QuidelOrtho Corp (QDEL) 2013 Q4 法說會逐字稿

Welcome to the Quidel Corporation fourth-quarter and full-year 2013 earnings conference call.

(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. 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, Director of Investor Relations. 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, today, February 11, 2014. 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 full year ended December 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 fourth 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 then we will open the call for your questions.

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

Thanks, Randy. Good afternoon, everyone, and thanks for joining us today.

For today's call, I'll focus my comments on three subjects: first, our revenue performance last quarter; second, the momentum we are seeing with Sofia; and third, a product development update for Sofia, AmpliVue and Savanna. Although this year's flu season started later in Q4 than the previous season did, revenues in the fourth quarter were $50.2 million, slightly less than the $53.9 million we reported for last year's fourth quarter.

On our last call, we described three different possible scenarios for the flu season in Q4; $10 million for a light flu season, $16 million for a normal flu season, and $28 million for a severe flu season. In the fourth quarter, total flu revenues were $20.9 million, and of that amount, $6.4 million were due to sales of Sofia influenza. Further, our cannibalization rate for Sofia flu held steady at approximately 32%.

Which means that roughly two thirds of all Sofia flu business, or approximately $4.3 million, was new. Inventory levels at distribution were 17% lower in the fourth quarter than they were during the fourth quarter of 2012, which tells us that orders during the period were indicative of real end user demand.

Clearly, Sofia has been instrumental in solidifying our base flu business, and it's evident that we've also picked up some market share with end-users in the fourth quarter. In fact, based on end-user data and third-party channel checks, we believe that we may have gained between 6% and 7% dollar market share. We attribute this success to our focused Sofia sales effort, particularly in the hospital segment, along with bringing online our distribution partners. The momentum we see with Sofia placements has been driven by demand for influenza, but now also helped by demand for Sofia RSV, strep, and most recently, hCG.

In terms of Sofia placements, based on our existing order rate, we are well on our way to our goal of 10,000 installed in revenue generating analyzers as we begin 2015. In terms of a product development update I'll highlight general progress in three areas; Sofia, AmpliVue and Savanna. The Sofia assays responsible for most of the incremental sales models for 2015, influenza A+ B, RSV, Group A strep and hCG have been FDA cleared, and Sofia influenza is CLIA waived. CLIA waiver on the last three is important as well, and we continue to make progress toward the goal of CLIA waiver on all Sofia products.

We have submitted the necessary data to the FDA for Sofia RSV CLIA waiver and plan to submit Sofia hCG this month. We expect to submit Sofia group A strep for CLIA waiver next quarter. In terms of new menu, on the horizon are quantitative assays that give us access to larger markets.

We expect to submit quantitative hCG to the FDA at or around the end of this year, with vitamin D to be submitted in early Q1 of next year. We have worked diligently on both the development and commercialization of AmpliVue assays, and we expect 2014 to be a big year for this product line. Since launching the first AmpliVue assays for C difficile last year, we have signed a number of key larger volume customers and should begin to see a meaningful uptick in our test order run rate beginning in Q2 as a result.

We have received FDA clearance for our Group B strep assay in the fourth quarter, and expect this assay to generate some incremental benefit in 2014, as well. Last year we suggested that, with the acquisition of BioHelix, AmpliVue product development would accelerate, and that has certainly been the case. We submitted the HSV 1 and 2 510(k) package to the FDA on December 31, and are expecting to receive clearance sometime in the second quarter.

We are initiating clinical trials this week for AmpliVue Group A Strep, pertussis/parapertussis and have several other assays in development. If all goes well, we could have a total of five to six AmpliVue assays either in market or with the FDA by the end of the year.

Finally, as we communicated at the JP Morgan conference, Savanna remains on schedule. Savanna is a robust fully integrated cartridge -based platform that will perform both real time PCR assays, as well as helicase dependent amplification assays developed by the BioHelix team.

As we move toward the conclusion of the development phase of the instrument, we have now begun in parallel the cartridge manufacturing phase. Our goals for 2014 involve installing the cartridge manufacturing line at our Athens facility, rolling out Savanna at a US trade show, and delivering the first integrated system to Africa for field evaluation trials.

