QuidelOrtho Corp (QDEL) 2007 Q2 法說會逐字稿

Welcome to the Quidel Second Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded July 26, 2007. I would now like to turn the conference over to Mr. Don Markley. Sir, please go ahead.

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 John Radak, Chief Financial Officer.

Earlier this afternoon Quidel released financial results for the second quarter and six-months ended June 30, 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 Leticia Hall.

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, July 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 joining us this afternoon. The business performed very well this quarter, as we continued to expand our margins and post double-digit revenue growth. Total revenues for the second quarter were $18.6 million, a 13% increase over the same quarter a year ago. We experienced solid growth in a number of our product lines, with the strongest contribution coming from the pregnancy and Strep A products.

Our Reproductive and Women's Health business experienced 13% growth in the quarter, led by strength in pregnancy test sales, which we believe was the result of market share gains. This was a very nice turnaround from Q1 where our pregnancy revenues declined. As you are aware, the second quarter is our lowest revenue quarter of the year, due to the seasonality in our infectious disease business, and as expected, our flu revenues were not meaningful in the quarter.

Gross margin came in at 50% in the second quarter, up from 47% in last year's second quarter. Contributing to the improved gross margin was manufacturing productivity gains and favorable impacts from our price increase at the beginning of the year.

While we grew revenues by 13%, we were able to hold the growth in operating expenses for the second quarter of 2007 to 3.5%. This includes non-cash expenses relating to stock-based compensation expense, which increased from $900,000 in Q2 of last year to $1.2 million this year and amortization of intangible assets, which increased $200,000 to $1.3 million, related to a license agreement we entered into in late 2006.

The investment we made in the latter half of 2006 in our sales force continues to drive higher sales and marketing expenses, reflecting added expertise and new capabilities within our sales group to further address potential market opportunities. Through revenue increases and leveraging our cost structure, we were able to narrow our operating loss to $3.2 million for the quarter, compared with an operating loss of $4.2 million for the second quarter of 2006.

The net loss for the quarter was $1.7 million or $0.05 per share, compared with a net loss of $4.0 million or $0.12 per share for the second quarter of 2006. Our balance sheet remains very strong. Cash and cash equivalents at the end of the quarter were $36.9 million, compared with $36.6 million at year-end '06.

In the second quarter, under our previously announced share repurchase program, we acquired approximately 290,000 shares for $3.7 million, bringing our total for the year to approximately 1.5 million shares or $17 million.

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. It's a pleasure to report strong positive growth and continuing momentum for our QuickVue Rapid tests. I'm pleased with our performance in Q2 and with the progress we made in key strategic areas. Before we take questions, I would like to briefly highlight results and major initiatives we have underway to further strengthen our leadership position in our various lines of business.

We experienced 13% growth in our Reproductive and Women's Health business, which includes our pregnancy, chlamydia, vaginosis, and bone health product lines. As John alluded to earlier, we experienced a rebound from last quarter in our pregnancy growth rate to the high teens. This is reflective of the strength of the brand and our leading market share position, as customers who switched in Q1, because of price, returned in Q2 for our quality.

Sales of our QuickVue Immunochemical fecal occult blood test (FOB) in the first half of 2007 are up 85%. This equates to a booking momentum in the first half almost equivalent to our bookings in all of 2006. Normally we would be very bullish on this growth in progress, however, we are impatient with the market acceptance, as guaiac-based FOB tests still represent over 97% of the total FOB testing market in the United States.

In this vein, we are working on a number of test enhancements, a generation two immunochemical test, which we believe should address many of the adoption hurdles in this market. Our goal is to introduce this generation two immunochemical test in 2008 into the professional and OTC markets.

In addition, Dr. Graeme Young, a leading researcher in bowel health and a distinguished member of our Gastroenterology Advisory Board, co-authored a study published last month, which indicated that neoplasia detection may not be compromised by sampling only a single bowel movement.

This study suggests that the simplicity of a simple sample regimen or a single sample regimen might improve population participation in screening programs, a key concern to physicians, considering converting guaiac. Dr. Young has agreed to support our clinical study requirements this year and our retrospective research study will now include prototypes of the generation two tests.

Our flagship Infectious Disease market segment includes our influenza, Strep and RSV products. In Q2, this business grew as planned, with Strep garnering double-digit growth. We are pleased to report that we are currently in Web Automation production for our flu product line, giving us quality, lot-to-lot consistency, and volume capacity to meet the accelerating demand for our influenza tests.

