Trinity Biotech PLC (TRIB) 2016 Q3 法說會逐字稿

Good day, and welcome to the Trinity Biotech third-quarter 2016 financial results conference call. (Operator Instructions) Please note this event is being recorded.

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

Thank you, Allison, and thank all of you for joining us today to review the financial results of Trinity Biotech for the third quarter of calendar year 2016, which ended on September 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. But before we begin with those prepared remarks, we should make 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 identified in the Company's periodic reports filed with the Securities and Exchange Commission.

Forward-looking statements reflect management's analysis 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 Ronan O'Caoimh with his perspectives on the quarter. Kevin?

Thanks very much, Joe. Today, I will take you all through the results for quarter-three 2016. Beginning with our revenue, total revenues for this quarter were at $26.1 million, and this compared to $25.8 million in quarter three of 2015, serving as an increase of 1.4%. The impact of foreign exchange in revenues was not significant this quarter compared to the equivalent quarter last year. Hence, we have not retranslated the revenues in constant currency in this quarter's earnings announcement. And calculated foreign exchange rate impact, which reduced this quarter's revenue by less than 0.5%, with sterling being the single biggest factor.

However, this quarter, we did suffer the impact of lower distributor pricing. This was due to the impact of the strong dollar on local pricing in a number of markets such as Turkey and Columbia. This did impact revenues more than this quarter -- impacted revenues more this quarter than in quarter three last year and, as you will see, similarly has an impact on gross margins.

Ronan will provide more details on the revenues for the quarter later in the call, so I will move on to discuss the other aspects of the income statement.

Gross margin this quarter was 44.7%, and this compares with 46.5% in quarter-three 2015. This continues the trend of lower gross margins compared to 2015 caused by mainly currency factors -- in this instance, the impact on distributor prices that I alluded to earlier on.

However, I will point out that the 44.7% does represent an increase on the margins for the first half of the year, which average 44.1%.

I will now move on to our indirect costs. Our R&D expenses for the quarter of $1.3 million was virtually identical to that of quarter-three 2015. Similarly, our SG&A expenses are also consistent with quarter-three 2015 at $7.5 million in both periods.

Operating profit for the quarter was $2.7 million, which is $300,000 lower than quarter-three 2015. However, I will point out the improvement versus quarter one and quarter two of this year, whereby operating profit has grown from $1.8 million in quarter one to $2.4 million in quarter to and now $2.7 million in quarter three. The principal reasons for this improvement are the increased revenues and improving gross margin on a sequential basis.

Moving on to our financing costs, which includes the impact of the Company's exchangeable notes. Financial income for the quarter was $212,000 compared to $204,000 in 2015, which reflects improved deposit interest rates. Financial expenses for the quarter were $1.2 million and relate almost entirely to the cash interest element of the exchangeable notes. Meanwhile, the non-cash financial expense is $2.1 million, of which $1.9 million relates to an increase in the fair value of the derivatives embedded in the exchangeable notes, with the remainder being $180,000 accretion interest also related to the exchangeable notes.

Our tax charge for the quarter was $148,000, and this represents an effective rate of 8.5%. And it was lower than the 16.2% reports in the equivalent quarter last year. This rate is lower than experienced by a lot of NASDAQ companies, and here you are primarily seeing the benefit of the very competitive Irish corporation tax rate as well as R&D tax credits arriving in our Irish, US and Canadian operations.

The net result of all that I have spoken about so far is that the net result for the quarter is a loss of $517,000. This gives a basic loss per ADR of $0.023. However, when adjusted for non-cash exchangeable note expenses, the profit after tax for the quarter was actually $1.6 million, which equates to an EPS of $0.07 per ADR. And the fully diluted EPS for the quarter was $0.097, which is the same as last year. Earnings before interest, tax, depreciation, amortization and share option expense for the quarter was $4.6 million.

Finally, before leaving the income statement, I want to talk about one item that has not been recorded this quarter. This is the impact of our recent decision to withdraw our Troponin submission from the FDA and close our Swedish facility. As pointed out in our communication on October 4 and reiterated in today's release, these decisions will result in us, one, likely recognizing an impairment on the Meritas assets currently on our balance sheet and, two, incurring a further charge in respect to the closure costs for Sweden. Both of which will be recognized and quarter four's income statement, given the decision to both withdraw and close occurred after the quarter-end.

We are currently in the process of calculating both amounts. The larger and easier of the two to calculate is the impairment of assets. So it effectively equates the costs incurred on the project to date to the extent to which those costs are still recognized on our balance sheet. This will consist of three elements: the cost of acquiring Fiomi in 2012; all development costs which have been capitalized to date; and, finally, the cost of any tangible assets on hand such as plant and equipment and inventory. I don't have any exact number to give you at this point; we have indicated it will be in excess of $50 million and will likely be of the order of $55 million to $60 million.

