QuidelOrtho Corp (QDEL) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation First Quarter 2009 Conference Call. (OPERATOR INSTRUCTIONS)

I would like to now turn the call over to Mr. John Radak. Please go ahead.

Hello, everyone, 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, Doug Bryant.

Earlier this afternoon Quidel released financial results for its three months ended March 31, 2009. 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 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 any 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, April 22, 2009. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law.

For today's call, I will report on the financial results and our previously announced restructuring. Then Doug will provide some observations to put this year's influenza season in perspective and give an update on our new product development activities.

Clearly our first quarter results were not what we were expecting at the start of 2009. This year's influenza season was a very late and mild season, as compared with any season in the past twelve years in terms of the number of patients presenting to their physician with influenza-like illness, or ILI.

Total global revenues for the quarter were $16.9 million, a decline of 59% in the first quarter of 2008. This decline was driven primarily by our influenza product line where revenues were 90% less than the first quarter of the prior year. Domestic revenues were down by 62% from the same period of the prior year at $13.9 million.

International revenues came in at $3.0 million, a decline of 31% from Q1 of 2008. Global infectious disease revenues were $7.8 million in the first quarter of this year, as compared to $32.2 million for the same period of the prior year, driven by declines in influenza and Strep sales. In spite of a very weak cold and flu season, we did see very strong double-digit growth of our RSV test in the quarter.

The global revenues of our reproductive and women's health category declined 11% in the first quarter of 2009, versus the prior year at $24.9 million, driven by lower pregnancy sales as domestic distributors continued to reduce inventory levels. Revenues in our other products family grew 32% to $4.1 million, due to the timing of orders for our veterinary products.

As you are aware, we have seen domestic distributor inventory levels fluctuate greatly over the last several quarters for our top three products - influenza, Strep and pregnancy. At the end of the first quarter, we estimate that domestic distributor inventory levels for our Strep and pregnancy products are now at normal levels.

As of the last couple of weeks, we believe that domestic distributor inventory levels for influenza tests are significantly higher than we would like at the end of the season. While end-users are still consuming flu tests and drawing down distributor inventories, it is unlikely to be enough for us to avoid soft flu sales in the third and fourth quarters of this year, historically a time for restocking in anticipation of the cold and flu season.

Gross margin in the first quarter of 2009 came in at 50% versus 65% in the prior year, primarily due to a less favorable product mix in 2009.

Operating expenses of $13.1 million were 1.0% less than the prior year and include $1.0 million of cost associated with the restructuring actions taken in March.

Sales and marketing expenses were lower than the prior year due to a decline in sales commissions and freight expenses.

Research and development expenses declined in the first quarter of 2009, primarily due to lower incentive compensation costs.

General and administrative expenses were higher than the prior year due to our CEO transition costs as well as the costs associated with our new credit facility, partially offset by lower incentive compensation costs.

During March, we initiated actions aimed at realigning resources to focus the organization on our key strategies - lowering our cost structure through a reduction in force and eliminating or reducing certain discretionary spending programs. Each of these actions has different costs and benefits, so let me address each action separately.

First, we reduced our headcount by approximately 10%. This action comprises the majority of the $1.0 million charge recorded in the first quarter. We expect this action to save approximately $3.0 million in 2009 and $4.0 million in 2010 versus our Q1 2009 cost structure. While the positions that were eliminated were across the Company, these actions will not affect our ability to achieve our previously discussed key strategies.

Second, we have eliminated, for 2009, the annual cash incentive plan. I would like to point out that there was no expense in 2008 for this plan, as the Company's performance did not meet the minimum performance targets. The annual cost of this plan at the current headcount level is roughly $3.0 million.

Third, in early April we ceased use of a portion of the facility we occupy in Santa Clara, California. As a result we will accrue, in the second quarter of this year, an additional restructuring charge of approximately $1.1 million for the future lease payments. This will reduce our costs by roughly $200,000 per year.

Finally, we have initiated other cost control measures relating to discretionary items that are designed to lower our costs in 2009.

I will now turn the call over to Doug.

