QuidelOrtho Corp (QDEL) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation third-quarter 2014 earnings conference call. (Operator Instructions). I would now like to turn the presentation over to your host, 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, October 21, 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 and nine months ended September 30, 2014. If you have not received our news release or if you would like to be added to the Company's distribution list, please call Rubin at 858-646-8023. For today's call, Doug will report on the highlights of the third quarter and provide updates on our product development pipeline. I will then briefly discuss our financial results, and then we'll open it up for your questions.

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

Thanks, Randy. Good afternoon, everyone. Thanks for joining us. We have a lot to talk about today, so let's get started.

Revenues in Q3 were $40.9 million, up $7.3 million, or 22% over the prior-year. Generally speaking, growth in Sofia, influenza and RSV, our AmpliVue and Lyra molecular products, QuickVue strep and an increase in grant revenue were offset slightly by a decline in QuickVue influenza due almost entirely to cannibalization through Sofia and our veterinary products.

Out sales from our distribution partners to hospitals and physicians' offices in the quarter were up 26% over the prior year, which suggests that this distributor inventories are well positioned with respect to Q4 demands. New-product revenues in the third quarter were $9.5 million, compared with $4.5 million in the same period last year. On a trailing 12-month basis, which includes a soft first quarter this year, new-product revenues were $29 million, compared with $15 million through September 2013.

Interestingly, for the first quarter since the launch of Sofia, Sofia influenza sales were higher than sales of our visually red QuickVue influenza products despite a low cannibalization rate which remains at about 30%. Encouragingly, Sofia placement numbers in the quarter were robust and consistent with those we've seen in previous Q3s, driven mainly by share gain and demand for influenza and RSV.

Our expectations of CLIA waiver for Sofia Strep A and hCG by year end remains unchanged. With CLIA waiver of these two products and the introduction of others like vitamin D in the back half of 2015, we think that the ultimate number of worldwide Sofia placements could be in the 20,000 to 30,000 range in the longer term.

Molecular sales were a modest contributor to year-over-year revenue growth led by AmpliVue C. difficile, which has been gaining traction, helped by the introduction of AmpliVue Group A Strep, Group B Strep, and HSV-1 and HSV-2.

With the recent FDA clearances for Lyra parainfluenza and adenovirus, we believe that we will continue to gain traction with this product line, enhanced by the impact of sales of our two recently FDA-cleared [saynovo] products, HSV 1+2/VZV and strep A, C and G as customers finish validation studies and come online.

Regarding the grant revenue increase, you will recall that in November 2012 we were awarded a milestone base grant totaling up to $8.3 million from the Bill and Melinda Gates Foundation to develop, manufacture and validate a quantitative low-cost nucleic acid assay for HIV drug treatment monitoring on the integrated savanna molecular diagnostic platform for use in limited resource settings.

More recently, in September 2014 we executed an amendment to this grant which provided additional milestone-based funding of $12.6 million through March 2016 for the purpose of accelerating the development of the savanna molecular diagnostic platform in the developing world. Upon execution of the amendment, we received $10.6 million in cash and recognized an additional $2.8 million in grant revenue in the third quarter.

Among other activities that will exhilarated the program's development, we have begun manufacturing an increased number of alpha units that will be used in assay validation studies, one of which will be shipped to Africa within the next few weeks.

With respect to how the savanna development project is going, I would say generally that we are pleased with where we are. As with any instrument development project, there are technical risks and issues along the way. There are technical issues that we have successfully resolved, and with each of these our confidence grows.

There are, of course, technical issues that we are currently working on, and then there's the risk of a technical issue not yet uncovered. At this stage, though, there is no technical issue that has the potential to be a showstopper, and overall the entire team is quite happy with its progress.

Our next internal corporate goal is to assess the performance of our HIV assay on actual African HIV patient samples, which we expect to start before the end of this year.

Early this year, we published a set of milestones for 2014, and from time to time throughout the year I've commented on our progress. Here's the latest on where we are with each of those milestones by key platform.

Starting with Sofia, our goal for the year was to reach 10,000 placements, and we assumed that was possible provided we received CLIA waiver for Sofia Strep A and hCG before the end of the third quarter, which did not happen. As I suggested earlier, we are confident that we will receive CLIA waivers for both products before year end, but clearly there will be little or no impact from these two products on our Sofia placement rate in the fourth quarter.

