Trinity Biotech PLC (TRIB) 2016 Q2 法說會逐字稿

Hello and welcome to the Trinity Biotech second-quarter fiscal-year 2016 financial results conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead.

Thank you, Carrie, and thank all of you for joining us today to review the financial results of Trinity Biotech for the second quarter of fiscal-year 2016, which ended June 30, 2016. With us on the call representing the Company are Ronan O'Caoimh, Chief Executive Officer; Kevin Tansley, Chief Financial Officer; and Dr. Jim Walsh, Business Development Director. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session.

Before we begin with those prepared remarks, we submit for the record the following statement. Statements made by the management team of Trinity Biotech during the course of this conference call that are not historical facts are considered to be forward-looking statements, subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements.

The words believe, expect, anticipate, estimate, will, and other similar statements of expectation identify those forward-looking statements. 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 Securities and Exchange Commission.

Forward-looking statements reflect management's analysis of only as of today. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements.

With that said, let me turn the call over to Kevin Tansley, Chief Financial Officer, for a review of the results. After Kevin's remarks, we will hear from Jim Walsh on product development issues, and Ronan O'Caoimh will wrap up the prepared remarks with his perspectives on the quarter.

Kevin?

Thank you, Joe. Today I will take you through the results for quarter two 2016. Beginning with our revenues, total revenues for the quarter were $26.3 million. This compares to $24.3 million in quarter two of 2015.

However, revenues this quarter continuously impacted by currency movements. And as you have seen from the press release, we have restated the quarter two revenues on a constant currency basis. And those on a like-for-like basis, revenues for quarter were $26.6 million. Ronan will provide more details on the revenues for the quarter later in the call, so I will move on now and discuss the other aspects of the income statement.

The gross margin for this quarter was 45%. This compares to 47% in quarter two 2015. This continues the trend of lower margins caused by the currency factors which I mentioned earlier, something which has been a feature of our last few quarters.

However, I will point out that 45% does represent an increase on our two most recent quarters, namely quarter four 2015 and quarter one 2016, both of which had margins of approximately 43%. Thus, it represents an improvement of 2%.

I will now move on to our indirect costs. Our R&D expenses for the quarter were $1.3 million, which is consistent with quarter two 2015. Meanwhile, our SG&A expenses have increased in the quarter from $6.7 million in the equivalent quarter last year to almost $7.8 million this quarter. As we have seen from the previous quarters, our SG&A expenses tend to fluctuate quarter on quarter due to a range of factors, including the timing of certain expenses, principally discretionary sales and marketing costs, travel, trade shows, etc.

We are also seeing the foreign exchange issue at play here, and the significant portion of the increase this quarter is due to book our non-cash foreign exchange losses recognized in the period. And of course, we are also seeing the impact of the prelaunch cardiac costs, which have been increasing each quarter as we approach our launch date.

Operating profit for the quarter was $2.4 million compared to $3 million in quarter two 2015. Key factors driving this decrease are the combined impact of the lower gross margins on higher SG&A costs, which I mentioned earlier. However, I will again point out the improvement versus quarter one this year, whereby operating profit has grown from $1.8 million to $2.4 million, or an increase of nearly 30%.

Moving on to our financing costs, which includes the impact of convertible notes, our financial income for the quarter was $233,000 compared to $93,000, which reflects improved deposit rates in different time periods over which these deposits have been made. Financial expenses for the quarter were $1.2 million, which is consistent with quarter two 2015 and relates almost entirely to the cash interest element of the convertible notes.

The non-cash financial income is $800,000, of which $1 million relates to the change in fair value of the derivatives embedded in the convertible note, and this is partially offset by about $200,000 of accretion interest, again also relating to the convertible notes.

Our tax charge for the quarter was $131,000. This represents an effective rate of just under 6% and was similar to the 7% reported in the equivalent quarter last year. As in previous quarters, we continue to receive the combined benefit of the very competitive Irish corporation tax rate and tax credits arising in Ireland, USA, and Canada.

