QuidelOrtho Corp (QDEL) 2013 Q1 法說會逐字稿

Welcome to the Quidel Corporation first quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later instructions will be given the question-and-answer session.

(Operator instructions)

I'd now like to turn the call over to Mr. Randy Steward, Quidel's Chief Financial Officer. Please go ahead.

Thank you, Operator, and good afternoon, everyone. 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 significantly from these stated expectations. For 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 well 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, April 23, 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 three months ended March 31, 2013. 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 first quarter and provide updates on our product development pipeline. I will then briefly discuss our financial results and we will open the call for your questions. I'll now hand the call over to Doug for his comments.

Thank you, Randy.

Total revenues for the first quarter of 2013 were $62 million, a 63% increase over revenues in the first quarter of 2012. The rise in revenue was driven primarily by increased flu testing, which continued from strong demand in the fourth quarter well into February until this year's epidemic began to subside. As a result, we experienced increased demand across the entire range of our respiratory test formats, including QuickVue Sofia, Quidel Molecular, and DHI's D3 Ultra. In the quarter we achieved 28% operating margin while continuing our investment in R&D and in our commercial organization.

For today's call, I will focus mainly on the two programs most likely to create near-term growth, Sofia and AmpliVue, and will comment only briefly on the other programs. Let's begin with Sofia. The good news in the quarter is that we were able to demonstrate that the Sofia platform clearly does address unmet needs and is a commercially desirable product. Customers appear to like both the objectivity and the improved sensitivity of the Sofia Flu Assay. Our US sales organization and principal distribution partner were able to generate significant demand for the instrument and Sofia Influenza A+ B test cartridges. Unfortunately, we were unable to fully supply the demand for the test cartridges and actually purposely slowed a Sofia instrument installations. At this point we have now cleared the back order for cartridges, our manufacturing at maximum capacity, and are shipping instruments and building cartridges in perpetration for the next flu epidemic, whenever that occurs.

In terms of pipeline, Group A strep, RSV, and hCG are all currently under review at the FDA and any other comments I could make regarding those three products would be speculative. I think, however, that we can safely assume that we will be selling one or more or perhaps all three of these products in the back half of this year.

Regarding AmpliVue, we received FDA clearance for our first assay for C. difficile in December, and the Moderate Complexity CLIA designation in early Q1. Three months or so into the launch, we can say that customer receptivity to the hand-held disposable molecular platform format has been good, and assay performance in customer hands is good and at least equivalent to the prominent molecular CDISC assays. We are encouraged by what we see in the field so far, and are now more confident that our investment in the development of additional AmpliVue assays for infectious disease targets like HSV [protestis], Group B strep, trichomoniasis and others, is warranted.

The other programs are proceeding as well, and I will provide a few bullets regarding our progress in the quarter. We did receive FDA clearance for Quidel molecular real-time PCR for an RSV human metapneumovirus combination assay. The assay uses the same easy-to-use format as our real-time PCR influenza assay; and, in fact, employs the same thermal cycling conditions which enables both two-plex assays to be run on the same play. We also received FDA clearance for Quidel molecular real-time PCR assay for the detection directly of C. difficile without the need for an upfront extraction step. And in the quarter, we received CE Mark for the Quidel molecular HSV 1 and 2 VZV test, a three-plex real-time PCR assay for the detection of herpes simplex virus types 1 and 2 and varicella zoster virus and lesions. We also made progress with Savanna in the quarter. For our discussion during our Analyst Day presentation, we are on track with both the instrument and the HIV test cartridge; and still expect to be in Africa in 2015, and are confident that we will meet or exceed our cost-to-goods-sold targets.

Overall, we had a good productive quarter. I have said before that 2013 will be a critical year for us, a year of truth, and we have much to prove. The good news is that we are off to a very good start. Our Company is completely focused on the two things that matter, namely Sofia and molecular. Our regulatory and R&D teams are focused on developing new assays. Our manufacturing teams are delivering quality products and our commercial group is energized with lots of great products to sell. We are proud of what we have managed to accomplish and are excited about the opportunities that lie ahead.

