QuidelOrtho Corp (QDEL) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation first quarter 2015 earnings conference call.

(Operator Instructions)

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

Thank you, operator. Good afternoon, everyone. Thank you for joining today's call. With me today is our President and Chief Executive Officer, Doug Bryant, and Ruben Argueta, 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 statement 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, April 23. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call except as required by law.

Today Quidel released financial results for the three months ended March 31, 2015. If you have not received our news release, or if you would like to be added to the Company's distribution list, please call Ruben at 858-646-8023.

For today's call, Doug will report on the highlights of the first quarter, the flu season, and provide updates on our product development pipeline. I will then briefly discuss our financial results, and then we'll open the call for your questions.

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

Good afternoon, everyone.

Before starting, you may notice that I sound like I have a respiratory illness, and that's because I do. And in fact I wouldn't be here except for the earnings call. I say all that not for sympathy but to let you know that the tone you hear right now is my most enthusiastic. So those of you who send a note to me later and ask me what's wrong, it's -- I don't know if it's flu or not, but it's something respiratory.

I'm pleased, though, to report on another good quarter and a good start to the year. With regard to the flu season, the CDC's proportion of patient visits for influenza-like illness, otherwise known as ILI, remained elevated in the first quarter of the year, which was reminiscent of the 2012-2013 influenza season in terms of duration, what we would characterize as a normal flu season that was not especially severe.

Nonetheless, we did see strong demand for our flu products as well as strong demand for Strep A and RSV. But demand for our products was not limited solely to those product lines. We also saw increased demand across several other of our products, including our molecular assays and Thyretain.

Revenues in the first quarter were $61.3 million, up $14.6 million, or 31%, over the first quarter of the prior year. Growth in the quarter came from influenza and Strep A products across all platforms as well as from Sofia RSV and from our AmpliVue and Lyra molecular products. Thyretain was up 18% year over year.

New product revenues in the first quarter grew 104% from last year's first quarter, to $16.1 million. And on a trailing 12-month basis new product revenues increased over 100% from quarter one of 2014, to $45.8 million. Of that total, $10.1 million were attributed to new non-flu products, an increase of 137% from the trailing 12-month total from quarter one of the prior year.

We fully expect this trend to continue well into the near- to mid-term due to several drivers: first, the commercialization of Sofia Strep A+; second, the continued growth from our AmpliVue and Lyra molecular assays; and third, the commercial introduction of Solana later in the year. And of course we have additional products in the pipeline that we intend to launch in 2016.

Beginning with Sofia Strep A+, we received CLIA waiver from the FDA for our next-generation Strep A product at the end of 2014. Earlier in Q1 we introduced our next-generation Sofia Strep A+ product, and the response has been good thus far. Like Sofia Influenza and RSV, Strep A+ has succeeded in creating further customer interest in the Sofia platform.

We achieved the most Sofia instrument placements of any first quarter since launch, assisted by the launch of Strep A+. In fact, with just three CLIA-waived Sofia assays, we moved through the 10,000-instrument milestone early in the quarter. With hCG, Vitamin D and others in our pipeline, we remain confident that we can accomplish our longer term target of 20,000 to 30,000 worldwide Sofia instrument placements.

Regarding our molecular products, AmpliVue C. difficile again led the growth in our molecular assay revenue in the first quarter of 2014. Recent introductions of AmpliVue Group B Strep, Group A Strep, HSV 1, HSV 2 and Pertussis also contributed, as well. In our conversations with customers we've noticed that having a broad and interesting menu does matter, and the introduction of each new assay brings with it an incremental opportunity to extend the relationship with the customer.

We recently received 510(k) clearance for our AmpliVue Trichomonas assay from the FDA. As we begin the second quarter, our sales force now has six AmpliVue assays to sell that can grow our non-influenza-based products.

Our Lyra product line also grew in the quarter, building brand awareness for our molecular assays in the various institutions that have adopted the assays. Again, we are finding that although some of our molecular assays may be niche products that aren't necessarily generating considerable revenue, products such as HSV 1+2/VZV and Group A Strep + C or G prove to be compelling enough to engage the customer and are helpful in building our brand in the molecular space.