Arriving out of all that I have spoken about so far is that the [NASH] result for the quarter is a profit of $2.1 million. This gives a basic EPS of $0.091 per share, while the EPS adjusted for non-cash items was $0.055. Fully diluted EPS for the quarter was $0.085. Finally, on the income statement, earnings before interest, tax, depreciation, amortization, and share option expense for the quarter was $4.4 million.

I will now move on and talk about the significant balance sheet movements since the end of March 2016. Property, plant, and equipment has increased by $300,000. This is due to additions of $1 million and re-translation movements of $100,000 being offset by depreciation of $800,000.

In the same period, our intangible assets increased by $3.9 million. This was made up of additions of $4.8 million, offset by re-translation movements of $200,000 and amortization charges of $700,000.

Moving onto inventories, you will have seen that these have increased from $35.7 million to $39.3 million. As I mentioned on our quarter-one call, our HIV inventories reduced in quarter one 2016. This trend has now reversed in quarter two when we revert to more normal inventory levels.

We also continue to build up Premier inventory levels in line with the growth of the business in anticipation of increased production and spare part levels. In addition, there was our normal seasonal increase in the levels of Lyme inventory in advance of the peak Lyme season in quarter three.

Meanwhile, trade and other receivables have increased by $1.5 million to $27.8 million. So whilst we saw an improvement in cash collections in the quarter, this was more than offset by the increase due to higher sales billings in the quarter. Meanwhile, our trade and other payables, including both current and noncurrent, remain broadly static at $21.4 million.

Finally, I will discuss our cash flows for the quarter. Cash generated from operations for the quarter was $2 million, which is $800,000 higher than quarter two 2015. This was offset by capital expenditure of $5.8 million, which is lower than quarter two of last year due to lower clinical trials costs.

The other major cash movements in the quarter were as follows: share repurchases of $4.7 million; our annual payment for our HIV-2 license of $1.1 million; and the half-yearly interest on the convertible loan notes of $2.3 million. Obviously, this covers a six-month period. The net result is that we have a decrease in cash for the quarter of approximately $11.9 million, with the quarter-end balance being approximately $85 million.

I will now hand over to Jim, who will take you through the latest developments with regard to cardiac.

Thank you, Kevin. I will take the opportunity now to update you on our cardiac development programs. In particular, I will provide you with a detailed update on our troponin FDA submission and an overview of our clinical trial data, and of our recent communications with the FDA. I will also provide a brief update on our Meritas BNP product, which as you know is currently undergoing clinical trials to support an FDA 510(k) application.

So starting with troponin, firstly let me give you a brief reminder of the excellent clinical performance we observed in our US trials. I have discussed this data with you on a number of recent calls, so today I will provide just a very high-level reminder.

In our recent US clinical trial, the Meritas product demonstrated an admission sensitivity in whole blood of 66% and a corresponding specificity of 94%. I will put this data into context for you by comparing our results against two of the market-leading products currently approved and widely in use in the USA today. Namely, the Abbott i-STAT point-of-care troponin product and the Abbott ARCHITECT central lab troponin product.

According to the manufacturer's package insert, the admission sensitivity of the current FDA-approved Abbott ARCHITECT central lab system is 60%, with a corresponding specificity of 95%. In the studies carried out at Hennepin County, the Abbott i-STAT point-of-care product was determined to have an admission sensitivity of 32% with a specificity of 92%.

The Meritas point-of-care product thus beats the market-leading Abbott i-STAT product by 35 percentage points in sensitivity, while the Meritas also beats the Abbott ARCHITECT central lab system by 6 percentage points in sensitivity.

However, you will remember that although these results look excellent for Meritas, you still need to keep in mind that we are not actually comparing like with like. In accordance with the FDA guidance, the Meritas MI patient cohort consisted of 57% Type I MIs and 43% Type II MIs, whereas our competitors would have relied predominantly on Type I MIs.

If I were to recompute our clinical performance on Type I MIs only, our time zero sensitivity rises from 66% to 75%, which is in fact substantially better than most of the data center lab troponin systems. Although this is a very brief summary of our performance, it should serve to provide you with the confidence that the Meritas product is demonstrating exceptional clinical performance.

