening the conference call to a question-and-answer session.

Before we continue, I'm required to draw your attention to the Safe Harbor provisions. 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 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 SEC.

So if I could now hand you over to Rory Nealon, our CFO.

Thanks, Ronan. This is our first full quarter post the acquisition of the bioMerieux haemostasis business. There are quite a few changes to our numbers, and I have a lot to get through.

As usual, I'll give you an overview of the key items in the income statement, in particular, comparing quarter 3 with the equivalent period last year and with the most recent quarter 2. I'll also take you through an overview of the recent September balance sheet as compared with both our December balance sheet and the recent June balance sheet.

Moving on to the detail of the numbers and then starting, as usual, with our revenues, as normal, you will note in the press release that an analysis of the key product areas and also by geographic location for the nine months to September. At a summary level, you'll note that our sales for these nine months have increased by 21%, whereas our sales for the quarter have increased by a slightly higher rate of 22%, or $6 million, which is largely due to the impact of the bioMerieux acquisition.

The key movers in this nine-month period include the positive impact of the bioMerieux acquisition, obviously, in the quarter. Results of the positive impact of the Primus acquisition, which happened in July of last year, in other words, it was not there for the full period last year. Results of the ongoing growth within our Point of Care Division and, lastly, it's offset, to some extent, by the negative impact of the declining Wampole business, which Brendan will touch upon later.

It's also worth noting that all of the geographic areas are up on the same period last year.

At this point, I will move on to the gross margins, and Brendan will take you through a more detailed analysis of the revenues later one.

In terms of our gross margin and before commenting on the trends in it, it's worth briefly reminding you of the impact of the bioMerieux business on our gross margins, and I'll reiterate what I said on the last conference call. There are two key factors at play here. Firstly, there's the general nature of the haemostasis business and, secondly, there is the impact over the upcoming quarters of the production transfer from Durham and St. Louis, where bioMerieux produced the reagents and instruments, respectively, to Trinity's operations in Ireland and in upstate New York.

Coming back to the first of these issues, the bioMerieux business itself is very similar to Trinity's existing AMAX haemostasis business line and how it functions. We typically place, or we sell instruments at low or, in some cases, breakeven type margins. We also service those instruments, again, at relatively low margins, and while we make up for some of this through the increased margin of the sale of our reagents and our instruments, the reagent on our consumables, rather, the overall effect is a lower average margin than is the case with our infectious disease or clinical chemistry or our Point of Care product areas where there is less or no impact of instrumentation.

I would point out that while we make a lower overall gross margin, we are, in some respects, better off, and that by placing an instrument in the customer's premises, that customer is effectively locked into buying reagents and consumables from Trinity for, say, the next five years. This is not the case where, for example, you're selling a Point of Care device where it is understandably easier for the customer to switch to a competitor product. That would be the case if an instrument were installed.

So, in summary, the slightly lower gross margin is offset by the repeat nature of the instrument-led business.

The second point I mentioned just a minute ago related to the impact of the production transfer from Durham and St. Louis. I'll remind you that Trinity is in the process of transferring the bioMerieux reagent manufacture from Durham, North Carolina, to Ireland, and the instrument manufacturer from St. Louis to Trinity's facility in upstate New York in Jamestown.

This is a process, which commenced early in quarter 3 and will continue on to late next year or even early 2008. During this period, our people will be training on the bioMerieux facilities and conducting transfer processes, which will not result in salable product. For example, there are 12 people over in Durham at present living there from Trinity.

As mentioned on the last two conference calls, this is having a slight downward impact on the numbers and the implications of gross margin. But, again, I'll reiterate what we stated before -- mainly, that the bioMerieux acquisition would be immediately earnings accretive, which it has been, and that we would expect the acquisition to result in improved operating profit of at least 5 million in 2007.

Coming back to the actual numbers, our gross margin has decreased from 48.9% in quarter 3 last year to 48.1% last quarter, and 46% in this quarter, and that is, in large part, due to the reasons I've just gone through and completely expected.

Moving on to our administrative expenses, our admin expense have been really consistent since we acquired Primus back in July 2005 and, specifically, they were 9.4 million in the comparable period last year. If we move to this year, they were 9.3 million in quarter 1; 9.3 million again in quarter 2; and 10.3 million in this quarter -- so fairly constant until we did the bioMerieux acquisition. And, in fact, all of that increase in quarter 3 is due to the increased costs associated with the bioMerieux acquisition. Specifically, we would have taken on extra sales and marketing people in Germany, the UK, the USA, and Ireland, and various other admin-related costs associated with taking on an expected $40 million revenue business.

Also, a reasonable share of these incremental costs -- it's probably fair to say our non cash amounts, such as amortization of the various intangibles, which we've acquired as part of the acquisition.

To conclude on the analysis of indirect costs, our R&D costs have been fairly constant -- consistent -- at about 1.7 million over the last number of quarters. Once again, and, similarly, rather, that share option expense has also been reasonably consistent with an average of 340,000 per quarter in 2005 and an average of 305,000 per quarter this year.

