QuidelOrtho Corp (QDEL) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Quidel Corporation's fourth-quarter and full-year 2012 earnings conference call. At this time, all participants are in 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. Randy Steward, Quidel's Chief Financial Officer.

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, February 12, 2013. 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 fourth quarter and full year ended December 31, 2012. If you have not received our news release, or if you would like to be added to the Company's distribution list it, please call Ruben at 858-646-8023. For today's call, Doug will report on the highlights of the fourth quarter and provide updates on our product development pipeline. I will then briefly discuss our financial results and we'll open the call for your questions.

I will now hand the call over to Doug for his comments.

Thank you, Randy. Total revenues for the fourth quarter of 2012 were $53.9 million, a 40% increase over fourth-quarter 2011 revenues of $38.4 million, consistent with our early January preannouncement revenue estimate of $53 million to $54 million. The increase in revenue was driven primarily by a sudden and early start to this year's influenza season and our ability to respond to the demand for our flu test, particularly given very low product inventories at our distribution partners warehouses and with physicians' offices and hospital labs. While sales of QuickVue influenza A plus B benefited most, the Sofia D3 Ultra and Quidel Molecular PCR products were a contributor to the increase in revenues in the quarter as well. Overall, we had a good quarter from our revenue perspective, but more importantly, our product development teams achieved several key milestones during the period, and we are now poised to introduce a number of new products over the next several quarters.

I would now like to update you on some of our near-term product development and commercial plans. Let's start with Sofia, our automated fluorescent immunoassay analyzer. We've said many times before that success with Sofia was critical to our ability to reach $250 million in revenues by 2015 and that our objective was to have the full-year impact of 10,000 analyzers online and operational at that time. In the preannouncement, we mentioned that we had surpassed 3,000 instrument placements and were ahead of our original internal projection of forecasts that had assumed more than just one assay in 2012. At this point, given our placement proficiency to date, I will add that we remain confident that we can, given further product development success, reach the 10,000 instrument hurdle, and that we see little technical risk with respect to introducing assays for Group A strep, RSV, and hCG, and a number of women's health assays over the next few quarters.

Also an important part of incremental revenue in 2015 is success with our two nearer term molecular programs, Quidel Molecular, which refers to our PCR-based assays for use on established FDA cleared thermocyclers, and AmpliVue, a hand-held disposable molecular platform that combines isothermal amplification with traditional lateral fluid detection. To date, we are FDA-cleared to market two PCR assays, Quidel Molecular influenza A plus B and Quidel Molecular HMPV.

In development or already submitted to the FDA are several other PCR assays, seven of which we hope to introduce in 2013. At this point, our menu is focused on assays for respiratory pathogens and still-based antigens, market segments where we believe we have both technical and commercial expertise. And as of December, we are now FDA-cleared to market our first AmpliVue assay for C difficile, a product that has received a moderate complexity CLIA designation. In development are three additional AmpliVue assays and a next-generation cartridge platform that we hope to roll out at the end of October.

Finally, the third aspect of our molecular program is Project Wildcat, a durable, low-cost fully integrated instrument that we will make available for use in limited resource settings for the purpose of providing through the Northwestern Global Health Foundation affordable access to HIV viral load and TB testing. As was noted in our fourth-quarter press release, we will be receiving some help from the Bill and Melinda Gates foundation for the HIV portion of this endeavor. The program remains very much on track, and we hope to provide further detail on our progress during our analyst day which will be held on March 7.

Overall, I think we had a productive quarter. Our R&D teams completed development programs and ran numerous required studies. Our clinical and regulatory staff conducted clinical trials and prepared and submitted a number of packages to the FDA. Our operations organization sized up and manufactured the products that were needed. Our commercial teams continued with efforts to place Sofia analyzers and prepared for the launch of AmpliVue C difficile. Our parking lots have been full, and in general, we once again did what we said we would do. In 2012 now behind us, we look forward in anticipation to what we might accomplish in 2013.

And now Randy will report the fourth-quarter financials, and then we'll take your questions. Randy?

