QuidelOrtho Corp (QDEL) 2005 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Quidel 2005 first 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, May 10, 2005. I would now like to turn the conference over to Ms. Ina McGuinness. Please go ahead, ma'am.

Thank you. This is Ina McGuinness, Lippert/Heilshorn & Associates. Thank you all for participating in today's call. Earlier this afternoon Quidel released financial results for the quarter ended March 31st, 2005. If you have not received this news release or if you'd like to be added to the Company's distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and speak with Cheryl Gerten [ph]. Today's call will begin with prepared remarks by management and then management will take your questions.

Please note 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, May 10th, 2005. 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 Caren Mason, President and Chief Executive Officer of Quidel, and Paul Landers, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Caren. Caren?

Thank you, Ina. And my thanks to everyone joining us to discuss our quarterly results. I am pleased to be speaking with you this afternoon about our strong first quarter operational and sales performance at Quidel.

I'd also like to thank you for your patience as we rescheduled our quarterly conference call from April 27th due to a late-breaking announcement of the settlement with Inverness Medical. We are delighted to have put the IP litigation situation behind us, and are now able to direct our full financial and human resources toward achieving our Company's business objectives.

As outlined in today's news release, the settlement is an all-encompassing global agreement that will allow us to operate in a most effective and efficient manner going forward. The net impact of our litigation settlement on future operations of the Company, when coupled with other developments, will be favorable as the new royalty arrangement will be more than offset by the reduction in legal fees associated with litigation, and royalties we will no longer be paying under two other third-party agreements, and our cash position remains very strong.

This quarter our adjusted net earnings per share, excluding the litigation settlement payment and other specified items, was $0.04 for the quarter, up compared with adjusted net EPS of $0.02 for the first quarter of 2004. For the quarter we achieved a 15% growth in product sales and showed particularly impressive domestic performance, as net U.S. sales increased 45% compared with the first quarter of last year. We posted solid increases in sales across all major product lines domestically. Importantly, U.S. revenues closely tracked product outflow from our distributors, and inventory levels for all of our key products were maintained at appropriate levels.

Looking at U.S. sales for the first quarter on a year-over-year basis, sales of Influenza tests rose 65%, sales of pregnancy tests rose 60%, and sales of Strep A tests rose 39%. Sales of all other rapid immunoassay point-of-care products in aggregate also increased. As anticipated, international revenues declined as we continued to sell through inventory from last flu season and tightened our distribution policy of focus upon higher margin markets, and minimization of parallel marketing, eliminating a number of overseas distributors. International product sales declined 55% from the prior-year quarter.

Based on specific discussions with our distributor partners in Japan, including wholesaler reports, we are now comfortable that inventory of Influenza tests in Japan has been substantially filled through and we expect to continue shipping our new flu A+B test into Japan in the third quarter. Market share for the QuickVue Influenza test rose to 64%, up 14 points over the trailing 12 months. Quidel's incremental sales and share growth year-over-year demonstrates our ability to continue to take share from competition, even as we grow the market.

Quidel's new QuickVue A+B Influenza test launched during the season, represented 18% of the product mix during its introductory season. QuickVue Strep A test grew to 45% market share, up 3 points over the prior trailing 12 month period. Quidel's share in the pregnancy test category remained at a leading 49%, as the second leading competitor dropped 3 share points to 21%.

I'd now like to focus on some new programs and updates. During the first quarter we began redefining our key relationship programs with U.S. distributors to assist in our share growth with end-use customers. These are distributors who represent nearly 75% of our domestic revenues. This effort coincides now with distributors' strong interest in strengthening our business relationships in the aftermath of the litigation settlement. The new programs are being developed to leverage Quidel's leading brand strength and create stronger relations through programs that are mutually beneficial.

Another change within the organization that will contribute to our goal of reducing seasonal reliance on a few key products, is our disease state management strategy. As we focus on reproductive health and infectious disease our longer-term goal is to achieve leadership in diagnostics, and predictive testing, and therapeutic monitoring.

Supporting Quidel's value proposition as a Company that markets the highest quality products in support of better medical outcomes, our Quidel value build or QVB strategy, includes ensuring each of our product portfolios is backed by economic and clinical validation of the high quality results and a significant return on investment that our products afford. QVB involves significant work in understanding the needs of the end-use customer, building products that meet those needs, providing proof studies, both clinical and economic in nature, and leveraging the excellent work of researchers and key opinion leaders who study the Company's QuickVue brand test and technology in order to validate the use of rapid diagnostic testing at the point of care.

The news we announced today in tandem with our financial results certainly supports our effort. Today we announced that Dr. Melinda Nye, a department fellow at the University of Rochester Medical Center, conducted a study in which the QuickVue Influenza A+B test was found to be the most analytically sensitive among four tests examined for their effectiveness in testing the flu. The study was presented this week at the Clinical Virology Symposium, which is being held in Clearwater, Florida.