Moving on to our net financial costs, our interest expense, rather, I've expected there have been significant changes during the quarter with the new debt facility, which was drawn down towards the end of quarter 2 to finance the bioMerieux acquisition. You will recall that we drew down an incremental 30 million in late quarter 2, which has resulted in an incremental interest expense, which is the reason for the increase from 400,000-odd in quarter 2 to 982,000 in the current quarter.

At the taxation line, you'll notice a small income tax credit in the current quarter driven by the mix of profits and slight losses, and with profits being in the low tax jurisdiction and the opposite in the high tax jurisdiction, those temporary losses being that -- temporary -- as we wait the ongoing increase in revenues in those jurisdictions following on from the recent bioMerieux acquisition.

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 have heard us say on many occasions that our goal is to get our operating margin before share option costs back up above 12% where we were before we launched our direct sales force in the USA, I believe, which I've also told you in the past is the industry standard.

This margin for the quarter was actually 9.9%, which is higher than the average of 7.9% for last year, higher than the 7.8% in quarter 1 and, again, higher than the 8.5% in quarter 2. So we're very much going in the right direction.

And in this context, it is also worth reiterating what we mentioned at the bioMerieux acquisition conference call and on the quarter 2 conference call; namely, that we anticipate that the bioMerieux acquisition will, in itself, deliver incremental revenues next year of approximately 40 million, of which we will add an incremental 5 million to 6 million of operating profit, or about 14%. Obviously, that, combined with an ongoing improvement in the performance of the existing business will and is pushing us towards our goal of exceeding 12%.

Moving on to our balance sheet, due to the scale of the bioMerieux deal, the equity fundraising in April, and the new debt facility drawdown in late June, there obviously have been a lot of changes over the course of the year. As noted on the last conference call, we're still in the process of finalizing the acquisition accounting for the bioMerieux deal and, by that, I mean the fair value exercise to correctly split out the value of assets acquired between goodwill and other intangible assets. And that fair value exercise is what companies would normally undertake in the months post an acquisition and will be finalized, in our case, before year-end.

Starting with our property plant and equipment, you'll note that it was increased by 2.6 million since last December, and that's consistent with the number at the end of June. That's a combination of bioMerieux acquired fixed assets of 2.3 million, ongoing day-to-day fixed asset additions of 2.8 million, and offset by depreciation of 2.5 million.

Similarly, 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 is again flat or consistent from June to September. As mentioned in the last conference call, the vast majority of this increase of 34 million is attributable to the recent acquisition.

Our deferred tax assets have also increased during, in large part, due to the tax associated with the 5.8 million once-off write-off in quarter 2, which I alluded to in the last conference call, and our inventory itself has had a significant number of changes since the end of December. Specifically, it has increased by just over 1 million from December to June, and that movement of 1 million consisting of the once-off write-off of 5.8 million as offset by the impact of the bioMerieux acquisition in Q2, which caused an increase of 4.5 million of inventory, and there are also some other increases in the rest of our business.

Moving from quarter 2 to quarter 3, you will note that our inventory has again increased by about 4 million, and that 4 million is caused by an additional 2 million of bioMerieux inventory. You'll recall me mentioning on the last conference call that we were taking on inventory from bioMerieux on a phased basis. There will be a further slight increase going into quarter 4, and then the next big move will be at the end of quarter 2 or the beginning of quarter 3 when we take over work in progress and raw materials when the bioMerieux facility in Durham formally hands over production to Trinity.

You will also see some further general increases from here on as we build up the transition inventory from bioMerieux. You'll recall last conference call that we said that bioMerieux will be manufacturing 18 months' worth of inventory for Trinity over the next 12 months, and that obviously is going to cause a temporary increase in that 12-month period which would then decline to more normal levels over the ensuing quarters.

Before moving off the inventory, it is worth noting the results of our focus in the last three years to reduce inventory. Specifically, if you compare the inventory in quarter 1 2004 when we started this process to now, you'll notice that the inventory has increased by 25% over that period while quarterly revenues have been increased by 103%. Not a bad achievement, it is fair to say, but also something, which we continue to work on.

Our trade and other receivables balance is comprised of trade receivables from customers, which is reasonably consistent quarter-on-quarter and also some prepayments or other receivables, which have been undergoing some fluctuations again primarily due to the acquisition; specifically, that balance increased from about 3.6 million at the end of December to 14 million at the end of June; that increase being largely down to 9 million of inventory, which we are yet to get from bioMerieux at the end of June and also there was a $1 million receivable balance, you'll recall, from the Inverness litigation.

From June to December, that balance has decreased off receivables and other prepayments from 14 million to 11 million, that decrease been accounted for by the payment by Inverness, cash which we've now received, and also 2 million inventory, which we have since received from bioMerieux, as mentioned before.

Meanwhile, the trade debt, or amounts received from customers has increased from 17.6 million at the end of December to 24 million at the end of September, and that is predominantly again due to bioMerieux, and that when we acquired the deal, as we announced at the time we acquired it without any receivable balances. In other words, as we have started selling product to customers, those receivable balances associated with the acquisition have increased from zero to where they are today, hence accounting for the majority of this significant increase.