In summary, 2013 proved to be a prolific year for our R&D and clinical regulatory teams. At the beginning of the year, we said that we would submit 10 assays to the FDA in 2013, instead we submitted 12 510(k) and 2 CLIA waiver applications. On the commercial side, our sales force is fully formed and is increasingly developing relationships directly with customers with each new product introduction.

Overall, we've achieved many milestones large and small. Throughout the Quidel organization, our people have remained determined, optimistic, and steadfast in executing our strategic plan for growth. Our research organization is motivated by discovery and innovation. Our manufacturing divisions are committed to quality and efficiency. Our sales force is trained, enthusiastic and responsive.

From my experience, the people you have make all the difference, and I'm very excited about our people and encouraged by their willingness to tackle the biggest challenges. Because of our people, and our focus, we are getting closer to creating a transformative business, a broader based diagnostic company with access to larger and faster growing markets.

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

Thank you, Doug.

As Doug mentioned in his opening remarks, total revenues for the fourth quarter of 2013 were $50.2 million, compared to $53.9 million in the fourth quarter of 2012. Global infectious disease revenues were $39 million in the fourth quarter, as compared to revenues of $44.3 million in the prior year. Influenza product revenue was $20.9 million, as compared to $26.3 million in the fourth quarter of last year. The decrease was driven by a more normalized influenza and respiratory disease season in 2013, as compared to an earlier and more severe season occurring in the prior year.

Sofia influenza revenue showed strong demand at $6.4 million, 103% increase over last year. Also contributing to growth in the category was a 48% increase in total RSV sales, which also benefited from new sales on the Sofia instrument. Strep A revenue was relatively constant to the fourth quarter of last year.

Revenues for the women's health category were $8 million in the quarter, as compared to $7 million for the same period last year. This increase was due to growth in pregnancy product revenue of approximately 24%, catching up on the timing of orders from the previous quarter. Thyretain product revenues grew 10% in the quarter. Our gastrointestinal product category revenues were $1.9 million in the quarter, compared to $1.5 million in the fourth quarter of 2012, mostly driven by increased AmpliVue C difficile revenue in the quarter.

Gross margin in the fourth quarter was 63%, as compared to 67% in 2012. The decrease in gross margin was primarily driven by the change in product mix associated with higher influenza sales in the fourth quarter of the prior year. Also negatively impacting the margin versus last year, is the incremental depreciation incurred from the placement of additional Sofia instruments, as well as increased costs associated with quality improvement initiatives.

In the fourth quarter, our operating expenses were $31.4 million, versus $22.2 million last year. In the quarter, we incurred a couple one-time expenses. First, as we discussed in last quarter's earnings call, we completed the move of our manufacturing operations from Santa Clara, California, to Athens, Ohio, our first class research and development and molecular manufacturing facility.

We recorded a facility restructuring charge of $1.3 million relating to this move in the quarter. The majority of the charges relate to lease termination and other relocation costs. Starting in 2014, we will be realizing a cost savings of approximately $2 million associated with this move, as we realize lower facility and human resource costs.

Approximately $1 million of the savings will apply to cost of sales. The other $1 million will be cost savings in general and administrative expenses. Second, the Company recorded in the quarter an additional expense of $1.8 million relating to the amendment of performance-based stock awards earned in 2013. Research and development costs in the fourth quarter were $11.3 million, compared to $7.3 million last year.

In the fourth quarter, there was no benefit realized from the Life Technologies collaboration agreement, whereas in the fourth quarter of 2012, the research and development cost benefit was $1.7 million. Also impacting the spend this quarter was the continued investment in our molecular platforms, including Savanna, as well as costs associated with the two acquisitions we consummated earlier this year; BioHelix and Andiatech. In the quarter the two acquisitions added an incremental $1.7 million in expense, as we realized higher clinical study costs associated with the AmpliVue platform.

As we have previously communicated, in 2014 we believe our research and development spend will be in the range of $30 million to $32 million, as we continue to support our immunoassay and molecular product development initiatives. Sales and marketing expenses increased in the current quarter to $9.7 million.

