Trinity Biotech PLC (TRIB) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Trinity Biotech fourth 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. Good morning, and welcome to the Trinity Biotech fourth quarter for 2006 and year-end results conference call. I'm joined here by Rory Nealon, our Chief Financial Officer, who will bring you through the results for the quarter and the year. After that, given that Brendan Farrell is suffering from a bad flu, I'll bring you through the overview of revenue performance for the year, before finally opening up the call to a question-and-answer session.

However, before I commence, I am required to read the Safe Harbor provision as follows: Forward-looking statements in this release are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, but not limited to, the results of research and development efforts, the effect of regulation by the United 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 at this point, I'll hand you over to Rory Nealon.

Thank you, Ronan. 2006 has certainly been an interesting year for us with the acquisition of bioMerieux in June and then Nephrotek in October, and the actual fund raising back in April. So in this context, I propose to review the key movements as usual in the income and balance sheet, and I'll also note the impact of each of those events that -- the impact that they had on our numbers. You will also have noted from the press release that we've decided to defer revenue associated with one particular customer, which has had a $1.7 million impact on our profitability, and I'll touch on this in more detail as I review the numbers. So starting as usual with our revenue performance, as normal, you will note in the press release an analysis of the key product areas and also by geographic location for the year. At a summary level, you will note that our sales for the year have increased by 20.4% and this is comparable with our growth rates in recent years, which were at 23% in 2005 and 22% the previous year. Quarter-on-quarter our revenues are relatively flat due to the impact of the deferred revenue situation which I'll touch upon in a minute. If you compare the first half of the year to the second, you'll note that our revenues have grown from $52 million in the first half of the year to $118.7 million in the second half, or a 28% increase. And this increase is largely driven, as you would expect, by the acquisition of bioMerieux in late June.

At this point, I'll move on to the gross margin performance, and Ronan will shortly take you through a more detailed analysis of the revenues. I'm conscious that we have a number of first-time investors on the call, so it might be useful to repeat what I've talked about on a number of previous conference calls, namely the impact of the bioMerieux acquisition on our gross margin and various other factors which will impact on our margins going into 2007. The key drivers of our margins generally are factors such as product mix, geographical mix, channels to market, and finally, instruments versus reagent mix. On a go-forward basis and things to watch out for, there are a number of other factors which need to be considered, such as China. You'll recall that we announced in August that we are moving the manufacture of our Unigold HIV product for the African market to China. This project is very much on target, and in fact we completed stage one in quarter four on schedule. The second and final stage will be completed in Q2, as a result of which we should see an improvement in our gross margin line going into Q3 and beyond.

The other 2007 factor you should watch out for includes the impact of the bioMerieux acquisition. As mentioned on the last conference call, there are two key factors at play here. Firstly, the general nature of the hemostasis business. And secondly, the impact over the upcoming quarters of the production transfer from Durham and St. Louis, where bioMerieux produced reagents and instruments respectively, to Trinity's operations in Ireland and upstate New York. Just to come back to the first of those two issues. As noted before, the bioMerieux business we just acquired is very similar to Trinity's existing Amax hemostasis product line and how it functions. In other words, we typically set our place instruments at low margins and we service those instruments again at relatively low margins. And while we tend to make up for this through increased margins on the sale of reagents and instruments, the overall effect is a lower average margin than is the case in our Infectious Disease, Clinical Chemical and Point of Care product areas, whereas there is less or no impact of instrumentation.

The second point I just mentioned a minute ago related to the impact of the production transfer from Durham and St. Louis. As just noted, Trinity is in the process of transferring the bioMerieux reagent manufacture from Durham, North Carolina to Ireland and the instrument manufacture from St. Louis to Trinity's facility in upstate New York. That's a process which commenced early in quarter three and will continue until later this year or early 2008. During this period, we will incur various costs associated with recruitment, training of our personnel in Durham, and various [solidation] studies before we commence true profitable production. And this is obviously having-- understandably having a downward impact on our numbers, and by implication, our gross margin. Albeit, and mostly importantly, I will reiterate what we stated before, mainly that it's expected 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 profits of at least $5 million in 2007. And we still believe that to be the case. Just by a simple way of example, those people who are currently in Durham training will produce 31 batches of product in Ireland in 2007, and those same people will produce 82 batches in 2008. So it gives you an idea for the improvement yet to come. Coming back to the actual numbers, our gross margin for the year before the impact of the $5.8 million once-off inventory write-off we talked about in quarter two has been broadly comparable to the previous year at 47.7%, despite the impact of those bioMerieux factors which I just alluded to.