Our combined cash balance has been more or less static since December, in that it has increased from 19 million at December to 20 million now, which is again consistent with the balance at the end of June. Obviously, within that, there have been some significant movements such as 30 million of additional borrowings in June; 24 million from the equity placement in April; we paid out 40 million to bioMerieux for the acquisition of the business -- again in June; we also paid out 3 million to the Primus shareholders of an earnout adjustment. It was 1.1 million in earnout for shareholders, debt repayments of 1.3 million, and convertible debenture payments of 3.6 million, and then various other working capital and fixed asset additions -- so quite a lot of fluctuation within the nine months.

On the [gearing] side, you'll note since the start of the year, an increase in the current and non-current interest-bearing liabilities of about 25 million, and that's obviously made up of the new debt facility of 30 million as offset by repayments to banks during the period and also repayment to some of the interest-bearing deferred considerations for Primus people.

You'll also note that the convertible debentures are reduced by 5.4 million, being a further three tranches of the convertible repaid on the 1st of January, the 1st of April, and the 1st of July. Two further tranches remain as at the end of the September, and these will be gone by the 2nd of January.

Finally, you'll note that the other financial liabilities line appears to have been relatively static, however, that represents earnout consideration at the end of December, which has since been repaid.

As at the December, it represents a short-term element of deferred consideration now due to bioMerieux.

So, in conclusion, and just wrap up, I'd like to reiterate a few key points and also talk to the analysts' expectations. Firstly, as was the case last quarter, our top and our bottom-line performance was once again better than the equivalent period last year and also the most quarter, quarter 2 in this case.

There has, in fact, been a marked improvement, quarter on quarter, following on from the bioMerieux acquisition. I would expect that to continue to improve as the revenue levels from that acquisition continue to increase.

Secondly, our operating margin of 9.9% is continuing to trend in the right direction, up from 7.9% in 2005 and 7.8% in quarter 1; 8.5% in quarter 2; and now 9.9%.

Thirdly, and probably most importantly, I would note that our EBITDA has increased to 5.1 million in the current quarter. In fact, that number has increased from an average of 2.4 million in 2004 and 3.1 million in 2005. And that, obviously, is a significant increase and is in excess of double what it was in 2004.

Finally, I'd make the point that our dilutive EPS number has again improved significantly, up from a quarterly average of 8.7% in 2005 to $013.5 in this quarter, and on reaching that number, $013.5 cents, it's worth noting that we're in the range of analyst expectations. In fact, we've beaten three of them, two of which I can recall, which were $011.9 and $0.13, and we've almost met the remaining and last one, which was at $0.14. So we're much in line with analyst expectations in terms of the bottom line.

Thanks, Rory, this is Brendan Farrell here. Hello, everybody, I'd like to provide you with further detail around the revenue numbers for Q3 of '06 and, indeed, for the first nine months of the year. And, as usual, I'll provide this information to you for each of our four business units; namely, Clinical Chemistry, Haemostasis, Infectious Diseases, and Point of Care.

During these updates, I'll also provide you with an update on the research and development programs, which are specific to each one of these business units. So kicking off with Clinical Chemistry, this business unit comprises the esoteric range of products, which we acquired from Sigma Diagnostics in 2003, and the Primus Hemoglobin A1C business, which we acquired in July 2005.

Sales for the first nine months of 2006 for the combined product ranges were $11 million. This was up 65% over the same period of 2005. However, as Rory has already pointed out to you, that while the esoteric chemistry range was available throughout all of 2005, we only acquired Primus in July of that year. So the numbers are not directly comparable.

As I mentioned to you during the last conference call, we have made a decision to transfer the international sales and marketing of our hemoglobin A1C products to our marketing and sales group here in Bray, Ireland, and in that context, I am pleased to announce the appointment of Dr. Robert [Passess] to the position of vice president Sales and Marketing International. Bob is a tremendous addition to our team here in Ireland and comes to us with 18 years sales and marketing experience with Abbott. Indeed, Bob has considerable expertise both in an academic sense and in a business sense in the area of diabetes, and we feel sure that his experience will be extremely relevant to a hemoglobin A1C product line.

We've also transferred the marketing and sales responsibility for the former Sigma range of products from our New Jersey group to the Primus group in Kansas City, and given that the Primus sales and marketing group is calling on clinical chemistry labs on a daily basis, we've decided that the addition of the esoteric chemistry range is a better fit for their selling skills.

Turning to product development in the clinical chemistry group, key focus here is on the launch of the Primus RapidGel, which has now been renamed the Tristat. Just to remind you, our current hemoglobin A1C business is a lab-based business involving instrument and reagent combination. And so typically the hemoglobin A1C testing done on our systems will be done in a hospital or reference lab.

In the case of the new Tristat product, the testing will be done in outpatient and diabetic clinics and in the physician's office. We think that the Tristat product is a very exciting development for Trinity Biotech. It produces results in 10 minutes, has a hands-on time of less than one minute, requires no reagent preparation or handling, has a coefficient of variation less than 5%, and utilizes a very small sample volume of 4 microliters, making it eminently suited for pediatric and fingerstick convenience.