Having said all that, for the first time since the launch of Sofia, all of our major distributors are fully engaged, and our weekly Sofia placement rate is now quite high in both the physician office labs and hospital segments. While it's unlikely we will surpass 10,000 before the start of Q1 2015, it's actually encouraging that we will get quite close to that benchmark with just Sofia influenza and RSV, which are much smaller opportunities in terms of the number of customers.

In terms of the development of quantitative assays, Sofia vitamin D and hCG, we are on track for the development of those products and expect to begin clinical trials with at least one of them in the first quarter of 2015.

For AmpliVue, we said we aimed to have four products in the market before year end and we do. In addition, our goal is to submit pertussis and trichomonas for FDA clearance before year end. That's highly likely to happen, as we are wrapping up clinical trials in both products now.

For Lyra, we suggested that we would gain FDA clearance for two de novo products, HSV 1+2/VZV and strep A and C and G, and we did. We also had a goal of submitting Lyra adenovirus and parainfluenza 1, 2 and 3 assays to the FDA for clearance. We did, and they are actually already approved as well.

And finally, we said that we would begin clinical trials with Lyra norovirus before year end, and that is still the aim. We discussed Savanna, but the specific milestones were three: manufacture the first integrated instruments, which we did; appear at a US trade show, and we did; and start studies on HIV patients in Africa, and that's expected to occur before year end.

Lastly, a milestone that was added to our list just prior to this year's AACC meeting was to move SOLANA and five SOLANA assays to the next development phase and to prepare for a first-half 2015 launch. And the Solano program is progressing nicely and quickly.

With respect to 2015 targets, I would like to comment on where we are in relation to the aspirational goals that we communicated during our first analyst day presentation in March of 2011. First, we said boldly that we would develop a number of new products with the aim of solidifying price and volume in our base business and give ourselves access to larger, faster-growing markets. We also said with this investment in R&D and a larger commercial organization would result in incremental sales of $100 million, with the goal to achieve this by 2015.

Since then, we've developed Sofia in four key assays. The CLIA waiver is critical in the rapid point-of-care diagnostic market, whether in the physician's office or in a hospital setting, and two of the four Sofia assays have achieved this objective. We said that we would develop PCR assays that could be ported to a fully-integrated molecular instrument, Savanna, with the goal of 20 assay targets. We've achieved that objective already, with more Lyra assays in the pipeline.

We said that we would develop the world's first handheld disposable molecular device, called AmpliVue, and we now have four assays in that format, with a couple more in that pipeline.

For the most part, we've delivered on the product development objectives that we said we would. In fact, we have had over 20 FDA clearances since our analyst day in 2011. In fairness, however, while our product development efforts and accomplishments have been impressive, in my opinion, there are a couple of key assumptions that will not be accomplished and a couple of key objectives that will be achieved but not according to our original timeline or the 2013 revision of that timeline.

Recall that in 2011 we presented 4 key programs: Sofia; Bobcat, which we renamed Stella; Molecular, which had two amplification strategies; and Thyretain. The original breakdown on goals was $30 million for Sofia, $30 million for Stella, $25 million for Molecular and $15 million incrementally for Thyretain. Since then, as we have communicated, Stella did not achieve the product performance we expected. And while we could have spent more resources improving the product, I felt that with the emergence of molecular methods for multiplex respiratory panels, Stella had missed its window of opportunity.

In addition, while Thyretain still continues to grow and is highly profitable, it was clear that $20 million in total revenues was not likely in the near term. On the other hand, we saw no reason why we could not get to $25 million in molecular revenue, and we thought that we had grossly under-called Sofia. The 2013 provision of our aspirational goals suggested $65 million for Sofia, $25 million for molecular and less than $10 million for Thyretain and other core products.

So where are we today? As we've discussed at many venues over the last couple of years, we have a couple of issues related to timing. One related to product development and regulatory clearances, and the other related to a delay in recruiting, hiring and training a larger sales organization in the US. Both of these factors, I believe, are widely known and fully reflected in the research reports that cover Quidel.

While we neither provide guidance nor comment on research reports, we've seen that on average these reports suggest that mid-teens growth rate in 2015 over this year. With Sofia, the first issue, our goal assumed that we would be in market before CLIA-waived products for the entirety of 2014, and at the installed base would exceed 10,000 placements as we began 2015. Earlier this year with updated timelines, we thought that if we could get CLIA waivers for strep A and hCG early enough in 2014, we might even have an upside as Sofia placements was only two assays for influenza, and RSV had been better than we had expected.

