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Edited Transcript of TRIB earnings conference call or presentation 1-May-18 3:00pm GMT

Q1 2018 Trinity Biotech PLC Earnings Call

Bray, Co Wicklow Dec 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Trinity Biotech PLC earnings conference call or presentation Tuesday, May 1, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joe Dorame

* Kevin Tansley

Trinity Biotech plc - CFO, Secretary and Director

* Ronan O’Caoimh

Trinity Biotech plc - Co-Founder, Chairman and CEO

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Conference Call Participants

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* James Philip Sidoti

Sidoti & Company, LLC - Research Analyst

* Matthew Patrick Reiner

Adirondack Research & Management, Inc. - CFO, Principal, CIO, and Co-Portfolio Manager

* Paul Nouri

Noble Equity Funds - Founder, MD, and Portfolio Manager

* William Lapp

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Presentation

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Operator [1]

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Good morning, and welcome to the Trinity Biotech Announces First Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Joe Dorame. Please go ahead.

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Joe Dorame, [2]

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Thank you, Steve. Good morning, and thank you for joining us to review the financial results of Trinity Biotech for the first quarter of 2018, which ended on March 31, 2018.

With us on the call representing the company are Ronan O’Caoimh, Chief Executive Officer; and Kevin Tansley, Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question-and-answer session.

Before we begin with prepared remarks, we submit for the record the following statement: statements made by the management team of Trinity Biotech during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify 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 FDA and other agencies; the impact of competitive products; product development; commercialization and technological difficulties; and other risks detailed in the company's periodic reports filed with the United States 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, let me turn the call over to Kevin Tansley, Chief Financial Officer. Kevin?

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Kevin Tansley, Trinity Biotech plc - CFO, Secretary and Director [3]

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Thanks very much, Joe. Today, I'll take you through the results for quarter 1 2018.

Beginning with our revenues. Total revenues for the quarter were $23.8 million, which represents an increase of approximately $300,000 versus quarter 1 last year. Ronan will provide more details on revenues for the quarter later on the call, so I'll now move on and discuss the other aspects of the income statement.

Our gross margin this quarter was 43.8%. This represents a significant improvement on the 42% achieved in quarter 1 last year. In fact, it is the highest margin we've reported in 6 quarters. On recent calls, I have been saying that we expected margins to improve, and this movement is consistent with our expectation. However, I will point out that there are variety of factors which impact our margin each quarter, such as sales mix, currency and production levels and thus, we can still expect some fluctuations in the quarters ahead.

Moving on to our indirect costs. Overall our indirect costs have remained in line with quarter 1 2017. Specifically, our R&D expenses remained static at $1.3 million, whilst our SG&A expenses decreased slightly from $7 million to $6.9 million. This reduction was then offset by an increase in our share option expense. The net results of the higher revenues, improved margins and indirect cost management has been an improvement in operating profit from $1.3 million to $1.8 million, which represents an increase of over 38%.

Moving on to our financing costs. Due to the impact of our exchangeable notes, our financial income for the quarter was $205,000 versus $177,000 in the comparative period, and this reflected slightly better deposit interest rates. Financial expenses were just under $1.2 million for the quarter, which is consistent with quarter 1 2017, and the vast majority of this relates to the cash interest element of the exchangeable notes. Similarly, the noncash financial expense of $300,000, which is disclosed further down the income statement, also relates to our exchangeable notes, with noncash interest of approximately $200,000 and a loss of over $100,000 recorded for the change in fair value of the derivatives embedded in the notes.

Our tax charge for the quarter was $132,000, and this represents an effective tax rate of 7% of operating profits, which is broadly in line with last year.

As in previous quarters, we continue to receive the combined benefits of the very competitive Irish corporation tax rate and R&D tax credits arising at a number of jurisdictions as well as the improved federal tax rate in the U.S.A. The net result for the quarter is a profit of $400,000. However, excluding noncash items, profit for the quarter was $700,000 versus an equivalent figure of $200,000 last year. The basic EPS for the quarter, excluding noncash items, increased from $0.01 per share to $0.34; meanwhile, fully diluted EPS also increased this time from $0.05 to over $0.07.

Finally, on the income statement, earnings before income -- interest, tax, depreciation, amortization and share option expense for the quarter was $3.3 million versus $2.7 million in quarter 1 2017.