Moving on to our administrative expenses, our expenses have been reasonably consistent since we acquired Primus in July 2005 until quarter three of this year. And specifically those expenses have been $9.4 million in quarter three last year, $9.3 million in Q1, $9.3 million again in Q2 and $10.3 million in Q3. In quarter four, those costs have increased significantly to $12.5 million, with the increase being due to the following factors: Firstly, you have the impact of bioMerieux, which has resulted in incremental sales and marketing people in Germany, the UK and the USA, and various other admin expenses associated with taking on an expected $40 million revenue business. Secondly, the costs associated with going direct in France. You will recall that we have gone direct since the start of October in this market and the associated costs associated with running such an operation have increased our SG&A costs. Those French-related costs, don't forget, also include the amortization associated with various intangibles we acquired as part of this acquisition. And finally, various once-off costs associated with setting up those direct selling operations in France and also with setting up our new facilities in the UK. You may not be aware, but prior to October, we used an intermediate logistics company in the UK, whereas now we have our own premises and obviously the costs of such are hitting our SG&A line.

Moving on to our net financial costs, you will have noticed significant changes since quarter two, as I mentioned before, with the new $30 million debt facility, which was drawn down toward the end of that quarter to finance the bioMerieux acquisition. And as you would expect, there's been very little movement quarter on quarter. At the taxation line, again you will notice the presence of a tax credit in quarter four, a bit like quarter three, largely driven by two reasons. Firstly, the geographic mix of profits and losses during the quarter, with profits being in low tax jurisdictions and some losses in high tax jurisdictions. And secondly, the recent introduction of a new accounting standard, which no longer permits general tax provisions on your balance sheet. So going forward, you won't see credits like this given, I suppose, the move towards profitability in all our tax jurisdictions, and also the removal of those general tax provisions.

Before concluding on our levels of profitability, I did promise to refer back to the revenue deferral, which you have noted from our release, and as noted in that release, we have experienced a delay in the collection of cash from a large customer, as a result of which we decided to defer the revenue. And this has had a $1.7 million impact on our profitability for the year. It is, to a large extent, based upon a strict interpretation of accounting standards. And as you all are aware, we follow International Financial Reporting Standards, or IFRS, which is strangely silent on this topic.

However, we've resorted to U.S. GAAP, which is more stringent, and hence, we're adopting a more conservative approach in the circumstances such as this, where customers breach their credit terms and thereby create uncertainty as to the collection of cash. There's an argument, albeit with the benefit of hindsight, that one should be conservative and thereby defer the revenue until the cash is collected. Like I said, there's an element of hindsight to get to this result, in that when you book the transaction in the first place, you obviously assume that your customer will honor the agreed terms. But in this case, we believe that -- we are probably aware now that -- while we're aware of now, that the end-user project that they were involved with was stalled by some product registration issues. And hence, we considered it appropriate to defer the revenue.

It's also worth reiterating what we said in the press release, namely that we fully expect to receive those moneys over the course of 2007. And in fact, ironically, we've received the first traunch of $500,000 in recent days and this revenue will be recognized in quarter one. Furthermore, we expect to receive a further similar amount in the next few weeks, and we're fully confident of receiving the rest of it in 2007, some of which is not even due for payment yet, incidentally. Without the impact of that deferred revenue situation, our operating margin before share option expenses for the quarter would have been approximately 10%, which is higher than the 7.9% we achieved last year, the 7.8% in quarter one, the 8.5% in quarter two, and is in fact comparable to what we achieved in quarter three. So, we're going in the right direction.

Now to talk about our balance sheet, and due to the scale of the bioMerieux deal and the Nephrotek acquisition in France, the equity fundraising in April, and the new debt facility we drew down in June, obviously there's been a lot of chopping and changing in our balance sheet over the course of the year. Starting with our property, plant and equipment, you'll note it has increased by $3 million since December and that increase is a combination of the bioMerieux and Nephrotek fixed assets we acquired on the acquisitions of $2.4 million, some day to day fixed asset additions of $4.3 million as offset by our depreciation of $3.7 million. So no major movements there. Our goodwill and intangible assets line has obviously increased significantly from $85 million at the end of December to $122 million at the end of December this year, and is again due to the impact of the bioMerieux and Nephrotek acquisitions. The vast majority of this increase, or $33 million in fact, being attributable to those acquisitions.

Our inventory has had a number of significant changes since the end of December, specifically the impact of the -- again, of bioMerieux, which caused an increase of $8 million, as offset by the impact of the once-off rise-off of $5.8 million in June of this year. Other increases during the year include the buildup of reagent inventories from bioMerieux in Durham, who you will recall are building 18 months worth of inventory for us over a 12 month period to facilitate the product transfer to Ireland. That upward trend is going to continue slightly until June, at which point the production will transfer to Ireland, and if anything, we would expect to see a decline thereafter. Our trade and other receivables balance, meanwhile, is comprised of trade receivables from customers and also prepayments or receivables, which in itself has been undergoing some fluctuations, again primarily due to the bioMerieux acquisition. Specifically, we prepaid bioMerieux back in June for certain inventories and other services as part of the acquisition agreement, and those prepayments are going to continue to decline until June of this year, at which point all those relevant services will have been provided by bioMerieux. Our trade receivables balance, meanwhile, has also increased due to the general overall growth in the level of the business, and in part due to the deferred revenue issue I just alluded to.

