QuidelOrtho Corp (QDEL) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation second quarter 2015 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 10K, 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 July 22, 2015. 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 six months ended June 30, 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 second quarter and provide updates on our product development pipeline. I will then briefly discuss our financial results and will then open the call for your questions. I'll now hand the call over to Doug for his comments.

Good afternoon, everyone. Thank you for joining today's call. As all of you who follow Quidel know very well, our Q2 is expected to be our lowest revenue quarter of the year. It has also been the least variable quarter and easiest to plan for with few significant surprises as the incidence of respiratory disease has usually fallen off by mid-March.

While our internal forecast did assume modest year-over-year growth, revenue in the quarter were slightly better than we had expected for a few reasons. First, flu revenue was up noticeably. Orders for QuickVue, which one would have expected to decline versus last year due to cannibalization of the business to Sofia, actually increased slightly as the respiratory season extended into April, accounting for about 20% of the year-over-year flu revenue growth.

The larger driver of flu revenue was Sofia, of course, which accounted for 80% of the flu growth, driven by a Sofia placement rates that was approximately double what it was last year at this time. Second, Group A Strep assay revenue was also up nicely, 60% of which was due to Sofia Strep A+ which received CLIA waiver at the end of 2014.

Interestingly about one-fifth of the strep revenue upside was due to startups of Lyra Group A Strep plus C or G, our PCR step product and a number of larger new customer sites with the remaining growth due to customers switching back from low-cost private label rapid strip products to QuickVue.

And finally, Sofia instrument revenue from international distributors in Europe and Asia, AmpliVue sales and grant revenue were each up in the quarter, offset by decreases in animal health due in part to timing, direct fluorescent antibody products and an increase in distributor incentives consistent with the improvement in year-over-year performance.

On a trailing 12 month basis, ended June 30, 2015, total revenues increased 24% to $200.6 million as compared to $161.9 million for the trailing 12 month period ended June 30, 2014. For the trailing 12 month period ended June 30, 2015, new product revenues totaled $49.5 million, an increase of 106% from the prior trailing 12 month measure ended June 30, 2014.

Revenues from non-flu new products increased 128% to $11.7 million. And as expected, Q2 was the first full quarter without the amortization of the Alere royalty buyout which contributed significantly to a nice improvement to gross profit in the quarter. In addition to favorable product mix was the year-over-year increase in flu tests and improved manufacturing efficiencies were big contributors to the improved gross profit in the quarter, offset somewhat by more Sofia instrument depreciation.

Overall, the year-over-year gross profit increase in Q2 2015 versus Q2 2014 was actually greater than the increase in revenue. Before turning the call over to Randy to review more detail on our financial performance in the quarter, I'll make a few very brief comments on where we are with each of the key platforms starting with Sofia.

We are exceptionally pleased with the IVD market's reception to Sofia which has clearly hit the mark with respect to our customers needs for ease-of-use, performance, connectivity and fit with their workflow. Despite some development and regulatory approval delays, we have done very well in every segment including hospitals, physician offices, and alternate sites.

Q2 2015 was the third consecutive quarter of year-over-year improvement in Sofia placements, and we remain confident in our commercial team's ability to continue this momentum throughout the next several quarters. We are in the midst of a Group A Strep launch with Sofia and expect to follow that effort with the launch of Sofia hCG once CLIA waives. Future assays like vitamin D as just one example are expected to address unmet needs in unique ways and to accelerate placements further. Because of our experience thus far and the opportunity that we see in products, we made the decision recently to develop a next-generation Sofia platform that provides even more benefit to our customers and expands our ability to develop more immunoassay menu for the platform. We will provide more detail on the platform at our investor luncheon in Atlanta next week.

As we said before, about half of our effort in development resources are focused on our molecular strategy. I feel like we're just getting started, but revenues for both Lyra and AmpliVue platforms did increase 56% in the quarter over the prior-\ year. More recently we have gained some traction with AmpliVue with larger customers, and some of the larger Lyra customers are just now coming online, mainly with the do novo products Lyra Strep A plus C or G and HSP 1, HSP 2 plus VZV.

