QuidelOrtho Corp (QDEL) 2008 Q4 法說會逐字稿

Welcome to the Quidel Corporation fourth quarter and full year 2008 conference call. At this time, all participants are in a listen-only mode. Later, instructions will be given for a question-and-answer session. (Operator Instructions). I would now like to turn the call over to Mr. John Radak. Please go ahead.

Thank you. This is John Radak, Chief Financial Officer at Quidel. Thank you for participating in today's call. Joining me today is our President and Chief Executive Officer, Caren Mason, and our incoming President and Chief Executive Officer, Doug Bryant. Earlier this afternoon Quidel released its financial results for the three and 12 months ended December 31, 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 at Porter Novelli Life Sciences at 212-601-8308.

Please note that this conference call will include forward-looking statements within the meanings of federal securities laws. It is possible actual results and performance could differ materially from these stated expectations. For a discussion of risk factors please see Quidel's annual report on form 10K and subsequent quarterly reports 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, February 25, 2009. Quidel undertakes no obligation to revise update any statements to reflect events or circumstances after the date of this conference call except as required by law. For today's call Caren will begin with opening comments, I will report the financial results, and then Doug will take a few minutes to address our general outlook for the near and longer term, and then we'll open the call to your questions. I will now turn the call over to Caren.

Thank you, John, I appreciate the opportunity to address our shareholders and the employees of Quidel for a final time as President and CEO. It has been a true honor and a pleasure to lead Quidel and to serve the board and the investors. During the past four and a half years, Quidel's employees have worked tirelessly to reshape the point of care landscape by developing and improving lateral flow tests that provide clinical and economic value and validation. As a result of this successful work, Quidel has expanded markets, substantially retooled our business, grown price value leadership and gross margins.

We have retained domestic professional rapid test market leadership in our key core products while organically growing global annual product revenue by $50 million and more than 10 million tests per year from fiscal years 2004 to 2008. While growing this business and adding critical investment in our go to market research and development and production capability, the Quidel team improved operating margins from 2% of revenue to 22% of revenue, generated $78 million in cash from operating activities, enabling important relevance and the repurchase of four million shares of Quidel stock, grew working capital from $50 million to $86 million and for our shareholders improved earnings per share from $0.05 to $0.58 from continuing operations. This team earned significant leadership award from the distributor partners including manufacturer of the year, supplier of the year, and best value supplier several times over the past few years, and this team merited recognition as one of Forbes best 200 small companies for 2007 and 2008.

I leave Quidel with the greatest admiration for this team and confidence in the future under the leadership of our new President and CEO, Doug Bryant, and a very involved and dedicated Board of Directors. Again, I thank you for your trust and confidence in the work of Quidel and its financial strength and promise. John?

Thanks, Karen. We are pleased with the overall performance of the business in 2008, especially given the greater macroeconomic environment. First I will summarize our fourth quarter results and then I will finish with a few additional comments on our full year 2008. Starting with the financial results for the fourth quarter of '08, total worldwide revenues were $33.5 million, a 12% decrease over the same quarter a year ago. Our international business continued to perform well with revenue growth of 18% over the prior year's quarter and represents roughly 20% of total revenues in the quarter. Sales of our infectuous disease products accounted for the majority of our international growth. On the domestic side revenues declined 17% versus the fourth quarter of '07, largely due to distributor ordering patterns associated with our nonseasonal products as we have previously discussed.

Looking now at revenues by product family, our worldwide infectious disease revenues increased 3% to $26.2 million compared to $25.3 million in the fourth quarter of 2008. Double-digit growth in our influenza and RSV product lines more than offset the expected softness in our strep products. As you are aware the current flu season is tracking even later than last year's season. Back in Q3 our expectations were for a more normal start of the flu season. In the fourth quarter of '08 revenue from our reproductive and women's health product family was $4.5 million compared to $9 million, a decrease of 50% from the corresponding quarter of '07. As you may recall distributors significantly increased their purchases of our nonseasonal products in Q4 of '07. While we did not expect to see the same ordering pattern in this year's fourth quarter, end-user demand has remained relatively constant for these products for 2008 as compared to 2007.

