QuidelOrtho Corp (QDEL) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation Second Quarter 2017 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. Our second quarter 2017 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 federal securities laws. It is possible that actual results and performance could differ significantly from these stated expectations. For a discussion of risk factors, please review Quidel's annual report on Form 10-K, registration statements and subsequent quarterly reports on Form 10-Q as filed with the SEC. Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast today, July 26. 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 3 and 6 months ended June 30, 2017. If you have not received our news release, or if you would like to be added to the company's distribution list, please contact Ruben at (858) 646-8023. Following Doug's comments, I will briefly discuss our financial results, and we'll open the call for your questions.

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

Thank you, Randy, and good afternoon, everyone. Q2 has truly been an extraordinary quarter for Quidel and the morale at our company is quite high, as you might imagine. For today's call, my prepared remarks on both our performance during the quarter and on the Triage business will be short, as I'm anticipating that we will need a bit more time today for Q&A, given our recent announcement and follow-up questions that we have received from our investors.

Let me begin with our revenue for the quarter and our progress on organic growth initiatives. Revenue for the quarter, the second quarter 2017, was $38.3 million compared with $39.1 million in the same period last year. Despite Q2 2016's unusually higher Influenza-like illness than is typical, and certainly dramatically higher than this year's Q2, second quarter 2017 Influenza test sales, driven by a greater number of Sofia Influenza A+ B customers than the previous Influenza season, we're only slightly below the second quarter 2016.

In fairness, however, given the additional Sofia placements, we should have been about 9% to 10% in growth of Influenza test sales or about $2 million more in Influenza revenue, but the orders from distribution, despite growth in out sales -- upsales, excuse me, to our customers, did not materialize as expected. And of course, as a matter of principle, we don't manage distributor orders. Even without the orders, normalizing for grant revenue and the flu seasons, Q2 was actually a pretty good quarter.

Group A Strep product revenue in the second quarter was up 10% over the prior year quarter. RSV product revenue was up 6% and herpes product revenue was up 8%. Trailing 12-month revenue through the end of June for all products was $214.1 million versus $188.7 million, 1 year ago. Trailing 12-month molecular revenue was $11.5 million versus $7.1 million, 1 year ago. Sofia trailing 12-month revenue was $64.7 million versus $48.7 million, and Influenza trailing 12-month revenue was $92.9 million versus $73.1 million. We are clearly making progress with our new products and are growing organically.

In the quarter, we also demonstrated continued progress with our product development programs. We received CE marks, 510(k) clearances from the FDA and CLIA waivers for Sofia 2 for use with our Sofia RSV and Sofia Influenza A+ B assays. We began actively promoting those products, and I can tell you that market receptivity has been very good and encouraging. Based on feedback from our commercial organization, I can say with some certainty, that Sofia 2 with Virena has legs and we'll meet or exceed our expectations over the next few years.

I know that there is some level of excitement for Sofia Vitamin D and Sofia Lyme, as well. I don't like to comment on our submissions while we are in dialogue with the FDA, except to say that we are communicating routinely with the agency on these 2 products, as we are with the Sofia Strep product for use on Sofia 2. We expect to launch all 3 products this year, and are excited about the opportunity that each of these products represents.

In the quarter, we also received FDA 510(k) clearance for our Solana C. difficile molecular assay, which increases the number of products in the Solana bundle to 6. We worked with one of our larger distribution partners in the United States on a Solana blitz program during the second quarter, and think that with the leads generated, we could see an acceleration in molecular sales as we exit the year. That's certainly what our operating plan calls for.

As previously discussed, the number of potential targets for Solana assays is large, and we expect to have at least one more assay in market before year-end and more to come in 2018. We currently have 17 funded and active R&D programs at Quidel in various phases of our 5-phase development process and numerous others in phase 0. We are happy to discuss any of our product development initiatives in some deal -- excuse me, in some detail, including Savanna, during our Q&A or perhaps at the upcoming AACC meeting.

Let me now move the Triage. The week before last, we entered into a definitive agreement to purchase the Alere Triage and BNP assets. And I think we did an effective job during the call, and in other meetings, at laying out the strategic rationale for this acquisition which does a lot for our company and checks many of the boxes on our acquisition criteria chart, the chart that describes what we've been patiently looking for. We said during the call that we would be using the time between signing and closing to begin to validate what we had modeled, in terms of synergies and other operating and financial details. And that after close, we would be in a better position to provide more color to our investors.

In the meantime, it's clear that as investors have analyzed the deal and its impact on Quidel, there are some common questions that I should probably address today. First, a common question is how we will handle the process of integrating the 2 assets. From an organizational perspective, we've assigned the overall integration responsibility to Karen Gibson, who is our Vice President, Information Systems, and an individual who has managed a number of highly complex projects in her career. She will be full-time on the project for up to 24 months, and we have backfilled her information systems role with a senior member of for current staff. And we've engaged a well-qualified consultancy, as well, to oversee the integration process and to help us to achieve our integration goals.

