QuidelOrtho Corp (QDEL) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation first-quarter 2016 earnings conference call.

(Operator Instructions)

I would 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. 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. Our first-quarter 2016 earnings release is now available on IR. Quidel.com, our investor relations website. We will also post our prepared remarks on the Presentations tab of our IR website following the conclusion of this call, for a period of 24 hours.

Please note that this conference call will include forward-looking statements within the meaning of the federal securities law. 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 report 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 27, 2016. 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, 2016. 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 and provide updates on our product development pipeline. I will then briefly discuss our financial results, and we'll then open the call for your questions. I will now turn the call over to Doug for his comments.

Thanks, Randy, and good afternoon, everyone. For today's call, I will talk about our results for the quarter, and our progress with several catalysts for growth that we're seeing or will see in 2016, and continuing through 2017, and our pipeline.

Total revenues in the first-quarter 2016 were $50.3 million, a reduction from $61.7 million in Q1 2015. The shortfall was driven almost entirely by a weak respiratory season, which peaked quickly but quite late in the quarter, and ebbed just as fast. As a result, revenues for the quarter were $16.1 million lower than our internal annual operating plan model, which had assumed a normal respiratory disease season pattern and volume and took into consideration market share gains that we had experienced with the placement of numerous Sofia analyzers throughout 2015. It really was an unusual respiratory season for a number of reasons. It was really late, as I mentioned. But it started in Arizona, which, as far as I know, we have not seen before. Then we saw cases in North Carolina and Minnesota and Massachusetts. It was clearly different than the pattern that we have seen before that typically begins in Texas, Georgia or Florida.

What was also different this season was that a significant proportion of the thousands of Virena connections were reporting real-time test results to our cloud, which gave us far greater visibility than we've had ever had before. Virena data are now rich enough in some regions of the country that we can tell by three-digit ZIP code when and where an influenza A or B epidemic is starting, based on actual positive and negative test results and importantly, when the academic is subsiding.

With thousands more Virena connections by the end of this year, our visibility into the next respiratory disease season will be even greater and the value of those data to other constituents will become clearer. While others will be guessing when and where influenza will hit their communities based on crowd source models, government agency reports or antiviral prescription rates, communities with significant numbers of Sofias reporting influenza test results will have instant access to actual test results from patients who feel ill and ill enough to seek treatment from a healthcare provider and instant access to the truth.

Moving forward, we are focused on both near and longer-term catalysts for growth. In 2016, we expect to see an increasing contribution from our molecular product sales, particularly as contracted Solana Group A strep customers come online, and other new Solana assays are launched onto a growing base of Solana installations. While the Solana portion of the $2.2 million in molecular sales in the quarter was relatively modest, we are expecting a noticeable ramp through the remainder of this year with our molecular revenues, led by Solana.

In 2016, we also anticipate a contribution from our international commercial organization, who are actively introducing Sofia streptococcus pneumoniae and Sofia Legionella products to the European market. In the quarter, we also added about $2 million per year in revenue through our bone health franchise with the acquisition of Immutopics. The transaction is immediately accretive, contributing over 50% in EBITDA and about $0.01 per share in EPS once we transported the manufacturing to our Ohio facility.

In terms of growth catalysts for 2017, we begin clinical trials for Sofia 2 shortly, and intend to have a significant number of analyzers in inventory by November for delivery to customers by the end of this year. Because of its smaller footprint, portability, intuitive graphical user interface, Virena connectivity, and low cost, Sofia 2 will be ideal in any setting where the workflow is dictated by the patient. And therefore, we expect even further penetration and through the traditional physician office segment, as well as other settings in which workflow is dictated by the patient like urgent care centers, retail clinics and pharmacies. We also begin US clinical trials for Sofia Vitamin D and Sofia Lyme soon, and expect meaningful revenue and margin contribution from these products in 2017 as well.

Also in 2017, we hope to launch Savanna in developed world markets, and are anticipating noticeable revenue and margin in the following year, 2018. We made excellent technical progress in the quarter with our Savanna program, which is somewhat of a parallel reflection of the increased R&D spend for the quarter, as we were able to move more quickly through our program milestones.