We've also found that having a broad menu of respiratory assays has helped. Although the molecular sales process can be lengthy, when customers in the highly complex labs complete the validation process and come online, they do so with large-volume commitments.

Solana, an instrument designed to run our HDA isothermal amplification assays, remains on the schedule that we previously communicated. We submitted the 510(k) package to the FDA in the first quarter for both the Solana instrument and the Group A Strep assay and expect to be in market in the US this summer. I'm pleased to announce that we received CE Mark today for both the Solana instrument and Group A Strep, another milestone and indicator of our progress.

Savanna, our fully integrated sample-to-answer platform, is making good progress, as well. We validated modifications made to the cartridge, plan to have the cartridge design locked down in May, and expect to be manufacturing the cartridge in Ohio this summer.

Overall, we had a good start to the year. We saw a normal flu season with good revenue and share gain. Revenue from new products is growing. And, finally, the launch of Solana will give us further momentum as we finish the year.

Randy?

Thank you, Doug.

As Doug reported earlier, total revenues for the first quarter of 2015 were $61.3 million, as compared to $46.7 million in the first quarter of 2014, a year-over-year increase of 31%.

Global infectious disease revenues, which include QuickVue, Sofia, DFA cell culture and molecular products, grew 35%, to $48.4 million, in the first quarter of 2015, as compared to $35.8 million in the previous year.

Influenza revenues, which include Sofia, QuickVue and the DHI respiratory products, rose 47%, to $33.3 million, in the quarter, as compared to $22.6 million in the first quarter of the prior year.

From a platform perspective, Sofia influenza revenue was up 91% from the first quarter of 2014, while QuickVue influenza revenue increased 44%. Strep A revenue grew 19%, to $8.1 million, in the quarter, and RSV product revenue increased 33% from the first quarter of last year.

Revenues for the women's health category increased 14% in the first quarter, to $9.3 million, led by 18% growth in Thyretain and 43% growth in our autoimmune complement product line. Our pregnancy revenue grew 4% in the quarter, to $4.4 million.

Our gastrointestinal product category revenues grew 7%, to $1.7 million, in the first quarter, compared to $1.6 million last year, driven by the continued growth in our AmpliVue C. difficile revenue.

Revenue from our other products category was $1.9 million in the quarter. This is compared to $1.1 million in the first quarter of 2014. The increase was mostly due to a $500,000 increase in grant revenue from the Bill and Melinda Gates Foundation.

Gross margin in the first quarter of 2015 was approximately 66%, compared to 57% in the first quarter of last year. The increase in gross margin was primarily due to the expiration of the Alere royalty amortization and improved absorption in our manufacturing facility, each contributing approximately 4 percentage points in improved margin. As we have said previously, the amortization on the Alere royalty expired in February, and we expect that for the full year this will benefit our gross profit by $7.4 million versus last year.

Total operating expenses, excluding cost of sales and amortization of intangible assets, in the quarter were $29.3 million, compared to $26.2 million last year.

Research and development costs were $8.1 million in the quarter, a decrease of $1 million from the first quarter of 2014. This decrease was primarily due to decreased development costs associated with our molecular programs. We still believe our full-year spend for research and development will be in the previously communicated range of $40 million to $42 million. We have planned several R&D projects that we will be initiating in the back half of the year that will offset the spend favorability that we realized this quarter.

Sales and marketing expenses in the first quarter of 2015 were $11.4 million, compared to $9.9 million last year. This increase in sales and marketing expense was driven by increase in commissions due to higher revenue as well as the added investment in sales personnel that we have made over the last year.

General and administrative expenses were $9.9 million in the first quarter of 2015, a $2.6 million increase versus last year, a high percentage of which was the result of non-reoccurring professional development costs associated with the business development opportunity that was under review, and the decision was made in the first quarter not to move forward with that opportunity.

In the first quarter interest expense was $2.9 million, driven by interest associated with the $172.5 million senior convertible note offering completed in December of 2014. The coupon rate is 3.25%. In the first quarter we recorded $2.7 million of interest expense related to the senior convertible note, of which $1.4 million relates to the coupon, due semiannually, and the remainder is the amortization of issuance costs and debt discount.