And now Randy will report the first quarter financials and then we'll take your questions.

Thank you, Doug.

As Doug mentioned in his opening remarks, total revenues for the first quarter of 2013 were $62 million, an increase of 63%, as compared to $38 million in the first quarter of 2012. We realize a 68% increase in domestic revenues and a 35% growth internationally. Global infectious disease revenues, which include QuickVue, Sofia, and molecular products, were $49.4 million in the first quarter of 2013, up 87% from $26.4 million in the first quarter of 2012. The improvement was primarily due to increased revenue of our influenza products. Influenza products were $28.4 million in the quarter, as compared to $7.5 million last year. The respiratory and general virology revenues from our cell-based assays increased 29% over last year.

Revenues for the women's health category increased by 4% in the first quarter to $88.6 million, led by an 8% increase in our pregnancy business. Our gastrointestinal product category revenues were $1.5 million in the quarter, compared to $1.6 million in the first quarter of 2012. Gross margin in the quarter of 2013 was 68%, compared to 61% in the first quarter of 2012. The gross margin improvement was favorably impacted by both product mix and higher volume due to the severity of the influenza and respiratory disease season this year as compared to last year.

Total operating expenses were $25.3 million in the first quarter of 2013 as compared to $22.7 million for the first quarter of last year. Research and development costs in the first quarter were $7.5 million, compared to $8.5 million last year. Included in research and development expenses is a $1.1 million expense reimbursement from Life Technologies related to our previously disclosed assay development collaboration agreement. We are currently estimating the collaboration agreement will have an impact of approximately $1 million in aggregate for the remainder of the year.

Sales and marketing expenses for the quarter were $8.4 million, compared to $6.5 million in the first quarter of last year. As we discussed previously, starting at the end of the first quarter of 2012 and continuing through the second quarter of last year, we made a significant investment in our sales organization to support new product growth, including an increase in personnel. The sales and marketing increase on a year-over-year basis is mostly the result of this increase in the sales organization as well as an increase in variable compensation due to the higher revenue. As mentioned at the Analyst Day presentation in March, we expect full-year sales and marketing expenses to be in the range of $33 million to $35 million.

Expenses for G&A were $7.5 million in the first quarter, compared to $5.9 million for the same period last year. This increase is primarily due to costs associated with the 2.3% medical device excise tax that went into effect in January of this year. This amount was $700,000 in the quarter. We also realized approximately $400,000 of professional services related to business development activities, as well as an increase in incentive compensation.

Stock-based compensation expense for the three months of 2013 were $2.1 million, and amortization of intangibles was $5.0 million. Our tax rate for the first quarter was 27% as compared to 37% in the first quarter last year. Included in the current quarter is a one-time benefit of $500,000 relating to the 2012 federal research and development credit. As you may recall, on January 3, 2013, the American Taxpayer Relief Act of 2012 was signed into law, reinstating the federal research and development credit for both the 2012 and 2013 years. Excluding the one-time discrete item from 2012, the estimated full-year effective tax rate for 2013 is in the range of 30% to 32% and includes the impact of a full-year research and development tax credit.

Net income for the first quarter was $12.4 million, or $0.36 per diluted share, as compared to net income of $50,000, or $0.00 per diluted share for the first quarter of 2012. On a non-GAAP basis, excluding amortization of intangibles and stock compensation expense, and including the benefit of the research and development tax credit in 2013, net income for the first quarter of 2013 was $17 million, or $0.49 per diluted share, compared to net income of $3.7 million, or $0.11 per diluted share, for the same period in 2012.

Also in the first quarter, the Company paid down the remaining $5 million outstanding on its senior credit facility. At the end of the quarter, the Company had $45.9 million in cash on its balance sheet.

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

(Operator instructions)

Your first question comes from the line of Bill Quirk with Piper Jaffray.

Thanks and good afternoon, guys. So the first question I guess I wanted to talk a little bit about the AmpliVue CDISC experience. I realise it's still new but obviously, Doug, you had some pretty positive comments to say. Can you talk at all about perhaps initial placements? Are you seeing competitive take away? Are you seeing perhaps some accounts that are currently using say rapid assays and converting over to molecular? Maybe if you could just expand a little bit on that, thanks.