The second element, i.e. the Swedish closure costs, are harder to estimate, as we are still going through the process of working with the employee representatives in Sweden in order to finalize the redundancy process and packages. In addition, we will also have to withdraw from other non-labor commitments and are going to be looking to renegotiate exit mechanisms with a number of third parties. The order of magnitude that we're talking about here is about $5 million, though it could vary up or down from this amount.

We will now move on and talk about the significant balance sheet movements since the end of June 2016.

Property plants and equipment has decreased by $300,000. This was due to depreciation of $800,000 and retranslation movements of $200,000 being offset by additions of $700,000. In the same period, our intangible assets increased by $4.2 million. This was made up of additions of $5.1 million offset by retranslation movements of $100,000 and amortization charges of $800,000.

Moving on to inventories, you will see these have increased from $39.3 million to $39.9 million, which is well within our normal quarterly fluctuations. This quarter, trade and other receivables meanwhile have decreased significantly by $2 million to $25.8 million, reflecting very strong cash collections during the period. Meanwhile, our trade and other payables, including current and non-current, but excluding the exchangeable notes, increased by approximately $600,000.

Finally, I will discuss our cash flows in the quarter. Cash generation from operations for the quarter was $5.6 million, which is $1.9 million higher than in quarter three 2015. This was offset by capital expenditure in the quarter of $5.6 million and net interest on taxes paid of $200,000. The net result is that we only had a slight decrease in cash for the quarter of approximately $200,000, with the quarter-end balance being $84.8 million. This has been the best [out term] from a cash point of view for a number of quarters, but it is somewhat artificial as we benefited from very strong cash collections as well as there being an absence of any scheduled interest payments, which occur every six months, or HIV license payments, which occur annually.

When taking such factors into account, we will be in a higher underlying cash outflow position. However, this obviously improved considerably once our Meritas costs diminished, still putting us on a more cash-neutral footing.

I will now hand over to Ronan, who will take you through the revenues for the quarter and other aspects of the business.

Thank you. I am now going to review our revenues for the quarter before opening the call to a question-and-answer session.

Our revenues for the quarter were $26.1 million, compared with $25.8 million in quarter three of 2015, which is an increase of 1.4%. Point-of-care revenues for the quarter were $4.9 million, compared with $5.4 million in the comparable quarter, which represents a decrease of 10%. This decrease is entirely attributable to lower HIV sales in Africa during the quarter. This reflects the irregular ordering pattern which characterized this market rather than any underlying adverse change in the nature of the business.

As you know, our HIV business in Africa is funded almost entirely by NGOs. Product orders from these agencies tend to be haphazard and are unpredictable in the context of a 13-week reporting cycle. However, our Uni-Gold HIV product continues to be regarded as a gold standard and continues to be utilized as the confirmed free HIV test of choice across virtually the entire continent, as has done for a decade. If you eliminate quarter-on-quarter variations, the underlying dynamic is that funding continues to increase as more and more Africans are put onto antiretroviral drugs, with the number now exceeding 23 million people.

Over the past 15 years, we have dominated the HIV confirmatory market in Africa. We have now decided to enter the screening market, which, in volume terms, is 7 or 8 times greater than the confirmatory market, albeit at a more modest selling price. Over the past two years, we have developed a new HIV screening test which is now undergoing independent trials as part of the approval process with the WHO. We will be entering the African market -- the African screening market in late 2017 with this product.

In the US, our HIV sales were flat when compared with the prior quarter, with hospitals there performing strongly, aided by the fact that we are now selling HIV-1, HIV-2 combination product.

Moving on to clinical laboratory, our revenues for the quarter were $21.2 million, up from $20.3 million in the corresponding quarter last year, representing an increase of 4.3%. On a constant currency basis, the revenue increases 4.7%. Our diabetes and hemoglobin variant business performed strongly, with revenues increasing 8%. We had strong instrument placements in all of our principal markets, with 78 instruments being placed during the year, leaving us on target to receive 350 placements for the year. The exception is Brazil, where we made negligible placements this quarter despite the strong demand for our 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 on sales tax and by creating a natural hedge. In addition, we are seeking price increases against the backdrop of a high inflationary environment. Another part of the factor is that the Brazilian real has strengthened over the past number of months and has now recovered to a rate of 3.11 today. And at this level we are in a position to reenter the market on a selective pricing basis during the coming quarter.