Our tax rate for the first quarter was approximately 31%. The effective tax rate is lower compared to the first quarter of 2014, mostly due to the change in valuation allowance related to certain state deferred tax assets. For the full year we expect our effective tax rate to be approximately the same.

Net income for the first quarter was $4 million, or $0.11 per diluted share, as compared to net loss of $1.5 million, or $0.04 per share, for the first quarter of 2014. On a non-GAAP basis, excluding amortization of intangibles, stock-based compensation expense and certain non-reoccurring items, net income for the first quarter of 2015 was $10.8 million, or $0.30 per diluted share, compared to net income of $2.9 million, or $0.08 per diluted share, for the first quarter of 2014.

Part of the non-GAAP calculation included in operating expenses for the first quarter of 2015 was stock-based compensation expense of $2.1 million, amortization of intangibles of $3 million, and non-reoccurring business development costs of $2.3 million. Also added back for the non-GAAP calculation is $1.3 million related to the noncash debt discount and debt issuance costs on the convertible notes.

From a cash flow perspective, $28.5 million of cash was added to our cash balance in the first quarter. Operating activities provided $31.8 million of cash, and purchase of property and equipment used $2.9 million in the quarter. As of the end of March, the Company had no outstanding borrowings under its senior credit facility and had $232.9 million in cash and restricted cash.

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

Thank you.

(Operator Instructions)

Nicholas Jansen, Raymond James.

Thanks for taking my questions. First on flu, I think your commentary back in February was you expected somewhat flattish revenue sequentially, and it looked like it was down a couple million. So was the end of the season a little bit more abrupt than what you were expecting? Maybe just some color there would be great.

I think what we saw was a very robust end of the fourth quarter, and then a normal first quarter. As we said before, the season looked a lot like the 2012-2013. So a couple of million at the end of the fourth quarter versus the first quarter I would call splitting hairs.

Okay, that's helpful. And then, secondly, thinking about the Sofia product line roadmap, you have a couple of your competitors looking to get CLIA waived. One's already CLIA waived for flu. One is potentially CLIA waived for next year's flu season. Maybe just broadly kind of address some of the competitive noise that's out there and how you think Sofia matches. And then also can Solana be CLIA waived at some point? Thanks.

Sure. Well, Nick, we treat every new potential entrant into our space with the respect that they deserve. And we've certainly kept a close watch on what our molecular competitors are doing, including the new entrant that you just mentioned.

The iNAT product, or the Alere i, whichever it's called now, is no different. And I'm confident based on what the product actually is and what many customers are saying that there's no serious threat to either the price or the volume of our core respiratory business.

I fully anticipate that any volume shift to molecular products would be offset by the increase in volume that moves from visually rapids to products like Sofia. That's certainly what we saw with the introduction of multiplex respiratory viral panels. In other words, I would say that I don't believe that it's a zero sum game.

And actually when you look in some detail at this flu season, for this last flu season our overall QuickVue revenue was up 44%. Now, when we normalize for seasonality, we would subtract from that something like 30%. In other words, we believe 30% of that 44% was due to just the fact that there was a much bigger season this year than the previous one.

And so you're still looking at the fact that even with our QuickVue business, which we're not actively promoting, that business is still increasing, and in fact, if our math's correct, it looks like it increased due to new QuickVue customers by about 14%. And when you look at Sofia, it's up 91%. So when we correct for the seasonality, subtracting, again, out 30%, assuming that the math holds, then that would say that 60% of the increase that we saw was due to new Sofia customers.

So even if a molecular competitor, including the one you just mentioned or others -- we know that the GeneXpert is potentially going to be CLIA waived as well -- even if a molecular competitor does have some success, and I'm not suggesting that they won't have any, I don't see how this is likely to negatively affect our core business in a meaningful way. There are just way too many customers out there.

