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Edited Transcript of HSKA earnings conference call or presentation 5-Nov-19 4:00pm GMT

Q3 2019 Heska Corp Earnings Call

LOVELAND Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Heska Corp earnings conference call or presentation Tuesday, November 5, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Catherine I. Grassman

Heska Corporation - Executive VP & CFO

* Jason A. Napolitano

Heska Corporation - Chief Strategy Officer

* Jon Aagaard

Heska Corporation - Director of IR

* Kevin S. Wilson

Heska Corporation - CEO, President & Director

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Conference Call Participants

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* Andrew Harris Cooper

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Benjamin Charles Haynor

Alliance Global Partners, Research Division - Analyst

* Bruce David Jackson

The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst

* David Michael Westenberg

Guggenheim Securities, LLC, Research Division - Analyst

* James Philip Sidoti

Sidoti & Company, LLC - Research Analyst

* Max Masucci

Canaccord Genuity Corp., Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Heska Corporation Third Quarter 2019 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jon Aagaard, Director, Investor Relations. Please go ahead, sir.

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Jon Aagaard, Heska Corporation - Director of IR [2]

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Thank you, and good morning, everyone. Welcome to Heska Corporation's Earnings Call for the Third Quarter of 2019. I am Jon Aagaard, Director of Investor Relations for Heska.

Prior to discussing Heska's third quarter 2019 results, I would like to remind you that during the course of this call, we may make certain forward-looking statements regarding future events or future financial performance of the company. We need to caution you that any such forward-looking statements are based on our current beliefs and expectations and involve known and unknown risks and uncertainties, which may cause actual results and performance to be materially different from that expressed or implied by those forward-looking statements. Factors that could cause or contribute to such differences are detailed in writing in places, including this morning's earnings release and Heska Corporation's annual and quarterly filings with the SEC. Any forward-looking statements speak only as of the time they are made, and Heska does not intend and specifically disclaims any obligation or intention to update any forward-looking statements to reflect events that occur after the time such statement was made.

With us this morning we have Kevin Wilson, Heska's Chief Executive Officer and President; Catherine Grassman, Heska's Chief Financial Officer; and Jason Napolitano, Heska's Chief Strategy Officer. Mr. Wilson and Ms. Grassman will provide details surrounding the results reported, and then we'll open the call to questions.

At this time then, it is my pleasure to turn the call over to Kevin Wilson, Heska's CEO and President. Kevin?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [3]

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Thanks, Jon. Good morning everybody. Today, we're pleased to report another strong quarter that remains in line with our full year outlook, including the timelines that are driving our core business growth and initiatives and major product developments.

Our performance in nearly all key areas again met or exceeded our goals for the period and year-to-date. Strong growth in Core Companion Animal lab diagnostics led the way, with POC lab consumables up 20.9% over the prior year period. Active subscriptions, months under subscription, minimum contract subscription value and subscription retentions all continue to progress nicely, in line with our full year outlook.

Sales campaigns, test menu expansions and favorable timing helped drive these strong results, and we anticipate again capturing market share in the lab space for the sixth year in a row.

We achieved in several areas in the period. First, we had healthy commercial performance. Second, our research and development investments are on schedule and delivering good results, especially in our highly anticipated Element UF product. And third, we had positive operating cash trends and we completed our $86.25 million capital raise to help power our offense.

As we look to close out the year and enter an exciting 2020, we sense good momentum that is underpinned by a healthy veterinary market generally and by Heska's execution and central position in that market specifically. Heska's full portfolio of point of care diagnostics are critical to veterinarians and pet families because pets can't speak, which makes Heska's products the indispensable voice of the pet that is central to driving positive healthcare outcomes for pets and positive financial outcomes for veterinarians.

Our Point of Care diagnostics continued to benefit from several strong long-term growth trends that are well known but deserve mentioning again. We continue to benefit from the humanization of pet trend that is expanding globally across pet households in multiple generations and demographics. We continue to see an ongoing and increasing pressure on traditional veterinary profit streams which make point of care diagnostics from Heska an indispensable part of the modern veterinary healthcare provider's business.

We continue to see robust corporate consolidation and investment into veterinary healthcare providers both domestically and internationally, which drives global markets for diagnostics. And we continue to see positive hospital patient visit and in utilization trends that continue to benefit from veterinary healthcare's wonderful streamlined payer and regulatory environments. All these trends and several others continue to drive robust industry investment and accelerating consolidation.