I will now move on to talk about the significant balance sheet movements since the end of December 2017. Property, plants and equipments has increased by over $1.2 million. This is due to additions of $1.6 million being offset by depreciation of $300,000. In the same period, our intangible assets increased by $1.7 million, and this is made up of additions of $2.4 million offset by amortization of $700,000.

Moving on to inventories. You will see that these have increased by $1.4 million to $34.2 million, and this is partially due to timing factors, which resulted in higher HIV inventories as well as the buildup in Lyme products in advance of the main Lyme season.

Trade and other receivables have increased by $1.4 million to $22.1 million, and most of this increase was due to an increase in prepayments through, in this case, the renewal of certain annual contracts, such as insurance and IT, support, which tend to occur at the beginning of the year. The remaining increase was due to a slight drift in cash collections from customers, though on an overall basis, cash collections have remained very healthy.

Meanwhile, our trade and other payables, including both current and noncurrent, have increased from $21.4 million to $22.2 million. The majority of this increase is attributable to an additional quarter of accrued interest of $1.15 million in relation to the exchangeable notes. The remaining movement is due to the timing of raw material purchases and vendor payments.

Finally, I'll discuss our cash flows for the quarter. Cash generated from operations for the quarter was close to $600,000 compared to only $59,000 during the equivalent period last year. But contained within this, there are negative working capital movements of $2.7 million due to higher inventories and accounts receivable balances, which I referred to earlier on. I'd like to point out this that we did experience this same phenomenon at the same time last year.

Capital expenditure in the quarter was $4.1 million, which represents an increase over the same quarter last year, partially due to payments in respect to our new Brazilian facility. And the other major cash movement for the quarter was share repurchase payments of over $400,000. And just note that this includes some payments in respect of purchases made in late 2017. The net result is that we had a decrease in the cash for the quarter of approximately $3.7 million, bringing the quarter-end balance to $53.9 million.

I'll now hand over to Ronan.

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [4]

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Thank you. I'm going to review our revenues for quarter 1 before opening the call to our question-and-answer session, and given that we announced our year-end results only 7 weeks ago, I'll be brief.

Our revenues for quarter 1 were $23.8 million compared with $23.5 million in the corresponding quarter, which is an increase of 1.1%. Point-of-care revenues were $3.8 million compared with $4 million in the corresponding quarter, which is a decrease of 5.8%.

Clinical laboratory revenues were $20 million compared with $19.5 million in the corresponding quarter, which is an increase of 2.5%.

Moving back to point of care, our revenues decreased this quarter by 6% when compared with the corresponding quarter. Our U.S. HIV revenues decreased 9%, and this is explained by the fact that public health spending in the United States on HIV testing continues to decrease.

Moving on to Africa. Our HIV sales increased by 3% when compared with the corresponding quarter. However, we do not believe that is the market or indeed our market share have diminished. We believe that this movement is consistent with the haphazard nature of NGO purchasing. Over the past 15 years, our Uni-Gold product has dominated the confirmatory HIV market in Africa with approximately 90% market share. During that time, we have not participated in any way in the much larger HIV screening market in the -- in Africa, a market that is at least 10x greater in volume terms. Over the past 3 years, we have developed a HIV screening product for the African market which demonstrated performance characteristics, again, equal the performance of our Uni-Gold product, and matches or exceeds the performance of the market leaders in African HIV screening. And the product is currently undergoing independent trials in the African market and will be submitted to the WHO for approval towards the end of this year. We believe that we can take a significant share of the African HIV screening market, given the quality of our product and our longstanding reputation for providing the gold-standard confirmatory product into the market.

Moving on to Clinical Laboratory. Our revenues increased by 2.5%, from $19.5 million in the corresponding quarter last year to $20 million in the current quarter. In Infectious Disease, our revenues declined 6% compared with the corresponding quarter last year. This reflects the gradual decline of our U.S. ELISA Infectious Disease business as the 5 biggest diagnostic companies continue to add more and more of our product offering onto their large immunoassay instruments.

Our Diabetes and Hemoglobin variant business performed strongly during the quarter, with revenue increasing 9%. We had strong instrument placements in all of our principal markets with the exception of Brazil, where we made modest placements during the quarter despite strong demand for the product. This arises due to the weakness of the Brazilian real. However, we have now completed the development of our new factory and expect to be in production thereby year-end, following the receipt of the necessary regulatory approvals. At that point, the savings that arise on import duties and sales tax will enable us to recommence the placement of instruments in the Brazilian market.

