QuidelOrtho Corp (QDEL) 2012 Q3 法說會逐字稿

Welcome to Quidel Corporation third quarter 2012 earnings conference call. (Operator Instructions). I would now like to turn the call over to Mr. Randy Steward, Quidel's Chief Financial Officer. Please go ahead.

Thank you, Operator. Good afternoon everyone, and thank you for joining today's call. With me today is our President and Chief Executive Officer, Doug Bryant, and Ruben Argueta, Investor Relations Manager.

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 today October 23, 2012. 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.

Today Quidel released financial results for the 3 months ended September 30, 2012. If you have not received our news release or if you would like to be added to the Company's distribution list please call Ruben at 858-646-8023.

For today's call Doug will report on the highlights of the third quarter and provide updates on our product pipeline. I will then briefly discuss our financial results and we will open the call for your questionsI will now turn the call over to Doug for his comments.

Thank you,Randy. Total revenues for the third quarter at $33 million were in line with last year's third quarter revenues of $33.1 million. Influenza like illness activity was also consistent with last year's third quarter as was test demand during the quarter. Inventory levels at distribution were low throughout the third quarter and remain so today.

Our sales force continued to actively promote Sofia with the success we would have expected given one product Sofia Influenza A+ B. Progress on our product development pipeline continued as expected. On the whole I'd say we accomplished what we said we would for the quarter. And I would like to now update you on where we are with our near term plans.

Let's start with Sofia our automated fluorescent immunoassay analyzer. Throughout the quarter we continued efforts to commercialize Sofia. Efforts that were enhanced by our larger US sales organization. Although the prevalence of IOI was low in the quarter customers are clearly interested in Sofia, and we continue to believe that Sofia will be successful in the longer term and that our longer term goals for the platform will be met. One key to Sofia's longer term success is, of course, menu development. We received CE mark for our Sofia RSV product in the third quarter.

As we have previously stated we expect to launch RSV, strep A and hCG early in 2013 pending FDA clearance. In addition we expect CE mark for Sofia Legionella in the near term as well. Another near term initiative is AmpliVue our hand held disposable molecular platform that combines isothermal amplification with traditional lateral flow detection. We launched the AmpliVue C. difficile product in Europe in September as scheduled. And while molecular testing for C. difficile is not as evolved in Europe and Asia as it is here in the U.S. we areseeing interest in the format. Given the quality of the data from our U.S. clinical trial we hope to be in market in the U.S. within the next few months.

The Quidel molecular real time PCR assay program is on schedule as well. We continue to make good progress on the development of these assays and are on track to achieving our internal goal of developing a suite of 20 molecular PCR assay targets that can be run on currently available thermocycling equipment like the ABI 7500 Fast Dx and Life Technologies QuantStudio Dx as well as on our Wildcat platform when it launches in the developed world in 2015. We have said before that we would have the cartridge design for Wildcat locked down by yearend and this was the critical path item for launch in Africa in 2014, and we are still on target. With regard to project Bobcat our automate multiplex DFA analyzer, we are awaiting the next respiratory disease season to restart U.S. clinical trials, and are anticipating that the next season will be in Q1 2013.

Finally as we stated during the previous earnings call we have entered into an agreement with Life Technologies for the development of molecular assays for Life's new QuantStudio Dx platform. We initially estimated that under this agreement the benefit and sharing development activities would be recorded as contract revenue in the statement of operation. After further review, it has been determined that the reimbursement of development costs should be recorded as a reduction to research and development expenses. So instead of our revenue number benefiting from the incremental $1.3 million as initially planed our R&D expenses were reduced by $1.3 million.

In all I think we had a good productive quarter. We are happy with our placement rate with Sofia, and are continuing to make progress on our product pipeline. Of course, there is always uncertainty around commercial and development activities, clinical trials and regulatory clearance time tables. However, I am very pleased with our achievements to date and the work we have done along the way. I am confident that we are well positioned for growth and on our way to becoming a broader based diagnostic Company.

Now Randy will report the third quarter financial, and then we will take your questions. Randy?

Thank you, Doug. As mentioned for the third quarter 2012 total revenue were $33 million compared to $33.1 million in the third quarter of 2011. Global sales of infectious disease products decreased by 2% to $21.6 million in the third quarter of 2012 from $22 million in the third quarter of 2011. We did realize growth from DHI's respiratory DFA, general virology, and herpes businesses in the quarter, but sales of influenza were lower by 6% to $8.5 million from $9 million last year.

