QuidelOrtho Corp (QDEL) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation Third Quarter 2008 Conference Call. (OPERATOR INSTRUCTIONS) I'd now like to turn the call over to Mr. John Radak. Please go ahead.

Good afternoon, everybody. This is John Radak, Chief Financial Officer of Quidel. Thank you for participating in today's call. Joining me today is our President and Chief Executive Officer, Caren Mason.

Earlier this afternoon Quidel released financial results for the third quarter ended September 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 Chow 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, October 22, 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 third quarter financial report. Then Caren will provide further comments on our strategic business initiatives and developments.

Turning to the financial results for the third quarter of 2008, we are pleased with another solid performance of the business during the period, as we posted margin expansion on double-digit revenue growth for the third consecutive quarter. Total worldwide revenues were $31.9 million, a 16% increase over the same quarter a year ago.

Our international business continued to perform well, with revenue growth of 27% over the prior year's quarter and represented roughly 10% of total revenues in the quarter. Sales of our infectious disease products, particularly the co-branded QuickVue bioMerieux Influenza Test accounted for the majority of international growth. Additionally, we saw solid domestic revenue growth of 14% during the third quarter.

Looking now at revenues by product family, our worldwide infectious disease revenues increased 33% to $24.6 million, compared to $18.6 million in the third quarter of 2007, led primarily by our influenza product line. We are also pleased with the traction we are getting with our RSV test, as it experienced substantial growth off of a small base. As part of our recent strategic sales program, domestic distributors placed considerable third quarter influenza stocking orders in preparation for the upcoming cold and flu season.

In the third quarter of 2008, revenue from our reproductive and women's health product family was $4.0 million compared to $5.9 million, a decrease of 32% in the corresponding quarter of 2007. The contraction in the third quarter for the women's health product family was expected as our strategic sales program during the second quarter shifted revenue of this non-seasonal product in the third quarter to the second quarter, in order to gain end-user unit share in future quarters.

Distributor stocking levels have declined from their high at the end of Q2 and we expect them to reach normal levels in Q4. Additionally, we expect our product mix in the fourth quarter to be closer to a more traditional mix between seasonal and non-seasonal, as opposed to the heavy Strep and pregnancy mix we experienced in last year's unusual fourth quarter.

Revenues from our other product category, which includes our H. pylori test for gastric ulcers, our fecal immunochemical test, or FIT, and our veterinary product line, were $3.2 million in the third quarter of 2008, an increase of 5.0% over the third quarter of the prior year.

Gross margin came in at 62.1% for the third quarter, a 260-basis point improvement over the same period last year. The majority of this improvement came from a more favorable product mix in 2008, as sales of our seasonal products made up the larger percentage of our total revenues in the quarter.

Operating expenses for the third quarter of 2008 were $12.4 million, which declined from the prior year period when we reported $12.7 million, as lower R&D spending due to the timing of clinical studies and amortization expense were partially offset by investments in our domestic sales organization.

Operating income in the third quarter of 2008 grew to $7.4 million, or 23% of total revenue, compared to operating income of $3.7 million or 14% of total revenue for the same quarter last year. In turn, net income for the third quarter of 2008 was $4.7 million, or $0.15 per diluted share, compared to a net income of $2.4 million or $0.07 per diluted share for the prior year third quarter, an increase of 114%.

Stock-based compensation expense was $1.1 million for the third quarter of 2008, compared to $1.0 million for the third quarter of '07.

Shifting our attention to our year-to-date results, revenues increased 18% to $94.6 million from $80.1 million in 2007. Year-to-date net income was $12.8 million, or $0.39 per diluted share, as compared to $5.5 million or $0.17 per diluted share in the same period of the prior year, an increase of 129%.

Operating margin for the first nine months of '08 was 21%, compared to 10% for the same period of the prior year. Stock-based compensation expense was $3.0 million year-to-date versus $3.4 million for the same period in '07.