Thank you, John. Given the importance and size of our flu business as well as its impact on our Q1 results, I thought it would be constructive to put this year's flu season into perspective.

As you know, there are a number of factors that can impact the size of the flu test market from year-to-year. Those factors include new physicians adopting flu testing, existing users' utilization rates, severity of the flu season as defined by the percentage of patients visiting healthcare providers with influenza-like illness, or ILI, influenza vaccine effectiveness, and the number of people who actually get vaccinated.

Clearly, we feel the most important driver is the flu test usage during a flu season or the number of patients who present with ILI and the number of physicians who use flu tests. It is instructive to note that there is some small incidence of ILI throughout the calendar year. The CDC characterizes this small level of ILI incidence as a benchmark, which they refer to as "the baseline".

We know that the majority of flu test usage occurs when ILI visits exceed the baseline level. Our internal analysis of CDC data on the rate of physician visits for ILI for the last twelve influenza seasons suggests that there were three mild seasons, three severe seasons, and six seasons that were average in severity.

The following seasons were mild - '01-'02, '02-'03, and '08-'09. The '03-'04, '04-'05 and the '07-'08 seasons fall into the severe category. Therefore, as many of you have already concluded, that severe '07-'08 season was followed by a mild '08-'09 season, which is actually the first time this has happened in the last twelve years.

Let me describe the difference between a mild and severe flu season. Generally, a severe season will last twice as long as a mile season, 16 weeks versus eight. The rate of patient visits for ILI in a severe season will be 50% more than in a mild season.

On average, in a severe season, ILI visits will begin to exceed the baseline level around the first week of December, although that has varied by four weeks in either direction in the past. However, in a more typical mild season, ILI visits don't rise above the baseline level until late January to early February.

In all of the last twelve seasons, the patient visits for ILI have fallen below the baseline level by the end of March, which suggests that regardless of the start, the season is over by the end of Q1.

Based upon all the data we've analyzed, we have concluded the following.

One, the severity of the '09 -- or, excuse me, '08-'09 season declined from the prior season in the neighborhood of 35% to 40%, as measured by the length of the season and the rate of patient visits per ILI.

Two, our market share appears to have remained steady through the end of 2008, but we won't have external sources to verify Q1 of 2009 until next quarter.

Three, our distributor out-sales of QuickVue Flu Test declined 30% to 35% this season versus last season. And four, the data suggests that there was additional physician adoption of flu testing this season, since physician purchases of flu tests declined less than did the severity of the flu season.

As we plan our business for the next flu season, we are assuming the '09-'10 flu season will return to the mean or be an average flu season.

So let me describe for you the profile of an average flu season. In an average flu season, ILI visits will begin to exceed the baseline level in mid-December and will stay above the baseline for a range of 10 to 13 consecutive weeks.

Therefore, we would expect the total ILI visits to be anywhere from 25% to 40% higher than the '08-'09 season, translating to a healthy increase in season-over-season flu tests purchases by physicians. However, the effect on our sales will be dampened due to the amount of inventory remaining in the channel, as John previously mentioned.

Additionally, we plan on reducing incentives for preseason flu test stocking. The effect of the inventory overhang and reduced incentives will result in lower flu revenues in both Q3 and Q4 of this year, as compared to the same period in 2008.

While these actions will make 2009 a very challenging year, from a revenue and earnings perspective, we believe they will better position us for 2010 and beyond as we return to top-line growth and leverage our cost structure to drive margin expansion.

Let me take a few more minutes to provide an update on our new product development activities. We're making great progress on the next three new products we anticipate launching -- generation-two FIT, mono and the flu RSV Combo Assay.

The clinical studies that are needed for our FDA submission on our gen-two FIT tests are underway at this time. These studies include physician office lab studies at different locations across the United States; controlled studies with lay persons, in the targeted age range, 50 to 75 years of age; and special supportive studies by Quidel R&D to establish the robustness of the test itself.