The increase is primarily due to the continued investment in our commercial organization. We have added approximately 25 sales reps since this time last year, and we believe we currently have a fully operational commercial organization, as Doug mentioned, to support our existing and future product launches.

Expenses for G&A were $6.9 million in the quarter, compared to $4.8 million for the same period last year. In the quarter, we realized expenses of approximately $400,000 associated with a medical device excise tax and approximately $300,000 associated with our ERP upgrade of our Athens, Ohio, facility. We now have successfully completed our Company-wide ERP upgrade project.

Also impacting the quarter, was an increase in incentive compensation expense, of which approximately $900,000 related to the previously mentioned amended performance-based stock awards. In the fourth quarter, our provision for income taxes was a benefit of approximately $1.2 million. This benefit was mostly the result of realizing a significant portion of the full-year research and development credit in the fourth quarter.

Stock -based compensation expense for the three months was $3.3 million, and amortization of intangibles was $4.2 million. In the quarter, amortization associated with the Alere royalty arrangement was $1.9 million, and was recorded in cost of sales. As a reminder, the amortization discontinues in February, 2015.

Net income for the fourth quarter was $1.1 million, or GAAP EPS of $0.03 per diluted share, as compared to net income of $8.7 million or $0.26 per diluted share for the fourth quarter of 2012. On a non-GAAP basis, excluding the facility restructuring charge, amortization of intangibles, and stock compensation expense, net income for the fourth quarter of 2013 was $7 million, or $0.20 per diluted share, compared to net income of $12.5 million or $0.37 per diluted share last year.

For the full-year, ended December 31, 2013, revenues were $175.4 million, compared to $155.7 million for the full year of 2012, an increase of 13%. Infectious disease revenues grew 16% for the year to $128.5 million, versus $111 million in 2012, driven by the growth from influenza products associated with a robust influenza season during the first quarter of 2013.

For the year we generated $62.6 million in combined QuickVue and Sofia influenza sales versus $45.2 million in 2012. Adding to this growth was a 33% increase in total RSV sales. Strep revenue for the year was down 12%, the result of a lower disease incidence realized in the first half of this year versus last year.

Our DHI infectious disease revenues grew by 2%, as a 9% increase in general virology was partially offset by a decrease in our respiratory/viral panel business. The women's health segment was $32.7 million this year, equal to last year. In 2013, our gastrointestinal segment grew 7% to $6.8 million, as compared to $6.3 million last year, mostly the result of growth in our AmpliVue C difficile product line.

Gross margin for the year expanded by approximately 1 percentage point over last year to 62%. This improvement is mostly driven by the increased influenza sales versus last year, and the positive impact on product mix. Research and development expense for the year was $34.2 million, in line with our earlier estimates. The increase versus last year was due to the increased investment in our molecular platform, mostly in support of our Savanna project.

Sales and marketing expenses for 2013 were also in line with our internal estimates at $33.8 million, a 12% increase over last year. Since the first half of 2012, we have increased the size of our sales and marketing team in order to support our existing and new product growth and to support our distribution partners.

General and administrative expenses for 2013 were $26.3 million, as compared to $20.6 million last year. The medical device excise tax increased our year-over-year spend by $1.9 million. For the year, we incurred $1.1 million for our ERP implementation project, and approximately $1.8 million for the full year in restructuring related to the relocation of our Santa Clara manufacturing operations.

For the full-year, the provision for income taxes was a benefit of $4 million. In the first quarter of 2013, we realized a benefit of approximately $500,000 relating to the 2012 research and development tax credit.

The second quarter of 2013, the IRS notified us that its review of our tax periods ranging from 2008 to 2010 resulted in no proposed changes. As a result, we released tax reserves of approximately $3.5 million. For 2014, we estimate our effective tax rate to be in the range of 34% to 36%, excluding the impact of any not discrete tax issues, and without consideration for the 2014 research and development tax credit which has not yet been approved by Congress.

