QuidelOrtho Corp (QDEL) 2006 Q4 法說會逐字稿

Welcome to the Quidel 2006 fourth quarter and year end financial results conference call. [Operator Instructions.] As a reminder, this conference is being recorded February 15, 2007. I would now like to turn the conference over to Don Markley. Please go ahead, sir.

Thank you. This is Don Markley with Lippert/Heilshorn and Associates. Thank you for participating in today's call. Joining me from Quidel are Caren Mason, President and Chief Executive Officer, Paul Landers, Principal Accounting Officer, and John Radak, the Company's new Chief Financial Officer. Earlier this afternoon, Quidel released financial results for its fourth quarter and year ended December 31, 2006. 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 Erica Torrez.

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, February 15, 2007. 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 Caren Mason. Caren?

Thanks, Don. As many of you know, Paul is retiring on March 31. I want to recognize and thank Paul for his contributions to the Company over the last five years. Paul, on behalf of the entire Company and the Board, it has been a pleasure working with you, and we wish you well in your retirement. In a minute, I will have Paul take you through our financial results one last time. But before that, I want to introduce our new Chief Financial Officer, John Radak, who joined Quidel just a few weeks ago. John comes to us from Invitrogen, where he was Vice President of Finance and Chief Accounting Officer. We're delighted to have him onboard. John?

Thank you, Caren. It is a pleasure to be here, and I am very excited about Quidel's future. Paul and I are working closely together through this transition. Over the next couple of months, I hope to meet as many of you in person as possible. Now Paul will address the financial results for the fourth quarter and full year 2006. Paul?

Thank you, John. I just want to add my thanks and appreciation to everyone at Quidel and the investor community for five wonderful years. I am confident that John will provide the critical financial leadership and stewardship to support Quidel in the years to come. I am very pleased to report our financial results for the fourth quarter and year end 2006.

Starting with the top line, total revenues for the fourth quarter increased 11%, to $38.8 million, from $34.8 million in the fourth quarter of 2005. Worldwide product sales were up 13%, driven by growth in our core product group and contributions from new products. On a worldwide basis, sales of our core products of pregnancy, strep A, and influenza tests were $33.1 million, representing 86% of net product sales. More specifically, comparing Q4 '06 with Q4 '05, sales of our strep A, pregnancy, and flu tests were up 11% in the aggregate. Our gross margin in the 2006 fourth quarter was 60%, down from 62% as compared to last year's fourth quarter. The change was primarily due to a less favorable product mix and by our planned strategic investments.

Operating expenses for the fourth quarter of 2006 were $12.6 million, including approximately $0.8 million in stock-based compensation expense, which reflects a 6% increase compared with operating expenses of $11.9 million for the fourth quarter of 2005. The net increase in operating expenses primarily includes non-cash stock compensation expense and amortization of acquired intangible assets. It also includes clinical trials associated with Quidel value build programs and marketing programs in support of new product introductions.

During the fourth quarter of 2006, we recognized non-cash income of approximately $1.3 million associated with certain remaining balance sheet credits of our foreign entities. These amounts were classified as $800,000 in discontinued operations related to the prior divestiture of our urinalysis business, and $500,000 in other income related to the previous closure of another foreign operation.

Net earnings for the fourth quarter were $18.3 million, or $0.54 per share on a fully diluted basis. This compares with net earnings of $9.6 million, or $0.28 per share, fully diluted, for the fourth quarter of 2005. Please note that the Company recorded a non-recurring, non-cash income tax benefit of $5.9 million, or $0.17 per diluted share, in the fourth quarter of 2006 associated with the release of a valuation allowance on certain deferred tax assets.

Adjusted net earnings for the quarter were $11.6 million, or $0.34 per share fully diluted. This compares with adjusted net earnings in the fourth quarter of 2005 of $9.8 million, or $0.28 per share fully diluted. Adjusted net earnings reflect certain non-recurring and non-cash items, including the tax benefit and discontinued operations encompassing the company's urinalysis business. A reconciliation of GAAP and non-GAAP net earnings is provided in today's press release.

Turning now to our full year financial results. For the year ended December 31, 2006, total revenues rose 15%, to $106 million, up from $92.3 million for the year ended December 31, 2005. Total product sales increased 18% and reached $104.7 million in 2006, with strong contribution from all core product lines. Gross margin for 2006 was 57%, compared with 58% for 2005, primarily due to the full year's impact of the royalty obligation that commenced in May 2005 and our planned strategic investments. Had the royalty been in effect for the full year 2005, our gross margin would have improved 100 basis points year over year.