Moving on to infectious disease, this business was flat compared with the prior quarter. Our infectious disease in the US performed well with strong line sales in the back of a mild winter. China was flat when compared with the prior quarter, but our revenues in Canada, Turkey, Russia, Columbia and the United Kingdom continue to suffer due to the weakness of these currencies against the US dollar.

Monoclonal antibody sales in our Fitzgerald subsidiary were down 2% when compared with the revenues from the corresponding quarter last year. Meanwhile, sales of our autoimmune product in Immco performed strongly, with revenue increasing 6% compared to the corresponding quarter last year, with the reference laboratory having another strong quarter.

Following the huge disappointment of our FDA Troponin submission, I am going to take a moment to review our core business, which will generate approximately $102 million of revenues in the current year. Using broad rounding, our business is made up of the following: Fitzgerald monoclonal antibodies, 10%; infectious disease, 20%; diabetes and hemoglobin, 30%; also immunity, 20%; and HIV, 20%. Our Fitzgerald monoclonal business has been flat over the past two years, and although it is highly profitable it is unlikely to generate significant growth.

Our infectious disease business, which constitutes 20% of our overall business, comprises principally a strong line franchise in the US, which is growing marginally, and traditional ELISA business, which is declining approximately 2% annually. A Chinese ELISA business, which is growing 4% or 5% annually. And finally, a rapid point-of-care syphilis test which is currently annualizing at about $1.3 million but which we believe has the potential to grow over the next three years to a level of approximately $5 million per annum. In summary, we believe that our infectious disease business over time will be somewhere between flat and 2% to 3% of annual growth.

Our next business segments are -- is diabetes and hemoglobin, which constitute 30% of our revenues. This business is our strongest growth engine, driven primarily by Premier placements, which have averaged over 350 placements per year since 2012. We believe that we can continue with this placement rate in the coming years given our strong franchise in Europe with Menarini in China, in Brazil and in the United States. During the year, we also launched our new Premier resolution instrument, which serves the hemoglobin variant market -- for example, for sickle cell anemia and thalassemia. This is a high-value market with few competitors, and we believe that with our best-in-class instrument that we can take significant market share.

Since the launch of the instrument in April this year, we have made 23 placements. We are confident in our diabetes and hemoglobin business, and we are confident of our diabetes and hemoglobin business getting double-digit growth in the coming years.

Our next business segment is autoimmunity, which constitutes 20% of our revenues and which has grown strongly in the past. It is comprised of both a reference laboratory and also of product sales. The reference laboratory has been the best performer, with significant growth coming from our children's product and also from the growth of our business with the two US mega-labs.

However, the greatest potential in our autoimmunity business is in the product revenue part of the business, where we continue to expand our instrument offering to serve middle- and low-volume laboratories in both the United States and across the world. We believe that this expanded instrument offering in line with an ever-expanding immunofluorescence and an ELISA product range will result in strong double-digit growth in the coming years. We have recently launched our new ANA screening product, which is a best-in-class flagship product that can drive growth and instrument placements.

Lastly, HIV constitutes 20% of our business. For more than 15 years, we have held more than 90% of the African confirmatory market, and we believe that we will continue to do so given the status of our product as gold standard. However, as I said earlier, we have over the past two years developed an HIV screening product which is about to be launched on the African market.

Given the quality of the product and given the price at which we can manufacture the product, and given our long-held reputation as manufacturer of the gold standard on the continent, we believe that we can take significant market share in this market segment.

So, in summary, when all of the components of our business are taken together, we believe that we can achieve high single-digit organic growth in our business over the coming year and that this growth rate can accelerate quickly into double-digit growth thereafter.

So, if I could now hand back please to -- for a question-and-answer session.

(Operator Instructions) Bill Bonello, Craig-Hallum.

Can you guys talk a little bit about your latest thoughts on capital deployment? For a long time, you had been talking about searching for an acquisition where you could get a good amount of synergies and high marginal return. And on the prior conference call to this one, I think you had talked about stepping up the pace with share repurchase. Just curious where you stand right now in terms of prioritization for the use of cash that you have on the balance sheet.

Ronan here. I suppose based on today's share price we believe that buying back our own shares represents the best use of our cash. So if the price continues to be at anywhere around these levels, our intention will be to buy back and to buy back aggressively. So that's our intention. I think that doesn't mean that we wouldn't do an acquisition and we continue to seek an acquisition. If we could find something that's accretive and that was plenty synergies, we would do so. But our primary focus at this time will be on buyback.

Okay. And just when I think of the growth profile that you laid out in terms of where the business could be going, I think that probably gets us into the mid- to moderately high single digits kind of overall revenue growth, at least in the clinical laboratory business. And then HIV being a wild card, what kind of leverage do you think you can get from an income statement standpoint on that? What type of top-line growth do you need to see margin expansion and where could margins go over time?