Revenues from our other product category were $2.8 million in the fourth quarter of 2008, a decrease of 23% over the fourth quarter the prior year. This decline was driven primarily by softness in the H pylori product category. Additionally there was a decline in veterinary shipments as orders inhouse were scheduled for delivery in Q1 of '09. Gross margin came in at 59% for the fourth quarter, down slightly from the prior year fourth quarter as lower unit volume and a larger international mix more than offset a more favorable product mix. Operating expenses for the fourth quarter of 2008 declined 6% to $10.9 million, the decline was driven primarily by lower incentive compensation costs across all functions.

Operating income for the fourth quarter of 2008 was $8.8 million or 26% of total revenue compared to operating income of $11.2 million or 29% of total revenue for the same quarter last year. Net income for the fourth quarter of 2008 was $6.1 million or $0.19 per share on a fully diluted basis compared to net income of $8.1 million or $0.25 per share on a fully diluted base prior year fourth quarter. Now I will summarize results for the 12 months ended December 31, 2008. For the full year 2008 total revenues increased to $128.1 million, a growth of 8.5% over 2007 revenues. Net income for the year 2008 was $18.8 million or $0.58 per diluted share compared with net income of $13.6 million or $0.41 per diluted share for the year ended 2007, an increase of 41%.

Operating expenses for the year decreased 1.4% to $49.3 million reflecting lower R&D as well as general administrative expense driven by the timing of hiring for R&D and more broadly lower incentive compensation. Operating income increased 47% from $19.5 million in '07 to $28.6 million in '08. Our gross margin improved 200 basis points to 61% in '08 compared with a gross margin of 59% in 2007. The improvement was mainly attributable to a more favorable product mix coupled with manufacturing cost savings.

Stock based compensation for the year ended 2008 was $2.7 million compared to $4.1 million for 2007. Our balance sheet remains very strong, cash and cash equivalents as of December 31, 2008, were $58 million compared with $45.5 million at the end of the prior year. Under our board authorized stock repurchase program during 2008 we repurchased approximately 1.3 million shares for $19.5 million and we have approximately $27 million of authorization left under the previously announced program. And now I will turn the call over to Doug Bryant. Doug?

Thank you, John. I appreciate the warm welcome I have received and look forward to continuing the momentum Caren and the team have established at Quidel. Having been with Quidel now just 25 days, I do want to offer a few observations. First, as many of you know, who have followed the Company for the last several years, Quidel has a very well regarded reputation in the industry and terrific brand equity with our QuickVue brand. Second, there has been and remains a dedicated focus on providing high quality products and supporting our key product portfolios with economic and clinical data. Third, our profitability and strong balance sheet provides us tremendous operating and financial flexibility. These strengths when combined with our leading market share position provide us with a solid foundation for future growth. Clearly there are short-term growth opportunities with our current product portfolio. We plan to continue to drive greater market penetration and adoption of our seasonal products such as flu and RSV. In fact, recent data show that we continue to maintain very high share of the flu market and have gained share with RSV as well.

In the back half of this year we anticipate launching our second generation fecal immunochemistry test, the QuickVue FIT lab in a tube, broadening the product portfolio is a near term goal for our lateral flow immunochemistry platform. The number of addressable opportunities we are currently evaluating is significant. We have prioritized our product development efforts around existing markets, but are also exploring product that is will address currently unmet clinical needs. Beginning this year we intend to develop at least two to three new products per year and to continue that pace for the next few years. We see additional scalable opportunities for our lateral flow platform in infectuous disease as well as in bone health.

For the longer term we're committed to developing a molecular diagnostics platform that will provide solutions for point of care diagnostics. We're confident that the strategy of increasing market penetration with our current product portfolio, developing new products for our core lateral flow technology and developing a molecular diagnostic competency as we look to introduce new platforms, will provide consistent growth for the business, strengthen our leadership position and secure our future in the point of care diagnostics market. That concludes our formal comments for today. I look forward to meeting our investors in the coming weeks. Operator, we're now ready to open the call for questions.

