QuidelOrtho Corp (QDEL) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter and year-end 2007 Quidel Corporation earnings conference call. My name is Denise, and I'll be your coordinator for today's call. At this time, all participants under listen-only mode. We will be conducting a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) . As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. John Radak, Chief Financial Officer. Please proceed,

Good afternoon, and thank you for participating in today's call. Joining me today is our President and Chief Executive Officer, Caren Mason. Earlier this afternoon, we released financial results for our three and 12 months ended December 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 Rachel Lipsitz at Porter Novelli Life Science at area code 619-849-5378.

Please note that this conference call will include forward-looking statements within the meaning of the Federal Securities Laws. It is possible that actual results and performance could differ materially from these 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. Further more this conference call contains time sensitive information that is accurate only as the date of the live broadcast, February 21, 2008. 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 some opening remarks. Caren.

Thank you,John and thank you to our participants for joining us today. I'd like to begin by saying that 2007 was a solid year for Quidel. When we spoke to at the end of Q3, we were heading into Q4 with great momentum. The Company was poised to generate several million dollars in additional revenue and influenza product line domestically. as flu incidents would spur demand and we would be in position in December to replenish distributor inventories. We were all very surprised when for the first time since we began selling our influenza test, influenza incidence in the last months of the year, weeks 48 to 52 did not materialize in the U.S. Typically, several states are experiencing at least local or regional flu with widespread outbreaks in a few states by December.

In December, 2007, influenza incidents uncharacteristically was hard to be found in the United States. Many of our investors and our analysts have become armchair prognosticator regarding influenza's seasons and severity and of course, influenza is a large portion of our business so we pride ourselves on following CDC and World Health's directives diligently. We also track the flu in the southern hemisphere which is ahead of our northern hemisphere season as another important data point. We begin the manufacture of our product in the summer months in preparation and use all of the data to help determine whether we should prepare for a mild, average or severe flu season. These data points, of course, are taken into consideration with our plans for new business, additional market share and annual double-digit growth for our influenza product line.

What is infinitely clear is that influenza prevalence is a contributing factor to volume projections. We expected a strong flu season this year due to what was reported in the souther hemisphere, a more severe flu season than had been experienced in several years with the appearance of a new Influenza A variant that became dominant there. We were also aware that the vaccine formulation for the northern hemisphere was already in production and would not be able to be modified ahead of the northern hemisphere flu season to take into account this new variant in the southern hemisphere. With all of this information, we built record numbers of flu tests to be certain that we could meet demand.

Today, although there was a seven-week delay in the season, we are experiencing very strong demand for our flu test and we are well positioned to capitalize on our readiness and our market leading positions. As of the last report from the CDC, there were 44 states reporting widespread influenza incidents in the U.S. As you know, we work very closely with our domestic distribution partners during the flu season, to balance our shipments with inventory levels in the channel and end user consumption of flu tests. We are aggressively working this process this flu season to assure ample inventory in the channel during the peak of the season and help assure an appropriate level of inventory's left in the channel at the end of the season. I'll now pass the call to John to present our financial results for the three and 12 months ended December 31, 2007.

Thanks, Caren. We are pleased with the performance of the business in 2007, especially with our domestic business that posted overall growth of 21% for the year.

Let me continue with summarizing our fourth quarter results and I'll finish with a few additional comments in our full-year results. Starting with the top line, total revenues for the fourth quarter 2007 were $38 million versus $38.8 million for the fourth quarter a year ago. As Caren discussed, the nearly seven-week delay in the start of the domestic flu season impacted our fourth quarter revenues as normal distribution reorders of our QuickVue Influenza tests shifted from December of '07 into the first quarter of '08.

For the quarter, worldwide infectious disease revenues declined 10% to 25.3 million, driven primarily by significantly lower Japan flu sales, as our distributor continue to work off higher than normal inventory levels, a situation we expect will continue through Q1 of 2008. Domestically, the delay in the flu season, which impacted our flu sales was offset by strength in our strep product line. In addition, reproductive and women's health revenues increased 29% to $9 million. Growth in both our strep and pregnancy product lines benefited in part from our continued successes in acute care purchasing contracts. Finally, the other products category grew 2% to 3.7 million.