With AmpliVue the second timing issue, the product works well, and we are gaining traction. Customers love the format. And we now have a much more effective commercial organization that is capable of selling molecular products. We are behind where we thought that we would be, but I believe that we will see acceleration of revenues for both AmpliVue and Lyra products over the next several quarters. With both issues, I believe that we are a year or so behind where we thought that we would be, but I don't think we have missed our window of opportunity.

Other aspects of our 2015 aspirational goals were related to profitability. With incremental revenues of $100 million, we said that we would leverage operational efficiency and could exceed 65% gross margin and achieve EBITDA margin of over 30%. Clearly, these are easier to reach with the achievement of higher revenues. But even with the delay in achievement of our original incremental revenue goal, we think the gross margin around 64% and EBITDA near 20% is possible in the near term and that our goals of 65% gross margin and EBITDA north of 30% will be reached, although clearly not in 2015.

And finally, like many companies we have been recently asked a couple of questions related to Ebola virus disease. One, whether we are developing an Ebola assay; and two, whether public concerns over EVD, which has a few symptoms in common with influenza, are likely to result in more influenza testing.

Let's start with Quidel's thinking on the development of the test for Ebola. First, as has been the case with previous potential threats to public health such as SARS, MERS, H5N1, H7N9, also known as bird flu, enterovirus 68 and now Ebola, many in vitro diagnostic companies have been contacted and asked to explore the development of assays that can be used to identify infected individuals so that they can receive appropriate care and treatment as soon as possible. and so the epidemics can be contained.

This is clearly the case with Ebola. And as an example, the WHO recently produced a target product profile for diagnostic tests to be used in a control of the Ebola outbreak in West Africa and also established an emergency quality assessment mechanism to evaluate both rapid tests as well as nucleic acid tests for qualitative and quantitative viral detection.

According to the target product profile, Ebola virus antigen protection tests should be highly sensitive and have high negative predictive value; that is, give very high confidence that no Ebola virus is present. Such tests will greatly reduce the fear that symptoms suggestive of EVD are not due to Ebola virus but any one of many other viruses that have similar initial symptoms.

And these tests need to be highly specific. According to the target product profile, the desired sensitivity of EVD antigen tests is greater than 98%, with a minimum sensitivity of greater than 95%. And the desired and minimally acceptable specificity are each greater than 99%. The desired time to result is less than 30 minutes, with a maximum time three hours.

Based on our preliminary review of the literature, and our own experience in developing both rapid lateral flow assays over the last 30 years, and more recently molecular assays, we've concluded a few things. First, antigen assays in any format would be more useful than antibody assays, as the research shows that in patients who die of EVD, antigen is detectable several days before the appearance of antibodies to Ebola virus. Furthermore, it has been shown that in convalescent EVD patients expressed both IGM and IgG for a very long time post-infection.

Second, while we could certainly develop a Sofia Ebola antigen assay, given the need to identify patients as early as possible and the need to exclude those that are not affected, we believe that a highly sensitive nucleic acid test will be required. And that an easy-to-use isothermal amplification assay, rather than a PCR assay, with simplified sample preparation to ensure the safety of healthcare workers and a fairly rapid turnaround time would be ideal.

We have some experience with Ebola. In fact, Dr. Raymond Kong at BioHelix published a paper in the Journal of Molecular Diagnostics in 2007 entitled development of a novel one-tube isothermal reverse transcription thermophilic, helocate-dependent amplification platform for rapid RNA detection in which he used Ebola virus RNA as the target for the assay. Our thought at this time would be to restart Dr. Kong's work and to have primers and probes put together within the next three weeks for an HDA assay that would run economically on Solana and decentralized locations.

While we won't load the project into our development schedule until it's clear that there will be a need, we'll hold the project that will be Phase I while we build a potential business case. We hope that it won't be necessary, but if there's a need, we'll be ready to go if asked.

To the question about Ebola and increased influenza testing, the short answer is I don't know. The latest data point I have is that the week before last, the percentage of outpatient visits for influenza-like illnesses increased year over year but only modestly. And the number of deaths per week due to influenza and pneumonia at a little more than 600 is also only modestly higher than last year.

However, influenza AH3 sub-types often thought to create more severe symptoms were 16.1% of season today cases, well above 6.8% last season, which suggests that people who are infected with flu this season will feel worse and may be more motivated to see a physician. And depending on where we are with Ebola in the next few weeks and months, the motivation to see a physician may increase due to fear. But again, I don't know.

