QuidelOrtho Corp (QDEL) 2005 Q2 法說會逐字稿

Welcome to the Quidel 2005 second 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 July 27, 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 with Lippert Heilshorn and Associates. Thank you for participating in today's call. Earlier this afternoon, Quidel released financial results for its second quarter and six months ended June 30, 2005. 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 Cheryl Guertin.

Today we will begin with prepared remarks by management and then the call will be opened up to questions. Please note that this conference 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 10K and subsequent quarterly reports on Form 10Q as filed with the SEC.

Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, July 27, 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; and Paul Landers, Senior Vice President and Chief Financial Officer. I will now turn you call over to Caren. Caren?

Thank you, Ina, and my thanks to everyone joining us to discuss our quarterly financial and operational results.

Let me highlight the positive trends reflected in this quarter's financial performance, which I think will give you a very good sense of the progress we've made and the groundwork in place to support our performance in the second half of the year and beyond.

For the quarter we reported total revenues up 7% to 14.8 million with domestic net sales up 18% compared with the second quarter of last year. This domestic sales growth reflects solid increases across most all of our product lines.

Some of the highlights include pregnancy test sales, up 25%; Strep A test sales, up 45%; influenza test sales, up sharply over virtually no sales in last year's second quarter; and sales of our biochemical markers through our specialty products group, up by 23%. Importantly, U.S. revenues continued to track product outflow from our distributors and we believe inventories remain at appropriate levels.

As anticipated, international revenues declined as we terminated unprofitable distributor relationships in the smaller geographies and negotiated preferred partnerships in other key markets. We now are focused on Japan, Germany, and Italy, where the rationale for selling quality and evidence-based medicine already is understood and appreciated.

During this process we finalized the details of a preferred distribution partnership agreement with our Japanese distributor for our Influenza, Strep A, and specialty product group product lines. In addition, I am pleased to report that our product inventories in Japan are currently low and we have received a commitment from our Japanese distribution partner that it intends to purchase $13.1 million worth of our Influenza product during the upcoming flu season. We have received initial purchase orders for this product that we anticipate shipping during the second half of 2005.

We made considerable progress during Q2 as well in the building of and redefining of relationships with key distributors around preferred partnership agreements in the United States. We continue to benefit in our discussions with these partners from the proof we are able to provide through clinical studies as well as brand surveys that point to Quidel's QuickVue as the leading brand in our primary rapid test categories. We are finalizing this process in Q3 as we enter into preferred partnership agreements with committed volumes, targeted co-marketing by segment, new product introduction, collaboration, and strategic alignment and measurement. We have additionally moved to a single-tier pricing structure for all distributors and announced a price increase, effective October 1, 2005.

Paul will be discussing our quarter and year-to-date financials in detail, so let me now turn to a brief discussion on clinical validation and product development updates.

An independent study conducted during the last flu season in Japan using nasal aspirate samples from 278 patients presenting with flu-like illness showed superior performance of the QuickVue Influenza A+B test, giving sensitivity and specificity of 97.5% and 96.2%, respectively, for influenza A and 87.7% and 97.4%, respectively, for influenza when compared to culture. It is our understanding that this study will be the subject of a forthcoming publication in a peer-reviewed scientific journal. These results are consistent with the reports at the 21st clinical virology symposium, where a study by Dr. Melinda Nye and her team at the University of Rochester Medical Center show the QuickVue Influenza A+B test was analytically more sensitive than the competitor's 95% of the time.

In addition, the ability of the QuickVue Influenza A+B test to detect H5N1, a potentially serious form of avian flu, was reported in two separate studies. Dr. Malik Peiris, professor of microbiology at the University of Hong Kong, reported that the QuickVue test detected H5N1 with a sensitivity similar to that observed for other human Influenza A viruses. In another study, Professor Hiroshi Kida, at the school of veterinary medicine at the University of Hokkaido in Japan reported that the QuickVue A+B kit detects not only H5N1 isolated from humans and chickens, but also a comprehensive list of bird Influenza A's, spanning all the known hemoglutinan subtypes, from H1 through H15, including isolates taken as far back as 1949 from an assortment of bird species, including duck, turkey, chicken and gull.