Gross margin for the quarter came in at 60%, in line with the prior year in spite of a shift in mix from flu to strep and pregnancy. This unfavorable product mix shift was offset by manufacturing efficiency gains and a more favorable geographic mix. Operating expenses for the fourth quarter of 2007 declined 8% to $11.7 million. The decline was primarily in general administrative reflecting lower incentive compensation costs as well as lower intangible amortization. Operating income for the fourth quarter of 2007, reached $11.2 million or 29% of total revenue compared with operating income of 10.9 million or 28% of total revenue for the prior year fourth quarter. Net income for the fourth quarter of 2007 was $8.1 million or $0.25 per diluted share. Compared with net income of 18.3 million or $0.54 per diluted share for the prior year fourth quarter. Included in fourth quarter 2006 net income, was a non-recurring non-cash income tax benefit of approximately $10.3 million or $0.30 per share from the release of evaluation allowance on certain defer tax assets, which contributed to a net tax benefit of $5.9 million or $0.17 per share. Stock-based compensation expense was $700,000 for the fourth quarter of 2007, compared with $800,000 for the fourth quarter of 2006.

Now, I'll summarize financial results for the year ended December 31, 2007. For the full year, we continue to see double-digit revenue growth. Total revenue's for '07 were 118.1 million an 11% increase over 2006. Net income for 2007 was $13.6 million or $0.41 per diluted share compared with net income of $21.7 million or $0.63 per diluted share for 2006. Included in 2006 net income, was a non-recurring non-cash income tax benefit of $11.6 million or $0.34 per share from the release of evaluation allowance on certain deferred tax assets, which contributed to a net tax benefit of $5.9 million or $0.17 per share for the year. Our effective tax rate for 2007 came in at 33.6%, primarily as a result of higher than expected research credits from 2007 and prior year's research activities identified as part of a multi-year review of our research credits. Going forward, we expect -- we currently expect our effective tax rate to be in the neighborhood of 38.5%.

Operating expenses for the year 2007 grew 6% to $50 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 added at the end of last year. Operating income increased 41% from 13.8 million in 2006 to 19.5 million in 2007. Our gross margin improved 100 basis points to 59% in '07 compared with gross margin of 58% in 2006. The improvement was mainly attributable to higher domestic revenue mix and manufacturing efficiencies. Stock-based compensation expense for the year ended 2007 was $4.1 million compared with $3.4 million for 2006.

Our balance sheet remains very strong, cash and cash equivalence as of December 31, 2007 were $45.5 million compared with $36.6 million at the end of the prior year 2006. Under our Board authorized stock repurchase program during 2007, we repurchased approximately 1.5 million shares or $17 million and we have approximately $21 million of authorization left under previously announced programs. Now I will turn the call over to Caren for review of the key strategic accomplishments and developments in the year. Caren.

Thank you, John. As John pointed out, we achieved many of our financial goals for the year. Our revenues grew 11% organically worldwide and 21% domestically which I believe directly correlates to the success of our QVB strategy and the leading position our QuickVue product line holds in the point-of-care professional market.

In 2007, we reinforced the strength of our QuickVue Influenza test by establishing co-marketing agreements for our flu test with two very strong partners. One is with Abbott U.S. Point-Of-Care, which is co-marketing the QuickVue Influenza A+B test with their iFOB analyzer and CLIA-waived cartridge. The second is with Roche A.G., which is providing our flu test to physicians and detailing a test and treat protocol with Tamiflu in Germany. We also launched a pilot program with Roche in U.S. to evaluate a test and treat protocol with Tamiflu in select markets. We have seen evidence that rapid test, such as our QuickVue Influenza test enables physicians to more accurately diagnose and prescribe antiviral treatment for influenza. We expect that data from these collaborations with Roche will further support the use of this test and treat protocol.

Sales of our QuickVue RSV in the fourth quarter increased 93% over sales in the same quarter in 2006. This is currently a small base of business for us but remains a major area of focus and promise for future growth. We continue to await CLIA-waiver for our RSV test the physician's office market and we will keep you updated on the status of this initiative. Meanwhile, with the flu season underway, we expect to continue to see progress with our RSV product as professionals like the easy to use rapid test that enables them to expeditiously diagnose and treat their pediatric patients and speed their recovery.

Moving to our reproductive health segment we delivered on our goal of achieving above market for 2007, with an increase in our worldwide sales of our reproductive health family of products of 9% over 2006. The remaining rapid test product category which includes veterinary and immunochemical Fecal Occult Blood test, among others, achieved a worldwide increase of 19% year-over-year demonstrating the strength of our brand in all areas. We recently made progress on another of our long-term goals focusing on the growth of our product lines internationally. Earlier this year, we formed a global strategic alliance in the area of rapid diagnostics with bioMerieux under the agreement bioMerieux will be the sole distributor of our QuickVue rapid diagnostic tests in all countries except the U.S., Japan and Scandinavia beginning in May of this year.