Net income for the full-year was $7.4 million, or GAAP EPS of $0.21 per diluted share, as compared to net income of $5 million or $0.15 per diluted share last year. On a non-GAAP basis, excluding amortization of intangibles, stock compensation expense, and certain nonrecurring items, net income for the year was $21.3 million, or $0.61 per diluted share, compared to net income of $19.1 million or $0.56 per diluted share for the full-year 2012.

For the 12 months ended 2013, the Company generated approximately $26 million in cash from operating activities, spent approximately $20.8 million on capital expenditures, and approximately $13 million in investing activities to acquire both BioHelix and Andiatech. In the year, we realized an increase of approximately $11.5 million in working capital, mostly driven by an increase in inventory to support our Sofia and molecular platforms, as well as building inventory ahead of our Santa Clara relocation.

For 2014 we do not believe inventory will be a continued use of cash. As of December 31, Quidel had $9.4 million in cash, restricted cash and cash equivalents. Currently we have no outstanding borrowings under our senior credit facility.

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

(Operator Instructions)

Brian Weinstein, William Blair.

This is Matt in today for Brian. Doug, come I was wondering if you could provide what the total Sofia number was in the quarter and maybe you could characterize contribution or pricing relative to your expectations in each of the assay categories? Thanks.

Well, we are not going to disclose total Sofia sales. We did obviously provide the flu number --

$6.4 million.

$6.4 million. And we also disclosed the amount of business that was new of that. In terms of pricing, I think we've previously discussed the pricing for the flu product is approximately $1 higher for Sofia than it is for QuickVue.

For Sofia Group A Strep we do have a price increase over the existing product that is meaningful. HCG is the same. For RSV it is typically about the same as it is, so we aim to be equivalent between QuickVue and Sofia for RSV.

I was wondering if you could just talk a little bit about how you expect cannibalization to trend here in 2014, 2015. It seems like it was probably 35% has been a little bit below what you are expecting, and how are you thinking about what that dynamic will look like in 2014?

Well, originally we had modeled overall to have 50% cannibalization, which would be a mix of cannibalizing the legacy products offset by new products. So that is how we originally had modeled 2015 a few years back.

What we are discovering, though, is that for these qualitative products, for the existing legacy products, that customers are preferring the objectively read answer, and as a result I think our salespeople certainly are more focused on converting our competitors' products than they are ours. Over time I would like to see a bit more cannibalization, but for the moment I do think that the 65/35 split that we forecasted for 2015 looks pretty good.

Bill Quirk, Piper Jaffray.

It's Dave Clair in for Bill. First question for me, wondering what% of your flu revenue do you think Q4 represents for those 2013, 2014 flu season?

Say that again, Dave?

In the past you said that the revenue in Q4 represents 40% or 50% of your total expected flu revenue for the season. Do you have any kind of metric like that this time around?

Well, what the math says is that we had $175 million in revenue for 2013, and Randy says that our total sales of flu products excluding molecular, excluding DHI, would be $62 million-ish -- $62 million, so roughly a third.

Right, I guess what I'm trying to get at, Doug, is typically -- should we expect an acceleration in flu in Q1? Have thinks picked up?

So, you're interested in what is happening in Q1 for flu?

In the past, you said that your Q4 you thought that it would be about X% of the total revenue for the flu season. I'm just wondering --

Let me be more helpful than that. I understand where you're going, Dave.

Through the end of January, inventory at distribution was approximately what it was at the end of January, 2013. And our distributors are telling us right now that flu sales are running slightly stronger than they were at this time last year. So, if we were to model conservatively after the February/ March 2013 sales, and our distributors manage inventories of flu down to one week on hand by the end of the quarter, which would be typical for us, then they will need to order a modest amount of product, which gets us to our mid-case estimate for the quarter.

So, for Q1, 2014, not counting sales of molecular, influenza and DHI respiratory, here are three scenarios. The flu sales in the low case scenario would be $20 million. In the mid- case, they are at $25 million, and in the high case they are at $35 million. So you know what our sales were in Q4 and you can do the ratio now. It is going to range from a very worst case of $20 million to a high case of somewhere around $35 million.

And you think you are tracking to that mid-pace?

Well, I gave you the scenario that got me to the mid- case.

