QuidelOrtho Corp (QDEL) 2004 Q3 法說會逐字稿

Welcome to the Quidel 2004 third-quarter financial results conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded, Wednesday, October 27th, 2004. I would now like to turn the conference over to Ina McGuinness. Please go ahead, ma'am.

Thank you. This call Ina McGuinness with Lippert Heilshorn & Associates. Thank you for participating in today's call. Earlier today, Quidel released financial results for the third quarter and nine months ended September 30th, 2004. If you have not received this news release, or if you would like to be added to the company's distribution list, please call Lippert Heilshorn in Los Angeles at 310-691-7100 and speak with Eleanor Kane (ph).

Today's call will begin with prepared remarks by management, and then we will take your questions. I caution that this call will include forward-looking statements within the meaning of federal securities laws. It is possible that actual results could differ from these stated expectations. For a discussion of risk factors, please review Quidel's annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, as filed with the SEC. This conference call contains time-sensitive information that is accurate only as of the date of the live broadcast October 27th, 2004. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. Today's conference call is hosted by Quidel President and Chief Executive Officer, Caren Mason, and by Senior Vice President and Chief Financial Officer, Paul Landers. I'll now turn the call over to Caren Mason.

Thank you, Ina. And my personal thanks to everyone for joining us this afternoon to discuss the third-quarter financial results and my views of the initial strategies and priorities that will serve to shape our company over the longer term. This is my introduction to most of you, and I am delighted to be speaking with you today. Having spent the last two months talking with our customers and assessing our company, I see significant opportunity to better leverage our assets and our established position of industry leadership in order to deliver sustainable, consistent financial performance.

In terms of structure for today's call, I will provide an overview of market dynamics that affected third-quarter financial results; comment briefly on our patent infringement litigation and on our development work with our LTF (ph) platform; and discuss my early assessment of Quidel and initial plans. Paul will provide details of the quarter's financials. Then I'd like to take some time to talk about the Influenza market and the exciting work we are doing right now to increase awareness of Quidel's QuickVue Influenza test, and how we believe these efforts not only will benefit Quidel this year, but also will help establish the role of our QuickVue Influenza test for years to come.

The third quarter was a period of transition at Quidel with 6% growth in domestic sales and leading marketshares for each of our three core products. However, during the 2004 third quarter we had no Influenza test sales in Japan compared with more than $5 million in sales during the prior year third quarter. With last year's light Influenza season in Japan that began early and ended abruptly, significant quantities of flu product remained heading into the start of 2004/2005 flu season. Since the start of the fourth quarter we have booked orders of flu product for the Japanese market of $6.8 billion, which we expect to ship by year end.

Reflecting the situation in Japan, international sales represented approximately 25% of third-quarter total revenue, down from 50% last year. Domestically Quidel continues to have leading marketshares for our core products. Based on trailing 12-month data for the period ended June 30, 2004, as compiled by Healthcare Products Information Services, or HPIS, each of our three primary product families maintained excellent domestic marketshare as measured in dollars for this period.

Quidel's pregnancy test share was 49%. The QuickVue brand Strep A test maintained its substantial lead with a 43% marketshare, which is more than two times larger than the nearest competitor. And the QuickVue Influenza test continues to command more than half the domestic flu testing market, with 51% marketshare. All of these figures reflect overall marketshare in both the physician office lab, our POL, and acute care segments.

Within the physician office lab segment, the QuickVue Influenza test commanded an 84% share. And with the focus on managing flu this season in our nation's emergency rooms, where use of Rapid Flu test is expected to be high, it's important to mention that in the treatment center category, which includes test usage in the ER, the QuickVue Influenza test holds a 91% marketshare position.

Now let me turn to a status report on our ongoing intellectual property litigation with Inverness Medical. Our policy on litigation communication remains unchanged. We will limit litigation discussion to comments that pertain to factual explanations of the status of legal proceedings, and our comments will be contained in our filings with the Securities and Exchange Commission. By maintaining this policy we can ensure that descriptions in the case are complete, are not taken out of context, and are available to all interested parties at the same time.

