QuidelOrtho Corp (QDEL) 2007 Q1 法說會逐字稿

Welcome to the Quidel 2007 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, today, April 26, 2007. I would now like to turn the call over to Mr. 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, and John Radak, Chief Financial Officer. Earlier this afternoon, Quidel reached financial -- released financial results for the first quarter ended March 31, 2007. If you have not received this news release or if you would like to be added to the company's distribution list, please call Lippert/Heilshorn in Los Angeles at (310)691-7100 and speak with Eleanor Tang.

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 10K and subsequent quarterly reports on Forms 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, April 26, 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 John Radak. John?

Thanks, Don, and thank you to everyone for joining us this afternoon. We are very pleased with the performance of the business this quarter, as we achieved excellent revenue growth, expanded margins and realized healthy operating cash flow. Starting with the top line, total revenues for the quarter were $33.9 million, a 25% increase over the first quarter a year ago. We experienced very robust growth across most of our product lines. Our gross margin in the 2007 first quarter was 62%, up 70 basis points from last year's first quarter, with higher average selling prices and improved manufacturing productivity primarily driving this improvement. Partially offsetting these gains was a slightly less favorable product mix compared to the first quarter of 2006.

Operating expenses for the first quarter of 2007 grew 17% to $13.2 million. This increase was due to several factors first, stock based compensation expense increased from $600,000 in Q1 last year to $1.3 million in Q1 this year, primarily due to the CFO transition. Second, was an increase in amortization of intangible assets to $1.5 million, compared with $1.1 million in Q1 of last year, related to a license agreement we entered into late in 2006. Finally, sales and marketing expenses increased, reflecting added expertise and new capabilities within our sales group to further address potential market opportunities. Caren will speak to this development in more detail.

We're very pleased with the drop through to operating income which grew 49% to $7.7 million. Operating margin expanded to 23%, compared with 19% in Q1 of 2006, reflecting our ability to leverage our cost structure over a larger revenue base. Net income for the quarter was $4.8 million, or $0.14 per share on a fully diluted basis. This compares with net income of $5.3 million, or $0.15 per share fully diluted for the first quarter of 2006. You will note that in Q1 of 2007 our effective tax rate was 39.5%, resulting in a tax provision of $3.1 million. Whereas in the prior year, tax expense was fully offset by the reversal of valuation allowances recorded prior to 2006. I would also like to point out that we expect to have very minimal tax payments during 2007, as we utilize our net operating loss carry-forwards.

Finally, the strength of our performance in the first quarter was most evident in our cash flow, where we generated $16.1 million in cash from operations, while repurchasing $13.5 million of our common stock, resulting in our cash and cash equivalents increasing by $2.4 million to $39 million as of the end of the quarter. I think this speaks to just how solid the fundamentals of our business and our operations are at this point. 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, John. Let me start by reinforcing what John said about the strength and momentum of our business fundamentals. We began the implementation of our QVB strategy in Q1 2005. Since that time, we have reported strong organic growth over several quarters. In fact, we took a look at our reported revenue in Q1 2007 versus Q1 2005 as a benchmark in evaluating QVB, and are pleased to report that our organic growth rate was 56%. In that same snapshot, we noted that influenza revenue was up 69% and strep revenue up 83%. All of the other products in the aggregate grew at 27%. This milestone achievement speaks volumes about the success of the strategy we put in place.

Over the past year we've introduced the RSV and IFOBT supported by a strong and growing body of clinical research and by solid marketing programs. Overall, we continue quarter after quarter to expand our customer base and improve our operations, which is creating sustainable momentum in our business.

In John's discussion of operating expenses, he mentioned the investment we are making to improve our capability to serve large accounts. Because of our growth in the last two years, along with the outstanding reputation of the QuickVue brand, we felt there was an opportunity to address the rapid testing needs of larger organizations and health care systems. To address and capitalize upon that opportunity, we have recently added sales and marketing executives who bring the necessary expertise and significant successes to help secure these accounts. The announcement we made last month regarding LabCorp standardizing on our IFOB tests was the first example of our execution of that strategy. The test has been standardized for use at LabCorp's regional labs, patient service centers and physician clients nationwide.