We held our integration kickoff with Karen and our executive staff last Friday, and with the consulting firm yesterday. There are several work streams, of course, and we will be seconding highly talented members from within our organization as needed, as well as third parties to complete the numerous stuff that need to be accomplished. Each of the work streams is important but the ones that I am personally following closely are R&D, international infrastructure, order to cash and commercial operations globally. While integrating the Alere assets, we'll require work and focus, we are quite confident that we know what to do and in our ability to execute.

Next, many investors having had time to read our 8-K, have asked us to clarify what was meant in the language describing the real estate. The short answers are, yes, the Alere San Diego campus assets are part of the transaction; and yes, we will execute a sale on leaseback as soon as possible, post-close. The net proceeds from the transaction, which are likely to be significant, will be used almost exclusively to pay down the note.

And then finally, we've been asked about the Beckman BNP assets, why the contingent consideration and what the mechanics are. So here's a quick explanation. While the agreement to distribute BNP kits used on Beckman immunoassay analyzers is for an extended period of time, it's possible that there is some risk that the business does not continue at the same level indefinitely. A risk that is not necessarily within our control. We've modeled that the business continues at the same level for 5 years, and then declines for several years after.

For each of the 5 years that the business continues at the current level, we are obligated to pay $8 million. If the business falls by a predetermined level, our obligation terminates. In other words, our obligation to pay $8 million each year, for 5 years, is contingent upon the current revenue being maintained at a certain level. I'm sure that our research analysts will have other questions related to the acquisition, some of which we will be able to answer today and others, we will answer later when we have more information.

In summary, the second quarter 2017 was a spectacular period for us: our core Quidel business looks solid; the Sofia and Solana programs are progressing nicely and our R&D teams, once again, demonstrated just how good they are; and we executed on a transaction that promises to be transformational for us and a real value creator for our shareholders. There has never been a better time to be at Quidel. Randy?

Thank you, Doug. As we reported earlier today and as Doug mentioned, total revenues for the second quarter of 2017 was $38.3 million, a slight decrease over the prior year. As Doug mentioned in his remarks, distribution sales lagged out -- our sales results in the quarter. We did realize a slight year-over-year increase in revenue, excluding the Gates grant revenue.

Immunoassay product revenues, which include all QuickVue and Sofia lateral-flow products, increased 1% to $22 million in the second quarter. Within this category, Sofia products grew 21% to $7.9 million, while QuickVue revenue decreased 10% to $13.8 million. Total Influenza revenue in the quarter was $10.1 million as compared to $10.4 million in the second quarter of 2016. The Influenza immunoassay revenue split was $5.3 million from Sofia versus $2.7 million from QuickVue. QuickVue and Sofia Influenza inventory at distribution is in line with prior year levels and prior quarter.

Revenues in the Virology category, which includes products from Diagnostic Hybrids, decreased 7% in the second quarter to $9.2 million. A major driver was the 18% decline in respiratory products included in our Influenza discussion. Our molecular product category, which includes the Lyra, AmpliVue and Solana brands, increased 44% in the quarter to $3.2 million. Solana continues to be the main growth driver in this category. And based on the placements to date and placements projected for the remainder of the year, we remain optimistic that we will continue to realize strong growth in this category.

Royalty, grants and other product category decreased in the quarter to $800,000 due to the decrease in grant revenue, as the revenues associated with the Gates Foundation grant were fully recognized by the third quarter of last year. From a platform perspective, and as Doug mentioned, we remain very encouraged by the continued commercialization of our Sofia and molecular product lines. These products grew 27% from the second quarter of the previous year to $11.1 million, and made up 29% of total revenues in the quarter.

Also worth noting, and as Doug stated, Strep A revenues increased by 10% to $8.5 million. RSV revenues increased 6% and herpes grew 8% versus same period last year. Our pregnancy revenues did decline 8% in the quarter due to continued competition from private label. Gross margin in the second quarter of 2017 was approximately 54%. This compares to 56% in the second quarter of 2016. This difference was primarily driven by the decrease in grant revenue, as well as increased depreciation on our instrumented system, the impact being magnified by our normally lower second quarter revenue versus the other 3 quarters. For the year, we continue to believe we can achieve a gross margin in the range of 64% to 65%.

R&D expense decreased by $2 million in the quarter due to a decrease in development spending for the Savanna molecular platform and reduced spending on clinical trials as compared to last year. Sales and marketing expense for the second quarter was slightly above last year, mostly due to the RPS acquisition and our investment in their commercial team. The slight increase in G&A expense was due to higher incentive compensation.

In the second quarter of 2017, we recorded onetime cost of $2.4 million in professional services related to business development activities, associated with the announced definitive agreement to acquire Alere's Triage assets. Our tax rate for the first quarter was approximately 14%. This compares to 34% for the second quarter of last year. The effective tax rate was lower compared to -- as we expected, to utilize net operating loss and R&D tax credit carryforwards to offset 2017 domestic taxable income. The company recorded a full valuation allowance against these tax benefits during 2016.

Net loss for the second quarter was $11.8 million and $0.35 per share. This compares to a net loss of $7.8 million or $0.24 per share for the second quarter of 2016. On a non-GAAP basis, net loss for the first quarter of 2017 was $4 million or $0.12 per share, as compared to a net loss of $3.4 million or $0.11 per share for the second quarter of 2016.