And finally, it has come to our attention that the QuickVue A+B influenza kit is being used for surveillance studies by public health officials in the United States, by various government agencies in Southeast Asia, including Thailand and Indonesia, and by clinical researchers in Australia and elsewhere around the world.

Under product development, I would like to focus on bone health, osteoporosis, oncology, and autoimmune testing markets, in that our Specialty Products Group or SPG is charged with developing promising markers and tests as well as promoting the use of existing markers among research organizations worldwide. Sales of these products exceeded our quarterly plan across the board as interest remained strong for Quidel's line of research products.

Research with our proprietary assay, Metra YKL-40 continues at several sites including the NIH and Memorial Sloan Kettering Cancer Center. By reorganizing existing assets and personnel, we have expanded our cell culture and protein chemistry capabilities to support further research on this marker. Clinical data collected by researchers and independent studies and presented at the American Association for Cancer Research and the American Society of Clinical Oncology conferences this year supports future clinical applications of this marker in oncology as an indicator of prognosis or therapeutic efficacy. Further studies are ongoing and significant collaborations are under consideration.

Quidel also participated in the European Calcified Tissue Society meeting in June, where our products were well received. There was widespread interest in our markers, including the Metra VAP, DPD, and helical peptide assays and support for our clinical focus from both European and U.S. clinicians, with [inaudible] Biomedical continuing to be an excellent partner for us in Japan and Asia.

Finally, we have made significant progress with our LTFI platform, a technology that combines the ease of a one-step assay format with the advantages of an enzyme-linked amino assay. We have held voice to the customer focus group sessions in Irvine, Dallas, Chicago, and Atlanta and have incorporated customer input into a new design and are very pleased with the most recent positive impressions in test data. We are collaborating with major equipment manufacturers and new material suppliers to incorporate the design, presentation, and packaging changes into the pilot manufacturing equipment.

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

Thanks, Caren.

Working our way down the P&L statement, second quarter total revenues were up 7% to $14.8 million from $13.8 million in the second quarter of 2004. This increase was supported by an overall 18% domestic sales growth.

U.S. sales of our core products of Pregnancy, Strep A, and Influenza totaled $8.5 million, up 38% from last year's second quarter.

International product sales declined 41% compared with the second quarter of 2004 as a result of our planned realignment of our global distribution network.

On a worldwide basis, sales of our core products of Pregnancy, Strep A, and Influenza were $9.4 million, representing 70% of net product sales.

As Caren mentioned our gross margin improved 51% from 50% last year. Operating expenses for the second quarter of 2005 were down slightly to $9.9 million from $10 million last year. This reflects a decline in legal fees due to our previously disclosed litigation settlement which was largely offset by a 21% increase in sales and marketing expense in support of our focus on competency and proof under the Quidel value build program.

The net loss for the quarter narrowed to $1.7 million or $0.05 per share. This compares with a net loss of $2.3 million or $0.07 per share for the second quarter of 2004. Results for both periods reflect the reclassification of our urinalysis and ultrasonometer businesses as discontinued operations.

Turning to the year-to-date financials, for the first half of 2005 total revenues rose 13% to $37.5 million from $33.2 million in the first half of 2004. Domestic product sales increased 33% with strong contribution from all core product lines. U.S., pregnancy tests rose 36%. Strep test A rose 40%, and U.S. sales of Influenza tests rose 74%.

International product sales declined 48% due to the planned realignment of our global distribution network and prior inventory levels.

Gross margin for the first six months of 2005 was 57% compared with 51% for the first six months of 2004, primarily as a result of higher product sales and a favorable product and geographic mix.

Excluding the one-time $17 million expense paid under the terms of the patent litigation settlement in the first quarter of 2005, operating expenses for the first six months of 2005 were $21.5 million versus $18.6 million for the comparable period last year. The increase in operating expenses primarily is the result of higher research and development costs associated with work on new technologies and increased market research, promotion, and advertising for key products as we build value for our brand.

The 2005 year-to-date net loss was $19.6 million or $0.61 per share compared with a net loss of $2 million or $0.06 per share for the same prior--year period.

Looking at our year-to-date financial performance on a non-GAAP basis, adjusted net earnings for the first half of 2005 were $175,000 or $0.01 per share on a fully diluted basis. This compares with an adjusted net loss of $922,000, up $0.03 per share for the first half of 2005. Included in the items in GAAP net loss but excluded from the adjusted net earnings or loss are the $17 million payment made as part of the patent litigation settlement, a resulting increase in our tax provision due to the impact of the settlement on our assessment of deferred tax assets, and discontinued applications encompassing our urinalysis and ultrasonometer businesses. A reconciliation of these items is provided in today's press release as part of the attached financial tables.