Good news on the clinical validation front continues as well. Recently at the Ninth International Conference on Respiratory Infections held in Hong Kong, a paper was presented comparing the analytical performance of 19 rapid tests from 13 different manufacturers, using two H5N1s, one H1N1, one H3N2, and one influenza B strain. QuickVue influenza A plus B performed with the highest sensitivity compared to the other 18 influenza tests.

At the end of this month at the annual Clinical Virology Symposium in Florida, we expect three separate poster presentations discussing results of studies showing the positive health care impact and superior performance of our tests. One poster is on our influenza A plus B tests and two are on our RSV test.

In June, at the Option VI for Control of Influenza Conference in Toronto, Quidel is proud to be a sponsor of the largest international conference exclusively devoted to influenza and chaired by Dr. Nancy Cox, Director of the Influenza Division of the CDC. At this conference we expect three additional presentations regarding the positive impact of the QuickVue flu test, in helping to manage and control physician behavior and the appropriate dispensing of antivirals and antibiotics in adult patient populations. The positive implications for public health and the economic advantages of appropriate diagnosis and therapeutics in managing influenza patients should be significant. This type of research support, both independent and funded by Quidel, is critical to having our products meet the evidence based criteria demanded by payers and in maintaining and growing our market leadership position.

In this vein, I am very pleased to announce that Dr. Graeme Young is joining our Gastrointestinal Advisory Board. Dr. Young is a recognized world authority on fecal occult blood testing. He is Chairman of the Colorectal Cancer Screening Committee for the World Organization of Digestive Endoscopy, and Professor of Gastroenterology for the Flinders Medical Center. We will work diligently with him on all aspects of FOB testing. In fact just this past week, Dr. Young provided us with terrific input on how to adjust our current IFOBT study protocol to assist us in better evaluating contemplated test improvements and clinical efficacy of immunochemical fecal occult blood testing versus guaiac-based tests. This change in the study methodology may require additional months of testing. Once we have a better sense of the total impact on the duration of the studies, we will let you know.

To wrap up, looking forward from a financial perspective, we anticipate delivering continued strong organic revenue growth throughout the remainder of 2007 with the products introduced last year, and with IFOB and RSV gaining momentum. In addition, we're pleased with our significant progress in the 2006/2007 flu season, and believe that we are well positioned for the upcoming season. It does appear, however, that Japan has experienced two weak flu seasons in a row, which may result in softness in that market. We will update you on the next call on the status, and our approach to the Japanese market when we have greater visibility.

Finally, we believe gross margins will continue to be positively affected by increased sales volumes, a more favorable product and geographic mix and increased average selling prices. Of course, as we continue to execute our QVB strategy, we anticipate continued investment spending in marketing and clinical trials in support of our new products and to further validate the clinical efficacy and economic efficiency of our existing products. We also expect research and development expense to continue to increase as we develop new technologies and broaden our investment in molecular technologies, as well as finalize the development of the MChip for commercialization in influenza surveillance. Operator, we are now ready to open up the call for questions.

(OPERATOR INSTRUCTIONS) And your first question will come from the line of Steven Crowley at Craig Hallum Capital.

Good afternoon. Nice quarter, obviously.

Thank you.

Thank you.

A couple questions. Actually, I want to focus on some of the bookkeeping items that would be helpful for us fundamental analysts. In terms of the split between revenues, you've historically given us a breakdown between influenza, pregnancy, strep and all other products. Could you share that with us?

Right. I think what we're going to do today is we will give you a percentage breakdown on increase and then we are going to over time most likely start to aggregate some of these products into the disease states we serve. For example, we will probably start talking about upper respiratory growth, reproductive health growth, gastroenterology growth, bone markers and so on. So we want to give as much clarity as possible, but for competitive reasons it's a little easier for us to break down in this fashion.