Operating expenses for 2006 were $47.4 million versus $43.5 million for 2005, excluding the $17 million expense paid under the terms of the patent litigation settlement in the first quarter of 2005. This net increase in operating expenses primarily relates to non-cash stock compensation expense and amortization of acquired intangible assets. On a GAAP basis, net earnings for 2006 were $18.3 million, or $0.54 per share, compared with net earnings for 2005 of $9.6 million, or $0.28 per share.

Looking at our full year financial performance on a non-GAAP basis, adjusted net earnings for 2006 were $15 million, or $0.44 per share on a fully diluted basis. This compares with adjusted net earnings of $11.7 million, or $0.35 per share on a fully diluted basis for the year ended December 31, 2005. Again, a reconciliation of these items to GAAP is provided in today's press release as part of the attached financial tables.

As for our balance sheet, we believe that it reflects a very solid financial foundation. Days sales outstanding for the fourth quarter were 46 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 fourth quarter were 5.1 times, or approximately every 72 days. Capital expenditures during the quarter were approximately $0.8 million.

Our cash and cash equivalents as of December 31, 2006, totaled $36.6 million, compared with $34.9 million as of December 31, 2005. The Company increased cash and cash equivalents by $1.7 million over December 31, 2005, notwithstanding the Company's repurchase during 2006 of approximately 1.2 million shares of common stock at an average price of $9.20 per share, as well as the licensing of intellectual property at a cost of $6.5 million.

And now I will turn the call over to Caren for a review of the key strategic accomplishments and developments in the quarter and for the full year 2006. Caren?

Thank you, Paul. I'm pleased to be reporting on another solid quarter, which concludes a very successful year for Quidel. It's an important milestone for our company to have crossed the $100 million mark to achieve $106 million in revenue. I'm very proud of the Quidel team and their significant accomplishments in growing this business profitably.

Worldwide product revenue was up 13% for the quarter and 18% for the year. In 2006, we grew our core rapid test franchise by 28% in flu, 24% in strep A, and 2% in pregnancy. We aggressively marketed our flu and strep A products in Q3 and Q4 of 2006 to assure that our distribution partners were appropriately stocked and end users were prepared for the upper respiratory season. This assisted us in securing significant sales gains to the distributor and in out sales to end users. In addition, our new RSV product, launched in September of this year, has been very well received. We are expanding our RSV position in acute care, and we look forward to achieving CLIA waiver for more significant adoption in the physician office labs.

In addition, revenue from our new immunochemical fecal occult blood test was up sequentially from the third quarter. We are very pleased with our progress and look forward to continued adoption of our IFOBT test and continued growth of this important line.

We secured an exclusive license in December for the molecular diagnostic technology in the MChip for flu, developed to detect, type and subtype interpendent influenza viruses, such as H1N1 and H3N2, and avian influenza viruses such as H5N1. Why is this significant? Historically, influenza viruses are typed and subtyped by a technically demanding and time-consuming process. This involves culturing the virus and performing hemoglutanine inhibitions. The whole process can take several days. RTPCR is the currently used molecular diagnostic methodology. This confers greater sensitivity and requires less time than culture. Our MChip technology builds on RTCPR and uses microarrays to detect, type, and subtype specific influenza viruses. The microarrays are multiplex in nature, allowing detection of a broad spectrum of influenza subtypes. We are currently working on the development of our Phase One product targeted for use in influenza research and surveillance.

In anticipation of questions regarding this flu season and its severity, we review and assess CDC data which is reported using surveillance data from the previous week. The latest report shows that flu incidence is above the baseline and has been trending upward. In this regard, we believe we are appropriately geared up to demand this season. We are also hopeful that timely diagnosis and the administration of appropriate antiviral therapy will help in the fight against the more serious complications associated with the flu.

Our QVB focus continues to be the major emphasis for Quidel. We have significant studies in various stages of completion in influenza, RSV, and ISOB tests relating to clinical and economic validation. We continue to conduct internal and external validations of our tests versus several domestic and international competitive tests and are furthering our quality, achievement, and effort. We expect to have results of these studies presented and published in several venues in 2007 and 2008. FDA submissions for expanding these claims will also be pursued in 2007.