As a final topic before we take your questions, let me provide some balance sheet highlights. Accounts receivable days outstanding improved 23% to 46 days from last year's 60 days. The quality of our accounts receivable as expressed as a percentage of receivables greater than 60 days out remain excellent.

Inventory turns as of June 2005 improved 46% from last year's second quarter. Capital expenditures during the second quarter were approximately 500,000 dollars. Our cash and cash equivalents as of June 2005 totaled $27.1 million, down from $36.3 million as of December 31, 2004, and reflective of the impact of our $17 million litigation settlement payment in the first quarter of 2005.

In summary, I am pleased to report that our focus on achieving operational efficiencies that deliver progressive improvement in balance sheet metrics continues with meaningful results. We remain confident in our plan and our commitment to deliver a strong, sustainable business model with positive cash flow.

Operator, let's begin the Q and A ^

[OPERATOR INSTRUCTIONS] One moment for the first question. Your first question is from Adam Chazan of Pacific Growth.

Hey, guys. Thanks for taking my questions. Looks like a very solid quarter. I was hoping you could discuss a little bit the gross margin line post the settlement with Inverness, and can you just walk us through what the gross margins currently reflect in terms of the current royalty structure? Maybe help us understand whether or not the current level of gross margins is now perhaps the new floor going forward?

First and foremost, we have the entire period reflective of the litigation settlement included in the gross margin. It does absorb the 8.5% royalty obligation under the terms of the settlement. But I think as we've talked and described in the past, that we had the offsetting cancelation of two previously liquidated royalty obligations that also were absorbed in the period, intended to neutralize, for the most part, one with the other.

Going forward, Adam, I think that given our cost structure of fixed and variable and things like that, I would just like to say that you should be able to interpret what I've said going forward.

Okay. Thanks. Then in terms of the other expense line, G&A, any other legal expenses associated with the litigation in the G&A line? And are there opportunities to also drive that down as well?

There were -- incurred over $600,000 of litigation expense in the quarter. There is continued litigation support ongoing, but there's certainly future benefit to be derived from some of our focus on spending going forward.

Okay. And then one last question, Paul, and I will get back in the queue. Perhaps this for Caren. As you have described the preferred arrangement in Japan, how might we think about those types of preferred arrangements in other regions, domestic, and perhaps other, rest of world?

They are in process. We are really pleased at the reception that we are receiving in elevating the partnerships with our distributors around the quality of Quidel through the Quidel value build proof, both of clinical and economic efficacy.

What we are seeing is there is tremendous trend -- I guess you would say agreement, both in the United States as well as with the partners that we are in discussion with in Europe and Asia, around the fact that evidence-based medicine is absolutely essential for reimbursement levels to be appropriately allotted as well as the fact that the high-end quality companies like Quidel want to make sure that their partners are selling the high-end quality capabilities of Quidel appropriately, pricing appropriately, and as you may have seen, as a result of all of this analysis and all of this investment, we also have announced a price increase.

So we are on all cylinders, working aggressively with our partners and all distributors to make sure the Quidel value brand receives its appropriate price and market share placement, not only in the United States but you'll see an uptick globally as well.

Okay. And again, the price increase takes place on October 1?

That's correct.

Great. I will get back in the queue.

Next question is from Eliad Hafsoleen [ph] with Axio Capital.

Hi, guys, congratulations on this quarter.

Thank you.

I guess on the same topic of domestic opportunities in terms of partnerships, what do those types of partnerships usually look like in terms of visibility in the business going forward and ability to maybe tie up longer type relationships? Is that a realistic goal?

Yes, if we enter into material agreements of course we must publish those agreements. It's by requirement. And what -- when we are talking about being able to characterize the agreements, I tried to, in my prepared remarks, address that. We are, for the kind of co-marketing we want do, the type of specific market segment strategy that we want to go after, the certain markets, whether they be acute care or the physician's office, where we see strength of a distributor we want to work aggressively with this distributor on new product introduction, we want to work with them on, in some cases, exclusivity, if it merits in a particular product and a particular segment.