So, our consolidated growth for strep A in Q1 was 41% over prior year, influenza was 24% over prior year, and pregnancy was a little soft for us in that we were down about 6%. And the aggregate of all the other products -- I don't think we've got that. What was it? I think it was 27%.

A 27% increase.

Right.

Obviously the number that jumps out is that 41% increase in strep. What was the driver or what were the drivers behind that kind of performance?

Well, we have been focusing on our strep product with our distributors, both in the U.S. and internationally, quite aggressively over the last couple of years. And we have really built our base of business. So we have over time really pushed the product hard, and we've worked aggressively to make sure that at the beginning of the season and through what we now find is an elongation of the season we now really have about a 9 month strep season we're seeing more and more momentum in the product category so it's just great execution.

My sense is that you've also I think embedded in your comments about international focuses. You have made some nice headway or had nice success in Japan with strep. Is that a correct assumption on my part?

Yes, it is. We were up over 200% in strep internationally.

Now in terms of coming out of the '06,'07 flu season, could you comment a bit about domestic channel inventory or the inventory that your distributors have here domestically? And, well, I'll ask that question first.

Okay. I am really excited about this flu season for us because we started strong way back in the August timeframe to get out there and really aggressively promote our product and position it properly as well as grow the market, grow new physician customers using our products. So what ended up happening, as you saw, is we have had some really nice build over time. Well, you really don't know until Q1 of the season how well you've done because at the of that time frame you need to see whether your distributors were able to in fact make those placements with the end user and they were. So our visibility now on the domestic side is looking very good, very similar to last year in that we should have a very nice beginning again in the August timeframe.

Now you did reference Japan, and the fact that you've had two weak seasons there in a row. My sense is that the contributions from your Japanese flu business was down meaningfully this season versus last season. But even with that decline, it sounds like you're a little bit concerned about the inventory they still have in Japan. Is that a correct read of your comments?

Yes. We don't yet have full visibility on what the end of the season will bring in terms of how the wholesalers will be stocked in terms of what's left over for this coming season. But we will have more visibility on that in the May timeframe when we meet with -- which is kind of an annual follow up with our Japanese distributor.

But you're correct in the assumption that over time, the portion of our Japanese flu business as related to our domestic flu business has gone down substantially as a percentage. So we're looking now somewhere in the mid single digits for Japanese significance in our business. It doesn't mean we're not going to focus on growing that. We are. But it means that our reliance on Japan for influenza success is not nearly what it used to be.

I just want to make sure I understand that mid single digits. Is that the percentage of your influenza business that's Japanese?

Yes.

Okay, so that doesn't account for any of the growth you've seen in other products like strep.

Correct.

Okay. One final question about the revenue composition. The mix between product sales and research contract license and royalty -- could we also have a picture of that for the first quarter?

Yes, that -- the royalty income in the quarter was very small, Steven. It was a couple hundred grand, and going forward we don't expect that to be a material piece of our business. So we're just going to lump that in with total revenues.

Okay. It had been tracking anywhere from high $200,000's to mid $300,000's per quarter so it sounds like it's staying there. You're just going to fold it in so we should probably do the same.

Yes.

And then there's one more detailed question. You provided a view of cash coming out of the quarter. Would it be possible for you to provide us with a feel for where accounts receivables and inventories ended the quarter at?

You know, they were -- both receivables and inventory were down in the quarter pretty-- well, receivables significantly. Receivables came in at about $11.5 million and inventories at $8.9 million.

Okay. That's helpful in terms of key statistics, and maybe I'll press my luck and ask one more question from a bookkeeping standpoint and then I'll get back in the queue. In terms of a couple other income statement items that you referenced in your breakdown, both amortization and stock comp. Maybe we'll start with stock comp, but- what's your view as to how stock comp is likely to play out over the balance of the year? It sounds like there were some things that were a bit anomalous in the first quarter. Might we see stock comp in the million dollar range for the balance of the year on a quarterly basis or is that inconsistent with the picture you have?

