QuidelOrtho Corp (QDEL) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation second quarter 2008 conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. John Radak. Please go ahead.

Good afternoon, everyone. This is John Radak, CFO at Quidel. Thank you for participating in today's call. Joining me today is our President and CEO, Caren Mason.

Earlier this afternoon Quidel released financial results for the second quarter and six months ended June 30, 2008. If you have not received this news release, or if you would like to be added to the Company's distribution list, please call Shirley Chou with Porter Novelli Life Sciences, at 212-601-8308.

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 23, 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 start today's call with a review of the second quarter financial report, then Caren will provide further comments on our strategic business initiatives and developments. Turning to the financial results for the second quarter of 2008, we are pleased with the very strong performance of the business during the period as we posted another quarter of margin expansion and double-digit revenue growth. Total revenues were $21.9 million, an 18% increase over the same quarter a year ago. Our international business performed exceptionally well with revenue growth of 78% over the prior year's quarter.

Influenza sales accounted for a little more than half of the dollar increase in international revenues, with the remainder coming from Strep A and pregnancy. This was the first quarter that our distribution partner, bioMerieux, was actively selling our co-branded product line and we are pleased with the transition thus far as bioMerieux continues to roll out our products across their exclusive territory.

Our international influenza sales for the quarter were driven by end user demand associated with preparations for the upcoming flu season and primarily relate to sales to a former distribution partner in transition to bioMerieux.

Domestically, revenues grew 8%. Looking now at revenues by product family, our worldwide infectious disease revenues increased 18% to $9.4 million compared to $8 million in the second quarter of 2007. International sales of our QuickVue flu product as well as strong performance of our Strep A tests globally contributed to this year-over-year growth more than offsetting the decline in domestic flu and mononucleosis products.

In the second quarter of 2008, revenues from our reproductive and women's health product family were $8.9 million, compared to $7.3 million, an increase of 23% from the corresponding quarter of 2007. The healthy growth in the second quarter was driven by our QuickVue pregnancy tests across all geographic territories. Revenues from our other product category, which includes our H.pylori test for gastric ulcers, our fecal immunochemical test, or FIT, for colorectal cancer screening, and our veterinary product line, were $3.5 million in the second quarter of 2008, an increase of 8% over the second quarter of the prior year.

Gross margin came in at 53% for the second quarter, a 300 basis point improvement over the same period last year. The investments we have made over the last couple of years in our automated web manufacturing process allowed us to really leverage our manufacturing costs on higher unit volume sales of certain non-seasonal products.

Operating expenses for the second quarter of 2008 were $12.8 million which remained in line with expenses for the prior year period when we reported $12.4 million as lower R&D spending and amortization expense partially offset investments in our selling and marketing activities. Our operating loss for the second quarter of 2008 narrowed to $1.1 million compared to an operating loss of $3.2 million for the same quarter last year. In turn, net loss for the second quarter of 2008 was $513,000 or $0.02 per share compared to a net loss of $1.7 million or $0.05 per share for the prior year second quarter, a 70% improvement.

Stock-based compensation expense was $900,000 for the second quarter of 2008, compared to $1.2 million for the second quarter of 2007.

Turning our attention to results for the six months ended June 30, 2008, total revenues for the first half of 2008 increased 20% to $62.8 million compared to $52.5 million for the first half of '07. Year to date net income increased 159% in the first half of '08 to $8 million or $0.25 per diluted share compared to net income of $3.1 million or $0.09 per diluted share during the first six months of '07. Operating expenses in the first six months of '08 were $25.9 million, roughly flat to the same period of the prior year as lower research and development spending and amortization were again offset by investments in our selling and marketing activities.

Gross margin for the six month period expanded to 61% compared to 58% in the comparable period in 2007. The improvement in gross margin was a result of improved manufacturing efficiencies and a more favorable product mix. Stock based compensation was $1.9 million for the first six months of '08 compared to $2.4 million the first half of '07. Finally, year to date operating income increased 172% to $12.5 million.