In June, Solana, our isothermal assay platform, was quite simply cleared by the FDA along with the first assay for Group A Strep, which does not require culture confirmation of negative test results. Among a number of Solana assay development projects, the CLIA waived version of Solana Group A Strep is well underway and looks promising.

And finally, a quick update on Savanna, we are on track per our previous communications and expect to be manufacturing test cartridges in our molecular manufacturing facility in Ohio this summer. In closing, we had a good quarter and through six months were slightly ahead of our internal annual operating plan. The commercial teams are in place doing well, and with the approval of Solana Group A Strep now have, with a couple minor exceptions, every product that they need to meet our goals for the year.

As I said to a few different audiences, Quidel is solidly at the stage at which we can deliver topline growth in the 10% to 15% range while we deliver against a number of aspirational opportunities, any of which could change our growth trajectory in the not so distant future. I like where we are right now. It's a good place to be. Randy?

Thank you, Doug. As we reported earlier today, total revenues for the second quarter of 2015 were $34.9 million as compared to $31.5 million in the second quarter of 2014, a year-over-year increase of 11%. Global infectious disease revenues which include QuickVue, Sofia, DFA cell culture and molecular products grew 17% to $21.3 million in the second quarter of 2015 as compared to $18.3 million in the previous year.

Influenza revenues which include Sofia, QuickVue and the DHI respiratory products, increased 38% to $9 million in the quarter, this compared to $6.6 million last year. From a platform perspective, Sofia influenza revenue was up 135% from the second quarter of 2014 to $3.8 million while QuickVue influenza revenue increased 25% to $2.7 million. These increases were the result of additional Sofia instrument placements versus last year which drove increased market share.

Total Strep A revenue grew 13% to $6.8 million in the quarter, and RSV product revenue growth grew 18% as compared to last year. Revenues for the women's health category increased 5% to $9.1 million, led by a 9% -- growth in thyretain. Our pregnancy revenue grew 3% in the quarter to $4.4 million. Our gastrointestinal product category revenues were flat to the second quarter of last year at $1.9 million. Revenue from our other products category was $2.6 million in the quarter, consistent with last year.

As Doug mentioned, gross margin in the second quarter of 2015 was approximately 56%. This compares to 49% in the second quarter of 2014. Primary drivers of the increased gross margins were improved product mix driven by higher influenza sales, expiration of the amortization of the Alere settlement and improved manufacturing efficiencies, somewhat offset by the increased depreciation of the Sofia instruments.

As we have said previously, the amortization on the Alere settlement ended in February of this year, and we expect that for the full year this will benefit our gross profit by $7.4 million. Total operating expenses, excluding cost of sales and amortization of intangible assets, in the quarter were $27 million compared to $23.4 million last year. R&D costs were $9.1 million in the quarter, an increase of $1 million from the second quarter of 2014.

This increase was primarily due to the increased development cost associated with our next-generation Sofia instrument. The spend on our Savanna platform was equal to last year. As we have previously communicated, we believe our full-year spend for research and development will be in the range of $40 million to $42 million. We do anticipate an increase in spend in the back half of the year as compared to the first half, and this relates to the next-generation Sofia instrument and Savanna platform.

Sales and marketing expenses in the second quarter of 2015 were $11.6 million compared to $9.4 million last year. The increase in sales and marketing expense was driven by the additional investment in sales personnel for both the hospital and POL markets. General and administrative expenses were $6.3 million in the second quarter compared to $5.8 million in the second quarter of last year.

This increase was primarily due to increased stock compensation expense and professional service fees. In the second quarter, interest expense was $3.1 million, driven by interest associated with the $172.5 million convertible senior note offering completed in December of 2014. In the second quarter we recorded $2.7 million of interest expense related to the convertible senior notes, of which $1.4 million relates to the 3.25% cash coupon due semiannually.

Our tax rate for the second quarter was approximately 31%. This compares to 33% for the second quarter of the prior year. The tax rate was lower compared to prior year primarily due to the change in the valuation allowance related to certain state deferred tax assets. For the full year we expect our effective tax rate to be in the range of 31% to 33%.