Moving on to our cash balance, our combined cash balance has been more or less static since December of last year. And that has increased -- well, decreased from $18.9 million to $18.3 million now. Obviously within that, there have been some very major movements such as the $30 million of incremental borrowings we drew down in June, the $24 million of equity placement we did in April, we paid bioMerieux $40 million for the acquisition again in June, we paid $5.7 million to the Primus shareholders by way of deferred consideration and some earn-out payments, there was a further $1.1 million to the Fitzgerald shareholders by way of earn-out payments, debt repayments of $1.3 million, and convertible debenture repayments of $3.6 million, and various other working capital and fixed asset additions making up the difference.

On the gearing side, you'll note since the start of the year that there has been an increase in the current and noncurrent interest bearing liabilities of $25 million. And that's obviously made up of the $30 million debt facility I've just referred to, as offset by some repayments to the banks during the period. Moving on -- just before wrapping up on the financials, and before I touch on the bioMerieux integration, it is worth noting that our bottom line performance is within the range of analyst expectations, which range from $7 million to $8.5 million profit after tax for the year, and that's despite the impact of the deferred revenue. Without that deferred revenue issue, we would have exceeded all analyst expectations.

Just before Ronan talks about the revenues, to talk a little bit about the bioMerieux integration process, because I get asked a lot of questions about this, I just want to spend a few minutes on this particular topic. And just to repeat what I said a minute ago, we are extracting a reagent product line from bioMerieux's premises in Durham, North Carolina, and moving it to our headquarters in Ireland, where we currently make similar hemostasis reagents. And we're also extracting some instrument manufacture from bioMerieux's operation in St. Louis to our Jamestown facility in upstate New York. During the 12 month transition period, there has been and will continue to be a significant amount of work, all of which I'm happy to report is on schedule and moving according to plan. The key steps we've had to undertake include the building of a new factory, the training of our staff, rationalization of various product lines, and the transition of key manufacturing equipment. Just starting with the new factory, which incidentally, I'm actually looking at as we speak, and if anything is slightly ahead of schedule and due for completion at the end of May. So no concerns there. And there is even room for slippage. Regarding the training of our staff, we've had a core team of about 12 people based in Durham since August, a rotating team of 12. And this training program has built in redundancies with multiple people trained on each process and is 56% complete today, with completion due for mid-May. So at this point, everything in the training program is also going to plan, and we see no risk to completing that process on schedule.

The third key task we set ourselves was the rationalization of various product lines. And this is going to be an ongoing process which will continue over the next two to three years as we seek to cut down the number of reagent product lines in conjunction with our desire to reduce the number of instrument types which we sell. So far we have called about 10% of the bioMerieux reagent lines, that is, those that we dot no propose to transfer to Ireland, which we have replaced with existing better Trinity products from the Biopool or Amax product ranges. This is a two-way process, needless to say, and in the future we would be seeking to replace some Trinity products with better bioMerieux reagents. The last core task we set ourselves was the transition of core machinery from Durham to Ireland and the acquisition of new critical machinery for the production process. And again, this project is very much on track and all the arrangements are in place for a smooth transition from Durham. In fact, the new custom built freeze dryer which has been made, is currently on the high seas, and will be with us in the next two or three days. Ronan?

Thanks very much, Rory. I'll now give an overview of the revenue performance for the year and highlight key product development projects. Firstly, in Chemical Chemistry, the product line has increased 25% year on year and 3.1% quarter on quarter. The year on year growth being largely driven by the fact that we acquired Primus in the middle of last year. Our key achievement in the recent quarter in this product line includes the addition of three new international distributors and the renewal of our contracts with the two largest reference [inaudible] in the United States. Going forward, we are particularly excited about the impact our rapid HbA1c product will have on our growth potential. Moving on to hemostasis then, 2006, as Rory states, has been an eventful year for the hemostasis business with the acquisition in late June of the hemostasis business from bioMerieux. You'll recall that this acquisition increased our market share threefold from a global 4% to 13%. More importantly, this acquisition has given us the scale necessary to compete in this market segment. In particular, we've been able to add significant incremental business to our direct sales forces in the U.S., the UK, and Germany, with a minimal increase in the overall head count in these sales forces. We have also been able to justify going direct in the French market, and it is with this scale in France which led to our acquisition of our French distributor, Nephrotek, in October. We now have 16 employees in France based out of Paris.

And overall, our hemostasis business has increased by 56% year on year, and very importantly by 10.6% quarter on quarter. The quarter on quarter growth is very significant and was somewhat expected, given to the extent to which products were sold into the market prior to our acquisition of bioMerieux business at the end of quarter two. So that 10.6% is very important, and I suppose it really reflects the fact that the filling out of distributors had come to an end, and that they have used up the stock they held. And our hemostasis business is now our largest product line and is in an area where we are particularly excited about going forward. We also believe that our instrumentation is soon to be the best in class, with the launch at the back end of this year of our Destiny Max instrument, which is targeted at the high throughput end of the marketplace. The Destiny range will be the only instrument range in the market covering low throughput, medium throughput, and high throughput laboratories, which have the same look and feel, same customer interface, and same consumables, no matter which instrument package is used by the laboratory.