We continue to have a very strong cash position. For the six months ended June 30th, cash provided by operations increased $4.2 million over the same period of the prior year to $22.7 million. During 2008, Quidel has repurchased roughly 468,000 shares of its common stock for $6.7 million under the Company's previously announced share repurchase program. A total of $14.7 million remains available for stock repurchase under the program. Even after the effect of the stock repurchase, our cash and cash equivalents as of June 30, 2008 were $61.1 million.

As I have mentioned on previous earnings calls, we look to certain trailing 12-month metrics to better understand the financial profile of our business. Revenue growth on a trailing 12-month basis at the end of the second quarter was 12%. Our gross margin in the trailing 12 months improved substantially, by 3 percentage points, from 58% to 61%. And, most importantly, our operating margin in the trailing 12 months was 21% up from 15% a year ago. This performance reflects the leverage in our business model and the strength of our Quidel Value Built strategy, which has provided the foundation for our growth and margin expansion.

Now I will turn the call over to Caren for a review of the key strategic accomplishments and developments in the quarter.

Thank you, John. We are pleased to be reporting the results of another quarter of significant organic growth and continued progress in several aspects of our business. As John reported, one of the primary drivers of our increase in total revenues was international sales. We are pleased with the performance we have seen thus far from our international partner, bioMerieux. The bioMerieux sales representatives increased our sales presence in the international market by more than tenfold and we believe the mutually beneficial alliance and formation of a powerful global brand provides tremendous validation of the QuickVue product line. bioMerieux sales and marketing organizations are working feverishly to complete the rollout of marketing materials and training for its sales professionals in 150 countries.

In addition, we secured infectious disease sales in countries gearing up for the southern hemisphere flu season as well as those adopting flu testing for the first time. Our revenues were also favorably impacted by strategic sales initiatives programs covering a majority of our product portfolio with certain of our key domestic distributors. During the second quarter of 2008, the revenue increase related to these programs was primarily driven by our non-seasonal products as we secured an increase in initial upfront stocking orders and purchase commitments for these products. Accordingly, domestic distributor inventory levels for these non-seasonal products is currently tracking in the higher range. Our focus with our distribution partners is to gain end user unit share in a number of non-seasonal products in coming quarters as well as to set the stage for influenza and RSV market expansion and share gain.

Since we last spoke during our April conference call, the domestic flu season had started late but had a dramatic peak in activity ended very quickly. We reflected with satisfaction on our ability to seize the opportunity to maximize our position as the market leader in rapid flu testing. For the coming season, we are continuing our collaboration with Roche. We are working with Roche US again this year by initiating programs to assist in flu management through the use of the QuickVue influenza test. We are also in discussions with Roche internationally on programs to support flu management in countries outside the US.

As we look to the upcoming flu season, we are monitoring the developments in the southern hemisphere for indications of the onset and the severity of the season. On Monday of this week, the Australian Department of Health reported the number of people with flu is up by one third compared to this time last year. The government health authorities also said the higher levels of confirmed flu cases are possibly due to increased awareness and testing following the higher than normal season in 2007.

Onset of flu season was also reported in Hong Kong. Our flu surveillance assists us and our distributors in anticipating and assuring our preparedness in all of the global markets we target. However, at this time, it is too early to identify significant trends which would help to clarify what we may expect in the upcoming northern hemisphere flu season. As for domestic distributor inventory levels of our flu and RSV products, we believe they are within acceptable levels as we enter the season and expect distributor ordering patters to be consistent with prior years dependent upon the timing of the onset of the flu season.

During this second quarter, we were very pleased to enter into an agreement with Prodesse to jointly promote Prodesse's ProFlu+ multi plex molecular diagnostic test within the United States. ProFlu+ is an FDA 510K cleared, real time PCR closed tube test that simultaneously detects influenza A, influenza B, and respiratory syncytial virus RSV which together cause the vast majority of serious respiratory infections. The agreement strengthens Quidel's acute care focus and provides a complimentary product offering to the Quidel QuickVue, Rapid Influenza and RSV tests. As part of the agreement, Quidel earns a fee for all product placements.

We are also continuing our development work on our M-chip influenza sub typing array which is targeted for research use only for determination of influenza A subtypes from suspected viral samples. The product will be targeted to researchers that are currently using other molecular biology techniques for influenza surveillance and epidemiological studies. The product will contain DNA primers and probes capable of amplifying and detecting the major strain of influenza. Depending upon validations, we are targeting introduction of this array for the research use only market during this influenza season.