We are enthusiastic at the prospects for another excellent season for our upper respiratory product lines. Our dominant position in the physician office lab continues and the Acute Care segment growth should accelerate, as we have added significant resources to address the hospital market.

We believe these actions position us well to offset some expected softness in our flu business in Japan. As you know, Japan had a mild flu season earlier this year and therefore our distribution partner has more inventory than we would like coming out of the season. In addition, there is pressure in the Japanese markets stemming from a decline in reimbursement that is driving significant price reductions. These market dynamics are not a surprise to us and we are working to appropriately reposition our brand in Japan.

It is important to place in perspective the relative importance of flu test sales in Japan to our overall business. While the Japanese market in 2007 is less than one-half the total dollar volume of just three years ago, the U.S. market has grown significantly over that same timeframe. It is this dynamic that provides us confidence that, in total, our flu franchise can continue to grow at or near its historical growth rate levels.

We are pleased to report that we have received approval from the FDA for a nasal wash claim for our RSV tests that further strengthens our offering to the acute care market, where the majority of product sales currently occur. In terms of product enhancements for the RSV product, end users can now utilize a single sample regimen to run both an influenza and RSV test.

We expect this product use enhancement will be most welcomed in the acute care environment, where both tests are often run on pediatric patients who tend to be uncomfortable with sample collection procedures. We continue to seek from the FDA a CLIA waiver for the POL market, which today is very small but can be a driver of longer-term growth, with successful physician adoption. Our goal remains to secure the waiver in time for the upcoming upper respiratory season.

Let me spend a minute talking about future technology platforms. With Quidel's dominance in point-of-care influenza testing, it is natural for us to pursue a significant role in surveillance of the influenza virus. Quidel's exclusive licensing agreement with the University of Colorado for the influenza MChip provides an excellent diagnostic tool for the identification of unknown influenza A viruses.

Work at Colorado University has shown that there is sufficient genetic diversity within the M gene segment to permit full subtyping of influenza A on a microarray. The 15 short sequences, which make up the MChip, provide a remarkable degree of pattern distinction over a broad range of different influenza A viral subtypes, including the 1918 virus.

This potential makes the MChip imminently suited for surveillance studies with a 7-hour time to results versus the 24 hours or longer process time for a single subtype confirmation today. The MChip will be initially provided as a " research use only" product. The product in development currently includes a kit consisting of the capture array on a solid support, primers, buffer solutions, and assay controls.

Also in development, for small-to-medium laboratories, is a short sequence chip employing a smaller number of sequences, resulting in a reduction of overall test time from 7 hours to 3 hours. The short sequence chip is designed to detect fewer subtypes than MChip and is directed to the most commonly circulating human subtypes and the avian subtype H5N1. We believe that this QuickChip has potential for both focused, surveillance, and diagnostic use and we will pursue these applications aggressively in 2008.

Enhancing our expansion of advanced influenza diagnostics capability, we recently announced additional license agreements providing for advanced microarray detection technology, specifically the BChip for influenza B and the AVR chip for detecting antiviral-resistant influenza.

In a recent study of 62 influenza B virus samples from 19 countries, dating from 1945 to 2005, as well as five negative control samples, the BChip exhibited 97% sensitivity and 100% specificity with no false positives. The AVR-Chip can detect mutations that may lead to antiviral resistance. This capability influenza important for global monitoring of influenza patterns and for directing physicians toward better treatment decisions.

Together, we believe the MChip, the QuickChip, the BChip and the AVR-Chip represent a significant and growing competency in the molecular-level detection of influenza viruses and plays Quidel in a very strong position in this new and exciting field of molecular diagnostics for influenza.

From a corporate strategy standpoint, we plan to leverage our leadership position in diagnostics and the reputation of our QuickVue brand to grow and build value. To help us execute that strategy, we are very fortunate to have brought onboard Rich Tarbox in the new position of Senior VP, Corporate Development Officer.

Rick is a 30-plus-year veteran in the life sciences industry and has led business development efforts for some of the industries top firms. We will be focused, with Rick's leadership, on product line expansion, strengthening our IP portfolio and building relationships with significant corporate partners in diagnostics and pharma. Rick will also have responsibility for our Specialty Products group and our OTC business.