We continue to have a very strong cash position. During '08 Quidel has repurchased approximately 485,000 shares of its common stock for $7.0 million, primarily in the Company's previously announced share repurchase program. A total of $14.7 million remains available for stock repurchase under the currently authorized program. Even after the effect of this stock repurchase, cash and cash equivalents as of September 30, 2008 were $62 million.

As I have mentioned on previous earnings calls, we look to certain trailing 12-month metrics to better characterize the strength of the business. Revenue growth on a trailing 12-month basis at the end of the third quarter was 12%. Our gross margin in the 12-month period ending September 30th improved substantially by 2.5 percentage points from 59 to 61.5% and most importantly, our operating margin in the trailing 12-months increased to 24% compared to 16% a year ago. This performance reflects the leverage in our business and the strength of our differentiated products in the point of care diagnostics market.

Finally, earlier this month we completed a new five-year, $120 million senior secured revolving credit facility with a group of four banks replacing and expanding at $30 million credit agreement, which was scheduled to expire in June of 2009. We established the new facility to take advantage of opportunities to grow and further leverage our business and execute on our strategic vision. The strength of our balance sheet and our ability to generate positive cash flow allowed us to complete the credit facility on attractive terms, despite the worst credit market in more than half a century.

Now I will turn the call over to Caren for a review of the key initiatives in place to sustain our healthy momentum.

Thank you, John. We are pleased to be reporting the results of another quarter of significant organic growth. John has provided a very thorough look back on our progress and we will answer your questions about our financial performance during the Q&A session later in the call. I will take a few minutes to look ahead to how we plan to continue to grow our business.

With the approaching influenza season, we are frequently asked about our predictions for flu incidence and its potential impact on Quidel. While the impact of flu incidence on our near-term results is something we watch, our primary focus is on how we're going to drive further market adoption of our products and build our market share in point of care influenza testing, regardless of the severity of the season.

We believe there is still a significant flu market that remains to be penetrated in the coming years. Based upon CDC estimates, there are approximately 30 million people that visit physicians annually in the United States for influenza-like illness and less than one-third of those people are tested for influenza with a rapid flu test.

Our strategy is to build upon our success in the influenza market and to apply it across our broader product portfolio. The first and most important element of our business growth strategy is demonstrating clinical evidence and the economic value point of care testing offers the healthcare system. Clinical proof remains at the core of our QVB strategy and it is an important element in winning new customers.

We continue to publish and present clinical data to support our differentiated QuickVue products. For example, yesterday very persuasive data was presented at the annual meeting of the Society for Medical Decision Making.

Our commissioned meta analysis of published peer-reviewed evidence compared the clinical utility of using rapid point of care diagnostic tests versus unaided clinical diagnosis in the management of patients with influenza. The study concluded rapid flu tests, including the QuickVue brand in particular, can significantly improve diagnostic specificity, reducing the number of false positives by as much as 22 to 32% when compared to clinical diagnosis alone.

The analysis showed that by using rapid flu tests there was a significant reduction in antibiotic use, emergency room utilization and other diagnostic tests such as x-rays and complete blood count tests, thereby reducing the overall cost of providing healthcare. This is a powerful validation of the economic value of our QuickVue Influenza Test and proves our point around the criticality of working with a company that does an excellent job in evidence-based medicine.

The authors of this study further concluded that unaided clinical diagnosis can potentially lead to 6.4 times more incorrect diagnoses of influenza than when using rapid flu tests. They suggest that improved clinical diagnostic criteria, combined with the use of rapid flu tests, will improve diagnostic accuracy. Studies like this help to drive increased adoption and market share of our QuickVue products by validating the clinical and economic value our products provide to our customers in the point of care testing market.

Second, we take advantage of our product line synergies. Quidel's reputation for excellent service in our high-performing QuickVue flu tests set the stage for our new CLIA-waived RSV test. Currently, less than 10% of the pediatricians who use our flu test also use our RSV test, as we are in the first year in the market with our CLIA-waived product. We believe this represents a significant opportunity for us and we are concentrating our sales and marketing initiatives to address the pediatrician market.