Moving on now to our interactions with the FDA, you know of course that on December 17 last, we submitted a 510(k) application to the FDA for our troponin product. To the very best of our knowledge, Meritas is the first point-of-care troponin product ever to be submitted for clearance under the new FDA guidelines.

In third week of January, the formal review process commenced and the review clock actually started ticking. In April, as I explained on our last call, we received the formal response to our submission from the FDA, providing us with a detailed list of questions and comments.

I will take a couple of minutes now to remind you of the type of questions and comments we received. However, you will remember I said that we thought all questions we received were reasonable and fair, and that there were no showstoppers or red-line items.

The good news, of course, was that our pivotal ACS trial, which as you know consisted of close to 1,500 patients at multiple trial sites around the USA, followed by a very complicated adjudication process, received very little comment. This was indicate that the trial was sufficiently powered, it represented the appropriate racial and ethnicity profile, had sufficient geographical spread, and most importantly, met the definition of an all-commerce trial, which with the appropriate mix of Type I and Type II MIs.

The questions in general could be segregated into three categories. The first one, by far the largest category, were questions and comments where the FDA had asked for further clarification or more information relating to certain points. Essentially, this is information required in order to ensure the completeness of the file. Work on all these questions is now complete.

The second category of question was for the FDA had asked for extra data to be generated to support or expand certain claims. This work could be carried out in-house by our own technical staff and was fully under our own control, and therefore not on the critical path.

You may remember the examples of this were related to expanding the list of potentially interfering substances, and widening the hematocrit range for whole blood samples. Again, work on all these questions are now fully complete.

The third category of question was where the FDA had requested extra data to be generated. However, this data required to be generated at external sites. Thus, this data generation was driving the critical path.

As luck would have it, we had only one main question in this category, and it was in relation to our point-of-care precision study. The FDA had suggested that our data be enhanced at a further three sites, and that at each site, patient whole blood at medium, high, and low troponin levels should be run, with each sample to be tested within one hour of the blood sample being taken. They had also suggested troponin controls be run over a three-week period at the same sites.

On our last call, I told you that we had applied for IRB approval at each of the three sites, and that we would have the necessary data generated and ready for submission to the FDA by the end of July. At this stage, we still have about a week or a week and a half's worth of data to be collected, with submission to the FDA now planned for August. For what it's worth, however, the data generated out -- at least to our eyes -- looks very, very encouraging.

In summary, therefore, we think the questions we received from the FDA were reasonable. There were no red-line issues. Data collection is virtually complete, and we plan to submit a complete set of answers to the FDA in August, which is well within the time allowed by the FDA.

Once received, the FDA will then recommence their review process. Pending that review, and of course depending on the number and type of follow-up questions, we believe that it is feasible that our Meritas troponin product may obtain FDA clearance even before the end of 2016. Accordingly, Meritas would be the only point-of-care troponin product demonstrating market-leading clinical performance to be cleared for sale in the US in accordance with the new MI guidelines.

I will move on briefly now to discuss Meritas BNP. As you know, BNP levels in the bloodstream increase as the severity of heart failure increases. Thus, BNP has emerged as the principal biomarker in the diagnosis of acute and chronic heart failure.

I mentioned on our last call that following a discussion with the FDA last year, we agreed to expand the number of trial sites to 10. The adoption of this strategy, we believe, would further help the smooth review of the process with the FDA.

The aim of the study, by the way, is to recruit 1,450 subjects, approximately 700 with heart failure and 700 without heart failure. At this time, with the trial sites actively recruiting, we are past the 90% point in patient recruitment. Patient enrollment will be completed very shortly, with submission for 510(k) clearance planned for Q3 2016.

The clinical data generated to date looks very good, and we are quite pleased that the product looks to be demonstrating the same high performance characteristics as we observed in our CE marking trials last year.

With that, I will conclude and now hand over to Ronan.

Thank you Jim. I am now going to briefly review our revenues for the quarter before opening the call to question-and-answer session. Our revenues for the quarter were $26.3 million compared with $24.3 million in quarter two of 2015, which is an increase of 8.4%. However, when the impact of foreign currency exchange movements is removed, revenues would have been $26.6 million this quarter, thus representing an increase of 10%.