During the second half of 2007 we expect to see continued strong revenue growth and improving margins. We expect improved margins will be driven by increased product sales, leverage of our cost structure, products mix related to our flu and RSV tests, and our price increase from the back half of the year.

We will also see a benefit from moving our flu test to our automated web manufacturing process and anticipate further margin improvement once we complete the transition for our Strep and iFOBT test formats as well. Of course we will continue to make investments in research and marketing in support of our QVB strategy.

By leading the way with research and evidence documenting the medical and economic benefits of our products, we have posted strong organic growth for several quarters and have clear leadership positions in our core product lines.

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

(Operator Instructions) Zarak Khurshid. Zarak, Caris & Co.

Great. Thanks for taking my call, good quarter, guys.

Thank you.

Thank you.

could you just give us a quick update on where LabCorp is in standardizing around the iFOB test? What -- how much of that growth that we've seen is attributed with the partnership and maybe kind of what fraction of iFOB is going through LabCorp today?

Okay. Based on confidentiality, we can't break out the numbers, but our growth includes LabCorp and includes a number of other new customers who are beginning to stock the product and testing the concept in their offices.

Okay, any detail, I mean, ball park as to where we are today? I realize it's growing off of a small base, but is it $1.0 to $2.0 million, $2.0 to $3.0 million, $3.0 to $5.0 million? What -- how should we be thinking about it?

Well, we're not going to break out iFOB revenues at this point. We're hoping that we might be able to do that in '08. So, in terms of the total market, as I said, it's a very small number of tests that have really converted from the guaiac yet to the iFOB, which is why we are concentrating of focus that will bring product features in our gen two tests that we think will address some of the hurdles that we are currently facing in terms of conversions.

It's not only us. There are a number of companies that are in this space that are working to try to get this conversion accelerated and so our goal is to come up with the appropriate tests and so our strategy continues to change and improve as we get smarter and smarter in this space.

Okay, great. Then it looks like the margins were strong. Were there significant manufacturing efficiency gains versus the first quarter?

No. It's just a continuation of what we have been experiencing all year.

Okay. But if flu was light, and I think it was, can you give us some color as to the improvements? Were they associated with one of the products during the quarter? Were they Strep-related or was it more or less across the board?

Well, it's really across the board, because as we look at our manufacturing operation, there's not a whole lot of distinction in terms of the drivers of manufacturing overhead between the different products. They're all lateral flow test and so they go through a very similar process. So it doesn't really matter whether you're producing a Strep test or a pregnancy test or a flu test. What we're experiencing is, as the unit volume grows year-over-year, we're able to leverage that same manufacturing cost base.

Okay and lastly and I'll jump back in the queue, could you give us a breakout of pregnancy, Strep and flu in the quarter, as well as growth rates year-over-year? Thanks?

Zarak, we're not going to be breaking out that level of detail anymore, due to competitive reasons. What we will comment on is the business lines that we've talked about in our prepared remarks. So I can tell you that, in the infectious disease business, that business grew about 6.0% in the quarter and in infectious disease, that includes Strep, mono, influenza and RSV. And then, in the Reproductive and Women's Health segment or business line, that grew 13% and then all other products grew approximately 35%.

Thank you.

Keay Nakae, C.E. Unterberg.

Yes, with respect to the other product category, anything in there showing significant growth?

Yes. Our veterinary business was -- again showed pretty substantial growth in the quarter. And as we'd previously mentioned, that also includes our iFOB product, which grew substantially as well.

And so did, as we said earlier, pregnancy and Strep. Influenza in Q2, in 2007 versus influenza Q2 2006, the season ended earlier, so there wasn't really a tail in Q2 as there was this year as there was last year and that's the only reason for the lightness in that product. Overall, we still have, by far, the dominant market position through our Q1 results.

Caren, as we head into this year's flu season, where do you stand with inventory levels in the U.S.?

Inventory in the U.S. looks good. We feel we're in a very prime position to begin early and charge hard.

Okay and relative to say where you were inventory-wise last year, would you say you're about the same, higher or lower?

About the same.

Okay, very good and finally, with FOB clinical results, are we still on track to see results from the retrospective study in Q4?

Yes.

Very good. Thank you.

You're welcome.

Steve Crowley with Craig Hallum Capital Group.