And coming down to the Destiny Max development, we expect that the embedded software would be completed in the next two months, thereafter we into validation, after which we expect to launch the instrument at the end of this year in international markets, and in the first half of 2008 in the U.S. following FDA approval. This instrument is a high throughput state of the art instrument, which has been demo'd at the recent Medica Exhibition in Dusseldorf. The customer feedback at the exhibition was overwhelmingly positive to the effect that it met all market needs and there had been nothing like it when it launches. We believe that this particular instrument, upon which we plan to run the best in class reagents from our Biopool, Amax, and bioMerieux ranges, will really drive growth in our hemostasis product line in 2008 and beyond.

And now moving on to Infectious Disease. Our Infectious Disease business has declined year on year by 4.6% as Rory mentioned. This year on year decline is largely due to the ongoing decrease in business, which we doing as Wampole. I will remind you that Wampole used to be our distributor of infectious disease products in the United States, and that our sales have reduced by approximately 85% from a high of 10 million two years ago. You'll recall that we sued Wampole for breach of contract, and that this action was settled during August, 2006 as part of the much more complicated assessment, in return for $1 million in damages and the lateral flow license Inverness patents, we agreed to drop our claims for breach of contract. Going forward, our objective is to leverage our lateral flow expertise, as demonstrated with our excellent Unigold HIV product, and our Inverness license to grow a broad range of point of care products.

Just to conclude on the Infectious Disease business, we're beginning to gain traction with the new sales team we have in place, and in fact are starting to win back some of the Wampole business in the United States in quarter four. We also won an [inaudible] contract with one of the megalabs in the United States. In summary, if one excludes the Wampole impact, a poor flu season, and a slow Lyme season, the Company's Infectious Disease business is performing strongly. And with continued instrument placements, particularly in the UK, Germany, and the U.S., we are confident of strong growth in the coming year.

I'll now move on to the Point of Care business, which grew 19% year on year. This is consistent with our growth pattern over recent years, and is in large part driven by significant funding, which is available in this market segment in terms of Africa. Our business, as you know, is divided into sales in the African market, which is typically high volume and low margin, and sales in the U.S. market, which is the reverse. In terms of the U.S. market, we're particularly excited in the recent growth that we've achieved. So in 2006, our sales grew 117% in this area in the United States. And more importantly, and most importantly, within 2006 in quarter four, we achieved 38% growth. So clearly, the elements are very strong for the future, and key drivers of this growth would include the recent CDC guideline issued in September, which has removed the need for pre-test counseling and consent, and suggests that all Americans be screened for HIV. Secondly, the reauthorization of the Ryan White Act, which for the first time has stipulated that funding provided for the treatment of HIV under the program may be directed towards HIV testing. And lastly, President Bush's stated desire to test an incremental 3 million Americans for HIV. So in summary, our U.S. HIV sales are progressing very well.

In terms of the hospital market, we estimate that we now have about 30% of the market jointly through our own direct sales efforts and that of Fisher. And in terms of the public health market, we have been gaining significant traction. You'll have noticed that we announced Planned Parenthood and in four separate states now, we've had significant gains in terms of entry to those markets. And I think that's reflected in the fact that we said we had 117% growth last year and 38% growth in quarter four.

And then moving on to the African market, which is an entirely different dynamic in that it's higher volume and lower margin, our volumes are typically half those of the United States, albeit off higher volumes. In 2006, we tested 8 million Africans using our HIV kits, and are most definitely number two in the marketplace. More importantly, and going forward, we plan to leverage our experience base throughout Africa together with demonstrating consistently high-quality product performance to dramatically expand the Trinity product range in Africa. Talking about funding, the key source of funding in this market segment includes the WHO, UNICEF, the Clinton Foundation, the Global Fund, Unitaid, and the President Bush's PEPFAR program. In underlying the goals set by such donor institutions, it is obvious to many that significant scaleup of rapid testing and therapy will be required if we are to make meaningful progress looking forward. As some of you know, donor institutions like PEPFAR and Global Fund, et cetera, are designed to dramatically increase resources to fight the world's most devastating diseases, and to direct resources to areas of greatest need by supporting locally driven strategies. This is why part of our strategy has been to advocate before the leadership of these institutions the need for a supply chain mechanism that acts as a kind of linkage between partners like Trinity, donor agencies like PEPFAR, and host nations.

To that end, we are pleased to announce in today's press release, the first of such strategic partnerships. As announced this morning, we are working closely with PEPFAR officials in Washington, D.C. together with host nation officials in each of the 15 PEPFAR-focused countries to help determine product needs and build sustainable forecasting models that should help PEPFAR scale up testing and corresponding treatment that is urgently needed. While it is too soon to project what revenue impact this partnership will have over 2007, we believe this partnership will underpin our growth projections going forward. It is also worth noting that we are the first manufacturer of rapid HIV tests to be approved under this program. And clearly, that is very significant. Finally, as part of our broader strategy in this market segment, we are in dialogue with other such donor institutions and hope to have more partnership opportunities to share with you later this year.