Point-of-care revenues for the quarter were $4.8 million compared with $3.4 million in the comparable quarter, which represents an increase of 41%. This increase is almost entirely attributable to higher HIV sales in Africa during the quarter, with Tanzania, Uganda, Mozambique, South Africa, and Malawi performing strongly.

In the United States, our HIV sales increased 5% over the prior quarter, with hospital sales performing strongly, aided by the fact that we are now selling the HIV-1/HIV-2 combination product. Our public health HIV sales were flat against a backdrop of reduced public health spending on HIV in the States.

Meanwhile, sales of our point-of-care syphilis product in the US were approximately $350,000, which is an increase of 350% on the corresponding quarter last year. However, although we believe that this product has large potential, the fact is that public health departments move slowly, and the evaluation, training, funding, and purchasing cycle takes a significant amount of time. We believe that this will be a significant product for us, but it will take two to three years to reach its full potential.

Moving onto clinical laboratory, our revenues for the quarter were $21.5 million, up from $20.9 million in the corresponding quarter last year. However, on a constant currency basis, revenues were $21.8 million, which represents an increase of 4.6% compared with the prior quarter.

Our hemoglobin, diabetes, and variant businesses performed strongly, with revenues increasing 9%. We had strong Premier instrument placement in all of our principal markets, with 83 instruments being placed during the quarter, leaving us on target to exceed 350 placements for the year.

The exception is Brazil, where we made negligible placements this quarter despite strong demand for the product. This arises due to the weakness of the Brazilian real. However, we plan to reenter this market when we increase our level of manufacturing activity in Brazil, thereby saving on import duties and on sales tax, and by creating in addition a natural hedge. In addition, we are seeking price increases against the backdrop of a high inflationary environment.

Another positive factor is that the Brazilian real has strengthened considerably over the past few months and has now recovered from a rate of 4 to a level of 3.25 today against the US dollar. And at this level, we are in a position to tentatively reenter the market on a selective pricing basis during the current quarter.

Moving on to infectious disease, this business grew 2% compared with the prior quarter. Our infectious disease in the United States performed well, with Lyme sales strong on the back of a mild winter. China performed particularly well. But our revenues in Canada, Turkey, Russia, and Columbia, to name just a few, continue to suffer due to the weakness of these currencies against the dollar.

Monoclonal sales in our Fitzgerald subsidiary were flat when compared with the revenues from the corresponding quarter last year. Meanwhile, sales of our autoimmune product in Immco performed strongly, with revenues increasing 8% when compared with the corresponding quarter last year.

Reagent revenues in Europe and the United States performed strongly. Sjogren's revenues were $700,000 approximately. But the outlook for these revenues has improved significantly following the signing of a contract with one of the US mega labs during the past quarter.

With that, I will now hand you back to the operator for our question-and-answer session.

(Operator Instructions) Jim Sidoti, Sidoti and Company.

You talked a little bit about Brazil and about how you thought that situation would improve when you built up manufacturing there. What's the timetable for that?

That's probably about nine months realistically by the time we get up and running.

Okay, all right. So sometime midway through 2017 you should see that pick up?

Yes, we've received approval in Brazil now to basically manufacture and thereby to receive the reduced VAT rate or sales tax rate. That'll give us a saving of 17%. So now it's a matter just of activating that and extricating ourselves -- of activating and basically putting ourselves -- sorry. What we need now to do is to set up a new factory and to extricate ourselves from our existing contract manufacturing arrangement.

Okay.

That should take about nine months.

All right, great. And then on troponin, it sounds like you are on track with the schedule you put out regarding the FDA. But you did have some increased spending in sales and marketing this quarter ahead of the launch.

Can you just give us a sense? Is that adding people; is that creating literature? What's going into that cost?

It's a bit of a mixture of both. You're kind of seeing -- as we continue to take on people, you are sort of seeing the wages come on, you are seeing a full-year effect for people who had been taken on the previous quarter, etc. And we do have then some marketing costs and travel costs and exhibition-related costs as well. So it's a mixture, to be honest.

So how quickly after approval is won do you expect to be out selling the product?

We would expect to be within a couple of months into the market.