Thank you, Doug. As mentioned for the fourth quarter of 2012, total revenues were $53.9 million compared to $38.4 million in the fourth quarter of 2011. Global sales of infectious disease products increased by 62% to $44.2 million in the fourth quarter from $27.3 million in the fourth quarter of 2011. This was primarily driven due to increased sales of our influenza products totaling $26.3 million in the quarter. Included in this total are our QuickVue, Sofia, DHI and molecular products. Revenues for the women's health category declined by 14% in the quarter to $7 million, largely due to the timing of pregnancy orders by our distributors, including our international business where some of the volume is based on tenders and manufacturing priorities. For the full year, our pregnancy revenue was equal to 2011.

Our gastrointestinal product category revenues were $1.5 million in the quarter compared to $1.7 million in the fourth quarter of 2011. As Doug mentioned in his formal remarks, we have been awarded a grant from the Bill and Melinda Gates Foundation totaling up to $8.3 million, and is dependent on achieving certain milestones through 2015. In the fourth quarter of 2012, we realized approximately $400,000 of grant revenue which is included in total revenues. Gross margin in the fourth quarter of 2012 was 67% compared to 60% in the fourth quarter of 2011. The gross margin improvement was favorably impacted by product mix and volume due to the early onset of the respiratory disease season.

Total operating expenses were $22.2 million in the quarter as compared to $21 million for the fourth quarter of 2011. Research and development costs in the fourth quarter were $7.3 million compared to $6.8 million in the fourth quarter of 2011. Included in research and development expenses is a $1.7 million expense reimbursement from Life Technologies related to our previously disclosed assay development collaboration agreement. The increased expense versus last year was driven by additional investment in our R&D projects, including molecular assays, Project Wildcat and clinical trial costs.

Sales and marketing expenses in the fourth quarter 2012 were $8.3 million compared to $6.8 million in the fourth quarter of 2011. The increase was a result of higher compensation costs associated with increased revenue, Sofia placements, as well as a larger sales organization. Expenses for G&A were $4.8 million compared to $5.7 million last year. This decrease is due to reduced professional expenses, including legal-related costs. Stock-based compensation expense for the three months ended December 2012 was $1.6 million, and amortization of intangibles was $4.1 million. Our tax rate for the fourth quarter was 36.9% as compared to 30.1% in the fourth quarter of last year. This difference is primarily due to the exclusion of federal research and development tax credit for 2012. Since research and development tax credit for 2012 was not approved legislatively until January of this year, the benefit of the tax credit of $500,000 for accounting purposes cannot be recognized until the quarter in which it was approved, that being in the first quarter of 2013.

Net income for the fourth quarter of 2012 was $8.7 million, or $0.26 per diluted share as compared to net income of $1 million, or $0.03 per diluted share for the fourth quarter of last year. On a non-GAAP basis, excluding amortization of intangibles, stock compensation expense, and including the benefits of the 2012 R&D tax credit, net income for the fourth quarter was $12.5 million, or $0.37 per diluted share compared to net income of $4.9 million, or $0.15 per diluted share for the same period in 2011. During the fourth quarter, the Company paid down $14 million on its senior credit facility.

For the full year ended December 2012, total revenues were $155.7 million compared to $158.6 million in 2011. The decrease was primarily driven by a 1% decline in sales of infectious disease products in 2012 when compared to 2011 as the first half of 2012 witnessed a relatively milder flu and respiratory disease season than that of 2011. Gross margin for the year was 61% compared to 60% in 2011. While revenues were down by approximately $2.9 million related to the very weak cold and flu season in the first quarter of 2012, gross margins were relatively constant for full-year 2012 as compared to 2011. This is largely due to two one-time charges in 2011 totaling $1.3 million. The Alere royalty buyout and a disposal of inventory associated with a discontinued product, both of which were partially offset by increased appreciation for Sofia leased instruments of approximately $400,000 in 2012.