Before concluding on Point of Care, it's worth noting that this product segment will become an even higher margin product, as referred to by Rory, for us in Africa in the future. We are currently transitioning the manufacture of Unigold for this product from Ireland to China, which will significantly reduce our cost of production. We expect to see the impact of this improvement in margin in the second half of this year. And just to deal briefly with HIV in the OTC market in the United States, we're moving forward quickly on this project. One of the key projects we're focusing on during 2006 was a product presentation and the information provided for in the test. A design house was developed in conjunction with feedback from potential users and our team of experts, an easy to follow set of instructions. At this point, we have undertaken several rounds of cognition studies to look at peoples' abilities to understand the test and the instructions, and the results have been positive.

The next significant project is our clinical trials. Our flex study protocol was submitted to and reviewed by the FDA in September. Since then, we've identified trial sites and investigators to undertake the further clinical trials. These investigators, all experts in the field of HIV, met up in January to finalize our trial design and discuss the overall project. The outcome of this meeting was that our trials to address Phase II of the FDA's requirements which relate to unobserved trials, will commence this month. A very aggressive schedule has been set for our clinical trials, with completion due towards the end of 2007. All going to plan, we will submit the trial data to the FDA very early in 2008. Regarding the size of the potential market, there are varying numbers floating about the marketplace, which we don't want to comment on at this point. Suffice it to say, we intend to capture more than our fair share of this market, and believe that our test is well-positioned to do so. The key competitive advantage as we our test having, include its shelf life, which is more than double that of our largest competitor, and will be a key requirement for the OTC market -- for the OTC market, its accuracy level and ability to detect positive earlier in the infection cycle. And finally, with the exception of the licensee, it is worth stating that we are the only Company to have the required lateral flow licenses to operate in the point of care market. And at this point in time now, I would like to hand this back to Joe to open the question-and-answer session.

[OPERATOR INSTRUCTIONS] Ian Hunter, Goodbody Stockbrokers.

I think first thing I have to get to is whether you can give us some more detail on this revenue deferral that's come through. You've said that some has already come into the system, et cetera. Can you see that the numbers that we have out there for '07, are you looking for an upgrade on the revenue side of things, the cause of this deferral against the pullback that has been in the numbers? That's the first thing on that, and how you would see that coming through over the four quarters. Secondly, then, I think on the SG&A costs. Is this -- are we going to see a gradual recovery in them over the next four quarters? Or are you going to see it bouncing back up on the first quarter, and continue on the better levels that it was in Q3? And maybe thirdly, with the SG&A and R&D costs as well, what do you think the cost of the Unigold rapid HIV OTC trials will be, and when do you think they will start coming into the numbers?

Hi, Ian, it's Rory here. Maybe just to cover the first three of the four questions, I think, and maybe Ronan can take the rapid OTC. In terms of revenue upgrade, yes, is the answer. We tend not to give guidance as a rule. But given the circumstances, we do expect that deferred revenue to come through in 2007. We do expect to to exceed the analyst expectations, which average at an average after-tax profit for the year from memory, of about $10.8 million. So we expect to exceed that number over the course of this year. In terms as to how quickly that comes in, to be fair, there's a little bit of uncertainty. And I prefer not to lock us into that just yet. I prefer a little bit more time to go by, if that's okay. In relation to the SG&A expenses, they're a little bit higher in Q4 than we would expect them to be going forward. Annualized, they come in at about $50 million, where I think the expectations seem to be coming in around $49 million next year. So we don't expect to see them increase. If anything, there might be a slight decrease. There were certain one-off costs in Q4 associated with the bioMerieux, associated with France, associated with the UK. And when you annualize those up, you very quickly get to $1 million or thereabouts. So we'd expect to see that number if anything over the course of the year coming down. Ronan, do you want to answer the OTC?

Just to deal a little bit further with the issue of revenue deferral. As we say, we were hoping we would received funds right up to today. But that unfortunately, as Rory mentioned $500,000 was only received, and just received in the last couple of days. In light of only receiving this amount of money, we agreed with auditors that the prudent course of action was be to conservative and recognize these amounts on a cash receipts basis only. However, clearly, the $500,000 that was received in the last couple of days will obviously be reflected in quarter one. And that clearly would be incremental. Right? We are absolutely confident that the balance of the money would be received during the course of the year, some I think will be received very quickly. I think it's important to point in fairness that some of the money isn't even due. All right? Some of it isn't even due under the credit terms. [inaudible] to a product registration issue. We're talking about a highly-valued customer. So we don't go into the very details of it. But fundamentally, it is probably a no-fault situation, where the product registration gave rise to a delay in payment and the conservative thing to do was to regard it on a cash received basis. So fundamentally, we're talking about a timing difference basically between 2006 and 2007.