As previously communicated for Savanna, we have focused initially on meeting the requirements for developing world markets, and specifically in connection with our work with the Bill & Melinda Gates Foundation, with the HIV viral load assay, cartridge and rugged instrument system. We are now at a point at which we will focus more intently on the developed world markets, and developing new and importing existing assays onto the Savanna system for the developed world.

In addition, our focus in the coming quarters will be on continuing the validations of the cartridge manufacturing line in our facility in Ohio. Over the next few quarters, we'll manage our R&D spend more narrowly on the Savanna project, as we focus on assay and cartridge development and spend less, at this point in time, on the instrument system itself. We are excited with our progress to date, and will provide more detail on strategy and plans for the Savanna system in the coming months.

In closing, Q1 was a productive quarter, in that the things we needed to get done to set our Company up for a breakout year, the things that are our catalysts for growth, were done and done well. Tremendous progress was achieved by our Sofia development teams, who are working tirelessly on Sofia 2 and the next two important Sofia assays, Vitamin D and Lyme. I continue to be impressed with the productivity of the BioHelix scientists who are developing our Solana assays, and with the engineers and scientists who are making Savanna a reality.

Our commercial teams have done well selling the new products that we have given them. We just need to give them more. Clearly it would have been great to have also had a reasonable respiratory disease season. But overall, I feel good about the quarter, this Company, our people, what we have accomplished and prospects for growth in the future. Randy?

Thank you, Doug. As we reported earlier today, total revenues for the quarter of 2016 were $50.3 million, as compared to $61.7 million in the first quarter of 2015. Global infectious disease revenues which include QuickVue, Sofia, DFA cell culture and molecular products decreased 25% to $36.4 million in the first quarter. Influenza revenues which includes Sofia, QuickVue and $2.8 million of DHI respiratory products decreased 40% to $20.1 million in the first quarter, due to a relatively delayed and weaker flu season than in the first quarter of 2015.

Sofia influenza revenue was lower by 19% from the first quarter of 2015, while QuickVue influenza revenue was down 56%. On a trailing 12-month basis, Sofia influenza revenue is now 61% of influenza immunoassay revenue, while QuickVue has decreased to 39%. Even with a weak respiratory system, strep A revenue grew 4% to $8.4 million, driven by assay growth with the Sofia and Solana platforms. This was somewhat offset by an 8% decrease in QuickVue strep revenue.

RSV product sales increased 22% in the quarter to $3.2 million, as we realized a 33% growth in our Sofia RSV assay sales. Year-over-year growth for both strep and RSV assays illustrate that our Sofia instrument strategy is working.

Revenues for the women's health category were roughly flat to the first quarter of 2015 at $9.1 million, as a 9% decrease in pregnancy revenues was offset by a 9% growth in Thyretain and a 6% growth in our bone health business. Other gastrointestinal product category revenues were $1.7 million, equal to the first quarter of last year. Revenue from other product category increased to $3.1 million in the quarter, as compared to $2.3 million in the first quarter of the prior year, primarily due to an increase in grant revenue.

As Doug mentioned, for Q1, we missed our internal revenue estimates by approximately $16 million. During our Q4 earnings call, we communicated that we missed our Q4 revenue targets by an estimated $20 million. The shortfall in both quarters was a result of a mild and late start to the flu season. If we had realized our definition of a normal flu season, we estimate that our influenza revenue would have been in the range of $75 million to $80 million for those two quarters. At the end of the first quarter, inventory levels at distribution were down 8% versus the comparable period of last year.

Gross margin in the first quarter of 2016 was approximately 62%, compared to 66% in the first quarter of 2015. This decrease in gross margin was primarily due to less favorable product mix as a result of lower influenza revenue. We estimate that the weaker flu season had a negative impact of approximately 6 percentage points on the gross margin.

For the first quarter, research and development costs were $12.7 million, an increase of $4.7 million versus the first quarter of 2015. Increased product development costs associated with our Savanna and Sofia platforms were the primary drivers of the increase. As Doug mentioned, we accelerated the spend for Savanna in the quarter to achieve certain technical milestones. We also realized increased third-party spend on our Sofia 2 instrument in preparation for clinical trials in the second quarter. We anticipate Q2 research and development costs to be approximately 15% to 20% below the first quarter, and our goal is to keep the full-year R&D spend below $40 million. This will be our objective for 2017 as well.