Operationally, Quidel continues to improve its core competencies and operating efficiencies while expanding its test capacity. Our plan to increase capacity to over 100 million tests per year in our current facility is tracking to schedule. In addition to our efforts in evaluating new products and technologies and the related investments, we also anticipate continuing our evaluation of and investment in our LTFI technology. We made capital expenditures in 2006 in LTFI and will continue to make investments in 2007.

So then to recap 2006. We solidified our position, both as the market share leader in our core products and as the industry thought leader for rapid diagnostics. We launched two new products in RSV and IFOBT that hold great promise in areas where this a substantial market opportunity and medical need. We expanded our sales force by 50%, added business development, health economics, clinical regulatory, and molecular diagnostics R&D capabilities. We achieved operating efficiencies that we believe can be sustained while we continue to grow. We initiated an OTC strategy with the development of our new ventures business and are in discussions with significant other partners in a number of test categories. And finally, with the exclusive MChip license we acquired in December, Quidel is focused on the development of significant new breakthrough technology to enable the early and accurate diagnosis of influenza.

As we look ahead to 2007, we anticipate overall revenue growth in our core product lines as well as revenue growth from our new products. We believe gross margins will be positively affected by increased sales volumes, more favorable product and geographical mix, and increases in average selling prices. We expect continued growth in revenues and market share in many of our core product lines through our focused efforts on QVB as well as expanding the portfolio of our product offerings. We also plan to make investments in sales and marketing that will support our leadership position and allow us to take advantage of the large opportunity in point-of-care rapid diagnostics.

Our research programs will also be expanded, as we believe the market for rapid diagnostics will demand greater evidence and proofs to support purchasing decisions. Further, we expect our growing R&D activities to result in an expansion of our capabilities to accelerate innovation in acquired and new technologies.

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

[Operator Instructions.] One moment, please, for the first question. Our first question comes from Zarak Khurshid with Caris and Company.

Hey, guys. Thanks for taking my questions.

Thanks, Zarak.

Congratulations on a good quarter and a good year.

Thank you.

Could you just give us a quick breakdown of the big three--flu, strep, pregnancy--in the quarter?

Okay. In pregnancy, the quarter was $5.4 million. Strep was $7.7 million. Influenza was $19.9 million.

Okay. How about RSV and ISOV?

We won't be breaking those out yet.

Okay. Any sense, kind of ballpark, for those two in, for the year, for '06?

Well, we were absolutely pleased with, as we said, the sequential progression at the end of the year as we had completed our introduction to those products, but we're not going to be breaking them out specifically.

Sure. Okay. And then with respect to margins, they looked a little lighter than we had hoped. I think earlier in the year you had alluded to higher overall margins in '06 versus '05. Anything, did anything happen there? Is there something we should know about?

No, I believe that the continued investment in our operating areas where, I think, very important in terms of what we're going to do in the future development. There is really nothing on the horizon that we can see that will impede us from our projection of improving those margins over time.

Okay. And then stock options, or the--sorry, the other income line looked pretty strong this quarter. So what exactly is in that line, and is this level sustainable for '07?

Zarak, this is Paul. In my prepared remarks, I described that we had certain balance sheet items from foreign entities that moved into the profit and loss statement in the fourth quarter. $500,000 of that miscellaneous income related to the closure of one of those foreign operations. So this would be a one-time, non-recurring activity that should not be looked at going forward.

Got it. And then stock options expense in the quarter? What was that?

Non-cash stock compensation amounted to $841,000 for the quarter.

Okay, great. Thanks for taking my questions, guys.

Thanks.

Your next question comes from [Ann Kwan] with Pacific Growth Equity. Please go ahead with your question.

Hi. Thanks for taking my call. I'm just wondering, could you give us an update on the rapid influenza market, and what percentage of the physician offices have transitioned from the traditional based methods to rapid flu testing?

We'll do our best to give you what we believe is going on in the marketplace, but the research services that we use do not give us full market potential. They give us what is converted market, so we're going to give you our best assessment. What we see today is approximately 50% of physicians are using a rapid diagnostic flu test. We believe that market is growing. We know certainly that we're growing at 28% year over year, and a lot of that is in acute care, but also continuous growth in the physician office lab. So we expect that there's going to be more adoption over time, as CDC and other, NIH, as well as major physician societies, are concerned about, first of all, detecting influenza in the critical first three days by using a rapid diagnostic, and second of all, avoiding the improper use of antibiotics. For example, yesterday on the CDC Website, around flu, there was a discussion there of diagnosis of flu appropriately. And one thing that was said there is the use of a rapid diagnostic test aids the physicians in diagnosis. So we believe there will be more adoption of the test.