Bill, Kevin here. That's a good question. As a lot of people on the call would have heard me saying in the past, our income statement is very much characterized by having a high level of fixed costs. Our labor is essentially fixed, our overheads are essentially fixed and what you are really talking about in terms of variable costs are essentially the materials inherent in our product.

The extent to which we can add to our top line means that we can have an immediate favorable impact on our gross profit and also our operating profit. What effectively you are doing there is you are spreading those fixed costs over a wider base and getting an immediate synergy (inaudible).

So, for example, if we were to grow our top line, we were probably going to do about $102 million this year. If we were to grow it by, say, even $6 million to bring it up to around $108 million, you would expect hopefully around $4 million of that to drop to the operating profit line, which would obviously mean an improvement in both the operating margin and gross profit, to growing somewhere from -- we're probably going to do somewhere between $9 million and $10 million of operating profit this year. Call it $10 million. That would mean growing our operating profit by $4 million, which is 40% obviously, that in the context of a top-line growth of less than 6%.

That shows you the extent to which the leverage works. And that leverage actually increases the further down the income statement you go. Our profit after tax this year is likely to be somewhere between $5 million and $6 million. Call it $5 million for argument's sake. To use my example there with an operating profit that's gone up by about $4 million, you are likely to see the profit after tax by going up by about $3.5 million. That means you are seeing a growth from $5 million to $8.5 million. That's a 70% growth on the bottom line.

So you can see a 6% growth in the top line translates into a 40% on the operating line, translates into 70% on the bottom line, and obviously you have 70% growth as reflected in EPS, which this year is likely to be mid-20s on a basic level. So that will push it well into the mid- to high territories of a clutch. And there's possibly a kicker then as well, depending on the extent of the buyback that Ronan just referred to.

Does that answer your question, Bill?

Yes, that's very helpful. And I guess the last thing I would ask, and I'll hop back in the queue, is just how you're thinking about the various businesses from a strategic standpoint. In other words, is it critical that you have each of these offerings? Is there the leverage that you just described? Does that diminish if you don't have the base of revenue that you currently have if you don't have all of the businesses? To one extent, you are sort of leveraging same sales force and infrastructure. Or is there anything in the portfolio that it might make sense to try and monetize?

You're right, I think, in your suppositions. The reality is that our model is fairly straightforward, and every additional $1 million of revenue probably drops about 50% to the bottom line. So if you basically take a scalpel and cut out a segment and I would say $10 million, the impact will be you will drop to profit -- $5 million.

Because largely our costs are fixed. You lose synergies across your sales force, your manufacturing operations, et cetera, et cetera. So the model is fairly straightforward. For every incremental $1 million dollars of sales, you increase your profit by $1 million and vice versa. So to cut out a piece would actually probably have a very negative dramatic impact.

Okay. Perfect. Thank you.

Jim Sidoti, Sidoti and Company.

Can you tell me how much is available on a -- for a share repurchase? How much has the Board authorized?

Well, at our last AGM we were granted authorization to buy back up to 10% per share capital. So taking into account the purchases which we have already made since that date, this means that as of today, we are entitled to buy back approximately 2.2 million shares.

And I would just make the counterpoint that in the event that we look like exceeding this amount before our next AGM, we are in a position to call an extraordinary general meeting with the purpose of increasing our authorization level. And just to say that that is a relatively simple process, and it can be achieved in a four- to 4.5-week time frame.

Great. And can you give us some kind of timeline as far as consolidating the facility into your Irish facility, the facility where you are developing Troponin into your Irish facility?

Yes, work on that is underway already, Jim. We are working through the redundancy process at the moment with our Swedish employees, and that is coming to a close at the moment. We will retain a transition team who will then work on migrating the technology from the Swedish plant down to Ireland. That takes a little bit of time. All the instrumentation has to be recalibrated one last time before pulling it into -- carefully into boxes, packing it up and then transport it carefully down to Ireland, where the process will be reversed, unpacked and then recalibrated again. So it is quite intricate equipment. A lot of us will take some time. So we envisage that will take us in the quarter one next year before that is completed.

All right. And have you had any other communication with the FDA since the withdrawal of the Troponin test (inaudible)?

It is Jim Walsh here. Yes, in fact, we have. Okay? We had -- we got a formal notice from the FDA last week -- early last week, which really --. It wasn't particularly long. It was a one-page email which basically outlined the same concerns as they had outlined to us verbally on our call with them in September 29.

So what's happening now is with that information -- and quite frankly, it wasn't very detailed. It was very, very high level stuff again. We're starting what we call this pre-submission process, a pre-sub. And a pre-sub process is a process whereby you essentially -- is the formal process by which you communicate with the FDA in certain circumstances.