Into this positive setup, we at Heska are thrilled to claim one of the very limited number of spots within this coveted space. To rapidly capitalize on the opportunities within the global animal healthcare space, in September, we successfully issued $86.25 million of convertible senior notes to accelerate and fund our intended expansion and strategic growth initiatives.

With that, I'll turn the call over to Catherine and Jon to walk through other updates outlined in our release this morning. Jon?

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Jon Aagaard, Heska Corporation - Director of IR [4]

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Thank you, Kevin, and thanks again to everyone who has chosen to join us this morning. We presented a lot of good information in today's release, and we want to take a moment to call out some of the high points here before Catherine covers the financial details.

First, I'd like to take a moment to overview our progress and product innovation. In June, Heska launched Progesterone and BUN tests to Heska's immunoassay and blood gas analyzers, respectively, as well as Heska's new chemistry eWrap Plus panel.

These product launches and effective work from our sales teams helped to deliver good retention and utilization in the quarter. With broad market launches of 2 new analyzers in the fourth quarter, we are optimistic that our sales teams and tactics are finding positive response from our customers.

In June, we began limited release of Heska's new Element i+. Element i+ is Heska's next-generation multiplexing immunoassay platform for global veterinary and animal health markets. Element i+ leapfrogs Heska's current leading immunoassay platform with multiplexing test cards, superior analyzer design, lower cost profile, expansive roadmap of first-and-only point of care testing and global markets availability within Heska's full point of care line. Early reception for Element i+ has been favorable in the third quarter and broad market release is scheduled for December.

Also in June, Heska launched the Element RC, our new rotor-based chemistry platform targeted directly to the company's geographic expansion. Initial installs have now begun. Early reception has been favorable and broad market release began starting late December.

And lastly, we are pleased to note that the highly anticipated release of Heska's Element UF urine and fecal analyzer is now a quarter closer to market. Heska's research and development investments continue to yield on target and on time key results, leading us to reiterate our previously released timelines. Element UF is expected to be a major first-mover innovation from Heska in a market estimated to be many hundreds of millions of dollars. We continue to be confident in the market opportunity, feasibility, benefits, timetable and potential for value creation of this exciting new fecal and urine testing technology.

Now I'd like to take a few quick moments to overview our progress in expanding our markets. Heska's 2019 acquisition of Optomed in France is now complete and it is making good progress with our first Point of Care Lab Diagnostics installations which have begun.

Also performing well is Heska Australia, which is running slightly ahead of expectation. Small early wins in Point of Care Lab Diagnostics continue, and the learnings from our work in Australia provide a detailed roadmap for future Heska expansion.

These early international market expansion results, while relatively minor in bottom line impact, continue to strengthen our conviction in Heska's ability to expand, execute and scale into markets outside of North America.

Lastly on market expansion, we turn to corporate accounts, which continue to perform well for Heska, as the number of sites continues to grow and we begin also to see opportunities to expand and extend our existing relationships. One such extension of note is with PetVet Care Centers, which has now extended its term with Heska by an additional 2 years through the end of 2026. PetVet Care Centers is a great Heska customer that is now on track for solid 2019 growth and for very strong and reliable midteens annual growth through the end of 2026.

For the full year 2019, Heska's corporate account, individual account wins and subscription retention results are progressing in line with our outlook.

Having covered a lot of information there, I will now turn the call over to Catherine to go through the financial details of the quarter. Catherine?

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [5]

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Thanks, Jon, and good morning, everyone. We are pleased to report a strong performance for the third quarter of 2019. Consolidated revenue for the quarter was $31.2 million, a 0.9% increase over the third quarter of 2018. Revenue in our Core Companion Animal, or CCA segment, was $26.3 million for the third quarter of 2019, a 3.1% decrease over $27.2 million in the third quarter of 2018.

Revenue from point of care laboratory consumables grew 20.9% in the third quarter of 2019 compared to the second quarter of 2018, which is in line with our full year outlook of 12% to 17%. Offsetting this increase was expected lower revenue from sales of pharmaceuticals and vaccines of 52.2%, specifically Tri-Heart, a heartworm preventative manufactured for Merck.

Revenue from our Other Vaccines and Pharmaceuticals, or OVP segment, increased 30.1% to $4.9 million in the third quarter of 2019 as compared to the third quarter of 2018, which was largely due to timing.