Just then to deal with the issue of OTC, I think in terms of OTC market, we have not included any revenues for 2007. And clearly, you're talking about something which is very uncertain in terms of a whole series of FDA trials. But in terms of 2008, we would expect to see some revenues coming through there. But really, I think it would be fool hardy for me to actually give any solid indications there.

I was wondering, Ronan, what the cost save would be in '07 if you're going to be running trials?

Excuse me, sorry. I missed something. Cost trials, I think we're just over $1 million in our budgets for that.

All right, okay. Cheers. Thanks so much.

Matt Dolan, Roth Capital Partners.

Just a couple questions here. On the deferred revenue contract and the $1.7 million profitability impact, can you give us an idea of what product category that falls into, as we kind of dissect the revenue categories here, in seeing some down year over year. Can you help us out in terms of which product line that may have fell on it?

Matt, just to say, we're dealing here with a really valued customer. And I don't want to get into a series of questions which would almost identify them. So I'm really not going to get into what product line, what product, or what country, if you don't mind. Again, to point out, the credit terms were exceeded. But there is an explanation there, in terms of product registration issues. So we're not really -- as I say, we've just received $500,000. We expect the rest to be received. We're not really in the business of blaming. So if you don't mind, I'm not going to go into that, Matt.

Fair enough. I thought I would give it a shot. Secondly, with respect to the Unigold contract with PEPFAR, as well as the New York contract you announced earlier this year, can you give us some perspective on the size of these contracts? Either relative on the African side to your 8 million tests in '08, or maybe how many of those 15 countries you were present in in the past? And secondly, should we anticipate similar announcements here going forward in '07?

Hi, Matt. It's Rory here. I suppose CHN is significant, not necessarily in terms of dollars, but because it validates the benefits of the Unigold platform in the States, and we do hope to have further announcements about that within the U.S. to talk to you about later in the year. PEPFAR is more -- is significant in another context, because it's the first time we're dealing directly with leadership officials in Washington, D.C. together with Ministries of Health in each of the 15 focus countries, albeit we've had some dealings with Ministries of Health before directly. And that direct dialogue should help drive significant product growth over time. Bearing in mind, our Point of Care tends to grow at about 20% per annum. I don't people to get too excited and assume it is going to be significantly greater. I think the words were using that it is underpinning our growth expectations. And yes, we do hope to have other such partnership announcements in the African market with you again later over the course of this year.

Okay, very good. And then just a couple more and I'll jump off. On bioMerieux, you characterized your rationalization or culling of the product lines. Can you give us an idea of that, relative to your prior expectations? Are you cutting more products than you originally thought there? And how should we look at that at a revenue and profitability standpoint for the hemostasis side?

First, an obvious thing to state is that ultimately the goal here is to improve profitability. It's not a negative thing. There was the one negative thing back in Q2, when we had a $5.8 million write-off, which was an up-front decision we took to very quickly cull the levels of instruments we were carrying, predominantly instruments. Some were reagents. When I referred to culling 10% of the bioMerieux products, there's no cost implications to us in doing that. We're just simply not transferring them from Durham over to Ireland. And we're very quickly -- and, in fact, have already replaced them with Trinity products from either the Biopool or Amax product ranges. Going forward, and this is a two to three year project, there is huge scope for us to, if you like, cut down the number of products we have in certain areas. For example, we have 60 [dimer] products and some of the best products in the world in that range, but we don't need six of them. And as we continue to cut down our instrumentation platforms, there is definitely scope to cut down on the number of products we have in that area, which has significant benefits to us in terms of stockholding policies, in terms of stock obsolescence, in terms of raw material holding policy, lead times, sequestering of batches for customers, the ability to move products back and forth between different customers. There are, huge, huge benefits for us. But you really won't see the benefits of that coming through in 2007. That is, like i said, a two to three year project and is very much down the road.

Got you. And then finally, on A1c, can you give us an update on timing there, Ronan? And then from a distribution standpoint, does Henry Schein have an A1c product to date? And can we assume they'll be your physician office partner? Or are there any other potential partners out there?

I think Henry Schein [inaudible] the market leader. But just to say, that we're talking to a couple of the major OTC distributors, national distributors. I'm not really in a position to say where we're at. But we're close enough to signing with one of them. We also do a bit of [inaudible] selling ourselves in terms of some customers that move very well, some of the more significant ones. But basically, Henry Schein does actually carry the market leader at the moment. But we're close enough to signing something there.

Very good. Okay I'll jump off. Thanks a lot, guys.

Maybe, Matt, just to give you the latest here. I think you asked about the status of the project, in terms of where we're at on that A1c. We are, as we all know, awaiting FDA approval. And that FDA approval has been coming for some time. But we genuinely do expect in the near future. I suppose the delays have in part been caused by a redesign of the test from a single test device to a three test device, which has involved some resubmissions to the FDA. And in fact, our next submission is due in next week to the FDA, with some further CLIA data submissions due in April. So we're quietly confident at this stage that the approval of this product is at last imminent. It's been a little bit disappointing how long it's taken, but we genuinely seem to be getting there.