Sales and marketing expenses in the first quarter of 2016 were $12.3 million, a 4% increase versus last year, as we continued to invest in Virena, our cloud-based information system, data visualization tools and word-of-mouth marketing campaign. General and administrative expenses were $7.3 million in the first quarter, a decrease of $2.6 million from the first quarter of 2015, primarily due to business development costs incurred in the first quarter of last year which did not recur this year, as well as the suspension of the medical device tax.

In the quarter, we realized approximately $600,000 in nonrecurring expenses associated with stock compensation expense and professional services. In the first quarter, interest expense was $2.7 million, of which $1.4 million relates to the cash coupon on the convertible senior notes due semiannually.

Our tax rate for the first quarter was approximately 44%. This compares to 31% for the first quarter of the prior year. With a small pretax loss, the effective tax rate becomes exaggerated. The key components of the greater tax benefit in 2016 is a federal research credit and the federal production deduction. Net loss for the quarter was $3.4 million or $0.11 per share, as compared to a net income of $4 million or $0.11 per diluted share for the first quarter of 2015.

On a non-GAAP basis, net income for the first quarter of 2016 was $600,000 or $0.02 per diluted share, compared to net income of $10.8 million or $0.30 per diluted share for the first quarter of 2015. As part of the non-GAAP calculation, included in operating expenses for the first quarter of 2016 was stock comp expense of $2 million, amortization of intangibles of $2.4 million. Also added back for non-GAAP calculation is $1.3 million related to the non-cash debt discount and debt issuance costs on the convertible senior notes.

From a cash flow perspective, operating activities used $7.6 million of cash in the first three months of the year and purchases of property and equipment were $2.0 million. During the first three months of the year, the Company spent $20.1 million to repurchase shares of its common stock. Since the second quarter of last year, Quidel has repurchased approximately 2.5 million shares of its stock.

In the first quarter, we also bought back $5.2 million at par value of convertible senior notes and realized a gain of approximately $400,000 that was reported in net interest expense. As of the end of March, the Company had no outstanding borrowings under its senior credit facility, and had $153.4 million in cash on the balance sheet.

As Doug mentioned, during the quarter, we acquired Immutopics for approximately $5.5 million in total consideration, including contingent consideration. Immutopics is a privately held, life science research company in San Clemente, California, that specializes in innovative assays for assessing bone health. The company has been a leading source of ELISA kits for pre-clinical studies in bone and mineral metabolism for humans, rats, mouse and other mammals. The company's portfolio consists primarily of research-used test kits for the quantitative determination of FGF23, several forms of PTH and osteo[patellson].

We are excited to have Immutopics join Quidel and our SPG business and portfolio of products. The combination of the Immutopics portfolio with our MicroVue line of products will enhance our ability to serve the bone health research community. We are in the process of integrating the Immutopics business into our facility in Ohio, and it's scheduled to be completed by October 31 of this year. Also as Doug stated, we expect the acquisition will deliver EBITDA contributions in excess of 50% following the integration. And with that, we conclude our formal comments for today. Operator, we are now ready to open the call for questions.

(Operator Instructions)

Jack Meehan from Barclays.

Good afternoon, guys. I wanted to start with a two-parter on flu. I thought the number could be a little bit bigger in the quarter. What are your latest thoughts on the competitive environments? Have you seen any potential disruption with one of your competitors, with the big transaction going on? I'm curious if you had any data on the Sofia placement rate in the quarter? That would be great.

First, I think that a number of folks who were looking at CDC data may have had a moment of misinterpretation with respect to what was happening with flu. Because a number of analysts actually suggested flu season was persisting, when we know actually that it was not. As our Virena data shows, the season did not persist meaningfully longer than normal. And as a result, we did shift some product in Q2, as distributed inventories were low in a couple of specific cases. But it's not more than we shipped last year at this particular point in time.

So let me just talk, Jack, generally about flu. Our influenza testing business has essentially doubled in the last several years. And yes, we can show that we've gained share, but the market has also grown. Roughly 20% of the population will have flu-like symptoms every year, and I think everybody knows that. I would guess that there's some variation in that number, depending on travel, weather, and other factors like vaccination rates and [neef] activity.

About half of those folks would have seen a healthcare provider in typical years. But perhaps in recent years, that would have increased with the number of flu-related deaths, awareness by the public, and the increasing morbidity of recent strains in the last couple of years. Of those seeing a physician, only half would have gotten a test. But perhaps with the ability of antivirals and the improved confidence in test results from analyzers like Sofia, more patients are getting tested.