Consolidated gross margin in the third quarter of 2019 was 43.7% as compared to 47.8% in the third quarter of 2018. In the third quarter of 2019, gross margin in our CCA segment grew 225 basis points to 51.7% as compared to the third quarter of 2018, due to the increase in consumable revenue. OVP segment margins decreased 3,500 basis points to 1.2% in the third quarter of 2019 as compared to the third quarter of 2018, resulting from unfavorable products mix.

Operating income increased $193,000 as compared to an operating loss of $3.6 million in the third quarter of 2018. The increase in operating income is due to $7.1 million of nonrecurring charges relating primary to the settlement of a legacy marketing complaint recorded in the third quarter of 2018. Excluding the nonrecurring (inaudible) $7.1 million for the third quarter of 2018, third quarter 2019 adjusted operating income decreased $3.3 million or 94.4%, from $3.5 million, primarily due to lower profitability on OVP-related sales and increased research and development spend on product initiatives of $1.6 million previously discussed on this call.

Depreciation and amortization was $1.2 million for the third quarter of 2019 compared to $1.1 million for the third quarter of 2018. Stock-based compensation was $1.2 million for both the third quarters of 2019 and 2018.

The company's effective income tax rate for the third quarter of 2019 was a tax benefit rate of 72.2% compared to a tax benefit rate of 52.9% for the third quarter of 2018. On a non-GAAP basis, excluding the tax effects of $2 million relating to the nonrecurring charges, the company's effective tax rate for the third quarter of 2018 was a tax expense rate of 3.6%.

The volatility in the company's tax rate is due to a lower level of income as a result of reinvestment in the business and discrete tax benefits associated with the stock-based compensation activity.

Net loss attributable to Heska Corporation for the third quarter of 2019 was approximately $300,000, or a loss of $0.04 per share, which includes approximately $600,000 of other expense related to a cybersecurity network event, or a $0.01 impact per share, compared to a loss of $1.7 million or a loss of $0.23 per share in the third quarter of 2018.

Excluding the nonrecurring charges in 2018, adjusted net income attributable to Heska Corporation for the third quarter of 2018, was a $3.4 million, or earnings of $0.43 per diluted share.

As of September 30, 2019, Heska Corporation [had] approximately $82.5 million in cash compared to $13.4 million as of December 31, 2018. On September 17, 2019, Heska Corporation [issued] $86.25 million aggregate principal amount 3.75% convertible senior notes due in 2026. The net proceeds from the sale of the notes were approximately $83.7 million after deducting the initial purchasers discount and the offering expenses. Approximately $12.8 million of the net proceeds was used to repay all of the outstanding indebtedness under the credit facility and $2 million was used as collateral to fully fund the letter of credit facility. Heska Corporation intends to use the remainder of the net proceeds from the notes to fund our intended expansion efforts, including through acquisitions of complementary businesses or technology or other strategic transactions and for working capital and other general corporate purposes.

Cash flow from operations was a use of $3.3 million for the 9 months ending September 30, 2019, due to litigation settlement payment of $6.8 million, as compared to cash provided by operations of $6.5 million for the 9 months ending September 30, 2018.

Regarding our outlook for the balance of 2019, investors may recall that we don't provide quarterly or in-period guidance. That said, we continue to believe our full year 2019 outlook is achievable, but, of course, not guaranteed.

Pertaining to our outlook for 2020, as indicated previously, we will provide our 2020 outlook on our regular schedule during our fourth quarter and full year earnings call.

Regarding our outlook past 2020, we plan to host an Analyst and Investor Day on May 20, 2020, in New York City, where we will discuss Heska's strategic growth strategy and multiyear outlook to incorporate more fully effects from our capital raise, business development activities, research and development, new product launches, geographic expansion and other helpful topics for investors and analysis. Details surrounding the event will be forthcoming.

With that, we would like to open up the call for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from David Westenberg of Guggenheim Securities.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [2]

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Congrats on a good quarter. So just first on the fecal market, how would you think about if competition came for that market? Is it big enough? And how big of a market do you anticipate that being in maybe a 2-, 3-year out period?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [3]

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David, it's Kevin. I think we've called out and I think I've seen reports out there, maybe one from you, somewhere in the $600 million to $700 million range, and we think that's accurate. Fecal itself is a very, very big market that in terms of point of care is basically unaddressed. And we think combining urine and fecal is certainly an advantage for us, if we're successful in doing that.