Okay. Thank you.

You're welcome.

And are you able to estimate what your market share currently is in the market? I know you have pretty good data in the U.S., but could you help us understand what your share is internationally?

Fourth quarter data is not in yet. Domestically and internationally, there's no one that is really reporting market share data outside the U.S. in rapid diagnostic testing.

Okay. All right. And lastly, what is the status of the CLIA waiver for your RSV test?

Well, I'll ask Dr. [Temarius], who's our head of clin reg with us today, to give us a quick update.

Okay, thanks.

We have submitted our application to the FDA, and we're waiting to hear a response back from them. So we expect to hear from them shortly.

Okay, great. Thank you.

Our next question comes from Steven Crowley with Craig Hallum Capital Group. Please go ahead with your question.

Couple questions. There was a pretty big jump in amortization expense in the fourth quarter. And I'm wondering if that, if there was anything quirky in that number, and what your outlook is for 2007?

Steve, there's nothing quirky about it from an accounting standpoint. We did have some acquisition of intellectual property last quarter, and based upon the life of that asset, we're amortizing that over respective periods.

It was certainly--we had talked about that. Now, if I understand correctly, there are some amortization expense that rolls off as we, as we go through 2007. But is the one-six a run rate for a period of time here? I think that was the number in the fourth quarter.

I think if you, for details, Steve, I would refer you to the annual 10-K that gives you a real solid look with respect to all the acquired properties with respect to intellectual property. But as a guidance to you, next year, on an annual basis, you should expect to see that line item decrease based upon estimated lives and expirations and everything of approximately $1 million on an annual basis.

From what you reported this year, for the whole year?

From Q4.

From Q4. Okay. So it will run up at these levels for a couple of quarters, and then we certainly looked at that and seen that there's a pretty, there's at least a noticeable dropoff in the second half of the year. But the one-six is a run rate until that dropoff takes place?

That's a good approximation.

Okay. In terms of your stock comp expenses, we looked at 2007. I think you disclosed in your press release, it was about $3.4 million for 2006. How should we view that for 2007?

I think, Steve, quite candidly, where we don't provide financial guidance in everything, and given the fact that that is a function of some forward activity that may occur, that I would refer to, I would prefer not to answer that at this point.

Yes, I prefer not to give an answer, either, but folks are going to ask me to give an answer. Would it be appropriate to model the run rate you had in the fourth quarter on an ongoing basis until you tell us differently?

I think, no change until the company says otherwise would be prudent on your part.

Okay, that's--I don't know if that's helpful, but it is what it is. In terms of the flu season, here in the Midwest we've seen quite a spike in both activity and severity. And the severity has unfortunately been highlighted by a surprising number of pediatric deaths, a half dozen or so in our state, and some in neighboring areas. What are you picking up about what's happening with flu and why we're seeing atypical mortality, at least here in the Midwest?

Well, I think first of all, because we have a week's delay, we don't exactly know whether the trend lines on the CDC graph are going to show this as reaching epidemic level, and that, and I'm referring, of course, to pediatric mortalities and hospitalization, which is what does usually determine an epidemic season. As of the report through February 2, they were below epidemic. However, we are watching the news, and we are hearing, sadly, that there are deaths reported in Washington, in Minnesota. I also believe there was one in Virginia. And also schools are closing, whole school systems are closing in states like North Carolina. So yes, definitely a rise in flu incidence. In terms of the type of flu, I believe it is the flu that the CDC did prepare for in the vaccine preparation. Unfortunately, what I also have read is that a number of individuals who have been stricken and have passed away from complications of the flu did not have the vaccine, although a few did.

Yes, we've experienced both of those here, and the latest pediatric deaths or mortalities I heard about was in the state of Nebraska.

Yes.

So there's, it's unfortunate, but there's growing new flow there. And there really hasn't been much scuttle, I guess, from your perspective on why. Because the perception has been that the vaccine was well matched, and there wasn't anything particularly exotic about this year's strain of flu. But there seems to be a growing body of evidence that might be able to argue against that.

