QuidelOrtho Corp (QDEL) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation third quarter 2010 conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) I would 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. Today, Quidel released financial results for its three months ended September 30, 2010. If you have not received this news release or if you would like to be added to the Company's distribution list, please call Reuben Argueta, at Quidel Corporation 858-646-8023. 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, registration statements, 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 27, 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 report on the financial results for the quarter and year-to-date, provide details on the DHI acquisition synergies, and speak to our financing activities. Doug will provide color on our near-term and longer-term business growth prospects and give an update on our new product pipeline. We will then open the call to your questions.

Total global revenues for the quarter were lower compared to third quarter 2009 primarily due to the benefit associated with last year's flu pandemic. Excluding the impact of influenza on the combined businesses, our revenues in total grew approximately 4% in the third quarter of 2010, over the same period of the prior year. DHI contributed $9.4 million of revenue in the quarter. International revenues accounted for 11% of total revenues in the third quarter of 2010.

In the following comments on revenues, I will compare our business on a pro forma basis as if DHI had been acquired at the start of 2009. For the third quarter of 2010, global infectious disease revenues were $16.2 million versus $56.9 million in the prior year third quarter, which benefited from last year's flu pandemic. Global flu sales in the third quarter of 2010 were modest as is more typical for this time of year and were reflective of distributor out-sales. DHI respiratory and general virology revenues declined 42% and 39%, respectively from the third quarter of 2009. Again, primarily as a result of the benefit in 2009 of the flu pandemic.

In 2010, revenues were favorably impacted by 9% growth in the herpes product line compared to the third quarter 2009. This product has been growing consistently in the 5% to 10% range over the last several quarters. Global sales of Strep A increased 5% over the prior year quarter. The global revenues of our reproductive and women's health category increased 13% in the third quarter of 2010 to $8.7 million. This increase was driven primarily by pregnancy revenues and a 21% growth in the Thyretain product line. The gastrointestinal disorders category made up primarily of H. pylori, enterovirus, and iFOB was up 18% from the third quarter of 2009 to $1.7 million.

Other product revenues, were $1.7 million in the third quarter of 2010, a $500,000 decline from the prior year, reflecting some softness in our veterinary product line. Gross margin in the third quarter of 2010 decreased 55% as compared to 69% in the prior year. Primarily as a result of an unfavorable product mix shift associated with significantly less flu sales this year versus last year.

Operating expenses were $18.8 million compared to $14.2 million in the prior year. This includes $4 million of DHI's operating expenses in the current period, as well as $1.6 million of intangible asset amortization associated with the DHI acquisition. Research and development costs were $6.1 million, in line with our expectations. Stock -based compensation expense was $1.3 million for the quarter, versus $0.8 million for the same period in 2009. With regard to the DHI integration, we have successfully implemented the majority of the cost synergies. And we anticipate $6 million in total synergy-related savings for 2010.

In addition, we are working toward cross-selling revenue opportunities identified earlier in the year. As you saw from our earnings press release today, in the third quarter of 2010, we recognized tax expense on a pretax loss. This was because included in the tax provision in the third quarter is $3.2 million of tax expense to reduce the tax benefits recorded in Q1 and Q2 to our current estimated effective tax rate. The effective tax rate has declined from the second quarter primarily as a result of a reduction in our forecast of full-year pretax income. On our last quarter conference call, we indicated that we expected our full-year tax to approximate 40%, assuming Congress extends the Federal research credit. Today with the same assumption regarding the Federal research credit, we expect the full year tax credit to approximate 38%.

During the third quarter, we took steps to maintain financial flexibility. First, we amended our credit facility to provide a no-test period in Q4 for certain of our financial covenants. And second, we filed with the SEC a $150 million universal self-registration. I will now turn the call over to Doug.