So yes, we think it's a good market and we think you get there relatively quickly. It's not a market, at least in our conversations with veterinarians that you have to convince veterinarians and technicians of the need. They do these often. They do them manually. That's a messy, unpleasant process that results in variability depending on the user, and we think we can improve standardized sample prep and things like that to get better results and more consistent results without having to deal with the manual, messy process. So we think it's pretty compelling.

In regards to competition, I think it just puts more focus and more visibility on the space, and I wouldn't view that as a negative. I'd probably view it as a slight positive, having another marketing machine out there advocating. To speed up market penetration both domestically and internationally, depending on where the competition came from, would be probably helpful on average as opposed to hurtful.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [4]

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Thank you. And then outside the U.S., can you talk about how you're thinking about investment outside the U.S. versus growth outside the U.S.? And I realize it's kind of a vague question. But I'm kind of getting a sense -- I'm just trying to get a sense of when you see a market is fully ripe to attack versus when you might be pulling back in a certain geography. If there's any sort of like guide rails you can give us there that would be helpful.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [5]

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Yes. I mean I called out markets in the past, generally kind of westernized democratic markets with good banking and good legal. I always like to remind people, we like to place assets that we own and keep on our balance sheet largely. That's our business model. And it's important for us to have stability in currency, legal, those types of things, property rights.

So I think that's the first piece. So we're not China-focused, for instance. We're not Asia-focused. We think, Western Europe, Central Europe, Australia, New Zealand are really good examples.

And in terms of looking for market opportunities that are right to jump on, most of these markets are more than ripe to jump on. It's really more looking for a thoughtful way into that market. And that's where business development and international growth for us are really tied very, very closely. I think getting a thoughtful beachhead in each of those markets is important and will largely dictate our next couple of market entries. If we can get a good entry point through some thoughtful business development, we'll take it and that will dictate where we would intend to grow that market over the next couple years.

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Jason A. Napolitano, Heska Corporation - Chief Strategy Officer [6]

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David, just to supplement here, it's Jason Napolitano. And as Kevin mentioned, I think we'll do it both organically, as we did in Australia, or by acquisition based on availability. And Optomed in France is a good example of acquisition.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [7]

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Thank you, Jason. And if I could just squeeze in one real quick one, and I'll take it offline. Outside the -- there was a couple Reference Lab acquisitions that just took place. Is that something that you might be opportunistic towards? Is that a strategic direction of the business? Just any color there is helpful. And congrats again on a good quarter, and I'll jump offline. Thank you.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [8]

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Yes. Phoenix Lab was acquired by Zoetis. Last month, Marshfield was acquired by IDEX. Those are the 2 largest remaining independent labs in North America. We would love to be in or partnered with Central Reference Labs in international markets. But we think largely the North America market is effectively served by 2 large players; namely, IDEX and Antech, which is owned by Mars. And so we don't really see a company like Heska in the North America market penetrating that. But we do think that's quite a possibility in some of these international markets, largely because Heska can bring the point of care component to the Central Reference Lab component instantly, and those are potentially nice tie-ups. So thank you.

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Operator [9]

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We will now take our next question from Mark Massaro of Canaccord Genuity.

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Max Masucci, Canaccord Genuity Corp., Research Division - Associate [10]

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This is Max Masucci on for Mark. So you extended the term of your relationship with PetVet Care Centers by 2 years to 2026. So I guess how did you arrive at this agreement? And what are some of the solutions that can address the slower-than-expected conversions in prior years? And I guess what gives you confidence in the midteens growth rate through 2026?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [11]

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Max, that's a fair question. I know you guys have probably followed that aspect of our story a little more closely. They're a good customer. Sometimes it takes a little while to get things synced up. We've been working with them for 2 years. As you recall, they were our first big corporate customer announced. So we worked with them over the last 6 to 9 months a little bit more intensively. And we've agreed to extend so that we get the economics and we get to work with them on a longer basis. And I think that's a good thing.

In terms of the growth, we have a high degree of confidence in that, I think we've synced up in terms of what their commitments and growth rates are and what our expectations and obligations to do the servicing are. And we just have a very high degree of confidence in that on a go-forward basis.