With regard to our fecal immunochemical testing or FIT product, we have successfully moved full production of the Generation I FIT test to our web based manufacturing system enabling tighter control, increased intra and inter lot consistency and greater capacity. As part of the QVV efforts supporting this product, we have tested nearly 200 stool specimens collected by patients who have had recent colonoscopy. These patients obtained specimens using the home stool collection system provided in our Generation I kit. The patients comprised several categories including, among others, those with confirmed colorectal cancer, those with polyps of various sizes, and those with apparently normal colons. We are extremely pleased with the results of this retrospective study. We intend to submit these results at a major forthcoming international meeting on colorectal cancer.

At that meeting, we also plan to present data showing the correlation between the QuickVue result and the actual concentration of stool hemoglobin in each sample. The quantification of stool hemoglobin levels was achieved using a new immunological laboratory method developed by our R&D team. These results show very significant differences in the level of fecal occult blood in the various categories of patients examined. The web Generation I FIT test began shipping this month.

You may have read that LabCorp has added new colon cancer screening tests to its offering and we have been notified that they will no longer standardize on our tests. We are disappointed on this outcome and have learned much from this experience. We are not satisfied with the industry transition to FIT from [GUIAC] of 3.7% of units as of Q1 of 2008. We are redoubling our efforts to promote early screening with the web Generation I test, while the Generation II test continues in development. Our Generation II test design efforts have been expanded to include continuing feature enhancement as we continue voice the customer validations provided by our medical advisory board and test users.

New features have required engineering enhancements so we are moving our clinicals and submission to the FDA out a few quarters. We believe this is absolutely necessary to assure that the next generation of testing meets the critical parameters of ease of use, patient acceptance, physician assurance, and clinical validation.

Finally, our second quarter results reflect our continued ability to deliver significant revenue growth and margin expansion particularly through leverage of our manufacturing operations and optimization of our QVB based marketing strategies. We continue to strengthen our position of rapid diagnostic leadership and provide evidence to support the increasingly important role that point of care testing plays in healthcare decision making and outcomes. That concludes our formal comments for today. Operator, we are now ready to open the call for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Zarak Khurshid from Caris & Company. Please proceed, Sir.

Thanks. Hi, Caren and John. Impressive results there. Can you guys hear me okay? I apologize for being on a cell phone. I just wanted to firstly touch on the strength in the pregnancy business. Just curious-- what is really the driver there? It looks particularly interesting in light of the sales that were pulled forward back in the fourth quarter and should we be expecting that business to correct at some point in the near future?

I think your question is a good one, Zarak. The focus for us on pregnancy has been instilled with more vigor as the result of two pieces of information in terms of our market position. First of all, we know that in acute care we have done an excellent job of securing new business and we're working with our acute care distributors to focus on the opportunity even to expand more in that space. In the POL we've been challenged by some private label activity as well as some price pressures. And so our focus with our distributors both in POL and in acute care is to really begin to push more aggressively to build back more unit share in the category. Our distributors have agreed to do that with us and our strategic sales initiative got underway in Q2.

With regard to Q4 and the leveling of inventory over time, our expectation is that our distributors have moved through that and will be moving through the inventory they acquired in this previous quarter in the quarters to come.

Okay, great. And then just quickly if you could talk about the strength, the international strength relating to bioMerieux. Is it more of a function of kind of initial stocking or I guess what is the demand, the real kind of end user demand component to that strength and should we kind of see that sort of I guess level off as we enter the flu and cold season and maybe pick up at the end of the year?

I think that (inaudible) bioMerieux definitely had a great (inaudible) with us in terms of (inaudible) orders as well as fulfilling orders that previous distributors had presold. So I think the opportunity for us in going forward with them is definitely very significant and we'll be watching with you over time. We're working very well with them, so our expectation is over the next couple of quarters that we'll start to see what we can then track on quarterly demand. We're gearing up for the respiratory season ahead of us. We're seeing some revenue definitely being generated in the southern hemisphere, so we're excited and enthusiastic which you can probably tell from our prepared remarks as well as my comments, but I can't predict exactly what the actual levels will be quarter by quarter until we get some traction behind us.