The court in the U.S. case is in the process of conducting a claims construction hearing, which is known as a Markman (ph) hearing. The court has as indicated that the hearing will resume early next calendar year. As you may have heard, Inverness Medical announced on October 7th that the court reversed a previous ruling granting Inverness's motion for a preliminary injunction against ACON (ph). In the order, the court determined that ACON had raised a substantial question relating to invalidity of Inverness's patent. At this point it is premature to speculate about how the outcome of the ACON case might impact Quidel's litigation, but we will be watching it closely. We will continue to vigorously defend our intellectual property while confidently continuing to operate our business and build some new opportunities and new markets.

Turning to our development work with our Next Generation Layered Thin Film technology platform, we remain committed to our proprietary patent-protected LTF technology. Our goal remains to further strengthen our position in the professional point-of-care testing segment by delivering a suite of rapid tests on LTF, with the end customer benefits including improved product performance and ease-of-use. We are on plan to complete feasibility on the LTF immunoassay platform by year end.

Before Paul reviews the quarter's financials, I'd like to share with you my initial impressions in my first few months with Quidel. To best understand our company's opportunities and challenges, I've spent the first several weeks meeting with our customers and employees to determine where we have exceptional capability and strong core competencies, as well as required areas for improvement or overhaul. In matching those capabilities with current and expected market requirements, we've begun the process of modeling the business and creating a strategic process that will guide us through operating plan development in the short-term and bigger plays in the years ahead.

Initially my focus is a full assessment of the Company's product portfolio and go-to-market strategy. I am prepared to reallocate investment to those product categories that offer growth opportunities, while divesting product categories that fail to create shareholder value. Near-term, my top priorities are to grow marketshare and increase the sales of our core products families and continue progress on our LTF immunoassay platform.

I have shared with, or am in the process of sharing with, key distributors our initial thoughts about business partnerships. We are currently addressing the critical issues that will move our manufacturer, distributor, traditional selling and buying patterns to the development of definitive agreements which will effectively address our shared business of rapid care testing. We are quantifying the lower risk, higher reward ratios that will be delivered from Quidel through the distributors directly to the end-user and consumer. We will be solidifying our market-leading position with proof of clinical efficacy, proof of economics and productivity, and proof of value build inherent in our QuickVue branded family of product solutions.

As we continue efforts not only to hold our leading marketshare, but to gain in the markets we lead, the potential for growth is substantial. While we are focused on the physician office lab market, we also see opportunities to grow in the acute care market, and we are approaching this segment with an understanding of the economic value build required and the importance of integration with information system requirements.

We view each of our core products as growth brands, and are working on increasing demand for each of them by working directly with luminary physicians in the specialty segments we serve. For the first time in many years we convened key opinion leaders through our advisory board to review and discuss our product line and assist us with positioning the QuickVue brand for future growth. Brand awareness continues to grow as evidence in the continuing and enthusiastic response at our recent professional meetings an exhibits, including the recent American Academy of Pediatrics and the American Academy of Family Physicians conferences.

Operational excellence is definitely a core competency at Quidel. With an ERP system in place and direct communications with EDI data exchange, we are continuing our talks with distribution partners to get them online with our vendor-managed inventory initiative. This initiative was launched last year and has been proven in our initial implementation with one of our largest distributors. We've been successful in reducing what had been 225 days of inventory on hand down to 30 days of inventory today. We believe a strong and definitive partnership with our distributors will assist us in tightening inventory management practices, and also holds potential to help decrease the seasonality of our business.

Extraordinary customer satisfaction is another benchmark of excellence I was pleased to discover. Our most reason customer surveys prove a customer satisfaction rating of at least 98%. This is an excellent datapoint, and one we intend to maintain, if not improve upon. The Quidel reputation of developing and introducing innovative, market-leading, high-quality near-patient rapid testing products will continue as our operational cornerstone for the Company.

Now let me turn the call over to Paul to review the financials in greater detail.