Yes. The concern, though, is also, the average in the United States is 36,000 deaths. Globally, anywhere from 300,000 to 500,000. One of the areas, though, I think of interest to you might be the fact that even if in an immuno-compromised individual, child or especially the elderly has the vaccine, sometimes just having a touch of the flu can be too much and could end up resulting in mortality. So it appears to be in immuno-compromised patients that, according to some of the early CDC reports, that are experiencing, unfortunately, significant complications this year.

I see. One final question and I'll get back in the queue. You gave us a little bit of commentary about your efforts on the OTC market front. I'm wondering and hoping that you might be able to give us a little more of a status update on your efforts there in terms of how you're approaching the partnership opportunity, how far along you are, and whether you have an active partner. And if it's a disclosure issue, or if you're still looking to secure that active partner.

Well, we are talking to a number of partners. Some of the negotiations are quite far along, and some of them are newer. There are various tests that we are considering that match our current portfolio as well as looking at tests we might develop that are new tests for Quidel. It is a major effort for us. We are sincere about our intention to grow in this market. Alternate sites for rapid diagnostics at the point of care are tailor made for what we want, which is the easiest, fastest, most rapid and accurate diagnosis possible everywhere where it makes sense. So if that is in a retail clinic, if that is in a home, we want to make sure that we're there in the same leadership position we enjoy and have earned in the professional market.

So the reason we talk about OTC is because when our partners are comfortable and confident that it's something that they would like to talk about in the public arena, we will, and we believe a few of those partners are going to be very excited to do so. So rest assured, Steve, we're working this very aggressively.

Great. Thank you. I'll get back in the queue.

Our next question comes from Keay Nakae with C.E. Unterberg. Please go ahead with your question.

Hi, good afternoon. First, Paul, can you tell us the tax valuation allowance that you pulled down? Does that represent the entire allowance, or is there some amount left?

That represents the entire allowance, Keay.

Okay, great. Can you then tell us what amount of deferred tax asset, net deferred tax asset you now have on the balance sheet?

Approximately $50 million. I'm sorry. I apologize. $15 million. One-five.

Fifteen. Okay. So with that amount, Paul or John, is it safe for us to assume for modeling purposes that your GAAP net income for '07 will reflect no income tax?

I think that based upon the work that we did in the fourth quarter and the assessment on our income taxes, I think it would be more likely than not that our GAAP income tax effective rate would be that, close to statutory rates.

Close to statutory, so 40% for you guys?

Approximately 40%. That's correct.

Okay, so just so we're clear. The net income in EPS that you reported Q1 and Q3, you're going to show 40% tax?

That's correct.

Okay, great. Thanks. Also, with respect to the FOB clinical studies, we know you have the retrospective study and later the prospective study. Can you give us a sense of the time lines? First, when you're going to complete the retrospective study and talk about those results, and then start and hopefully complete the prospective FOB study?

Yes. We are definitely on track in terms of both the retrospective study, and then have, are finalizing the protocol on the prospective study, which in many ways will be adjusted based on what we learn in the retrospective study. So I'll give, I'd like John to just give a little flavor here, so that's one of the reasons we've asked him to be here. John?

Yes. We've identified several sites that we've signed up. The IRBs are completed, and we've already received samples, so the retrospective study is underway. And that's going to take probably two months, at least, to get all the data that we want. And when we have that, we're prepared already to go very quickly into the prospective studies. As Caren explained, we have to build on the results that we get in that retro study, and the protocol's ready, and we're poised to do so and to capitalize on these results.

So two follow-ups to that. Caren, will you talk about the retrospective results when you get them?

Yes.

And then also, how long do you think it will take to complete the prospective study?

At least through the end of the year, maybe into '08, so the results for the prospective study, we hope to have as early as we can in '08. If we can do it sooner, we will. It depends on the number of samples we get and how fast we get them.

Okay, great. And one follow-up, Paul. Final question, Caren. You know, coming into the flu season, because of the good visibility you have with your distributors, you talked about them having low inventory. So not, on a qualitative basis, can you give us a sense of where those inventories stand at this point?

Well, I believe that they are in a good place in terms of having what we feel is appropriate inventory to manage an aggressive season, and that means our orders in-house as well as what's on their shelves. So I think we're all in a good place for a good flu season.

So in terms of how we think about reordering them, if they're well prepared, does that mean with the existing inventory of sales you've already booked? Or does that also include some orders you have and are filling at this point?

No, we're talking about orders.

Okay. Okay. Thank you.

[Operator Instructions.] Our next question comes from [Mohannas Kalapatra] with Thomas Weigel. Please go ahead with your question.

