QuidelOrtho Corp (QDEL) 2013 Q2 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by, and welcome to the Quidel Corporation second quarter 2013 Earnings conference call. At this time all participants are in a listen-only mode. (Operator Instructions).

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

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 significantly 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, July 30, 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 and six months ended June 30. 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 second quarter and provide an update on our product development pipeline, as well as our near-term drivers for growth. I will then briefly discuss our financial results, and we'll then 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 second quarter of 2013 were $29.7 million, compared to the $30.9 million for the second quarter of 2012. Two factors contributed to a modest decline in revenue for the second quarter. First, as you recall, we had an early onset to this recent season's influenza epidemic, which then tapered significantly in February. Therefore, sales of our QuickVue respiratory products that we might typically see in early Q2 did not occur. While sales of our new products, Sofia influenza and AmpliVue C. difficile, were helpful in Q2, the increase in revenues for those products was offset by a decline in QuickVue product sales, most notably Group A Strep.

In addition, some orders from distribution that we would have expected at the end of Q2 did not ship and instead fell into Q3. Given the impact of seasonality on Q2, the first half comparison may be more relevant, although in fairness, we should recognize that in Q1 2012 sales were particularly soft.

For the first six months of this year revenues were $91.7 million, compared to $68.8 million in the first six months of 2012, a 33% increase year-over-year. For today's call I'll focus mainly on the two programs most likely to create near-term growth, Sofia and AmpliVue, and will comment more briefly on the other programs as well.

Let's begin with Sofia, our automated immunoassay analyzer. Three events occurred in the worth that are noteworthy. First, as a proactive measure, we sought and received special 510-K clearances from the FDA for our Sofia and QuickVue influenza products to include the detection of the Avian H7N9 strain among the list of other flu A strains that are already included in our package insert. Should H7N9 pose a major risk in the near future, we will be ready to respond.

Second, in June the FDA convened a microbiology devices panel that recommended that rapid influenza diagnostic test be reclassified from class one to class two. If this reclassification is implemented in the next few years, it would essentially mean that most, if not all, of the current visually read rapid influenza test brands may need to improve their ability to detect influenza. In other words, products like our own QuickVue, based on the meta-analysis that was referenced would need to demonstrate through a clinical trial that we can achieve a sensitivity greater than 90 -- greater than or equal to 90 percent relative to cell culture. We believe for us any way that this is achievable. But more importantly, Sofia is one of the few products that already exceeds this criterion, a fact that should be helpful to our placement rate within a customer segment that has already expressed demand for Sofia's enhanced sensitivity and objectivity.

Finally, in the quarter we received 510-K clearance from the FDA for Sofia Group A Strep. We expect that strep A will be another important near-term driver for Sofia instrument placements, and that as we exit this year, we will be well-positioned to achieve our goal of at least 10,000 instrument placements before 2015. We have recently added additional sales personnel to our commercial organization and are in the process of training our sales force and distribution partners for the imminent launch of Sofia strep A.

Currently under review at the FDA are two more Sofia products, Sofia RSV and Sofia HCG, which, depending on the timing of approval, could also have a positive impact on our instrument placement rate. Regarding AmpliVue, our handheld disposable molecular device, our sales force has been selling our assay for C. difficile in earnest since receiving CLIA moderate complexity designation in the first quarter. Receptivity to the format and technology has been very good, which gave us confidence that the acquisition of BioHelix was a good decision.

The acquisition is significant for us for several reasons. One, BioHelix provides enzyme development and molecular reagent manufacturing expertise, as well as technical skill sets that are complementary to Quidel's existing molecular development programs. Two, with BioHelix we have doubled the number of AmpliVue assays in development. And three, BioHelix's HDA, Helicase-Dependent Amplification technology, can also be used to quickly amplify targets for assays that can be run on a Savanna cartridge and instrument, which may be useful on settings where shorter turnaround time and costs are important.