Meanwhile, our Premier Resolution instrument, which serves the hemoglobin variants market for sickle cell anemia and thalassemia, has performed strongly. 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.

Moving on to autoimmunity. This business performed well during the quarter with an 8% revenue increase. We have consistently grown this business since its acquisition and believe that it will be a real growth engine for the company, and we believe that double-digit growth can be achieved this year. The Reference Laboratory business has been the best-performing part of this business, with significant growth coming from our Sjogren's tests and from the growth of our business with the 2 U.S. mega labs. However, the great potential in our autoimmune business is in the product revenue side. We believe that we have a best-in-class immunofluorescence products range, but in order to better leverage the quality of this product range, we are currently developing a new instrument. This new instrument will be completed by the end of 2019, and is an automated integrated immunofluorescence processor and reader, which will enable -- which will eliminate the requirement for the use of microscopes in most instances. We believe that the impact on our autoimmune business will be transformational.

And I will now hand you back to the moderator for the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Jim Sidoti with Sidoti & Company.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [2]

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You talked about the Brazil facility. You said that the capital spending was up, I assume, because of that plant, property and equipment were up. Can you give us timing on when you think that facility will be up and running?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [3]

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So the facility is completed at this point in time. And we've done production batches. We need to send results to ANVISA, which is the Brazilian Regulatory Authority, the FDA equivalent. But in addition to that, we actually need the facility itself to be approved. So there is kind of a double hurdle to be completed before we can actually sell into the market. So our best estimate is that we'll have achieved both of those hurdles by year-end.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [4]

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Okay. And a similar question for the Clinical Laboratory business. You said that -- that new product that you're working on, when do you think that will be released?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [5]

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I mean, our Premier Resolution instrument just completed and is now in the market. So the product that we're dealing with now is the autoimmune immunofluorescence reader and processor. And that is a project that's been ongoing now for about the last 9 months. And we estimate that we will be into the market with an FDA-approved product by the end of 2019.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [6]

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Okay, all right. And then last question. Last call, you thought that low single-digit revenue growth was achievable for 2018. Do you still feel that way?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [7]

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Yes, we're still in -- exactly in that space. So we had indicated 0 to low single digit, and we're comfortable on that. We obviously hope to exceed it, but that's what we're indicating.

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Operator [8]

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(Operator Instructions) And our next question comes from Paul Nouri with Noble Equity Funds.

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Paul Nouri, Noble Equity Funds - Founder, MD, and Portfolio Manager [9]

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Has there been any significant progress made with the syphilis test? Is -- on an annual basis, are we in 7-figure territory or no?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [10]

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We're at about $1.3 million, Paul. So the progress on that product has been disappointing. And I think the CDC are basically seem -- appear ambivalent, really. They're not giving it any support, and that's proving -- it's proving a practical difficulty for us. We're getting very gradual growth, but our assessment at this point in time is that this is a market of somewhere between $2 million and $3 million of majority.

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Paul Nouri, Noble Equity Funds - Founder, MD, and Portfolio Manager [11]

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Okay. Yes, I mean I've seen increased spending on public awareness campaigns for getting tested for syphilis. So I'm a little surprised that, I guess, that they're not investing more in purchasing the test. Do you think that they're holding back on funding for the syphilis test? Or just not enough people are coming in to get tested for it?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [12]

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Well, this is -- what's -- and what's transpired has been a surprise because when we were going through the process of trying to get an FDA approval and then a clear waiver, the CDC were full square behind us in terms of supporting us and trying to cajole the FDA into giving us a green light. And as soon as we achieved this, they seemed to lose enthusiasm. And indeed, we're now in a situation where they're conducting trials to try and really satisfy themselves that a syphilis test actually serves a useful purpose as in basically will it -- will public health service syphilis testing actually uncover positives that would otherwise not be uncovered. And we're satisfied they're -- the answer to that question will be a very solid yes, a resounding yes, but they need to be satisfied on that. And they are conducting trials using our product to try and form a view on that. And in the event that the results will be positive in terms of indicating that actually syphilis tests have a very useful purpose, then I think their attitude may change, and it can go from kind of inactivity to positive support. But we have to wait and see if that transpires, but for the moment, they're just inactive and ambivalent.

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Paul Nouri, Noble Equity Funds - Founder, MD, and Portfolio Manager [13]

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Okay. And to what extent did currency movements affect the revenue this quarter over the prior year?