Now, we look at maybe of our own customer base something in the 30,000 range. Now, that's a lot of customers, and many of them are very small. So, again, I'm not completely discounting what our competitors are doing, and we're certainly keeping an eye on them, but at this stage, based on what we know, we're certainly not overly concerned.

Now, on the Solana product, Solana will be a terrific product for the hospital and the reference lab segment, and we have plans for those assays to be CLIA waived, as you mentioned, Nick. The reason, however, that we don't talk a lot about Solana in the physician office segment, and certainly not counting on any contribution in our strategic plan, is a couple of reasons.

First, I'm not sure that a higher reimbursement will be a sustained benefit for the physician moving forward. Expecting that reimbursement for molecular assays will decline is not shooting too far ahead of the duck, in my view.

Why should a private payer reimburse at a significantly higher rate for a product that is essentially molecular in name simply because we've amplified RNA if a negative still needs to be confirmed in the case of influenza or sent out to be cultured in the case of Group A Strep? Should a payer reimburse for a product that's not significantly better in performance than Sofia or Veritor and not as good as existing PCR methods?

I know that at least one large private payer has asked these questions. Perhaps others have, as well.

We believe fundamentally that healthcare costs must come down and that manufacturers with low cost-of-goods-sold positions will be in a position to succeed over time. And that's why we're so excited about what we're doing with Solana, but not in the physician office, because of the second and probably more important reason, which is related to workflow.

Now, we're told over and over again by physicians and their staffs that assays of any significant volume need to be under 10 minutes. The number one complaint we have when converting our QuickVue customers to Sofia is that for flu we've increased the time to negative result from 10 minutes to 15 minutes. And although we're doing well with the Sofia Strep A launch, the number one obstacle is that the Sofia, that with Sofia the lab can only run one test at a time, and it takes five minutes.

So with Solana we can run 12 tests in about 30 to 45 minutes, depending on the assay. But by then the patient has already gone home. So I don't view Solana to be a competitor in that space. But honestly I don't see how molecular products at this stage, based on what I see out there, are going to be in that space at least in the next three to five years. So that's a long-winded answer, Nick.

Brian Weinstein, William Blair.

This is Matt Larew in for Brian this afternoon. The first one for me, you reported $10 million in non-flu new products for a trailing 12-month basis, which I think is around about 10% of ex-flu revenue over that time. If you kind of forecast out thinking about Solana, the additional products in the bag for AmpliVue and Lyra, as well as the developing Sofia menu, can you give us a sense, direction maybe, if we're talking 12 months from now, where would you be satisfied that that number is at?

Well, again, we're a company that doesn't provide guidance, so that one's a difficult one for us to ask -- I'm sorry, answer, Matt. But given our performance in Q1, which was as we expected, our forecast for the year, which would include some benefit from Solana in the back half, at least internally at this moment remains unchanged.

Okay. And then the second one, you mentioned the costs incurred related to evaluating a business development opportunity. And obviously now with the cash and the convert on the books, just wondering, Doug, your thoughts on what's out there or if there are things that have changed, dynamics that have changed, and sort of your intentions there?

Our intent for a long period of time now has been to look at lots of opportunities hoping that we can find something that gives us broader geographic coverage, potentially gives us something that's additive to our molecular strategy, and/or gives us leverage in the point-of-care space. We thought recently we had such an asset, and we were going after that in a meaningful way. Unfortunately, everything that we had hoped would be a part of that company was not, and we have a fairly disciplined approach to the way we look at things.

The expense that you see is related to getting lots of advice from professional services, and I think you could expect not necessarily for us to spend that every quarter, but every once in a while we would be looking at a company that fit one of those three things. And then the last piece is we haven't looked at anything seriously that wouldn't be accretive in the very near term, and that would be, obviously, a key criterion for us, as well.

Okay. Thanks for that, Doug. I'll get back in line.

Mark Massaro, Canaccord Genuity.

This is Dave in for Mark. Thanks for taking my question. Can you guys give us a -- do you know what the FX was in the quarter and what the impact was on revenue and how we should think about that in the year?

Our revenue as a percentage of the total is small, that's ex-US. And some of that is in dollars. So our FX exposure is minimal.