(Operator Instructions). And we'll pause for just a brief moment to compile a list of your questions. And your first question comes from the line of Keay Nakae with Collins Stewart. You may proceed.

Yes. Good afternoon.

Hi, Keay.

Wanted to start with the operating expense. Obviously you had a lower number there. John, you talked about a reduction in incentive comp. Beyond sales commission, what else might that statement include? Does that include bonuses or anything of that nature?

Yes, it includes both the Company's cash, bonus plan or incentive plan, the annual plan, as well as certain performance based restricted stock for which the vesting hurdles were not met.

Okay. So as we look at those line items going forward, how much of these Q4 numbers should we be using as a base? R&D was down from where it has been. Is this going to be the new level of spending there?

No. I think you probably ought to look -- use Q3 as a better benchmark for looking at the future.

Okay. And how about G&A? Would that be similar or --

Yes.

Okay. With respect to any expenses in Q1 related to the CEO search, is that something we should expect to see?

There will be some transition costs in Q1, so, yes, Q1 will be impacted somewhat by that.

Can you give us a ballpark of the amount of incremental expense?

I mean, well, it is actually most of it is relocation costs that's already disclosed in Doug's employment agreement.

Okay. Very good. We can look at that. And then comment on how you're feeling about the flu season and obviously we can see the CDC stats, the flu start stats, things picking up here of late. How is that translating into your sales? It sounded like your Q4 flu sales were actually up respectively year-over-year, so where do you stand now?

Well, you're right. Q4 was a decent quarter for flu. I guess I would remind everyone that the flu season, in '07, '08, was late just like it is this year, so the performance in the business in Q4 of '08 is not really reflective of end-user consumer demand. It is more reflective of the size of the market and how much pre-season buying distributors are willing to do and physicians are willing to do.

I guess what I was looking for, with respect to the Q4 result given the delayed onset of the flu season, can we read into that that you have had market share gains?

I think it is too early to tell because we really won't know. We always look at market share of end-user consumption, so since the season is delayed, we're sitting here in Q1 waiting for the data essentially, the season to end and to see the data. At this stage we wouldn't expect there to be significant changes.

Well, I guess what I am getting at is, we're seeing the uptick in flu activity, so if you're not seeing a strong correlation in reorder sales, then that would suggest that, that was over stocking by your distributors as opposed to market share gains.

I think Keay, maybe another way to look at it is we haven't seen the season peak yet, and distributors are still used to the fact that the season used to begin in about week 48 to week 50. This year the season really began in about the second week of February, so as a result of that you really have to wait to validate end-user demand based on an entire season of use. What I can tell you, though, is it is obviously an uptick going on now in end-user use of the product with so many more widespread and regional activity states in the last week and we believe in the coming weeks that are starting to use up these kits.

Okay. One final question for Doug if I may. Doug, you talked about the pipeline of products outside of the redesigned FIT test. Do you plan on launching other tests this year?

We intend to make an investment in R&D whether we'll get products into the market this year, I cannot say. We clearly are in a position now, though, to dedicate more R&D resources to the development of additional lateral flow products, both for existing markets as well as examining what unmet clinical needs we might address, particularly in infectuous disease testing. And finally, Keay, I would say over the next 60 days I think we're going to be prepared to have a discussion on exactly what that product pipeline looks like.

Okay. Very good. Thank you.

Sure.

Thanks, Key.

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

Good afternoon. Hi, guys. First question a little bit confused on the gross margin line, despite what appeared to be a decent year-over-year and I think sequential increase in flu sales the gross margins were still down fairly significantly. What exactly is going on there?

Well, we had a pretty significant increase in international business, and as you know, our international gross margins are lower than domestic ones, so that was the biggest driver there.

So are international flu margins below the corporate average?

Yes.

Yes.

Okay. All right. And then on the tax line, looked like there might have been a credit there. Can you just walk us through that and how we should be thinking about taxes this year?