Revenues for strep A were up 1% to $5.6 million. Revenues for the women's health category grew by 7% in the quarter to $8.7 million, growth in this category was largely driven by an 8% rise in sales of our pregnancy business along with higher sales of our bone health and thyroid products. Our gastrointestinal product category revenues were $1.6 million in the quarter compared to $1.7 million in the third quarter of last year.

Gross margin in the third quarter of 2012 was 55% unchanged from the same period last year. The gross margin was adversely impacted by product mix the result of lower influenza sales. This decrease was offset by the nonrecurring of a onetime charge last year of $700,000 relating to the Alere agreement.

Operating expenses were $19.3 million in the quarter of 2012 compared to $19.4 million of the prior year. Research and Development costs in the third quarter 2012 were $5.1 million compared to $5.9 million in the third quarter 2011. Included in the third quarter 2012 R&D amount is a reduction relating to our collaboration with Life Technologies. As Doug stated previously in conjunction with the development agreement, we will record the reimbursement in development costs as reduction in our R&D expense.

The master agreement was executed in July of this year, and we have executed on several project plans with Life Technologies. The $1.3 million is representative of the portion of the actual cost incurred as percentage of total costs expected to be incurred for all current project plans. Going forward the agreement anticipates continued reimbursement of a certain portion of the product development cost associated with mutually agreed upon projects plans and time lines for each molecular assay.

Sales and Marketing expenses in third quarter 2012 were $7.8 million compared to $6.5 million in the third quarter of 2011 driven by our investment in our commercial organization which incorporates an increase in the number of sales representatives andassociated training and travel costs as well as incentives related to Sofia placement. We expect this quarterly spend in Sales and Marketing to continue in the fourth quarter.

Expense s for G&A decreased $400,000 to $4.8 million. This decrease is primarily due to lower accrued incentive compensation. Stock base compensation expense for the 3 months ended September 30 was $1.4 million and amortization of intangibles was $3.6 million.

Our tax rate for the third quarter was 56% as compared to 34% rate in the third quarter of last year. In the quarter we recorded $300,000 as a discreet tax benefit associated with the expiration of tax statute on certain R&D credits. Excluding this onetime benefit our effective tax rate was 35%.

Net loss for the third quarter was $700,000 or a loss of $0.02 per share as compared to a net loss of $1.1 million or $0.03 per share for the third quarter 2011. On a non-GAAP excluding amortization of intangibles and stock compensation expense net income for the third quarter of 2012 was $2.6 million or $0.08 per diluted share compared to net income of $2.9 million or $0.08 per diluted share for the same period in 2011.

In the quarter operating activities provided cash of $1.2 million and cash used for purchase of capital equipment was $2.7 million. During the third quarter the Company did not borrow nor pay down any amounts associated with its senior credit facility. As of September 30 the outstanding balance on our credit facility was $19 million and cash on hand was $17.8 million.

For the nine months ended September 30, 2012, total revenues were $101.8 million compared to $120.2 million for the same period in 2011. The decrease was primarily driven by 21% decline in sales of infectious disease product in 2012 as the first half of 2012 was a mild flu season as compared to 2011.

Gross margins for the nine months in 2012 was 57% compared to gross margin of 60% for the period in 2011. Our margins for the nine month period in 2012 were primarily affected by unfavorable product mix associated with lower sales of influenza products. Operating expenses for the nine months was $63.4 million versus the prior year amount of $61 million. This increase was a result of our continued investment in Research and Development driven by new product development as well as sales and marketing and support of our commercial efforts.

Net loss for the nine months ended September 30 was $3.7 million or $0.11 per share compared to net income of $6.7 million or $0.20 per per diluted share for the same period last year. On a non-GAAP excluding amortization of intangible and stock compensation expense net income for the first nine months of 2012 was $6.6 million or $0.19 per diluted share compared to a net income of $15.7 million or $0.47 per diluted share for the same period in 2011.

Stock based compensation expense for the 9 months was $5.5 million compared to $5.8 million for the first nine months in 2011. Amortization of intangibles was $10.9 million for the nine months compared to $7.9 million for the same period in 2011.

For the nine months ended September we have used the cash provide by operations plus excess cash on the balance sheet to pay off the remaining balance on the Alere agreement of approximately $15 million plus pay down our senior credit facility by $23 million. As previously communicated in August of this year we secured a new 5 year $140 million credit facility. This facility provides the Company with a strong capital structure and support of the our future business needs.

With that, we conclude our formal comments for today. Operator, we are now ready to open the call for questions.