Operating expenses for the 12 months were $85.6 million versus the prior year amount of $82 million. Research and development expenses for 2012 were $27.7 million compared to $26.3 million in 2011. This increase is due to expenses related to continued investment in our Sofia and molecular platforms. Also included in research and development is a $3 million expense reduction as a result of our collaboration agreement with Life Technologies. For 2013, we are currently estimating an incremental $1 million to $2 million reimbursement from Life Technologies on our R&D expense.

Sales and marketing costs for 2012 were $30.3 million versus $25.8 million last year, and we were -- and was due to increased compensation costs driven by a larger sales force as well as Sofia placement incentives. G&A expense in 2012 was $20.6 million versus $22.8 million in 2011, the result of lower incentive compensation expense and a reduction in professional costs as compared to last year. Net income for the full year was $5 million, or $0.15 per diluted share compared to net income of $7.6 million, or $0.23 per diluted share for the same period last year.

On a non-GAAP basis, excluding amortization of intangibles, stock compensation expense and including the effect of 2012 research and development tax credit, net income for the full year 2012 was $19.1 million, or $0.56 per diluted share compared to net income of $19.8 million, or $0.59 per diluted share for 2011. Stock-based compensation for the full year was $6.6 million compared to $7.5 million for 2011. Amortization of intangibles was $15 million as compared to $11.8 million for the same period in 2011. For the full year, our effective tax rate was 34.4% compared to 33.5% in 2011. Had we recorded the federal research and development tax credit that applies to 2012, the effective tax rate would have been approximately 28%. For the year, we've paid down $37 million on our credit facility, and the balance, as of December 31, 2012, was $5 million, of which we paid off the remaining balance in January of this year. Cash on hand at year end was $17 million.

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

Thank you.

(Operator Instructions)

Your first question comes from the line of Shawn Rodriguez from Cowen and Company. Please proceed.

Hi, guys. Good afternoon.

Hi, Shawn.

Maybe, can you talk about this year's flu season in the context of some of the general guidance that you have shared in the past about sort of a normalized flu season yielding somewhere between $50 million and $60 million in rapid flu revenues for you guys with roughly a one-third/two-third distribution across Q4 and Q1? I guess the question is both how you're viewing the magnitude as well as the pacing of this flu season relative to those general guidelines that you have shared in the past.

Sure. There are really, Shawn, two perspectives to consider when looking at Q4 2012 and Q1 2013 flu dynamics. The first is what's happening at Quidel that might have an impact, and the second is when the season starts and stops in terms of patient visits and tests and the shape and area underneath the curve. I can address each briefly, starting with our perspective.

Going into the season, inventories at both the end user and distribution partner sites were exceptionally low for both QuickVue and Sofia. And of course, there is rarely any inventory in the field for our clinical virology product because of short shelf life.

So, at both of our manufacturing facilities we have been making as much product as we can and have been shipping it immediately. In fact, here in San Diego, we've been making products seven days a week with two 10-hour shifts per day since December and are still not able to meet the demand for Sofia reagents. So, our sales pretty much line up with end user demand except for Sofia where there is a lag, and we're still playing a bit of catch-up.

In terms of the other perspective, in terms of the early start and potential early end to the flu season in Q1, and what that means regarding proportionality, I can make a couple of comments. First, the demand for QuickVue, our highest volume product, of course, is slowing at a rate that would suggest that we will experience the typical bell-shaped curve that we're used to seeing. And if that turns out to be true, in other words, the slope remains about the same, then the area underneath the curve will be larger than we had projected. And our sales of our flu product will be at least as big as our original internal projections for Q1.

Assuming that our current forecast is correct and that a flu season spans across Q1 and Q4 only, then slightly more than 40% of this season will have occurred in Q4 2012. And slightly less than 60% will have occurred in Q1 2013. So, a little bit different than we've modeled before, Shawn. So, if we were to provide a range, I would say that for Q1 2013, that you would see somewhere between 55% and something less than 60% of the total flu season, if that makes sense.

That's really helpful. I appreciate that.

And then maybe a couple partner here on Becton Dickinson's update. First of all, can you share your general thoughts on BD's update that they have placed about 4,000 of their Veritor systems? And so, number one, are you surprised about that in either direction?