Let me conclude my remarks by saying that overall we had a good third quarter. We had 20 or so projects moving smoothly through our product development pipeline, and our R&D teams continue to exceed expectations. Our commercial organization fully formed, trained and motivated performed nicely in the quarter as well.

Randy?

Thank you, Doug. As we reported earlier today, total revenues for the third quarter of 2014 were $40.9 million, as compared to $33.5 million in the third quarter of 2013. We realized strong growth in infectious disease, women's health and gastrointestinal disease as well as incremental $2.8 million in grant revenue.

Global infectious disease revenues, which include QuickVue, Sofia and molecular products, grew 17% to $26.3 million in the third quarter of 2014, as compared to $22.5 million last year. Influenza revenues in the quarter were $14.2 million, compared to $10.7 million in the third quarter of last year.

From a platform perspective, Sofia influenza revenue was up 107% from last year's third quarter to $7.8 million, while we realized an 8% decline in QuickVue influenza revenue. The influenza mix was 55% Sofia to 45% QuickVue.

Strep A grew 29% versus the third quarter of last year, and RSV product revenue increased by over 100%, heavily driven by our CLIA-waived Sofia RSV product.

Revenues for the women's health category increased by 8% in the third quarter to $8.8 million, led by double-digit growth in both our autoimmune complement and Thyretain product lines. Our pregnancy revenue was unchanged from last year. Our gastrointestinal product category revenues were $2 million in the third quarter, compared to $1.4 million in the prior year, driven by increased AmpliVue C. difficile revenue.

As Doug previously mentioned, in the third quarter the Company amended its grants on the Bill and Melinda Gates Foundation. The initial grant in November of 2012 was for up to $8.3 million, and through September the Company has realized $5 million in grant revenue. The amendment to the agreement is for up to an additional $12.6 million in funding.

In the third quarter, the Gates Foundation advanced an additional $10.6 million in cash related to this grant agreement. The Company realized an incremental $2.8 million in grant revenue related to this amendment, and in total $3.4 million in the quarter.

Going forward, there will be approximately $13.1 million of future grant revenue to be realized based on the proportional performance method which compares the R&D spend as a proportion of the total anticipated spend and recognizes revenue accordingly.

Gross margin in the third quarter of 2014 was approximately 59%, compared to 54% in the third quarter of last year. The increase in gross margin was primarily due to product mix, improved absorption in our manufacturing facilities, as well as increased grant revenue. The improvement in margin in the quarter was slightly offset by the unfavorable impact of higher access and obsolete inventory expense. Excluding the impact of the Lyra royalty amortization that is set to expire in February of 2015, gross margin in the quarter would've increased by approximately 4 percentage points this year and 6 percentage points in 2013.

Total operating expenses were $34.2 million in the third quarter, as compared to $24 million for the third quarter of last year.

Research and development costs were $11.5 million, compared to $7.5 million last year. The increase in R&D was primarily due to the accelerated spend associated with the Savanna project. Adding to the R&D increase was a $300,000 R&D expense reimbursement associated with the Life Technologies collaboration agreement in the third quarter of 2013 that was not repeated in the third quarter of 2014.

Sales and marketing expenses in the third quarter were $11.1 million, compared to $8.7 million in the third quarter last year. This increase was mostly driven by additional investments in our sales organization as compared to last year. We have added approximately 20 additional sales personnel in the last year.

General and administrative expenses were $5.9 million, compared to $5.6 million for the same period last year.

During the third quarter, the Company determined that project Stella, or earlier known as Bobcat, the technology and associated assets were to be written off. As a result, the in-process research and development to capitalize developed software and associated manufacturing line investment are fully impaired, and the carrying value was reported as an impairment loss. The amount of a total impairment loss recorded in the quarter is $3.6 million and is a non-cash charge.

Our tax rate for the third quarter was approximately 44% as compared to 29% last year. We anticipate that our full-year effective tax rate will be approximately 37%. The significant differences between the 44% in the quarter and the full-year estimates are mainly the recording of one-time discrete tax items in the third quarter of this year.

Net loss for the quarter was $5.8 million, or $0.17 per share, as compared to a net loss of $4.4 million, or $0.13 per share for the third quarter of 2013. Excluding the impairment loss, the loss would have been $0.11 per share.