Okay. So a couple months after approval, you would be in the market.

Yes.

Okay, thank you.

Bill Bonello, Craig-Hallum.

Couple of follow-up questions. Just first of all, on the point-of-care side, the number was a lot better than we have been looking for. Is Q2, do you think, a good proxy for the rest of the year? I know this can be kind of a lumpy business; just trying to think about what you think of sort of a run rate for this business being.

Yes, I think it probably is. I think quarter one was a particularly weak quarter. I certainly don't see anything like that on the horizon. I think quarter three ought to be at the level of quarter two or stronger. But I mean clearly, it is somewhat early to be indicating that. But I think in general terms, our pipeline is looking strong and we are positive that basically what we have produced this quarter can be exceeded.

Okay, that's helpful. And then just as a follow-up to the last line of questioning, can you maybe elaborate a bit more on what's in place at this point for troponin commercialization, what you've done from a sales force standpoint, what you've been able to do in terms of identifying target accounts, etc.?

What we've done is we have a marketing team in place and we are preparing for the launch of the product. We intend in the United States to key into our existing sales force. So we have a sales force of 27 -- existing sales force of 27 people, and they have undergone ongoing training on our troponin product and on the troponin market in general. And they have been out in the market for the past number of years assembling information on the hospital space -- on all the hospitals that they visit in terms of how they handle troponin.

We are seeking a senior appointment, as in a -- I say it's a marketing director -- to spearhead our efforts in the US market. So we are looking for somebody experienced in this area, and that will be -- it's a fairly senior appointment within the Company. And we have just commenced that process with the intention of having somebody on board around the turn of the year.

And beyond that, I think beyond that specific appointment, I think all the pieces are in place. We will add in addition maybe somewhere between five and maybe eight sales reps, specialized sales reps, in the United States. But with the exception of that and the key individual, I think we are ready to move.

Okay, that's helpful. And then just one last question on the Premier side. You talked about the placements. Can you talk a little bit about how the pull-through is trending these days?

Sure. Just in general terms, China is performing very well in terms of the number of instruments that we are placing. So we are more or less placing 25 instruments per quarter, more or less exactly. So you can take it at 100 a year. That is the positive side.

The negative side is that the pull-through is somewhat disappointing. We are at around a $4,000 per-instrument per-year level, which compares with the rest of our business is more like $10,000 or $11,000 per instrument per year. But we firmly believe that that will increase, and I do believe that if we were to reassemble it in four years' time, that actually -- the most productive instruments of all will be the Chinese ones against the background of 90 million diabetics [in the] troponin to in the country. And for actually universal reimbursement.

So the missing link really is the general practitioner or doctor who isn't, at this moment in time, basically sending samples into the hospitals. But our instrument is in the hospital ready to be utilized.

And then moving on from that then, our best-performing instruments are United States instruments. Pull-through there is very, very high. Our placements are strong. But bear in mind that the US market is also an immunoassay market, and so therefore, the pie is somewhat smaller for us.

Our Menarini market -- to remind you, Menarini is our partner in Europe and they have 40% of the European market. And basically we are basically replacing [harcrays] instruments in that market and are inheriting, in effect, 40% of the European market. And that process is continuing exactly as we had expected, so we are three years now into a seven-year cycle of replacements.

Bear in mind that everything we do in Premier is new business because we had no existing business there. So every instrument, every one of the 350 to 370 instruments that we will place this year is new business. We are never basically replacing our old instrument.

And then of course is Brazil, which I discussed. We did 115 instruments last year. We have more slowed to nothing now because of the rate of the real at that. But it was at 4 and the positive is it has come back to 3.25. We've got now an exemption in the state of Minas Gerais, which is beside Belo Horizonte. We are seeking just to put a factory in place.

And the combination of the VAT break, the saving on the import duties, the inflationary environment there, and the recovery basically of the real, which it moved from 4 back to 3.25. I think it's the strongest-performing exotic motion -- we shouldn't call it an exotic currency. But it's one of the strongest-performing currencies this year. So all those factors should enable us to reenter that market fairly quickly.