The research was conducted under controlled laboratory conditions and the results found the QuickVue test to be more sensitive than the other tests 95% of the time. As we prepare for the coming season, in which we will conduct extensive professional and consumer outreach programs and advertising and public relations, it is our belief that such compelling evidence of the QuickVue brand's superiority and other studies like it will further encourage adoption of the QuickVue flu test.

Regarding product development activities, we continue to be encouraged by growth and development in our marker's business, the Specialty Products Group, or as we refer to it, the SPG. Quidel's SPG assay kits continue to be widely used in cutting edge research in the fields of oncology, autoimmune disease, and bone health osteoporosis. In Q1 of this year several publications were released citing these products further reinforcing Quidel as a key contributor to the research environment. Studies and collaborations remain ongoing at the National Institute of Health, University of California and several international sites.

Independent work using Quidel's oncology marker YKL-40 was presented at the American Association for Cancer Research in April of this year, demonstrating its possible prognostic value and glioblastoma multiforme or GBM, a relatively common, but deadly brain cancer. Our work in ovarian cancer and other disease states is on going.

Work also continues with several of Quidel's proprietary bone markers, most notably helical peptide. Ongoing studies with partners in the field are intended to demonstrate the superiority of this marker over existing tests. We hope to present these and other data at several meetings later this year with the goal of further validating to key researchers and clinicians the superior performance of this and other Quidel bone markers.

Having successfully demonstrated that LTF is suited for both hormone and infectious disease testing, our Research and Development Group is now engaged in work aimed at establishing the feasibility of the manufacturing process for these test devices on the LTF format. While exploiting the utility of the technology for immunoassay applications, we continue to work on expanding the menu of tests offered in the rub-and-read configuration on the LTF platform.

Later this year we will introduce our next-generation rub-and-read PH and Amines test to aid in the diagnosis of bacterial vaginitis. The PH and Amines test will be the subject of a poster presentation at the upcoming annual meeting of the American Association of Clinical Chemistry in July.

Recent changes in the litigation environment provides our R&D group an opportunity to critically reassess a variety of candidate technology platforms that it has been actively working on in order to further enhance the performance characteristics of our current products and provide a continuum of rapid tests that will answer the specific needs of a variety of users in point of care testing.

And with that let me turn the call over to Paul for his financial review.

Thank you. We are very pleased with this quarter's financial performance. Working our way through the P&L, first quarter revenues were up 17% to $22.7 million. This increase was supported by domestic product line growth across the board, with our core products of pregnancy, Strep A and Influenza together accounting for $18.0 million or 84% of net product sales. This is up from $14.5 million or 77% of net product sales in the first quarter of 2004.

Comparing the first quarter of 2005 with the first quarter of 2004, gross margin of 61% is up substantially from 52% as the result of higher product sales, favorable product mix and a decrease in royalties associated with the expiration of a patent licensed from a third party.

Operating expenses for the first quarter of 2005, excluding the litigation settlement, were $11.9 million, up from $9.0 million last year's first quarter as a result of a 34% increase in research and development costs associated with work on new technologies and ongoing work on the LTF platform. And a 30% increase in sales and marketing expense, primarily due to increased market research, promotion, public relations and advertising costs for our key products. And a 42% increase in G&A, primarily due to increased legal fees associated with our intellectual property litigation and higher accounting, tax, and other professional fees.

Let me first report on GAAP results. On a Generally Accepted Accounting basis, our net loss for the quarter was $17.9 million, or $0.56 per share as a result of the impact of the litigation settlement payment, and the resulting income tax expense from an increase of a valuation allowance for a portion of our deferred tax assets. This compares with net earnings of $0.3 million or $0.01 per share for the first quarter of 2004. And both periods reflect the reclassification of financial results for our urinalysis and ultrasonometer businesses to account for these businesses as discontinued operations.

And our non-GAAP results, for which we have provided a reconciliation as a table included with today's press release, we reported adjusted net earnings for the first quarter of 2005 of $1.4 million, or $0.04 per share. This compares to adjusted net earnings of $0.8 million, or $0.02 per share for the first quarter of 2004. Among the items in GAAP earnings, but excluded from the adjusted net earnings are, the patent litigation settlement, the income tax impact of the patent litigation settlement, and discontinued operations net of taxes encompassing the urinalysis and ultrasonometer businesses.

I am providing this non-GAAP financial information to you as a supplement to allow you to appreciate the effect of certain nonrecurring items on our adjusted net earnings and adjusted EPS, because we believe it allows for a better comparison of our financial performance from period to period, and to that of our competitors.

Turning to the balance sheet, we made progress in all our key metrics. Accounts receivable days outstanding improved 22% to 47 days from last year's 60 days, and the quality of our accounts receivable, as expressed as a percentage of receivables greater than 60 days, is excellent. Inventory turns as of March 31st, 2005, were five times, or every 73 days, and represented a 52% improvement from last year's first quarter.

