QuidelOrtho Corp (QDEL) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corp. First Quarter 2010 Conference Call. At this time, all participants are in a listen-only mode. Later instructions will be given for the question and answer session.

(Operator Instructions)

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

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.

This afternoon Quidel released financial results for its first quarter 2010. If you have not received this news release or if you'd like to be added to the Company's distribution list, please call [Joyce Shea] at Porter Novelli Life Sciences at 619-849-5381.

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, April 29th, 2010. 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 begin by reporting the financial results for the quarter and Doug will provide an update on our strategic initiatives. We will then open the call to your questions.

Global revenues for the first quarter of 2010 were $28.4 million, an increase of 68% compared to $16.9 million in the first quarter of 2009. Our organic growth rate was 28% for the first quarter. Domestic revenues were $21.5 million, an increase of 55% period over period, while international revenues came in at $6.9 million, an increase of 128% from the first quarter of 2009.

Excluding the acquisition effect of DHI, our organic growth rate for domestic and international revenues was 15% and 100% respectively. International revenues accounted for 24% of total revenues in the first quarter of 2010 compared to 18% in the first quarter of 2009.

Before I report on revenue by disease state, let me explain how we are reporting that information now with the acquisition of Diagnostic Hybrids. We will report revenue in the following categories, infectious disease, women's health, gastrointestinal disease, and then all other products. The infectious disease category includes flu, strep and RSV, which is the same as last year, along with the addition of DIH's products for respiratory disease, urology and herpes.

The women's health category includes, as in previous years, pregnancy, bone health, Chlamydia, and now also autoimmune and complement products reclassified from the other category, and the DHI Graves' disease test. Grave's disease, incidentally, is one of the more prevalent autoimmune diseases in the United States, with a prevalence of 1% of the population.

Gastrointestinal disease, a new category, includes H. pylori and iFOB tests, previously reported in our other category, as well as DHI products for enterovirus and C. difficile. Our other product revenues will then include veterinary, royalty and grant revenues.

We have posted on our website on the Investor Relations page a link to schedules that present our previously reported 2009 revenues reclassified to be consistent with this new reporting classification. That will be live at the conclusion of this call.

Worldwide infectious disease revenues increased 122% to $17.4 million from $17.8 million in the first quarter of 2009. Excluding the acquisition effect of DHI, our organic revenue growth rate was 44%. Influenza, strep and RSV product sales were all key growth drivers during the first quarter of 2010.

The growth in strep is reflective of a more stable level of inventory in the channel during the first quarter of 2010 versus 2009, while the growth in influenza this quarter was primarily driven by the timing of international flu orders in 2010 versus the prior year.

During Q1 our domestic and international markets experienced very little seasonal flu activity, with most influenza isolates being the novel H1N1 subtype of flu, now known as 2009 H1N1. According to information provided by the CDC, in the U.S. the percentage of patient visits for ILI trended below the national baseline of 2.3% for each week during the first quarter.

Global revenues of our women's health category increased 32% to $7.6 million from $5.8 million in the first quarter of 2009. Organic growth was 20% in the first quarter of 2010. Much like strep, the growth in revenues is largely driven by a more stable level of inventory of pregnancy products in the channel in the first quarter of 2010 compared to 2009. Revenues from our gastrointestinal products were $1.1 million, which was relatively constant in both the first quarter of 2010 and 2009.

With respect to our domestic distributor inventories, we continue to see normal levels of both our strep and pregnancy products at roughly 20 days sales in inventory. In addition, domestic distributor inventory levels for flu are approximately half of what they were a year ago. Our international distributor inventories are at acceptable levels heading into the next flu season, although our Japanese distributor inventories are slightly higher than we would like to see.

Gross margin was 53% for the first quarter, up from 50% in the first quarter of 2009. The improvement in gross margin was due to product mix, primarily of higher margin influenza tests. The margin gain was partly offset by $700,000 of amortization related to the write-up of DHI's inventory to fair value. The remaining $400,000 of the inventory write-up will be amortized in the second quarter.