The current status of this product is that it is with the FDA awaiting CLIA waiver. To clarify, it is already FDA-approved; it is just awaiting the CLIA waiver. We anticipate receiving this waiver before the end of the current quarter -- quarter 4.

In Europe we'll be launching the product at the Medica Exhibition in Dusseldorf, which commences on the 15th of November, and if any of our shareholders or analysts will be present at that trade show, we would be very happy to demonstrate the Tristat product to them.

In terms of distribution of the Tristat product in the USA, I will be in the U.S. the week after next for meetings with potential distributors of the product. We, of course, will be focused on meeting with distributors whose primary market is the physicians office and outpatient clinic segment.

Looking forward into 2007, we anticipate with the launch of the Tristat product, our chemistry business unit should experience double-digit organic growth, going forward.

Moving now to the second business unit, which is Haemostasis. Sales for the first nine months of '06 were 29.8 million, which was up 39% over the comparable period in 2005. What you're seeing here, of course, as Rory has outlined, is the impact of the bioMerieux acquisition, which we closed at the end of quarter 2, 2006. At the time of the acquisition of bioMerieux, we indicated that we anticipated 2007 revenues from this business to be approximately 40 million, and we continue to be comfortable with that number.

I should point out, however, that we did not expect bioMerieux sales in both Q3 and Q4 to be necessarily one quarter of the 2007 sales. Many of the bioMerieux customers took the opportunity to stock up just prior to our acquisition of the business in the event that there might have been any disruption in product supply post acquisition.

Going forward, I should stress it will not be possible to separate sales of the existing Trinity haemostasis product line and the bioMerieux product line as the consolidation of these two lines has already commenced and, indeed, we have already substituted some Trinity products for the comparable bioMerieux product.

Our focus during Q3 has to been to ensure that we have visited as many bioMerieux customers as possible in those territories in which we are direct; namely, the USA, Germany, and the UK, and to ensure that all of our distributors in the other markets are doing the same. The transition of the business from bioMerieux to Trinity has gone well, customers have been positive about the change of ownership, many of them already knew us from our existing Trinity haemostasis product offering, and those that did not know us certainly do so now.

We remain confident the business derived from bioMerieux will contribute in excess of 5 million of incremental operating profit in 2007. The long-term prospects for our haemostasis business are excellent. We will continue to select the best routine and specialty reagents from the existing Trinity and bioMerieux product lines to create a best-in-class product offering and, indeed, the combination of our Destiny instrument platforms with the MTA, MTX, and thrombolyzer instruments from bioMerieux will provide haemostasis labs with a very compelling choice.

In terms of research and development in haemostasis, the key focus here is the development of the larger instrument platform called the Destiny Max. We already have a Destiny, which is targeted at mid-size hospitals and a smaller Destiny targeted at the smaller hospital segment. The Destiny Max would fill out the product line, as that will be targeted at the large hospital segment of the market.

Indeed, during the past quarter, some of our R&D scientists took the opportunity to visit end users of the bioMerieux MDA instrument in the U.S., France, UK, and Germany, to try to ensure that we are incorporating the best features of that instrument into our Destiny Max offering.

Moving now to Infectious Disease -- sales of Infectious Disease products in the first nine months of 2006 were $32 million. This is marginally down in the same period of 2005 and is entirely attributable to a decline in business with Wampole. Wampole, you will recall, were our exclusive distributor in the United States.

In the first nine months of 2005, we sold over $3 million of product to Wampole, and in the same period of '06, we sold just marginally over 1 million. So this decline is entirely expected in view of the fact that Wampole have been making every effort in the past 12 to 18 months to move their customers away from Trinity products to competitor products.

In both the Fitzgerald business and the remainder of our Infectious Disease business worldwide, we have experienced organic growth roughly in line with market growth.

In terms of research and development for Infectious Diseases, there are three key programs in place. The first of these is the development of a [Lymealyzer], which is suited to the European market. This program has reached the end of its development phase, and we are currently conducting clinical trials in the center of excellence in the UK. As this is a product designed for the market outside the U.S., FDA approval will not be required but CE marking will, and this is in progress as we speak, and we would expect to launch our European [Lymealyzer] in quarter 1 of 2007.

The second R&D program in the Infectious Disease area is the development of the HIV Western Blot confirmatory test. We are currently in the process of optimizing the antigens for use in this test and would expect pilot production to commence first quarter of '07 leading clinical trials in the second quarter of '07 and submission to the FDA in that quarter -- in quarter 2. The FDA then has a maximum of six months to review the data and to provide approval.

The third project underway under Infectious Disease is the development of an HIV incidence assay. This is an assay, which we have licensed from the Centers for Disease Control in the U.S., and which we are developing in our Trinity facility in Carlsbad in California. It's not a diagnostic tool. This is an assay, which would be used for epidemiological purposes, and which is designed to detect new HIV infection. What this means essentially is that it is possible to track those people who have been infected with HIV within the previous 160 days, which is a key tool for epidemiologists. Given that this product does not require FDA approval because it's not used for diagnostic purposes, we are targeting quarter 2 of '07 for the launch.