Regarding Savanna, our fully integrated molecular diagnostics platform, we made steady progress in the development of the instrument in the quarter. I won't go into great detail, but to give you a sense for the progress we're making, we developed and tested the assay cartridge and are now building independent test beds to demonstrate assay feasibility in the current cartridge configuration. The next major milestone is in Q2 2014 when we validate the assay cartridge on a fully integrated instrument. Following that you can look for us to be presents at industry conferences like AACC and AMP, and you will know then that we expect to be in market within one year of those meetings.

Overall, our company continued to execute well against our long-term strategy. I'm proud of what we accomplished in the quarter. Throughout the remainder of 2013 we will maintain an acute focus on the two things that matter, commercial execution of our new AmpliVue, Sofia and real-time PCR products, and two, product development acceleration that results in the completion of US clinical trials and submission to the FDA of at least ten new assays before year-end.

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

Thank you, Doug. As Doug mentioned in his opening remarks, total revenues for the second quarter of 2013 were $29.7 million, compared to $30.9 million in the second quarter of 2012. Global infectious disease revenues from $17.3 million in the second quarter, from $18.8 million in the prior year. This decline was primarily driven by a year-over-year decrease in strep A visual lateral flow revenue resulting from an early end to the respiratory season and the timing of distributor orders, as Doug mentioned previously.

In the quarter influenza product revenue was $3.2 million as compared to $3 million last year. Our cellular product revenue, which includes general virology, herpes, and respiratory virology panels, was flat versus the same quarter of last year.

Revenues for the women's health category were $8.4 million in the quarter as compared to $8.7 million last year. This decrease was a results of lower pregnancy product revenue, somewhat offset by a 7% growth in our Thyretain product revenues.

Our gastrointestinal product category revenues were $1.8 million, compared to $1.6 million in the second quarter of 2012. This increase was primarily driven by revenues from our AmpliVue C. difficile products. Revenues from our other categories were $2.2 million, compared to $1.9 million last year.

Gross margin in the second quarter was relatively constant at 54%, compared to 54.6% in the second quarter of 2012. Total operating expenses were $23.2 million in the quarter, as compared to $21.4 million last year. Research and development costs in the second quarter were $7.9 million, compared to $6.8 million last year. This increase, resulting from increased development costs for both Savanna and Sofia.

Sales and marketing expenses decreased in the second quarter of 2013 to $7.1 million, compared to $7.7 million last year. This decrease was due to lower commission expenses and lower hiring and personnel costs. As Doug mentioned, we recently additional personnel to our commercial organization. We are estimating that this will add approximately $1 million to our SG&A expenses in the back half of the year.

Expenses for G&A from $6.1 million in the second quarter, compared to $5.1 million for the same period last year. In the quarter, we realized expense of approximately $400,000 associated with the 2.3% medical device excise tax that went into effect in January of this year. We also incurred approximately $700,000 of professional services related to business development activities mostly associated with the BioHelix acquisition and our ERP system upgrade project which went live in San Diego on July 1.

Stock-based compensation expense for the three months ended June 30 was $1.9 million, and amortization of intangibles was $3.1 million.

Our tax rate in the second quarter was 76%, as compared to 35% in the second quarter of last year. During the quarter, we were notified by the IRS that it had completed its review of our 2008 through 2010 tax periods and they proposed no changes. As a result, the Company released tax reserves of approximately $3.5 million. We realized that benefit in the quarter. Excluding the non-recurring tax benefit the effective tax rate would have been approximately 34%.

Net loss for the second quarter was $1.8 million, or $0.05 per share, as compared to a net loss of $3.1 million, or $0.09 per share, for the second quarter of 2012. On a non-GAAP basis excluding amortization of intangibles and stock compensation expense and the one-time tax benefit, net loss for the second quarter of 2013 was $1.9 million or $0.06 per share compared to net income of $200,000 or $0.01 per diluted share last year.