And then beyond that, in countries like Turkey, for example, our market isn't as strong because of -- just because of the recent political factors. We haven't seen the impact of that yet. But because of just basically the extent to which the currency has weakened. But in general terms: China, Europe, USA, and Brazil all performing very well.

Great. Thank you so much.

Larry Solow, CJS Securities.

If I just may, just a couple of follow-up and just clarifications. Just on troponin, it sounds like everything is pretty much aligned with where you were when you guys had your last call.

Jim, is there any formal process going forward? So you resubmit -- you answer all the questions for the FDA. Is there a new clock of some sort, a 90-day clock, or should we expect the FDA to come back to you with more questions? Or how do you -- what would be some of the next milestone to look for, if there is something to look for? Or is it sort of uncertain?

Well, it's sort of uncertain, Larry, quite frankly. First of all, there is a formal process. The clock has stopped as we speak, so the FDA are not on the clock right now. As soon as we resubmit and they acknowledge that they have received this resubmission, then the clock starts again. And in theory, I believe they have 90 days to review and before they need to comment.

Our belief will be that we should receive comments back from them. I would have thought within a month to six weeks of our answers -- to answer your questions going in. And at that stage, a number of things can happen.

First thing that could happen is they could say everybody is perfect, thank you very much, and let's get ready to approve this product. But more likely, they are going to come back with some comments, suggestions, something like that. Hopefully not asking for any more data to be generated, but maybe looking for clarifications, etc.

At which time when they send back their questions or comments like that, the clock stops again and we get X amount of time to make our answers back to that. We will do that obviously, and then it starts again -- another 90-day clock starts again from the FDA.

But because they did such a very -- such a total review of the first application -- and they really did. They went through our application with a fine-toothed comb. We have answered as we believe very, very well all of the questions they have put to us. There should -- with a fair wind, there should be maybe a couple of months or six weeks to get their comments back.

There will be then follow-up questions normally on things like labeling and stuff like that. Where they say well, okay, we are approving it, but we are curtailing the claims to XYZ or whatever. So you have to change your labeling. You get the labeling approved and then they say yes. You are free to market.

So all going well, as I said in the prepared remarks. There is a reasonable chance that this product could be approved before the end of 2016, pending what they come back with.

Okay, great. Fair enough. And then just switching gears, just SG&A expense, and maybe Kevin, you could help. In terms of the sequential increase, you mentioned that the substantial -- the significant piece of that was actually related to FX losses recognized. Was that -- is that non-cash? Can you just elaborate more on that and maybe quantify it?

It's actually a combination of both. We -- this quarter actually, interestingly enough, you see the currencies have moved somewhat differently. We actually had a strengthening of the euro as such, and some other currencies versus last year that were weaker. So not everything moved in the same direction.

So the fact that the currency rate of the euro was stronger, that pushed cash costs up somewhat. Now, the differential between the two rates wasn't enormous, but that was a factor. But also what is at play here is when you do your revaluations of any foreign-currency-denominated assets or liabilities at the end of the quarter, that creates book or sort of non-cash amounts.

And in the case of the latter, that's about somewhere between $300,000 and $400,000. The cash amounts will be more modest, maybe of the order of $100,000 dollars or so.

Got it. So that's basically a balance sheet items that shows -- have to come through the P&L and you're putting it through on the SG&A line [at some point].

Yes, it is. It's something -- it's a re-translation adjustment that has to be performed at the end of each quarter. It hits the P&L, and because you have to restate your assets and liabilities at the prevailing rate at the end of the quarter.

Got it. So all things being equal, if SG&A were flat sequentially on a cash basis, next quarter, it would be closer to the $8 million number or the -- well, that's $8 million. That includes your stock comp. So close to $7 million number.

If you were to -- the $7.8 million, which is the number we have in here at the moment, if -- or you have none of those items were there, so if the euro went back to the way it was and if we had a complete flash currency, then you will be back around the $7.3 million.

Got it, great. Okay, thank you very much.

Chris Lewis, ROTH Capital.

Thanks for taking the questions. Wanted to start on the Immco business. It continues to be a nice growth driver for you. Can you elaborate on just how big that business has grown to at this stage, and what's driving the growth and the continued strength within that segment?