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Kevin Tansley, Trinity Biotech plc - CFO, Secretary and Director [14]

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Very little, to be honest. One good thing that's happened in the last couple quarters is that the headwinds that had been in currency movement has ceased. But this quarter, there was a mixed bag. We had some improvement in relation to the euro, however, that was offset largely by a deterioration in the Brazilian real. So the net impact was a very slight tailwind, which is actually good to see. As I say, we've come from a position of having quite a headwind in the past, and now we're broadly neutral if not slightly favorable.

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Paul Nouri, Noble Equity Funds - Founder, MD, and Portfolio Manager [15]

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Okay. And China continued to be a good market for the Premier instrument in the quarter?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [16]

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Yes, the -- it has been -- yes, it has done reasonably well, but it's not as strong in previous quarters. We've actually increased our price into the Chinese market for our instrument somewhat and that has given rise to slightly lower sales. And it's probably reflected now in -- and that would be one of the contributors towards the better margin that you're seeing this quarter. So basically, we had been putting instruments into the Chinese market below -- slightly below cost. And so we've brought price back up to just above cost. So -- but we have a very strong -- I mean, we have over 300 instruments in the Chinese market. And I think, at this stage, we're beginning to concentrate more on making those instruments -- those existing instruments work better rather than just pushing more and more instruments in at a negative margin.

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Paul Nouri, Noble Equity Funds - Founder, MD, and Portfolio Manager [17]

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Okay. And final question, do you see any value in improving the working capital situation in terms of inventory and accounts receivable? I know you gave a little bit of an explanation as to why accounts receivable went up. Do you think there's any room for improvement there? Or do you think it's just a result of you being in so many different markets?

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Kevin Tansley, Trinity Biotech plc - CFO, Secretary and Director [18]

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The -- in terms of the accounts receivable side, accounts receivable and prepayments, and as it happens, most of the increase happened in the prepayments and that's because of the time of year. A lot of our contracts are annual -- for example, the IT maintenance and insurance, I referenced those 2. So you end up paying for 12 months at the start of the year and you unwind it during the year. And you would've seen the same phenomenon last year; that's why we had a working capital movement which was negative last year as well. We did have a slight drift in terms of debtor days, but not to the extent to which it was a concern. So there is a little bit of scope for improvement there. However, I would say that our debtor collection has been -- historically has been very strong, and therefore there's limited improvement, but obviously working capital is something we do look at strongly. If you look at last 3 quarters of last year, you'd see reasonably favorable movements in that regard, and it was in quarter 1 we saw a negative. So we're seeing the same phenomenon this time around as well.

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Operator [19]

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(Operator Instructions) And our next question comes from William Lapp.

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William Lapp, [20]

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Two questions. How many instruments did you place this quarter?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [21]

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65 Premier instruments.

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William Lapp, [22]

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Okay, and then on the issue of the screening, I thought you were going to have it done before the end of the year. How -- what's your prognosis on this and your forecast of getting it through the World Health Organization. Are you pretty optimistic?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [23]

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Well, I mean, we're -- at the moment, we're conducting independent trials, and we estimate that they'll be finished probably around the end of quarter 3. And at that point in time then, we will submit to the WHO. They will review. They will -- they may or they may not do a factory inspection. I think they probably would do it. So on balance, I think we're talking about December, January, being free to sell.

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William Lapp, [24]

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I mean, is that a big process? I mean, do you appear before the World Health Organization? Or is it just all paper submission, or what do you do from a procedure standpoint to get it approved?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [25]

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I think to understand the WHO approval process, you just -- it will very -- it will be -- mirror very -- be very similar to the FDA process. So you make submission, it take 3 or 4 months typically to review. They can ask questions, and they're more likely than the FDA to actually do a physical inspection. So their -- the process is fairly onerous, frankly and -- but it's equivalent to the FDA.

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William Lapp, [26]

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Okay. And you say you wouldn't be submitting you don't think before the end of the third quarter, right?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [27]

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No. Because, I mean, I think there's a bit to run in our trials. I -- yes, I think, sort of -- I think September is realistic for submission.

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William Lapp, [28]

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Okay, all right. And do you want to say anything more on your buyback program? I mean, you didn't buy many shares this quarter. I'm just wondering what -- one time you were going to be pretty aggressive on it? And at these prices, I'm just wondering what's your thinking is now about repurchasing shares.