So we're doing that. And the purpose of that pre-sub would be essentially to -- using the information that they sent us to ask them the questions back as to how they drew the certain conclusions that they are drawing, et cetera. And then following up from that what the conclusion would be.

But I suppose Jim, what we're really -- is -- our understanding is -- at the moment is that in order for any new point-of-care product to obtain FDA clearance, the FDA will require to demonstrate performance equivalent the most recently cleared laboratory-based device. And as I said before, we believe that there is no certainty that this level of performance could be achieved on the Meritas system.

So even though we will actually run through the pre-sub process and we will work very diligently to get to the bottom of all of this, we still really in our heart don't believe that the Meritas product can actually match what is now being demanded by the FDA in terms of performance relative to the current central lab systems.

Do you think there are other applications for the technology that might be easier to win approval for?

Oh, yes, absolutely, Jim. The platform is an exceptional platform. It is genuinely really, really good. And we genuinely have a very, very good performing product on that platform, so there are myriad applications for the platform.

For example, our B&P product, just for example, which is quite a difficult product, sat on that platform and worked on that platform without virtually a glitch. It worked perfectly well. And do the same for any of the sort of the normal analyzed -- things like forecasted tone and the KB markers, the cancer markers, labor markers. Any marker that would run in critical care will run on this platform.

So there is huge value with the platform, and that's the reason we're moving down to Dublin here: to actually take that time to analyze what the right profile of product on the platform would be. And assuming that is the -- we can come up with the right profile, we will engage in other development again sometime in the future. But the platform is excellent.

All right. Thank you.

Larry Solow, CJS Securities.

Just a couple of follow-ups. Ronan, you gave a nice overview of sort of the outlook for each of the products. Just on the HIV in particular, I realize it is lumpy, so this quarter has dropped. Can you explain that lumpiness? How about just -- what is your outlook annually just on a confirmatory side? Do you view this as sort of a flat market? I know you said funding continues to grow in an effort that would choose your bigger piece. So do you expect some growth on the confirmatory side? And then obviously, with screening would, I guess, cannibalize a little bit of that, but it would be at a much higher volume. So if you can just explain those two dynamics.

I think if you look over the past four or five years, our HIV business has grown 2% or 3% annually. I would expect that level -- I know there have been ups and downs; in the middle it's been lumpy. But broadly speaking that's what it's done. And I would expect it to continue to do something like that certainly to be growing.

Just to make the other point that I believe that we can enter the screening market without cannibalizing our Uni-Gold confirmatory product, which plans a higher price. Because they are two entirely different products.

But I do believe that -- I do believe that there is a very big opportunity for us in the screening. We have developed a product that can be manufactured at a cost that enables us to compete in a very real way. And I think if you add that with the reputation we have, I wouldn't underestimate the importance of our reputation. It is truly excellent. I believe that we can make inroads. It's just going to take time if we were to go through the whole regulatory process of approvals with the WHO. We take time. So I think we can enter the market late 2017.

In terms of what kind of growth we can get in terms of percentages, difficult really to assess. But just to make the general point that it is upwards of $90 million to $100 million mark, the screening market is dominated by [Lear]. And I think it is very realistic to take a good market share there. I think -- I would say the combination of our reputation and the product and our pricing capabilities should achieve that.

And is that $90 million to $100 million screening market -- are you afraid to -- that's just in Africa alone, or is that a worldwide market?

Just Africa.

Okay. And could you have the screening and the confirmatory test in a particular country, or would you -- or is there a checks and balances where you have -- where you could provide a (inaudible) to both?

Given that -- you can have both because our products are entirely different. They use entirely different recombinants. So just to remind yourselves of the dynamic, what happens is 1,000 people will be tested for HIV. Let's say the typical algorithm is -- and let's say that 120 of them would come up positive. So maybe 120 people would be screened using a Lear and then 1,000 people would be screened using a Leer. If 120 of them come up with positive, and then those 120 people will be tested with our Uni-Gold product.

So that's the way it has worked over the past 15 years, broadly speaking. There have been some other players, but, broadly, that is what has happened. So those volumes would be. But then there's some and determinants and some mistakes made. So on average, the volume probably spares our (inaudible) hours.

Got you. Okay. What's -- is there anything going on with -- you had all these other immunoassay point-of-care tests proved a couple of years back. I know you had a little $0.5 million contract in Indonesia or in some other maybe Mediterranean countries. Is there -- have those basically -- I don't think you have given up on them, but is there any potential coming from those or is that basically around there?