Operating expenses in the first quarter of 2010 were $18.8 million compared to $13.1 million in the same period of the prior year. Included in the first quarter of 2010 were $2.7 million of operating expenses related to diagnostic hybrids and $1.4 million of business transaction and integration costs. A higher level of investment in R&D to support our new product initiatives was the primary driver of the higher operating expenses.

Although our effective tax rate this quarter of 38% appears to be relatively constant to that of the 2009 rate of 37%, I want to highlight a few items affecting our rate. First, as you may be aware, Congress has not yet approved the deduction for the federal R&D tax credits. Also, we have incurred significant transaction costs and a large portion of those are nondeductible for tax purposes. In addition, we have an effective lower state tax rate. And accordingly, we were required to revalue our deferred tax assets.

The net loss for the quarter of $2.5 million includes $2.1 million, or $0.05 per share, of nonrecurring items associated with the acquisition of DHI. Stock-based compensation expense was $1.2 million for the first quarter of 2010 compared to $900,000 for the same period of 2009. During the first quarter we repurchased approximately 300,000 shares of Quidel common stock for $4.3 million under our previously announced share repurchase program.

A total of $14.8 million remains available for stock repurchase under the current board authorized program. We had $20.3 million in cash and cash equivalents at the end of the first quarter. In addition, we currently have $45 million available under our credit facility.

Aside from our reported results I would like to provide pro forma financial data for the first quarter of 2010 and 2009, as if the Diagnostic Hybrids acquisition had occurred at the beginning of both periods.

This will include the impact of increased amortization of intangibles as well as increased interest expense and lower interest income as a result of the transaction, and then exclude the effect of certain nonrecurring items, including the amortization of the DHI inventory write-up of $700,000 in 2010, business acquisition and integration costs of $1.4 million in 2010, restructuring charges of $1 million in 2009, and $3.9 million of DHI related transaction costs incurred on DHI's books earlier in 2010 but prior to the acquisition date.

Pro forma revenues in the first quarter of 2010 increased 24% period over period from $27.4 million to $34.1 million. Gross margin grew to 56% in the first quarter of 2010 from 54% in 2009. Research and development expenses were $7.8 million for the first period in 2010 compared to $4.7 million in 2009, an increase of 65%. If you recall, during our yearend 2009 earnings call back in February we indicated we would have a meaningful increase in R&D during 2010 as we built toward an R&D investment target of 13% to 15% of revenues in 2011.

Selling and marketing expenses were $6.6 million for the first quarter of 2010 versus $5.8 million in 2009, an increase of 12%. General and administrative expenses were relatively constant at $5 million for both the three months ended in 2010 and 2009. Pro forma net loss decreased 20% to $1.9 million in Q1 2010, or a loss of $0.07 per share. A schedule providing this detailed information will be posted to our Investor Relations webpage.

As part of our integration process with DHI, we have and expect to continue to drive cost synergies within both organizations. As of today, we have removed approximately $1.5 million in annualized costs from the consolidated entity. During our second quarter conference call we plan to provide more information leading to additional savings that reflects a more efficient and appropriately leveraged organization. With that, I will now turn the call over to Doug.

Thank you, John. As you're aware, since the end of 2009 the incidence of influenza-like illness has been very low. According to CDC published data, the percentage of patient visits with ILI did not rise above the national baseline of 2.3% at any time in the first quarter. This is very unusual and, as John mentioned, had a significant impact on our first quarter results. As of today, we do not expect to see a resurgence of ILI until the next flu season starts in late 2010.

Importantly, if and when there is an up-tick in flu, we expect sales to fall shortly thereafter, as we were extremely effective last year in limiting the amount of QuickVue flu test inventory at distribution and on end user shelves. We are currently estimating that our U.S. distributors have a little bit more than 800,000 tests on hand, which we believe is appropriate given the increase in the number of physicians who now do rapid flu testing in their offices.