No, that's about right. Basically what's going to happen is some of the stock comps associated with the CFO transition will go away and that will get replaced by, not fully replaced, but partially replaced by a new grant that occurred at the end of March.

Okay. And in terms of amortization, is the $1,524,000 number that looks to have been in the first quarter, would that depress it at all? Is that a high water mark, even for quarterly amortization given what you've -- what we know right now?

Yes, that's a high water mark.

I will get back in queue and come back with some more strategy questions later in the proceedings.

Okay.

Your next question will become from the line of Keay Nakae at Unterberg.

Good afternoon.

Hello.

Hi, Keay; how are you?

Good. In the other product category is there anything that really stood out in terms of contributing to that 27% growth?

We have some really nice pick up in a number of product categories. I guess we could talk a little bit about H.pylori. H.pylori is up 36% over prior year. Our bone marker business and our autoimmune and complement business is also up quite nicely. Autoimmune and complement up 24%, bone marker's up 17%, and our veterinary business is really picking up. You're probably aware that there's a lot of interest in the veterinary side of influenza testing, etc. And so we're up over 60% in the veterinary business as well.

Okay. Great. You mentioned, Caren, perhaps some modifications to the IFOB studies. Does that pertain to both the retrospective study and the prospective study?

We're just talking now about the retrospective study, but that study really predicates what's going to happen on the prospective study. I think bottom line, the way to think about it is that we're really looking to prove two areas of interest for us. Fundamentally, one is we want to really focus on changing the standard of care from guaiac-based testing to immunochemical fecal occult blood testing as the first line of defense for screening. So we already have some initial indications from the tests as we were running it -- the clinical study as we were running it, that for example, if you have a patient who has already been proven to be colorectal cancer positive, if that patient's stool samples are tested, guaiac is missing the blood in the stool; and we're finding it every time, so there is that indication that we really need to prove, but we need to make sure that the study is really outstanding in reflecting perfect protocol so we're making some tweaks there.

The other piece that is really important is also talking about the tweaking of our tests as a result also. Because the levels of sensitivity, etc., are -- require basically the kind of support that Dr. Young is going to give us in terms of making sure we have an excellent balance. You always want to err on the side of making sure you don't miss a blood in the stool indication of a potentially serious condition such as colorectal cancer. And right now we feel we're dialed perfectly, but we want to make absolutely sure we can continue on in that way or make other changes as our tests prove we should.

So if I heard you correctly, you feel like the sensitivity level is okay and obviously you're always looking for ways to improve or increase the sensitivity without compromising the specificity?

That's correct. And for every test that is a balance. If Dr. Young were on the call, he would tell you that talking about sensitivity and specificity in fecal occult blood testing is not appropriate, that there are other ways to measure effectiveness. And so, I think for us we feel we have a very good test. Certainly the standardization of our tests by LabCorp is just one indication of that. We have a number of other accounts that we have closed, and we have a number of trials continuing. So we like what we see in our IFOB tests very much. We like the fact that we are growing the business. We have great momentum; we have some national coverage now, as well as the fact that in the early stages of the clinical trial we like the results we're getting.

So with these changes to be implemented, previously you had talked about perhaps having the retrospective results at the end of the second quarter or mid year. So how far back is this going to push that event?

We don't know for sure. We're talking months, not a year. We're talking months, but we don't know exactly how many, but we will. We just met with Dr. Young in the last few days and so it's just very early indication of change, but it's positive change in that we're going to grab more in this study that we otherwise might have.

Okay. So maybe, perhaps, some time early Q4?