Hi. Thank you for taking my call. Excellent quarter. Congratulations.

Thank you.

I had a couple of questions, actually. One is on the R&D side. I noticed that R&D as a percentage of sales was about 8% this quarter, which makes it about 12% for the full year, which is pretty much in line with what you've been achieving historically. My question was that in the light of the financial and economic validation study that you're undertaking for the FOB test, is that a little lower than what you would have anticipated, or is it pretty much in line?

No, it's definitely in line.

And going ahead into 2007, what would you estimate in terms of, is this the run rate that one should expect to see going forward?

As I said in my prepared--right. Pardon me. As I said in prepared remarks, we expect to grow our R&D spending. We are obviously doing more in the clinical studies, as you allude to, and then we also have our initial spending in the molecular arena.

Correct. So is that an increase in terms of in a proportion, in proportional terms, or an increase in new dollar terms?

I think proportional terms.

Okay.

Yes. Proportional terms, in the fact that we're going to keep our spending, obviously, in line. There's a lot of programs that may be continued or moved out. The bottom line is I think that what we've done in Q4 is pretty representative of what we'll be doing with a little additional over time.

Okay. So we are looking at 10% to 12% spend on the R&D?

Yes.

Okay, great. And the other question I had was sort of related to Cholestech. Cholestech recently announced the inclusion of the pregnancy kit, your pregnancy kit in the dermatology kits that they're going to be positioning to dermatology practices, targeting Accutane users. Is that, do you see that as a, as an up side to your regular pregnancy sales going ahead, or is that going to be a minimal up side? How would you classify or characterize that?

I think we'll know more as we get reports from Cholestech as to the success, but we plan to co-market and support them in their efforts. So we're very enthusiastic about this new program.

Okay. And can I talk of a little more about the arrangement with Cholestech on this, and would you be sharing marketing resources, and how will that work? If you could shed some light on that?

Well, we are providing them with the marketing materials, and we are obviously supporting them in the sales, direct in terms of promotion dollars, allowance, et cetera. So that's about as much as we can share.

Okay. Great. Thanks. Great. That's pretty much all I have. Thank you again, and great quarter.

Thank you very much.

Thank you.

Our next question comes from Zarak Khurshid with Caris and Company. Please go ahead with your question.

Hello again.

Hello.

It looks like the flu season is shaping up similarly to what we saw last year. Would you say that your channel and your business is also shaping up similarly to last year?

Well, you know, they pay us to do more than we did last year, Zarak. So the bottom line is we're very aggressively pursuing the continuation of our flu season, which really starts in the July-August time frame of the previous year. In terms of determining how long and the severity of the flu season, we just can't do that. But we definitely know when flu is happening. The orders go up, and there's just a clear recognition from us that the time is right for a lot of concern by physicians to be well prepared. And we're seeing that.

Great. Then also, it looks like sequentially, even after you correct for the mix shift in Q4, gross margins per product improved. Would you agree with that statement, and is there one specific product that may have had substantially better margins in Q4?

Well, I think that a better way to describe it in terms of pressure on margin, was really more around our Japanese flu sales in that there was a reimbursement decline in Japan. And we participated with our distributor in meeting some of the pressure for physicians and their demands in terms of help around those issues, because, as you know, Japan is a very large flu market. So overall, we're pleased with our gross margins, but the real pressure really only came from that one category. There was also a ordering shift for a Japanese distributor in that they ordered more in Q3 than they normally do and less in Q4. They just kind of shifted their order pattern, as they wanted to aggressively attack opportunities in the Japanese market for preparation at the physician level, physician office level. So from a margin standpoint--.

Okay, this greater order in Q3--.

Go ahead.

That negatively impacted margins more so than Q4?

I think the shift to more in Q3 versus Q4 definitely was kind of a mixed issue. But if you take Q3 and Q4 together, we were up 21% and margins were positively impacted.

Right.

Okay.

Okay, very good. Thank you.

Thank you very much.

Our next question comes from Steven Crowley with Craig Hallum Capital Group. Please go ahead with your question.

Hello again. Couple questions to pick up on the tax issue. If I understood you correctly, Paul, you said you're likely to report a pretty full tax rate for book purposes in relation to your GAAP numbers. So 35% or 40%. Will the company actually be paying taxes in 2007, and what's your NOL position to shelter cash tax payments, and how long might those run?