This mutual beneficial alliances and formation of a global provides tremendous validation of our product line. With its almost 2,000 marketing professionals and more than 150 countries, we are confident that bioMerieux is the right partner to help us drive international market penetration, similar to our domestic market penetration where we outsell our competition 3-1 with our QuickVue product line. Additionally, we intend to work with bioMerieux to leverage a combine wealth of experience in the area of infectious disease to develop new rapid diagnostic test using bioMerieux library antibodies and antigen and our superior development capabilities.

Our goal with this alliance is to diversify our infectious disease business further and reduce seasonal dependence by building a high value pipeline of point-of-care tests for our team to sell in the U.S. and to leverage bioMerieux extensive QuickVue SP reach. While we expect much of the upside of this alliance to come to fruition beginning in 2009, this year we plan to work closely to bioMerieux to identify tests with the largest market opportunities.

Finally, looking ahead to 2008, we expect to report continued strong revenue growth and margin improvement to expand our product portfolio, to increase our international reach and to strengthen our position as the market leader in rapid diagnostic for the professional market. That concludes our formal comments for today. Operator, we're now ready to open the call for questions.

(OPERATOR INSTRUCTIONS) . Your first question comes from the line of Un Kwon-Casado from Pacific Growth Equities, please

Hi, good afternoon.

How are you?

Pretty good. First question is I was wondering this year, are you going to be implementing ASP increases across your product line similar to what you did last year?

Yes. We announced a price increase in October effective January 1st so that is already implemented.

Okay, great. And that's across all your product lines?

Yes it is.

Okay. Wonderful. With respect to your flu business, do you expect that to sequentially grow in Q1 given the weak start to the flu season and distributors shifting their ordering from one quarter to another?

Yes. Yes, we do.

Okay. Great. And then lastly, would you be able to give us some color on your operating expenses next year? This quarter they came in lower than expectations and was wondering if, for certain line items if it's a good run rate going forward or if you expect incremental more spending in certain items like R&D?

Yes, the way I try to characterize the fourth quarter was it's probably abnormally low for a couple of reasons. One, we didn't have as much incentive compensation in the quarter as we originally expected. As you know, we try and time our incentive compensation more in line with how our, you know, revenues and profits fall. So I would probably look to see that give our operating expenses a little bit of lift going forward versus a run rate in the fourth quarter. We also plan to continue to add some sales personal in our sales personnel, that'll take sales and marketing up as well. At the beginning of the fourth quarter, we stopped the development on our LTF program in Santa Clara, and so we're going have a little bit of a dip in R&D expense as we rebuild that capability down in San Diego. So I think that's probably generally kind of the trend that you'd expect.

Okay. Great. Thanks very much.

And your next question comes from the line of Zarak Khurshid from Caris & Company. Please proceed.

Congratulations, in light of the flu weakness.

Thanks, Zarak.

Wanted to dig deep near the flu channel. So I mean, looks like activity is strong as we speak. Is there something fundamentally more difficult about activity that peaks kind of this time of year versus, say, late November and December, which is harder to actually kind of monetize in your business?

Well, traditionally, the peak of the flu season where we see the most states with widespread incidents is in the February, early March time frame. So with regard to our ability to meet kind of the peak demand, we actually start our process in the summer months as I said earlier so that our focus is making sure that our distributor shelves are lined and ready to go to get the test physician offices as well as acute care settings including retail clinics so that if there are cases in October there are tests available immediately. So we really consider an entire flu season as our priority which for us begins really in the August/September time frame and doesn't finish up until April/May depending upon the length and severity of the season. Hello?

Hi, guys, thanks. Then follow-up question, just wanted to dig deeper into the year-over-year growth and maybe some of the different segments. You broke out flu growth in '07. That was helpful. Could you maybe provide some color as to the overall growth you saw in the strep franchise as well and then also what are we seeing with iFOB and how did that perform in '07 versus your expectations?

Well, in terms of the strep business, it performed very well in the year we were we were up solid double-digits. And so we're pleased with that business, you know, it looks like we're capturing some nice market share there. The iFOB business continues to percolate on. Clearly we'd like to see more conversion than what we've seen. We saw definitely nice growth year-over-year there as well.

Great. Any updates on the next generation platform and what's planned in terms of clinical studies and so forth?

