QuidelOrtho Corp (QDEL) 2011 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Quidel Corporation's second-quarter 2011 earnings 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 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 is our President and Chief Executive Officer, Doug Bryant. Today Quidel released financial results for its 3 months ended June 30, 2011. If you have not received this news release or if you would like to be added to the Company's distribution list, please call Ruben Argueta at Quidel Corporation at 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 form on -- 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 August 2, 2011. 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 the financial results for the quarter and Doug will provide an update on our new product pipeline. We will then open the call to your questions.

The second quarter of 2011 total revenues were $27.5 million compared to $25 million in the second quarter of 2010. An increase of 10%. Infectious disease product lines comprised $1.3 million of the revenue increase driven mainly by growth in Strep and RSV. Global sales of infectious disease products totaled $15.2 million in the second quarter of 2011, compared to sales of $13.9 million in the second quarter of the prior year. While the primary contributor to this increase was very strong growth in our Strep A product line we also saw growth in our RSV and flu product lines relative to 2010. Revenues in the women's health category grew 1% to $8.4 million as a 17% growth in Thyretain was offset by continued weakness in our bone health product line. Our gastrointestinal product category revenues increased 16% to $1.8 million due to increased sales of iFOB, H. pylori and enterovirus.

Gross margin in the second quarter of 2011 increased to 54.4% as compared to 49.5 % in the second quarter of the prior year primarily due to lower manufacturing costs as a result of acquisition cost synergies and lower scrap costs at DHI. In addition, the 2010 period included amortization of an inventory fair value purchase accounting adjustment related to the DHI acquisition. Operating expenses were $20.1 million in the second quarter of 2011 compared to $19.9 million for the second quarter in the prior year which included $0.7 million of business acquisition and integration costs. Research and development costs in the second quarter of 2011 were $6.5 million as clinical trial costs came in lower than expected.

General and administrative expenses increased primarily as a result of increased stock compensation due to 2 and 3 year cliff vests and an accrual for incentive compensation in 2011, as compared to not doing so in 2010. Stock-based compensation expense was $1.9 million in the second quarter versus $1.4 million for the same period in 2010. We expect stock compensation to be lower in the second half of the year, totaling approximately $6.4 million for the full year. Our effective tax rate for the second quarter of 2011 was consistent with the first quarter at 34% versus the year-to-date rate of 59% for the first 6 months of 2010. You may recall that last year the tax rate in the second quarter was abnormally high, particularly when compared to the effective tax rate at the end of the calendar year. This drove an unusually high tax benefit on the pre tax loss in the second quarter of 2010, thereby significantly reducing the net loss in that quarter.

Had the final year end rate at 35.3% been applied to the second quarter loss in 2010, the resulting net loss and loss per share would have been $5.3 million and $0.19 respectively. Net loss for the second quarter of 2011 was $3.7 million or $0.11 per share compared to a net loss of $2.5 million or $0.09 per share for the second quarter of 2010. On a non-GAAP basis, excluding nonrecurring items, amortization of acquired intangibles and stock compensation expense, net loss for the second quarter of 2011 was $1.5 million or $0.04 per share compared to a net loss of $0.1 million or $0.0 per share for the same period of 2010. I will now turn the call over to Doug.

Thank you, John. Except for flu sales, second-quarter revenues were as anticipated. We had light flu sales as the season ended abruptly in March and distributor inventories continued to remain at very low levels. This shortfall versus a more typical end of flu season was offset in part by sales of our Strep A products due to a prolonged strep season, by sales of RSV and veterinary products, and by continued growth of Thyretain, our TSI product for diagnosing Graves' disease.

Shifting now to our products in development, I will update you on our recent accomplishments with our 3 major programs; the immunofluorescent analyzer and First Assay, the Bobcat DFA analyzer and our multi-faceted molecular program. I will begin first with Sofia, the brand-name for our recently developed Immunofluorescent Assay Analyzer system. In the second quarter, we completed the clinical trials for the Sofia analyzer, and one assay, the Sofia influenza A+B FIA, and have now submitted the 510(k) package to the FDA for the agency's review. In addition, we submitted a package to European authorities for CE marking. This is a significant milestone for our R&D organization and represents the first of many products we expect to develop on the new Immunofluorescent Assay or FIA platform. In fact, clinical trials for the second assay, the Sofia Strep A FIA, are already underway here in the US and we expect clinical trials to start later this year for a third assay.