Thank you, Caren. For the third quarter of 2004 total revenues were $14.2 million compared with total revenues of $18.6 million in the third quarter of 2003, down 24%. Net product sales were $13 million compared with $18.3 million last year, down 29%. The net loss for the third quarter of 2004 was $3.6 million, or $0.12 per share, which included $1 million of non-recurring costs. This compares with a net loss of $500,000, or $0.02 per share for the third quarter of 2003, which included a $1.4 million restructuring charge.

Our core products of pregnancy, Strep A, and Influenza together accounted for $8.6 million, or 66% of net product sales. These same products represented $12.9 million, or 71% of net product sales in the comparable quarter of 2003.

Gross margin decreased to 42% of net sales for the third quarter due to lower sales of a higher margin flu and Strep A test and a less favorable product mix. This compares with gross margin of 50% for the same period last year.

Operating expenses for the 2004 third quarter rose to $11.7 million compared with $10.2 million last year, which included a $1.4 million non-recurring restructuring charge. The increase was due to approximately $1.7 million in litigation costs in connection with the Company's patent infringement lawsuit; higher research and development expense, primarily reflecting continuing activities associated with our LTF technology and related projects; and $1 million of non-recurring costs associated with the previously-announced CEO transition. These costs were partially offset by savings attributable to the closure of our sales and support offices in Germany and Italy during 2003.

Our balance sheet continues to be very strong. Cash and cash equivalents at September 30, 2004 totaled $30.2 million, up from $25.6 million at December 31, 2003. Accounts receivable days sales outstanding improved by 25%, to 46 days from last year's 61 days. Inventory turns held steady and were impacted by lower sales volumes during the period. We expect inventory turns to improve in the fourth quarter.

The strength of our balance sheet adds to our confidence that we have the resources to pursue our litigation strategies while also continuing to fund our technology development and marketing programs.

For the first nine months of 2004 Quidel's net loss was $5.6 million, or $0.18 per share, which included $1 million of non-recurring costs and $4.3 million in litigation costs. This compares with net earnings in the prior period of $0.8 million, or $0.03 per share on a diluted basis, which included $2.2 million in restructuring charges.

Continuing with 2004 year-to-date results versus last year's, total revenues were down 22% to $48.2 million. Net product sales were down 24% to $45.9 million. Domestic product sales decreased 3% and represented 71% of net product revenues versus 56% of net product revenues last year. International product sales were down 51% and represented 29% of net product revenues compared with 44% last year. Gross margin was 47% compared with 51%, owing primarily to lower sales volume. Finally, I would like to remind everyone that financial guidance remained suspended for the balance of the year, and we do not expect to provide revised guidance in the near term.

And now, let me turn the call back to Caren to discuss the Influenza market and the developments we are seeing in this important product category. Caren?

Thanks, Paul. I'd like to spend a few minutes reviewing our plans for this year's flu season. Last year flu season we were highly successful at increasing the penetration of our flu test from 13% of physician offices up to 34 % penetration. And this year our stretch goal is to have our product available in 50% of U.S. physician offices. For physicians, we're emphasizing that our reliable test is one of only two rapid flu tests that is clearwaved. And for consumers, our work falls under the tagline, "Request the test, QuickVue for flu."

Turning to our communication strategy, our focus has been on early market awareness through targeted advertising and public relations to healthcare professionals and to the general public. We are focused on getting flu tests into the hands of more physicians. Creating maximum awareness of the consumer benefits of a flu test when symptoms emerge is an additional objective for us this season.

Some of the highlights of this year's program include producing a video news release that has been distributed to 800 TV stations nationwide, resulting in more than 10 million viewer impressions in the first two weeks of its availability, including 8.6 million impressions in the first two days. This compares with 9 million media impressions for last year's entire flu season. In addition, our professional market advertising campaign will make 8.4 million impressions via professional journals.

We also have identified 15 physician spokespersons across the country who will be speaking publicly to raise awareness among consumers about the value of early testing. We have vastly expanded our flu test.com website to provide important information for all constituencies wanting to learn about testing. This site now includes flu prevention and treatment facts, CDC flu activity, and a Find-a-doctor service that locates physicians by ZIP code who are qualified to administer the QuickVue brand flu test. And we've also run a full-page ad in USA Today to inform consumers, as well as healthcare providers, that there is a way to manage the flu using the QuickVue brand Influenza test. Our media campaign will continue through the season in national, regional and local print and broadcast media outlets.