Pending outcome of these studies, which are proceeding well and on-schedule, we intend to submit a 510(k) in the second quarter of 2009. Assuming a favorable review by the FDA, we are on track to launch the product sometime in the second half of 2009.

Development efforts for our mono tests and our flu-RSV combo tests are progressing nicely. We're on schedule to re-launch our QuickVue mono test in the first half of 2010. The flu-RSV combo product will essentially be a three-in-one test detecting flu A, flu B, and RSV, which makes it ideal for children's hospitals and pediatrician offices. The ability of physicians to differentiate flu from RSV-mediated illness will be enhanced through use of this simple test that will provide diagnostic information in 15 minutes or less.

Clinical studies for the flu-RSV combo test will begin in the fourth quarter of this year and we expect to submit our 510(k) at the conclusion of the '09-'10 flu season. This test should be ready for launch well in advance of the '10-'11 flu and RSV season.

And finally, as you're aware, the CDC published an MMWR regarding the first two cases of a flu A, H1N1 virus that occurred in Imperial and San Diego Counties here in California. We've gotten some questions on the CDC's report, so I'll give you a brief update on what we know.

First, let me quote from the MMWR, "The viruses from the two cases that are closely related genetically, resistant to amantadine and rimantadine and contain a unique combination of gene segments that previously has not been reported among swine or human influenza viruses in the United States or elsewhere".

In addition, the MMWR report states, "Although this is not a sub-type of influenza A in humans, concern exists that this new strain of swine influenza A H1N1 is substantially different from human influenza A H1N1 viruses, that a large proportion of the population might be susceptible to infection and that the seasonal influenza vaccine H1N1 strain might not provide protection. The lack of known exposure to pigs in the two cases increases the possibility that human-to-human transmission of this new influenza virus has occurred."

Based upon that, let me tell you what Quidel is doing. We've contacted the San Diego County Health Department, as well as the Texas State Health Department because one of the children traveled to Texas in early April, and the CDC. And we let each of them know that Quidel has product inventory that we can make available for immediate delivery should they request it.

It's important to remember that while our test is appropriate for human H1N1, its applicability in this case has not been determined and at this point that is really all we can say about this issue.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Mr. Scott Gleason with Stephens, Inc. Please proceed, sir.

Hey John and Doug and thanks for taking my question.

Hi Scott.

Hey. I guess the first question is just when we look at -- you guys mentioned that you still have some excess flu inventory in the channel. Is there any way you can kind of quantify what you believe that excess amount to be on a dollar basis or give us some more granularity on how to think about them, when we think about the third and fourth quarter of this year?

Well, we've previously disclosed, Scott, as you know, that we think that the amount that is required to stock the acute care setting and physicians' offices, that amount is approximately what we have in the channel. And we're validating that, plus we've recently concluded a study of end users. So we have a pretty good understanding of what's out there and beyond that we really can't quantify for you.

Great and then, Doug, I guess just given some of the events that are going along around the Company and the weak flu season and some of the inventory issues, how do you guys get comfortable around market share data and the claims that your market share is staying the same? I guess what gives you -- what additional data points do you guys look at right now to kind of give the assessment that your market share has not changed?

Well, we have a telemarketing department and they are in constant contact, daily contact with our end users and so, based on those data, which then obviously are not absolutely conclusive, we conclude that market share hasn't changed much, if at all. And we look forward to getting the report after Q1 and seeing what the results actually are.

Great and then you guys said that the RSV test grew double-digits. Can you guys maybe give us any more granularity around the actual kind of magnitude of that test contribution in the quarter? Are you ready to talk about that yet?

No. I mean, we are just pleased with the performance of the sales of RSV in the quarter, but we're not ready to break that out separately.

Great and then, John, one housekeeping question. Can you give us what the stock-based compensation was in the quarter and then also can you talk a little bit about what the expense was from the management transition?

Yes. The stock-based comp in the quarter was about $800,000 and that was versus roughly about $1.0 million in the prior year quarter, first quarter. And the CEO transition costs were roughly around $300,000.

Great. Thanks for taking my questions, guys.

Okay.

Ashim Anand, Natixis Bleichroeder

Hi, Ashim.