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Max Masucci, Canaccord Genuity Corp., Research Division - Associate [12]

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Great. And how's the funnel looking for additional tuck-in M&A in Europe? I guess do you see additional opportunities that resemble Optomed in terms of their financial profile? Or are you looking at companies that are different from Optomed, maybe in terms of size, reach and financial profile?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [13]

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Yes. Jason, you want to take that?

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Jason A. Napolitano, Heska Corporation - Chief Strategy Officer [14]

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Yes, sure. It's Jason. I'll take that. We are looking at several opportunities in Europe. I think Optomed is a pretty good proxy for the type of company that we like to see. We like to see someone strong in country, someone's got a real good market presence in their particular country. There are several of them out there. I'm reluctant, obviously, to start guiding to closing deals and things along those lines, just because these things tend to be very personality-driven, and you got to find the right opportunity, you got to do your diligence and you got to be sure you've got a good economic arrangement. But I expect over the next year you're going to see a few Optomed-like transactions being announced by Heska.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [15]

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Yes. And I'll just add, too, that Optomed was small. And I think what we're signaling is, if they have the right position in their local market and they're a good entry point for us, that's not a negative thing for us. We like the smaller transaction. But we have an appetite, obviously, for larger, healthy entry points as well. So I think we consider both.

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Jason A. Napolitano, Heska Corporation - Chief Strategy Officer [16]

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For sure. For sure.

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Max Masucci, Canaccord Genuity Corp., Research Division - Associate [17]

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Great. And then one more if I can. So you're now manufacturing some instruments and consumables in Des Moines. You guys beat us on gross margins for the quarter.

I guess how is the process of manufacturing yourself going? And any challenges? And I guess when should we expect to see any sort of benefit to your gross margins? In 2020, or is that further out?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [18]

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Yes. I do think it depends on which gross margin you're talking about. If you're talking about consolidated gross margin, that can also be driven by mix. And so as you launch some of these new tests, analyzers and the supplies that run through them, may have better margins than some of the products in our stable, whether that be imaging or OVP or things like that.

We have not started manufacturing tests in Des Moines. We're still in investment mode and development mode on that. So we haven't seen any benefit of that. Some of our new product launches also have very good margin profiles. And as they become part of the mix, we do think that they can be a positive impact on consolidated gross margins as well. But we haven't started doing the manufacturing piece; we're still investing in that.

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Operator [19]

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We'll now move on to our next question from Andrew Cooper of Raymond James.

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Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [20]

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A lot's already been asked. But I think maybe one just relative to our model. I think the sales and marketing build was a little bit slower than we had expected. So just kind of any commentary in terms of buildup either domestically ahead of some of the -- or in conjunction with some of these newer products, and then internationally as well, as we think about Australia and with Optomed in France. And potentially more, just how you think about when you reach sort of a scale there domestically, and, again, how you're going to add internationally would be helpful.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [21]

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In terms of domestic scale, we added last year throughout the year. I don't think we've been as aggressive adding head count this year. We, actually this week, just promoted 2 very, very qualified individuals to vice president roles to manage and build out and grow our sales force for the Point of Care Lab business; Kevin Klass and Jeff O'Brien. So there's a little shout out to those guys. They do a great job. They've been here a long time.

And so we are making those investments. But I think we've got the timing about right in order to align those things with product releases and when we actually need the feet on the street. I do anticipate we will continue to expand our reach, but it varies quarter-by-quarter, as you know.

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Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [22]

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Okay. That's helpful. And then kind of circling back on the thoughts on M&A internationally. Are there any sort of assets that would be a better fit or, frankly, ones that you'd say, we don't want to be involved here? I think there's a lot more fragmentation in a lot of these international markets. So clearly, there's a lot of opportunity, whether it be, to your point, partnering with a Reference Lab, or something more like Optomed that's obviously in a little bit different market than what you had domestically.

But how you think about rank ordering, something that's maybe more directly linked to what your existing business is verse something maybe a little bit more further a field, whether it be vertical or horizontal in nature.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [23]

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I think Kevin and Jason. So I'll take a first stab at it.

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Jason A. Napolitano, Heska Corporation - Chief Strategy Officer [24]

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Yes, I'll supplement it.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [25]

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Jason can let me know if I whiff it. I think we've called out in the past mini Heskas in geographies that Heska's not in would be attractive, would be very attractive and easier for us to integrate. So I think those are very positive beachheads.