Sure. Thanks. And then quickly, how would you characterize domestically the levels of flu product in the channel today? Then I'll jump back in the queue. Thanks.

Thanks, Zarak. As we indicated in our remarks, we believe that the inventory levels are at an appropriate level as we go into the season. Next question?

Our next question comes from the line of Jeff Frelick with Lazard. Please proceed.

Hi, Caren. Can you tell me what the geographic revenue growth was for US and OUS?

Yes.

The US growth was 8% in the quarter and the international growth was 78%.

Okay, thanks, John. And then in a normal southern hemisphere flu season, when do you typically see reorder rates occur?

The season has really just kicked off. In June there was some incidence. In July, in the middle of July we're seeing definitely increased incidence as I referred to. We should start to see over the next two to three weeks the peak is my guess and we'll probably be finished by September so you would expect reorders in the next two to three weeks.

Okay. And then did-- I had trouble hearing your comment on Zarak's question, but did you say you've instituted strategic pricing with pregnancy with some select distributors in the US?

Actually we've offered distributors strategic selling partnerships that go in multiple quarters over a number of our product categories and those are underway. You saw most of the result of that as we kicked off in Q2 with some non-seasonal product initiatives.

But it will run--

Oh, it keeps running, yes.

And across several product categories?

Yes, it does.

Okay. All right. Thank you very much. I'll jump back in the queue.

Our next question comes from the line of Scott Gleason with Stephens. Please proceed.

Hey, Caren and John, thanks for taking my question. Just to start off, you guys have seen some really good expense control especially on the R&D line. We've seen total R&D expenditure line go down for the last 5 quarters. John, can you give us a little sense of what we should think of there going forward? Is 29, 2.9 million, a good run rate for the second half of the year?

No. we-- at the end of 2007, we terminated a development effort on our layered thin film technology and that freed up a large amount of R&D dollars in our Santa Clara facility that we are in the process of rebuilding and replacing down here in San Diego. So the 2.9 is really probably a low point in our R&D spend and we would expect that will ramp up over the following couple of quarters.

Okay, thanks. Then on the pricing front, it looks like CMS this year is going to implement a 4.5% CPI adjustment. Do you guys have a sense that you'll be able to carry any of that on in terms of price increases when we start looking at next year's pricing?

I think we have to be careful of all of the costs associated with distribution, fuel, etc. So I-- we're going to maximize our premium brand position and work with distribution appropriately to be able to raise prices wherever appropriate. We expect that that would most likely be in our infectious disease category as we continue to prove the value of those products is superior in the marketplace. So I think we'll be judicious in that conditions are challenging for everyone. But at the same time, we'll also take opportunity wherever we feel it is appropriate.

Okay, thanks. And finally just on the second generation fecal occult blood test-- you guys mentioned that you've pushed back a few quarters. Can you maybe give a little more definitive date as far as when we could expect a market launch or I guess a more definitive timeline?

Well we're in the midst right now of engineering in a number of changes that we believe are strengthening the product even more so. So we're definitely into 2009 before we start our clinicals. We have, we believe though, that we can still obviously see an introduction in 2009, hopefully earlier than later. By that I mean probably around mid-year. The opportunity here for us is that this is a major game changer. I would call our new test more of a medical device than our current format. And as a result of that, there are a lot of opportunities for enhancements that we're going to take advantage of. We feel that with the recent information that we got clinically on our Generation I web based product, that that product will do just fine as we move ahead in our efforts to get more business in that product category. So we're going to do the right thing on Gen II and get it out there so that it meets all the criteria that our MIB and our key users and test sites have indicated

And then, Caren, have you guys got a sense from the FDA whether your current CLIA waiver will be able to stand for the second generation product or if you'll have to resubmit?

It's automatic.

Okay, so you'll be able to carry over the existing CLIA waiver?

Yes.

Okay, thanks. That's all I have. Thanks a lot.

Our next question comes from the line of Matt Hewitt with Craig-Hallum Capital Group. Please proceed.