Revenues for the six months period ended June 30 were $91.7 million, compared to $68.6 million for the six months period in 2012. Infectious disease revenues from $66.7 million versus $45.1 million last year, an increase of 48%, largely due to growth from our influenza products. For the six months, strep A revenues decreased by 10% while RSV revenues increased 27%. Our cellular product revenues grew by 10%, driven by increased respiratory viral panel revenues.

The women's health segment was $17 million for the first half of the year, compared to $16.9 million in the first half of last year. For the first six months our gastrointestinal segment was $3.4 million, compared to $3.2 million for the same period last year. The revenue from our other categories was $4.6 million. This compares to $3.6 million last year.

Gross margin for the six months was 63.8%, compared to 58.1% for the six months of last year. This improvement is driven by increased influenza sales versus last year and the positive impact on product mix.

Net income for the six months of 2013 was $10.6 million, or $0.30 per diluted share, as compared to net loss of $3.1 million, or $0.09 per share, for the six months of 2012. On a non-GAAP basis excluding amortization of intangibles, and stock compensation expense, and the one-time tax benefits, and excluding the benefits of the research and development tax in 2012, net income for the first half of 2013 was $14.7 million or $0.42 per diluted share, compared to net income of $4 million or $0.12 per diluted share for the same period in 2012.

At the end of June the inventory value was $24.7 million. This increase, as compared to last quarter and last year, was driven by increased visual lateral flow and Sofia influenza inventory as well as and inventory build for our new molecular products.

For the first six months of the year the Company invested $11.7 million in capital, primarily related to Sofia instruments, the continued molecular manufacturing expansion in Athens, Ohio, and the ERP system upgrade as well as normal manufacturing maintenance. In the quarter the Company completed the acquisition of BioHelix for net cash of $9.2 million. As of June 30, the Company had $22.8 million in total cash and no outstanding borrowings under its senior credit facility.

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

Thank you. (Operator Instructions). Line of Jeff Frelick at Canaccord. Please go ahead, Jeff.

Hey. Good afternoon, folks. Can you hear me okay?

We can hear you fine, Jeff.

Greats. Thanks. Sorry about that. Doug, so a little clarity on your comment on the shipment timing of the shipments to distribution. Was it across most of the product line or was it specific to one or two products? Were you referring to just strep shipments? Could you just clarify that please?

Well, inventory and distribution right now are actually quite low and so normally we would have expected shipments for all of the major products so flus, strep, hCG, hCG in particular, I think is especially low at this time and obviously some of that shift in Q3. The big driver, though, of course, was the fact that the prevalence of strep dropped off pretty dramatically about the middle of February. And normally we expect, typically we might see some sales leak into April as a result and that -- that's mainly the delta that you see.

Okay. And then just maybe an update on kind of the next -- again, congratulations on the Sofia strep approval. Then maybe help us understand, what are the next steps there if you can share any timing as you submit for clear waiver?

Well, quick update on the launch itself. We're just getting started really. We've added the product to our agreements with key distribution partners and are in the process ever training their sales organizations. While make AmpliVue sales calls on hospitals, our folks are now also talking to customers about strep, and I think so far the feedback has been -- has been positive. And what was the other part of your question, Jeff?

Just on the next steps moving the strep A to clear waiver.

Well, what we would say for all of our Sofia products generally that we intend to pursue clear waiver, but because of the variability of approval times, because of approval times are much more variable than they are with 510-K clearance, we're not going to comment on when we submit and when we expect to get approval.

And the reason I'm a little bit hedging there, Jeff, is that you recall that when we submitted for Sofia influenza we got approval for 510-K right away, but then it took some time before we actually got clear waiver. So we will do whatever is necessary to get clear waiver. We believe with all of our products but the timing is going to be variable and in the meantime our guys are out there selling to the moderate complexity segment.