I wouldn't expect us to go a whole lot further afield. I think you've listed them. You've got little mini Heska-type of geographic expansion. You've got Central Reference Labs that are geographic expansions. We've called out practice management software companies that could be geographic expansions with good customer bases in a local market that's not the United States. And I wouldn't expect us to go crazy and go buy some app company or an insurance company or anything that is kind of out of the core of our business. We're not looking to bolt on oddities and brand new revenue streams. We think we've got the right model and we think we've got the right capabilities. I think it's more about scaling our existing business and taking the learnings that we've gotten from Australia and from Optomed in France, and applying those and scaling those in several other countries over the next couple, 12 months, 2 years, I think is probably the strategy.

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Jason A. Napolitano, Heska Corporation - Chief Strategy Officer [26]

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Yes, I think -- yes, I agree with Kevin. Just to supplement a little bit, I think what we would look at, product-type expansions. But there's not a huge amount that I see on that front that really fits with what we're doing. Most of the opportunity I'm looking at is primarily geographic. As Kevin mentioned, we think we've got the right in-clinic suite at this point. We've got largely international rights to the products we need. And it's a matter of getting those products in that region to a given geography.

We are trying to send a message out there that we're interested in looking at acquisitions. We would pretty much -- hard for me to imagine saying I don't even want to look at an opportunity. But we're going to be pretty disciplined about being sure we bring things in here that ultimately fit, we're confident we can integrate properly and will be synergistic to what we've got going on.

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Operator [27]

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Our next question comes from Ben Haynor of Alliance Global Partners.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [28]

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First for me, just nice to see the step-up in lab consumable growth rate here versus kind of the first half of the year. Is there anything specifically that you can kind of attribute that 600-plus basis point increase? I mean, is it free term promotions expiring? Is it international-driven? Is it menu expansion? Is it equivalent days? What kind of drove that, for the most part? Or is it kind of a mix?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [29]

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It was a mix of a number of things. But I think really it's just general health in the business. And there are some year-over-year timing questions. Remember you're comparing prior year quarters to current year quarters, and there could be some timing in terms of shipments and things like that.

We guided 12% to 17% for the year. I think we're still just barely within those goalposts with (inaudible) third quarter, but we're at the positive end of those goalposts. And I think we've got it about right for the year.

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [30]

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Yes.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [31]

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Okay. Fair enough. And then I'm sorry if I missed this. But on the PVCC term extension, did that come alongside the placement of new instruments? Or is it just purely an expansion in the timeline of the agreement?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [32]

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Yes. I think it's a little bit of both. It's an extension. I think we've got better alignment and much more discrete targets in terms of testing and financial performance. So we feel really good about, again, our long-term forecast through 2026. I think we've got very good alignment with them. And we've got a team ready to support them for installations, and they've got focus and believe very strongly that they can do the numbers that we agreed to through 2026. So it's in a good place.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [33]

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Excellent. And then lastly for me, I know you announced the Analyst Day coming up next May. Previously you'd held one, I think every 5 years before this.

Should we expect one to be held every year? Or is this kind of a one-off with similar timing for the launch of the Element UF? Or what's a good way to think about this?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [34]

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I suspect it's more of a one-off. We'll do them when we think enough has moved that the analyst and investor community that models our business, probably need a more detailed walk-through of how some of those changes can affect the longer-term models, and that's what really drives it. And when you launch a urine and fecal product, for instance, that has a market opportunity that's 4x the revenue baseline of the whole company that probably deserves some modeling help.

We raised over $80 million for business development. I suspect we'll have more details surrounding the deployment of that and what those impacts could be. So they're major enough that we really think the analyst and investment community is probably going to want to sit down and model some of that news that may be coming through by and after that period.

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Operator [35]

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Our next question comes from Jim Sidoti with Sidoti and Company.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [36]

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So it seems like you've got everything going in the right direction here. Other than the heartworm medicine, the Tri-Heart medicine, it seems like everything seems to be back to growth.

Regarding Tri-Heart, though, have you gotten any feedback from Merck regarding end user demand and pricing? Is that a business you expect to come back over the next couple years?

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [37]

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I think we'd say -- and, Jason, feel free to supplement. But I think we'd say we're pretty consistent with what we said on our Q4 call. We had stated at that point that we thought that while the business would return, not necessarily to the levels that it had been in the previous years, but we do have a sense of what 2020 looks like, and that would be part of our Q4 guidance that we'll provide.

