QuidelOrtho Corp (QDEL) 2007 Q3 法說會逐字稿

Welcome to the Quidel third Quarter 2007 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a question-and-answer session. To ask a question, please press * followed by 1, on your touchtone phone.

If anyone has difficulty hearing the conference, please press *0 for operator assistance. As a reminder, this conference is being recorded today, October the 2fourth, 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 & 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 its third quarter and 9 months ended September 30th 2007. 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 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 Form 10Q, as filed with the SEC.

Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast -- October 2fourth 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 for a quick status update on the impact the San Diego fire situation has had on Quidel. Caren?

Thanks, John. And thank you to everyone for joining us this afternoon.

I'm sure all of you have been following the news reports of the wildfires in San Diego over the last several days. In light of that situation, I want to provide you with a brief update on how our business has been impacted.

Most importantly, our employees are safe and secure, although many have been displaced from their homes due to mandatory evacuations in San Diego County. We have had a skeleton crew at our San Diego facility since Monday of this week -- ensuring customers' orders are fulfilled from our finished-goods warehouse in the Los Angeles area.

Our inventory levels have been able to meet demand, and we are shipping daily. We anticipate that production will be at full throttle in the next few days. It is important to note that we have been cognizant of the need to meet public health demand for our upper-respiratory tests, and we have worked diligently to get the job done.

We expect to have our San Diego facility fully functioning by the beginning of next week at the latest, and this temporary disruption should not impact our ability to meet customer demand in the fourth quarter. My thanks to our employees, suppliers and distributors for their excellent performance and partnership during this very challenging time.

Now, John will present our financial results for the third quarter. John?

Thanks, Caren. And hello to everyone on the call.

We are pleased with the performance of the business this quarter, as we've posted another quarter of double-digit revenue growth. Including this quarter, we have delivered 7 consecutive quarters of double-digit organic revenue growth. Just as significantly, our operating margins expanded 520 basis points, for the third quarter of 2007 -- compared to the same period of last year.

Starting with the top line. Total revenues for the third quarter were 27.6 million -- a 16% increase over the third quarter a year ago. This growth was driven by strong sales of our infectious disease tests. In particular, domestic sales of the QuickVue Influenza Test, in advance of the upcoming flu season.

Our gross margin in the 2007 third quarter was 60%, compared to gross margin of 56% in last year's third quarter. The improvement was mainly attributable to a favorable product and geographic mix.

Operating expenses for the third quarter of 2007 grew 11% -- to 12.7 million.

The increase was primarily in sales and marketing -- reflecting the personnel additions we made at the beginning of this year, and capabilities within our sales group to address expanded market opportunities, as well as higher intangible amortization related to licenses at the end of last year.

Operating income grew significantly, from 2 million in the third quarter of 2006, to 3.7 million this year -- an increase of 87%.

Net income for the third quarter was 2.4 million, or $0.07 per share, fully diluted -- compared with a net income of 2.1 million, or $0.06 per share, fully diluted for the third quarter of 2006.

Just to remind everyone -- last year, tax expense in the third quarter was zero. For comparison purposes, had we recorded tax expense in 2006 at the same rate as this year, our EPS last year would have been approximately $0.04 per share.

Our balance sheet remains very strong. Cash and cash equivalents as of the end of the third quarter were $35.3 million -- compared to $36.6 million at December 31st 2006.

Year-to-date, we have repurchased approximately 1.5 million shares for $17 million.

I'd also like to take a couple of minutes to discuss trailing 12-month data and comparisons. I believe this information is more revealing of our annualized strength, as the trailing 12-month numbers put in perspective the quarterly seasonality of the business.

Trailing 12-month revenue ending September 30th 2007 was 118.9 million. Up 17% over the comparable trailing 12-months ended September 30th 2006. Our gross margin in the trailing 12-months improved from 58% to 59%. And most importantly, our operating profit in the trailing 12-months was 19.2 million -- an increase of 47% over the prior 12 months.

This performance reflects the leverage in our business model, and the strength of our QVB strategy, which has provided the foundation for our growth.

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.

We're privileged to be presenting the results of another strong quarter, trailing 12-months in progress, and several aspects of our business. I do want to reinforce one of the key areas John highlighted -- which is the continued improvement in operating margin. I believe this improvement is directly related to the success of various elements of our QVB strategy, which we are leveraging across a growing customer base, and into new markets.

These elements include the strong clinical research support for our tests, our outstanding go-to-market strategy and technical support programs, and a leading brand name that signifies quality, and enables partnerships with leading diagnostics and pharma companies.

A number of the developments in the third quarter -- and subsequent to the close of the quarter -- demonstrates the strength of QVB in building our business, and growing shareholder value.

Before I get to those highlights, I want to mention that our most recent success was noted by Forbes, as it included Quidel as 82nd on its list of America's 200 Best Small Companies, for the first time, in 2007.

I'm particularly pleased at achieving this recognition, as the criteria for inclusion included -- Return on Equity Performance, Sustained Sales Growth, and Net Profit Growth. In addition, Forbes recognized Quidel in a 10-company category designated as "Safe Bet," for efficient companies with little or no debt, and a solid board of directors.