Okay. Thank you for that. Thank you. And then I was just wondering, if you could give a little bit of an update on some of the longer-term AmpliVue assays? I think you've talked about trichomoniasis and chlamydia/gonorrhea in the past.

Sure, we have. So, just a very quick recap: C. difficile is launched; Group B Strep we are launching; Group A Strep starts clinical trials this week -- actually started this week, already started; and AmpliVue pertussis/parapertussis also starts this week. We should be in clinical trials for trichomoniasis shortly. We did conduct a beta trial already. And then we do have, as you mentioned, a couple of others out there, one of which is CTNG. That's a little bit further out. Am I missing one, Randy?

You talked about Bordatella?

Yes, that's pertussis/parapertussis.

Yes, I think you got them all.

I think I got them all. In the future, we -- I'm not mentioning that one, sorry. Okay. So that's it. That's it for now.

Jeff Frelick, Canaccord.

Doug, with respect to strep how is the incidence in the quarter versus the third quarter?

It actually rebounded a bit, and it was in line with Q4 2013. I'm sorry 2012.

It was significantly higher than Q3, Jeff.

Okay, so you did see incidence pick up?

We did, and pretty much does mirror in that quarter what's happening with flu.

Inventory specific to strep in the channels?

Low.

Okay. So, if you've launched a lot of products, you have an expanding very expanding pipeline, you've built out you're -- you've added and built out some of the primary care physician office sales force. Are you starting to see increased focus from your distribution partners in that marketplace?

Sure. I think what we saw early was with the acquisition of PSS by McKesson, some integration issues if you will. And for the most part I think our commercial guys would tell you that those things have been sorted out and that the entire organization McKesson PSS are active and out there.

I guess what I'm trying to get out my other observation is, what you meant to the distributors a couple of years ago, X number of dollars to them, and their overall product offering. You've grown that significantly and probably will continue to grow that. So I guess are you getting your fair share or more so time, focus, ride alongs -- are your reps starting to get somewhat overwhelmed with the attention? We're not quite there yet. How should we think about it?

We'll I think you should think that the Sofia launch has demonstrated that the product is pretty compelling, and that with each new menu item that we add, it's just another thing for our distribution partners to focus on. We just now launched hCG and immediately we saw an uptick in activity from our distribution partners. So I would just say, yes, having more product does create more leverage, and it's handier to have more things to sell than just flu.

Steven Crowley, Craig-Hallum.

Congratulations on the flurry of development and regulatory activity down the stretch of 2013.

Thank you, Steve.

You were nice enough to share with us some data on a pickup in market share in flu. You said up or 6% or 7% from what you can gather. Where do you think that is ballpark? Where has it moved to in terms of a percentage of this point?

You mean since then --

I mean after you picked up 6% to 7%, what does it total up to at this point, what is your best guess, at least a ballpark?

Overall it's very difficult, Steve, as you know. We try to draw upon a number of data sources to try to figure it out. The market leader is still Alere, and we are still second, and after that it drops off dramatically. So, we are still in that position, but I like -- I like the fact that we are closing the gap.

And I think another vein of thought that has come out of recent discussions with you and Randy is that you had a very productive fourth quarter in terms of penetrating the hospital base versus the physician office lab with Sofia. One, is that accurate? What kind of color can you give us on that? And we probably haven't seen the extent of the market share gains since you have just started seeding these accounts, so hopefully the trend's your friend for a while there?

First, Steve, I would say your comment is accurate. We did see a significant increase in the number of placements in the hospital segment. We like the hospital segment, because -- and because the volumes are significant, and they are about double what we see for the average Sofia placement.

So, you are right that we should see some -- some revenue growth that is associated with that market share gain. And you would not have seen that fully realized in the fourth quarter, because many of these placements were just being installed. So -- honestly, I know what the contracts say, but the contract and actually with this order, could differ based simply on the incidence of flu and RSV and strep.

Okay, that is helpful, now, Randy, or Doug and Randy, you gave us some sense for the delta that could be there with influenza from Q4 to Q1, you have some other infectious disease categories, and product lines. Along with some new introductions that should spur growth sequentially in non-seasonal products like hCG.