Moving now to the final business unit, which is our Point of Care unit, and which is essentially our rapid HIV product portfolio. Sales for the first nine months of '06 have been 12.3 million, which is almost 30% up over the same period in '05. In the U.S., our sales are up 95%, and outside the U.S., sales are up over 20%. This is an excellent performance, and this business unit continues to have the strongest growth profile of our four business units.

As you can see from the numbers outside the USA, we continue to grow our business by approximately 20% per annum. Indeed, a telling statistic is that in the first nine months of this year, six million people were tested for HIV in sub-Sahara in Africa using our products. Within the USA, growth has been excellent in the first three quarters, and we expect that growth to continue.

There have been two very interesting developments in the USA and 2006. The first of these was contained by President Bush's State of the Union address in an exciting and a bold new initiative to test an additional 3 million Americans in 2007 using rapid testing technology was requested by President Bush. Indeed, his budget contained a provision of $93 million to be managed by the CDC specifically to reduce the number of new HIV infections each year and to diagnose those Americans currently infected with HIV but who do not know it. It is our view that approximately one-third of this money could be allocated to the purchasing of HIV test kits, and it is our understanding that funding for this important initiative was supported in the U.S. House and Senate, although funding decisions have not concluded, and funding levels may be less than 93 million.

We are very aware of this initiative, and we are tracking its progress. We do believe that some level of funding will definitely be provided, and we look forward to working in full partnership with CDC and those grantees tasked with meeting President Bush's goal of testing an additional 3 million Americans. This announcement, when taken in conjunction with the CDC-revised HIV screening guidelines, will surely yield an overall increase in the need for rapid HIV tests in 2007 and beyond.

And just a brief word on the progress of the OTC approval for rapid HIV testing -- we are continuing to dialog with the FDA. We are identifying clinical trial sites and lead investigators and continuing to make progress in that regard. With that, back to you, Ronan.

Thanks, Brendan. I'm just going to speak very briefly about bioMerieux, which both guys talked about, and as Brendan said, the bioMerieux products are progressing well, although we should see an increase in these sales levels in quarter 4 as the impact of the staffing of laboratories passes.

Meanwhile, the process of transferring production of the bioMerieux reagents to Ireland has commenced. There are currently 12 of our people in North Carolina learning the product and production methods for the bioMerieux reagents, and they should be there for another six months.

Meanwhile, a new manufacturing facility is under construction in Dublin, and this facility will be completed mid-2007, both enabling the phase transfer production from Durham. Transfer of the production of the MDA instrument from St. Louis will follow. The completion of this technology transfer will result in increased gross margins on the manufactured as opposed to the purchased reagents.

Meanwhile, just to talk about Inverness Medical for a moment -- the transfer of the manufacture of UniGold HIV from Dublin to the factory of Inverness Medical based in Hangzhou in China is progressing well. The transfer of assembly and packaging has progressed very quickly. This was a particular bottleneck for us, and the first 1,000 kits were completed in China in the past two weeks. The transfer of the entire manufacturing process is continuing with the key exception of the fact that the recombinants antigen manufacturer will remain permanently in Dublin. The transfer of the entire manufacturing process is transferring well and will complete in May 2007, giving us significant cost savings.

Just moving on to the French acquisition -- in the past number of days, we acquired [Nefrotek], our French distributor, for an amount of $730,000. We acquired from them only the Trinity branded and manufactured product that they distribute. The operation comprises a team that we regard highly including seven sales reps, a marketing team of three, four service reps, and a strong general manager. This sales and marketing team can now focus exclusively on the Trinity product range and, in addition, will take over the bioMerieux product range, which have sales of $3 million, and the upside of this deal, these 3 million of sales would have reduced to approximately 1.5 million when distributor margin was taken into account.

We currently have a transition agreement with bioMerieux to distribute the bioMerieux coagulation product range in France, and this business will transition to our direct selling operation on the 1st of January, 2007. And the bioMerieux acquisition has given us a critical mass in revenue terms to go direct in France. We feel that we have achieved this objective at a most reasonable price.

The French market makes up 7% of the world diagnostic market, and when you add our direct operations in the United States, in the UK, and in Germany, we now cover 60% of the world diagnostic market directly with our own sales and marketing and service teams.

At this point, if I could just hand back to Jenna, please, for a question-and-answer session.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS] Matt Dolan, Roth Capital.

Just a couple of questions here. First, on the revenue numbers, I'm trying to get a sense of contribution from bioMerieux versus an organic growth rate. We talked about, last call, some pre-acquisition buildup by some of their customers prior to Trinity taking over. Can you give us an idea of maybe what percentage of those customers are now at a more normalized run rate at this stage, or some way to gauge the differences there between the two businesses?

Yes, Matt, this is Brendan here. We have indicated that we're not going to spit out revenues between our traditional base haemostasis business and bioMerieux and, indeed, as I indicated in my remarks, it's even not possible to do that because we've already commenced a merging of the two product lines.