Sure, Bill. Initially our view was that the greatest needs for the AmpliVue C diff product, the hand-held disposable molecular device, was with the non-molecular C diff customer who was currently employing either EIA only or GDH followed by EIA. That certainly has been true for the most part. But some of our earlier -- or some of our early closes were customers who were using one or more -- I'm sorry, one of the more prominent molecular methods. And these customers have tended to be higher volume customers, which we did not anticipate. But I will also add though that the number of these customers is relatively few. So it is still very early yet with C difficile. How well our non-molecular customer targeting will work with this assay going forward and then the others in the future that we will deliver will need to be carefully considered.

And so, Doug, in terms of the -- what is driving the interest there? Is it the price point? Is it the ease-of-use, say, relative to certain other molecular products that, how shall I say, have perhaps are less user-friendly?

It is easy to use -- not necessarily easier. It does not require an instrument. That is a major factor. It has somewhat of the cool factor. It is unique and it's disposable. And there clearly is a need to move to molecular. I think there's recognition in the marketplace that molecular testing for these hospital acquired infections is the state of the art and the way to go. And there are still a lot of customers that have not quite made the leap yet.

Very good. And then a question on perhaps of what maybe a new pipeline product. Anything or any comment, guys, around Asian bird flu and whether or not you are working on something there?

Sure. First, I'll start by saying that Quidel does not actually have a P3 facility and does not actually have the H7N9 virus. So we're not working on anything specifically here. On the other hand, we have been contacted by a couple different country government agencies that do have the virus and clinical samples and have been asked to participate and we have been asked to participate in a couple of different XUS studies in Asia with both our antibody-based product and our PCR assay. Our antibody-based tests are targeted at a highly conservative region of the nucleoprotein of these -- of all influenza viruses. So it is highly likely that are antibodies will bind to this influenza virus. We will know how well our products perform on cultured isolates at some point.

But I should caution -- we should be careful in thinking about the potential for our QuickVue and Sofia product. As at present, the H7N9 virus has not been transported human-to-human. And it is unlikely to be in these patients nasal passages in large quantities. It is therefore uncertain whether any rapid tests, even Sofia, would be sensitive enough at this stage, at least until the virus mutates and is transmissible human-to-human.

And then finally, I would say regarding our PCR product, we have looked at the sequences and see very high homology with H7N9 as it is today. If it were to mutate and become transmissible human-to-human, while we are confident that we will detect it, how well we would detect it would need to be demonstrated with actual clinical samples. And so that is sort of the overview, Bill, of where we are at with respect to H7N9.

Great. Thanks very much, guys.

Thank you.

Shaun Rodriguez with Cowen and Company

Hi, guys. Good afternoon. Thanks for taking the question. On the Sofia manufacturing and your inability to keep up with the demand, I think you said you're back on track with that kits, but just as a clarification, does that also mean that you're caught up on placements? As I think, you were holding off on placing until you could provide the kit demand as well.

We are still shipping customer instruments and the initial stocking of the reagents. I would say that our main distribution partner, at least historically throughout the first part of the launch, has kits on hand. So we're not shipping a lot of product at the moment in terms of the cartridges. But we are shipping instruments with the idea in mind to have customers who had demand for the instrument to be installed here this quarter.

Okay. Thanks. And related to that, I think you said you are now preparing yourselves for the next time flu hits. But again, just to be clear, what does this mean for your confidence in your ability to meet the RSV strep and HCV -- hCG demand when those get cleared?

The issue we had in the fourth quarter, and then our supply the first quarter and those other products, are unrelated.

Okay.

We had a large amount of replacement product that needed to be shipped and therefore, we were both replacing product as well as shipping new product to customers. And then recognizing that some of those customers were reordering product again in the middle of the epidemic is what the issue was. And so we didn't have the benefit as we do normally of building inventory, which we pouch here prior to the season. So I would not anticipate that we're going to have a similar issue with any other product.