Hi guys. I was wondering if you have available some balance sheet data? How much was the accounts receivable this quarter?

Sure. Accounts receivable at the end of the quarter was $6.1 million.

Wonderful and inventories, if you have?

Inventory was $12.6 million.

Wonderful. Now, in terms of other revenues, would you be able to tell us what revenue stream contributed the most or that got a nice increase there?

Veterinary. The veterinary product (inaudible - multiple speakers).

Okay and H. pylori and sPG, they were essentially what they have been?

Yes.

Right and finally, I think you already said this, but I think I didn't get it, in terms of timing of the new products. You said second half for FIT and then probably -- what did you say about -- did you give us a timing about mono or not?

Yes we did. Front half of 2010.

Okay. Well, that's all. Thanks a lot.

Thank you, Ashim.

Thank you.

Zarak Khurshid, Zarak, Caris & Co.

Hi Zarak.

Hi guys. Thanks for taking the questions. Sorry, John, I think I spaced it out, but could you just go back over the breakout of the three big segments quickly?

Oh, sure. So the Infectious Disease category in Q1 was $7.8 million; Reproduction and Women's Health was $4.9 million and Other was $4.1 million.

Great, thanks for that. And then my only question, really, pertains to the molecular diagnostics strategy. So, Doug, could you just remind us what you're thinking there? How might that strategy -- how has that maybe been refined over the last few weeks and how are your meetings going with some of the platform technology companies in San Diego and elsewhere? Thanks.

Sure. We're actually doing diligence around a couple of ideas, which would include the technology itself and IP, so we've got two things that we're working on immediately and those are progressing pretty much as we had described during the Investor Road Show.

Okay.

Does that answer it for you?

Yes. I think so. More specifically, I was curious with the cost savings we're expecting to see over the next year, do you envision that being offset by either small acquisitions or investments in new technologies?

Sure. Some of that will occur. Remember also, Zarak, though, that the P&L is pretty leveraged such that any of these new products that we launch, even though they will not necessarily be more than modest in terms of sales in the immediate future, the fall-through on those products will be very healthy. Driven by, mainly, the fact that our direct labor expense for our manufacturing is quite low, so that the remainder of our manufacturing costs are essentially fixed.

Okay and then roughly what are your thoughts on the timing to get potentially a molecular product to market?

Well that's really hard to estimate at this stage, but I would say that we're aiming at the two-to-three-year mark.

Very good, thank you.

Sure.

Keay Nakae, Collins Stewart.

Yes, good afternoon.

Hi Keay.

Hi Keay.

John, can you give us an idea of, with your cost cutting initiatives, what level of quarterly gross profit you're targeting for breakeven?

Boy. That's a tough question to do without providing financial guidance to you, Keay. I mean I think, as you look at the business as we described in the past, you have our high margin products, flu and RSV and you've got the rest of the products, which are generally in that 50% gross margin range. So I mean, I think somewhere slightly north of that 50% should deliver kind of a breakeven performance through the course of the year.

All right. Yes. I don't know if that really answers my question, but maybe I'll follow-up with you on that later.

Okay.

In terms of the FIT test, how long do you think it'll take you to get the CLIA waver? Are you going to file for that at the time of the PMA filing -- or, I'm sorry, the FDA filing?

Well, what we did say is we're working on the studies that would be necessary to do the filing and so far, we're actually encouraged by the early results.

Obviously what we're looking for is the ability of the average person to be able to perform the test without failure and we're encouraged by the high percentage for which that is actually true so far. But until we get to the end of the study, I can't actually answer the question.

Okay. In terms of some of your product categories and the inventories associated with those, for pregnancy, reproductive health you posted this number of $4.9 million. Is that what we should consider as the baseline number now? Have you got your inventory straightened out for that product category?

Yes. Those two categories or those two product lines are down at inventory levels that we would expect.

Okay, very good and then what about Strep? You haven't talked about the inventory there. What is that looking like at this point?

That's the same.

At levels that you're comfortable with?

Absolutely.