There certainly was some stocking up of the pipeline on the part of customers, both distributors and end users, and I think what we're seeing now, Matt, is that flushing its way out through the system and by the end of quarter 4 should be completely out of the system at that time. I think that's the best way to characterize it for you.

Okay, that's what I was wondering -- just qualitatively speaking, so it should be -- it still exists today and should be done by the end of the year?

Absolutely, yes.

Okay, appreciate that. And then in terms of profitability just looking at the operating margin in the quarter and looking at that 12% target, in terms of timing or giving us some scope on the calendar, how does that roll out here, and when could we expect getting there, either by providing a time guideline or a revenue run rate or something along those lines? I'm assuming, in terms of my model, it looks like most of it has to do with gross margins coming up and getting you there.

Yes, it's Rory here, Matt. The reality is, as you know, we have quite a fixed cost base in terms of labor and overhead. In fact, material only represents about 25% of what we do, so in that context, our variable costs are relatively light. So with that in mind, to get to the magical 12%, it's going to be driven on the revenue number. Our best guess, at this point in time, is it's probably going to be quarter 1 next year but, again, that depends on the revenue number.

Okay, fair enough. And then, just talking about seasonality, I know we've talked about it in the past, but given the bioMerieux acquisition, you know, the composition of the business has changed. Has that changed the sequential seasonality in the business one way or the other for you?

It's Rory here again, Matt. It probably dampens the seasonal impact in the sense that a lot of our other business lines, in particular, Infectious Disease, are outbreak-related, so, of course, flu or Lyme disease would be outbreak-related and largely beyond our control and also largely driven by seasons.

With haemostasis, or coagulation, that's not the case. It's more driven by people going under the knife in hospitals, and as we all can appreciate, that tends not to be seasonal. So one would like to think that, over time, the seasonal aspect of what we do will be dampened. That said, you cannot legislate for an outbreak of flu or an outbreak of Lyme or whatever. So there still might be some fluctuation but hopefully less so, going forward.

Okay, I understand. And then one final one, and I'll jump off. Rory, what's the diluted share count? I think you gave basic in the press release. Do you have a diluted number for us?

It do. It's -- let me come back to you in a second with that, Matt, and I'll give you the exact number, okay?

Michael Feldman, Triathlon Capital.

A couple of quick questions. First, on the $5 million operating profit for next year on bioMerieux. I know you had initially, at the time of the acquisition, there was some -- because of the way the accounting was done, it was sort of unclear as to how confident you could be with that number. I was curious if that -- if you're reiterating that number -- if there's anything that's gotten you more comfortable with it now that you've sort of seen the business and seen where the profitability is than you were last time, three months ago.

It's Rory again. I suppose we're more comfortable with the 40 million number than we would have been, say, three months ago. That, in itself, was one of the, I suppose, uncertainties as you go into an acquisition immediately post-acquiring it. So we're getting more comfortable with that number, and that does have a big impact on the bottom line, as I said a second ago. I suppose there still -- there always are some uncertainties, and there still are some associated with the product transfer, but I'd like to think that certainly a large chunk of it is beginning to move off the radar screen, as it were. Does that answer your question?

And then, I guess, on that $5 million operating profit number as well. Does the same go -- I mean, basically, the same statement hold?

We're still comfortable with the $5 million to $6 million operating profit number we gave last quarter, yes.

Is there any sort of color you can give on the integration in terms of whether if things that have been difficult or things that have gone especially well in terms of getting systems up and running with new customers? I'm just kind of -- I'd love to be able to get a better picture of what the challenges have been, what's been tough, what's gone well?

This is Brendan again. Fundamentally, it's been a case of getting to know the customer but, very importantly, getting the customers to know us and to trust that we will be there to provide the level of support, which is necessary in the haemostasis business. Haemostasis is a pretty support-intensive business, and both at a technical support level -- by that I mean at the reagent level, but also for the instrument platforms in terms of service engineers. And in all of the countries in which we're direct, we have transferred some bioMerieux personnel into our own operations. This would include technical specialists, selling specialists, and engineering people. And so that has been the challenge, really, has been the transfer of that technical support, as it were, into our hands from bioMerieux, and that has gone well. Of course, it's not without its difficulties and its bumps in the road, but it has -- overall, it's gone well.

And there has been no important account losses or anything like that that we need to be thinking about?

No, we're very tightly focused on the instrument placements, which we inherited from bioMerieux and making sure that all of those folks are happy with our service and our support. So there have been no significant account losses that were not in the pipeline prior to the acquisition.

Right, right, and then, I guess, one final question, moving to Point of Care. If I did my math right, it looks like there's a slight sequential decline. Is that season? Is that a meaningful trend to be looking at?

Ronan here -- no, we don't see that at all, and what we're saying is that there was an element of filling up of distributors prior to the acquisition.

No, I'm sorry, not on BMRU, on Point of Care.