Okay. Thank you. And then on AmpliVue, I think it was back in January and talking about the launch, you said that you really wanted to put a strong push ahead of the CVS meeting and that by that time you'd have a sense for where you are and that, that might inform you for -- on what you might need from a sales force perspective. So given that we are there now, can you just provide us an update on this front?

Sure. C difficile customers are receptive to the format like the data that we are presenting and some have signed two and three year purchase agreements. We are ahead of our internal forecasts in terms of the number of customers at this stage. And so I would characterize it as so far so good. We also have a number of papers and posters that we are presenting at CVS, which are reflective of assays performance, and that is pretty good for us as well. So I expect to create a little bit of buzz coming out of that meeting and I think that our sales guys will continue making calls and closing a pretty significant number of customers.

Steve Crowley, Craig-Hallum Capital Group

Good afternoon, gentlemen. Congratulations on the nice start to the year. On the topic of CVS -- upcoming CVS -- I was taking a spin through some of the abstracts, or the presentations of the papers, and there were a number on Quidel molecular products, both Quidel molecular assays and AmpliVue talking about the potential to avoid reflex testing under the two-step method. And is this just a front of the beginning of the push there? Help us understand where we are in that mindset and how important these presentations are toward changing the mindset.

Well this is one of the early meetings of the year. It is a meeting at which many key Virologist's are gathered. Many of these we know and so do our competitors because these are key opinion leaders. And you see a pretty good representation of what the companies are planning on delivering to the marketplace at some point in the future. So you'll see a number of abstracts written both internally by companies, but some also by customers. You'll see a number of posters presented. You'll see a number of presentations made. And just overall, it is just the earliest meeting of the year in which you'll see a number of papers being presented.

Now in terms of the take away from a couple of these experiences in these trials about replacing a two-step algorithm with Quidel molecular assays, help me understand how close you are to really seeing that happen in practice and in some volume that matters to the Quidel molecular assay product line.

Well my answer is probably redundant. Right now it is early. We've made a lot of calls. We are closing customers daily. Most of those customers are those customers using these two-step methodologies. In other words, they're running EIA on the front end -- I'm sorry, GDH on the front end and EIA on the backend and making a determination. And then sometimes those tests are further sent to other labs for reflex testing by molecular methods. So these are primarily the customers that are switching to AmpliVue CDISC at this point. Does that make sense?

Absolutely. Now in terms of Sofia in your installation activity now, what is the major incentive? I mean, what is driving customers to install Sofia now post the wind down of flu season?

There is still pent-up demand for the analyzers and the assay in front of the upcoming season. This is actually the perfect time for customers to get the instrument, to get it installed, run their validations and all of that. And most customers do not like to do all of that right in the middle of the season. So you would have seen a number of customers who said I can't do it now because I'm right in the middle of the season. They're now installing the instrument and running their studies -- sometimes on contrived samples that they either had from a third-party or that we helped by manufacturing, sometimes by testing samples that they had archived.

Jeff Frelick, Canaccord Genuity

Good afternoon, folks. So, Doug, just on a follow-up on AmpliVue -- are the customers that are converting to AmpliVue, are they going to run it in front-line format or are they using as a reflex?

They are running it as a front-line format. And I was just pausing because I was wondering if that's what Steve was asking me as well.

Okay.

But the customers so far are running it as their primary assay.

Okay. Thanks for that clarification. And then with respect to Sofia, is the sales force starting to do some pre-selling and prep work ahead of the additional assays that are expected to roll out later this year -- basically kind of leveraging that install base -- priming them?

We can do some things but what our sales force can't do is talk about the assay performance characteristics and -- or anything, really, about the assay either fore RSV hCG or strep because they're frankly not cleared to be marketed. So we can do some things in terms of studies being presented at some of these shows like the Clinical Virology Symposia -- Symposium, excuse me. But face-to-face selling of these products to customers, we're not doing it.

Okay. And then just last question, could you share the install base of Sofia exiting Q1 and the busy season?