(Operator Instructions). Our first question will come from the line of Jeff Frelick Canaccord Genuity .

Good evening everyone. This is [Mark Massaro] in for Jeff.

Hello, Mark.

You mentioned that flu inventories remain low at the distributor level. Can you just give us a little more color with respect to distributor actions ahead of the flu season.

Because we ship products typically within 48 hours of order most of our distributors are conditioned to order product as needed, so we do not expect any loading in the channel, rather we expect to see an up tick in flu orders from distribution that is consistent with the up tick that you would see at the end user level. In other words, when we see an up tick in actual flu cases.

Great. Then my next question is related AmpliVue C. difficile. You said over the next few months you are looking to roll it out in the U.S. But can you just comment on what you have seen over in Europe since receiving the CE mark earlier in the year. I know you mentioned a little bit in your prepared comments, but if you could try to characterize the up tick in the EU and how anecdotally how that may play out here in the U.S.

So far the experience we have had with AmpliVue C. difficile in Europe has been through meetings with distributors who have taken onboard initial stocking orders and are now making sales calls, so I can't really speak at this early stage essentially one month into the launch as to what they are seeing at the end user level. I do know that most of the market there is forming C. difficile testing using the standard GDH and then EIA testing algorithm and the transition to molecular has not evolved as it is today. So I sense that will be somewhat of a missionary sale for those distributor reps and we will have to see how well they do.

Great. And my last question, obviously you have a large pipeline going out several years. Do you see any material change to the timing or launch of the menu, and in particular with respect to Wildcat as well?

No, change at this stage. We have said for Sofia we expect to round out the respiratory menu followed by women's health products. We haven't disclosed what those are yet. But we feel like we have a capacity of doing four to five new assays per year, and that is what we are aimed at there. On the molecular side the PCR development is going as scheduled. With the AmpliVue products we are pretty much on schedule there as well. We expect to launch our first assays as I mentioned here shortly followed by another three over the next 12 months following that. In terms of Wildcat it has been widely discussed previously that we are in the process of locking down our cartridge design for the Wildcat platform. That is pretty important for us in understanding what our costs are likely to be at launched.

We have said that we expect that be locked down by year end, and we are still pretty much on schedule with that. Following that I think that the development should go fairly straight forward, and that we are still pretty confident that we will be in market in Africa in 2014 with a HIV viral load assay and we will be in market in the developed world with a menu approaching if not exceeding 20 assay targets in 2015.

Great. Thank you very much.

Sure, Mark.

Your next question comes from the line of Steven Crowley, Craig-Hallum Capital.

Greeting, gentlemen.

Good afternoon.

Maybe some follow-up color on Sofia and the nature of the accounts who are adopting the product, and how you are equipping them with disposable early on in the ball game would be helpful to us.

Sure. I will start by saying we are happy with the placements of Sofia so far. Most of those have been placements versus sales. And with those placements we have an initial order that varies but is actual pretty small ranging from what Randy 1 to 3 kits. For the most part we are not loading the channel as yet. And those customer with Sofia reagents on hand once the season starts we will probably blow through those fairly quickly and we will need to order.

That is 1 to 3 bundles of kits. And you historically have talked a little about the types of accounts you are getting in to; hospital versus physician office, your account base versus competitors. Can we have a little bit of an update there also?

Initially we have said that our placements in the hospital segment were about 40% cannibalization. The numbers in hospitals is small relative to physicians now. In the physicians segment for the most part initially looking at our QuickVue customers, but obviously overtime we have also identified customers that are new to Sofia new to Quidel as well and I would say there we are running probably about 50% cannibalization in total.

And your next question comes from the line of Bill Quirk Piper Jaffray.

Hi, Bill.

Good afternoon everyone. It is actually Dave Clair here for Bill.

Hi, Dave.

I was hoping to get a little bit more color on the number of reps you have in the field right now. Where are we now ? Where do you expect us to go in the next 12 months or so as the new products come online?

We had completed the hiring for the larger sales organization about Q2, so as we previously said the SG&A expense that we have in the P&L at Q2 was about what our run rate would be going forward. Total all in, in the United States organization including marketing folks and managers we are north of 60 people. Ex U.S. obviously the organization is much smaller.

Okay. Then just given the flat ILI year-to-date what are your expectation for the upcoming flu season?