That approval including CLIA waver, Rory?

Yes. Okay, thanks guys. I'm not going to give you an actual date, guys, but it is imminent. Well, next quarter or two, shall we say.

Sounds good.

Sean McMahon, Kennedy Capital .

A question on the trial you guys are running. Can you guys -- how is that trial being run?

Which product, Sean? Is it the HIV?

Yes, the over the counter HIV?

Do you want me to go with that?

The trial hasn't actually commenced as we speak, but I'm not sure, Sean, what question you're actually asking?

Well, is it -- how is it being run? Are you taking 100 people, and seeing if they can use the device without anybody helping them? Or how does that work?

Sean, there are three phases to it. One is effectively done, in that the product is already approved. And that would be the same for our competitors. Stage two is unobserved trials, where you would have clinical trial sites and people would be brought in off the streets and run the test unobserved. If -- before running any of these trials, you have to agree to protocol with the FDA. And we've obviously submitted our protocols, and the FDA seems to be reasonably relaxed with how people are running these trials -- sorry, the protocols behind them. Those trials are due to commence this month at a limited level, and then they kick in in earnest in May of this year. And we expect to have the the results of that phase, which is the unobserved, and Phase III, which is the observed trial, back by the end of this year for submission to the FDA early next year, a good foot forward. So it's certainly an aggressive timetable, but it's something we're pushing very quickly. It's something we want to get out there quickly with a hope to be first to market on.

Okay. And then on the PEPFAR contract, did you guys win that from somebody? Or is that a new contract? Did you take that -- did you win that from a competitor?

[inaudible] it is a new contract, and we are basically the first Company to be approved. So we're the only one as we speak.

Okay.

Basically it's like being a preferred supplier under the program, Sean. So President Bush has put $15 billion into this program. And I think the spend in '07 is going to be about $2.8 billion. Obviously, it's not all into testing. It's going to be treatment and counseling and what not. But part of it will be spent on testing. No defined amount, I should add. But obviously we're hoping it will be a significant amount. And we're the first to be an approved vendor under that program.

Okay. I guess on the operating profit, I appreciate the detail there. But you talk about one of your customers having a product registration. Can you give me any more color? It's a newer product, and that's why the shortfall came? Or can you give me any more color? I don't really understand why it's a product registration if it's -- we were expecting this to kind of already hit Q4. Is this a newer product for you guys, or -- help me out?

Don't so much go there. But just simply that it basically, in the country in which the product is about to be sold, and basically it transpired in the end due to a competitor and complaints that in fact the product required additional registration, which hadn't been foreseen. And that results in a situation where the distributor basically had the product, but wasn't able to sell it. So [inaudible] and therefore haven't received any money from any customers. And basically, that's why the delay rolls.

Okay.

Delay and payment of cash to us. The registration issue in some respects, Sean, doesn't affect us at all. That's something that the distributor does locally. But all of that led to a situation where they didn't pay us cash, and then by virtue of not having cash, the strict accounting rules say you should reverse the bookings and defer the revenue until it actually comes in.

But the difficulty was that only part of the cash was actually due. But because of the fact that the customer had defaulted under the accounting rules, it was determined that everything relating to that customer should actually be reported on a cash receipts only basis.

Okay.

But therefore, despite the fact that some of the funds aren't even due at this moment in time, and that some has actually been paid for, the whole lot is put on a cash receipts basis, and will be back-dated 31st of December. Therefore, as it stands, we pay for $500,000 worth of product, right? But it actually happened -- we're going to book it in quarter one, all right? So basically, because of what happened, basically, the customer -- all of the business with this customer goes on to a cash receipts basis.

I understand. And lastly, are there any earn-outs that are due in '07?

There's just bioMerieux. There's $3.2 million due on the 25th of June, to be exact. And there's another $2.6 million due on the 25th of June, 2008. There were potentially incremental amounts if we exceeded exorbitant levels of sales, but that didn't happen and nobody ever expected it to happen, so that's gone. I think we made reference to that in the press release back in May. So just to summarize, $3.2 million due in June this year, and $2.6 million due in June of next year.

Okay, thanks, guys.

I should also say, Sean, that that cash receipts basis is the first time anything like that has ever happened to us, just to state the obvious. Okay?

Yes.

[OPERATOR INSTRUCTIONS] Jack Gorman, Davy.

I just had a couple of small questions, please. Just on the PEPFAR relationship, firstly, Ronan. Can you just confirm that it's a preferred provider relationship that you've got on to now, as opposed to actually receiving an order? Just wanted to clear that up. And secondly, Rory, just in terms of tax, just wondered what you have in for guidance for 2007 for tax of [role]. And thirdly, the Point of Care division on my numbers looks to have had a down quarter in Q4 compared to Q3. Just wondering if there's any kind of underlying things we should be aware of there?