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Jason A. Napolitano, Heska Corporation - Chief Strategy Officer [38]

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Yes, Jim. That relationship rolls up under me. And talking to the Merck people, they've been historically sensitive to giving too much information because they know we have disclosure obligations. But I've had some pretty in-depth discussions with them. They're seeing pretty consistent demand on their side. This is a generic. There is some pretty strong price competition out there. But they seem to be holding their own, largely, in terms of share.

And as Catherine mentioned, we've got a good forecast for next year. If anything, it's a little better than I had hoped originally. And we've got 120-day lead time. So by the time we get on the next call, I expect we'll have [locked] purchase orders in hand and be able to give you a lot more confidence in terms of a forecast.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [39]

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Great. Okay. And then last one from me, regarding the balance sheet. Inventory's down a couple million from the quarter, the previous quarter, which surprised me, in that you have some pretty big product launches coming up. What's going on there?

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [40]

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From the previous quarter, I think it's following a similar cadence from, we generally have higher inventory in the beginning of the year, just based on our minimum purchase requirements, and we -- I think the only change in that would be imaging-related purchases may be inconsistent between the periods. But other than that, it was as expected there.

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Jason A. Napolitano, Heska Corporation - Chief Strategy Officer [41]

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Just to supplement. The OVP business rose up under me. We did hold some inventory that we managed to get at the end of Q2 that we shipped during Q3. So that's probably a piece of it, Jim.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [42]

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Okay. So we should expect inventory to rise again early 2020?

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [43]

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Absolutely.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [44]

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Yes.

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Operator [45]

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And our final question comes from Bruce Jackson of the Benchmark Company.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst [46]

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Just a couple more questions about the Tri-Heart product. So Zoetis had a heartworm launch in the third quarter. Elanco is known to be working on something as well. Did that factor into the discussions that you had with Merck when discussing the demand for Tri-Heart during 2020?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [47]

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We've discussed this products, obviously. I think I would describe those products as more on the higher end. Everybody's trying to go to, what I'm going to call a holy grail of every sort of pest out there, fleas, tick, heartworm, all-in-one pill. And the Tri-Heart, we see much more on the lower end of the market. It protects against 2 intestinal worms as well as the heartworm. And it's been out there. It's a 15-year-old generic. So we don't think there's a tremendous impact of those products directly on the Tri-Heart product.

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Jason A. Napolitano, Heska Corporation - Chief Strategy Officer [48]

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And Merck is certainly aware of the Zoetis and Elanco and the competitive landscape when they're preparing their forecast for us.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [49]

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Absolutely.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst [50]

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Okay. Great. And then with the Element i+, so the plan is to launch later this year. Then how does the manufacturing side of it transition as the demand grows? So right now the instrument's being manufactured by someone else, and I believe you were thinking about doing the reagent manufacturing at your facility. So just how does that transition play out over the course of late 2019 and into 2020?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [51]

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Yes. I think it's more of a end of 2020 transition. We have analyzer manufacturing locked down; we like it. We don't intend to make it. We've got good production, and the analyzer's great.

The tests, we have enough manufacturing volume without bringing it in house, to launch that product and fulfill all the need that we anticipate. It's really more of a positive going into 2021 in terms of margin, and plant utilization in Des Moines are the things that would drive that. But we won't have supply constraint. And so we're not really looking at that as a major cost in 2020 or major driver for gross margin in 2020.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst [52]

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Okay. Great. And then last question for me. Could I get the head count of your field sales force, please?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [53]

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I don't think it's moved much from last quarter. I don't have it off the top of my head. I don't want to give you a wrong number. But we'll follow up with you after the call.

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Operator [54]

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It appears there are no further questions at this time. I would like to turn the call back to Kevin Wilson, CEO, for any additional or closing remarks.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [55]

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Thank you, operator. And thanks to everybody who joined the call. We appreciate the analysts' questions.

To close, I just want to reiterate, I'm very pleased with the quarter. I think our team did a great job. We're a quarter closer on our major R&D for the Element UF, and we like the health of the market generally. We like our execution specifically. And we look forward to updating you again on our full year call at the beginning of next year. Everybody, have a good afternoon.

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Operator [56]

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Ladies and gentlemen, that concludes today's call. Thank you for your participation. You may now disconnect.