In fairness though, I think that physicians are becoming increasingly aware that RSV and human metapneumo are also viral pathogens that kill the young, the old, the immune-compromised; so in other words, kids and their grandmas, pregnant women. And I can see that in the acute setting, analyzers like Sofia may not see the entire growth in volume as the number of physicians requesting a multiplex respiratory panel may continue to grow. But we are relatively unaffected by what has happened so far with the introduction of other molecular products.

And we are the beneficiary of two things. One, our success with Sofia -- which, you asked what are our placement rates. Our placement rates in the quarter were not as high as they would have been in the first quarter of last year, obviously. But we still had placement. So we're the beneficiary of our success with placement. But we are also the beneficiary of increasing awareness of influenza, increasing morbidity, and all of those things.

So our flu business remains relatively healthy. I did see your note, Jack, I guess a week or so ago, and I understand your logic. But if you were looking at CDC data, you may have been a little bit misled about what was happening in the market. And certainly, we're thrilled that we have the visibility as to what's happening with influenza.

I guess we're going to have to retool the CDC, the way we think of things. Even just looking at the first quarter out of the fourth quarter, it was a lower number sequentially. Which, I would have thought that, given the later -- even though it was still weaker than last year, because it was later, the numbers would have picked up sequentially.

I thought your note was very good, and you make some very good points. We did obviously ship a lot of analyzers last year. And so you would have expected that we would have gained share, and we did. This was a pretty soft market.

I will say this, I think we certainly don't think that we need to apologize for the quarter. The last time we saw a flu season that started this late and peaked and subsided so quickly, was 2009. And at that time -- I'm sure you've seen the history on this -- but [qifu] influenza was our main provider of cash and margin, and we were vulnerable and susceptible to wild swings in performance. If this were Q1 2009, with of the season you just saw, our sales would have been $16 million, almost $17 million in total. And flu sales would be $2.3 million, right?

So we have made some progress. But our sales are not $16.9 million and $2.3 million being flu, because other non-flu parts of our business have grown, organically and through acquisition. Instead, we had $20 million in influenza revenue, we had $30 million in non-flu revenue. That revenue has grown because of our success with products like Sofia strep, Sofia RSV, Sofia hCG, Sofia Legionella, Sofia strep pneumo. Thyretain, which Randy mentioned, grew 9% over last year. Our bone health and complement research assays continuing to grow as well, and obviously at a smaller number, our molecular products.

So we continue to invest in R&D because we choose to. We continue to create catalysts for growth because we choose to. As Randy said, our R&D expenses are higher this quarter because of Sofia 2 and Savanna, but they are nearing the end of the bigger-spend quarters. So, we are on a mission to broaden our business. Clearly we have achieved a lot, and we have more to do. Sometimes, every five or six years or so, we've got a disastrous flu season, and that is what we just saw.

Sure. Well, then maybe one question on the things that we are actually excited about. The pregnancy test for Sofia -- I'm just curious. The process with the FDA, I think it's taking a little bit longer than we would have expected. But how does that change your thinking about trying to bring in the new tests through, like for vitamin D, at the end of the year? Does that change your thoughts around timelines at all?

That is a great question, Jack, and it's something that we are actually actively pondering right now. We are actually in the process of requesting an extension on our CLIA submission to the FDA. So that I can take a timeout and evaluate the trade-offs between doing the additional work that has been suggested by the FDA, versus starting other Sofia assay development projects that are in the queue. Some of which clearly have better ROIs. At the moment our two highest priorities are vitamin D and Lyme; assays that we view as important growth catalysts. And we are focusing our efforts on getting those two assays over the finish line.

So for Sofia hCG, just to be completely frank and open, our options are threefold. We can complete work on the CLIA product that we have in front of the FDA now, which would allow us to gain share and I think possibly solidify some of our business as well. But it is not the gross margins that we like, and not at gross margins that are accretive to our existing P&L.

The second idea is that we could develop an enhanced, perhaps, on Sofia 2 that might support a higher price. But that higher price still might not be at the margins that we are looking at with the other products. And may not necessarily be, if we were to stack-rank it, one of the top things we would do if we were starting from scratch. Or third, which is certainly an option, we can park the assay for the moment, continuing to sell the 510(k) product that we now have in the market, which actually is going pretty well, and use the resources to develop a higher-market Sofia assay.