Net loss for the second quarter of 2015 was a $8.9 million, or $0.26 per share, as compared to a net loss of $6.9 million, or $0.20 per share for the second quarter of 2014. On a non-GAAP basis, excluding amortization of intangibles, stock-based compensation expense and certain non-recurring items, net loss for the second quarter of 2015 was $4.8 million, or $0.14 per share compared to a net loss of $3.4 million, or $0.10 per share for the second quarter of 2014.

Revenues for the six-month period ended June 30, 2015 were $96.2 million compared to $78.2 million for the six month period in 2014. Infectious disease revenues were $69.7 million versus $54.1 million last year, an increase of 29% driven by increased demand for respiratory products in the first half of the year. For the first six months influenza revenues increase by 45%, Strep A revenues increased by 16%, while RSV revenues increased 29%.

The women's health segment increased 9% to $18.4 million as compared to $16.8 million for the six months last year. The 14% growth in thyretain was a major growth contributor. For the first six months of the year, our gastrointestinal segment was flat to the same six months period in 2014 at $3.6 million. The revenue from our other products category was $4.5 million. This compares to $3.7 million last year.

This growth comes from the increased the grant revenue associated with Bill and Melinda Gates Foundation grant. Gross margin for the first six months of 2015 was 62% compared to 54% over the first six months of 2014.

This improvement was driven by the same factors as in the first quarter, product mix -- excuse me, the second quarter, product mix, exploration of the amortization of the Alere settlement and improved manufacturing efficiencies, somewhat offset by the increased depreciation on the Sofia instruments. Total operating expenses excluding amortization of intangibles was $56.3 million versus $49.6 million last year.

Research and development was fairly constant year-over-year. Sales and marketing increased due to the additional personnel in our sales organization, and G&A was fairly constant to last year except for the increase in the first quarter of this year relating to non-reoccurring professional development costs. For the first six months of 2015 we recorded $6 million of interest expense, of which $2.9 million relates to the cash coupon due semiannually on the senior convertible notes, and the remainder is the amortization of issuance costs and debt discounts.

Net loss for the first six months was $4.9 million, or $0.14 per share as compared to a net loss of $8.4 million, or $0.25 per share for the first six months of 2014. On a non-GAAP basis, which excludes amortization of intangibles, stock-based comp expense and certain non-reoccurring items, net income for the first half of 2015 was $6 million, or $0.17 per diluted share compared to a net loss of $500,000, or $0.01 per share for the same period in 2014.

For the first six months of 2015, depreciation, amortization and other was $11.8 million as compared to $13.7 million in 2014. From a cash flow perspective, $3.8 million of cash was added to our cash balance in the first half of 2015. Operating activities provided $23.3 million of cash, and we purchased property and equipment of $7.3 million in the first half.

Additionally, as part of the Company's share repurchase program, the Company purchased approximately 632,000 shares of common stock for $14.4 million in the second quarter. As of the end of June, the Company had no outstanding borrowings under its senior credit facility and had $209.6 million in cash and restricted cash.

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

(Operator Instructions)

Bill Quirk, Piper Jaffray.

Great, thank you. So I guess first question is can you talk a little bit about the competitive environment in point of care flu? It certainly seems based on the comments in the release and your prepared comments that that really was not factor in the quarter.

You're right, Bill. It wasn't not a factor. At this stage we see really very little activity from the two most recent competitive entrants. For sure we see very, very little on the POL. Some modest interest I think in hospitals. You might want to talk to some of our molecular competitors about what they think about that, but from our perspective it has had no impact so far.

And for a number of reasons, at least one of the new competitors isn't actually shipping product at the moment so that may be a factor. Our Sofia placement rate though, as we tried to imply in the prepared comments, has been unaffected. And truthfully if you were to check with the folks at DDNS and ask them about their [very] replacement rate, I would think they would be unaffected as well.

Got it and then, Doug, just I guess kind of staying on this topic for a minute and I guess more so in the broader category, you had some really nice kind of broad-based performance in flu. Any concerns at all that might be a little extra inventory in the channel here that we're going to have to work our way through in the third quarter?