No, we are working (inaudible) Legionella Urinary Antigen, H. pylori, we're building our sales as primarily European efforts. But don't know, we are building our sales, and that is continuing, that is a part of our infectious disease business now. We don't isolate it, but it's -- come up with about $700,000 at this moment in time.

Okay -- got it. And just sticking with our immune infection disease side, Lyme disease this quarter -- was that up year-over-year in the US? I thought the last couple of years have been sort of pretty down significantly and we've got a milder winter this year? So has that proven?

For the year, we're up. But this particular quarter, we are just about a level with last year.

Okay, and is that just from kind of a -- what have you got? Is that explainable or -- I guess it's random small numbers. Or is that -- I thought maybe you would get a little pomp out of that this year after it had been down the last --

We have had a good -- we have had a good line season compared with last year, and that is as a consequence of the very mild winter that we had last winter. Just happens that this quarter was just about level with last quarter and the corresponding winter. But overall we are up.

Got you. And in the outlook on the autoimmune side, I guess clearly -- I guess that is mostly Immco. It's been sort of mid- to high single-digit growth, and you think it's -- can you get back to the double-digit. Is that -- can you just sort of give us a little more color on that? Is that from the children's product? Is that other approvals coming on board? What sort of -- do you think will be the driver of that acceleration in growth?

At think children's has got huge potential. As you know, we moved from Nicox to Bausch & Lomb, and it has been in the betting in period of time but I do believe that has got Hughes potential. We're still running around $700,000 a quarter on children's, but it's got huge potential beyond that.

And the other thing that is significant that has happened to us in the reference laboratory side of things is that we have won a couple of contracts or a number of contracts with the two mega-labs in the United States, where they would choose to use us to do some of their testing rather than run it in-house. So that -- those combinations -- those events have been very positive for the reference laboratory which has performed really strongly.

And -- but I think, as I said in the prepared comments, the real bigger growth potential which hasn't been realized yet but which is out there is in terms of our product revenue potential. And really even still, our product revenues in the United States are very modest. They have huge potential.

So we are competing with two competitors, and we really -- our product revenues at this time are modest. But I think as soon as we have fitted out all of our EIA ELISA approvals with the FDA and added them and instrumentation offering for the middle and smaller laboratories --, and when you take into account the strength of our immunofluorescence product offering, and you also take into account the strength of our just-launched ANA screen product, I think that we have got lots of potential across the world but particularly in the United States, where we are starting from almost a zero base.

So I think over the coming years, you're going to see the autoimmunity business be a really, really strong growth engine for us. And that -- we will be solidly into the double digits, I believe. We are already close to that.

So basically what I'm saying is there's two engines for growth. There is the reference laboratory, and there's the product revenues, and only one engine is really running at this moment.

Okay. And then just lastly, on Premier, I think still your highlighter in terms of growth, as you outlined -- this sort of double-digit expectation for growth, is that -- do you expect level placement at this [350] -- maybe a little higher as you get Brazil and then just rising reagent sales as utilization improves on these machines? What is going to drive the growth? Is it more replacements and a rising installed base or a rising utilization, or both?

Well, I think, firstly, you should bear in mind that we have grown this business from the $14 million to $30 million over the past few years. So it's actually four years. So growth has been strong. But bear in mind also that every Premier that is placed and is not replacing existing Premiers, they're are all-new placements. And so we are still on the kind of this -- the first run in terms of the cycle. It's a seven- or eight-years cycle; I'm only four years into it. So every placement is new incremental business, just to make that point.

In terms of growing the business, I think that reopening Brazil is going to make a big difference. Clearly, Brazil is in effect closed at the moment. We are virtually making no placements there. And we suffered a situation where the real moved from [1.8] to [4] against the US dollar, which was catastrophic from our point of view.

And -- but now it has come back. It's coming back gradually. It's at [3.11] today. It's something we watch every day. And so we're getting to the stage where we can get back into that market. So I think that's going to drive the instrumentation -- instrument placements way above [350].

And the other factor that's going to make a huge difference to our Premier -- our diabetes business is basically increased reagent usage in China. So we are continuing to place instruments at a very impressive rate in China -- broadly speaking, 25 a quarter, 100 a year.

But the run rate on those instruments is modest. But it's increasing all of the time as more GPs in China plug in to reimbursement, the fact that it's available and the fact that (inaudible) testing is available basically, and reimbursement is available on it.

So that dividend -- I think -- so the combination of Brazil being plugged back in and China building are going to make a big impact. And then I did mention also in the prepared remarks the fact that we've just launched Premier Resolution, which basically is going to serve the variant market -- significant market with very few competitors. And of course also allied to that is the neonatal market.