On a non-GAAP basis, excluding the amortization of intangibles, stock-based compensation expense and certain non-reoccurring items, net loss in the third quarter of 2014 was $200,000, or $0.01 per share, compared to a net loss of $500,000, or $0.02 per share, for the same period in 2013.

As part of the non-GAAP calculation, including the operating expenses for the third quarter, were stock-based compensation expense of $1.3 million, amortization of intangibles of $3.9 million and an impairment loss of $3.6 million.

Now let's briefly talk about the nine-month financial results. Revenues for the nine months were $119 million, compared to $125.2 million for the nine-month period in 2013. Infectious disease revenues through September were $80.4 million versus $89.2 million last year, a decrease of 10% primarily due to a weaker flu season in the first quarter of this year as compared to last year. During the first nine months, influenza revenues decreased 15% to $36.3 million from $42.8 million last year. Strep A revenues are comparable to last year, while RSV revenues increased 29%, again, driven by our CLIA-waived Sofia RSV assay.

Our cell-based product revenues declined by approximately 5%, also impacted by the light respiratory season in the first quarter of 2014.

Women's health segment was $25.6 million for the nine months, compared to $25.1 million last year. Through the first three quarters of 2014, our gastrointestinal segment grew by 16% to $5.6 million, led by growth in AmpliVue C. difficile. The revenue from our other categories of $7.5 million compares to $6.1 million last year, mostly due to the increased grant revenue associated with the Bill and Melinda Gates grant development agreement.

Gross margins for the nine months was approximately 56%, compared to 61% over the first nine months of 2013. This decrease was given by product mix mostly due to lower influenza revenues in 2014 as well as lower absorption and manufacturing costs due to lower production in the first half of the year. Lyra royalty amortization negatively impacted gross margins by approximately 5 percentage points this year and 6 percentage points in 2013.

For the nine months, operating expenses, excluding the impairment loss, increased to $84.7 million, as compared to $71.8 million last year, excluding the facility restructuring charge. The increase in R&D of $5.8 million is primarily due to increased spend on our Savanna platform. Also contributing to the increase was a reduction in the reimbursement of R&D costs associated with the third-party collaboration agreement of $1.0 million.

For the nine months, sales and marketing expenses increased $6.2 million, primarily driven by our continued investment in the sales organization. Net loss for the nine months was $14.2 million, or $0.41 per share, compared to a net income of $6.3 million, or $0.18 per share for the first nine months of last year. On a non-GAAP basis, including amortization of intangibles, stock compensation expense and certain nonrecurring items, net loss for the first nine months was $700,000, or $0.02 per share, compared to net income of $14 million, or $0.40 per diluted share for the same period in 2013.

For the first nine months of 2014, depreciation and amortization and other was $20.6 million, compared to $18.5 million last year.

In the third quarter, operating activities provided $200,000 in cash, and purchase of property and equipment was $1.9 million in the quarter. As of the end of September, the Company had no outstanding borrowings under its senior credit facility and had $23.4 million in total cash, including the $6 million in restricted cash associated with the Gates grant.

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

(Operator Instructions) Bill Quirk, Piper Jaffray.

It's actually Dave Clair in for Bill. So, first, thanks for the update (multiple speakers). Thanks for the update on the long-range financial targets. I guess first question from me would be what you think will be necessary to hit the $100 million incremental revenue target. Is it just a matter of getting the additional CLIA waivers and some of the additional products that you mentioned approved? And then would you be willing to give us what you think the new product revenue run rate could be exiting 2015?

First, Dave, I'll start with the question with regard to what would it take to get to the $100 million incremental revenue. And the short answer is it's the same story as we had before. We said that a high percentage of the Sofia revenue net of cannibalization was just those four initial products all CLIA waived.

So obviously we need two more products CLIA waived. And once that occurs, we believe that our experience so far with Sofia placements that tell us that we're going to do pretty well with those two products also. And so I don't see any reason why we would be worried about the $65 million. The question is how soon can we get there given that we are delayed in terms of CLIA waivers.

Clearly, we still believe that our molecular products are unique and interesting to customers. It's taken us a while to hire an organization that was more oriented toward direct selling efforts that would be supplemented by distribution. That's a hard thing to do for a commercial organization to change the way they go to market, but we've done that. And now all the folks that we thought we needed to hire, we have. All the folks that needed to be trained have been trained, and I believe that we have the right comp plan in place in order to motivate those people to sell both molecular products and Sofia. So I'm pretty comfortable that we are going to get to the incremental target that we said we would in the not so distant future.