Yes. Briefly, we are on target as we said for the product in Q3. And we definitely are making inroads in terms of the clinical work that we're doing collecting colonoscopy negative samples to and colonoscopy positive samples and using those specimens to further establish the performance of the current generation of our tests as well as our next generation of our test. So everything is exactly going as scheduled with regard to the clinical evaluation of our current generation and next generation test.

Great. Thank you.

Thank you.

From Lazard Capital, your next question comes from the line of Jeffrey Frelick. Please proceed,sir..

Thanks. Can you comment just on the reorders for flu that are occurring now. Just what that rate is similar to a typical reorder rate kind of post initial stocking orders of the distributors?

I think the best way to characterize it is that when the flu map is lit up as aggressively as this is and when flu is in the new as aggressively as it is, we have as well very healthy order right. In some cases by the time we ship out the product it's already promised to the end user by the distributor. So it's quite a bit of demand.

Okay. And then are those typically -- so the reorders that come in, are those typically large orders that maybe carry them through the rest of the season or are do you see small orders throughout the first and second quarter?

It's actually all over the board. I mean, you have some of our distributors that prefer to work in 30-day increments and others that will buy as they go. But in this season, which is so active, we're seeing the order patterns a little bit all over the board because of the surprise for some of the distributors in terms of the shear volume. And what we are doing, though, is tracking inventory with all of our distributors, almost on a daily basis. We know the out sales of our distributors almost to the kit SKU and we are working with them to make sure that we manage very well now and through the end of the season. So what we think very good shape right now.

Okay. And can you comment maybe on the growth of of strep in the quarter? Are you seeing any impact on private labels?

At this point, no, we had some very aggressive growth domestically. We're also growing strep quite a bit in the international business. So this is strong double-digit growth that we worked on for a long time in terms of proper placement of our excellent strep offerings. We are also beginning to see as I mentioned in previous calls that strep is becoming almost a year round use product. So we're real pleased when our strep growth and we see momentum continuing.

Okay. Just last question. Can you remind us what the dating is on the flu test?

24 months.

Okay. Thanks.

You're welcome.

And your next question comes from the line of Keay Nakae from Collins Stewart. Please proceed.

Yes, good afternoon.

Hi, Kaey, how are you?

Good. Reproductive health you had some nice growth there, was that primarily pregnancy and that number's bounced around a lot this year. How should we think about that going forward?

Well, it's not only HDG, it also is our bone health line from SPG business. In terms of pregnancy, we have been awarded a number of acute care contract opportunities where there is in these large integrated delivery networks to a maximum of two vendors to a period of time of just three years to purchase pregnancy. What your seeing is the uptick from distribution in gearing up in anticipation of our being awarded more and more share associated with these large acute care IDMs.

If I heard you correctly, were these shares to your distributors that have yet to be placed in the facilities?

Some of our distributors have stocked up in advance. Other distributors are probably trying to vie for some of this business as well but have not stocked up in advance.

Just so I understand the awarding of the contracts, are they awarded to your distributor as a hunting license for them or are they directly --

Ones I am referring to, the contracts are with Quidel and there is distributor of choice usually involved in the process.

Okay. Very good, with respect to flu in Q4, can you give us a sense, Caren of what your growth looked like in the acute care segment of the market?

We normally don't break out our influenza growth, but in the acute care segment of the market, it pretty much mirrors the growth rate now in POL and that we've sold quite a bit more product into the channel for acute care. So the 26% plus growth also includes all of the acute care new business.

And if I understand that side correctly, you've also been awarded the same types of contracts to participate as a vendor there?

I'm sorry, with who?

On the acute care side for flu?

Right, right. Oh, yes. I'm sorry. I understand your question now. Yes, we absolutely have been awarded a number of IDM contracts where we are one of two companies that are the primary source for influenza testing for the season. Now, what you have to do then in the hospital market is you have to go through the appropriate studies where by committing in the acute care setting and make a determination after selection as to which tests they might like to use for either that season or the next seasons to come. So we have just completed a round of correlations that a number of acute care facilities that were interested in our product as a result of our becoming one of the two selected for the influenza test products. So we're in really good shape there not only for this season which we certainly hope as the season ends to be able to break out for you acute and POL growth but also for coming seasons and that these contracts tend to be awarded for at least two to three-year increments.

Was that something you were not able to capitalize in Q4 but will be able to capitalize in Q1?

That's correct. Because the demand that pulls through only really occurs in large measure when we start seeing a light or lit up flu map. We'll know quite a bit more about end users and be able to profile them for you much better at the end of the full season.