I'm wondering, if your mid-case is about a $5 million sequential increase in flu, are there buckets that add up to about that amount in other products from Q4 to Q1? Is that a reasonable way for us to think about it? Or are there other dimensions and variables in here that we need to consider?

Well, the greatest variability of course on any of these quarters is the flu number. So, for that reason, we have provided a range, a low, a mid, and a high case, but it would not be our intent to provide revenue guidance beyond that.

It would take me 15 minutes to walk you through all those variables, Steve, and all those different line items. As Doug said I think flu is an excellent way to trend.

Okay, and then just one question on the regulatory experience you are having. Can you give us some indication of how the agency has reacted, responded to your recent applications for AmpliVue and Sofia in terms of the path and the timelines and what kind of template there might be there for future approval timelines? Can you give us some recent experience at least on some tests?

Sure, I would caveat all of this by saying that -- that the submissions and their approvals vary depending on the quality of the package, the type of product, et cetera. Most recently, the most recent AmpliVue submission was actually our fastest in recent times. It was -- but I wouldn't expect that to be -- to be the norm.

In this particular package for Group B strep we were approved in 28 days is it? In 28 days, that would not be typical. But I will say that on average, most of the 510(k) packages end up being approved, if they are approvable, certainly within the 90-day window.

Nicholas Jansen, Raymond James.

Thanks for the color. Thinking about the margin profile longer-term, I think you've thrown out thinking that maybe this can be a 25% to 30% GAAP operating margin business in 2015 or 2016 when you hit the revenue target that you've outlined. And I just want to compare that target relative to the -- the 2% GAAP margin that you put up in 2013. I know there were some one-time items this year, but just maybe better help me explain some of the lever points that you see over the next few years as you think about getting to that projected target? Thanks.

Yes, certainly we are confident in achieving operating margins in excess of 25% and EBITDA margins in excess of 30%, as we realize that incremental $100 million in revenue growth. By 2015 gross profit margins we are projecting to exceed 65%. Really two drivers there. One is the discontinuance of the Alere royalty amortization, and the other one is the incremental margins improvement with our new product launches.

Relating to our operating expenses, we believe we have -- we can leverage our current operating expenses, the base today without any significant increases over the next couple of years. We did provide guidance on our R&D spend, where in 2014 we think that is going to be below our 2013 spend. And as Doug has mentioned, we certainly have currently a fully functional sales team that will support -- we believe will support our sales growth over the next couple of years. So, we do see expansion in the operating margins and the EBITDA margins over the next couple of years.

That's very helpful. And then thinking about the acquisitions that you did in 2013, Andiatech and BioHelix. How should we think about their contribution in 2014 and 2015, and some of those products you spent a lot of money in R&D in the quarter ramp up? And are you thinking about more tucked in M&A in 2014 as a better way to accelerate your molecular profile? Thanks.

Yes, let me just talk generally about product development. We are in very good shape from that perspective. All of our new product introductions in 2014 will be molecular.

We have two PCR products at the FDA that we believe will be important for us. Those were developed organically. We have completed the development of two others that are ready to move into clinical trials, as well.

And of course, as you suggested, of course we now have the Andiatech assays and a number of which we will bring into the US this year, as well. I mentioned already the AmpliVue assays. We are really pleased with how that program is going. Five or six new products -- AmpliVue products by the end of 2014 is a pretty good move on our part. So, obviously we are really pleased with how that program is going.

And then of course there is Sofia, the CLIA waivers, the first two Quan assays and a couple of others that are also in the works. So that is the overall of where we are at. I would see 2014 looking a lot like 2013 in terms of our R&D productivity.

Tycho Peterson, JPMorgan Chase & Co.

One or two quick ones on flu and then a follow-up. You talked about the expectation at your analyst day last year for about 22% of revenues from flu by 2015. Is that still accurate in your view?

If we continue to gain share, I'm not sure that is possible. I think we had modeled somewhere around 25%, 26%. I seem to recall a chart, Randy. So, yes, I think that's probably the right range. It will fall for somewhere around a third now to probably 24%, 25%. So, that's where we at, Tycho, that is my best guess right now.