And I think -- so -- bear in mind, we have a strong franchise there. It's over a $10 million business already. But it's been a business that over the last five years has been flat. But now with the advent of this new instrument, I think we can grow that business significantly. I gave the example that 20 -- I think 23 instruments have placed since April since we launched.

Got it. Okay. Great. Thank you.

Nicholas Jansen, Raymond James.

A lot has been covered, but just want to focus a little bit more on the Meritas strategic alternatives decision. How do we think about the -- what is going into that evaluation vis-a-vis either building out that portfolio on your own, partnering, outright sale -- any sort of conversation or discussion on how we should be thinking about that being evaluated internally would be helpful.

Right. As Jim mentioned, it's an excellent platform. The BNP product that went down to it was perfect. And we were confident that we could put many different parameters down to it.

The problem for us was that our plan A was that Troponin would lead out -- we would lead out with Troponin and we would put various other parameters onto the menu. But the Troponin would lead it out. The issue now we need to basically consider very carefully and that constitutes part of our review is basically in the absence of Troponin as the lead blockbuster product, how we could best utilize that -- this platform. We are confident that the platform can carry a very impressive menu. It's a matter of identifying what that will be. Whether we will do that, activate that alone, whether we would face the partner, or whether indeed we would actually dispose of the platform. And it basically constitutes part of the review and we are really only starting it.

So I'm afraid I can't really help you so much in that sense at the moment. We're just looking at the whole thing with an open mind. But we do make this point that this is not a valueless platform. There is value in this platform, and we believe that we will realize that value. Whether on our own -- whether (inaudible) with our own menu, our own instruments sold and marketed ourselves, whether in partnership or whether by -- to a disposal, we're just not sure this time.

Okay, that's helpful. And then the second question I had more so on just the cash in the balance sheet, $85 million, I know there's going to be some cash restructuring charges and some things in the very near term before you get to that near-breakeven level. But how much do we think we fall off of this $85 million level before we get to that breakeven forecast as we think about kind of the availability or flexibility with your balance sheet? Thanks.

Obviously, I think we are entering into a period now where we are going to try and unwind the Swedish facility. We anticipate that that is going to come down by about $7.5 million annually, which is close to but not quite $2 million a quarter. Wouldn't expect to see any reduction in quarter four. We will have the redundancies for the Swedish employees, which will be likely in excess of the average wage build as such. The facility will still be open while we do the transition. So we will burn cash in quarter four. And I expect there will be an element of that in quarter one of next year as well.

Quarter two next year will be the first year where we are really going to be clear of everything. So it's a question that ultimately -- how much that whole Swedish unwind is going to be.

I'm going to be a bit vague, to be honest, because we have a lot of commitments that we need to just negotiate our way out of, and that will cause a certain amount of variability upside or downside in the amount of that. So you're probably going to see a couple of million for next year -- next quarter and then potentially the same again the following quarter. So there will be continued cash burn. Whether it ends up being low 80s for high 70s -- mid to high 70s, that kind of number, it's difficult to say at this remove.

Okay, that is helpful. And just to confirm the over $50 million that you discussed regarding the Meritas, that is all non-cash for the fourth quarter?

Yes, exactly, all non-cash and anticipated would probably to be in the range of $55 million to $60 million, and it's all non-cash.

Okay. All right guys, thanks.

(Operator Instructions) David Cohen, Midwood Capital.

I just wanted to dig in on the diabetes business a little more. Did you actually -- I couldn't -- I may have missed it, but did you give placements in the quarter or year-to-date for Premier?

Yes, 78 placements in the quarter. And I'm not sure year to date, that's roughly in -- or I would have been sort of doing (multiple speakers) yes. It's just more -- anyway, it's 78 in the quarter. I think 83 last quarter, and I don't have quarter one in front of me (inaudible).

85, 83.

85, 83, 78. So just on --

Got you. And can you quantify the reagent -- the Premier reagent sales in the quarter or year to date? How big of a business is the consumable portion of the business today?

It's about $3 million -- a little over $3 million in the quarter and it will fluctuate a bit. Quarter three tends to be a little bit weaker because of vacation period, particularly in Europe as such.

And overall, you characterized -- Ronan characterized diabetes as 30% of the business, so roughly a $30 million business. Is any of that -- or how much of that if any is non-Premier related?

Well, there's about $10 million of non-Premier, which is the legacy variant business, which is -- remember I talked about we just launched a new Premier Resolution instrument. That is going to replace an older instrument which is a non-Premier instrument. We call it the Ultra. And just for example, that will do all the sickle cell anemia testing and variant testing. Virtually all -- certainly all of the variant testing for the two US mega-labs, for example. So does that --

Right. I guess what I'm getting at is the degree to which -- with that -- the variant instrument, whether that's a -- going to be incremental revenue or going to cannibalize our own revenue, which I understand if we are going to cannibalize our own revenue because someone else might do it someday as well. So we might as well maintain that revenue stream. But is -- are we displacing our legacy revenue with that new variant instrument?