Not at all. Inventory levels are reasonably low. What we saw was ordering that continued into April. That's why we ended up with the QuickVue sales, and I would say that the Sofia numbers are driven not by necessarily a continuation of flu season into the second quarter, but rather the fact that we continue to close new customers, each of whom would have taken onboard inventory. So the inventory you're -- being out there today is at end-user level. It's not at distribution.

Okay, got it. And then just maybe one for Randy here, and I will jump in the queue. Can you elaborate a little on the step up here in R&D expenses in the back half of the year. Obviously it implies a pretty significant step up. I'm assuming this is at least somewhat tied to the Savannah cartridge manufacturing which I think should be classified as R&D. And then I guess the second part to that is should we continue to expect to see that elevated spend level as we exit the year and look into 2016? Thank you.

You bet. Yes, the two programs that were accelerating, we really kicked off the -- our next-generation Sofia platform in the second quarter. So we see the acceleration of that spend as we did in the clinical studies in the first part of 2016. And then also, you're right, we are excited about the opportunity with Savannah, and we are starting manufacturing of the cartridge in the back half of the year in the summer. So those two are accelerating spend here in the back half of the year

We are also building units as well, alpha units for Savanna. And then I'd just add to your comment, Randy, that for the Sofia 2, the next-generation Sofia platform, that expense we expect to fall dramatically in January, because about that time is when we will be going into clinical trial. So we will see in the first quarter some clinical trial expense, but thereafter, Sofia 2 R&D spend would fall off pretty sharply.

Yes and so certainly, Bill, we do not expect our 2016 R&D spend to be to the level it was in 2015.

Nicholas Jansen, Raymond James Associates.

Hey, guys. I just wanted to touch base on Strep and what you're seeing thus far with the CLIA approval and as Bill mentioned, the competitive landscape. Just trying to how you're thinking about molecular strep. I know times and result is much more important given the volume of strep customers. So just trying to get a better sense of your views of the strep opportunity and what Sofia 2.0 could bring to the table with strep that may be Sofia 1.0 could not do.

Hi, Nick. That's several questions in a row there. On the Sofia 2 (multiple speakers) -- that's okay. On Sofia 2 specifically, I prepared a strategic plan update for the analyst luncheon that we are holding next Tuesday at the AACC. I believe you're attending, and we'll talk about each of the platforms, including Sofia 2 in some detail. So I'd rather for today's call focus on the quarter and our performance and then save the strategic questions for next Tuesday. And then remind me of the other it was on --

Strep A with Sofia 1.0, just what you're seeing thus far and the time for result for your platform versus some of the moleculars that have been approved. Just wanted to come get your better sense of the competition on point of care for strep. I know you addressed flu with Bill's question, but just wanted to touch base on strep

Strep on Sofia is going reasonably well. I would say at the higher end of the market we're going to need the additional claim of what we call the read now mode so that are higher volume customers can start them all at once and simply insert the test cartridge into the instrument. It's a little bit better for their workflow.

What we're finding is that in the larger volume settings the customer does not want to wait five minutes for the test results. They're used to seeing, particularly with a pediatric patient, a positive pop at 1.5 minute to 2 minute level. And a large number of their positives actually can be read within that window, so waiting five minutes believe it or not, has been a little bit problematic for those customers at the higher end of the market.

We are doing pretty well though at the I would call the medium level, medium volume customer segment, and I would expect, again, when we get the claim for read now instead of just walk away that that will improve our placement rate even further. With regard to Group A Strep on Solana, of course we've just now gotten clearance. We are in the process of launching that product. We expect a small number of instruments to be shipped shortly.

The customers that we have that are imminent now are larger and promising. And so I don't know what that would portend for the future, but so far it looks pretty good. And in each of these instances, these are not customers who are running a molecular test on the front end. These are rather customers who are reflecting their negative rapids to Solana versus sending them to a lab to be cultured

Thanks for that detail. And then my last one, it looks like you did buy back some stock in the quarter, I think that's something new, at least recently, I just wanted to get your sense of why the decision to repurchase shares and your views on capital allocation going forward. I know you guys were looking at some M&A activity in the first quarter, but just trying to get a better sense of capital deployment priorities. Thanks

We've had a repurchase program and authorization to purchase up to $59 million in stock for a very long time. We've re-upped that from time to time. We consistently evaluate where we are, our internal evaluation of where we think we should be, and from time to time we've made a decision to purchase shares. In terms of M&A, we continue to look at opportunities. We don't necessarily have anything that's in front of us our that's imminent.