The actual amount, just so you know it's minimal, was $80,000 in the quarter. Even international business, most of it's billed in US dollars.

Got it. Thank you. That's helpful. And just to follow up on Solana, can you give us a little more color on what's coming after Group A Strep and what the timing's going to be? I think you have Flu A and B after that, and can you just give us a little more color on what you're thinking on menu on that?

Sure. Well, clearly Group A Strep is under active review at the FDA, which, since we've announced that we have CE Mark as of today, you know that that's moving along as we had scheduled. We also said previously that we would be in studies with our flu product this summer, and that's still on track.

We're also working on a couple of other products. We've got an HSV 1+2 assay. We've also got a trichomonas assay in development, a CT assay. And then, like everybody else, we're looking at MRSA and C. diff.

Great. Thank you very much.

Shawn Rodriguez, Cowen and Company.

This is Ryan Blicker filling in for Shawn. Thanks for taking my question. So sticking with Solana for a second, how should we think about the impact of the Solana launch on AmpliVue and Lyra? Will you be actively trying to convert your customers there when there's menu overlap, or will it be relatively distinct?

The AmpliVue menu that we have today will stay with that number for the near term unless we get customer feedback that tells us that they want assays in that format. So most of the ongoing development in the isothermal category is for assays that we intend to go on Solana.

So it is possible that some of those larger volume AmpliVue customers may want to convert to Solana. And if they do that's okay with us, because our cost of goods sold on Solana is dramatically lower. So we would view cannibalization in that instance to be highly favorable.

Those two products, though, aren't in overlap with Lyra at all. Lyra is designed for customers who already have a thermocycler who are mainly in the larger labs. Those products, though, when they're moved to Savanna and are ported over to the Savanna test cartridge, would become available to be run in the lower volume settings, and that's where we have to be careful between the mix between Solana and Savanna.

But for Lyra itself we have a two-pronged strategy. One is to develop products for the larger volume customer and develop those products, then, that we would be interested in porting over to Savanna.

So, but your question on cannibalization from AmpliVue to Solana is a good one, and we would hope to encourage that.

Okay, thanks. I'm just following up, I guess. If you could, would you be willing to quantify for the quarter maybe in 2015 how much revenue was generated just from AmpliVue and Lyra?

We haven't actually disclosed that previously. I would say to you, though, that both are meaningful in terms of --

AmpliVue is a little higher.

Yes, AmpliVue is slightly higher, but both are actually meaningful. And the reason is because AmpliVue you have far more customers, of course. But every time a Lyra customer starts up it's big, it's big sales.

Okay, thanks. And then maybe just one more if I can. Given the recent (inaudible) of flu, maybe last quarter looking at Q1, or maybe over the last two quarters to get a sense of the whole season, would you be willing to provide how much revenue was specifically from Sofia, QuickVue and DHI?

Well, we really haven't -- I mean, we're giving you the total flu, but we have not provided specifics relating to the different platforms at this point.

Okay, thank you.

Tycho Peterson, JPMorgan.

This is Steve Raymond on for Tycho. So I think you mentioned last quarter that you expect the sales force to be relatively flat on the year. Is that still the way you're thinking about it, or are there any areas where you might try to add some incremental heads, given all the new launches?

I think we're in good shape for the moment. We've gone through a significant hiring process over the last three years. We believe that we have the right numbers for both the POL and the hospital segment.

We did make an investment last year in more molecular talent. But I think that we're fully staffed there, as well. So at the moment I think the statement from before that we plan to stay flat still holds true.

Great, thanks. Then just a quick one on R&D. You mentioned despite coming in a little lower than we expected that you still plan on ending in that $40 million to $42 million territory. So when should we kind of expect the spend to ramp? Would that be a 2Q event, or should we be thinking about that more in 3Q?

It's pretty much evenly over the next three quarters. Some of the shortfall in spend, if you will, was less spending on Savanna than we had anticipated. We do have a couple of other significant projects that are starting in the next couple of quarters, so they should make up the difference.

Great. Thanks.

Jose Haresco, JMP Securities.