Yes, good afternoon, a couple questions here. I want to talk to you a little bit about the gen two iFOB test initiative. What does that do, potentially, to the timeline of the inflection point of this market? Do you run some risk that by coming out publicly with the intention to do a gen two, you cause people to shy away from moving to gen one and what does it do to the timeline for your data presentation strategy?

Our gen one product competes very, very well in the market today in comparison, we believe, to other products in terms of test type, ease of use, rapid detection, sensitivity, etc. We're talking about the development of what we think is a very different test format. That not only has utility in the physician's office, but it has great utility as well in the OTC market.

So we, for all the right reasons, physicians should definitely be moving from guaiac to immunochemical for higher sensitivity and higher confidence of detecting blood in the stool. So, no, there should be no impediment to this announcement. What we are telling you, the investment community, is that we are committed to this category.

We see this category having great opportunity and I'll give you a prime example. If you look at Q1 in distributor data, the market information that we get, less 2.7%, which is what I was alluding to in the 97% still guaiac only. Only 2.7% of total units are currently immunochemical-based tests. That represents 23% of total dollars.

So that shows you what the conversion opportunity is in this market and so we're not going to just sit still when we get the kind of responses back from physicians about "here's what we need to see", and say, "yeah, okay, we're going to just sit on that information". We're going to move on it immediately and we're going to incorporate it in our tests.

Then can you share those dollar amount and unit amounts with us? How big was the iFOB market in dollars in that period you just referenced?

No. We don't -- I don't think any of us who get this information from HIPAA, which is the highest-sponsored service, share the particulars of the information down to the detail level. What we do is give you as much as we can under our relationship with that group.

What is your market share, do you think, of that 23%?

Of that 23%, we're probably 13 to 15%, in that range, but we don't have Q2 data. That's Q1 data.

And is that 13 to 15% of the 23% or 1300 BPs out of the 2300 BPs? I mean, do you have 13 to 15% market share of the 100?

(Inaudible) of the dollars. We have 23 % of the units.

Okay, 23%. Okay, the point you make earlier. Was that 2.7% of the combination of FOB, iFOB tests, were iFOB test units, but that equated to 23% of the total dollars?

That's correct.

But the industry statistics. You're saying out of that portion that's iFOB, you have 13 to 15% market share?

Dollars, yes.

Okay. Great. Now, in terms of LabCorp, what kind of embrace have you seen of your product in terms of substituting it and their sales process, substituting it on their sales sheet and any real traction with the product inside of LabCorp?

We're not going to discuss specifics around the LabCorp partnership. What I can tell you is that we are pleased with the introduction of the product, we are working through continuation of that partnership in terms of strengthening. They have the same responsibility and requirements to get physicians to move away from guaiac into immunochemical.

One of the comments, though, I do want to make about market share, which is why we try hard to give you as much color as we can, but then we get distributor-based information and so the percentages, for example, that I just gave you does include some of our direct business and so I'm not going to give you any more specificity than that.

But I think it's just important that we clarify that part of the reason why it's difficult to give you some of this market share to the decimal point is because there is mix amongst manufactures in terms of their distribution strategies, both direct product as well as through distribution product.

Okay. Well, we'll try and survive on that. I think we're all trying to figure out whether this product can be a 5.0% product in your mix this year and its awfully difficult to get there without some help from the Company.

That being said, switching gears, the Japanese issue, in terms of some inventory overhang and some issues in the market, can you help us get a sense for what Japanese flu business was a year ago in the third quarter? Was it $3.0 or $4.0 million? Kind of looks like that's what we heard last year. Is that correct?

I think you're in the ballpark.

And it would appear that RSV, if you can get that test rolling this season, is one of the things that could make up for a difficult comparison in the Japanese flu business. Is that correct in -- is it contingent on you getting the CLIA waiver in the next couple of months here so you have it at the beginning of the season?

No. Our focus in RSV is, yes, to really aggressively -- this is really our first entrance into RSV in a full season and so a lot of the prework that's done in acute care is beginning already and it's really an acute care emphasis that we believe will give us significant RSV penetration this full season.

Also, we expect to sell more flu domestically. That also should support further growth in terms of strong possession and momentum in the influenza market in the U.S.

And just to close the loop on RSV, we've been anticipating CLIA waiver for quite some time now. Have you run into a specific obstacle or issue that elongated this timeline or is it more general delays? What kind of visibility do you have there?