Thank you, John. For today's call, I will provide an update on our progress with our near-term initiatives to accelerate revenue growth and then update you on the status of our new product development programs. Before I begin, however, I want to remind the audience that our strategic intent is to create shareholder value by building a broader-based diagnostic company with products and market segments in which we have significant expertise and know-how.

For the past 18 months, Quidel has been focused on three strategic imperatives. First, utilizing our core infrastructure to launch two to three new products per year. Second, strengthen our distributors emphasis on Quidel products and finally, third, develop a molecular franchise. As we execute these strategic imperatives, we will be building a broader, more diversified diagnostic company with an ability to capitalize on respiratory disease epidemics as they occur.

In terms of near-term growth drivers, there are three products that we expect that will have an impact in 2011, QuickVue Influenza A+ B, Thyretain, and our recently launched lateral-flow immunoassays. Starting with flu, we continue to see influenza as a growth driver for our business in Quarter One 2011 and over the next several years. While rapid flu test usage by physicians has grown substantially in recent years, we believe that the rapid influenza test market is still under-penetrated and that there is opportunity for growth. From 2003 to 2008, the number of patients presenting to physicians with ILI that were tested with a rapid flu test has increased dramatically. And the market has more than doubled over that period. And in 2009, physician adoption of rapid diagnostics increase further still, albeit during the pandemic.

We are encouraged that during the third quarter of this year, most of our major distributors had significant increases in their out-sales been compared to the same time in 2008, our last non-pandemic flu season. Since current ILI activity is only slightly above what we saw in 2008, we believe it is likely that the reason for the increase is that more physicians are purchasing products and that we will see a larger customer base going forward into the 2010, 2011 season as a result.

In addition to flu, another growth driver and near-term opportunities for us is Thyretain, the only FDA cleared thyroid-stimulating immunoglobulin test, a test that is specific for TSH receptor antibodies that are stimulating and therefore confirmatory for Grave's disease. Although we continue to see a growth rate in the high-teens, we have not reached the inflection point in the market, the point at which every potential Grave's patient is routinely tested. And this, of course, is where our marketing activities are aimed.

We have refined our view of the domestic TSI testing market and estimate that it's an annual 2.7 million test opportunity. We do see increased interest and positive feedback from endocrinologists and key opinion leaders, so targeting them is key. We are also in the middle of finalizing an economic benefit model for Thyretain to determine the cost of undiagnosed and misdiagnosed Grave's disease to the healthcare system. And so far, the preliminary results are very positive.

We remain committed to driving growth in this product and have an internal goal to grow Thyretain appreciably in 2011. Moving on, this quarter was an exceptionally good period for our product development teams as we launched four products. We relaunched QuickVue Mononucleosis, which will serve an estimated 3.3 million test markets in the US. We launched the RapidVue Pregnancy as our fighter brand to gain access to the price-sensitive segment of the pregnancy testing market. QuickVue RSV 10 just recently launched. It is unique in that it is, to our knowledge, the only FDA-cleared 10-minute respiratory syncytial virus test on the market. The test also employs the identical test method in sample preparation as the QuickVue Influenza A+B test, allowing for the use of the same nasopharyngeal patient specimen when testing for influenza or an RSV infection.

QuickVue Mononucleosis, RapidVue hCG, and QuickVue RSV 10 are derived from our core lateral flow technologies. We will leverage our existing automated production facility and will provide cash positive contributions in the near-term. Equally important, these launches demonstrate that we have the talent on board and the processes in place to develop in commercialized products and to execute our longer-term strategic plan.

In addition to the three lateral flow product just mentioned, MicroVue Ba was launched by Quidel's specialty products group this September. MicroVue Ba, the recent addition to Quidel's autoimmune complement product line, allows for the rapid quantitative detection of the Ba complement fragment in experimental samples including urine, serum, and plasma. Although our revenue expectations for MicroVue Ba are not large, the autoimmune complement category as a whole has grown 17% on a trailing 12-month basis, and is another solid cash positive contributor.