Okay. And this is my last question then. On the Sofia strep orders, as distributors complete training what we would expect them to start buying some product, so should we -- is it safe to assume we start seeing that occur during the third quarter? Is that kind of when you wrap up training with the distributor partners?

Sure. I would expect all of the major distributors to carry some level of inventory. Although I think the expectation now after a few years of shipping product within 48 hours that they're not going to load a lot of inventory into all their distribution centers. So I would expect in Q3 a modest inventory build.

Another question for you. Line of Bill Quirk at Piper Jaffray. Please go ahead, Bill.

Thanks. Good afternoon, everybody. A couple of questions from me. One is basically a follow-up on Jeff's question. Could you actually just quantify the number of orders that flipped from the second quarter in the third quarter? In other words, you know, under a perfect scenario kind of what would that -- that revenue delta (inaudible)?

I can't comment on the actual number. I can tell you that each of the major distributors probably had some orders that didn't get shipped in Q2 and -- but, again, I will remind everyone that these days we don't ship a ton of product with each order, as we used to maybe five or six years ago. So the big driver to the delta, as I said before, was the seasonality of strep.

And then secondly I realize it's early but can you talk a little bit about your early experience with AmpliVue -- what type of customers are you going into, what type of business are you seeing? Are these competitive takeaways, are these customers who previously haven't been doing molecular that would be great. Thank you.

Sure. Well, given the number of competitors that we see on the line on this call, I'll be somewhat frugal with my comments and stick to things that we have said publicly before and that is that our initial target was the EIA customer. EIA and GDH customer, and we have seen some success in that segment. In addition, we have seen some success selling into the integrated delivery network space. And obviously we're pleased with how it's going so far. Just, as you can imagine, just within the last 60 days we've taken significant number of orders. We have a number of customers, but also add that we're pretty pleased with the way the product is now performing in the field post-launch.

Thank you for your question. We have another question for you now Steven Crowley at Craig-Hallum Capital Group. Please go ahead.

Good afternoon, gentlemen.

Hey Steve.

Hey Steve.

Obviously there are quite a few developments that you laid out for us. In terms of Sofia strep and the significance of this launch, in the overall scheme of things for Sofia and maybe even relative to flu, could you help us characterize the relative significance of this launch and the benefits you are bringing to the marketplace that have hooked the distributors on the product?

In terms of strep A impact on Sofia placements, I will just point out, Steve, the obvious -- that there are far for strep customers than there are flu customers and the unit volume of those customers is five times greater or more. So for us, strep is a significant opportunity even though initially we're just going to launch into the moderate complexity segment. So as you can imagine, about two-thirds of our current volume is within the larger customer who typically would be the folks who are of moderate complexity capability, in addition the fact that we're also launching in hospitals.

So I would characterize the strep A impact as potentially pretty significant for us in terms of placements. And then I would add that if we are successful in restating the market to a price more appropriate for the value that we're providing, I think that would be particularly helpful.

Great. Now, in terms of your priorities, you mentioned a few objectives with BioHelix and incorporating that technology potentially into Savanna, into new assays in the development pipeline. Can you help us understand your prioritization, what you've been able to determine so far are the highest priority projects for you within that opportunity set?

Well, the first priority is the eight assays that are on our development list and we would hope to have each of those available as we head into 2015. I would also add that there is and earnout associated with a number of those, and so we want to make sure that we're extremely helpful to the team there in the Boston area and make sure those get out as expeditiously as possible. So that's the number one priority.

Right now we're also exploring what are the appropriate targets for real-time HDA assays that can be used in the Savanna cartridge. And I think that's going to be particularly useful for us. And then in addition over the next 12 to 24 months, we will be looking at ways to speeds up the enzyme even further.

So those are really the three priorities. We do have other things that are assets of that acquisition, other things that we're working on that will potentially disclose as we get a little closer, but those are the top three priorities.