Yes. We had some one-time items flow through in the fourth quarter including the R&D item, and so I think going forward in the future, you probably won't see some of those items, and so I think looking into '09, you'll probably see a tax rate closer to what we have been booking at earlier in '08.

Okay. Great. And then I was wondering if you could provide a little color on the strep product. In light of the late flu and cold season, how is that business tracking?

I think our strep business as we talked about earlier has been a little bit lumpy, and our focus is really been in trying to get our end-users that have tried private label product to come back to our premium branded product, and we are having some success there, but in terms of the season itself, we haven't seen a lot of strep yet. And so even though strep isn't always mirroring or parallel with upper respiratory infectious disease season, this season especially I think we're seeing a little bit less strep.

Okay. Thank you.

And your next question comes from the line of Un Kwon [Casada] with Pacific Growth. You may proceed.

Hi. Good afternoon.

Good afternoon.

I was wondering with respect to your two new products per year, how does bioMerieux factor into this?

Well, it is part of an ongoing discussion around a joint development agreement. We are working with them to identify the products that is we might develop for them, so we had not actually factored in anything that we're working on for them into what I was discussing on in term of the two to three products per year. So two to three products per year by our own development team coupled with what we would do additionally with bioMerieux.

Okay. That's helpful. And so I guess how would the development and the types of markets you would address be different than your own efforts versus partnering with bioMerieux?

Well, in the bioMerieux case we will work together to identify things that they think are valuable in the markets ex-US, so some of those might be applicable as well to the United States, but given that they're the distributor ex-US, they're obviously going to be focused more on what their needs are there. And any of the things that we currently are developing sort of on our own potentially can be offered to bioMerieux for distribution as well.

Okay. Great. And then I wanted to touch upon you had talked about a lab in a tube test. What is that exactly? I think that was related to your iFOB test. Is that a new format where it's outside of lateral flow?

There is still lateral flow strips and immunochemistry associated with this test. This is a self-developing test that requires almost no intervention or support or running of the test by lab or office personnel, so we -- at the JPMorgan conference we started talking about the generation two fecal immunochemical test and what it looked like. We had referred to it earlier as being almost medical device like, and so we're starting now as we get closer to finalization, we are starting to talk more about this test, its capability, and the fact that the format has the potential for other test uses and it is also we believe a good candidate for OTC.

Great. Thank you. And then just lastly, just to go back on R&D spend in '09, to me qualitatively it sounds like you're accelerating your efforts in this area, especially if you're expecting to to come up with two to three more products. So again, I guess the Q3 run rate, is that a fair number to use, John, or should we be a little bit more aggressive in modeling that?

Yes, you probably should be a little more aggressive in modeling specifically the R&D number than that. Excluding the incentive comp issue, we would have seen R&D probably more along the lines of what we saw in the fourth quarter of '07.

Okay. Great. And then just one quick one if I may just a housekeeping one. So on the amortization of intangibles, I know in your K you break that out that is going to decline so about $1.4 million this year. So that -- should we just amortize that equally over the quarters?

Yes, that's correct.

Okay. Great. Thanks very much.

You're welcome.

And your next question is from the line of Ashim Anand with Natixis Bleichroeder. You may proceed.

Thanks. First of all, welcome, Mr. Bryant, welcome to the team.

Thank you.

And congrats, Caren, for a great job for last four years.

Thank you.

Could you give us the -- if you have inventory level in the fourth quarter?

For which?

From the balance sheet if you have that available.

Our inventory level.

Yes.

Yes. It is $11.7 million.

$11.7 million. And cash from operations, do you have that for fourth quarter?

Yes. Well, for the 12 months -- for the year it is $28.9 million.

$28.9 million. Just something on pricing on the flu and the strep and pregnancy products, has there been any change in that recently this quarter?

No, I mean, the market as we have indicated before is a competitive market, and but no significant changes. We continue to work at maintaining a premium price position, so it hasn't really declined.