Well, in our planning process we have to assume something approaching a normal season, although we have no understanding of whether that would be true or not at this stage. What we do know are the same things that you could see. Things that are publicly available right now. Of those flu tests that are being performed in the market place about 4% of those are positive which is pretty darn low, but that is actually slightly more than is typical for this time of year, but I am not sure that means anything. We do know that about one-third of the cases so far have been H3N2. In previous years we would have said that a higher prevalence of H3N2 would be indicative of severity of the season, although following the pandemic in 2009 I am not sure that is exactly true anymore. Year-to-date flu vaccines scripts are down a little over 7% versus what they were last year, and deaths due to flu are also down. So all those things at this stage are interesting, but it is October and in years past we really didn't see any up tick until the very end of December. So I am quite certain that is not very helpful for you, but it is round about way of saying we really don't know at this stage.

Your next question comes from the line of Evan Lodes JPMorgan Chase.

Hi, good afternoon. Thank you for taking the question. On Europe and on AmpliVue in particular can you talk about (Inaudible). ASP is, and then can you talk some about how you would define success in a year or so in terms of either revenue or market share there? Thank you.

Sure. I won't say specifically what our price is in Europe, but I will say pricing in Europe particularly for molecular products is slightly lower than what you would see here in the U.S. Typically here in the U.S. as you know C. difficile tests have ranged at the low end in the 20s to the high end in the 30s for those molecular assays. Our expectation for share I can't really comment on. I will say that the market again is not very evolved most testing for C. difficile in Europe is done by cytotoxicity assays as well as GDH followed by EDA testing. So there is an opportunity I think that is probably equivalent to the opportunity in the U.S., but over some period of time and unlike here in the U.S. we are probably not behind in terms of approaching the market there.

Given the level of pay down on obligations and the new credit facility will you be looking for more M&A in the near future?

Given the product pipeline that we are working on we are not highly focus on M&A activity. Obviously there could be opportunistic things that arrive from time to time and we continue to look at those. I will say because of the position that we find ourself in anything we would do would need to be accretive almost immediately, so that obviously limits the number of things we look at.

Thank you.

Your next question comes from the line of Brian Weinstein William Blair & Company.

Hi guys. This is actual Matt in for Brian. Thanks for taking the question.

Hi, Matt.

So just quickly thinking about current customers that are coming online with Sofia and customer that are not coming online. What feedback are you getting from customers you currently have in terms of things they would like to see on the menu? And then feedback from customer who are not coming online what is the push back you are are getting there? Thanks.

In terms of customers that have already acquired Sofia I would say on the hospital segment most are looking forward to RSV and strep and that is good because those products are imminent. On the physician side interestingly enough flu is of interest. I think strep is also interesting, RSV less so, and I do think there is a demand for objectively read hCG product. In terms of push back from customer at this stage we are not really seeing a lot so far.

Okay. Great. Thanks. The new accounts that you are getting do you have any sense whether that is share gain or if these are customers that are new to flu testing? Thanks.

That is a great question, Matt. Predominantly they are takeaway's from competitors. Although I would say some number less than 10% are brand new start ups. In other words, customers that previously or at least in recent history have not performed rapid flu testing. So we are seeing a little bit of market expansion there.

Okay. Thanks Doug.

Your next question comes from the line of Shaun Rodriguez Cowen.

Hi, guys. Thanks for taking the question. For Sofia what do you view as the key drivers of incremental revenues there for the more near term products (Inaudible). flu, strep, RSV and hCG just in terms of particular indications or applications that the platform might be opening up?

Objectivity is the number one stated reason that our sales people relate to us. In addition the data for flu are clearly better than our existing product and therefore the competitor products that there in market. Connectivity for some customers is an issue. The ability to download the data somewhere whether to extract it through the SD card or interface directly to either an EMR or laboratory information system. But interestingly in the physician side the number one driver is next generation technology and the ability to objectively read the answer.

Thank you. And heading into this flu season how do you think about contributions from OUS markets from the open box products and the DFA products, basically trying to get an idea for how you are thinking about opportunities outside of the U.S. rapid platform.

Let me start with the DFA product line. We have had success in Asia and in particular China with our DFA products. We do see an opportunity for Bobcat as well there in China but also other markets. We have had some experience already in a couple of key markets with Bobcat, and we are very much interested in getting that product in to that market. In terms of the real time PCR assays I would say that our success there so far has been somewhat limited but recognizing our menu is also quite small. We would like to have a bit more critical mass, so that we can sell a bundle of PCR assays on those Life thermocyclers in particular but others as well. I think we will have a bit of bundle to promote in 2013, and we look forward to seeing how well we can do. I will caveat that by saying that so far with the limited menu our success has been somewhat small.