Okay. And moving on to your iFOB test, you'll have the gen2 out in Q3 but beyond the features of that device that make it easier to use, what do you think it's going take for the overall conversion of FIT over traditional FOB occur. It seems like to's plenty of data that it's a much better test yet the conversion still remains sluggish.

I think it's really going be up to the new guidelines when they release from the American Cancer Society if, in fact, they place the kind of emphasis on FIT we'd like them to and de-emphasize or eliminate CLIA, then we're going to see a strong pickup in the conversion rate. Until that time it's going be the key opinion leaders and the manufacturers working together to try to get the standard of care shifted to CLIA to Fecal Immunochemical Chemical testing.

Very good. Thanks.

Thank you.

As a reminder, ladies and gentlemen, if you wish to ask a question, please press star followed by one. Your next question comes from the line of Steven Crowley from Craig-Hallum Capital. Please proceed.

Good afternoon.

Hi, Steve. How are you?

Great. Couple questions for you. Obviously, the timing of the flu season, we talked a lot about the shift. The implication there looks to me like Q4 has typically been stronger historically than Q1 as the bigger flu quarter. You already referenced some sequential growth as likely from Q4 to Q1. Might we have a scenario where Q4 ended up looking like what we had forecasted Q1 '08 to look like and vice versa some.

Well that's a possibility, Steve, but the caveat is how much longer and how deep and intense is the flu season in these remaining six weeks and will there be a tail into Q2 where we have for the first time in many years a season actually in Q2? So I think there's still a lot of unknowns as we talked about. The prognostication by us all is difficult but true. So, you know, we're certainly encouraged obviously by this level of activity which is strong, but I think for certain predicting a flip is something we wouldn't do.

Okay. Now in terms of your Japanese flu inventory situation, it seems like progress is being made there. John mentioned it's likely to continue into and through Q1 here but are you making good headway and cleaning up that market in terms of inventory?

Early signal is yes. We're feeling good about our product getting moved through the channel. The Japan flu season is quite different than ours, they had an early incident in the Q4 time frame and now they tapered off a bit. But there is a general belief that there might be a second peak in Japan. Any which way you look at it, we're encouraged by the movement of our product in Japan.

Great. Switching gears to your colorectal cancer screening product, I believe March is colorectal cancer awareness month. I'm wondering what you might have on the docket to take advantage of that spotlight that would be one question?

Okay. Well, we definitely are very active in coming this month in a number of different ways. We have partnered with Suzy's Cause, which is a very active and aggressive colon cancer prevention group that has a web site that boasts a lot of traffic and interest. They have a number of events we'll be participating in with them. I'd encourage you to visit our web site, www.Colorectaltest.com. It's a really full indication of some of the things that we're working on. We also will be exhibiting our products at the forthcoming digestive disease week meeting which will actually be here in San Diego. And we also, during that time will continue to focus on and talk about the clinical studies that we have ongoing as well as with the support of Professor Gastroenterology for Pennsylvania Medical Center who'll be with us and participating in a number of special events during March.

And in terms of the ACS guidelines or new ACS guidelines, are those likely to be sync up with colorectal cancer awareness month?

Well, the rumor has been that we would be made aware in the March time frame, but I, you know there's really no way for us to be able to predict it because there've been a number of deadlines that have come and gone where the guidelines were not yet released. We're very hopeful that this March they will be.

Do you any the availability and the data availability on your gen2 test is key to the emphasis on FIT that you're talking about and the de-emphaze CLIA?

Absolutely. I think -- first of all, there's a lot in the literature as Keay was talking about earlier that already supports FIT as a more accurate test than CLIA. But with all of the need to move physician standard practice and to create a standard of care, it still really boils down to what is the cancer society and what are the key opinion leaders willing to do around illumination of CLIA as a preferred method?

I guess ways just wondering whether or not the timing not sync up right now with you having that gen2 test and gen2 data? Is it gaining factor for that key change and endorsement to take place? That would seem to imply that a year from now might be the more likely step function and changing of guidelines?

I really can't comment. I am aware of what's in the literature as well as what our medical advisory board tells us, and that's about the best I can do.

That's reasonable. One quick question for John. Could you just share a couple balance sheet items with us, inventories at the end of the year versus year prior since you have them in front of you and just DSO at the end of Q4?

Sure. The receivable balance at the end of 2007 was 23.2 million, and the inventory was 11 million.

Great. Thank you very much.

Thank you.

At this time, we have no further questions in queue. I'll now turn the call back over to Caren Mason for closing remarks.

John and I 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 first quarter results. Take care, everyone, and thanks.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.