Yes, that would be the latest. But when we talked about the challenges before, we really felt we were going to be very reliant upon the study to really force a lot of quick transformation to standard of care to immunochemical. We're feeling better now that with the American Cancer Society guidelines that came out in March, that made it clear that immunochemical fecal occult blood testing was a standard they would like to see adopted. We have seen more and more interest and, for example, we are going to be at ACOG on May, I believe it's 7, 8 and 9. That's the American College of Obstetrics and Gynecology meeting here in San Diego and that's going to be -- major focus is talking to the ob/gyn's about the stopping of the practice of digital rectal exams and moving into immunochemical fecal at home testing work or moving that business to LabCorp. So there is a great opportunity here, I think, to move faster than we otherwise had projected.

With respect to the announcement of the partnership of LabCorp, help us understand while certainly they are a good partner how you expect them to manage perhaps a conflict, if there is one, with the fact that they also represent currently the DNA tests? Is this just going to be them providing a full spectrum of products, or are you at all concerned that they might want to favor one over the other? Perhaps to your benefit, perhaps not?

No, we have no indication from them. When they looked at immunochemical testing as a category, they looked at a number of different tests and chose ours. So immunochemical testing for screening appears to be the preferred methodology for most physicians. But I think they won't be promoting the testing, per se, as to physician preference versus the two. I think the physicians will make their own determination of what they would like to do and what the patient and the health system can afford in initial screening. And what's coming through loud and clear is that the value related to the immunochemical testing and its sensitivity in picking up blood in the stool is one indication would be -- what we would think would be the smartest initial approach. DNA testing still has a long way to go. In our estimation it is difficult, it's expensive, and there's some misrepresentation that DNA testing is today ready to replace colonoscopy, which is not true.

Okay. And a final question is one of your competitors recently reported their results and their flu sales were down significantly. They mentioned the fact that they were actually out of the market in Japan. Can you talk about, to the extent that maybe not perhaps so much in Japan but in the U.S., your growth was represented by market share gain?

We don't have the market share numbers yet for Q1 so we will share those in the next conference call, but I can tell you that in the U.S. our influenza increase was 33%.

In terms of market share gain?

I don't have the market share gain number for you yet.

Oh, I'm sorry.

Our growth was 33% in the U.S. in influenza. So obviously we still have a very nice profile there.

And did you implement any price increases at the beginning of the year?

We sure did. We announced a price increase in October and we implemented it January 1.

Of about approximately how much?

It's approximately 3 to 5%. It's dependent on really which of the SKU's, so that's a good range to kind of look at. Some way higher, some lower.

Okay, thank you very much.

You're welcome.

Your next question will come from the line of Zarak Khurshid at Caris & Co.

Hi, Caren. Hi, John.

Hi.

Hi, Zarak.

Nice quarter right out of the chute there, John.

Thank you. Caren made it easy on me.

He's a great addition.

Great. So, impressive gross margin in the quarter. Could you give us a little more color as to what was driving the improvement? Do you think that you fully realized most of the benefits of the recent migration to the web manufacturing platform?

No, I think we're not finished by any stretch. We just had a really nice review with our operating team yesterday and there's a lot more to come.

Okay. And then just maybe a little more color as to what was, on the product side, driving the improvement there?

Well, for us it's really a combination of everything that we're working on. But if I had to pull back the covers on this one, I'd say that the amount of proof we have around our critical product continues to grow. The interest in the QuickVue brand and the association of quality with QuickVue, flu with QuickVue, strep, continues on so the end users that are approached are familiar with the brand, even if they're not yet using the brand so we're getting conversions at the end user on a much faster pace than we have in the past. We expanded our sales organization by several people on the street as well as in the health system side. We've really advanced our marketing capability. We, for example, have gotten a lot of flexibility as well. We're not exactly what I would call a custom house because I know the connotations of that are not always positive. But we do manage, when we take on a new account, if they're of size and scope necessary, we will change our packaging and really accommodate their needs. Also, we continue to constantly monitor our quality, and we continue to constantly monitor what feedback we get from customers and tech support. And we are getting very, very high marks in terms of quality, consistency and ease of use. So we're hitting on all cylinders in that regard and I think that the momentum is evident.