Our initial promise to the investment community was that we would introduce two to three new products per year. As of the third quarter, we've exceeded that challenged for 2010 and look forward to exceeding that challenge in a meaningful way in the next couple of years as well.

Let's talks next about our progress with the two new instruments that we have in development in our product pipeline as we see it today. First is a fluorescent immunoassay instrument that employs and improved assay chemistry format and an objective read on a small benchtop analyzer. In addition to eliminating the variability among different practitioners in reading a visually red assay, which gives physicians more confidence, assays in development for influenza and strep have demonstrated a significant improvement in analytical sensitivity to date. The graphical user interface is nearing completion and we are on track to begin clinical trials in the first quarter of 2011. Our initial product menu will include flu A+B, followed by strep A later in 2011, with additional menu thereafter.

Also under development is the Bobcat, an automated instrument that eliminates manual processing of direct fluorescent antibody slides and significantly reduces the time involved in interpreting liquid DFA samples. Traditional DFA testing takes between 90 to 120 minutes. With FastPoint liquid DFA, the slide preparation is reduced to about 12 minutes and the Bobcat instrument interprets the slide for the presence of eight different viruses in three minutes, for a total assay time of 15 minutes. The Bobcat eliminates the need for a fluorescent microscope and therefore does not require a highly skilled virologist to operate it or certainly not much of their valuable time. We think the ease of use, the 15-minute results, and an assay cost of under $30 will be a very compelling for many customers to take a look at Bobcat. We're on track to begin clinical trials in the first quarter of 2011 and are targeting a fourth quarter launch.

Next I would like to talk about our progress with molecular diagnostics. As we mentioned in the past, we have a three-part molecular strategy consisting of a non-instrumented set of assays, open box assays, and an integrated system. With regard to non-instrumented assays, we are working with Bio-Helix to develop C. diff and MRSA molecular tests with additional menu plans. We've received positive feedback about the technology and platform particularly due to recent improvements in total user workflow. This platform allows clinical labs to more easily run molecular diagnostics without having to invest in a molecular instrument that can be cost prohibitive.

We will begin clinical trials for MRSA and C. diff in the middle of 2011. The second part of our molecular strategy is to develop open box assays, which are molecular diagnostic kits which will be performed on commercially available molecular platforms. We are making good progress and, in fact, are slightly ahead of our internal schedule. Our current development menu consists of seven infectious disease analytes. Clinical trials are scheduled to begin in the first and second quarters of 2011.

Third is our integrated platform strategy. We have entered into an exclusive licensing and joint development agreement with Northwestern University and the Northwestern Global Health Foundation to develop an automated molecular diagnostic testing platform that will incorporate clinical sample preparation, nucleic acid extraction, amplification, and detection. We expect product launch to take place in 2014 and are excited about the commercialization of a lower-cost integrated system and the benefits that it will bring the clinical labs.

As with all product development activities, there is inherent uncertainty with development work and clinical trial outcomes. Activities remain subject to change, but we nonetheless felt it important to share with you our progress and planned activities as we see them today.

In conclusion, we are moving forward with our plans to diversify our business. We have good near-term prospects to drive growth and have made significant product development advances over the last three quarters, largely due to our investment in R&D. We're beginning to show the results of a re-invigorated product pipeline and the internal competencies that we've acquired as a result of that effort. We're executing on our strategy to position ourselves as a broader-based diagnostic company and are moving in the right direction, away from a heavy dependence on seasonal products, like flu and strep, and to a more diversified portfolio of higher growth product lines. That concludes our formal comments for today. Operator, we're now ready to open the call for questions.

(Operator Instructions) Your first question is from the line of Zarak Khurshid with Wedbush. Please proceed.

Hi, Zarak.

Hey, guys. Good afternoon. Thanks for taking the question. I was just curious, what are the challenges you are seeing with penetrating the Thyretain opportunity? And what are you learning about, I guess, the kind of challenges within the sales force as well?

