QuidelOrtho Corp (QDEL) 2006 Q3 法說會逐字稿

Welcome to the Quidel Third Quarter Conference Call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded, November 1, 2006.

I would now like to turn the conference over to Mr. Don Markley. Please go ahead, sir.

Thank you. This is Don Markley with Lippert/Heilshorn & Associates. Thank you for participating in today's call. Joining me from Quidel are Caren Mason, President and Chief Executive Officer and Paul Landers, Senior Vice President and Chief Financial Officer.

Earlier this afternoon, Quidel released financial results for its third quarter and 9 months ended September 30th, 2006. 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 Park.

Please note that this conference call will include forward-looking statements within the meaning of Federal Securities laws. It is possible that actual results and performance could differ materially 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.

Furthermore, this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, November 1, 2006. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. I will now turn the call over to Paul Landers. Paul?

Thanks, Don. I am very pleased to report our financial results for the third quarter of 2006, which includes significant improvement in several key performance metrics.

Starting with the top line, total revenues for the third quarter increased 18% to $23.7 million from $20 million in the third quarter of 2005. Worldwide product sales were up 19% largely driven by an increase in sales of our influenza products of $3.9 million. On a worldwide basis, sales of our core products of pregnancy, Strep A, and influenza tests were $18.7 million, representing 80% of net product sales.

More specifically comparing Q3 '06 with Q3 '05, sales of Strep A, pregnancy and flu tests were up 22% in the aggregate. Our gross margin in the 2006 third quarter was 56%, up from 53% in last year's third quarter. The improvement was primarily due to increased volume, a more favorable product mix, and an increase in average selling prices, partially offset by our planned strategic investments.

Operating expenses for the third quarter of 2006 were $11.4 million, including approximately $900,000 in stock-based compensation expense. This compares with operating expenses of $9.4 million for the third quarter of 2005.

The increase in operating expenses primarily relates to the non-cash stock compensation expense, an amortization of acquired intangible assets as well as planned R&D activities, clinical trials associated with QVB programs and marketing programs in support of new product introductions.

Net earnings for the quarter were $2.1 million or $0.06 per share on a fully diluted basis. This compares with net earnings of $700,000 or $0.02 per share fully diluted for the third quarter of 2005.

Adjusted net earnings for the quarter were $3.1 million or $0.09 per share fully diluted. This compares with adjusted net earnings in the third quarter of 2005 of $1 million, or $0.03 per share fully diluted. Adjusted net earnings reflect certain non-recurring and non-cash items including stock-comp expense and discontinued operations encompassing the company's urinalysis and ultrasonometer businesses.

Our reconciliation of GAAP and non-GAAP net earnings is provided in today's press release.

Turning to the balance sheet, I believe the Company continues to have a very solid financial foundation. Days sales outstanding for the third quarter were 45 days. As important as the DSO metric, the quality of our accounts receivable as expressed as a percentage of receivables greater than 60 days out is excellent.

Inventory turns for the 2006 third quarter were 4.7 times or approximately every 78 days.

Capital expenditures during the quarter were approximately $700,000.

Our cash and cash-equivalence as of September 30, 2006 totaled $30.6 million compared with $34.9 million as of December 31, 2005. We continue to repurchase our common stock during the third quarter under our $25 million buy-back program announced back in June 2005.

During the third quarter, we repurchased 896,502 shares at an average price of $9.35 per share. As of September 30, 2006 we had bought back approximately $11.6 million of our shares under the repurchase program.

And now I will turn the call over to Caren for a review of the key strategic accomplishments and developments in the quarter. Caren?

Thank you, Paul. As our results indicate it was a very successful quarter on a number of fronts. With overall product revenue up 19% and core product revenue up 22%, we are clearly maintaining or extending our leadership position for our core rapid diagnostic products.