In terms of exiting this year, we do have a number obviously in our forecast. But that, Dave, we've not disclosed.

Yes, we certainly don't want to give guidance on 2015, but we'll certainly continue to give you the historical run rates as we continue to report our numbers.

And I'm sorry, guys, I think I missed the gross margin target that you threw out there. Was that 54% or 64%? And then the 20% EBITDA margin?

What we said is that in the near term, even though we've had a delay in terms of the acceleration of the top line, we still believe in the near term we can get to 64% in gross margins.

Okay. And then for Savanna, thanks for the update there. Any color you can give us on expected launch, I guess, for both OUS and US?

There's no change, Dave. We said that we would be initiating studies in Africa, and this year we are. We've also said that we would aim to start the WHO prequal process and CE marking next year with a goal of having that completed by the end of 2015. And the other date that we've thrown out there is that we would hope to be in market in the developed world including the US in the back half of 2016. So all those things that I just mentioned are unchanged at this stage.

Okay. And then just one last quick one for Randy. Just given the Lyra royalty expires in February of 2015, how big of an uptick do you think we should be expecting gross margin next year?

As we commented in the quarter that, excluding that amortization, that we would have picked up approximately 4 of those margin percentage points. So we reported 59%, so I would say excluding that that would get you to a 63% gross margin. In the period and full year, approximately the same impact. So that gives you confidence that going into next year that, as Doug had mentioned, we think the 64% gross margin is a realistic target.

Okay. Thanks. Congrats on the quarter, guys.

Brian Weinstein, William Blair.

Doug, you talked about having a lot of confidence in getting that CLIA waiver by the end of the year. You had confidence in it, hopefully getting it by the end of September. But what gives you that confidence that we're going to see it by the end of the year? And when we do see it, can you talk a little bit about how those products fit into kind of the Sofia mix? Meaning, current customers that have Sofia, how -- do you expect a significant uptick from them, or is this also going to be as a significant uptake from new customers? Because I know the strep product in particular doesn't always overlay with the flu. So just trying to think about how we think about that. Thanks.

Sure. In terms of our confidence, the two CLIA waiver packages are under review at the moment. Therefore, we have ongoing dialogue with the two reviewers that are handling the packages. We have received the questions; we've responded to the questions. We know based on the series of questions where we are in the review process. And so I would say the things that we've been asked most recently would lead us to believe that we're coming to the end of that process. So while nothing is assured, of course, I believe that there is a reasonable likelihood that we will have CLIA waiver for those products before year end.

In terms of the mix of customers that are out there, as you know, Brian, we said before that we have north of 20,000 QuickVue customers. And if you were to construct a VIN diagram, you would see that a pretty big chunk of those are strep only. Some of those are strep, flu, RSV; that would be a smaller number. So when you think about the number of placements for strep, it would be new Sofia; it would be a significant amount.

And that, of course, doesn't count the visually red lateral flow of strep customers that aren't using QuickVue. So this would be in the mix as well.

So less opportunity when we launch both strep and hCG. And of course, hCG is completely different category, and there are a number of customers that do hCG that of course don't do flu or RSV, for that matter.

And then, Randy, one for you on R&D. Obviously, the tick-up here in the quarter is $11 million number. Should we think about that to a baseline for the next couple of quarters as you're ramping up some of these projects, or would that drop down? In other words, was there anything kind of special in the third quarter for R&D in particular?

No, I think that's a good assumption. That kind of that run rate will continue for the next couple of quarters, specifically designed for the investment in the Savanna project.

Tycho Peterson, JP Morgan.

This is [Jordan McCain] on for Tycho. Can you hear me okay? (multiple speakers) Okay, great. You guys talked a little bit about the inventories being more than sufficient for the fourth quarter, and I was wondering if you could kind of speak to the inventory build channel as an early read for the flu season.

Inventories in the channel on a nominal basis are a little higher, but they are consistent with what we would expect from a Company that just gained share. And so that's why I made the comment the way that I did. We had out sales of 26%, which was quite high. You would've thought, well, should that result in a decline in inventories. But relative to what we normally see, the answer is, no, you don't see that. Why? Because our distribution partners are taking on board more inventory because we have the new customers.

Got it, okay. And then, also, how do you see the proposed increase FDA oversight on [LDTs] impacting just the industry and your competitive landscape?