Great. With respect to the exciting new opportunities of RSV and IFOB, could you give us maybe just a little sense for the year-over-year growth in those businesses, maybe the sequential growth? And we'd love maybe an absolute break out of the size of those businesses in the quarter?

We are going to start -- as we're adding a number of products, and we will continue to add products to our portfolio, we are going to start reporting more in the segment areas. So we will start talking, for example, about gastroenterology/cancer; for example, we will probably start marrying H.pylori and IFOB. Toward the end of the year or early next year we will probably start to give more color there as we get the momentum built.

I can tell you that our IFOB product is up 272% from prior year quarter, but that's really not a fair assessment because we were just getting get out of the gate there so it's a pretty small number. In terms of RSV, we were not on the market last year at this time. So I think the focus for us is really -- on RSV -- is getting a lot of the proof out there. And I mentioned earlier, there are a number of papers so we're going have a lot of, we think, positive impact especially as we this year have a real -- we're going to be out there in time to be talking about our nasal wash claim which has just been approved by the FDA. So we are going to be in the acute care environment really focusing very aggressively on flu and RSV as a package. So we're going to be definitely in time for the correlation studies this summer which we missed last year because we were approved in September of '06. So very good momentum I think in terms of preparation for this year's upcoming RSV and flu season, as well as the momentum in IFOBT, which is good.

Great. Any sense for the total size of the RSV market today, and what do you think the growth of that market is?

Yes. I think -- at this point we think the RSV market is somewhere around $18 million at the end user but we're not exact; we don't have exact numbers. What we believe is that we will help to really grow that market as we did flu and as we are IFOB. So I'm looking for double digit growth, of course.

Right. Any sort of limitations you see to allowing you to grow that market like you did with flu?

No. As a matter of fact, I think because flu there is so much happening now in flu around -- especially I referred to the fact that you really need in flu to do two things. You need to prove that your test really is excellent at giving you the right accuracy for positive or negative diagnosis. And then the second thing that you've got to do is you've got to prove that when the physician uses the test, they appropriately treat the patient with the right antibiotic and right antiviral. And, what we found in the study, and I can't speak too much to it until after the conference, is that there is a tremendously positive impact when they use a flu test versus when they just experiencially guess. And so it doesn't matter if it's early flu season or late flu season. There is that positive and a very strong, economic and clinical impact in doing it the right way. And so we see that, and RSV will be on the tail of a lot of that positive information. So we think those two categories are really going to continue to grow. There are still a lot of physicians that are hoping they get it right.

Great. Lastly, with respect to LabCorp standardizing around IFOB, have they begun training the reps on the test, and what is it really going to take to make this partnership really material to Quidel's business?

That's a really good question. Each of the big customers you'll get over time needs to make sure that they properly inservice their sales organizations and get their marketing information in gear. And we believe LabCorp is going to do an outstanding job, but we also know that really we are just getting started. It's going to take time to get really great impact but there's a lot of interest and a lot of positive momentum from LabCorp's senior leadership to get this done. So, for example, and I don't blame them, LabCorp has very tight controls over communication and everything that we say, if we put them at press release or even in our earnings script today, we have to get approval. So when we talk about LabCorp in positive terms, it's with the authorization of their leadership that this is something they want to get done.

Okay, great. Thanks for taking the call.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question will come from the line of Soon Kwan at Pacific Growth Equities.

Hi. Congratulations on the strong quarter.

Thank you.

Thank you.

I was wondering as far as price increases are concerned if we were sort of forecasting long term, is this something that you believe you'll be able to do on an annual basis at least for the next few years?

At this point we have over the last couple of years announced and appropriately implemented three price increases. We have to have it done preannounced. Do we believe the value of our products over time can be proven to merit a higher price in the marketplace, especially in relation to competition? Absolutely. So I wouldn't tell you on schedule exactly when we are going to do that, but I will tell you that we continue to have the ammunition to do it when we want to.