Okay. And then relative to the quarter $10 million I think was flu. Can you maybe just talk about the delta relative to your expectations for the non- flu businesses?

In Q4, Tycho?

Yes, correct.

I think that we were anxious to see what the strep revenue looked like given what happened in Q3, and we had been looking at customers and numbers of customers, and we didn't see that we were losing share. So we were certainly hypothesizing that it was timing, and so we were somewhat relieved in the fourth quarter to see that, that was true. And we were also pretty pleased that we saw the bounce back of hCG.

So, that looked good. Cybertaine, for no other reason other than the educational things that we have ongoing, continues to grow. We were a little bit surprised as well by the 10% growth, because it really hadn't been exceeding 10% for a few quarters. So, that looked pretty good. And am I missing anything, Randy?

I think RSV on the Sofia platform.

We did have a nice launch with RSV, but obviously that is small members, a few hundred customers, I guess at this stage. But that's going well, also, and so that contributed.

And actually on Sofia, can you talk about how you see per box utilization trending for the remainder of this year?

Boy, that is a tough one to call at this stage. Early on, of course all the placements were due to flu. We've just now started to see reasonable uptick with strep. I already mentioned RSV, but that is somewhat of a niche market. I'm really anxious to see what the utilization per box looks like after we get hCG loaded.

But in general, what has committed in the agreement so far is somewhere around for the hospital base customers somewhere around 1000 tests per year -- per box. We are doing about 1.6 boxes per site. And so, that looks pretty good. The RSV number obviously lower, and so I would say we are comfortably on our way to that early target that we had set of $10,000 per Sofia placement per year.

Okay, and then last one, what would next steps we should be thinking about for Savanna?

Well, we are building the cartridge manufacturing line, now. And then we expect to transfer that to our Athens facility and have that done by April. That we are doing in parallel with completion of the instrument design. We are building fully integrated units now.

We are also going to use those boxes in conjunction with our alpha test beds to do development work on the assays. And so we would hope to have certainly around the time of the US launch we would hope to have a handful of assays that we can launch early on.

So, that's kind of where we are at. We do expect to have units in South Africa by the end of the year as well, and I said that we would be at a US trade show. It looks like we could indeed be in time to show Savanna at the AACC in July.

Mr. Taylor, please check the mute feature on your phone.

A quick modeling expense on R&D. Big uptick in Q4, and you gave some of the reasons for that. But how should we think about R&D in 2014 other than your previous comments that it should go down versus 2013. And that $1.7 million in incremental expense you called out that is associated with the two acquisitions, is that going to continue at that level on an incremental basis, or is it offset spend somewhere else?

Well the $32 million to $35 million that Randy mentioned does include the additional $1.7 million that is associated with BioHelix and Andiatech.

And, Ross, we did say that we think that full year 2014 the spend would be somewhere in the of $30 million to $32 million range. The anomaly in Q4 really was, we did get a benefit in Q4 2012 with the collaboration agreement with Live Technologies of $1.7 million, and we didn't get any benefit out of that in Q4. So that is somewhat of a unique item, as well.

Okay. That helps. Thank you.

Shaun Rodriguez, Cowen and Company.

So following up on an earlier pricing question, I think you mentioned you are taking material price increases on Sofia strep. But to be clear I think previously talking about pretty significantly repricing that market with Sofia. So are you getting less of a premium than maybe you are previously talking about, and if so what was the strategic rationale behind that decision?

We had originally talked about somewhere north of $1 in terms of price increase. We launched a matrix that was significantly higher than that. So, what we actually attempted to achieve in the field early on was, I would say, dramatically more than that. The number of customers that jumped on board with that pricing matrix was fewer than we had hoped, so we've actually come back a bit toward that initial thought of $1. I think -- it's actually north of that.

It's about the right range.

Okay, so then on the incremental revenue opportunity from the 10,000 placements you expect by year-end, and that is reflected in the 2015 targets, it seems like maybe less pricing, but you are still comfortable with those targets on Sofia. Presumably because you are expecting to get more share than previously thought? I'm just trying to understand how the pricing not being where you thought it would be is being offset just to make --

No, first Shaun let me be clear, what we modeled in 2015 was with that $1. Not more. We attempted to go to market last year far north of that, but what we modeled in 2015 was what we are actually doing now. Okay, so there is no change there. Does that make sense?