We have also surveyed our physician office and hospital lab customers to get an estimate of the level of their inventory of QuickVue influenza tests. Based upon our calls to numerous customers, we estimate that test inventory on our customers shelves is equivalent to roughly one week's usage during a normal flu season.

During the first quarter with low ILI incidents, our customers were still consuming flu tests in the hundreds of thousands, which further suggests that QuickVue customers are not overstocked and will need to order again if we see flu later this year.

In response to a softer Q1 than we had anticipated, we are making the following adjustments to our business for the remainder of 2010. First, we implemented a hiring freeze and have taken measures to significantly reduce discretionary spending across the Company.

Second, because of the low incidence of flu, the clinical trials on our next generation flu tests have been postponed until the next flu season, which will reduce R&D spending in the next couple of quarters.

Third, we are reallocating sales and marketing resources to our best near term product growth opportunities, [Thyrotane] and our next generation fecal immunochemistry test, and expect to see a positive impact from these efforts in the year.

The actions we are taking to reduce our spending and reallocate resources in 2010 are prudent in the shorter term, yet they still allow us to continue to pursue our long term strategic goals. One of the more significant activities in the quarter has been the integration of Diagnostic Hybrids into Quidel. We are very pleased with the progress that the team has made thus far.

John mentioned some of the cost synergies that we've identified. I would also like to point out that there will be revenue and product development opportunities as well that will result from the efforts of the combined company.

We completed the integration of the two commercial organizations and now have one single marketing team, a physician sales team, and one hospital sales team. With the larger combined sales force in the U.S., we are cross-selling products in the hospital lab segment. There are about 700 hospital accounts that purchase Diagnostic Hybrid's products directly from us, fewer than 5% of which use our QuickVue branded products.

This is a significant new business opportunity for us and we're looking forward to seeing what we can achieve in this segment. And correspondingly, there are about 300 QuickVue customers that are very good prospects for DHI's products. Overall, we estimate that focused cross-selling efforts could deliver as much as $10 million to $15 million in annual incremental sales.

Perhaps the biggest reason we sought to acquire DHI was our vision for what the two product development teams could do together to accelerate the introduction of next generation products that would matter to customers. The leadership group from the three R&D teams at Quidel, DHI and SPG, has now completed its assessment of ongoing projects, skill sets and future joint development projects.

We had hoped that with the merger of Quidel and DHI, one plus one would be more than two. And we are pleased to report that this is certainly the case. We have generated ideas that neither team had previously contemplated and have several areas where we will leverage core competencies to deliver new products faster.

We had committed last year that we would launch two to three products per year and that, because of our operating leverage, much of the incremental sales of these products would fall through to the bottom line. With the combination of DHI and Quidel, we will easily exceed that commitment.

We also committed to developing a molecular strategy and introducing molecular assays in the next three years. With the efforts and resources of the combined R&D organizations, this will happen even sooner than we had anticipated.

Overall, Quidel's combined R&D and manufacturing organizations will develop and deliver as many as 22 new products over the next four years. We expect that nine of these will be immunoassay products, eight will be direct fluorescent antibody or cell culture products, and five will be molecular.

The R&D spend for Quidel is now appreciably larger, as you saw in Q1, even without the addition of DHI's R&D. We previously said that we believe that increased investment in new product development was critical to our company's longer term success and that the appropriate level of expense was in the range of 13% to 15% of sales in a normal year.

We expect this to be the right level for the combined R&D organizations as well and believe this is sufficient to fund the 22 new product programs we have in the pipeline. Later this year, as we present at conferences, we'll provide more detail and color to the product development roadmap. In the meantime, we can certainly provide an update on the products we intend to launch this year.

We anticipate modest sales for three new research us only assays. The first, C3a Plus, is a marker of complement pathway activation and is used by researchers looking at biocompatibility and autoimmune disease. We began shipping to customers in March.