Bobcat, is the internal project name for our automated direct fluorescence analyzer that eliminates the need for a fluorescence microscope, and for highly trained technologists to interpret Multiplex liquid DFA slides. This summer we initiated Beta site trials in Hong Kong, and New Zealand. And pending outcome of these studies anticipate starting US clinical trials before the end of the year. Our molecular program is very much on track and we are very excited about the progress we have made to date. Here is a brief update on the 3 programs.

First, since October 2009, we have been working with BioHelix on a non-instrumented disposable assay platform that combines lateral flow detection technology with unique isothermal amplification chemistry to produce a molecular assay that is simple, and inexpensive enough to run in any lab, anywhere in the world. Instead of making a large upfront capital investment, any lab can run these assays using only a low-cost heating block. These tests are ideal for use in smaller labs, or on work shifts where molecular diagnostics are not typically performed.

We are preparing for beta trials for the first 2 assays, and have 2 other development projects that are also fairly far advanced. We plan to begin clinical trials on the first 2 assays, MRSA and C. difficile sometime in the fall and are working toward a US launch in the first half of 2012 depending on the timing of regulatory clearance from the FDA. And, with our second molecular program called Open Box, we develop assays that are designed to be run on commercially available thermocyclers and that provide value by offering laboratory technicians significant improvements over existing assays with respect to process time, ease-of-use, storage, and cost. We recently submitted a 510(k) package to the FDA, seeking clearance to market our first molecular assay influenza A+B, real-time PCR, for use on Life Technologies' 7500 Fast Dx, and will submit a similar package for use on the assay -- of the assay on Cepheid's SmartCycler, very shortly.

In addition, we submitted a package to European regulatory authorities for CE marking and expect to launch there in the fall. Further, we anticipate significant menu expansion, and product launches in the very near-term. Finally, Project Wildcat is the third arm of our multi-faceted molecular program. Wildcat is our integrated molecular platform that performs extraction, amplification, and detection all in one lower-cost instrument. The integrated system will also have the capacity to run the Open Box assay and menu currently in development. We are making excellent progress with this program, expect to complete our first development phase by year end, and are still on track for a late 2013 product launch outside the United States. We are excited about this potentially game changing technology, and will provide more details about this project in the future.

I do want to mention that products in development always remain subject to change in terms of content and timing because there is always uncertainty around development activities, clinical trials, and clearances by regulatory agencies. Despite these uncertainties, over the last 18 months we have accomplished a great deal and with Sofia, Bobcat and Wildcat, we have and are taking great strides to provide valuable products across the diagnostic continuum. I am especially pleased with the progress we made during the second quarter with our ability to stay focused on our strategic objectives and with the position we now find ourselves in.

Our intent is to build a broader based diagnostic company that is uniquely positioned to meet the needs of laboratory customers, regardless of location. From rapid point of care, immunoassays, to cellular-based assays, to molecular diagnostics, each of which serves an important function in the diagnostic continuum. And, as a result of our progress in the second quarter, we are well on our way. That concludes our formal comments for today. Operator, we are now ready to open the call for questions.

(Operator Instructions) Matt Hewitt with Craig-Hallum Capital Group.

Good afternoon, gentlemen. Maybe one financial question, and then one on the new product developments. Given that you had typical seasonal weakness in the quarter, and despite the fact that you had pretty strong strep sales I am surprised to see your gross margin up as strong as it was. What were the factors behind that?

It was primarily improvement in the cost structure of manufacturing and leverage of the existing infrastructure in San Diego. Keep in mind that strep tests drive a lot of volume, so we experienced some favorability there.

Maybe, follow up -- congratulations on it sounds like significant progress on the new product pipeline. I am wondering, you have talked about opportunities for revenue or financial top line performance, this year -- could you provide a little bit maybe more color as far as when we might see that, is that something we see here in Q3, or Q4 -- is it going to be small and then ramping throughout the normal flu season given it is going to be flu assays and tests to begin with?

We will launch first in Europe with both the molecular assay and in the first Sofia product, but we don't really expect sales until Q4. We had previously said that the sum total of all the molecular offering launched ex-US this year would be somewhere north of $1 million, and we believe that still to be true. All of which we expect to see in the fourth quarter.

On top of that, we really have not forecasted much in the way of Sofia, influenza sales or strep sales because as we have also previously stated, we intend to do a rather limited launch in 1 specific country to make sure we understand the recipe for success. So, all in all fourth quarter upside is just slightly north of $1 million.

Maybe, one more quick question, then I will jump back in the queue. Thyretain, 17% increase, if I heard you correctly. That sounds like a nice pop, given that we are seeing some softness in office visits. What is driving that -- or that move, and are you seeing the results that you would hope to at this point?

The short answer -- what we had hoped to achieve, is no, we are not there yet. I do want to be respectful of our commercial organization, I think high teens growth is still growth but our expectation is to be north of that in the 20s. We are not quite there yet.