Okay and then, finally, on the flu inventory. You talked about where those levels are now, but relative to where you would like them to be versus, say, where the prior CEO would have liked them to be, is your desire to have those at a much lower level and go from there?

Let's -- I'll answer that by starting at it in a little bit different way, if I can. First, we just concluded a fairly significant study at the end-user level, because actually that's where the inventory matters most. So we conducted a survey of a large number of our end-users and a very high percentage of them have actually not enough inventory to go into the season. So I don't know if encouraged is the right word, but we're certainly not discouraged by what that survey told us.

So, having said that, then, the question just is how much will need to go into the system in advance of the next flu season and so we would expect some modest amounts of sales into distributors probably in the fourth quarter. But that the uptake that would be required to get more product into the physicians and acute care setting, those labs, that amount would be essentially taken up by what we have in inventory now.

Okay, understood and then, to make all that work, I guess you, as well as your distributor/end-user customers, have a high degree of confidence in your ability to deliver product in a just-in-time fashion?

Absolutely. I think it's well described and well known that the efforts that the Company has taken over the last four years to improve efficiency and to move to a more automated manufacturing process means that we can take [whips]. That we continue to build throughout the year and we can gear up in very short notice to supply virtually anything that's required, whether it be Strep, flu, ACG. So, I think that's well known by our distributors that that's the case.

Okay and then just to kind of complete the loop here. While I guess most of this has been focused on the US market, where do your inventories stand with respect to distributors in Europe, bioMerieux, or in Japan?

I think we're comfortable with the inventory levels in both Japan and at bioMerieux.

So are they where you want them to be at the start of the season, as opposed to the excess that you're seeing in the US, when you feel comfortable, John?

Yes, I believe so.

Yes.

Because, actually, the amount that was ordered in Q1 by bioMerieux was not over the top.

Right.

Okay, very good. Thanks.

Okay. Something just happened.

Operator? Yvette, are you on the line?

(Inaudible) happened to the line. Are we going to need to dial back in?

I'm sorry about that, sir. (OPERATOR INSTRUCTIONS) Your next question comes from the line of Mr. Steven Crowley with Craig Hallum Capital Group. Please proceed, sir.

Good afternoon, gentlemen.

Hi Steve.

Hi Steve.

I felt like I was in hyperspace there for a moment. I do have a few more questions. I'm hoping you can give us a bit more information. You've attempted to give us some feel certainly for flu and the difficulties you experienced in Q1. I think you said year-over-year sales in that product were down roughly 90%. Q2 has typically been a period with very little flu product shipments. I think it's probably a safe assumption that there's not much flu product shipped in Q2, there's nothing quirky there with international or Southern Hemisphere or anything that should affect your flu sales in Q2?

No, nothing we're aware of.

And Doug, from the sounds of things, what you're telegraphing for Q3 and Q4 are some prospects for business in Q3 but some dampened prospects for business in Q3. I'm just trying to get a feel for what the range of outcomes might be for flu shipments.

I mean, you've had Q3's historically at the Company where you've shipped $13 million, $15 million, $18 million of product. We're certainly talking about something considerably less than that. But in the range of outcomes is there a repeat performance of the March quarter potentially with just a couple million dollars or so of flu.

Is that in the range of outcomes? I'm just trying to understand what the middle part of the curve here looks like.

Well, again, we're assuming an average flu season, because that's the best we can assume at this stage and if that's the case, then we wouldn't see a real start to the flu season until maybe that first or second week of December.

And so, therefore, we know that there's enough in the channel to fulfill a big part, we believe, of what the physicians and the acute care labs are going to need. So, yes we are telegraphing that we're not expecting to see the typical Q3. It's difficult to predict, from our end as well, because we don't -- we're actually just assuming average.

So, if we as a collective were to try and be real prudent and real --.

Uh-oh.

Steve, I think we lost you. Operator?

Yes sir?

I think we lost a questioner, Steve Crowley.

Okay, sure, I'll take care of that for you. I'll pull him back so he can ask another question. It'll be one moment.

Okay.