It does, it does, that is important. And then lastly, when we are thinking about the number over 5000 placements at year-end, your confidence in the 10,000, we hear from Beck and Dickinson, it sounds like they are already at that bigger number. So clearly a lot of momentum for this class of products, and it is evidenced in your share gains, as well. I guess my question is really why wouldn't 10,000 placements by year-end, if, again, if you are not taking as much prices maybe you hoped you would, why isn't that a really conservative target, and really why would we expect you to do better than that by year-end?

Well, when I have evidence that suggests that the forecast is not close to that, I would certainly advise folks, including our investors. At this stage, we said that we are well on our way. We said we are north of the halfway point, and I think we are in pretty good shape.

Obviously, we've got a commercial organization that is aiming a lot higher than that, and I think your intuition would tell you that if we continue to have success that the end number is going to be higher than 10,000. The timing of that is -- is the question that we have, and I'm pretty comfortable and confident in saying we are going to get there. Now, I'm not trying to pull an aha.

Now with regard to what competitors would suggest they have shipped, I really can't comment on all that. And I won't speculate. What I do know is our placements, because we have a contract with each end user, and I know that each Sofia generates revenue. I know how many Sofia's are per site and what our cannibalization rate is.

And I know who specifically we are taking business from by site. These are the things I do know. The things that I hear, I don't know.

Zarak Khurshid, Wedbush Securities.

Question on the quantitative hCG product, curious how do you think about the size of that opportunity? And then as far as the technology goes, where do things stand as far as the validation of the quantitative aspect of the platform?

We believe we are in pretty good shape to deliver a quantitative hCG product to be in clinical trials and in the near-term. From a technical perspective, we've had some things that needed to be solved, but they have now been solved. I think we are on a pretty good path to get the job done.

In terms of market size, I think what we have said is that the quantitative hCG market itself is a bit nichy, and that the area at least where we are thinking we are going to play, and I think what we have modeled in our strategic plan is somewhere around 6 million or so tests that we be going after. So this would not necessarily be the market that you would count on for a lot of sales, but on the other hand it was something that we thought that we needed to do in order to demonstrate that we could handle this technically.

The one that we are obviously more interested in is the quantitative vitamin D, and obviously a lot of the work that we've done with hCG was somewhat of a precursor for that product. And that market obviously as you know, Zarak, is significantly larger.

Great, thanks for that. And then just a couple of questions on Sofia, here. Obviously nice ramp this year. How would you characterize the latest crop of Sofia adopters versus the early adopters? Would you say that the latest customers are of higher quality or increasing quality in terms of the potential test utilization?

They are just by virtue of the increasing number of hospital customers. The other thing that is true is that the hospital customer, Sofia placements are coming in chunks. When a larger organization makes a decision to place Sofias, they can be significant numbers.

We have had systems that have ordered 50 to 60. We have had recently one for 70 something Sofias. So again they are coming in chunks. They are coming with three year commitments, and the commitment is larger than the physician office customer.

These large multi-unit wins, I don't recall too much commentary on that in the past. Is this a recent inflection given the expansion of the test menu?

Well, remember last year with the issue that we had and a recall, we specifically tried to stay out of the hospital segment as best we could, because we did not want to start up a big customer only to back order them. So, this is really the first quarter that we've had a lot of traction.

In addition, the relationship that we had -- that we now have with Cardinal and with Fisher was not fully formed. So, in the fourth quarter it was our guys in the hospital segment, and Cardinal and Fisher's as well, and frankly, it has gone extremely well. So, you are right, it is new. It is somewhat of a new phenomenon.

We do have an IDN group, though, that this is what they do, they focus on the very large groups. And some of those groups have taken a while to come on board. They do extensive evaluations, they compare all the products, and then at the end of the day, fortunately, it appears as though we are winning most of those head-to-heads with our competitors.

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

Okay, this concludes the call for today. Thanks, everyone, for your time this afternoon and for your continued support. Take care.