Okay, great. Let's see. I guess on the IFOB side, to the extent that you can because I noted your comments earlier about LabCorp and sort of them monitoring what you say about it, but are you able to even provide any high level detail on the type of clinical validation studies that they performed in house?

No, you have to ask LabCorp that information. We would not attempt to speak for their researchers and doctors that perform that evaluation.

Okay. And about the general FOBT market including guaiac-animated chemicals, what percentage of the market is split between the reference labs versus the physician office labs?

At this point I'm guessing because I really don't know what that breakdown would be, but the physician office labs would have most of that business today in the guaiac form. I think the reference labs both Qwest, now LabCorp as well, are very interested in promoting immunochemicals. So I think there may be a shift. Certainly we are going to do everything we can to assist that shift in the POL, but today guaiac at the physician's office would to me be the overwhelming use of the test.

Okay, great. And I guess just lastly could you give us an update on MChip, and what you plan on doing within your R&D to develop that and when we'll get more visibility as to when you'll have a commercial product?

Yes, we're going to talk at length probably in Q's 2 and 3 about where we are, but I can give you just a quick look. We have created in our own company, through the hiring of and collaboration with top molecular biologists and chemists the ability to move what we have acquired in terms of intellectual property into an MChip surveillance slide that will be able to be used for initially the detection of H5N1 and other subtypes of interest at all the Sentinel and Surveillance labs globally. And so the work that is being done now is to finalize the movement of the MChip technology onto the appropriate medium so it can be easily used in the labs. That technology then will be moved over time to a simple reader technology, and I think I'll stop there for this call. But there's a -- it's very exciting for us; our lab's up and running; we've hired some great people. We've got some very strong research partnerships that are proprietary that won't be discussed probably but they're with some of the top researchers in the world in this area so we're real pleased.

Okay, so is this technology long term amenable to being a point of care diagnostic?

Yes.

Okay. Right. Well, thanks very much for the update.

You're welcome and thank you.

Thank you.

Your next question will come from the line of [Steve Friedman] at Wachovia Securities.

Good afternoon, Caren and John, and congratulations again on a fine quarter of growth and profitability.

Thank you.

Thank you.

I think probably most of the questions I had or most of the question about LabTech have been asked but possibly you might expand a little bit on the scope of the contract, not withstanding the tweaks yet to be made in the IFOB test? Well, just in general is there any further? I mean that seems like a tremendous joint venture for Quidel and maybe if there's anything, again noting that LabTech does control, I guess, what you have to say -- but from Quidel's point of view?

We're very pleased to partner with LabCorp to cause the physicians that they serve to have a really strong interest in moving to an immunochemical fecal occult blood test, namely the Quidel test. But there's still always work to do to get all that education done in all those labs, and to get all of the marketing people that support the physicians to understand the immunochemical story, and to get the physicians to place those orders and give those patients the prescriptions and/or the kits to take home to send to LabCorp for reading. So we're real excited about it, but in any partnership it always takes time to ramp up and get it done. And we wouldn't be satisfied in replacing what is going on today in the LabCorp world or with any of our major customers and the volume on guaiac we want to weigh, make for our partners a tremendous value, so that they increase dramatically their share of the market in fecal occult blood testing period. So we're going to both have goals that we're going to want to achieve together to get this done.

Ladies and gentlemen, we do have time for two more questions. And your next question will come from Steven Crowley at Craig Hallum Capital Growth.

As promised, I'm back with some bigger picture questions. We haven't heard anything about your efforts in the OTC market with prospective partners, existing partners. What can you tell us about those efforts and what kind of priority they hold in your playbook?