Thanks for taking the questions. So I'm sorry if I missed this, but what are your -- how should we think about gross margins and SG&A for the remainder of the year?

Yes, I think we've given some previous guidance saying that for the full year that we believe our gross margins will be approximately in the 64%, 65% range. We really haven't -- yes.

And the SG&A, should we -- if you're not doing kind of hiring, I assume that there's not anything that changed that moves that needle other than just commissions, or is there something else that's happening that we should be aware of?

Yes, no, the run rate for sales and marketing and G&A other than remember we have the non-reoccurring business development costs in Q1, otherwise, yes, they're pretty consistent for the next three quarters.

Okay. Thank you. As you guys think about moving in molecular, and I think you mentioned a couple of minutes ago that docs all want tests under 10 minutes, qualitatively as you think about product profiles for molecular in the point-of-care setting, what are the different types of variables or qualities that you guys are looking at or what your customers are asking for that we should look to be -- that are going to be integrated in either this generation or even the next generation of products?

Well, I think that generally I could just say, Jose, that faster, easier to use, less expensive are -- and accurate are critical. And they need to be in the physician office setting reimbursable. Those are the drivers of that particular segment.

For us when we look at it I see a number of things that we can do on a qualitative basis, and we've certainly addressed some of those already. But more importantly we see a larger market for the quantitative assays, things like Vitamin D and others.

On the molecular front, workflow is such a huge factor in a physician's office that things have to be very simple, but they also have to be quite quick. And I'm not sure the technology is there. You can certainly speed up assays, but the tradeoff, obviously, by speeding things up is the sensitivity is diminished, and that's a nonstarter, particularly -- well, sensitivity and specificity are both nonstarters if you have a problem there.

Okay. Last question, and I doubt you'll answer this one, but as you think about the new product revenue and given that it's grown so well over the last year or so, how should we think about that as a percentage of sales, say, a year from now, or two years from now?

Well, I'll relate back to our original aspirational goal, where we said that we, with our pipeline, would try to address incremental revenues of around $100 million net of cannibalization. A big chunk of that was, of course, with Sofia, which we said we would generate around $65 million.

The four assays that we've been talking about, and of course we still are waiting for hCG, got us to about $59 million of the $65 million, at least in our model. A big chunk of that was related to molecular, of course, and we said that we'd have approximately $25 million, all of which would be incremental to us.

Obviously that has gone a bit slower than we had anticipated. But when -- I don't know if it's next year, necessarily, or the year after, but we still see that those products that we're developing certainly have the potential to get us to that $100 million incremental, which would put us in about the $250 million range.

Bill Quirk, Piper Jaffray.

It's actually Dave Clair in for Bill. First question for me, I was just hoping you could remind us how many customers are currently using the QuickVue Group A Strep assay, and then what are your expectations for converting this group over to Sofia?

Yes, I'm going to give you a general area versus a specific number. Of course, we know specifically how many customers we have. But I will just tell you that in total across the physician offices and the hospital segment and other locations that we're somewhere around 20,000 customers.

For QuickVue?

Yes.

And then, so what would -- what are your expectations for conversion over to Sofia among that?

Well, in our model originally, if you went back and scrubbed all the presentations and transcripts, we would've said that 50% cannibalization would be great. I can't forecast it for you at this stage, though, because we just got CLIA waiver. I can say that we're still just under the 1,000-customer mark. So that's -- relative to the total that's kind of small.

Okay. Thanks for that. And then can you talk about Sofia's potential in the walk-in clinic? I think you have some trials going on there. Just any updates would be great.

You're just talking about urgent care?

Urgent care, yes.

Well, we have a number of pilots, I think you're aware, Dave, that are looking at Sofia. Interestingly, they're more interested in Sofia strep than they are flu, or have been. And those are going pretty well. I don't really have any feedback yet, because a lot of these we've just installed. And we'll look at how they do over the next couple of quarters. But it's certainly an interesting segment, isn't it?

Oh, yes. Okay. Thanks.

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

Thanks, everyone, for your support and for your interest in Quidel. We had a great quarter, and I believe that we are very well positioned to achieve our growth objectives. Take care, everyone.

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