Great. The last question for me relates to the panel meeting of the FDA and now that the dust has settled -- any practical consequences that you have seen or market reaction that's been obvious to you in the real word? And what's your best read -- again, now that the dust has settled a little bit -- on the implications, if any, for the upcoming colds and flu season?

I have not seen and certainly not heard from our guys any impact or any discussion with regard to that -- the microbiology devices panel session. The impact to any of us in the space in the next season I think is likely to be quite small. We would hope, although I'm not sure how we will position this, but I would hope with the sensitivity that we see with Sofia that that would create even further demand for a product that has that kind of performance plus gives the user the comfort of an objective read. But, again, I'm not certainly forecasting anything further in terms of upside in the next flu season. That's for sure.

Thank you for your question. (Operator Instructions). I have another question in the queue. This one is from Brian Weinstein at William Blair. Please go ahead, Brian.

Hey, guys. I apologize for the backgrounds noise. Couple quick ones. First, can you give us an update on the next gen AmpliVue timing? I think that we are thinking about something kind of in the fall for that. Is that still on track?

We've got two assays in clinical trials right now for AmpliVue, and so those trials will go reasonably quickly and then we will certainly submit. Obviously we're not in control of timing in terms of approval, but I think your guess is pretty good.

Okay. And then you care to comment at all on the open box assays? We haven't heard a whole lot on that. Is there anything brewing there? Was there any contribution from those in the quarter ?

There would be very little in terms of sales because we're talking about flu and then we have also C. difficile that's available. What we -- I probably should take the opportunity to review, Brian, the timeline. We said -- in fact, we said again in the call here today, that we expect to have ten assays submitted. So let me just review where we're at because it's related to the open box assays.

We've submitted to the FDA so far this year four. Two of those were Sofia, two of those were the open box. In clinical trials at the moment, we have four assays and as I mention the two of those are AmpliVue, the other two are open box. And then we have me trials that should start in September. Two of those are open box and one of those is AmpliVue.

Okay. That is helpful. Are you at this point able to tell us a little bit more about what those open box assays are? Just looking at my schedule here and I know that I have five of them is there, so can you kind of review what those five actually are?

You know, I would rather not. I'm sure there will be an opportunity for me to review them publicly, to disclose, and in fact I'm quite confident if I go back to investor conference transcripts I can pull them all out, but I don't have them all off the top of my head at the moment, I don't want to make a mistake.

Okay. And then as far as your goals for AmpliVue, we heard you talk, I think publicly, about targeting 1000. I'm trying to recall the time frame of that but you said that you were moving towards your placement goal on Sofia. But are you moving toward your placement goals and are you happy with kind of the uptick moving towards those goals on AmpliVue as well ? That's it for me. Thanks.

Okay. Grad question, Brian. Based on what we're seeing in the field so far I'm still confident that we can achieve a customer base of at least 1000 customers for AmpliVue. The question is obviously when. It depends in part on how many additional assays we can launch in the near-term as well as our success, of course, with C. difficile.

Overall again, we're pleased with the uptake, and the product is performing well, and I think our customers would say that they like the format, which is obviously very important, and the product is obviously performing quite well in customers' hands which is very encouraging. So overall I am pretty confident we are going to get to 1000. Can we get there by year-end? We're going to have to really -- well, we need some help from the other assays. I would say it that way.

Thank you very much for your question. We have another question for you now. This is from the line of Nicholas Jansen at Raymond James and Associates. Please go ahead.

Hey, guys. Sorry for the backgrounds noise but maybe just a little update on the competitive landscape with regards to the objective readers. How are you performing relative to some of your peers in that (inaudible). Certainly Veritor been quite a pretty good launch so far in terms of Sofia versus Veritor and kind of your head to head competition in the reader market. Thanks.