All of these measurements reflect significant value creation for shareholders. This positive attention is a tribute to the hard work and dedication of everyone at Quidel.

Moving on to a review of the quarter -- our strong results were driven by the planned performance of our infectious disease test group, which had sales growth of 29% over the third quarter of 2006, and growth of 25% year-to-date.

More specifically, we saw very strong demand for our influenza test in the US, and the initial sales of our RSV test in acute-care facilities. We believe third-quarter strength provides an early indication of our continued success in driving physician adoption in the POL segment, and our ability to capture more large-volume business and influenza testing in the acute-care segment.

The overall growth in the infectious disease group was achieved in spite of a decline in our international influenza business -- which, as we mentioned earlier this year, is a reflection of the challenges of a declining reimbursement and price-sensitive environment in Japan.

During the quarter, we were pleased to enter co-marketing agreements for our flu test with two very strong partners. One is with Abbott US Point-Of-Care, which will co-market the QuickVue Influenza A+B test, with their I-STAT Analyzer and CLIA-"waived" Chem 8-plus Cartridge.

The second is with Roche AG -- which is providing our flu test to physicians, and detailing a test-and-treat protocol with Tamiflu in Germany.

We believe these two agreements attest to the quality of our QuickVue test, and the confidence in us by global leaders in diagnostics. We expect these agreements will effectively supplement our sales and marketing efforts in the fourth quarter and into 2008.

We continue to await CLIA-waiver for our RSV tests for the physicians' office market. However, we are aggressively pursuing acute-care business, with correlation studies underway at several hospital systems, and the advantage of an RSV and flu test single-sample capability. It is our hope that we will be able to achieve RSV CLIA-waiver yet in 2007.

I want to take a moment to highlight two recent studies that illustrate how our QVB strategy supports Quidel's long-term goals. Both studies highlight the importance of point-of-care testing to properly treat cases of influenza, and were presented earlier this month at the Infectious Disease Society of America annual meeting.

The first study conducted by clinical researchers associated with Texas A&M University included 876 pediatric patients, and demonstrated that physicians who received flu test results were 4-times more likely to prescribe anti-viral treatments for children with the flu -- and were significantly less likely to prescribe antibiotics for children with influenza than were physicians who did not receive test results.

Separately, initial results of an ongoing study conducted in Australia, demonstrated that nursing homes receiving active-surveillance with Rapid Tests and intervention with antivirals, showed a significantly reduced rate of flu outbreaks, a shorter time between initial outbreak and treatment, and a shorter duration of outbreaks compared to nursing homes not using rapid influenza tests. I am pleased to point out that both of these clinical studies used the QuickVue Influenza Test to support their research.

Moving to other segments of our business.

Sales in our reproductive health segment were down 6%, compared to the third quarter a year ago, and are up 2% year-to-date. You may recall that our increase in this segment was 13% in Q2 of this year -- which was several percentage points ahead of market growth. We expect this segment to achieve above market growth for the year.

The remaining Rapid Test product category -- which includes veterinary and iFOB Tests among others -- was flat for Q3, compared to prior-year, yet is 31% ahead of prior year-to-date. We expect strength here in the fourth quarter, as well.

Before we go to the q-and-a, I want to briefly provide a 12-month outlook for our business. As we've stated before, we expect continued revenue growth and margin improvement. We believe that the clinical comparison studies at hospitals which I discussed will support continued growth in flu test sales.

We plan continued strong investment in research and development. This increased spend in R&D also includes a reallocation of spend away from our LTFI program, as we recently decided to discontinue this program in light of other, more promising technologies. And, we will continue to develop new partnership programs both in marketing and research.

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

Thank you. Ladies and gentlemen, if you wish to register for a question for today's question-and-answer session, you will need to press the * key, followed by the 1 key, on your touchtone telephone. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the * key, followed by the 2 key.

If you are using a speakerphone, please pick up your handset before entering your request. Given the number of people on the call today, we ask that you limit yourself to one question, and one follow-up question. One moment, please, for our first question.

Our first question comes from Zarak Khurshid with Caris & Company.

Hi, Caren. Hi, John. Great quarter! And best wishes to the Quidel family, there, in light of the fire.

Thank you.

Thank you.

So, first question. Could you break out perhaps the split of the big three products? Or their growth rates?

We're not splitting out the big three, any more. We talked about infectious disease and reproductive & women's health and other products. So I can tell you that the infectious disease business grew 29% in the quarter. And that was 18.6 million.

Reproductive and women's health declined 6%, to 5.9 million. And other products came in at $3.1 million -- growth of 2%.

Okay. And then could you perhaps quantify the acute-care market for flu testing? And maybe perhaps give us some insight as to how well-penetrated that is, today? And maybe a split of your flu business -- acute versus physician office? Then I'll jump back in the queue. Thanks.

Thanks, Zarak.