Secondly, given that it seems that Sofia has stacked up pretty favorably to that system in published comparisons, where do you think you are losing placements to them and why?

And then maybe lastly, assuming a good proportion of those placements are going to labs that didn't do a detailed head to head for whatever reason, are there specific areas of the market where you think you might be at a material reach disadvantage against them?

Okay. That's a lot there, Shawn, but I'll give at shot.

Sorry about that.

Let me make a few comments on Sofia instrument placement dynamics thanks may be helpful, because I think you are arriving at a conclusion that might be different if you had some of these facts. First, our sales force is targeted at specific customers, and they have been. And as a result, a high percentage of our Sofia placements have been competitive take-aways and have been for the most part in medium to larger volume settings.

The number of times that we've competed directly with BD's meter has actually been few. I would guess because of the type of customer that we're targeting.

We ship Sofia instruments directly to end users, whether that's in a physician office or a hospital lab. Therefore, the number of instruments that we've stated that we have shipped is in direct proportion to the number of customers who are actually using our Sofia influenza product. And 90% is those are in the United States.

And I can't comment on the number of competitive reflectance meters, in other words, the BD meters, in use, because obviously, I didn't ship them. If we assume for a second, though, that our statement that we've shipped more than 3,000 means that we've shipped only 3,000, and that all instruments shipped from both companies are at end user locations, then 7,000 divided by what we use per site, which is 1.4, gives you about 5,000 customers.

There are about 30,000 rapid flu customers in the US, so together, the two companies are in the best case about one-sixth of the market that has been penetrated. And by the way, there are a lot more strep and ACG customers than there are flu customers. So, there's even more than that to go after.

In a nutshell, I would say we're not losing to BD in head to heads. In fact, we're not -- we don't see BD much, so I can't comment on the number. I assume it's true. I assume they've shipped them somewhere, but perhaps we don't see them because they're not in the accounts that we're targeting.

Yes, makes sense. Thanks, guys. Very helpful.

Sure.

Thank you.

Your next question comes from the line of David Claire from Piper Jaffray.

It's Dave Claire in for Bill Quirk. How are you guys?

Fine, thank you.

Good, so first question from me. I was hoping to get some more details on the AmpliVue C. diff launch. What technology are you displacing in accounts, and are you seeing repeat orders, and what is the ASP?

Okay. Just taking a note here, I'll just give you a brief overview, Dave. First, we're FDA-cleared to market AmpiVue C. difficile since December. Our molecular specialists and hospital system directors were trained early January, and our general account managers were trained last week.

So, so far, we've taken orders, we've shipped product to a number of early adopters. We have many side-by-side evaluations underway comparing ourselves with the usual suspects out there. And I would say we're encouraged by the initial reception so far.

Repeat orders, I would be surprised if we have one. We do have some initial shipments to customers who have issued POs and have converted, but I don't know factually that I have a repeat order at this stage, because we're just starting. ASPs are so far north of $20.

Okay. Thanks for that.

I will add, if you don't mind, that we have increased, based on our initial feedback, we have increased our manufacturing forecast to make sure that we can handle the demand in the event the launch is more successful than we had planned. And we're still on track to launch an even lower cost next-generation cartridge at the end of October. So, that's the latest on AmpliVue.

Okay. And then do you think you are going to have enough disease prevalence this time around to submit Bobcat?

We restarted the clinical trials this flu season. I think the disease prevalence is fine, but so far, we're still not satisfied with the sensitivity of flu B.

We may look at a few tweaks so see if we can improve the performance. For example, we could look at swapping out the flu B floor for, but frankly, any significant further work that we might do would have a fairly hefty opportunity cost given the much higher value of the other things that our R&D group is working on. I'll make a decision regarding our ex-US launch very soon, and I expect to provide an update at our analyst day in March.

Okay, thanks. Congrats on the quarter.

Thank you, Dave.

Thank you.

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

Hi guys, this is actually Matt in for Brian. How you doing?

Hey, Matt.

So, quick question, follow up to Shawn's regarding account wins. You said you're seeing about 10% new accounts, 50% cannibalization, so maybe about 40% share wins. Are you still in that ballpark, or has this mix shifted?