Okay. Wonderful. And final question would be I know you have said in some recent presentations, Caren, that penetration of flu test is around 26%. I was wondering if you have a ballpark number for physician office labs at this point?

Well, yes, it is difficult. I would say at this point physician office labs, I would say anywhere between 25% to 33% penetrated. There is still a great opportunity for the expansion of more certainty around diagnosis of influenza, and there continues to be concern, especially in this season where we have two compelling issues. One is that we have a B influenza that is not matched to the vaccine, and we also have resistance to Tamiflu for H1 and one, so we're seeing physicians now more interested in using differentiated tests to be absolutely certain that they properly diagnosis especially since unfortunately recently we witnessed some pediatric mortality.

Okay. And going forward, obviously we haven't seen the future, but physician office labs would be greater opportunity in terms of penetration than hospitals?

I believe, yes.

Do you agree with that or --

I do.

Wonderful. Thank you, guys.

Thank you.

(Operator Instructions). And your next question comes from the line of Steven Crowley with Craig-Hallum Capital Group. You may proceed.

Good afternoon.

Good afternoon, Steve.

First of all, Caren, thanks for all your efforts over the last several years and good luck to you in whatever endeavors you may have out there.

Thank you.

And, Doug, welcome, and we look forward to you being able to quickly and aggressively build on what Caren and the team have done there.

Thanks, Steve.

A couple questions for you. It seems like qualitatively the RSV product has been a nice fit in your product line. Can you give us a little help as to understanding how significant a product it is becoming, what kind of potential there is for RSV, and just back of the envelope is it a couple percent of sales now and can it be much more than that over a period of time?

I mean, I think in that neighborhood, and certainly we think there is opportunities to continue to grow that product line faster than the rest of the business.

Yes. I think, Steve, the RSV product for us especially as of late, this is our first season for our CLIA-waved product being marketed into the physician office lab, and preliminary data for fourth quarter shows a really nice bump in end-user demand for the products, so I think RSV for us definitely has major focus. You may have noticed that we have announced a couple of what I would call value-added services around RSV. Those can be found on our Quidel RSV website where we are assisting both moms around their symptomatic concerns about their children, as well as physicians and the use of the test. So we are dedicating resources and we are focusing heavily on RSV, especially in a physician office lab and also in acute care.

So with it being maybe again a couple percent of sales, couple million dollars or so product right now, I think in the past we have talked about they're clearly being runway for that to be a $10 million plus product for you. What are the key things that need to happen at Quidel and/or out in the industry for that to take place?

Well, I think that as I said, there is a lot of outreach going on. There is also work being done on side by side comparability in terms of the value of the test and how it stacks up in terms of accuracy and in terms of sensitivity and specificity and we're going to be releasing some of that data later in the season. We have posters coming out at a number of conferences. There is actually a presentation made being made in Bangkok around this at this time. And that information we believe to show the clinical excellence of the product in comparison to the competition, as well as the fact that it is a wonderful companion product to our influenza product which is by far the most often used in the physician office for pediatric cases.

And then in terms of -- thank you for that. And then in terms of influenza, the clear impression we're getting is that despite there being a late start to the flu season and a mild start, that influenza was up year-over-year in Q4, the $1 million or $2 dollars? I guess, I just want to make sure we're in the ballpark of understanding the order of magnitude because the more important question is as we look at Q1 and the cross currents of some economic pressures maybe inhibiting some patient visits to get tested, but a recent flurry of media reports about the severity of flu and pediatric deaths may be offsetting that, and flu blossoming, would seem like there is the recipe for flu to grow Q1 of '09 versus Q1 of '08. And I guess that's my long-winded question there. How plausible, probable is growth there and could that growth be pretty meaningful?

We haven't seen the peak yet, Steve, so we can't really predict that. We also can't predict how moms are going to deal with these symptoms in terms of going and paying those co-pays at the physician offices. One thing, though, that I would give guidance around is, we believe because of this very late start that we'll probably see some bleeding into Q2 for influenza sales. So we think that the season is going to go longer and so you have a Q1/Q2 dynamic here, no peak yet, but most likely we're going to see some of that going on, so later means later enough to even impact Q2.