We are achieving these results and implementing our plan with no overall increase in expenditures compared with last year, owing to a very efficient use of funds. We are optimistic about the potential of our comprehensive campaign to drive usage of our QuickVue Influenza test this season, and we are encouraged by the early success of our efforts. We currently have product on the shelf consistent with forecast for an increase in demand versus last year. Also, we are able to ramp up production quite rapidly should the demand for flu tests warrant such an increase. So we are comfortable we can support all customer demand.

Our new QuickVue Influenza A+B test, a product that differentiates A and B strains, is in its first year of introduction and already accounts for more than 44% of orders in-house. This is the product that most likely will be the test adopted by the acute care lab market.

And with that overview, Paul and I will be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS). Adam Chazan, Pacific Growth Equities.

I was hoping I could ask you a couple of questions. Maybe we can talk a little bit about Japan first. Can you help us understand -- the channel is now completely flushed, and you've got about 6.8 million in revenues booked. What are we looking at in terms of the mix, the new flu test versus the old flu test. What was the kind of prior thoughts on the channel? And then, while we are on the topic of stuff getting pushed around, where do we stand in terms of filling the Fisher (ph) order that was delayed last quarter?

Let me try to handle those number of questions, Adam. As you may recall from past discussions with the investment community, there was a delay in the shipment of our Influenza A+B test in Japan. That delay being driven by the weak flu season earlier in the year. As a result of that, and all that we saw happening in the fourth quarter of '03, we ended up with a significant quantity of our old flu A/B in the entire Japanese distribution channel. I think that the evidence of the orders being booked now is indicative of the fact that we see that the channel has returned to more normal patterns. And depending upon the timing and severity of the disease incidence of flu in Japan, we'll determine ultimately what will happen during the fourth quarter and future quarters. So we can't predict, nor would we, what would happen. But we certainly moderated the inventor issue.

And Fisher?

Fisher's expected audit did not materialize as we had planned. We're certainly disappointed in that outcome. But as Caren alluded to, our goal is to continue to extend our leadership in the Influenza tensing during the upcoming season, and we believe we are on target with all those goals and plans.

Let's shift gears a little. Just quickly, refresh our memory as to the price differential between the old flu test and the new test?

The old, which is referred to as the flu A/B test, retailed at slightly under $10, $9.95, in the U.S. And the new flu A+B will retail at $13.50.

So of the orders in hand, that's 44% right now?

It's probably closer to $14.00, Adam.

And can you talk a little bit -- a lot has changed since the close of this quarter. What is the tone of the conversations after the news of Chiron's vaccine debacle with your distributors, with your customers? Can you help us get a feel for what the feeling really is out there in terms of the anticipation of the coming flu season? Is it hysteria? Where are we in terms of reality?

Adam, we have had a number of conversations with customers, with end-users obviously, the recent HIDA meeting, the Healthcare Industry Distributors Association meeting, we had lengthy discussions with all the distributors regarding what the impact would be of the vaccine shortage. What we are promoting, and we feel responsibility as brand leader to do, is to get the message out that what we don't want is an overreaction of anti-viral prescription as a result, meaning it's prophylactics kind of interim treatment without testing first. And this is a year where there could be the possibility that high-risk individuals who had not had the opportunity to be vaccinated will be more nervous about their condition. And as such, with the onset of anything related to flu-like symptoms, will be trying to determine whether or not they've got something to worry about.

So that physicians we've been speaking to and the distributors who are gearing up to prepare to meet the physicians' concern believe that, for example, in emergency rooms, in acute care environments, we'll be looking to try to triage patients immediately so that we can use the rapid flu test to isolate those patience who may be caring the virus, and then to be sure that they would be able, within the first 48 hours, to receive treatment.