No, no, let me be clear. As of last week, 69% of our physician office Sofia accounts are competitive conversions, and 78% of our hospital accounts are competitive conversions. So obviously, our cannibalization rate is lower than we had initially thought.

Okay, great. Thanks, Doug.

And then just about the next sort of assays here on Sofia, I think one was at the FDA as of mid January and then the other two expected to be submitted in the first quarter. Do you have any update regarding the assays there?

Yes, the first assay actually went in end of last year, first week, I think, of December. And we expect to submit the second one imminently. And we're still on track to have the third into the FDA before the end of the quarter.

Okay. Thanks, Doug.

So, pretty much on schedule.

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

Good afternoon, gentlemen. This is Steve for Steve (laughter). Congratulations on a good quarter.

You mentioned that you were having trouble, maybe a high-class problem, keeping up with Sofia consumable demand. I trust that's a function of both the number of placements and the activity in the flu season. I'm wondering if you have had any quirks in terms of your ability to produce, the performance of the test that's required anything or whether it's been relatively smooth. And whether or not keeping up with demand on the consumables has actually inhibited the number of placements you could have made in recent periods.

Well, we were caught off-guard, Steve, by the demand during the season, and our yields have not been as high as we would have expected. And so that actually has had an impact on the number of shipments, the timing of those Sofia instrument shipments.

We're still taking orders at approximately the same rate as we did before we hit this flu season. But we have slowed down the installs, because we want to make sure that any install we do, of course, they can get reagent product. So, we expect to come out of that in the next couple of weeks and to be in good shape. We'll continue to manufacture throughout the remainder of this year, to make sure that as we head into the next season, maybe again in December 2013, that we have plenty of product on hand.

In terms of being able to get the systems that you ship into work flow and cater to the demand for the systems that were shipped, do you feel like you've done a generally good job with those folks who committed to the platform early?

We've invested a lot in training of customers, and I will say probably actually that it's gone quite well. Our calls into customer service related to instrument issues are very few.

And the whole issue of getting these systems that have a little different work flow obviously than the visually read test firmly into those work flows was -- I trust this flu season was really helpful in doing that. But I'm concerned about unintended consequences. Flu was really so busy, were they relegated, doctors, to using more visual read tests even though they wanted to use more Sofia, or were a lot of Sofias thrust into pretty high velocity use?

The Sofias that went into use, I'm comfortable in saying fit nicely into the work flow, and there were no issues there. We obviously hung on to some QuickVue customers that would have preferred to have shifted over. And that is honestly a bit of a disappointment that we couldn't satisfy the entire demand. But having said that, being caught off-guard by more demand than we anticipated is a problem that is okay.

Yes, relatively high class for sure. Now, in terms of the gross profit margin influences in the quarter, was the reimbursement of some development on Wildcat by the Gates foundation, it wasn't that much, but does that come on as pretty much revenue without much cost of goods? And I guess another question -- I'll let you answer that and I'll give you the follow-up.

Yes, it's straight through. It's all -- it's revenue with no cost, and it was about $400,000.

Double question here. How -- would you expect that to be a quarterly run rate on the pace of development? How should we think about that?

And then your comments about Sofia and some of the inefficiencies there would lead me to believe there might have been some drag in the period from Sofia. When does that become more normalized?

Let me answer the first question. In terms of how to plan for the Gates funding, the easiest way would be to assume it would be straight line between now and 2016, let's say, beginning in 2016.

Okay.

In terms of the drag by Sofia, I'm not really sure I understand what you mean.

We did comment, Steve, that in the quarter, there was about $400,000 of Sofia depreciation.

okay. But in terms of the growth --

But otherwise, the margins are very similar between QuickVue and Sofia.

Okay, very, very good. Then just one more question, I'll hop back in the queue. In terms of Wildcat, obviously it appears that you're continuing to make progress at least at a respectable pace. Some of the technical hurdles there and accomplishments I'm sure will you detail at the March analyst day. But can you give us a little bit of a flavor for how things are going with that program and whether or not it's making nice forward progress?