So those are the three things that I'm looking at right now. I'm hopeful that the FDA grants the extension so I can take the time to fully vet our options. But it's either stay the course, get this thing done, or are there other things that we should be doing that are more beneficial to us and our shareholders? And we're weighing that now.

Great, very helpful, we will catch up later, thanks.

Thanks, Jack.

Bill Quirk from Piper Jaffrey.

Great, thanks. Good afternoon, everyone. This is actually Alex Nowak filling in for Bill today. This is somewhat of a follow-up to Jack's first question. The flu revenue number did come in below our estimates, but you did beat the infectious disease number. And it sounds like that actually came from the Group A strep on Sofia. So what is driving the growth on Sofia Group A Strep? Is it mainly collecting more revenue for tests on Sofia than QuickVue? Any color around there would be great.

It's a great question. So we have a large number of customers that do, of course, influenza only, but we also have a large number of customers that do influenza, strep and RSV. And as a result, we've gained some share with both of those assays. And even though we didn't see a lot of influenza, we still had testing for Group A Strep and for RSV.

Okay, perfect. And then another question for Doug. Can you provide some more color on what the benefit is to having -- well, the benefit to Quidel's business of having your customers, or a majority of your customers, connected to Virena? Any color would be great.

Well, the idea is that the more customers that are sending data to our cloud, the richer the data set. Immediately then, in some regions, we can tell a physician that not only is your patient positive or negative, but that physician can look at that answer within the context of everything that's going around him in the community.

So imagine you are a physician and it's later in the season, you don't know whether in your community you still have an epidemic or not. Ordinarily, you would not know that. But you can go on myVirena.com and you can see exactly what is going on in your community. And actually, there are tools that will allow you to just punch in your ZIP Code, and it will tell you as well.

So there are immediately benefits to physicians. There are benefits patients. The benefit to the community is in creating greater awareness. We should be able to get people to see their physicians when they have those symptoms, knowing that flu is around them. And hopefully, that physician will test that patient, and appropriately administer an antiviral when warranted, and don't prescribe an antiviral when not warranted. So we hope that through having better information, that we can do a better job in the United States and perhaps elsewhere as well, with the primary respiratory pathogens that kill kids and their grandmas.

So, of course we would like to grow the market. We're going to benefit from that revenue and that margin. But we also have a mission of the Company that we don't like to see kids or their grandmas or pregnant women die of influenza or RSV, or human metapneumo. And so all of our Sofia analyzers sending their data into our cloud, we think, is going to benefit us, of course. But it's going to benefit communities and it's going to save lives.

Okay, that is very helpful. Thanks for laying out the plan there, and the idea around that. And then just a final question from me. It's a two-part question. I was curious what you saw in Immutopics to make you pull the trigger on the acquisition for them? And then I was hoping we can get an update on future M&A plans?

We've been talking to folks from San Clemente, where they're located, for a couple of years now, almost three years. And we've been interested in their marker, which has promise. They've got existing business as well; it's small. So there are those two factors. One is, their existing products fit perfectly in with what we do, into our current customer base. We have a bit of commercial leverage there and I think this will be helpful.

Their products can be easily manufactured. I probably shouldn't say, easily so quickly. But they can be manufactured in our facility in Ohio, and we think we can take advantage of our operating leverage there. So great company, great little company; smart guys running it. We think we can take it from this point and move it forward, grow it a bit. And we think it fits quite nicely with what we do, with that small team of people we have on that particular business.

Brian Weinstein from William Blair.

Hi, good afternoon. This is Matt Larew in for Brian. The first one, I'll just follow up on the previous question -- alluded to future thoughts on M&A. So Doug, if you could circle back on that? Obviously, maybe looked at a larger deal last year, and then executed a smaller deal here in the quarter. So what are you seeing in terms of M&A out there? Obviously, you still have a quite a bit of cash on the balance sheet. Are there other things like this smaller deal? Just forward-looking thoughts on M&A?

Well, Matt, you know, I can't say a whole lot. But what I would say is, we are actively looking at assets that could use either our R&D expertise or our commercial organization and leverage, as we did with this Immutopic acquisition. Or assets that would help us create more commercial leverage. Clearly, some of those would be a bit larger companies, with larger revenue than Immutopics.