So there's a lot of dialog; there are discussions at the CDC; there are discussions with customers and physicians in several societies, occupational health organizations, and large-group purchasing organizations regarding how to prepare and be ready for what could be a new wave in the standard of care for flu management, including testing. Because as you are probably aware, the converted marketplace is still in the 30% range. So there's a lot of opportunity going forward in the physicians' office. And then there's an even greater opportunity in the acute care side for rapid care flu testing.

That is helpful. One last question on litigation. With the next court date pushed into January, any thoughts on legal expenses in the quarter? Can we expect you guys to currently understand old projections of legal expenditures?

Based on the delay that we have seen in the Markman hearing, Adam, I think that's a reasonable conclusion, that we would not be spending at the rate of previously-anticipated, around $8 million annually. So, it will be below that.

Great. That's helpful. I'll get back in the queue.

And Adam, if I could just make one clarification to a comment on the pricing of the A+B, I just looked at data in front of me, and its around $12. So I stand corrected from my earlier $13.50.

Phillip Grenneman (ph) with Cadence Investment Partners.

Couple of questions here. First of all, can you explain, I suppose in addition to the previous payment to your CEO -- can you explain the G&A increase as a percent of revenue?

Let me try to provide a little bit of the key drivers or components to that spending. As I said in my prepared remarks, $1.7 million of the increase is attributable to the litigation cost. We did also incur $1 million of non-recurring costs associated with the CEO transition. A sizable portion of that related to contractual obligations to our former CEO. And additionally, as most public companies are well aware, we are in the midst of conformance to the Sarbanes-Oxley requirement Section 404, and we did incur professional fees related to that compliance. Those are the three primary drivers to the G&A question.

Do you anticipate that the Sarbanes-Oxley expenses will be of a limited or non-recurring nature?

The section 404, we will be in full compliance with it the end of this year. So those costs in a model going forward will not be around in 2005.

And the extent of those costs are?

The extent of those costs for Sarbanes-Oxley compliance would be approximately $300,000.

For the quarter?

No, for the third and fourth quarter.

Okay, together. You did mention that the anticipated Fisher order did fall through. Can you explain the reason for that?

Yes. The Company, Fisher, has required a product that is a competitor to our flu test. And they have decided to private-label that product as their focus product for the acute care market. They will continue to purchase from us all categories of testing, rapid care testing, and they do have customers in the acute care market that will continue to, I'm sure, demand. And we will supply for Fisher our flu care testing going forward.

I have two more questions. The second to last is, as mentioned, I guess previously by Adam, the Chiron news, I think pretty much, and certainly is reflected in the price of your stock, just seems to be a windfall -- could potentially be a windfall for the organization. And yet you seem to very much temper your commentary beyond even what one would consider as a normal conservative nature. Is there a reason for that?

I think the reason for it is that we cannot -- we don't have a predictive value on the flu season. And we even cannot appropriately apply a predictive value on behavior of people who, knowing of a test, would automatically demand the test. This is the year of transition for us, we believe, in terms of promoting the test and seeing that the efficacy of the test and the application of the test, especially in the intensive care ER situations, acute care environments, could be substantial. And we also believe that we've only been around for a few years in terms of drying the consumer into requesting the test, which is why we developed those tagline "Requests the test, QuickVue for flu." And on our website, flutest.com, we encourage consumers to request from physicians who have clearwaved offices to ask for the flu test.

So we believe there will be some opportunity there, obviously, for increased usage, but the test itself, as part of the standard of care, is continuing to gain traction. We believe this year will be the year where we will see, in this vaccine shortage, the adaptation of it more than before. But we have to temper that with an inability to give you a predictive value on what they could mean.

That pretty much answers my last question then, which was why suspend forecast. Thank you very much.

Al Kildani, SS Capital.

I realize it's a difficult time for the Company to be able to provide projections. Can we at least have some confidence that in Q3 we saw the low watermark?

Well what I would offer is if you look on a historical basis, Q3 has always been the most seasonal softness of all fiscal quarters. We are not at all through, but I would certainly hope that 2004 resembles historical patterns.