Well, first, thanks for the question. I would like to stay at a high level for today's call and just say that Wildcat is progressing nicely, and we remain confident that we can hit our cost targets for both the instrument and the cartridge. We're committed first and foremost to doing what we said that we would do for the Northwestern Global Health Foundation and the folks at the Bill and Melinda Gates Foundation.

And doing so, we still believe, Steve, that customers in the development world will also benefit from a low-cost fully integrated platform. And to that end, we continue to expand our menu of PCR assays, mainly for infectious diseases. And as you guessed, we will share more detail on the progress against time lines at the analyst day in March.

Great. Thanks for taking my questions.

You're welcome, Steve.

Thank you.

(Operator Instructions)

Your next question comes from the line of Ross Taylor from CL King.

Hi, I have a few short questions. First, just wanted a little bit more color on the new cartridge that you talked about for AmpliVue in October. Is there anything to that besides the lower cost feature that you mentioned in response to an earlier question?

It's more ergonomically friendly, meaning the average female lab technician finds it easier to squeeze the trigger. And as you said, Ross, it's -- there's a pretty significant cost benefit.

Okay. And just three modeling related questions.

The milestone payments from Bill and Melinda Gates Foundation, is there going to be some incremental R&D spend associated with that project? Or is this really just going to offset or pay for something you're already planning to do and we probably incorporated it into our models already? How should we think about that? Is it net to zero or is it kind of a benefit?

You more than likely have modeled the cost of this already. What this does for us obviously is to make sure that we are able to spend at the rate that keeps us on track for their time lines.

Okay, and G&A spend in the quarter was lower than I would have expected. How much -- if you an give any color as to how much G&A might increase during the course of calendar 2013?

Yes, G&A was favorably impacted because of a one-time -- kind of a one-time event. So, as we go into 2013, I would kind of model out, probably $5 million, $5.5 million range in the quarter.

Specifically, we reversed an accrual in the fourth quarter that was tagged for legal expense that is not now necessary.

Okay. All right, that helps. And final question, with the R&D tax credit, can you give some rough guidance as to what your tax rate might be in 2013?

Yes. There sometimes isn't logic to accounting treatment, and so that benefit of $500,000 will impact our effective tax rate in Q1, so it's kind of a one-time event. Excluding that, we're estimating our effective tax rate to be in the low 30%, 31%, 32%.

Okay, all right, that's helpful. Thank you.

You bet.

Your next question comes from the line of Jeff Frelick from Canaccord.

Good afternoon, folks. Doug, can you give us some color on some of the commonalities you are seeing with Sofia customers thus far?

Commonality in terms of what sort of things?

Like on physician office side, size of practice, are they -- appetite for taking on additional tests beyond flu, stuff like that.

Sure, sure. I would say the larger number of customer agreements that we have in place, and I believe I have said several times before that most of our agreements are three-year agreements, they require that 300 to 500 tests be purchased per year. Although experience tells me that the severity of the season is more important than what the customer commitment actually is.

Beyond that, we have various VIN diagrams that describe the overlap between our flu customer base and strep, RSV, and hCG customers. And it's not surprising that the number of strep customers is far larger than the number of flu customers. The number of hCG customers, for us, anyway, is approximately the same size as the flu customer base.

So, we believe, based on early commentary from customers, that there is some level of pent-up demand for an objectively read strep and RSV assay in particular. And we for sure believe that an objectively read pregnancy test will be received quite well.

Great, thanks. And then maybe a question for Randy. Given the menu expansion on tap this year with Sofia, should we assume the gross margins start to improve in 2013?

Yes, I think we see estimated 1%, 2% improvement, especially as we get into the back half of the year with those additional Sofia assays.

Okay, and the last question. Can you just comment, Randy, maybe on the strep activity this respiratory season and where does inventory stand exiting the quarter?

Relating to inventory, if you mean at distribution --

Yes.

Certainly they're extremely low. Don't have the exact numbers, but pretty much everything that we've shipped in has been shipped through. So inventories, like I said, are extremely low.