Oh, excuse me. No, there is nothing of significance. I mean, if you look at the overall trend line, Michael, as I mentioned, outside the USA, it's growing about 20%. I mean, it's never going to be smooth, quarter on quarter, because you get various sized orders coming in on a quarterly basis. It's smoother in the U.S. than it is outside the U.S., let me put it that way. But we're seeing substantial continued growth in both key markets right now.

Right, so maybe there's a couple of big orders last quarter that explain that kind of blip but, for the most part, we should think of it as a 20 -- the trend, 20% outside the U.S. and a bit higher than that in the U.S.?

Absolutely correct.

If anything, Point of Care is more susceptible to big bulky orders than any of our other product lines.

Can I just jump in and come back to Matt's question -- sorry -- it's Rory here again. The diluted number of shares is 19.28 million, one-nine-point-two-eight. Okay, Jenna.

Ian Hunter, Goodbody Stockbrokers.

I know, Ronan, you ran through the acquisition side of things. I was just wondering if you could give us a feel again for it. Have you bought the whole pot of this business, or is it just the business that was dealing with you directly, and what were the staffing levels, et cetera, and how do you see it progressing over the coming, say, two to three years you're developing the business there in France?

What happened there was they were a typical distributor that would have applied a number of lines. What we did was, we bought our own business back, right, and then we basically selected what we regard as the strongest components of the business in terms of people, and we have taken them out in new location very close to the existing one and set up a new operation there. And so, as I mentioned, we took seven sales reps, two product managers, a marketing manager, and a general manager, and a number of service people. So we selected the people, but what we've achieved there is a very orderly transition of the existing Trinity Biotech label business. We're clearly not in the business of selling other people's product.

And I think, given the kind of relatively modest consideration we paid, it was well worth doing that. In addition to that, we took people who had experience in the coagulation haemostasis area and are now able to add into that, of course, all of the bioMerieux business, which we had, in the meantime, part would bioMerieux in anticipation of doing this deal.

So just to go back, what we've done is we've -- you know, France represents 7% of the world market, and we now are direct there, and the bioMerieux acquisition obviously gave us the critical mass to enable us to take this step because typically a step like this would result in losses for a number of years, but in this context, we've been able to achieve and be profitable from day one or from January when the transfer of the bioMerieux happens.

And then in terms of how we go beyond that, I mean, it's -- the entire operation will have sales of about 4 million -- 4 and a bit million dollars, which clearly is less than 7% of our sales, and so now it's up to us to kind of, with direct sales force there, to kind of catch up on our diagnostic world market share, which ought to be around the 7% mark, you know? And the reason for that is that, clearly, a distributor will never be as focused on the product range as one will be one's self.

When you say you bought your own business back, you mean they were selling a whole range of products, were they, and now you'll be trying to focus them more on the bioMerieux side of things, or will the be specializing?

In essence, they divided the business in two, and they took everything out, and we took our own.

[inaudible].

Ian, they wouldn't have been selling our entire range, which is part of -- that's more of an issue. A distributor, they always cherry-pick. It's when you have your own direct sales force you can push all your product line as opposed to the ones they want to push.

But, needless to say, it just works out much more cost-effective than starting in the greenfield side from day one and then turning around and having a row with your distributor and canceling him and he's trying to get competitor ranges in there and all of that. So this is a very orderly transition with a good management team.

Jack Gorman, Davy Stockholders.

Jack Gorman. Just a couple of questions on bioMerieux related maybe to some previous questions. Firstly, obviously, you talked about the recent French acquisition. Can you just give us a sense just in terms of the integration process, particularly associated with the range of distributors that you have worldwide? Obviously, BMRU, I think, were marketing the product via their own subsidiaries and now you're transferring across to existing Trinity distributors. Firstly, I suppose, can you give us just a sense of that?

Secondly, Brandon, you mentioned the overall haemostasis market. Have you got any sense since you've made the acquisition of any competitor reaction or change in competitor behavior to yourselves or in the market overall? And, thirdly, and I suppose, Rory, perhaps -- any further write-offs or product rationalization write-offs expected over the next couple of quarters?

In relation to the transition of business in those markets where we are not direct, in other words, going through our own distributors, in general, it has gone very well, because we would have been transitioning the BMRU business into distributors who were already handling our base, our traditional haemostasis business. In other words, people who knew the haemostasis business and knew the customer base and so on. So, generally speaking, I'm generalizing now, it's gone well. There have been several countries where there have been issues of one kind of another that needed to be resolved.

Has it allowed you more pricing power in terms of a bigger product line to push in front of these guys?

It has given us some advantages, given that we have a more modern instrumentation platform than BMRU have. The Destiny platform is state-of-the-art. It is brand new, where as the BMRU instrumentation would be sort of longer in the tooth, as it were, and less current.

In relation to your question about competitors, any competitor worth their salt is going to jump on an opportunity like this and try to capitalize on it. But most of the BMRU business, worldwide, is locked into the instrument placements. There are contracts in place. So that's why I said earlier in this call that our key focus has been on maintaining the population of instruments, which are out there in the market. If you keep the instruments in place, then you keep the business in place, that's essentially what it's all about, and that's what our focus has been on. So, yes, there has been competitor activities, but that's always there. Anytime you're bidding for a new instrument in a hospital, your key competitors are in there with you -- that's to be expected.