I think as everybody's well aware, we did look at an opportunity that we discontinued in the first quarter, and for good reasons. And then we have obviously still cash on the balance sheet in the event we do find something that's compelling. I would say that given the strength of our organic story, the number of things that we find interesting are quite few. And therefore, I would not anticipated that we would be doing anything imminently.

Great, Doug. Look forward to seeing you next week. Thanks

See you, Nick.

Brian Weinstein, William Blair

Hey, guys. Good afternoon. Thanks for taking the question. Maybe we can start on the sales force, the expanded sales force. Can you just talk to us if you're willing to about the size of the sales force at this point? Are you through kind of where you think you need to be to expand it? And what are the primary competition metrics that you guys are using? Is it still for Sofia products? Is it about placement? Is it about utilization at this point and getting multiple products? What are the things that you're using there?

Generally, we have about what we think we need in terms of sales force. The additional spend here was the completion of the hiring and training of those last folks. We have what we think we need in terms of the physician office segment, a group of which is supporting distribution. We also have folks that are calling on the larger practices, including in the moderately complex segment.

And then separate from that we have folks calling on hospitals and the integrated delivery networks. So we think that we're fully staffed. We think that we have what we need for continued sales [associa], and we think we have what we need in terms of the launch of our molecular products. And I think that our experience in the last quarter has shown that we think we can be successful in that particular arena.

In terms of Sofia, I think what you're asking, Brian, and follow-up if I'm missing the mark here, but our strategy with Sofia is to solidify our price and volume of our legacy products but then also establish a base that we can sell into once we have these unique products like vitamin D and others that I'll talk about next week. But I think we're pretty comfortable with the placement rate that we've achieved so far. We'd like to be further ahead and would be, we think, if we already had CLIA waived hCG. But having said all that, I think we're in good shape.

We will finish up the launch of strep as we head into the back end of this year. And as we finish up with some of those activities, we will be perfectly in position, we think, to launch Sofia CLIA waived hCG. So then going into 2016, obviously those new products would be dependent on regulatory approval. Did that answer your question?

Yes, and I can follow up off-line with some follow-ups on that line of questioning. But the other question I had for you was, as we look to Solana getting multiple products out into the market in a CLIA waived setting, Sofia of course as well, I'm still trying to understand how those get segmented to your customers. What customers do you think would be more Solana versus Sofia-based, and how do your reps detail that and present that to the physician or the ordering clinician?

Well, at the moment we just have the one Solana assay Group A Strep. I can talk about that and obviously would be very willing to discuss this in some detail on Tuesday. But, briefly, I would say that we have a product that addresses everything that you would want to do with regard to strep testing except for culture. We have a rapid test on the front end, including our QuickVue product line which still has very significant market share. We are seeing some success with Sofia, as I mentioned before.

Our view is that the value of molecular is more on the confirmation of the negative than it is to do the test on the front end, because what we've found in our experience is that workflow really does matter in these physicians' offices. So even though we will have a CLIA waived Solana Group A Strep product, which I think even our hospital customers will appreciate because of the elimination of all the validation work, I don't really see Solana Group A Strep or molecular products, period, as being a front line for strip testing.

Strep testing is too high in volume, and the customers are very concerned about workflow. So this is not the first time I've stated this of course, but I see us as being able to revive in the very front end to AmpliVue if the customers prefers that methodology. We can also do it 12 at a time with Solana, and we can do it 96 or more at a time with our Lyra product. So with strep we have a product that basically meets the needs of the customer whichever way they want to go.

Thank you.

Tycho Peterson, JPMorgan.

Thanks. Maybe, Doug, first on Solana, can you talk a little bit about cannibalization with your existing AmpliVue user base? And I guess how do we think about your long-term commitment to AmpliVue? Should we think about you kind of phasing that out over time or what are your thoughts?