We believe that the acute-care market is growing. We've seen a lot of interest in our flu tests, as we've really amassed an exceptionally strong effort this year with our distribution partners, to go after large, acute-care systems -- integrated delivery networks and others.

We had that very nice announcement about the Adventist Health System, which we're excited about. And there are others where we have been awarded a dual-source or letter of commitment. That give us some real excitement about what we'll be able to talk about in the quarters to come, with regard to new users of QuickVue A+B tests, and our RSV tests.

With regard to splits, we believe that that acute-care segment for us will grow dramatically in this season. Certainly in excess of 30-35% or more. Our target's way above that, of course -- and we always go for the gold. But we're confident that we're going to continue to grow the acute-care split, get more conversions as we do more of these great clinical studies.

We're getting a lot of interest as a result of what we're reporting about the proper use of antivirals, the stopping of the improper prescribing of antibiotics. We know how difficult that process is today, with so many bacterial infections being resistant with the improper diagnosing of antibiotics.

So just all of the arrows are pointing up for the market to expand for both POL, acute-care, and also alternate market sites -- retail clinics, et cetera.

Your next question comes from Keay Nakae, with Collins Stewart.

Yes. Hi. This is actually Drew Teufel for Keay.

Hi, Drew.

How are you?

Good!

Just a couple questions about inventory levels at distributors. Can you give us any color on that, or where those levels are at?

Well, the distributors are in-process in the fourth quarter, making sure that all of their customer base and all these new converted customers have tests on the shelves appropriately, as we start to see influenza at this time.

We know that there is influenza sporadically across the country, and some areas are expiring more regional influenza. So we don't have a full really look from distribution for this stocking time, until we get to about mid-quarter or to the end of the quarter.

But our belief is that we're going to have a quick movement of that inventory, and we will continue to replenish throughout the end of this year.

Okay. And just switching over to the FOB. Any word on the timing of the clinical data from the study on that?

We'll have that ready by the end of the year and report on that in Q1 of '08.

Okay. Great. Thanks.

Thank you.

Thank you.

Once again, ladies and gentlemen, as a reminder -- to register for a question, please press *, then the number 1, on your telephone.

Your next question comes from Steven Crowley, of Craig-Hallum Capital Group.

Good afternoon, folks.

Good afternoon, Steve.

Hi, Steve

A couple questions for you.

You mentioned your significant pending or your objective for there to be a significant investment in R&D. In the quarter, R&D was flat year-over-year. Probably a bit less than we had expected.

It appears you're telegraphing a more ambitious effort there, and I'm wondering if you could give us a sense for how much more money you might be spending there, and your priorities in R&D.

Sure. I think, Steve, I'll start with our priorities in R&D. We are really focusing on an enhancement to our current in technology. And instruments may be part of that enhancement.

We also have a team of people that are working on molecular systems and solutions -- to exploit our worldwide ownership of the M-Chip and Flu-Chip technology. And we also have a team of people that are looking at alternate market development and design -- including OTC. So there is a lot going on in terms of expansion.

With regard to percent-of-revenue, I'll turn it over to John for discussion.

Yes. Steve, I think we're targeting R&D to be in the 11-12% of revenue range, on a trailing 12-month or annual basis.

There could be quarters in which that might spike up -- depending upon the kind of activities that we might be doing in the quarter.

Yes. I think just to add one note -- there's been some delayed spending. And that, we believe, will pick up again in Q4 and Q1, of course, and into '08.

Okay. Excellent. In terms of an update on iFOB, what can you tell us about signs of market traction, or any evidence about growing traction around iFOB? And an update on your second-generation tests.

And as part of my follow-up, maybe, John -- just a bookkeeping item or 2 about the balance sheet accounts receivable and inventories at the end of the period. Thanks.

Okay. On iFOB, we're continuing to see -- and gladly so -- more studies being published that support the use of immunochemical over [GLYACK]. We believe that the iFOB test will definitely have traction over the months and years to come, as a first-line defense for screening over today's [GLYACK].

Our Generation-2 product is very exciting. The design and development of that product is meeting and exceeding our targets. We are confident in that product, in its opportunity and ability to delight end-users. The patients themselves -- the physicians who will prescribe them -- any lab services companies who want to work with us, as well.

We believe we have some very unique ways of delivering the products and services around the iFOB products, so that that along with outstanding marketing, distributor partnerships -- and really good end-user, consumer-based advertising and education in the spring -- will set us up perfectly for Q2 of '08.

I'll turn it over then to you, John, with regard to Steve's other questions.

So, with respect to the balance sheet.

Receivables at the end of September of '07 stood at roughly about $17 million versus $18.1 million at December of '06. And inventory stood at 11.6 million at the end of the quarter, versus 9.6 million at the end of the prior year.

Great. Thanks for taking my questions. I'll hop back in the queue.

Thanks, Steve.

Thanks, Steve.

That is all the time we have, today. Please proceed with your presentation or any closing remarks.

Thank you again for your time, this afternoon, and for your continued support. I look forward to updating you on our progress again, when we report year-end results. Take care, everyone.

Thank you.

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