From a technology perspective, we think now that we have what we need, and believe that have the capabilities internally to develop products that will make a difference. So there is really nothing on that front, from a technology acquisition perspective, that we are looking at currently. So again, it is more about how can we gain commercial leverage or how can we use our commercial leverage moving forward.

Okay, sure that makes sense. The second one, also a follow-up on Virena. Certainly, it seems pretty clear that it brings value to patients, physicians, communities -- the numerous things you alluded to. You've been assessing now for certainly before flu season and beyond that, how you might be able to best-monetize Virena for the Company. Now that flu season is behind you, I just wanted to know if you had any updated thoughts on how you might be able to monetize the value of bringing it to the market?

It is a good question. We have been working on this for a while, nearly three years now. The data we are collecting though, in this season, we saw as very valuable to a number of constituents, particularly those who live in the regions of the country where we have large numbers of Sofia placements; or those who have interest in data from those regions, which would include government agencies, both state and federal.

We have modeled the number of Virena connections that we will need to power the data visualization tools that Randy was talking about in his comments, that we are currently developing. And believe that we will reach that number by year end this year, so year-end 2016.

Anticipating what that may look like at that time, we are actively looking at options for further monetizing those data, other than simply continuing to gain market share. And actually, we are exploring a small number of different options. I don't want to talk too much, with competitors who clearly would be on this call. Certainly don't want to talk about everything we're working on. But Matt, I will say this. Virena is a real program, and it's a high priority for me personally.

Okay, thanks, Doug, I appreciate that. I will jump back in the queue.

Tyco Peterson from JPMorgan.

Hi, guys, it's actually [Vetas] on for Tyco. Just a couple of housekeeping questions here. In terms of the cap in R&D expense, do you expect to take back down to the $9 million to $10 million range through the remainder of the year?

Yes.

Okay, perfect. And then, I know you have spoken about Sofia Lyme and the vitamin D assays. Can you help us dimension how big that market could be for you? I remember last quarter you had spoken about vitamin D targeting only the patients who are routinely tested versus the entire population. Maybe you could talk about why you want to approach the market like that? And then Lyme, obviously much smaller. But any color on the revenue upside there, perhaps, in 2017 and beyond?

Sure. Vitamin D is tested for a number of different reasons. And we don't expect that the volumes that are being sent into commercial labs, that are part of a routine physical exam, would be our market. So when you think about the total market, I'm thinking that we are in the 50 million to 60 million tests per-year range. And of that, we believe that only about 18 million of that could be decentralized into the segment where we have Sofia placement opportunity.

It is possible that some small hospitals or some labs might want to have a Sofia for vitamin D, but we are certainly not counting on that. So our conservative forecast is some reasonable percentage over the next thee to five years of that 18 million or so tests.

Now on Lyme, you are correct. It's a much smaller market, but that's only if you are looking at the number of tests that are done. The disease itself is actually quite significant, and I would suggest that people who are bitten by ticks coming back from summer camps or whatever, probably ought to be tested. Because it has been shown that testing early and identifying the disease early, the prognosis for the patient is better.

So I think there is increasing awareness. And this is another one where I think Virena really is just an awesome tool. Can you imagine, you're traveling somewhere or you're going on holiday somewhere, and you want to know what the prevalence of Lyme disease is in that community at that time -- you will be able to see that. And I think you will be able to see the spread of Lyme throughout the United States, and track by ZIP Code on our Virena cloud-based system.

I think it's just going to be interesting. And I just think it may become a good gatekeeper for us as well. So again, you're right -- it's a small market. There is, I think, 300,000 or so tests done per year today. It should be a lot more than that. And I think for our existing customers, it will be a nice add.

Got it. And then one quick follow-up on Virena. I'm sorry if you mentioned this data point earlier, but have you spoken about the penetration rate in terms of your Sofia installed base? I know it was about 10% last quarter. Have you updated that number?

I don't recall actually stating the percentage so far. I can just tell you that customers who have agreed to be connected, those connections total in the thousands, which is encouraging. A far fewer number than that, though, actually, during the season, actually were reporting data. Clearly some of that had to do with the start to the season. But as we end the year here, we would expect thousands more.