Capital expenditures during the first quarter were approximately $300,000. Our cash and cash equivalents as of March 31st, 2005, totaled $43.9 million, up $7.6 million, or 21% from $36.3 million at December 31st, 2004. The $17 million payment in settlement of the patent litigation was paid in the second quarter of 2005.

We think our first quarter performance positively reflects the efforts underway at Quidel on many fronts. We continue to focus on achieving operational efficiencies that will deliver progressively improving balance sheet metrics. With the litigation brought to a close and several programs in place that are designed to eliminate our seasonal reliance on just a few products, as Caren has outlined, our goal of providing a strong, sustainable business model with positive cash flow remains our focus.

Before we open the call to your questions, I'd like to take this opportunity to let investors know that Caren and I will be presenting at the Pacific Growth Equities 2005 Life Science Growth Conference, which will be held June 6th through the 8th in San Francisco. The Quidel presentation will be webcast, and Caren and I look forward to seeing many of you.

Operator, let's begin the Q&As.

[OPERATOR INSTRUCTIONS] Your first question comes from Adam Chazan with Pacific Growth.

Hey, guys. Thanks for taking the call, and congrats again on the numbers. I was hoping you guys could help us get a better handle as to what's going to be going on in the gross margin line. And perhaps you can talk about -- provide more detail as to the play between the new royalty which you're paying, and kind of what you're getting for that 8.5% versus the expiration of the BD license and how that might impact things going forward.

Adam, very sensitive question because, as you know, we don't provide any financial guidance, but the 8.5% royalty will be largely offset as a result of two patents that have expired. One that expired at the end of 2004 and the other expiration has recently occurred. So for the most part, I think there's a neutralization of those two patents that have liquidated to the ongoing royalty obligation under the recent settlement.

Right. So maybe, Caren, two patents expire or two licenses expire for two separate patents and that equated to some percentage, again, the portfolio you're tapping as a result, just to give us a feel for kind of the value that you're getting here.

Yes, I think the value is significant. Between Inverness Medical and Quidel there is a large family of patents and lateral flow technology, now cross-licensing each other. We are in a very strong position together, and we feel that we add very strong position as did Inverness and the net settlement is satisfactory to both sides in terms of valuing of each family and what the derivatives are of that. And then for our side, obviously when we made the decision to go forward and settle, we took a look at what we were paying in royalties, when they were expiring, what the value of our family was with the value of Inverness family was, then puts and takes, and we feel very pleased that we have a positive gross margin result as matter of that fact, especially in light of the fact that the litigation costs diminish and are gone.

That's helpful. I was also hoping you could just kind of give us an update or help us prioritize maybe where the R&D spend might go. I'm sure pre-settlement a lot of the funds were going towards porting assays, and now that you have the opportunity to take a step back, how do you think about R&D going forward in terms of mix of continuing to move assays to the format, the LTF format to kind of boost gross margins versus working on new assays or new assays on a new format?

We've made it a strategic imperative to acquire, develop, and introduce a number of new tests and that when we develop those tests and design those tests that they are designed around the appropriate platform. So we are assessing now, as I said in my prepared remarks, our R&D team is assessing our current portfolio of capabilities, looking at certain partnerships and certain acquisitions of technologies or intellectual property associated with new platforms of opportunity, and we are spending to what we feel is an appropriate level as an innovator, and becoming the absolute leader in rapid diagnostics to the point of care.

So in answer to your question, yes, we are definitely reassessing where we are. We are reallocating those litigation dollars appropriately to R&D and sales and marketing, and we are very aggressively focused on introducing new products, three of which we look to for -- by year end Q1 '05.

Right. I'll get back in the queue. Thanks so much.

Thanks, Adam.

[OPERATOR INSTRUCTIONS] Your next question comes from Michael Moran, private investor.

Thank you. Longtime investor by the way. And I attended the annual meeting just after LTF was acquired, and I remember there was some kind of giddy conversation about how LTF might have applications beyond the healthcare field. I have a two-part question. During the recent LTF validation that was mentioned in the last conference call, was any thought given to application of LTF beyond the healthcare field? And if so, are there currently any discussions underway about licensing LTF for use by other firms or perhaps government agencies or other entities?

We are definitely entertaining requests for the licensing of LTF. I believe that -- though we'd have to double-check, we have the healthcare applications, but I believe that non-healthcare applications remained with the inventor.

Thank you.

You're welcome. Thank you.

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

I'd like to thank everyone for tuning in today. As I noted we are working toward providing a compelling and demonstrable return on investment that will serve to drive Quidel's unique value proposition. We are making good progress in achieving these goals and I look forward to reporting to you on our progress and successes as we push forward on all fronts. Thank you for your time.

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