Yes. So just to go back, there's two elements to our diabetes drug -- hemoglobin business. There is a new diabetes Premier business. That is all-new. We were never in that before. It took (inaudible). And then there is the legacy business -- the original business which we originally bought -- when we bought the business. And really that was a variant -- hemoglobin variant business that was typically sold to major labs running on an old instrument called the Ultra.

So when we launched the new -- when we just announced the launch of our new Premier resolution instrument, that is going to do two things. It's going to open new markets for us as it's just -- as it's doing for example with Menarini. When I talked -- 23 instruments would have gone there. But in addition to that, what it will do is it will secure that legacy business by providing a new instrument base for us.

Okay.

So the combination of new and replacement of existing.

Okay. And then shifting gears a bit, you reiterated the comments you made in the past about the go-forward effects of reducing your expenditures related to the Meritas development -- $9 million to $1.5 million. But if I'm not mistaken, is that all cash flow -- statement of cash flow related? Or in other words, when I look at your P&L and exclude the derivative accounting around the convert, what will change on your P&L from a cost standpoint? So your [1.3] of R&D, your [7.5] of SG&A, will those numbers start to come down?

The answer really is it's a cash flow benefit because virtually all -- virtually everything that went into the whole Fiomi project was being capitalized because the US and European rules are different there. So we were obliged to capitalize that. So what is happening will have negligible P&L impact, but very significant cash flow impact.

So the cash flow impact will be $9 million minus $1.5 million, which is $7.5 million a year. But the P&L impact will be negligible.

Okay. So in the absence of growth, we're still looking at what sort of pro forma profitability that could -- this is a Company that in its past, and it wasn't that long ago, did -- was earning $0.20 a share of earnings. And now we do $0.07 on an adjusted basis? So I'm trying to understand what has to happen to get us -- to get the Company back to showing higher rates of bottom-line profitability. And can that only come from -- is that only going to come from growth? We aren't going to cut costs, our P&L expenses, in any particular way.

Okay, David, let me maybe deal with that. I think you are right. The key driver -- and this goes back -- the answer goes to Bill's question earlier on -- was in relation to growth around the top line. Because so much of that additional growth, even as a point model -- so I use the example, and this is purely illustrative, of a 6% growth in the top line can result in 40% on the operating, can result in 70% on the bottom line. So that's the best bang for the buck.

Now, we're not going to adopt a unidimensional strategy. We will also look at our costs. We will have some cost reduction coming from the costs that we're going through, the statements in relation to Meritas. There will be a small reduction in that. There might be a bit of leakage of costs that were going to the balance sheet back into the income statement because they are no longer capitalized. But on top of that, we will look at our overall cost base and look at trimming costs somewhat. That's something we do on a periodic basis anyway. And -- but the bigger bang for the buck will come from the revenue growth.

The other kicker then obviously is in relation to the buyback. So if you're looking purely at EPS, the revenue of measures will improve the profitability in a profit after tax (technical difficulty) in the EPS than can be further improved by reducing the denominator, i.e. by buying back shares.

Okay. And I guess -- so you have got five -- as you broadly characterized, there are five components of the business. I don't think we've heard about Fitzgerald growth for some time. I think we have heard about very modest, if any, growth in Lyme, which is a significant portion of infectious disease. HIV, notwithstanding the entry into the screening market, has been a very up-and-down business, and it seems to be very hard to predict quarter to quarter.

Premier has been -- certainly been a winner. The investment in the point-of-care testing menu doesn't seem to have affected the P&L. So -- and I got involved with the stock in 2011 when the growth plan was around Premier as the first building block, then the point-of-care testing program as the second building block to achieve this double-digit growth.

Here we are, and we're supposed to believe that we're going to somehow have a new way of achieving that double-digit growth when some prior organic mechanisms or initiatives just really haven't panned out. So, I don't know. I would encourage you to think very differently about how you are going to maximize value of this Company. And going it alone -- I said this on your last call, going alone to me isn't the way to do that. Obviously not a question, so you guys can move on to the next caller. Thanks.

Thanks very much. I think at this stage we don't appear to have any more questions, so maybe we could close up the call. Operator, please.

Yes, ladies and gentlemen, that will conclude question-and-answer session. Mr. O'Caoimh, would you like to do any closing remarks or would you like to conclude at this time?

I would just like to say thank you to everybody for your attention and interest, and we will talk to you again this next conference call. Good afternoon. Thank you.

Thank you. This conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.