And we are on a track that our statisticians have computed for us. We're on a path that gets us to the number that would be required to have a rich enough data set to power our tools that we will use in most of the major markets in the United States.

Got it. Thanks so much, guys.

Sure.

Nicholas Jansen from Raymond James.

Hi, guys. Most of mine have been answered. But first, just a quick modeling question. I think you talked about the first quarter being $16.1 million below what you would have had, given your share gains in a normal season. And you talked out a similar statistic from 4Q. So as we think about as we model 4Q 2016 and 1Q 2017, is it reasonable for us to use those as a baseline for growth going forward -- again, assuming a normal season?

That's what I would do, Nick, yes.

Okay, that's helpful.

The next major inflection point will be when Sofia 2 is launched and we see further penetration into these settings that I'm describing as being where the workflow is driven by the patient. So physicians' offices, retail clients, urgent cares. I think Sofia 2 is a much better fit for that, and plus it will have far greater capability. So, I see us continuing to march with the new Sofia 2 platform.

And have you had conversations yet -- I think you have had at least some trial work with Sofia 1 in some of those retail clinics. And has been the feedback that they needed something like Sofia 2? Or is this more of your conjecture in terms of how you think the market will respond once it's launched?

We have numerous pilots ongoing. I will tell you that the number one driver for the placement is strep, and not influenza. But influenza comes along for the ride. But those pilots that have gone well. We had one that was delayed a bit because of a merger, but for the most part, all the pilots have gone well. A lot of discussion around encryption of the data and how does it work, making sure this is a solid platform. Obviously, we are working through all those things and have overcome all those hurdles so far.

But in summary, large number of pilots. They seem to be going well. We could see some impact at the end of this year, the first part of the next upcoming season. I would just say, stay tuned.

Okay. And then my last question. Solana has been on the market for almost a year now -- nine months. It's still getting kind of modest revenue, I think, is the word that you used. I think you are expecting a noticeable pickup, given the contracted group -- eight customers coming online. But how should we be thinking about molecular as a category in 2016 from a total dollar perspective, as we think about the acceleration and growth there? Thank you.

Sure. Not to sound defensive, but we got approval at the end of July -- July 31, I believe. The market introduction was at the AMP meeting in the fall. We actually started commercializing, with boxes and inventory and all that, in the fourth quarter. So nevertheless, we do have customers. Some of the customers have come online, some have not yet.

I would tell you that it is very difficult for me at this stage, Nick, to model, because the average is so far, effectively meaningless. We have had a handful of customers that are confirming about 1,000 samples per year or fewer. And obviously we hope that, that is not the norm. We have some customers that are actually over 10,000 tests per year. And more recently, we have a customer that likely will need to confirm over 70,000 tests per year. So we like the last group better than the first group.

So right now, I'm having a tough time modeling. I know you would like us to peg where we think we're going to be at this stage, but it is really impossible. What I will says is, we are encouraged by the customers that we've got. We know they like the product, we know they like that they are reducing their antibiotic usage. We are hopeful that word of mouth continues with the clinical microbiology lab segment, and that more and more people talk about the product.

But at the end of the day, what we do know is, we are definitely solving an important issue for customers. We're having an impact on reducing the number of unnecessary prescriptions. And I think this could catch on. The issue really is that this launch is dependent on us selling the micro lab and the infectious disease doc on the concept from moving from a 48- to 72-hour culture to confirm negative rapid strep tests, to a method that enables the lab to report the answer to the physician a number of times a day. And thus, avoids kids being put on antibiotics when they don't need them.

And of course, in the 10% of the time when they do require antibiotics, the prescription can be written the same day. So the concept sale that we're talking about does require more conversations and often with more people. But we have been effective at closing customers, and we are gaining traction. So I don't know that I would call it slow at this point. I would say it is early, but we are encouraged.

Doug, as always, thanks for the color.

Thanks, Nick.

(Operator Instructions)

Mark Mossaro from Canaccord Genuity.

Hello, Mark?

Doug, could you spend some time explaining how you might be able to monetize Virena? If you can comment on an opportunity to potentially go on a per-member, per-month subscription model there?

Sure. I think a lot of you guys are looking to do two calls simultaneously, which I appreciate. It must be just impossible. So I will just briefly mention what I said just a few minutes ago about that.