That's a terrific question, Tycho. Logic would tell you that if you have a lower cost of goods sold option you'd like to migrate your customers over to that. And that certainly would be interesting in our view. Our cost of goods sold with Solana is about a fourth of what it is on AmpliVue, so clearly I would like some of that to happen.

At the same time it's interesting that we do have kind of an interesting following, even though not as large as we had hoped, of AmpliVue customers. So I'd like to move those folks over to Solana over time if that's what the customer wanted. But I think what we're going to find is some of this is going to be a little stickier than we thought. And that might actually cause us to develop other products for the AmpliVue product line that we hadn't necessarily thought of. I'll give you an example that might make it a little bit more clear.

Pertussis is one of those diseases that you have outbreaks, but until you have an outbreak, there really is no volume. And so having a higher volume way to do pertussis doesn't seem to make as much sense. So I see the AmpliVue pertussis product, which is out there in a number of sites now on the shelves, being very handy and a very good format with long shelf life. I think there's a segment there with things that aren't super high volume that might make sense.

So it's certainly a great question. It would be great if I could convert it all over to Solana, but at the same time, we're seeing some customers with individual and interesting needs that we should consider.

Okay, that's helpful. And then on Sofia, you've been talking more recently about connectivity that aspect as being a differentiator. Can be maybe just talk about the degree to which users are taking advantage of that feature and --

Sure, the number that are coming online has increased pretty dramatically in the last several months. We expect that to continue. I can't get specific numbers. I'd be happy to discuss it in a bit more detail next week as to what our actual strategy is, but we do see connectivity as an important feature, and we see a growing number of customers that agree with us.

So we are connected not just through our cloud-based system, in which we collect via identified data. We are also connected through laboratory information systems and EMR. The whole connectivity piece we believe is going to become increasingly important, not just in hospitals not just in physician offices, but also in these alternate sites.

And then how well are you doing selling to the alternate sites? Going to back to Brian's question before about your sales and investments, do you need to invest more in that channel or -- ?

We've made a pretty significant investment at this stage in that. We have a number of alternate sites that have Sofias, some of which are contractually committed, some of which are in, what I would call pilot phases. I haven't seen an explosion in terms of the numbers yet, but it is noticeable. And I suspect that within the next year or so, we will see a number of different alternative sites with all sorts of testing, not just what would we do, but other tests as well.

So I would say it's still early, but as I'll explain again next week, with our specific strategy, it's definitely something that we've made an investment and continue to look at very closely.

Okay, and then last one, I know you don't want to talk a lot about Sofia 2 at this point on the market opportunity and the like, but you have talked about the cogs in the past $250 or so. Can you maybe talk about how we should think about the margin profile? And I guess what I'm getting at is, is this something that has the potential to drive you above kind of a low to mid-60s gross margin business as we think about the next couple of years?

Sure. It's definitely helpful, because as you can imagine, we have a growing depreciation expense associated with a very large number of Sofias now. Moving forward, effectively having each placement be one-fourth of that, is going to be helpful moving forward, which helps us a number of ways. With our current customer base, of course that size of customer, but also the lower volume customers that we previously had not been able to reach.

Further, Sofia 2 helps with workflow because instead of having one or two Sofias on the lab bench, the Sofia 2 is inexpensive enough to be placed in exam rooms where they can do the testing immediately. So we see a cost-reduction opportunity. We also see an opportunity to gain share at the lower end of the market, but also gain share at the higher end of the market as well because of workflow.

Mark Massaro, Canaccord Genuity.

Hey, thanks for taking the question. In the alternative site market, are you seeing in an increase in activity in terms of conversations to adopt new technologies, or are you seeing just more of the same in terms of pilot projects? Or are you seeing an uptick in RFPs and perhaps some meaningful contracts that might be signed in the next six months or so?

Short answer is yes. The activity has increased noticeably and significantly. And it's almost -- I can't think of, Mark, a major big-box retailer that might have an interest in testing who has not already been involved in that conversation. So within the next six months, I would say that we would have something to talk about, because we are going to be approaching the next seasons. Strep is a big product for us in that particular segment so is flu. So yes within the next six month I would think that we and others will probably see a lot of that [fade in].