The business is approximately -- it's sort of about $4.5 million per quarter of that order.

And you continue -- it obviously is growing above where you are, your corporate average. So can you walk us through what's driving that growth?

Yes, a number of factors. Obviously, Sjogren's is part of that. The lab business in general is doing well. It's got -- we've got a reference laboratory in downtown Buffalo, which has been performing very well since we have acquired it.

Within that, obviously Sjogren's has been a new product we've added on since we have acquired Immco. That has been growing. Hopefully as well that that will accelerate now that the new arrangements that we've found in place, one of the mega labs in the US.

On top of that, we are looking at growth outside of the US in the international market. We've got a very good distributor network. We've got a base business of infectious diseases in place, which we would look to marry with the Immco range of products. There are natural synergies there, and so that's about -- is an opportunity as well.

As is the case in the US. Prior to acquisition, Immco made very little sales directly in the US. They essentially didn't have a sales force. We obviously now plugged that product range into our sales network and looking to get growth there through, again, giving them the first opportunity to sell in the US, but also by having synergies that are existing infectious diseases business.

Great. And then the gross margin ticked up nicely compared to the past two quarters. How should we think about gross margins trending going forward?

What I would say about gross margin is gross margins will hop around quite a bit. And the reason being that there are a lot of factors that are at play there. You are talking about sales mix. Even within sales mix, you will have customer mix.

Layer on top of that, you've got currency issues. And then other factors can affect it, like levels of production, etc., timing and which factors are completed, etc. There's a whole range of factors that go into it. So I would never -- I would always caution people about expecting it to be very linear and predictable per se. There will always be a degree of hopping around per se.

We expect that over time, it will improve. The key drivers to make that happen will be, one, obviously a growth in revenue by virtue of the fact that we've got a very significant fixed cost base. The more than we can drive through our cost base, the greater we will be able to spread our overheads and that will help us in terms of our gross margin.

We also have obviously our Premier business. The more instruments we put out into the field, the more throughput that we will get on those instruments. And the reagent pull-through essentially is a higher-margin business.

So over time, that has been increasing each quarter. Obviously, we can start at a very low base, because initially we were putting out very significant numbers of instruments, which would be at very low margins. And then over time, building up a revenue stream of reagents, let's say, which are higher margin.

So those types of factors will lead to some underlying growth. That's before cardiac comes on. I will do cardiac separately. So you can expect it to go up, but I caution again about expecting just a very linear growth rate. There are a number of factors at play each quarter, and 13 weeks is very short. So I would be looking at underlying trends over a number of quarters rather than from one quarter to the next.

I did say I would come back to cardiac. When we get up to speed with cardiac, post-launch you can expect higher margins again there. So if you're looking at the medium to long term, that's a further driver of improved margins for the Company.

Great. And I just have one more question. Congrats on returning to the positive revenue growth -- reported revenue growth in the quarter. Going forward, I know you don't give guidance, but can you talk about how you feel you're positioned to continue and sustain that year-over-year quarterly revenue growth on the positive side going forward? Thanks.

I think just Larry asked something there or Bill asked something there. So just to repeat what I said there, while we don't have huge -- we don't have much visibility on quarter three, for example, I do think that quarter one was a quarter that we won't see repeated. It was an unusually poor quarter. So I would expect that quarter three would match or exceed quarter two.

And similarly for quarter four, but I say that with less confidence for quarter four because typically it's just a slightly smaller -- it's slightly softer quarter. Because Lyme, for example, kind of disappears really in quarter four. But certainly quarter number three is looking stronger than this quarter.

But our visibility at this moment in time in the middle of it, just after the middle of July, isn't great. But I would certainly see nothing like quarter one again, and I think quarter two will be beaten next quarter.

Okay. Thanks for the time, guys.

(Operator Instructions) Nicholas Jansen, Raymond James.

Just wanted to talk a little bit about the balance sheet and cash flow use for the balance of the year. Certainly you have always been acquisitive. We haven't seen a deal in over a year or so. So just wanted to get your thoughts on the pipeline.