Steve, great insight. While we would be reporting for statutory rates at the 40% based on GAAP and everything, we have asked, I think we've said before, we have refreshed all our NOLs, and we are in a strong position to say that in 2007, we will not be paying taxes to Uncle Sam, other than alt minimums and everything.

Okay. And will some of those benefits linger into 2008?

I think that we're getting into really projections with respect to earnings flows and everything like that, and what I'd like to do is have you look at our 10-K and everything and, based upon your model of earnings flows, you'd be able to make that calculation yourself.

As you give us the remaining NOLs.

Right.

Are you in a position to disclose what those NOLs are now?

Not at this point. I would again refer to the 10-K that we would file by mid-March.

But there shouldn't be anything particularly exotic with the fact that you put that in the '05 10-K, and is there anything that would hamper the analysis of looking at what you likely consumed in '06 and carrying it forward? Is there some kind of distortion or adjustment that takes place?

I don't think you'll see anything that has been distorted what we've been previously reporting.

Okay. And away from the bookkeeping questions here, you made some comments about distributors' inventory position and orders that you have in hand. If we were to look at where you sit now in terms of orders in hand versus where you sat a year ago, my sense is that, well, there's the question. How do you sit now in terms of visibility for the first quarter versus where you sat a year ago?

Well, we get used to being basically in a daily discussion with distribution. And that partnership allows us to understand almost to the hour what is going on in terms of their demand requirements at all their major distribution centers. And what you can do is you can track where the demand is in the country. It pretty much follows the flu map to the distribution warehouses. And so we're all over it, Steve, but we can't, we really can't predict exactly how it's going to track to a previous year, because, for example, last year at this time, we did not have pediatric mortality like we do this year. We did not have mass school closings like we are this year. But we had a really good flu season last year, we felt. I mean, it was not at epidemic levels, but it, we managed to aggressively push the quality of our product and its excellent accuracy, and so the value of the Quidel flu test gives us great share and continues capturing what is available out there in terms of opportunity. That's the best way to describe it.

Well, that's consistent with the sense I had, that last year was a long-duration, but slow-building flu year. And every one is different, but I have to believe that last year probably was more challenging in terms of visibility, because it was so atypical in terms of duration. We're getting a flare-up now which, if you're on top of orders, you're probably seeing some.

I have to compliment you on that. Last year was a much tougher year to call than this year seems to be.

In terms of the new products, you gave us some nice, qualitative feedback on both RSV and IFOB. In terms of RSV, has that product significantly outstripped your expectations out of the gate? Has it been a little better? Has it been consistent?

I think it's been really well received, and in the acute care settings and the moderately complex labs, we're doing great. All of our flu users would love to use our RSV tests. We have further product applications for RSV under development, different specimen collection types, some other great enhancements we'll be talking about later in the year. So we're feeling very, very good about RSV and a number of clinical studies that we'll be announcing and publishing at major meetings throughout the year. So RSV product is going to be a big product. We're very happy with it.

And the CLIA waiver. Is it, is that really setting the table for next year in RSV, or is there still some chance that it could aid the cause down the stretch here in this cold and flu season?

So RSV, for whatever reason, and we don't know why, but RSV tends to take a backseat to influenza once influenza is prevalent. So the RSV season will probably begin to wane now, so our expectation is that all the upraise in opportunities that I'm addressing here with RSV will definitely be recognized in Q3, Q4 and Q1 of next year.

Okay. And in terms of IFOB, I think I heard you correctly in talking about some encouraging sequential growth in the product. What do you think was behind that, and do you think that was just a periodic stair-step on the way to your data, or are we seeing a more consistent build to product sales in IFOB?

I think there's a more consistent build to product sales in IFOB. We're especially targeting acute care. There's a real opportunity there. There's an opportunity in independent reference labs. There's also the opportunity in the POLs, but that was going to come, we believe, a little more slowly in that I think there is kind of a wait-and-see there, but once there's some big pockets of business, you're going to see more adoption. The American Cancer Society guidelines are coming out in March. We're approaching Colon Cancer Awareness Month. So there's quite a bit of opportunity, and we're feeling very good about the growth that we're seeing in the opportunities where we are in the number of trials that are going on across the country. It's a major effort for our sales organization.

Great. Thank you.

Thank you. Okay, Operator, I think it's time for us to conclude, so I will say, then, thank you, again, everyone, for your time this afternoon and for your continued support. I look forward to updating you on our progress again when we report 2007 first quarter results. Good day, everyone.

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