Okay. And last for me at least for now, with the potential of the first molecular (Inaudible). flu product coming on the market over the next year, can you share your thoughts on how such a platform might fit into the market relative to the traditional lateral flow with Sofia and some of the lab based molecular offerings out there? Thank you.

First I would say that I am not absolutely convinced that a molecular product would be (Inaudible). depending on what the steps are. If we are talking about things like the automated platforms that are out there I think the time to result is going to be problematic. Certainly anything that is PCR base is probably going to take too long in a physician's office to be valuable. So what we see is a continuation of the need to do infectious disease tests including flu in that 15 minute or less window. Now having said that, if there were something as easy as Sofia to run and you could do it in under 15 minutes there is a potential that you could see some share shift although it would certainly be very expensive on the healthcare system to perform molecular assays in the same volume that you see in the rapid category.

Thank you.

Sure.

Your next question comes from the line of Nicholas Jansen, Raymond James and Associates.

Hi, guys. Thanks for the taking the question. First in terms of just normal flu season obviously it has been a bumpy road each of the last couple of years. What would you define as kind of a normal flu season, so we can better gauge performance relative to that target for both the December quarter and March quarter, a normalized number.

Around 50 million.

And 15/35 split?

Five zero, and then you are saying 15/35 meaning?

4Q, 1Q.

We have said traditionally two-thirds in the first quarter.

Okay.

And the remainder in the fourth quarter.

And then looking at the Life agreement. How much reduction to R&D would be anticipating for this over the next 12 months to 24 months? Is it going to be a similar run rate to what we saw in the third quarter or is it going to fluctuate with the development timeline? Thanks.

It could fluctuate depending on how many assays that we have agreed on project plans, and our success obviously in executing product development. So it could vary from time to time.

But should we be assuming a much lower -- roughly $5 million to $6 million lower run rate of R&D going forward as result of this collaboration, or you don't want to provide that level of specificity?

I think it is too early to provide that. As soon as we have more clarity we will obviously provide it. But at this stage I would be guessing along with you on what it would be that we would be reducing our R&D expense by going forward.

Okay. Lastly for me looking at I think PSS is your distributor for Sofia once they came on board I believe it was early in 3Q how much of a dramatic turn did you see once they came on board? Thanks.

I will just characterize it by saying we are pleased with the level of activity and their performance and they were helpful for sure.

Thanks, guys.

(Operator Instructions). Your next question is a following up from the line of Steven Crowley Craig-Hallum.

Hi, guys. Thanks for taking my follow-up. In terms of Thyretain you mentioned there was some growth there. Can you give us a sense for the extent of the growth, and what is percolating or not percolating along there?

We saw about a 6% increase, Steve, over third quarter 2011. We do see in the summer months a slow down, so it doesn't change our perspective that we think it is going to be going forward low double-digit growth around the 10%, 11%, but summer was a little slow but that has been indicative over the last couple of years.

That is helpful. Then back on Sofia. In terms of trying to decipher your comments about the traction you have been able to gain so far, are we talk about hundreds of units several hundred units that you have been able to seed and hopefully get in position for the onset of the flu season? What is the right way for us to calibrate the success you have had?

I am having a difficult time Steve, because I really do not want to give out the number mainly because I do not want to disclose to our competitors how many we have out there. I have spent a lot of time trying to figure out how many competitive analyzers of various types are out there, and I really do not want to make it that easy on our competitors to know exactly what we are doing, what our strategies are. I would say we are comfortable with what we have done so far to date and we are looking very much forward to the upcoming respiratory season. We are also looking forward to the next three assays we plan on launching here in the next few months.

In a normal flu season Sofia flu volume -- I know an average account, the elusive account -- but can you help us understand what one of these instruments that you have placed might drive in terms of consumable utilization since I'm sure you had to make some assumption for the placement agreement?

Well, our average customer is a difficult number to use because we have a pretty big disparity between the very large customer and small customer. You could probably guess that we are not targeted at the small customer, so instead we are targeted at the larger customer. That is the best I can tell you right now. I know you want to model this, Steve, and I know you want to take a guess at the number of analyzers and multiple it and try to figure out how many of those are share gain, how many of those are new, et cetera, but at this stage I would rather not get into that level of detail.

And this is all the time we have today. Please proceed with your presentation and any closing remarks.

Well, this concludes the call for today. Thanks everybody for your time and for your continued support. Take care.

Thank you.

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