No, this is typical for all companies who are dealing under the lack of CLIA guidelines with regard to time to submission and approval.

One other topic and then I'll hop back in the queue. You've spent some time talking about your newer technologies and the stakes you've put in the ground in molecular diagnostics and I applaud that.

At the same time, there's quite a bit left to the imagination in terms of the timetable and the magnitude of both the necessary investment to be a real player in that space and when the payoff might begin to take place. Can you help fill in some of the blanks as to when you're going to need to step up investment in molecular diagnostics and when we might begin to see the financial rewards from that investment?

John and I are going to be on the road in the fall and we plan to have a presentation at one of the conferences to give a further detail, more enlightenment on this entire area. I think it's too big a subject to try to tackle on the call. I can tell you, though, that the commitment is significant and that we will give you as much color as we can toward the end of year.

The genesis of the question is, in part, R&D was down rather meaningfully year-over-year, I believe, and you have a rather ambitious plan or appropriately ambitious plan to continue building the product set at the Company. There would seem to be a bit of an inconsistency in the financial model right now with those two items. Are we going to see a jump in R&D in the back half of this year, commensurate with what you're trying to do to build out the portfolio in that technology?

You'll definitely see increased R&D spending, there's no doubt.

All right. I'll jump back in the queue. Thanks very much,.

Zarak Khurshid, Caris & Co.

Hi, thanks for taking my follow-up question. Have you been seeing any increased competition from competitors who may be arming distributors with a lower priced private label flu test or is it too early for any visibility on that front?

At this point, we have not seen that.

Okay, good news, and then I recall the iFOB acquisition press release. There's the number 50 million FOB-type tests per year. Can you describe for us, perhaps, what the compliance rate was for those 50 million, roughly, and how many of those were actually reimbursed? And if you could, just maybe give us a sense for, I guess, whose loss is it when those tests are not fully complied with by patients? Thanks.

Well, I think that under the guaiac model, what our market research has been covered is that physicians often, because of the low acquisition costs and the costs of paperwork and loss of productivity to really file claims around the guaiac, they take that test and they roll it into their physician's Office C.

And so, from that vantagepoint, physicians today, especially if the patient does not return the three-night regiment for a guaiac slide-based product, the physician suffers no harm, so to speak. Patient certainly does. Patients don't appear to like a three-night regiment, which is why we continually speak to a single specimen testing methodology as being important to get the population to comply. So the physician, today, in the current environment with guaiac, does not take on a lot of risk.

In the immunochemical test, which is the better test, obviously, there is a patient preference that we would like to improve. Meaning that we want to find a way to get the patients to find the ease of use of test so simple and the ability to get that test returned to the doctor so quick that it becomes an excellent and a better method than today's.

And so that's our goal, is to get that 50 million tests moved in the right direction as fast as we can. A number of manufactures are working in this environment, but there are better methods and we're working to get those to market as soon as we can.

Thank you.

You're welcome/

Un Kwon-Casado, Pacific Growth Equities.

Hi, good afternoon.

Hi Un.

Hello.

I was wondering, so with respect to the influenza market, what is the breakdown between the POLs and the reference labs?

I don't have a breakdown on POLs versus reference labs. Most of the POLs in influenza, to our best knowledge, continue to purchase through distribution and do not have the reference labs as a primary focus at this time. They tend to run that test right in their office.

Okay and so I was wondering, with respect to your molecular-based tests, can you help us understand where that sits in the market? Is it more appropriate for the reference labs, for hospitals or is it more point of care and how is it going to compliment your current flu test?

It's really a thee-pronged approach. Our goal is to have a surveillance lab product, to have a small hospital, small lab product, and eventually to move into point of care very aggressively into the reference lab in physicians' offices.

Okay and so could you give us rough timing on when you anticipate these tests to launch?

As I said, we're going to be more specific on that toward the end of year. At this point, though, from the surveillance standpoint and from potentially the QuickChip, we're looking at 2008.

Okay, that's pretty soon. Great, okay, thanks very much.

You're welcome. And ladies and gentlemen, that is all the time we have for today for questions. Sir, do you have any closing remarks? Yes. I'd like to thank everyone for calling in today. We really appreciate the support of the Company. We look forward to updating you on our progress again when we report third quarter results. Thank you.

Thank you.

This concludes today's Quidel Second Quarter Earnings Conference. You may now disconnect. 10