Well, we don't have an opinion as a Company because for the most part we don't really participate in that particular segment. We don't have an instrument, for example, on which customers would run their LDTs. So there are plenty of documents that would tell you about where the FDA is in the process with respect to those issues, but we don't really have a public comment on that particular topic.

Bill Bonello, Craig Hallum.

Great, a couple of questions. So when you were talking about the [bad] bit, the market and the Street is pretty well aware of the factors that might have caused a delay in the timing of which you would hit the $100 million new-product revenue target. And I would agree, you've been very vocal about that.

You also then threw in a comment about we've looked over most of the models, and the analysts appear to be projecting sort of a midteens kind of top-line growth. Can we infer from that that you kind of think those estimates pretty accurately reflect where you're at today in terms of product approvals and sales force development?

I'm sorry, Bill, but, no, I can't because, as I said in my prepared comments, we neither provide guidance nor comment on your model. Therefore, I just observed, though, that on average it looks like the consensus of you all appears to be around a mid-teens growth rate.

All right. I thought maybe we'd get something. The second question is just as you think about CLIA waivers out there for your tests, what's your thought on the potential competition from some of the molecular tests that are out there sort of pending CLIA waiver as well, particularly on the flu side? And do you think there is much of an appetite for that? Do you see much competition to what you're doing on the Sofia front, maybe just sort of the pros and cons?

I would say the CLIA waiver is certainly one issue that would be a barrier to entry, particularly in the physician office segment. But regardless of CLIA waiver, speed and economics actually matter most. And so we've always found that workflow in the physician office, in other words patient flow, was significantly important to the physician. And anything that you did to disrupt that was going to be problematic. So anything that is longer than 10 minutes is a little bit of a problem, and we know that from our own experience in the market.

So tests like strep are five minutes. Tests like hCG are in a couple of minutes. Some of the Japanese flu tests are now three minutes. So if you look at the way the market is going, I don't know that somebody's going to want to invest in a capital equipment -- piece of capital equipment, and I don't know they're going to want to take on board the cash flow issue regardless of what the reimbursement is.

So, again, regardless of CLIA waiver, I don't know that I see, even with our own products, even if I told you that Celano we thought was CLIA waiverable, I'm not sure I would tell you to count on a lot of revenue as a result of that not in the physician office space.

Now, does CLIA waiver mean something in the hospital space? I think so. Because even though a hospital lab or emergency department can certainly -- would handle moderately complex products, CLIA waiver is better because it shortens the validation time and enables anybody in the ED to run the product. So I think if there is an opportunity for manufacturers like us who might have either moderately complex or CLIA-waived flu RSV product that the hospital segment is probably the market where we are going to focus. Make sense?

Shaun Rodriguez, Cowen & Company.

So if I look at the infectious disease segment specifically, on a year-over-year basis it looks like flu provided just under $4 million of growth while non-flu was about flat. And then you noted growth in several new product areas but that they were offset, I believe, by QuickVue. But in my model, again, you provided the QuickVue numbers; that was down by less than $1 million year over year. So I'm really just trying to understand what else is offsetting growth within infectious disease. Is it DFA or anything from the acquired business or anything else that you might call out?

The DHI business is relatively flat. The vet products are off quarter over quarter, and I think some of that is timing related. We're certainly not expecting that segment to grow, but it hasn't declined either. So some of that is timing. We do have some molecular growth; I said modest. It's not big. And then you are correct that most of it is -- most of the new products are revenues related to flu and RSV.

Okay. And so how significant are these vet products within that franchise? Clearly enough to impact and offset some of the growth. But is that something that could continue to improve the headwind or no?

No, I don't think so. I mean, there was a $1 million order in the quarter similar to what I think it was in Q1 where the order got pushed into the next quarter. So, I mean, it's a $3 million business for us full year, so it's not significant.

Tim Evans, Wells Fargo Securities.

Thanks. I wanted to come back to the expense question really quickly. Both R&D and sales and marketing were higher than we had modeled. And if they continue at the same run rate in Q4 would be higher than what you've guided to. So I just wanted to understand what is driving that higher. Is it just a pull-forward of investment based on the new grant revenue you got, or what is going on there?

Yes, really the way to look at the R&D is the fact that the incremental spend that you see in R&D is offset by the kind of incremental grant revenue that we realized in the quarter as well. So if you take out that incremental Gates acceleration payment, it's pretty consistent with what our guidance had been.