Third, we are pioneering new market segments. We continue to make considerable inroads in the acute care setting and are working intensely to win additional accounts and gain market share. We are at the forefront of the effort to sell to long-term care facilities and retail clinics. Building upon our QVB initiative to demonstrate the advantages of fast accurate testing, long-term care facilities, and retail clinics represent large opportunities for Quidel to fill the void in these developing markets.

Finally, we're pushing hard on the international market. As John mentioned, we made excellent progress outside of the U.S. during the third quarter, particularly with sales of our influenza tests. This underscores the progress made in the last two quarters through our distribution partnership with bioMerieux. Our powerful brand provides the foundation for Quidel to drive international market penetration and to position both Quidel and bioMerieux as global leaders in the rapid point of care testing markets.

I would be remiss if I did not provide any color about how we're preparing for the upcoming cold and flu season. Last week we attended the Health Industry Distributors Association meeting where we interacted with our U.S. distribution partners. As John mentioned, we saw solid flu test stocking in Q3, as they prepare for the influenza season. This is significant for two reasons. First, the stocking and stocking patterns we have seen suggest that distributors do not believe worsening macroeconomic conditions will adversely affect the number of doctors visits and flu test sales during the '08-'09 season.

Secondly, although exactly predicting when the flu incidence will begin to reach regional and widespread thresholds is difficult to assess, the CDC did report last week that doctor visits for influenza-like illnesses are within prior years' levels for this time of year.

Development of our second generation FIT test remains on track and we continue to be excited about its potential. In addition, on last quarter's conference call I mentioned some encouraging clinical data that had been developed regarding our first generation FIT test. We now expect the data from that study to be published before the end of this calendar year.

To summarize, we have a multi-pronged QVB strategy to expand the infectious disease market and build our market share in point of care diagnostics that we think will allow us to continue to achieve double-digit revenue growth and continuing margin improvement.

We continue to strengthen our position of rapid diagnostics leadership through our expanding customer base in the retail clinics, acute care, long-term care and POL markets to increase our international reach and to expand our product portfolio with clinically validated tests that address significant market opportunities.

That concludes our formal comments for today. Operator, we're now ready to open the call for questions.

(OPERATOR INSTRUCTIONS) Your first question from the line of Matt Hewitt with Craig Hallum Capital Group

Yes, hi, this is Matt Hewitt calling for Steve, a couple quick questions, if I could. First, congratulations on the quarter. Looking at the brisk uptick of the RSV tests, does that imply that you guys are able to bundle the upper respiratory products and that's been resonating well? Or have you just found pockets of strength for the RSV test?

Well, first of all, our pediatricians, we have a very strong market share, as you know, in the POL market, especially the pediatricians, so they're very interested now in adding the RSV test. They have an opportunity with a single specimen to be able to run both an RSV and flu test by Quidel, so that is working very well for us.

Excellent. And then secondly, could you provide a little bit more color on the progression of the bioMerieux partnership, I guess where is it versus your prior expectations and any update on the co-development agreement that you guys have discussed in the past?

Yes. We are very pleased with the progress with our bioMerieux partnership, as evidenced by our results in Q3. Remember that we really got started with this in May, so we're very happy with the progress. We loved what happened in Australia during that continent's influenza and RSV season with our bioMerieux co-branded product.

In terms of the co-development agreement, we are making progress. Our agreed upon pipeline of proposed products for development is close to being finalized and so we're hoping to give you more color on that for sure in the next call, if not early in the year as we make our rounds.

All right. Thank you very much.

Thank you, Matt.

Keay Nakae, Collins Stewart

Yes, good afternoon. John, with respect to R&D in the quarter, it was flat sequentially. I think we were expecting that number to be higher. So how should we think about that going forward?