In reviewing the third quarter I was especially pleased with our ability to improve operating margins while continuing to invest in the development and marketing of new products. What we are seeing is evidence of the focus we have achieved through our QVB strategy. In other words, our R&D and marketing programs are very concentrated on the areas and activities with the highest current and/or potential return. Our early success under this program is beginning to be reflected and leveraged to our P&L.

Another key accomplishment during the third quarter was the expansion of our product offerings with the introduction of the QuickVue RSV test, illustrating our commitment to expand our foundation for further growth. The roll-out of our QuickVue test for RSV following FDA clearance in September is now in full swing. RSV is not an ailment you may have heard a lot about but it is the leading cause of bronchitis and pneumonia in children under 1 year of age. And RSV infection results in more than 120,000 hospitalizations each year.

We are optimistic that this test will be an important product for Quidel, in part because we can build upon our leadership in diagnosing other upper respiratory infections including Influenza and Strep A. And it is an excellent companion product to our flu test.

From a competitive standpoint our RSV test is well-positioned. It is very easy and quick to perform, results are obtained in 15 minutes or less, and it has demonstrated 99% sensitivity with the Nasopharyngeal aspirate.

In addition we have applied for CLIA waiver for this test, and we anticipate that the test will receive CLIA status later in this cold and flu season. In the meantime we are focusing our efforts on acute care facilities and hospitals.

I'm also pleased with the progress we made in the quarter building awareness for our immunochemical fecal occult blood test for the early detection of colon cancer. We are in the early stages of converting the market from the traditional guaiac test to a superior immunochemical test. And this requires a significant investment in clinical research and marketing not only to raise awareness of the benefits of the immunochemical test but also to provide convincing evidence of the need to switch.

For the remainder of 2006 and in looking forward to 2007 we anticipate continued year-over-year revenue growth through our focused efforts on QVB including revenue from new product launches. We believe gross margins will continue to be positively effected by increased sales volumes and a more favorable product and geographical mix as well as increased average selling prices.

We expect continuing market conversion of the fecal occult blood test market from the current guaiac based test to an immunochemical based test. Successful conversion of this market, however, requires changing physician behavior through education focused on clinical and economic validation.

Additionally we expect our recently launched RSV product to be a well received companion test to our QuickVue Influenza A+B test so that physicians are well prepared to diagnose and appropriately manage patients with influenza and/or RSV.

We anticipate continued investment spending in marketing and clinical trials in support of our new product launches and to further validate the clinical efficacy and economic efficiency of our existing products.

OTC test development and partnering are also part of our corporate strategy. But I want to emphasize that completing such agreements and further developing and bringing in OTC products to market takes time.

We expect research and development expense to continue to increase as we expand our capabilities to accelerate innovation and invest in research and development of new technologies.

And finally, we will continue to pursue investment in new technologies and/or acquisitions which will meet our QVB standards for new and better performing tests.

Operator, we are now ready to open the call up for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Zarak Khurshid with Caris & Company.

Hey, guys. Congratulations on a good quarter.

Thanks, Zarak.

Just a couple of questions if I may. Paul, could you break out the big 3 products, Flu, Strep, Pregnancy?

I'd be happy to do so, Zarak. Pregnancy for the quarter totaled $4.9 million, Strep $4.4 million and Influenza $9.5 million.

Sorry, $9.5?

$9.5, that's correct.

And then maybe just a little more color on the growth in the flu franchise? Where is that coming from? Can you just characterize the market, where are we in penetrating that?

Yes, our flu penetration is improving in both the physician office lab and the acute care segments. But in the most recent quarter, when you look at the trailing 12 months we have made a nice impact in acute care improvement.

So we see our flu test continuing to be purchased by those physicians and in those acute care environments where the validation of sensitivity such as the ease of use are of most concern.

Okay, great. And then going back to the gross margin issue it looks like you made a nice recovery from the prior quarter. Have you realized all the improvements that you invested in in Q2 in migrating some products to the web platform? I'd love to get some more color there.