Relating to strep, pretty much on expectations as we enter into Q1. We did shift priority of manufacturing, but certainly, it didn't have a significant impact on the strep business.

Great. Thanks, guys.

You bet.

And your next question comes from the line of Zarak Khurshid of Wedbush. Please proceed.

Hey, Zarak.

Hey, guys. Good afternoon. Thanks for taking the question. Nice year. Nice finish to the year there.

Thank you.

I think -- did you say flu was $27.4 million in the quarter, and can you just clarify --

$26.3 million.

$26.3 million, okay. Can you just clarify what exactly was in that? How much of that was rapid versus the DHI-related flu biz?

Yes, we really -- in fact, I don't even have it broke out in front of me. I would say that based on the number of customers we have on the molecular side, it was at that stage quite small.

I will say, though, that the number of customers in total that do flu testing we now know is quite small, and they tend to be larger volume sites. And so we did -- we have so far had an increase in sales as we moved through the end of the year into the first quarter on the molecular side. But at that stage it was still pretty low.

Okay. Would you say that the DHI business is kind of going to mirror the big year, couple years back with swine flu? I think DHI had a pretty decent season.

Well, I think that we did some math, and it was about a 15% increase over the quarter in 2011 -- Q4, 2011. That was about -- Q4 2012 was about a 15% growth, right?

Yes.

Maybe that's helpful.

Got it. Yes, that's very helpful. And then on the Sofia yields, just curious, why were the yields not as high, and is this still a sort of a reel to reel manufacturing process similar to the older rapid tests? Is there any fundamental difference or reason why you would not be able to improve those yields going forward?

We identified a number of things that we needed to do in order to ensure that we had high quality product. And it's very important at launch and moving forward that the product does what we say it is going to do in the package insert. And so we have been performing a higher rate of QC on the reel than we normally would, and we've been selecting product that absolutely meets those specs, and it's gotten better. And I would assume that over the next several weeks we'll have an operation where we're fully up to speed.

Unfortunately, we didn't start that in that December, and, that's our fault. We didn't anticipate that demand is going to be that high. That's the constraining factor.

And obviously, another factor is that this is a cassette-based product where as the old product was a dipstick. So, we're now using our pick in place equipment which is in demand. When we only have so much capacity, and that's another constraint. So, those are a couple of factors.

Got it. Very helpful. And then lastly, sorry to beat a dead horse named Sofia here. But are the 69% or so competitive take-aways, are those conversions of customers that are using an objective reader, or are they generally people that are using one of the other rapid tests out there?

Generally one of the other rapids. And so what I said in terms of BD earlier works both ways. We're also not taking business from BD. When I say we don't see them, we don't really compete a lot with them in the accounts that we have primarily closed.

I'm not saying that we never see them, but there's not a lot of crossover so far. So, the short answer to your question is the take-aways are coming from the typical legacy visually read competitors.

Great. Thank you.

Sure.

Your next question comes from the line of Tycho Peterson from JPMorgan.

Hi guys, [Ruma Mukerji] for Tycho, sorry, I jumped on a little bit late. Just in terms of Bobcat expectations for 2013, what should we be looking for in time lines?

We may have some sales of Bobcat in 2013 ex-US. But as I said earlier, we're not comfortable with the data we're seeing right now in the clinical trial. And we may be looking at a few tweaks to see if we can improve the performance.

But we don't want to spend a lot of time on it in 2013 because frankly, we've got a lot going on, and the other stuff that we have going on is much higher value to us. We may continue to make tweaks and then do what's necessary from a regulatory perspective ex-US. But as I will confirm here, in early March at our analyst day, I don't expect that we're going to do much in the US in the near term with Bobcat.

Okay. And then just a follow-up on the 3,000 placements to date, I guess. Can you help us segment them a little bit better? I think you said you have done well in medium to high throughput centers. Is there any sort of segmentation that we can think about where you have the largest strength today?

I think what might be helpful is to just do an overview of where the placements are. 80% of the placements are in US physician offices, 10% of our placements are in US hospitals and 10% are ex-US.

Okay. That's helpful, guys, thank you.

Sure.

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

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

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.