Yes. We had a couple of things. One was some clinical studies got moved out in terms of the timing of when we ended up starting those, so those will hit in Q4. We also were expecting to bring on, fill more of the open R&D positions in Q3, earlier in Q3, but those came onboard later in Q3. So we will see an uptick in Q4 for R&D.

Okay and with respect to your other product line, the past couple of quarters have been positively impacted by sales of your vet product. Has that sort of washed out and how should we think about growth in the other product category going forward?

Yes. I mean, I think mid-single-digits is a reasonable number for the other product category. The veterinary business performed pretty well in Q3. And so we're -- that business, that segment or that product category will, the big item there that will impact the growth rate there will be as we begin to really drive conversion in the FIT market.

Okay and then Caren, as far as looking forward and new products you might launch under the QuickVue brand name next year, can you give us a little color there?

Yes. As I said earlier, we're really -- we have a pipeline of products in infectious disease and reproductive health that we are either developing ourselves; that we are either potentially sourcing and selling, as well as the co-developments deal with bioMerieux.

In terms of actually identifying the products themselves and when we can expect them to enter the market, we plan to have that ready for sure, for discussion, probably, I would say we'll start talking it through at analyst conferences in early January. But I can tell you that is -- we're very pleased and enthusiastic at the partnerships and we're excited about the opportunity to bring some of those products forward even in 2009.

Okay and is it too soon in '08 to have any of the products from co-develop with bioMerieux come in?

Yes.

Okay. All right. Thank you.

Thank you, Keay.

Thanks, Keay.

Zarak Khurshid, Zarak, Caris & Co.

Hi, good afternoon. Thanks for taking my questions. I just want to start maybe with kind of the ubiquitous macroeconomic question. How is this challenging environment having an affect on the end-user demand for your products and is it changing the way that your distributors are operating, specifically with respect to inventory levels?

No, as we said in our prepared remarks, we find inventory levels at normalized volume for expectations, in the flu season, is as planned. In Q3, we were pleased to see that sales to end-users were very, very strong.

So, when you put those two data points together, at this time and with our discussion with distributors as late as last Friday, everyone is continuing, going forward, recognizing that flu knows not macroeconomic conditions and that individuals will visit their doctors to make sure that, especially in the case of their children, they're getting proper care.

Sounds pretty good. And then with respect to the share buyback plan, it doesn't look you purchased any shares in the third quarter. Would you anticipate buying back shares in the fourth quarter?

Zarak, our policy is not to comment on what we're currently doing relative to our share buyback program, except to talk about what we disclose in our SEC filings, so.

Understood. And then going back to the RSV product, it sounds like that is starting to gain some nice traction. I wanted to maybe get a better sense for what's driving the strength there. Is it more a function of this new -- the features of the test or in which you're taking share from someone else or is it just sort of new opportunity, new market that's developing for that test?

Well, I think it's a combination of both. There's no doubt that we are definitely having conversions. We are especially aggressive in the acute care market where we undertake what we call the QV Quidel Value-Build Correlation Challenge, and to date we've won accounts 69% of the time that our product goes head-to-head versus competitors. So obviously there's some share that we're winning there.

On top of it, there's a lot in the literature and a lot that's going on. Discussed recently at the American Pediatrician Association meeting about the fact that RSV that goes undiagnosed is definitely proving to have consequences for those children later in life, more asthma, a lot more ear infections, etc, pulmonary conditions that are tied directly to undiagnosed RSV. So you put all of that together and we see RSV being a real nice growth for Quidel over the years to come.

Excellent and then lastly and I'll jump back in the queue. Qualitatively, can you remind us how the gross margins look on the CLIA-waived RSV test relative to the flu product and the corporate average?

They are higher than the corporate average and in line with our flu products.

Okay, great. Congratulations on a nice quarter.

Thank you, Zarak.

Thank you.

(OPERATOR INSTRUCTIONS) Un Kwon-Casado, Pacific Growth Equities

Hi, good afternoon.