We did announce before because we thought that you folks were -- had a certain expectation and we were running a little ahead of it. But it is not our intent to do an update, mainly because as I look at the screen, there's a number of competitors who really just are dying to know how many we have out there. And I don't want to make it that easy.

Okay. How about just may be the mix between hospitals and POLs?

Well it is still running about 80% POL, 20% hospital.

Okay great. I'll jump back in queue. Thanks.

Brian Weinstein, William Blair.

Hi, guys. This is Matt in for Brian. Thanks for taking my question. Last quarter you mentioned that QuickVue, in particular, has benefited by the strong flu season. But the commentary this quarter, I caught, was that you saw higher demand across the entire range of platforms. Could you just maybe provide a bit more color on the first quarter flu versus fourth quarter flu?

The first quarter flu -- what is the breakdown that we had? About -- we said that we were going to do 45% in Q4 and 55% in Q1. And the actual, Randy, ended up being 48% -- 52% -- something like that. So we probably were short of our forecast by about a week. And most of the demand, of course, is still so far for our flu products in terms of volume, is for QuickVue. Although I will say that we were pleased with how well we did with Sofia and we were also pleased with how well we did with the PCR product. Although our number of customers was very small, each of those customers had fairly significant volumes. So overall, I thought we did fine with respect to this respiratory season, both in Q4 and Q1. Did that help, Matt?

Yes. Thanks, Doug. And then just one quick other one here. The gross margin number that we saw -- certainly the highest that we have seen in a while -- is that a number that we can think about for revenues up over $60 million? Just as we parse together the multiple revenue target for 2015 and the operating margin that we might look at -- is that gross margin target reasonable for that revenue number moving forward?

The PNL certainly is leverage able and when your higher-margin product is the one that is responsible for the list, the answer to that question would be yes. But on average, it is not that high. What else can I say? So it would be difficult to say any -- above any dollar value. It depends on the mix. And if it came in the second or third quarter, since it is not probably flu, I'm going to suggest that it probably would not be at 68.

Well we certainly have said, Matt, that as you are saying in our strategic plan, as we target a 30% operating margin, we fully believe that we can achieve a 65%-plus operating -- or gross profit margin over the next few years.

Great. Thanks, guys.

Nicholas Jansen, Raymond James and Associates.

Hi, guys. Two questions. First on the incremental revenue that you guys expect to get by 2015. I was wondering if you can maybe help us frame the opportunity in '13 relative to kind of getting towards that target so we don't kind of get ahead of ourselves with regards to some of that new product revenue contribution this year.

I don't really think I can help you out specifically with 2013 as we don't provide guidance, necessarily. What I can say is a key driver to our ability to hit that $100 million incremental revenue in 2015 is the number of Sofia placements. As I mentioned earlier, we do have three new assays which could be cleared in time to have an impact in 2013. And our models certainly says there will be some benefit. But most of the real huge -- most of the significant uptake would be with big bowl of Sofia analyzers as we enter 2014. And I would add then that we should see some acceleration of the top line also as a result of both AmpliVue and a similar manner with the Quidel molecular PCR products.

And, Nick, I also think that our cannibalizing rate is consistent with what we've said previously as well. So that is following our long-term modeling expectations.

Okay. That's helpful. And then looking at SG&A trends, I know the medical device tax hit harder this quarter because of the strong flu sales. Maybe you can kind of walk through your expectations for the balance of the year on SG&A. I know you gave some commentary on sales and marketing.

Yes. In the quarter there was probably, as indicated, maybe some one-time expenses we don't see incurring here in the back half of the year. Medical excise task I think we said we thought was probably going to be in the probably in the mid $2 million range. We did see -- because of the profitability this quarter versus full-year, the incentive compensation was a little more this quarter than probably you will see in the out quarters.

Thanks much.

(Operator Instructions)

Ross Taylor, CL King

Hi. I just had a couple of questions. First can you elaborate at all in terms of what specifically might have caused some of your supply constraints with the Sofia cartridges and whether that might be a material issue going forward or it might spring up again?

That question was just asked a second ago.