Congratulations on the first quarter. A couple of questions. First off, can you break out as far as what were international sales as a percentage of the mix? We know what they were as far as up year-over-year, but can you break that out as to the current quarter?

16%.

I'm sorry, could you repeat that?

Wait a minute-- 16%, yes.

16%. Excellent. Also, with bioMerieux, we've heard that things are ramping well there. Initially you had spoken of it as more than just a sales and marketing partnership. Can you tell us anything regarding the development side and if and when there will be a product ready for that piece?

Our joint development agreement with bioMerieux is progressing well. We have identified a pipeline of products that we'll be working on together and as soon as we get the thumbs up from them to publicize that and we complete the agreement, we will do so.

All right. And I guess last question, in the press release you talked about strategic sales initiatives launched with several domestic distributors. Could you provide a little bit more color there?

Yes. Just at a high level, our interest as we have developed partnerships with distributors over time was to be able to get to a point where we could work on committed volumes over longer periods of time rather than incentivized with targeting. So that gives us the opportunity now through our premium brand position to get that done. So the strategic sales initiative gives us as a manufacturer partner and with our sales lead partners, the opportunity to really be able to better predict quarters as they move, as we move ahead throughout the year. So we went on a multi quarter program for committed volumes and we're confident and happy about Phase I of this process.

Excellent. Thank you.

Our next question comes from the line of Keay Nakae with Collins Stewart. Please proceed.

Good afternoon, folks. Caren, can you update us on what you think your market share in the influenza market is coming out of the last season?

Okay. We are going to defer market share discussion until after the end of the Q2 period when we get those results. We don't have them yet We usually get them about 8 weeks, which is too late for this call. And so we would like to be able to give analysis not only of US but global position, so bear with us and we'll get with you in the next quarter.

Okay. As far as the upcoming season, can you give us a sense for what kind of success you're having with the GPO Broadlane?

I think we are really pleased with our success thus far with Broadlane. We have converted a number of hospitals. As you may be aware in these committed purchasing agreements, there is usually one or-- there's usually two categories or vendors selected for each product. And what we are doing with our health systems team on the acute care side is very aggressively going after getting as much of that business as possible. So we're pleased with progress so far.

Okay. With respect to some of the line items on the income statement, John, with respect to G&A, you did have a sequential decline there. That number-- how should we think about that going forward for the rest of the year, the 3.1 that you did in Q2?

Yes, the Q2 number was abnormally low and benefited by a lot lower stock compensation expense which will rebound in Q3. And then also lower management incentive bonus accruals in the quarter as we time those expenses with when we earn the profits.

Okay, so something closer to what you did in Q1 is maybe more appropriate?

Yes.

Okay, very good. And then finally, Caren, going back to an earlier question, you were asked about bioMerieux and the initial stocking. I know you answered it but I could not hear what you said.

Okay, I apologize for that. The initial stocking with bioMerieux, we're really enthusiastic about our ability to get them the product and get them marketing the product at [EkMed] in Europe as well as through all of their distribution outlets and through all of their direct representation as well. So our hope is that we'll know better to guide you after we get two to three quarters under our belt and have our first infectious disease season underway. Right now, everything that we're seeing is really encouraging. So we're happy with their initial order, we're happy with some of the order flow through into end users and we'll be able to better identify in the next couple of quarters what our actual run rate ought to look like.

And was the stocking across all product lines?

Yes.

Okay. All right, well very good. We'll look for those numbers going forward.

Okay, great.

We have a follow up question from the line of Zarak Khurshid from Caris & Company. Please proceed.

Thanks for taking the follow up question. You guys have had great success levering the improvements with the web automated manufacturing process. Just curious also on the cost side, have you locked in some of the input prices and how are kind of the price of plastics and reagents potentially affecting that cost of goods and the potential continued improvement on the gross margins going forward? Thank you.

The proportion of our costs that are represented by plastics is really very small, so we don't expect that that will be a significant impact to us going forward. And then with respect to other reagents and so forth, we're not seeing a tremendous amount of cost price pressure there yet.

Thank you.

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

Well John and I thank you again for your time this afternoon and for your continued support. We look forward to updating you on our progress again when we report third quarter results. Thanks and take care, everyone.

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