They are also very helpful with us in working with some of their biggest customers or biggest group purchasing organizations or integrated delivery networks to set up beta testing of a number of the new products we're working on. So it becomes no longer the arm's length distribution process. It becomes part of a co-strategy where we are strategically aligned as well as measurement aligned for both companies over a two to five-year period.

That's terrific. Just in terms of the interplay between vaccines and the point-of-care tests, can you just sort of discuss certainly some of the issues that in the past and they're continuing with some of the vaccine manufacturers, how is the flu product in particular positioned in the market, vis-a-vis the vaccines?

Well, what we found last season is that if the vaccine production is in any way impeded, preseason, and there is concern that those very -- those patient populations that are most, I guess you would say, part of what could be a lessened immune system or people who are prone to having pneumonia and potentially mortality, we have found that as a result, flu testing can help in the preparedness in that the ability to, for example, in emergency rooms to isolate and triage patients who are presenting with symptoms and then who receive a positive test. And this is so that those individuals who do present with symptoms can get diagnosed very quickly within the first 48 hours so they can have an aggressive course of temaflu [ph] type antiviral products.

So, the linkage with the vaccine situation for us in flu testing is really dependent upon how in the standard of care in an institution or in a physician's office there is a use of flu test more for the prescription of anti-virals than to have a connection with vaccine other than whether there is shortage or enough supply.

Great. Thank you.

[OPERATOR INSTRUCTIONS] Next question is from Herbert Roth, private investor.

Yes, this is Dr. Roth. I am a pediatrician in the Detroit area. This is in regarding the Influenza test. It is a big problem that we incur. Number one is many of the insurance companies do not cover it in the physician's office as of last year and I think if Quidel should make a concerted effort to point out to the insurance company the cost effectiveness and the treatment effectiveness if the physician can do the test rather than sending them to the lab and two days later you got the result at which time everything is too late.

The second problem is I would say at least 50% of physicians do not know that they can do the test in the office. And I think that's the main thing. First I think Quidel should make a concerted effort to get the insurance companies to cover it and the second thing is to get the physicians awareness that these tests can be performed in the office.

Thank you very much, Dr. Roth. We are underway with what we refer to as Quidel Value Build, and the sales and marketing increases this year in preparation for the flu season has a lot to do with outreach to insurance companies. It also has a lot to do with outreach with regard to getting the word out to physicians.

We do after flu season research and what we found is that approximately 52% of physicians today are using a rapid flu test and 90% of those who use the rapid flu test are using Quidel. What we want to do is of course is now capture the other 48% and we also want to work aggressively so that insurance companies understand the value equation.

The way we're working on that is by undertaking economic studies that will support what happens in terms of a quicker access to the antiviral and then less potential hospitalization as well as the fact that for presenting in the emergency room, the number of tests that are normally ordered if a flu test is not immediate, appears to be in our early assessment, which we will validate, more tests, more costly, and in some cases hospitalizations that might otherwise have been avoided.

Thank you very much. That's exactly what I wanted to hear.

Thank you.

Next question is from Matt Aaron with Cox [ph]Investment Advisors.

I apologize if you already addressed this. Did you mention, on the Japanese distributor order, given the shelf life and given the fact that the cupboard seems pretty bare in Japan, are we likely to see significant shipments in the third quarter?

Well, I can't give forward-looking information but I can tell you that the shipping schedule that we currently have in our possession calls for shipment's in the third quarter and beyond.

Okay. And just as a reminder, there is -- is it a two-year shelf life on the flu product?

Yes.

Okay. Thank you very much.

Thanks, Matt.

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

Thank you. We continue to provide proof that our clinical and sales and marketing strategy for building mind share and market share is working. As we enter our seasonally stronger half of the year we look forward to benefiting from our ever-expanding effort as well as the ongoing shift in the healthcare industry toward point-of-care tests that positively affect patient health outcomes. We are making good progress in achieving these goals and I look forward to reporting to you on our progress and success as we push forward on all fronts.

Thank you very much for your time and good day.

Ms. Mason?

Yes?

We do have one question from Adam Chazan with Pacific Growth.

Okay, Adam.

I'm sorry, his line has disconnected.

He must have thought we were finished. Thank you.

Thanks everyone.

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