Sorry. I missed that

But maybe I can add a little bit of clarity. We manufactured both for new customers, customers reordering, customer starting up, as well as replacement product. We did all of that as we were in the middle of an epidemic. So we did not have the advantage of building inventory prior to the season, as we normally would. Right now, for example, for 2013 year-end, we're already building both QuickVue product and Sofia product. So by October, we will have all of the product that we think that we're going to need for the following season with safety stock. We didn't have that advantage with Sofia.

Okay. And just with regards to the flu market, I don't know if you can talk to the competitive environment during the quarter. Did you see much change in pricing or market share shifts among your various competitors and yourselves?

Yes. I don't think we saw any specific change in competitive dynamics in this last season. I do know that several competitors are talking about new products. And, again, we just talked earlier about these shows like CVS are good places to find out what these competitors are planning. But for this last season, we didn't really see any significant share shift either way. And I really didn't see any competitive dynamic that was strange or unusual.

Okay. And the last question is more just a modeling question. But amortization expense jumped up to about $5 million compared to $4.1 million in Q4, if I'm not mistaken. I was just wondering what is driving that sequential increase?

It is driven, Ross, by the Alere settlement. As you know, we -- the accounting treatment -- we have indicated it is $8 million for the full-year. But we also take it as a percentage of sales. And since the sales percent was a lot higher in Q1 this year versus last year, there is a higher amortization amount.

Okay. Got it. That's make sense. Okay. Thanks very much.

You're welcome.

Steven Crowley, Craig-Hallum Capital Group

Hi, guys. Thanks for taking a couple of follow-ups. In terms of the sales force priority, are the molecular diagnostic sales force priorities an opportunities? Obviously AmpliVue is a big priority. But it seems like you've put more clubs in the bag around the Quidel molecular product line, especially with what you are doing with life and their quant studio DX platform and some of the opportunities that might present there. How are you prioritizing those opportunities for your sales force?

For AmpliVue we are using our general sales force -- the typical sales representative who has a geographic responsibility. For the Quidel molecular PCR products, we are using a smaller specialist organization that is targeted at the higher-end customer who typically already has a molecular lab. So it is almost two different sales forces. And we are targeting AmpliVue C diff based on the criterion that we talked about before. That's the customers who aren't currently doing molecular testing. For the Quidel molecular, it is basically targeted customer by customer based on what we know their needs to be.

And then in terms of life and the opportunity to leverage what they're trying to do in diagnostics, does that present as a pretty legitimate opportunity?

The most significant opportunity we believe in the future will be access to the QuantStudio DX, which is the new upgrade, if you will, to the 7500 fast DX. We have exclusive rights as we stated in one of our public filings and, in addition, we got access to certain IP that we thought was useful for developing quantitative PCR assays. Those are the two main things. And in addition, as you know, we have the relationship in which we develop assays for them. But in terms of commercial opportunity, we think that there will be customers at some stage who will want to have some consolidation of menu onto a platform that could serve multiple purposes. And I think the QuantStudio could be that analyzer.

That's helpful. Now your 8-K filing with the buy-back alterations moving it to $50 million, is that just housekeeping? Or how should we interpret what you're doing there?

There is little interpretation there, Steve. We had already in place a buy-back authorized. That authorization was set to expire. Our Board in the last Board meeting suggested that we re-up it, basically, and revise it through a number that made more sense.

That's helpful. Thanks.

Bill Quirk, Piper Jaffray.

Thanks. Just one quick follow-up for me and that is, Doug, perhaps I miss heard you but I thought you mentioned reiterating some of the pipeline timeline's for Savanna. But then I thought I heard you say African in 2015. Did I hear you correctly? Or perhaps -- I guess I was saying that Africa was '14 and US and the developed worlds were '15.

During the analyst day, the presentation that we did suggested that we would have ongoing studies and analyzes in Africa by 2014. When I'm talking about 2015, I'm talking full launch.

Perfect. Thank you for the clarification.

Sure.

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

Well this concludes the call for today. Thank you for your time this afternoon and thanks, everybody, for your continued support. Thanks, everybody.

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