I think you have to look at it in two different ways. One is the physician office segment and the other is the hospital segment. In the physician office segment, we did not see a lot of Veritor activity, and certainly we would say that we certainly have held our own. On the hospital side I would guess that they had some success converting their BD Directigen business to the Veritor, and I have not heard anything negative about the product or its performance and in fact I would view it to be a viable competitor, but just probably competing at a different space.

Thank you very much, Nicholas. We have another question for you. This one is from Shaun Rodriguez at Cowen and Company. Please go ahead.

Hi, guys. Good afternoon. Thanks for taking the question. So a different angle on a previous question. On AmpliVue, last quarter you noted that although most of your placement were the lacks doing GDH or toxin immunoassays, you did see some competitive molecular wins, and this did include some of the higher volume variety. Could how this higher volume mix looked in Q2, and if you have noticed any notable competitive response on the pricing front specifically?

That's actually a terrific question, Shaun. If you look at our March sales which I'm not going to go into that level of detail, but if you were to look at March sales, you would see that a big chunk of our business was driven by a very small number of customers. So the smaller number of customers I would say are taking a lot of the come online, but the larger customers actually at this stage are the bigger part of our business.

Okay. That's helpful. And you've talked about MRSA and Group B Strep tests in later stage development for AmpliVue. So these along with C. diff are also available from a couple other vendors. Do you have a sense at this point for the proportion of your early AmpliVue customers where you might be able to get them to add these other tests, or at least the proportion that are already running competitive MRSA or Group B Strep tests where at least there is a direct opportunity to get competitors swap out there?

We would love to think that there is a lot of synergy between C. diff and other tests, but I don't actually see that as the case. Group B strep, for example, in our view is a slightly different market and so it -- we look at it a little bit differently.

The MRSA product that we have in development, I would think would be a similar question -- would the same customers who runs C. difficile also run MRSA? Different segment. And further, the product that we intended to launch initially for MRSA was a blood culture confirmation assay, not a screening assay.

Okay. Right. That's a helpful clarification and then lastly I guess maybe this is for Randy, can you talk about the impact of the BioHelix acquisition on your gross margin expectations for AmpliVue, given I think there was a royalty component there, as well as on R&D, given you're taking those activities in-house?

And actually finally maybe this is back to Doug and update on some of their existing licenses that I think you were planning to maybe have to re-negotiate as you fold that in?

Yes. Certainly with the BioHelix acquisition, we are seeing gross margins on their business synergistic to our margins, so they're up around 70%. So they're certainly complementary to our existing business. On an annualized basis from an R&D investment perspective, we're estimating R&D investment of about $2.5 million as we move forward with -- over the next 12 months or so as they continue to roll out additional AmpliVue assays.

And I'm sorry there was -- we were getting costs reduction as well, since we don't aren't paying the margins that were required when BioHelix was separate from us. So we're getting a benefit on the costs side as well.

And then he asked about licensing, which I'll just address.

Okay.

We have a couple folks that we're talking to about out-licensing opportunities and we have concluded nothing at this stage.

That's it for me, guys. Thank you very much.

Thanks, Sean.

Thanks, Sean.

(Operator Instructions). We have another question from the line of Bill Quirk of Piper Jaffray. Please go ahead.

Hi. Thanks. Real quick follow-up for me guys. If you mentioned this in your prepared remarks, I apologize if I missed it. The next timing milestone for Savanna, Doug, can you repeat that? Thank you.

Sure. I think what we said was that the next major milestone was Q2 2014, and we intends to validate the cartridge works on a fully integrated instrument and then I also said that following that then we would be able to take the product to shows. And if and when we did that, you would know that we're within a year of launch.

Got it. 2Q 2014. Thank you.

Thank you for your question. That's all the time we have today. Please proceed with your presentation or any closing remarks. Thank you.

Well, this concludes the call for today. Thank you for your time this afternoon, and for your continued support. Take care, everyone.

Thank you ladies and gentlemen. That concludes your conference. You may now disconnect. Thank you for joining us. Do enjoy the rest of your day today.