The data we're collecting so far, we believe, are proving to be valuable. It is early, particularly for those people who live in regions where there are lots of Sofias. And also, if you are one of the agencies who is interested in all those data, like the state health departments, or even the CDC. We've internally modeled the number of placements that we think that we're going to need as we exit this year into next season, that would be needed to power the tools that we are developing, that are useful to the a number of the current constituents.

We think that we're going to get there by the end of the year with that number of placements. We're certainly on that path right now. And I think we will have a super-rich data set that will be valuable across almost all the major markets in the United States. And I think it will be at that time that we are able to evaluate the options that we are now starting to look at. And sometimes it is hard to talk to somebody about the value of something until you show them what it looks like. But I can tell you this, that the people who have seen the data that we're able to provide, are certainly impressed.

So I'm confident there's value, and I'm confident that one of the options that we are looking at could be helpful to us in terms of monetizing the data. And what I said before also, is that I can't talk about all the things that we're looking at, because I don't want everybody to know those things. But what I did say, Mark, is that this a real program. We are heavily invested in it. I'm personally invested in it, and it is personally a priority for me.

Great. And then just on Savanna, can you remind us how you think that you will be differentiated in the marketplace upon launch? Historically, you have commented on the notion that it is a rugged instrument, and will likely gain strong adoption internationally. But even as you think out over the next three years, how do you see the differentiation on that platform when you do launch in the US?

Well, I would just say generally, regardless of whether it's Savanna or any product introduced into the market with our existing platforms, it is necessary to have competitive advantages on a number of fronts. It is not simply good enough to be lower cost, although we know for a fact that we're going to be lower cost. It is not good enough to simply be easier. Because frankly, the other platforms are easy enough. The fact that we are easier doesn't necessarily compel somebody to put your box on their counter and take up counter space.

The way we will enter the marketplace is by producing things that others don't have. And for the things that they do have, there has to be some compelling reason, whether it is speed of assay, total turnaround time, total cost of ownership. These things are interesting, but at the end of the day, we've got to pick an interesting menu that compels somebody to say: I've got to have that box.

And so in the coming months, we will talk a little bit about what those assays are. But for the moment, I would just say, rather than telling everybody in the world what we are working on, we are interested in developing things that are not presently out there.

Excellent. And my final question. Can you comment on the market opportunity for both the Lyme disease and the vitamin D assays? And can you give us any inkling for timing on those? Thank you.

In terms of timing, we're going to start trials imminently. And I would not hazard to guess how long that will take us with the FDA. These are one-of-a-kind assays, when we're being first to propose issues on that share. So I cannot really guess about the timing once we get the packages to the FDA. But I certainly hope to be in market very early next year, if not at the very end of this year. But perhaps the latter would be the most optimistic.

In terms of size of market, I did answer the same question a little bit earlier, Mark. But Lyme is a small market, if you are looking at the number of tests. The number of tests is somewhere in the neighborhood of 300,000 or so per year in the US. That is not so relevant, I believe, compared with the number of people who actually should be tested. So there is value in no, and there's a value in a positive answer. And the value of the positive answer, if you get that answer early enough, is to be on the appropriate antibiotic therapy, and the prognosis for those patients is better.

And then I remarked, Mark, also that this is a very interesting opportunity for those data to be sent into our Virena cloud, so that physicians can actually see the prevalence of Lyme disease in their area. Which would be helpful in counseling their patients who are taking trips and maybe coming back from summer camp, et cetera. I think it would be a nice add for us, to our existing Sofia placements.

And I think there will be physicians who actually get a Sofia just because they've got Lyme disease. And I think those customers then become candidates for our other products, including flu, strep, orthopedic, et cetera. So that is Lyme.

Vitamin D, huge category. You know that we have been talking about -- we're not talking about displacing the product that is done in the big reference labs. We're talking about decentralizing the market in situations that warrant it, monitoring different types of patients. And instead of 50 million to 60 million tests, we're saying that the number that we're going after, that we think is possible, is somewhere in the 18 million tests. And some reasonable share of that is what we would expect to have.

Very helpful. Thanks very much.

Thanks, Mark.

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

Okay, thanks, everyone, for your support, and your interest in our Company. We had a great quarter, as I said, I believe. And I believe that we are well-positioned to achieve our growth objectives. Take care.

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