Another research marker to launch in 2010 is [Ba], an indicator of alternate complement pathway activation. It will launch this summer.

And an immunoassay for sclerostin, which has an inhibitory effect on bone formation, will be launched in Q4.

More significant in terms of sales, our second generation fecal immunochemistry test is still being evaluated by the FDA and we expect that process to conclude in the current quarter. We were very excited about this product and plan to use a dedicated sales force focused on demand creation for this unique product.

Our mononucleosis test was scheduled for re-launch in the first half of this year. We are now completing stability testing and will re-launch this test in the third quarter.

We recently completed the development of RapidVue hCG and submitted a special 510k to the FDA. RapidVue hCG is a pregnancy test that is designed to be our [fighter brand], a test that will compete very well in the lower price professional pregnancy testing segment beginning this summer at pricing comparable to the existing private label pregnancy products.

And finally, we completed the clinical study for our new pediatric RSV test and are conducting a reproducibility study that will be included in the data package we expect to submit to the FDA shortly for their review. If the FDA review process is completed favorably this summer, we will be prepared to launch this product in the fourth quarter.

Given the lack of ILI activity in the first quarter, 2010 is shaping up to be a different year than we had originally expected. However, the underlying fundamentals of our business remains strong and we remain focused on our long term growth strategies.

With the continued commitment of all Quidel employees, our executive team and directors, I am confident we can create a company unlike any other in our industry, one with an unmatched high value product portfolio.

Thank you for your continued support. This concludes our formal comments for today. Operator, let's open up the call for questions.

(Operator Instructions). And your first question comes from the line of Brian Weinstein with William Blair & Co. Please proceed.

Hi, guys. This is Andy O'Hara in for Brian this afternoon. Just a question on your integration with DHI, specifically with regard to the combination of your efforts for developing a molecular platform. Sounds like this collaboration is going well. But can you go into any more specifics on the combination of those efforts?

Sure. More specifically, Andy, the tests that we had in development at DHI prior to our acquisition were developed in order to do the clinical trial work necessary to submit the [DFA] assays, those packages to the FDA.

So you can imagine that for each of the DFA assays that DHI has in the market today, there is more than likely a corresponding PCR-based assay that they have developed.

Okay. And then one quick follow-up here. With the huge up-tick in vaccinations that have occurred for regular seasonal flu and H1N1, do you think in the upcoming season and potentially upcoming multiple seasons this will drive down the incidence of flu over time potentially?

I really don't have any idea what the impact of vaccination has been on the rate of ILI. It certainly -- or likely to be. It certainly -- there certainly has not been a strong correlation between the vaccination and the number of tests requested historically.

All right. Thanks a lot, guys.

Your next question comes from the line of Steven Crowley with Craig Hallum Capital Group. Please proceed.

Good afternoon, gentlemen.

Hi, Steve.

Hi, Steve.

In terms of the big jump in R&D expense, you certainly telegraphed a much more significant expenditure there. Can you tell us, were there -- what could you tell us about what that investment went towards in first quarter and the second gen flu, or the next generation flu test that you referenced, delaying development? Is that a function of your willingness to spend dollars or the fact that there wasn't a whole lot of seasonal flu around to do the necessary trials?

So, in reverse order, there is no flu season, therefore, even though we had established clinical sites who were prepared to do the testing, we did not find positive samples. So we discontinued looking for them given the fact, again, that there is no -- there's no flu season. We would have been prepared obviously to continue at the same rate of spending in order to get through the trial. But the fact is that inadvertently we end up with a savings relative to what we were spending.

Now, in the first quarter you do see that we spent $7.8 million on the pro forma. You'll see that. And we would anticipate, though, that that will lower in Q2 through Q4 and will average, Steve, about $6 million a quarter.