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Kevin Tansley, Trinity Biotech plc - CFO, Secretary and Director [29]

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Well, first thing just to say, Bill, most of quarter 1, the vast majority of it, we were actually locked out of the market by virtue of a close period, and we didn't release our results until the second week of March. So that had a major impact in terms of first thing. And in terms -- I just noticed you mentioned there that we are being -- we said we would be aggressive. In fact, we've bought back 2.5 million shares over the last couple of years, in excess of 10% of the company shares. So we have been quite aggressive in that regard. And I think at this particular juncture, that affords us the ability to be more selective in terms of when we want to exactly do our pricing -- our purchasing and obviously we'll be conscious of price in that regard. So the program remains in place, and going forward, we'll make purchases in accordance with how we feel what the prices are.

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William Lapp, [30]

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Okay. Do you have any feeling -- and you don't control the stock market, but what do think the sudden drop in the last like 20 days have been for the stock? I mean, it was up to $6.50, and then it's been gradually going down. And before these earnings released, it hit a low of like $4.48. Do you have any feeling of what's causing this? I mean, I don't know what you could say publicly.

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Kevin Tansley, Trinity Biotech plc - CFO, Secretary and Director [31]

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There's nothing we can say -- to say publicly. There's nothing that we're aware of that is actually causing that decrease. So I'm just -- I presume it is the normal ebb and flow of the markets in terms of supply and demand, whether there is somebody purchasing or buying shares and the interaction between those 2. But there's nothing specific that we are aware of that's driving the share price either up or down.

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Operator [32]

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Our next question comes from Matthew Reiner with Adirondack Funds.

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Matthew Patrick Reiner, Adirondack Research & Management, Inc. - CFO, Principal, CIO, and Co-Portfolio Manager [33]

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My first question is, how many Premier instruments have you placed in total at this point?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [34]

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Over 2000.

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Matthew Patrick Reiner, Adirondack Research & Management, Inc. - CFO, Principal, CIO, and Co-Portfolio Manager [35]

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Over 2000, okay.

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [36]

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Just over, yes. This quarter, we tipped over 2000.

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Matthew Patrick Reiner, Adirondack Research & Management, Inc. - CFO, Principal, CIO, and Co-Portfolio Manager [37]

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Okay, and then if we looked at, I guess, maybe an established instrument -- and I'm not sure how long it takes for -- what's like a typical reagent sales or what kind of volume do you expect to go through that instrument once it's …

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [38]

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We've been around $10,000 a year. And just bear in mind that it would be a combination of instruments that we sell direct in both Brazil and the U.S.A. where we would get a higher price and it would be -- it would represent a combination also then of our instruments in Europe, where we're selling through an intermediary, Menarini, and a combination of our instruments in China where we're again, through individual distributors. So -- but on average, if you take all of our instrument base, it could be averaging about $10,000 per annum of reagent.

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Matthew Patrick Reiner, Adirondack Research & Management, Inc. - CFO, Principal, CIO, and Co-Portfolio Manager [39]

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Of reagent, okay. And then does -- is it fairly quickly that it gets up to that kind of rate? Or does it take a little while to establish once an instrument's placed?

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [40]

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Well, it really depends on the market and the instruments. Where we were taking competitor instruments, for example, it would be right up there immediately. And if you go into a market like China, it'll take a while to develop, in fact, it continues to develop. So the Chinese instruments are running less reagents. They start off quite low -- they probably -- may grow to 10% or 15% annually. Whereas, say, instruments in the U.K. would be super-busy instruments. There's 280 NHS hospitals and so every instrument is probably doing $50,000, $60,000 a year. So it depends on the country is the honest answer there.

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Matthew Patrick Reiner, Adirondack Research & Management, Inc. - CFO, Principal, CIO, and Co-Portfolio Manager [41]

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Okay. And then my last question was just, how much has left in the buyback program that you had announced. Did you give a dollar amount on that at one point?

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Kevin Tansley, Trinity Biotech plc - CFO, Secretary and Director [42]

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We didn't give a dollar amount. What we have is the ability to buyback 25% of our share flows and that would've been in excess of 5 million shares as of the last AGM back in June of last year.

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Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman and CEO [43]

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I think -- we appear to have no more questions at this time, so I think we will close our conference call and thank you very much for your support and interest, and look forward to talking to you next quarter. Good afternoon.

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Operator [44]

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