And then secondly, on just free cash flow, I would assume that some of the capitalized R&D tied towards the Meritas launch will start to ease a bit. But I would assume some of the operating expenses associated with ramping up that sales force might be an offsetting. But just wanted to kind of get your views on where the cash on the balance sheet looks at year-end. Thanks.

I will address there the -- your question there in relation to the free cash flow. You are correct absolutely when you say that the investment in the Meritas will decrease. We are going through a phase now, where actually having reduced expenditure in relation to troponin.

You will have seen that in the cash flow compared to, say, this time last year. We would have been spending an awful lot of money on trials, etc.; still putting a lot of resources into that. The whole process of getting that to the FDA is usually labor-intensive. There's a lot of work going into that, and obviously there are a certain amount of third-party costs associated with the trials themselves for the additional data.

But that has been coming down. I will point out that that BNP is still going through very much its regulatory process and the cash intensive phase of its trials, etc. While the trials and sales are nearly completed, the cash, as you can imagine, tends to follow a little bit afterwards. So that will remain to be a feature for some time.

You are right as well that there is an offsetting relation to the investment from -- we're making in relation to the SG&A costs. So I do expect that there will be an improvement from that sort of [NASH] position in terms of investments and in terms of the intangible costs versus the OpEx as such.

In relation to the rest of the business then, and you don't need me to tell you this, but as the level of revenues will very much drive the profitability. The profitability will drive the operational cash flows per se. So whilst we are not giving guidance in relation to revenues, the stronger the quarters we have will be better for the operational cash flows per se.

Okay. Then on M&A?

With this and M&A, we are continuing to seek out acquisitions. We are looking at a few things at the moment. Though we really at all times in the past year, we have been looking at something. We are finding difficulty really with price expectations of vendors. But we are looking a couple of things at the moment.

But we are -- I couldn't say that we are any way close to doing a deal. We are just really in that continuing to search. We are finding it a little bit frustrating, but ever determined not to overpay. So we are just continuing on our search. Nothing to report.

Okay. And then my last question would be on Sjogren's in terms of the international lab agreement that you called out that should help drive an acceleration of the current revenue base that you disclosed on earlier in the call. I just wanted to kind of get a little more details, if you can. I know it's perhaps a contract you can't disclose. But any broader thoughts there might be helpful in terms of the magnitude of opportunity there. Thank you.

There's only two national mega labs, so everybody knows who the two of them are. So it's fair enough to say which one it is. But it is a significant development for us because they will be processing quite a lot of dry eye samples. So really, it actually has -- it will have a significant impact on our business in terms of how -- what percentage it could grow. It can grow at, I suppose, 30%, 40% over a period of a year. It has that kind of potential.

But you know, that still needs -- it still needs input from the Bausch & Lomb sales reps because really what it does, it opens up a market that was previously closed to us. But it's not just -- you still have to sell it to the specialist, if you follow what I mean. So basically in the absence of a deal with either Quest or LabCorp, some of that custom wasn't available to us and now it will be.

Okay, thanks for the color. Nice job on the quarter.

I think there's only one questioner left, which is Paul from Noble Equity. So I think maybe we make that the last question, if we could. And then we'd wrap it up.

Paul Nouri, Noble Equity.

Thanks for taking my question. A quick one: why the inventory build in the quarter?

Our inventory turns will fluctuate a bit as well, partly due to seasonal factors. We are entering now the heavy Lyme season, so we've been building up our inventory in advance of that. We tend to manufacture more in quarter two than probably any other quarter so that we've got the inventory available to service the customers in quarter three.

We also had unusually low HIV inventory at the end of quarter one. So we have built that back up again somewhat as well. So you are seeing what was unusual dip in quarter one being reversed and in quarter two, we are very -- we are optimistic in relation to the rest of the year.

In relation to Premier, we've sold a lot of parts there in relation to manufacturing, but also spare parts. We carry a significant spare parts inventory in line with the continued growth of our installed base. So there are a number of factors that are driving that. But again, I would caution at looking at one quarter versus the next. I would tend to look over a period of time rather than over one.

Okay, thanks.

Maybe at this stage, we will close up the call. Thank you very much, everybody, for your support and look forward to talking to you again in a couple of months time. Goodbye and good afternoon.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.