The biggest challenge is when we've polled physicians on average, many are not aware that there is an assay that would be confirmatory for Grave's. So, our mission at this point in mainly educational. So, we've got the sales force who are doing a great job, I think, of making the calls they can, but 30 people on the ground can only go so fast as the number of calls they can make each day, right? We are doing a great deal of work around educating through -- physicians through other means including symposia, workshops, webcasts, and we have a number of papers that are due to come out in the fall which will be helpful.

Great. Had a follow up question regarding the R&D around the fluorescent reader and the Bobcat. How should we be thinking about the R&D expenses associated with the development of those platforms? Should it -- will it be ramping up as you get closer to FDA approval? And, you know, manufacturing scale up?

That is a great question, Zarak. Let me start by saying that as we exit 2010, a lot of the instrument development costs will fall off. And then they will be replaced in the first half of 2011 by clinical trial costs. So, if indeed all of those things that we described actually hit the timing that we have in mind, it is entirely possible that in Q1 and Q2, that our R&D expense will increase slightly, but then be offset in Q3 and Q4 by an equal amount, such that at the end of 2011, we will still have an R&D expense that is about the same as we are seeing in 2010.

Great. That is helpful. Thank you.

Your next question is from the line of Scott Gleason with Stephens. Please proceed.

Hey, Doug, hey, John. Thank you for taking my question. I guess, Doug, would you be willing at this time to share a little bit more information about the second generation lateral flow product? And I guess when we start thinking about the actual system cost to the end-user, and we start thinking about the workflow, and then also maybe from a cost of goods sold on the disposable basis. Can you give us some, I guess, granularity on what that could look like?

The short answer is I don't think it would be appropriate to announce our costs are for the either instrument or the reagent. I can tell you that when we look long-term at the strategic plan, we certainly see gross margins and operating margins that improve throughout that period.

Okay. And then Doug, can you give us an update in terms of what is going on with the second generation fecal occult blood test?

We have -- essentially now are at the point where we need to make a decision as to changes to the product that would make it inherently easier to read than the current methodology. Right now as we see it, our product as well as the other competitive fecal occult blood tests that are in the market, all suffer from the same problem and that is that they are positive at levels that may not be particularly useful for a physician.

And so, we are looking at ways that we can improve the product such that when a physician sees a positive, it is at a level that is indicative of the need to refer that patient for colonoscopy. And so until we can see greater traction in the market, we are not sure when we should make that investment to improve the product.

Okay. Great. And then just last question, when we start looking at the Bobcat platform, I guess when we think about a virologist performing these tests, how are they reimbursed? Is there a technical component and also a professional component? And I guess would that professional component change at all in terms of thinking about a direct read for the laboratory?

Scott, let me make sure I understand the question. Are you asking about reimbursement for DFA tests generally?

Yes. I am talking about with the virologist. Would there be any change in terms of how they would get paid when you start introducing the Bobcat in terms of their incentive structure with the test?

There should not be any change. If you are talking about an inpatient of course, that is not a reimbursement question. On an outpatient basis, DFA tests -- the reimbursement is the same for the existing as well as the future.

So, there is no professional slash technical component associated with those?

Not that I am aware of. No.

Thank you for taking my questions.

Your next question is from the line of Pete Vitale with William Blair and Company. Please proceed.

Hey, guys. Question for you on kind of where you are at right now on the percent of revenue that you are generating from seasonal versus non- seasonal products, kind of what the current run rate is?

That is a tough question to get at right now because of we are at the seasonal low period. Generally, we believe by the end of the season, we'll probably would be roughly around a third of our revenues will be seasonal.

Are there any long-term goals that you guys have as far as where you would like to see that in the next two to three years?