Having said all of that, we are making some progress. We have seen a little bit of improvement I think because the American Thyroid Association issued new guidelines for the management of hyperthyroidism in May, and those guidelines actually recommended the use of a TSI test, for the diagnosis of Graves' disease and, in particular, for pregnant women.

So, that may be in part responsible for some of the uptick. In addition, there were a number of new publications in the quarter that detailed the benefits of testing for TSI. There were 2 posters and a plenary discussion regarding TSI that were accepted at this year's European Thyroid Association for the meeting that is coming up actually next month, that is, September.

5 abstracts were accepted by the American Thyroid Association for their meeting which will occur in October. I think we are doing things from a marketing perspective that would put us in a position to take advantage of the situation.

But I will say that this physician education process is slow and somewhat deliberate. What we are doing is taking the contract sales organization and reducing that number slightly and having those people focus mainly on generating city-by-city symposia, during which we educate physicians.

All right, thank you very much for the update I will jump back in the queue.

Thanks Matt.

Scott Gleason with Stephens.

Yes this Trey for Scott, thanks for taking my question. First, if we could start with flu. Now that we are out of the flu season do you have any assessment for what you're market share is post season. Then maybe if you have any insight as to whether you're ordering physician count was up year-over-year?

The position count, generally is slightly up. We actually discussed that in some detail on the last call. We also said during that time as we came out of both the fourth quarter and the first quarter, which are primarily the season, that when you took our sales and the sales of our next nearest competitor, the sales appear to be somewhat similar in total, which leads me to believe that our assertion that we have somewhere around 50% share in total across both segments, that is physicians and hospitals, that 50% is fairly close and somewhat unchanged.

Okay, thanks for that. And then on the Open Box molecular assays, you filed for 1 approval but maybe if you could give a little color or commentary around what the progression of tests will look like there, and maybe what your highest priority targets are?

Sure. Well, immediately we will launch upon receiving CE marking flu A+B in Europe. All, very shortly after that by human metapneumovirus product and an RSV product. We are also contemplating the combination of those 2 as an individual product. We are also preparing to launch before year end HSV/VZV.

And finally, interestingly enough, our first C. diff molecular assay. So, those we would expect before year end and obviously we have a number of targets that are either in phase 0 or phase 1 that we are looking at. I would say very excited about what we have done so far in building a menu and I expect us to be very competitive.

Okay, thanks for taking my question.

You are welcome.

Ashim Anand with Natixis.

Thanks for taking my question, guys. I was wondering if you guys would like to break out total DHI revenues you had this quarter and OUS revenues?

The ex-US revenues were about $4 million or 14% of the total. DHI revenues were roughly right around $10 million.

Okay. How is the mono test progressing? Has there been any change in the physician behavior in terms of their interest or any updates you can give?

You are talking about the mononucleosis?

Yes.

I think we have made reasonable progress at launch. We are not exactly right where we would like to be. We have got a number of marketing things we are working on at the moment to see if we can get better traction. So, I would say mildly pleased. But, not exceptionally pleased.

Okay, and obviously you guys are doing exceptional work in your pipeline, a number of really exciting projects and obviously you know, if funding is not a problem obviously you would like to have all of them going in the full speed. But, so that we understand if you can kind of put priority to what is most important. And sort of what is least important in the near-term, and for getting the instrument through FDA and then taking the rest in terms of additional assays, just so we can talk about priorities in terms of pipeline.

It would be very difficult to prioritize the pipeline because this is probably not the answer you are looking for Ashim, but for each of the segments in which these products serve these products are quite important for us. Take for example the Sofia analyzer, getting that clinical trial completed and the instrument submitted with the initial assay was absolutely critical for us.

As I mentioned, we got that done and actually submitted last week. That was a huge document that we had prepared for the FDA and that is now behind us. And we would expect approval sometime this year. That is very important for a number of reasons.

1, is that it solidifies our current business with both flu, enables us perhaps to gain traction with strep, and as I said before, puts us in a position with this analyzer to look at markets that we have not served before. Specifically the quantitative assay that market segment. So, that is pretty darn important for us.

When you look at the molecular assays, we have not been in molecular before, and molecular is the other rapidly growing segment in the diagnostic world. Our participation in that segment I view to be very important. Plus, it enables us to provide products at the very end of the continuum that began in the physician's office and ultimately ended up in the larger hospital lab. So, it would be very hard for me to prioritize which of those 2 is more important to us.