Great. And relative to some of the molecular entrants that have compelling platforms, how do you see your Sofia platform competing against them? I know you have Solana in the wings, but can you just remind us of your differentiation with Sofia in terms of how you think you're going to win some of his business going forward?

Well, first I'll start, Mark, and I don't want to sound arrogant, because we certainly are not, but we have won a sizable piece of that market already. We continue to do well in the segment, despite the fact that there's a lot of conversation with regard to molecular. I would say again the biggest differentiating factor with any of the rapid products versus the molecular products is simply workflow and time to results. I think that's a biggest issue.

The other thing that's a factor is a couple of us out there, including the Sofia, have pretty good product performance that is not that far off the molecular. So molecular in name, but not molecular in performance. So I see our ability to compete based on performance as not significantly different than it was, And certainly on a workflow basis, none of the molecular players, including ourselves, has a product that is going to fit those requirements.

And at the end of the day, I think connectivity is going to matter. And connectivity is something that none of the molecular sellers have addressed either. We certainly intend to with Solana, but again, I'll say this today once more, and I'll probably say it again several other times, our intent with our molecular strategy is not thinking that we're going to have a CLIA waived platform that is going to go in the physician office, because, frankly speaking, I don't think the workflow fits.

Great, and maybe my last question, you're doing a nice job with Sofia traction, can you update us on your install base there?

You're asking me for numbers, and we said that we would tell everybody when we -- at 10,000 we said that. I think it would be probably reasonable for us to tell you when we put through 20,000, and I will certainly do that.

Great, thank you.

Zarak Khurshid, Wedbush Securities.

Hey, guys. Good afternoon. Thanks for taking my questions. Just a follow-up on the last comments there, anyway that you can quantify the relative spend on Savannah versus the other projects? And as we think out three years or so, what is most attractive to you, and how does Savannah rank now, given your recent immunoassay momentum?

Hey, Zarak. This is Randy. We've said that about half of our R&D spend is on all of our molecular platforms. We haven't specifically identified Savannah, but it's certainly is a major contributor of the molecular spend. We are ramping up as we build out instruments and the cartridge, so certainly sometime next year will be more into the manufacturing cycle and out of the R&D spend. We like the next generation Sofia platform and will continue to ramp up our assay build on our molecular platforms.

Got it. And the second part of the question, Doug, as you think about the rapidly evolving space, how does Savannah rank in your three year crystal ball in terms of a real needle mover for the business versus assay?

I think it's a pretty big opportunity for us. I think that others have demonstrated that there's demand for sample to answer. And that if we could get the cost down, which we suggested that we will, we think that we can move more testing from the traditional way that infectious diseases have been assayed to molecular methods.

It's been a long time since PCR first was developed and there's been really not a whole lot of moving from aminoassay and culture to molecular. We think that a big reason for that is cost as we've said before, and therefore, we think Savannah is an opportunity for us in that three year window that you're talking about.

Great. And then the last one on just Sofia business, and was wondering if you could provide some color on the competitive takeaways versus QuickVue conversion, and ultimately how much of the QuickVue business do you think will be converted? Thanks.

Sure. Our cannibalization rate has not changed a whole lot. It's been in the mid-30s maybe. I think we said before 35% or so. I would love moving forward with Sofia 2 to convert more of that, and I would think that by the end of 2016 certainly as we move into 2017 a much higher percentage of the QuickVue business would be cannibalized to Sofia 2.

At the moment though, as we've said before, we've done a really nice job in the middle of that pareto that shows the volumes by customer, and we are not able to address really very well with Sofia the low end of the market. We have a huge number of customers that don't buy really significant number of kits per year. And then at the very high-end, there are workflow issues, as I alluded to before, which prevent us from converting some of those larger QuickVue customers. So we think with Sofia 2 that we will be able to move both left and right on that chart, and our cannibalization rate will come up.

We had said early on that we thought by now we'd have about 50% converted. Interestingly enough, that has not happened, so most of our placements have been actually competitive takeaways. Which I would say we are not displeased with, but certainly we would like to cannibalized some of that QuickVue business over.

Wonderful, thanks

(Operator Instructions)

Tim Evans, Wells Fargo.