Well that is a continuing process. We are moving many of our tests to the web automation. And so you do see some gradual trending up on that. I think more importantly in the gross margin it was really about raising average selling prices, good mix of products, etc, and a lot of strength in our domestic market.

Okay, so it sounds like there is some room for improvement as everything gets fully up to speed on the more automated platform. Do you have any idea for the timing there? Going back historically to when pregnancy was moved to the web platform, how many percentage points of an increase in gross margin did you see on that product and would you expect to see similar improvement here soon?

Your first question was how long. It is going to be about 12 - 24 months before the majority of our products move to web automation. We do expect improvement, but each of the categories is a different percentage. So I wouldn't go back to hCG to use that as an example or a barometer. I think we are getting better opportunity each time we begin the process of validation of cost. So I guess that is probably the best way we can describe it to you; about 12 - 24 months.

Okay, good. Thanks for taking my call.

Thank you.

Our next question comes from the line of Steven Crowley with Craig Hallum.

Good afternoon. Nice quarter. Couple questions for you. Caren, you continue to drive home the importance of clinical evidence in your conversion of the market to IFOB? When are we likely to have some early visibility on the clinical and economic data that you are generating in your clinical studies?

Well it's definitely on the board for 2007. I think the timing is really depending upon how quickly our university partners can support us and move us to the forefront of the work that we are undertaking. So, 2007 I'm comfortable, mid-2007 to be able to talk about our first clinical study and then as soon as we already have another study that we are developing that will closely thereafter begin. So definitely in 2007.

And then in terms of cancer screening guidelines is there anything brewing with new recommendations or new guidelines that could help that market conversion?

We are hearing on the street that the American Cancer Society is definitely taking a closer look at appropriate screening guidelines for the detection of human hemoglobin in stool samples that would support looking further to determine if colon cancer polyps are present. So, yes, we are hearing that on the street but don't have any definitive timeframe for when that will be released.

And then a related question, maybe more for Paul. Are we seeing any of the impact of higher margin IFOB tests on the gross profit margin of the Company or is that still in front of us? Have we seen any impact really so far is my question?

Not material at all at this stage, Steven.

And then in terms of the other new product of real significance, RSV, maybe you could give us a little more color on why you seem to be pleased with the initial stages of the roll-out here. Is it because of the number of distributors or number of accounts you are in? Is it qualitative feedback? What can you tell us to give us a little more?

Sure. I think it is all of the above. The RSV test from Quidel has been the most requested test for the last few years. There has been a tremendous interest by pediatricians in the physician office lab market who rely on our flu tests; they would like the companion RSV test to be a QuickVue test. We tend to be easier to use, very quick to result. And so there is a lot of interest there. We have yet to gain CLIA waver status but pediatricians still are very interested in the test. So we are feeling good about their receptivity.

In terms of acute care, we are pleased with some early successes that we've had in the market. The distributors are supporting us very well. We have promotions in place that we think are resonating well. And so we are very enthusiastic about the initial introduction of the test. The renewal of that introduction per se with the CLIA approval and then continuing emphasis on the area with other claims that we are working on able, hopefully, to announce in early to mid 2007.

One follow-on and I'll get back in the queue. In terms of attaining the CLIA waiver, given the similarities and methodology to a number of your other tests, I'm not anticipating that you have real tricky streets to navigate through there, but I don't want to assume that. So that's a question.

I think your assumption is correct. We are confident in terms of understanding what the FDA requirements are around CLIA waiver. They have been tightened up most recently. And so we are going through a new level of scrutiny, a new level of proof than previous tests have required. However, our early indication is that we are on a very clear pathway to success here and hopefully before the end of this cold and flu season.

Great. Well I will hop back in queue again. Nice job.

Thank you, Steve.

[OPERATOR INSTRUCTIONS] And we have a follow up question from Zarak Khurshid with Caris & Company.

Hello?

Hello.

Hey, Zarak.