And then finally, I would say with respect to Bobcat although it is a much smaller set of customers we are talking about 700 or so customers in North America today that do our DFA products. For that set of customers, in the highly complex virology lab having something that dramatically improves their ability to interpret slides, I think is pretty important from that customer's perspective.

And then the real opportunity there, of course being, can we drive that down into the smaller hospital laboratory segment? So, if I were forced to prioritize I would say the first 2 buckets are probably just in terms of market size, the quantitative assays, quantitative immunoassays in the quanticare segment and the molecular are probably equal, followed by the market opportunity that the Bobcat represents.

Okay, wonderful.

I would add, Ashim that I am not worried about prioritization because we intend to actually launch them all.

The reason I asked, obviously, and obviously you have explained it already, is that one would have thought in terms of influenza and strep and infectious disease -- some of the infectious disease, everybody knows you. In terms of molecular test, maybe the challenge is more that it is molecular. C. diff and MRSA are relatively new markets and people don't know you there.

Maybe getting there and being in the mix, right now would be more beneficial than --everybody associates you with influenza and strep. That was my thought process. But, maybe it is not like -- one does not have to give for the other to benefit, maybe that is how it is.

If you're asking will there be a trade-off between the 2, no I don't think there is any cannibalization that will occur from our base business by launching molecular. And then, I would add, Ashim that any company whether it is Quidel or another company that can produce a molecular menu that is faster, better and less expensive will get known quite rapidly, I think.

Okay, I do not mean cannibalization in terms of sales, just cannibalization in terms of R&D dollars, but you answered my question, though.

Okay, thanks.

Tycho Peterson, JPMorgan

Hi, good afternoon. You made the comment about lower spending in the quarter because you spent a little bit less on some of the clinical trials. Can you just tell us about -- you have obviously got the Bobcat's trials, just talk about how we should think about spending on the trials in the back half of the year and maybe into next year.

Yes, I think previously we had said that R&D spend in the back half of 2011 would be slightly less than what we had spent in the first half. We were going to have some of these trial costs like the Bobcat as Doug mentioned and probably starting up in Q4. And so, we would expect R&D spend probably to be a little bit higher than what we had originally expected in the back half, but not a whole lot.

And quite similar to what we saw in Q2, actually.

Yes, that is right.

Okay, as we think about capital deployment can you just talk at all about whether you are still looking at tuck-in deals or what your appetite is for further acquisitions?

We have a small number of deals that we are looking at right now, not 1 of which would require us to raise money. We have now about $65 million, is it, John? (multiple speakers) And so, none of the things that we are looking at the moment would cause us to need to raise money.

And then maybe just on the manufacturing side, a couple questions. I think at one point you talked about longer term operating margin targets of around 30% and can you talk about maybe what it takes to get there. And then where you are today around capacity utilization. I think you talked about 50% or so in San Diego previously. If you could give an update there, that would be helpful.

Sure, we remain at about 50% capacity and so we are in good shape there. When we model out over our strategic plan where we would like to be in the next few years what we've said was that by 2014 it would be our objective to generate another $100 million in revenue and that with the leverage that we had across the P&L that we ought to be able to get our operating margin north of 30%. And, that is, Tycho, just doing the math.

Holding certain costs constant across the P&L. That is how we modeled it out. If we did that, then we would be north of $300 million or so and that is what we are aimed at.

We have demonstrated by the way that even in the absence of significant volume that we are generating productivity gains in the factories. We had a target for ourselves this year, that target has already been achieved, as John pointed out, with the improvement in the gross margin that you saw in Q2.

Okay. As we think about some of the items you highlighted in the pipeline, can you comment specifically on the go-to-market strategy for BioHelix. In particular C. diff and MRSA, given those markets are a little bit more crowded today?

We actually intend to look at what we can do from a direct sales model. At the moment, our new commercial head is actually organizing territories around key opinion leader sites. We think we can address immediately the higher end of the market with some number around 25 to 30 salespeople.

As you know, our total commercial organization at the moment in the United States is about 60. So, we certainly think we can handle that within our existing resources without adds, but rather redeployment.

Okay. For international, did you guys resign the bioMerieux agreement that expired in June, right?

We extended the agreement through the end of the year in order to have an effective transition in the areas where we thought that we needed to move to our own local distribution. In other areas of the world we will remain non exclusive with bioMerieux.

Okay, last one, given what we are seeing around utilization and physician office visits, any commentary around inventory levels, around pregnancy and strep and some of your other tests as you have gone out and talked to physicians?

Inventory at distribution is actually quite low, and inventory at physicians offices is normal.

Okay, so you have not seen any kind of de-stocking or anything?

At the physician level, no.

Okay great. Thank you.