Thanks. I kind of wanted to tap into that crystal ball myself if I could. Looking out maybe five years, can you talk about the flu market as you see it evolving? What percentage of the market in particular do you think is ripe for penetration with molecular products versus this second gen immunoassay product? How do you see that breaking out as a market matures years down the road?

That one is probably the hardest question, Tim, what happens in five years with the flu market. I would say that if we are successful with connectivity, and with the alternate site strategy, that it is possible that we, and maybe with the help of other manufacturers as well, would be able to create more flu awareness in the United States, and that the -- and the flu market will grow.

So this is one reason why I say that even though there are molecular products that will address certain needs better than immunoassay products that we don't feel threatened by that. So right now let's say there's 1 million or so molecular tests that are done per year in the US that could grow to some number more than that and probably should, but as a percentage I don't know that it would change much.

There's still to be a need on the very front end to do very quick rapid testing. The other factor that changes the game a little bit is just the immunoassay products actually improve just a little bit in terms of sensitivity, and our -- at a point where they are greater than 98% in terms of sensitivity relative to culture and certainly in the 90s relative to other PCR products. And the lower down element of the 95% confidence interval would be greater than 90%, it would be hard to suggest that a molecular test is necessary when in fact a negative test result by that immunoassay method would matter. In other words the number of false negatives being quite small.

So it will be interesting to see whether there's a dramatic migration to molecular methods if indeed the immunoassay manufacturers, including ourselves, are able to improve their products, and certainly all of us are interested in doing that. So again, crystal ball, I don't know. I would see molecular testing increasing pretty nicely. I think it makes sense. At the same time, I think the market's going to grow.

That's very helpful. I want to ask about the next gen Sofia. What was the real trigger here to get you start to thinking about that, and how long has that been in development?

In terms of full funding, we started in the second quarter. In terms of pre-development costs, if you will, in other words, in phase zero we've been talking about this for some time ever since our new R&D director arrived last June. And there are two things that we think are key. One is we have to get the cost of the instrument down so that we can address both the low end of the market and again the higher end of the market because of workflow. And then the other thing is that we would like to have access to larger markets.

We will talk on Tuesday about the parameters within which we operate for Sofia 1 and the extended parameters within which we think we would be needing to operate with Sofia 2. And what you'll see is when we look at each of these four major parameters, the opportunities for menu expansion are far greater with Sofia 2 because of the difference in optics and a number of other factors.

So again, stay tuned for the discussion next Tuesday, but two things are the drivers. One is cost and the other is the ability to expand our immunoassay menu. And we think (technical difficulty) going to matter

Okay and the last question, I wondered if you could just comment a little bit on thyretain. What's really driving the growth there?

It is just awareness, and its global. It's global awareness of the ability to accurately diagnose Graves' disease. That's it, because we're not spending any money on marketing. We certainly don't have anybody selling at. So it's all just word-of-mouth among endocrinologists and other thought leaders who are treating these Graves' disease patients.

Bill Quirk, Piper Jaffray.

Thanks for taking the follow up question, guys. Sorry, one more on Sofia 2 and that is, Doug, given the changes that you are making to the instrument, is this a letter to file, or do you think you're going to have to go through the formal 510(k) process for all the assay?

No, this will be a 510(k). The initial product, not to reveal too much, the initial product is intended to use the same test cartridge initially. So the first one out the door is likely to be a reasonably straightforward 510(k) clinic process, but it will require a 510(k).

Okay, that's very helpful. And then, sorry, just bouncing over to Solana. Obviously there's been a lot of discussion here, but can you talk about the initial weeks since the approval, just help us take a little bit about lead generation? And I guess specifically what I'm trying to get at is what is the sort of very early read on your mix between those would be customers who already have molecular versus those that may be new to molecular?

Well, again, it's a good question, but really, we're pointed at replacing backup cell culture, so we're not really ever in a situation where we are discussing somebody else's molecular product.

Got it, thank you.

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

Well, that will do it for us. Thanks, everyone, for your support and of course, for your interest in Quidel. Again, we had a great quarter, and I believe that we are well positioned to achieve our growth objectives for the year and beyond. Take care, everybody, and I look forward to seeing most of you next week in Atlanta.

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