Hi guys. Sorry, bad connection here. Just a follow up on the flu franchise. Can you comment just on how the channel is looking as we enter the flu and cold season?

Caren Mason. Well, our focus has been since the August/September timeframe to work with distribution to be prepared to provide physicians with the appropriate stocking level as they start to see cold and flu symptoms in their patients and can begin to use the flu test to either confirm or eliminate flu as the reason for the discomfort and the symptoms.

And so the answer to your question is that we have absolutely had what we feel is a great roll-out with our distributor partners and with end users getting ready by taking that stock from the distributors and getting their shelves ready for this cold and flu season.

Very good. Thanks.

Thank you.

Our next question comes from the line of [Thomas Shaw] with [Kepler Corporation].

Good afternoon. Wonderful quarter, Paul and Caren. Quick question for you regarding Inverness and your dealings with them and possible ways of pushing forward your technology to sort of get out from underneath that 8.5% royalty that you have to pay on your pregnancy, flu A and Strep. Do you have any comments on that, Caren?

Well I can say that you would be disappointed in us if we were to say that that's not an area of interest or an area of emphasis with our R&D team. It certainly is, so we have a number of avenues that we are exploring currently, some nearer-term and some a little more out there in terms of future potential. But yes, it absolutely is a priority for us.

Thank you.

You're welcome.

We have a follow up question from the line of Steven Crowley with Craig Hallum.

Hello, I'm back. Paul, you were nice enough to share the breakdown of core products in this year's third quarter. Do you have the comparable numbers that you can share with us from the year ago quarter?

For those same categories, yes I do, Steven. Pregnancy in the 2005 quarter was up 5.3%, Strep A was 4.3% and Flu was 5.6%.

So the growth was overwhelmingly from the flu category. Year-to-date Strep has been a strong performer. Should I be concerned at all with relatively modest year-to-year growth? Maybe you can give us an update about the Strep business.

Well I think Strep in the third quarter for us is not what I would say a bellwether requirement. Strep for us is turning into a year round commitment. So I would say if at the end of the year we don't see some nice growth after we have all four quarters then we will have some concern. But we have actually grown share by 3 points. And Paul is showing me here that year-to-date Strep is up 28%.

So it looks like this period or this window was somewhat anomalous relative to the overall trends in the business.

Yes, it is just seasonal ordering patterns, and I think distributors are really, really focused on flu.

And your market share in Strep is mid-to-upper 40s?

We are now at 46% trailing 12 months.

And then in terms of your perception or read of the early flu season data. It's really early, and I don't even know the predictive power of the early data, but anything notable qualitatively about the early election returns so to speak on the flu season.

They would pay me a whole lot of money if I could be the price indicator for flu, let me tell you. Right now, you probably have seen on the map a few states are seeing sporadic activity. One state, Louisiana has seen more than sporadic activity. So, even though we are looking back where CDC reports 1 or 2 weeks in arrears, it's really hard for us to determine, and we would really not be appropriate in trying to guess.

And then anything as to the nature of the viruses that have been identified? Or is that an exercise in futility at this point also?

Well there really aren't, I don't think, enough cases yet to be sure of what the seasonal strains will for certain be. We can certainly look at Australia and see what happened there as we always do in the Southern hemisphere, but it is not always indicative or predictive of what we are going to experience in North America.

So at this point, no, we don't really know whether A or B will be prevalent. What we do know is that historically A tends to be prevalent about 90% of the season.

And are there any ramifications if B were to be prevalent for you in terms of what that typically means or what that might mean to you?

No, our tests either can give a non-differentiated A /B result, or a differentiated A plus B result. So they are used for both strains.

And is the competitive landscape if B were to be prevalent any different? Is it lesser in that context or not really?

We find that we are most competitive in both categories.

Alright, well thank you very much.

Thank you.

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

I'd like to thank you very much for joining us today and we look forward to being with you again as we close out our year. Thanks very much.

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