No, that would be impossible to do because what would be unbelievable is to grow the non-seasonal by some huge percentage but also grow the seasonal by that same huge percentage. I have to say that no, I don't -- we don't have a specific goal to say that the seasonal will be low as a percentage of the total. Frankly speaking, if we had seasonal products that grew hugely, that would be fine.

Okay. Thanks, guys.

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

Good afternoon, gentlemen.

Hey, Steve, how are you?

I want to ask you a little bit of a follow up on Thyretain and the whole thyroid area. In terms of some of the push marketing and outward show activities that you've tried to crank up, what are some of the leading indicators that you are looking for in terms of response, besides more test ordering? Are you seeing some reaction to your actions that leaves you at least somewhat encouraged at this point that what you're working can have a positive impact?

Like any commercial organization, we have a system in place where we track weekly the activities of our sales organization. So, we know the number of calls that they attempt to make and then the number of calls that they are successful making. We know the responses from the physicians, either positive or negative. And so, we track all of those things. I would say though, Steve though, we should be careful with that because even though those are a positive, just because the physician says yes, I will start ordering TSI, when I see a certain level of TSH result, doesn't mean that actually translates necessarily into test ordering.

So, we do see positive signs, but I won't be satisfied until I see a dramatic shift in actual sales of our product into the big reference labs. And thus far, we are seeing very good growth, year-over-year high-teens for sure. But it needs to ramp up dramatically past that to be the product that we ultimately think that it could be.

Some of the other potential opportunities for you in the thyroid disease complex, is your pursuit of those opportunities contingent on whether you can get this ball rolling a whole lot faster or just have the steady progress there? Are you waiting on those decision or is it so logical to you that you're likely to proceed with some of those other product initiatives?

Not only, Steve, is it logical, we are highly confident that this would happen. The old already funded internally another program that is closely related to Grave's disease. So, if you look at the autoimmune disorders, Grave's, of course, is the largest and most common followed by rheumatoid arthritis.

The third most common in the US is Hashimoto, which is also -- Hashimoto thyroiditis, which is also related and would incorporate a similar cell-based format. So, to say it again, not only are we confident, but we are already making the investment on the R&D side.

Great. Then as a precursor to what you're going to be doing with Bobcat, the introduction of FastPoint DFA tests. Have you had some success getting a fair number of evaluations of that technology out there in the field and beginning to convert those? Where do you stand on that process?

Let me start by saying while we are very happy with the progress we made with the integration with DHI generally, certainly one of the disappointments was that we did not have a respiratory season in Q1, the season during which we had expected to start up a large number of evaluations. We had expected to be further along in the process. So, starting the process in the summer, we knew he was going to be slow anyway.

Having said that, I think the most encouraging thing, Steve, is there are a number of evaluations ongoing already. Equally encouraging, most of those evaluations were started by the former Quidel sales force, which says something about the segment that we are going into. And then third, we are encouraged by actual sales we are starting to see now in October. So, I would say that we are in the very beginning of that stage during which we achieve traction. It will be our objective now to follow up with customers as we go into the respiratory season and not only get product ordered, but get it reordered.

One more for me and I will hop back in the queue. The development project and the relationship with Northwestern and the intention to bring the system, as you describe in your prepared comments. It seems that the angle of those comments was about bringing a much more cost-effective solution to the marketplace. You also envision a certain set of differentiated capabilities or a disease group or disease groups where the features and functionality of the system will be best suited. Can you give us a little bit more of a picture of the opportunity you are looking to shoot at there?

Well, as a result of the agreement, initially we are obligated to co-develop an HIV-viral lode product, which would be distributed to emerging growth countries. And we will use that expertise to load in other assays along the way. Certainly all the things that we have currently as open box assays, the seven analytes that I mentioned a few minutes ago, those would be immediate candidates.

So, along the lines of infectious disease and certainly respiratory disease products, those would be obvious for us. But there are some other candidates as well that we certainly are interested in.

Great. Thanks for taking my questions.

Thank you, Steve.

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

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

Good bye.

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