Welcome back.

Thank you, its good to be back. I was wondering, your gross margins came in really strong in the quarter. Besides product mix, was there other operational improvements that drove that expansion?

Well, as you know, we've been -- a number of our products have been on web manufacturing over both in the third quarter of '07 and in the third quarter of '08, so we get a little -- that helps us a little bit. But we didn't have as much volume, the volume from our non-seasonal products in the quarter, so we didn't get that kind of leverage, so most of it was product mix.

Okay and then, so, going forward, as far as potential margin improvement is concerned, should we be modeling in operational improvements into your margins? Or is it going to be largely driven by product mix, given that your flu franchise is growing faster than the rest of your businesses?

Yes, we have lots of initiatives underway in our manufacturing operation to drive efficiencies. The thing that is tough to predict going forward is what might happen relative to raw material costs and so forth, but I think we still have opportunities to see some improvement there.

Okay and then with respect to the flu market, could you talk about a little bit about what you're seeing as far as pricing is concerned from your competitors and whether that's having any pressures on your business?

Well, our focus is really to sell the value equivalent of the way our test performs and the confidence that end-users have come to rely on with our product, as well as the rather thick volume of proof that we have produced over time and continue to produce. As we speak, more side-by-side clinical studies are underway, which we will be addressing in the months to come.

In each of these studies and the way that we work with distributors and end-users, we talk significantly about the performance of our product in clinical studies that are independent, side-by-side. As well as what we know that individuals do, for example, laboratorians during the year who like to take a look at our tests versus other tests. As a matter of fact, the CDC has in their most recent publication started to address where they thought sensitivity deficiencies were taking place and I'm pleased to say that certainly not with the Quidel test.

So, when it comes to price points, yes, there is always pressure. Especially by competitors who are focusing on filling plants with product rather than the continuation of producing very aggressive clinical and economic validations for the product, such as Quidel's work in getting the AMA to absolutely approve a dual-coding process for our flu test.

Okay. So the take-home is that you're not facing -- you're not having to come down on pricing to stay competitive for certain contracts?

We never lead with price. But what we will do is, when there is opportunity for increased volume, we will meet those opportunities appropriately.

Okay, got it. And then just lastly, it looks like the international market could present a nice opportunity for upside to your flu business. What percentage of your flu business did that represent last season? In this quarter you said 10% and so do you expect that to be the relative mix for this year?

Well, I think that the 10% is the total international business, of our total revenues.

Okay.

And so Q3 of '07 it represented about, international was about 9.0% of the business. On a year-to-date basis, it's roughly 12 or 13%.

Okay and then could we use the same proportion for your flu revenue that was in that quarter?

Yes. That's probably okay to do.

Okay and so I know that last season or last year, for example, you experienced some drag to the growth because of Japan and so is bioMerieux really expanding beyond those geographies or where are they having the most success?

Well, thus far, our success with bioMerieux has really been in the Australian and New Zealand Southern Hemisphere flu season, of course. That's where we've got real data. We also had some nice orders from the Middle Eastern countries and so we'll really have to get through the season to see. But there is focus in Germany and in other European countries as well, which have traditionally looked at influenza testing as an important part of their care.

Great. Thanks very much.

Thanks, Un.

Keay Nakae, Collins Stewart

Yes, John, just wanted to ask you about the other net items, the other $160,000 on the income statement.

Yes. That was a settlement of some assets that we sold at a gain.

Okay.

That's non-operating assets.

All right, very good.

Okay.

And this concludes the question and answer portion of today's call. I will now turn the call back over to Caren Mason for any closing remarks.

Thank you very much. We appreciate very much your being here this afternoon and for your continued support. We look forward to updating you on our progress again when we report fourth quarter and year-end results. Take care, everyone.

Ladies and gentlemen, that concludes your conference call for today and we thank you for your participation and ask that you please disconnect your lines. 7