Caren, you talked about taking a close look at the various products and perhaps divesting of some areas, some product. I wonder what timeframe do you expect some of those activities could take place?

Well, at this point we're in the process of doing our strategic modeling and really taking a look at all aspects of the business. As you can imagine, we have been delighted with what we think is some untapped potential. And we have been doing assessments and evaluations of certain areas of the business where we think it may make sense for us to exit. I would expect that the initial phase of this strategic modeling will be done in early 2005, but it will be an ongoing process. So I can't say there will be an end. The reason we call it strategic modeling is, my experience, especially in my work with General Electric, is that the planning is on a daily basis, and that we keep our eye not only on the operating plan numbers, but on opportunities for big plays and to the opportunistic. So I guess the answer to your question is, everything is immediate, as you can well imagine. And we are working as quickly and swiftly as we can to make appropriate decisions.

The flu test that will be shipped into the Japanese market, is that -- will that cover their demand for the entire flu season, presumably, by the end of the year, that 6.8 million?

That is their current ordering. We do not have visibility on their flu season; we don't know. Again, we don't have a predictive value on the severity of their flu season going forward. As you know, flu season traditionally really impacts our Q4, Q1. So the best I can tell you is that the visibility we have is on the current bookings.

Can you remind us who manufactures the other clearwaved flu test?

Finax (ph).

And lastly, Caren, I guess I'd be very curious to get your perspective on the LTF development program for long-time observers of the Company. It's sort of one of those things that's always been on the calm and has taken, I think most people would say, longer than expected to generate or to manifest itself in new product. I wonder if you might have a perspective on why that is and how quickly we might be able to begin to see some of those products that we've been waiting on for some time.

Well, I can tell you that we are all over it. We've hired a project manager with an extraordinary background. He's the Director of Chemistry for us; he comes out of Abbott. He's very strong, and he's amassed a project team that is putting all of our capabilities and competencies to work in full force. We've had some outside-in look in terms of some extraordinary support from people that are very versed in the potential for this type of immunoassay design. And so I think -- bottom line is I believe that the design feasibility will be completed this year, as previously stated. And I can tell you that we are moving ahead with multiple patent applications for that LTF immunoassay platform. That we will file upon completion, and some of those are imminent. And they apply to flu, pregnancy, and Strep.

(OPERATOR INSTRUCTIONS). Ross DeMont with Midwood Capital.

Just a couple of quick questions. Who is the competitor who won the Fisher business?

They bought a company by the name of Remel.

So they actually took the company in-house.

Yes they did.

I guess you can't speak to their strategy, but are you concerned that they'll lose more business there as they do more stuff in-house?

You now, the private label opportunity for distribution has been there since I started with American Hospital Supply -- I hesitate to say -- in 1979. So there's always been a three-pronged branding approach. And we'll continue, but we are doing our level best to redefine the distributor partnerships to share business platforms. That would be a dis-incentive for them to compete in a branded environment.

And then finally, if you're ultimately, sometime early in '05, to lose this court battle against Inverness, is LTF the technology that you'll be leaning on if the technologies in question are no longer available to you? Sort of the typical lateral flow of (indiscernible) technologies aren't there for you anymore?

I can't answer that question specifically, as you would well imagine. I can just tell you that any organization would rely on multiple platforms of potential to create a workaround if that were a requirement.

Maybe if I could be more general, then, because I'm not trying to get you to reveal any specific corporate strategy, but would it be fair to say that you have workarounds in the works such that if what is in question -- the first set of Markman hearings didn't go particularly well for you. Nothing much happened in the second set, and we're kind of going into the third set. I'm assuming you've got contingency plans, assuming that that stuff doesn't go well again.

We find some difficulty with your commentary regarding your assessment of how things have gone, but we won't comment on it specifically. What I will say, yes, we do have workarounds other than LTF in progress.

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

I trust that through today's conference call I have provided you with an overview of how is the new CEO of Quidel. I'm assessing our business and our assets and am putting in place the plan to deliver the kind of financial performance our shareholders rightly expect of Quidel. Thank you very much for joining us, and I look forward to speaking with you next quarter.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.