Okay, Mr. Crowley, your line is now open.

Okay. Guys, I'm back. So, my follow-on to that, to your answer, was if we were to try and be conservative and prudent and all those good things, assuming a couple to several million dollars of flu in Q3 would seem consistent with that objective of being prudent and conservative? I mean, I just want to make sure I understand what you're trying to telegraph to us.

Then you should be conservative about Q3.

Okay. In terms of Strep, can you give us some similar color? It was obviously down year-over-year. Was it down, double-digits 20%? Can you give us a feel for what kind of challenge you have there and what kind of category is Strep as it's normalized here and begins to operate in a normalized manner? Help us understand how that category shakes out for you.

Well, during Q1, we had distributors reducing inventory levels for both Strep and pregnancy and so the -- and those are -- we exited Q1, as we said, at more comparable inventory levels in the channel for those products.

So, going forward, we should return to a more normalized run rate of those, of revenues for those products and would be more, would be closer to what we experienced, say, in 2007.

Okay. So, if I take those comments to heart - and I appreciate them, because again, we're trying to calibrate what the floor is, a quarter without much flu business and more normalized run rates in your other product categories. For example, your Q2 of '07 was an $18 million quarter. That looks a little aggressive in the context of what you just reported, but maybe not overly aggressive.

Is the Q1 run rate in your business representative of a more natural run rate in your non-flu products and little or no contribution from flu? Is that the way we should think about it, so $17 million to $18 million or $16.5 million to $18 million?

Well, sequentially, we would expect pregnancy and Strep to be higher in Q2 than Q1, because of a drawdown on the inventory levels.

Okay. But other had a nice pop and was that artificial or wrong -- is that not sustainable up at those levels? Is there a bit of timing that helped Q1 there?

Yes. There was a bit of timing that helped Q1. If you recall, when we talked about the fourth quarter of '08, we said that there was some veterinary orders that moved from Q4 into Q1, so Q1 is a little bit high on the veterinary business.

And then, as you move into the September and December quarter, I guess there are some seasonal elements of your product mix that aren't hampered by the inventory situation. Those would be Strep, RSV, and other in cold and flu type products, correct? So there would be some positive seasonality even ex influenza for the back half of the year?

Yes. I mean, there are clearly Strep sales in Q4 that tend to be higher than Q3 and higher than Q2 and --.

Now, your cost savings from your restructuring seem to be rather significant. I want to make sure that we understand what you're telegraphing. In the quarter you just reported, ex the roughly $1.0 million restructuring charge, your total operating expenses were, what, $12 million, $12.1 million?

Yes.

You mentioned about a $1.0 million per quarter savings in operating expenses because of your restructuring. So is it fair for us to assume on what sounds to be a largely similar revenue number we wouldn't have big commission differences, just $1.0 million less operating expense is your run rate? Is there another variable in the equation that we need to know about?

No. I think you've got it.

And the management, the CEO transition expense, does it -- is it just in the first quarter or is there any tail to it into second quarter?

There's a small portion that's being recognized over the course of twelve months, but it's not material. So, for all intents and purposes, it's just in Q1.

And then final question, just moving back up to the growth side of the equation and the new products. Doug, can you talk about any response from the marketplace, distribution, potential partners, about the new product roadmap that you've disclosed so far? I guess I'm talking about the combo panel, about the mono test. What kind of interest do you have there? And if you don't really have interest, how have you sized up your opportunities in the mono area for example?

We've had one initial meeting with a key distributor and laid out the product roadmap and I have to say the reception was quite good. Don't have a lot of experience beyond that. I think, again, we should characterize these opportunities as base hits. So the top-line is not so important as the margin growth and again, any dollar in new product sales, because of the leverage we have in the P&L, is going to fall pretty much straight through to the bottom.

Well thanks very much for taking my questions. I'll look forward to picking up some of the stuff with you after the call.

Great.

Sure. Okay, Steve.

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

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

Bye-bye.

Ladies and gentlemen, we thank you for your participation and ask that you please disconnect your lines. Goodbye.