I guess the other variable for year to year growth in the infectuous disease category as a whole in Q1 '09 versus Q1 '08, would be the contribution of strep in Q1 of '09 versus Q1 of '08. And are the prospects for a pretty decent contribution for strep there after a couple of tougher quarters or is that a very open question mark?

I think again we really are focused on end-user demand. Some of the promotions that we ran under what we talked about the strategic alliance program have now we feel we have invested appropriately so that we get the I guess reap the rewards of those programs, so you're going to see a demand cycle that's going to be totally driven by end-user need.

Okay. And in terms of the bigger picture stuff, and some of stuff you mentioned, Doug, I am absolutely thrilled to hear the Company is moving down the path of a commitment to a couple of three new products every year. It also sounds like we're going to get some visibility on a couple of those initial efforts in the not too distant future. I have to believe that's going to require at least the kind of 9% R&D budget that you guys have had here, I guess it was 8.7% last year, it was a bit higher. But using a lower run rate of around $3 million, does that get us there or do we need to think about this more in percentage terms?

Well, I think we've got a couple of things going on in the R&D organization, and I think a lot of it will in terms of percentage terms depends upon what you're looking at in terms of top line growth as well obviously, but I think the $3 million run rate in Q4 of '07, we might be a little bit north of that going into the latter half of '09.

Okay. And then my final question, Doug, it relates to your commentary that included unmet medical needs in terms of a focus for your new products. That has the flavor of product that is are not me too for sure have a proprietary bent to them. Does that significantly extend the development time or do you think you can have a pretty decent philosophy to these product development and product launch initiatives?

I believe the development time around those specific products, at least the ones that we're looking at right now, Steve, is not significantly extended. The time to market or the time to develop the market may be a little bit longer, but in terms of the actual development of the product, I don't see that as being the issue.

And the two initiatives -- or the two kind of big picture initiatives of new products, unmet medical needs and molecular diagnostics point of care, are those two separate initiatives, or I trust that some point they'll be overlap?

Well as you and I talked a little bit in a previous conversation, we're interested in scalable development, so that over time what we have is not only products that fit the same channel from a commercial perspective, but also products that are developed in a fashion that takes advantage of our organizational learning, so that we have one product followed by another that looks a lot alike. And then in addition I would say that from a manufacturing perspective we're also interested in making sure that we have a scalable pipeline. So therefore, yes, we would see that the two ideas are going to converge over time.

Great. Looking forward to some detail. Thanks for taking my questions.

Thank you, Steve.

And your next question is from the line of Keay Nakae with Collins Stewart. You may proceed.

Yes. Hey. I just wanted to push back on you guys a little bit regarding the flu season, and with the understanding that there is some economic uncertainty this year which might change the normal way we think about increased activity as it correlates to your product sales. So we're seeing the increased activity now, and granted we don't know where it is going to peak or how long it is going to last, but more definitively, are you starting to see a meaningful increase in reorder rates?

Well, at this point it is just beginning. We're just not -- maybe I can explain it this way best, Keay. When we really win at the race in the flu season, is when all of a sudden everything across the country meaning the regional and the widespread states are all 50, okay, and then there is more widespread and there is regional. We're not there yet. And when that happens, then we do really well because we're ready. We don't back order. Everything gets out in time. And that last year we could already talk about in the middle of February.

This year we can't talk about it to that level because we're not there yet in terms of experience out in the market. But when it happens, I guarantee you that we're ready and we have primed the market very, very well by expanding markets, expanding customers, expanding opportunities, and proving value when we first start talking about flu to the end-users in Q3 and then more again in Q4.

Okay. I appreciate the answer.

You're welcome, Keay.

That is all the time we have today for questions. I would now like to turn the call over to Mr. Doug Bryant. Please proceed with your presentation or any closing remarks, sir.

Well, this concludes the call for today. Caren, John and I thank you all again for your time this afternoon and for your continued support. Take care.

Thank you. Bye.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.