Okay, very helpful. And then in terms of some specifics, can you give us at all a feel for where those dollars are going predominantly? I mean I know you have a big pipeline and a bunch of projects, but there are a few things in particular that you can paint for us?

Well, there's the next generation on the infectious disease products that you referenced. That's a pretty big piece of the spend. In addition, we have an instrument platform that we're working on at DHI. That's another big piece of the R&D spend.

Great. I'll hop back in the queue.

Thanks, Steve.

Your next question comes from the line of Zarak Khurshid with Wedbush Securities. Please proceed.

Hey, Zarak.

Hey, guys. Thanks for taking the questions. Sorry to harp on the R&D issue, but if we do sort of average out around $6 million, I mean doesn't that mean that we're likely approaching the 13% to 15% R&D as a percent of sales sooner rather than in 2011?

That's right, yes.

Great. Thank you.

Your next question comes from the line of Ashim Anand with Natixis Bleichroeder. Please proceed.

Thanks. Thanks for the clarity on R&D expenses post Diagnostic Hybrids acquisition. I was wondering if you can give us more color on SG&A. How should we look forward in terms of as a result of acquisition? My guess is that it's not -- shouldn't be going up. But if you can give us more clarity on that.

Well, you will have a little bit of effect in sales and marketing because you'll have a full quarter of DHI going forward. There's not a whole lot of G&A at Diagnostic Hybrids. So the G& piece won't move that much.

Okay. Thank you, guys.

Thanks, Ashim.

And you have a follow-up question from the line of Steven Crowley. Please proceed.

Hey, guys, I want to pick up on your commentary on the second gen [fit test] and the upcoming Digestive Disease Week. I'm wondering how you might be able to use that forum to lay the groundwork for a launch of the product if it's still sitting at the FDA. And I guess that's the question.

We won't be able to take advantage of any of those marketing activities because we can't make any claims unless we have FDA approval.

Now, your current product and any clinical data around that, I mean when is the organization -- dedicated organization for sales of that product going to be in place and what can you do at Digestive Disease Week?

Well, again, we can probably attend and observe Digestive Disease Week. But we can't really talk a lot about the product. We certainly can't have a sales force out talking about the features and benefits of the new product.

Okay. And then in terms of the performance of DHI in the quarter, I mean we can figure out the pro forma, so the quarterly performance of the business. I trust they were affected by some of the same lack of flu factors that you at the core Quidel were affected by. What are the implications for that business of lack of flu here in the second quarter, middle part of the -- well, really second quarter, so that we understand the kind of deviation from a normal year that they might see with lack of influenza.

Yes, in Q1 2009 their sales for flu related products, if you look at it on a pro forma business, would have been $1 million to $2 million, more in that quarter than this quarter. Does that answer your question?

Yes, that's very helpful. Thank you very much.

And just I realize I didn't tell you about when we plan to implement the dedicated sales force. We -- if we assume that we will have approval sometime in Q2, then obviously we would be ready to go for the back half of 2010 with that group of people. And that's our intent.

We have a follow-up question from the line of Zarak Khurshid. Please proceed.

Thanks for taking the follow-up. I guess some of the other analysts are busy. I was curious about the new -- the pipeline that you laid out, particularly on the molecular side. So what platform should we be thinking about on which these tests are going to be run?

Yes. So, from the BioHelix effort that we have ongoing today, we have now identified two of the assays that we will launch in the period that I -- that I described, one of which could possibly be in 2011. Then in addition to that, we would anticipate within a reasonable period of time launching two to three products from the DHI portfolio of molecular products. And those could be launched either on an open platform early or later on a platform that we would be bringing to market.

Okay. And then I had a follow-up question on the C. dif franchise. Can you kind of just talk generally how that plays into our gastro segment and what are you seeing in terms of the opportunity there?

Well, we definitely see it as an opportunity and it is on our list of things that we're closely looking at. It's a very interesting market, either on the immunoassay side as well as the molecular side.

Okay, thank you.

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

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

Bye,.

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