Jack, in terms of PEPFAR, you're right. What we're talking about is being a preferred provider, but there's not a solid order connected with it. But clearly, the PEPFAR program has very significant budgets and financing attached to it. So we're very confident that basically being a preferred supplier here will basically underpin our African growth going forward.

In fact, from that context, John -- sorry, Jack. There's a small chance that the first of those orders might even come through in this quarter. Literally, the contract has just being signed. It's hot off the presses. And there's been talk already, but no firm POs in just yet. But it's not long before the first revenues under that contract will start to flow.

I would just make the point, too, that it's hardly surprising, given that we've tested 25 million Africans over the last three years, if not four years for HIV and that we're probably regarded as in second place and regarded as a very excellent product. Many people regard it as the best product available. So it's hardly surprising that we would actually gain this status. But having said that, it's excellent news and it's excellent news and the real thing is the tap has now been turned on and we're rolling, you know?

To answer your other question, Jack, obviously Q4 has had -- this Q4 quarter on quarter, it hops around a little bit. It depends on the mix, as well, don't forget between the U.S. and Africa.

Yes.

Just quarter on quarter, it's very hard to judge our numbers and how they perform. The other question you had was in relation to tax in terms of FY '07. There's a little known accounting rule, now a largely know accounting rule called FIN 48 in the States which says that from now on, thou shalt not have any general tax provisions. So all our tax provisions were reversed out this quarter. And also what happened to us, there was -- we do have a situation where we're very profitable in our low tax jurisdictions, and yet we're making tax losses in the higher tax jurisdictions. So that creates tax credits, and ends up in our deferred tax asset. Going forward into 2007, there's no more general tax provisions. There's nothing left in the kitty, as it were. So you'll see the tax numbers come back to more acceptable numbers. I think if you look at any analyst expectations for next year, including your own, you'll see our EBITDA expectations in or around $25 million. So bearing that in mind, at the EBITDA level we're certainly going to be profitable, and we're going to be profitable in pretty much every jurisdiction. So you'll see the tax number go back to where it should be, remembering that our lowest tax environment is a 10% environment and our highest is around 35%, 36%. On a normal year basis, you would expect that tax charge to be somewhere in the mid-teens percentage-wise. Okay?

That's great. Thanks.

Brett Pollard, Numis.

I have a couple, actually. Firstly, could you give some guidance on how you see your working capital unwinding next year and the year after? Secondly, on the Lyme disease slowdown, is that due to just fewer infections? Or is it more competition in the market or a change in what physicians are doing -- or clinicians are doing in terms of diagnostics?

It's Rory here, Brett. Just answer the Lyme one first. Bearing in mind, we're the market leader in the States with about 55% market share, it's not that the business would be going somewhere else rather than to us, if you know what I mean. It does just appear to have been a slower season this year. Normally, the Lyme season would continue into October. But it finished very early in September -- finished is the wrong word. There's always some. It's a question of degree. But it very much slowed up in early September. So we lost the best part of two months in terms of high throughput sales that we would normally experience. It appears to be nothing more than less infection. And it's the nature of the business we're in. There either is an outbreak or there isn't, or it's strong or it's weak. Another good example of that is flu, which has been relatively slow again this year, albeit, has picked up in March of 2007.

To answer your questions on the working capital, I touched on it a little bit in the press release -- or in the talk. But maybe just to expand upon it. Our inventory levels will increase a little bit over the next six months. Remember, bioMerieux are making 18 months worth of product for us over a 12 month period. So there is this ramp-up of finished goods. That stops in June of this year, at which point, those finished goods ramp back down to more normal levels, albeit, it will be offset to some extent by us now having to carry raw materials and work in progress to make those products. . So I would expect it to start coming back slightly from June onwards. We've also put in some some new IT systems, which basically control all our inventories around the whole group, more or less. France and Germany have to be added to the picture. But they're starting to have an effect, as well. So I would suggest to you that our inventories would increase by a couple of million over the next six months, and then will start to decline back to more normal levels.

Accounts receivable are obviously impacted upon by that deferred revenue issue, in that there are moneys out there which we should have received. So as soon as they start to be received, it will drive down the accounts receivable line. And other than that, no major significant movements, I would suggest, Brett. Other than the prepayments to bioMerieux, which I alluded to a minute ago, sorry, where we prepaid them for various services, including some inventory which they are providing over that 12 month period. And obviously, that will start to come down, as well.

Should we assume that the converse will -- ?

It's gone from the 2nd of January this year. The last repayment was on the 2nd of January, so you'll see $1.8 million in the balance sheet at the end of December, and on the 2nd of January, that was gone.

Okay. Thank you.

Joe, just maybe we take one last call.

There are no further questions in queue.

All right. Well, in that case then, we'll close the call and just say thank you to everybody. Thank you for your interest and your support, and talk to you next quarter. And good afternoon, good morning. Thank you.

This concludes today's conference. Thank you for your participation.