Relating to sales and marketing, yes, that was little higher than what we had initially estimated, more because of one-time events that occurred. So I think we're still saying that kind of on a run rate we're looking at a $40 million annualized spend in the sales and marketing area.

Okay. And you said you expected $13 million of future grant revenue, I believe. Can you predict how that is going to pace out? Is it kind of even over the next few quarters, or what should we be expecting there?

Well, as Doug had mentioned, that the agreement goes through the first quarter of 2016. So it's really predicated in the old-fashioned world that was kind of a percentage completion. But you look at the percentage of spend and the total, and it's kind of amortized over that period. So it's predicated on the acceleration of the spend. We certainly would say that -- so it's not straight-lined. Proportion probably would be more in the next three to four quarters versus the fifth and sixth quarter.

Mark Massaro, Canaccord.

Could you please comment on what percentage of your Sofia installed base has expressed interest in running a CLIA-waived Strep A or hCG assay assuming you obtain the CLIA waivers?

Mark, we really haven't polled the customers to kind of get a percentage. Certainly -- there's certainly interest out there, but I couldn't tell you what a percentage would be.

All right. Okay. Is it safe to say that maybe the majority of them would be likely to use Strep A, for example?

I would think that it makes sense that quite often when a physician would do a nasal swab for flu, they quite often will also test for strep. I think that's quite common. But please understand that there are also physicians who will swab a throat for strep who don't do flu testing. But you are right. If the customer does run flu, there is a propensity to also run strep. And obviously with a Sofia on the bench, that makes that a very good target.

And I appreciate all of your color on Ebola and the development of Ebola. With respect to your comments on continuing some of Dr. Kong's work, can you maybe put that in perspective on the timing that you think you could bring a test to market?

Sure. I mentioned that it would take us about three weeks to put the probes and primers together. But, frankly, we got a little bit of head start there. I think the way to think about it is that typically we could put an assay together in a couple of months. And certainly when we were asked to put an H7 and 9PCR product together last year, we did it in seven weeks.

But then you have to think about developing pilot lots and getting ready to do full-blown manufacturing, and that actually is where is little bit of a time constraint. So I would think conservatively we could have a product that would be available, absent regulatory hurdles, within the six- to nine-months period of time.

Zarak Khurshid, Wedbush Securities.

So, just curious, Doug, how we should thinking about the Lyra and AmpliVue franchises just in terms of their absolute revenue contribution and as growth drivers in the future. I guess I'm just trying to understand which one is more attractive and which one is likely to be most impactful going forward.

We view them to be somewhat equal at the moment. They address, at least at this stage, quite different segments. Even though we do have a handful of very large AmpliVue customers for the most part, customers are small and, I would say, in that less than 200-bed hospital size.

Whereas the Lyra customers are actually customers that fit somewhat in between the very, very large reference lab and the very, very large hospital. So when I look at the names of the customers for Lyra, they are all institutions that most of us could name. And so the number of customers with Lyra is quite small, but their volumes are quite high.

And I'll just give you an example here. We have a flu AV customer that during a flu epidemic tends to run 3 to 4 plates per day. So that would be 3 times 96 per day. So it's handy to have a high-volume platform like that to run all the respiratory viruses that we now available. Because the products that today exist in a marketplace that are multiplex, they run just a small number of patients at a time. So the ability to run higher volumes where we see [layers] of [putting] in. And while we've done some forecasting along those lines, and we do see a subtraction, we couldn't really evaluate which is going to be more important in the longer term.

And then, Zarak, let me just conclude this. The other reason we're developing these PCR-based assays is because they fit very nicely on Savanna, and we think that that would speed up the process when we get closer there. So then Lyra becomes maybe more important (laughter), if that makes sense.

Got it. Can you give us a sense for the just absolute revenue coming off of these businesses?

Well, the only thing, as we said initially, is that we would see a path to getting to $25 million of revenue over a period of time. As I said earlier on the call, we're obviously behind that. We had to hire recruit -- recruit and hire, excuse me, the other way around, and then train a commercialization that could be capable of selling those products. I don't think the organization realized how much that was going to take, but we now know and we have had that behind us. So I still think that $25 million split evenly at this moment between the two product lines seems appropriate as a goal for us in the medium term.

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

Great. Thanks, everyone, for your support and for your interest in Quidel. We had a good quarter, and I believe that we are well positioned to close out this year and to take that momentum into 2015. Take care, everyone. Appreciate it.

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