Brian Weinstein with William Blair.

Good afternoon. Let's see what we can come up with after all the questions here. Just to confirm Doug, you guys are going to launch the Sofia without strep here in the United States, correct?

We would like to launch both simultaneously. Obviously flu is running ahead because we just submitted the package. Good news though is we did have a prolonged season for strep in the United States and we were actually able to start here.

Plan B would have been to start in Australia, New Zealand or somewhere else in the southern hemisphere but we did not actually have to do that and we have already started. I don't know what the timing will be, of approval necessarily but I can tell you that we do expect a fairly quick clinical trial. It is possible that we launch both.

And then you had talked previously a lot about the quantitative assays that you guys are going to potentially be looking at. Any update on the clinical trials for those, or what your updated thoughts are around some of the quantitative stuff?

Sure, we did develop a prototype assay in order to gain a lot of confidence that we can do this. We have another major assay that is of significant volume that we are working on right now. I would rather leave it there, at the moment until we get close to launch.

Okay, but no timing, as far as when that could be?

Well, internally we have timing, but I really don't want to alert our competitors at this stage, where we are at.

Okay. That will be it for me for now, thanks.

Nicholas Jansen with Raymond James

A quick question on Sofia, obviously you expect a US approval by the end of the year I am just wondering how quickly do you think you can start recognizing revenue from that in the US. If there is a delay at the FDA, I am just trying to make sure that you guys are going to be on point still for this year's flu season versus next. Thanks.

We are not counting on a great deal of revenue in the United States for Sofia. We will do a limited launch. We have a number of instruments that we are building right now for that launch, based on that forecast. I can tell you that we don't have a lot planned. So, there is not a number 2, to be missed. We do plan, however to have a pretty significant and robust first quarter 2012 launch.

Any comments on the IOM recommendations last week. Just your thoughts on the FDA in general and how the feedback has been so far, I know you just submitted your data this past week, but any color there would be helpful. Thank you.

Sure. Last Friday the Institute of Medicine published a report that was actually requested -- the work for which was requested by the FDA. It recommended eliminating the 510(k) approval process. I was reading that one of the statements was that they found that the process generally to be flawed from a legislative foundation.

And, that rather than modifying the 510(k)., they thought that a completely new program that had pre-and post-market regulatory things in place, would be better in terms of ensuring safety and efficacy. The FDA has since responded that they will take all of those comments under advisement. If I am guessing correctly, I would suggest that the FDA will use those comments to support its existing agenda, which is to make modifications to the 510(k) process. Then previously on Wednesday the FDA had released a draft guidance to medical device manufacturers about pre market notification submission.

That is the 510(k), for changes or modifications made to a previously approved device, which I read as meaning that if your product were being used in the market differently, or even on an off label basis that you would be required to go back and submit data. Either way, my read would be that although the process may not get more difficult, it may get more expensive over time. And that our organization will need to make sure that we are as efficient as possible in our R&D processes in order to accommodate that.

I don't really see any sort of significant impact, either in the shorter term for us or in the longer term. At the end of the day, our view has been, and I think will continue to be, that the quality of the data submission drives a lot of what happens at the FDA. Provided you run a clean clinical trial and you have the data to support your product, we have found them actually to be pretty straightforward and fair.

That is all I had, thanks guys.

Thanks.

(Operator Instructions) Brad Hoover with Sidoti & Company.

Good afternoon. Going back to Strep A, obviously it sounded like it was strong this quarter and I don't recall how it performed in Q1, but it sounds probably stronger than that. Is that true? Then secondly is there anything beyond just a longer season that you guys are benefiting from, whether it be market share, pricing or something else that maybe is driving the strength in Strep A?

There is certainly no pricing play, the price is already at a level that we don't like. So, there is not a lot of downward area to maneuver, actually. I would say mainly it is just a prolonged season and we continue to participate at fairly high market shares across all segments. We have been holding fairly steady at those shares for quite some time now. I think we are just the beneficiaries of a longer season.

Secondly, on RSV 10 I think you begin issuing that into your channel in the first quarter, could you guys maybe comment on how sales are progressing there and in what situations or where you are having success with RSV 10?

It has actually taken off quite nicely, and we are running favorable to what our expectations had been. But not in a huge way. We are running favorable by some number, $200,000, or something better than we had forecasted. So, overall I think it has gone nicely. It is not a huge product, it is also not a huge market as well.

Okay great. It's all I have, thank you.

Thanks Brad.

This concludes the question and answer portion of today's event. Please proceed with your presentation or any closing remarks, gentlemen.

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. Goodbye.

Ladies and gentlemen you may now disconnect, have a great day.