Well, definitely they have great priority for us. There's a real excitement and enthusiasm in this company for getting our flu testing and other tests over the counter when it makes sense. We need the right partner, and we need to make sure that that partner understands the commitment and the cost and the time associated with getting especially regulatory approval of whatever format of test we choose to go forward with. That being said, we are getting much closer. We're getting some really strong, I would call it, understanding between the presidents of some of these businesses and me. And so it's a matter of time, so I appreciate your patience, Steve, but we'll get there and we're excited about the possibilities there because we believe the over the counter market and the retail market are very exciting opportunities. And with our test capability and ease of use it's a natural for us.

Makes sense. It sounds like you're still very much in the formative stages of making this happen versus a fair ways down the path and not being able to talk about it. Is that a fair read on my part?

Yes, well no. I think we're further down the path than what your last comment was. And now we're getting a lot closer. Believe me as soon as we -- when we have a partner that wants to talk about it, we'll talk about it. In the interim there's a lot going on behind the scenes is probably the best way to say it.

Okay, that's a good additional clarification or qualification for us.

Good.

In terms your RSV test, I know there's a significant development on the horizon there and that's CLIA waiver for the test. What's your latest temperature on that process and how long it might take for you to attain that?

Well, we are about ready to march on Washington. It just does not have a regulatory guideline associated with it like 510K and PMA does. So when you send your follow up letters and you send even requesting should we do more, what you get back is we'll get back to you when we think we can but in a regulatory way we really don't have to give you a timeframe. That doesn't mean we're sitting still. We are continuing to push on all cylinders and have meetings scheduled in Washington. So we're not sitting still for this. But we are also aware that under the new guidelines, there is just a lot of I guess you would say slowness with regard to the reviewers getting back to us. So we have not received one bit of negative information back from the FDA on our submission. They just haven't made a determination and so we're waiting.

Great. Well, that's also some good color. In the spirit of trying to keep that good color going, let's talk a little bit about making sure we analysts understand the ongoing seasonal aspects of your business. In the prior couple of years, you have experienced pretty meaningful sequential declines in sales from first quarter to second quarter; I think it was 39% last year, 35% the year prior. You have some products in the mix, new products, that aren't seasonal. You have some that are, and you still have some of your horses that are pretty seasonal so should we continue to think about the seasonality of your business from first to second quarter being of similar magnitude as it has been in the last couple of years?

Well, I won't comment on the magnitude, but I will tell you that yes, you will see a seasonal shift between Q1 and Q2 this year as well.

And historically that has meant second quarter is typically a quarter where you lose some money; you make some investments that position you well for the balance of the year in the next cold and flu season. Is that the same mentality that you are approaching second quarter and we analysts should also approach second quarter?

Yes.

Okay. And one final question and this one might be a little easier for you to be more specific on. You do have a number of new initiatives, things you are investing in, yet in the first quarter of this year R&D was not up very much at all year over year. How should we look at your R&D budget for this year? Is it despite the first quarter modest increase should we still be thinking about a couple million dollars more in absolute dollars this year in R&D than last year?

Yes, it's a timing issue. We're definitely investing more in R&D and so yes, it is significant as you suggest.

Well I appreciate the color again.

You're welcome and thank you for coming around twice.

Your next question is a follow up from Keay Nakae at Unterberg.

Hey, John, quickly -- what was the share count at the end of the quarter? You gave us the weighted average but I just wanted to clarify that?

Are you asking about the absolute, or do you want the fully diluted shares?

Yes. Both.

Well the fully diluted shares at the end of the quarter were at 33.5.

Okay, and then just to go back to the G&A number. You had the sequential increase and you talked about the increases related to the CFO transition. But going forward then, is that -- most of that increase is taken care of in Q1 -- you won't have too fat of a tail for those subsequent quarters?

Yes. Some of that will be picked up in, as I mentioned, the stock -- the new stock grant. There will be a little more. But yes.

Okay. That's all I had. Thanks.

Thank you very much.

Ladies and gentlemen, that is all the time we have today for questions. I would like to turn the call back over to management for closing remarks.

Thank you very much. Thanks again to everyone for your time this afternoon and for your continued support. I look forward to updating you on our progress again when we report second quarter results. Good afternoon.

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