And the third question, I believe, was for Rory.

At this point, we certainly don't see any further write-offs, Jack. We have said on, I think, the previous two conference calls that we would expect integration costs associated with the transfer of production from Durham and St. Louis to Dublin and upstate New York, respectively. But what we're saying is, despite those costs, that we would still envisage doing operating profits of $5 million to $6 million. By implication, and don't ask me for a number yet, it's too soon, but by implication when we get through the transition process, we would expect those numbers to improve because, obviously, those transfer costs will disappear.

If I may, just ask one small supplementary to Brandon -- you mentioned, obviously, the screening guidelines from the CDC. I know it's very preliminary and very premature to ask this, Brandon, but presumably we should interpret this as a potential sea change in the market for rapid HIV testing overall?

Well, I think you can certainly expect to change in the market dynamics as a result of those recommendations. But a couple of points I would stress about them -- one is that they don't specifically mention rapid tests, they mention HIV tests. However, having said that, they are asking that everybody between the age of 13 and 64 should be tested for HIV and, given that the CDC believes very strongly in rapid testing and the efficacy of rapid testing, then a lot of that testing will be done using rapid test and, in particular, they're targeting emergency rooms in hospitals and, there, of course, it will be done using rapid test and essentially it will be done using blood-based tests as well. I think that's a very strong point, because any patient arriving in emergency room, blood will be drawn from them for a variety of tests including HIV. So I think that's a very strong point there.

So both the Bush initiative and the CDC guidelines certainly will lead to significantly increased business in HIV testing -- rapid HIV testing next year.

Benny Soffer, Beta.

A quick question for you -- given the new capital structure -- or I guess new from last quarter, but how do you guys intend to use the internal cash with respect to that debt? In other words, over the next year should we expect significant debt repayment?

Our debt repayment schedule, Benny -- it's Rory here -- is -- it's a five-year term loan commencing repayment on the 2nd of January and then to July and so on every six months. So have a $4 million repayment every six months starting from 2 January.

I would say in relation to the 20 million, a lot of that is earmarked for the production transfer process. We have quite a significant capital expenditure plan associated with building a new factory and kitting it out, and those funds will start, I suppose, being spent quarter 2 of next year, and quarter 3, so you'll see quite a bit of capital expenditure. You'll also see debt repayment starting from 2 January, and the other point to make is that albeit a lot of this has already happened, you'll see some working capital outflows.

For example, and to go back to one of the points during my script, are we acquired the business without any debtor balances or creditor balances, for that matter, and we effectively had to build those up from scratch. I would say we're almost at that level now, so there won't be much more in terms of incremental working capital usage, but there will be a little bit more as we continue to get up to a normal run rate from a zero starting position.

Brett Pollard, Numis.

I just wonder if you could a little bit more detail on what's happening in terms of OTC HIV testing?

This is Brendan here. Fundamentally, we are in dialog with the FDA. There is no fixed testing guidelines or clinical trial guideline. There is no red book, as it were, coming from the FDA to say exactly what we have to do. So it's a matter of dialoging with the FDA. We are in the process, right now, of finalizing the product format because, of course, we haven't previously sold our HIV product in a single test format, and we're in the process now at the end of the design stage of [inaudible] exactly how that product should look and how the guidelines to the use of the product should be within the packaging itself.

We're at that stage. We are at the stage of discussing with the clinical trial sites about protocols, about investigators, and we're looking at a number of sites across the U.S. and basically we're progressing our discussions with the FDA. In terms of timing, there will not be approval of an OTC test in 2007. We're certainly looking at 2008 at the earliest here.

For all tests.

For all tests.

Jenna, could I suggest maybe one last question. We're nearly an hour here now.

[Steven Peterson], Private Investor.

One quick question -- the line item for Africa and Asia, next report maybe split that up, because I feel that's probably where your growth may be. And, also, are there any discussions with the Gates Foundation to get some support -- their commitment to fight diseases in the Third World?

Well, just to answer the second question first, we do have a lot of discussions with a lot of different groups that are concerned about HIV and HIV infection and the spread of HIV, and not just Gates but many, many other kinds of groups. So the answer to that is yes, yes, we do.

And also, we are in discussion with a number of funding organizations, whether it be Clinton, whether it be Gates or who else, we are in discussion with a number of those people. And as we indicated in the press release, we recently hired a senior executive, David Oxley, who worked with Orasure, and he would bring with him some of those contacts that we perhaps do not have.

In relation to your question about splitting Asia and Africa, it's not something that we had particularly planned to do. Most companies would view their business as the U.S., Europe, and then the rest of the world. Not all of the growth, by any means, is coming necessarily from Asia and Africa. You can see that there is very substantial growth in Europe and the USA as well.

It would be also fair to say if we were to split it, it would make them relatively slow in the context of the other line items.

Thank you very much, indeed, then, to everybody. We'll close the conference call now and look forward to speaking to you in the new year. Thanks for your interest and your support. Good afternoon.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation, and you may disconnect your lines at this time.