During the 6 months ended June, our net cash position increased by approximately $5.5 million. Through 6 months, the major contributors to operating cash flows were a net income of $2.4 million, a net working capital contribution of $3.4 million and the add back of noncash items of $18.4 million associated with depreciation, amortization and stock-based compensation.

During the first 6 months, we spent $8.1 million on property, equipment and intangibles. We also used approximately $14 million for the acquisition of the InflammaDry and the AdenoPlus diagnostic businesses from RPS Diagnostics. As of the end of the second quarter, the company had $175 million in cash.

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

(Operator Instructions) And we'll take our first question from Jack Meehan of Barclays.

I wanted to start actually with the Sofia 2 product launch. Obviously, some good updates since last quarter with the CLIA waivers for flu and RSV. Could you just talk about any data points you have related to early momentum? Obviously, we're not in flu season, but just any interest from alternate sites or large hospital systems related with your new product?

Sure. Hi, Jack. We've seen a lot of early success actually across the board: the hospital systems, physician office labs and in particular, urgent care settings. In fact, we've had a number of recent closes that, I believe, were tied to the attributes of both Sofia 2 and Virena. In particular, the Virena data, and access to those data, are a real benefit to larger networks, whether that be urgent care centers or integrated delivery hospital networks. Those networks contract our QC. They can understand what's going on in their communities with respect to Influenza Strep, RSV, et cetera. But importantly, also Sofia 2's early read. The ability to read positives as early as 3 minutes. And with most of the positives, actually, positive at 8 minutes or less. That's been an important factor in a lot of those decisions. So it's a cool product, of course, I'm biased, but it's a very attractive-looking in vitro diagnostic immunoassay analyzer that does a lot for the customer. It's inexpensive and it's affordable. And again, as I commented in my prepared remarks, the receptivity has been extremely good.

As you talked with the some of the distributors as they prepare for the launch, and I know Randy commented about the inventory levels year-over-year, do you think there -- it's possible you could actually see the inventory level start to pick up as we go into the back half of the year, as people gear up for the launch in the U.S.?

I believe we will see that. And I would guess that it will be disproportionately more so on the Sofia test cartridges than it would be on the QuickVue product this year. Albeit, Sofia sales are larger than QuickVue. But you'll see more of a movement, I think, Q3, Q4 this year.

Got it. And Randy, one that -- this is, obviously, a good problem to have with the recent stock performance, but you've blown away through the $32 conversion price now for the converts. Could you just help us -- what we should be watching for from an accounting perspective? Is there anything that would change -- that we should be modeling in the share count or the other financial statements related to that?

Yes. I agree, it is a nice problem to have. Yes, and as a result of the stock price being above the conversion price, we do have to incorporate an increase in our shares outstanding. And as you've seen in our prior documents that we've stated that we plan to sell the conversions through what's called a combination settlement, so we anticipate selling the principal in cash and then potentially, the incremental increase in either cash and/or equity. So based on that assumption, Jack, we probably -- the accretion or the increase in our outstanding share price is somewhere probably, at today's stock price, around 25,000 shares. So it doesn't have a significant impact at all in the dilution.

Great. If I can squeeze in one final one. I can hop back in the queue, too. Just what was Solana revenue in the quarter and how much did that grow year-over-year?

Well, Solana revenue was about $1.3 million of the $3.1 million in total molecular sales for the quarter.

Our next question comes from Brian Weinstein of William Blair.

First, I just want to reconcile the distribution comments. Randy, I think you were saying that distribution is at sort of normal levels, but then things didn't materialize that you guys thought were going to materialize. So just -- can you just reconcile those comments for me? Maybe I misunderstood them.

Yes. I'll answer that. Most distributors are about the same level, one particular -- or most are lower, and then one in particular, despite how sales did not [order process] in the quarter. So most of what I'm talking about was due to one distributor, in particular. So overall distributor inventory should be slightly down versus what they should be.

Yes. And especially, as Doug had mentioned, as we've see an increase in the number of Sofia instruments compared to a year ago, inventories being down slightly, where, in theory, you'd say the inventory should be higher versus a year ago.

Exactly. That was what my comment was intended to mean.

So then, for the third quarter, you would expect maybe a greater impact from kind of a buy-in, so sort of making up where they're at now, plus getting back to a normal level?

It's possible.

Yes.

It's certainly possible. But there's so many factors that drive when distributors order product. But rationally, yes, they should be ordering product in Q3.

Okay. And then as it relates to the assets that you're acquiring, the EBITDA margins on that business appear to be somewhere in the low 20s. Where do you think that those can go over time, as part of your organization?

Yes. What we commented, Brian, was that certainly with this acquisition, it wasn't going to change our long-term objectives on an EBITDA margin of all-in being in excess of 30%. So we continue to believe that's true with the combination of the 2 assets.

Okay. And my last question would be, Doug, you had mentioned in your comments about validating synergies. I don't believe that there are synergies that were sort of baked into your base case. But if there were, can you just describe what those synergies are that you guys are looking for?

Sure, Brian. The bucket of synergies that we're going to be looking at early on are improved manufacturing efficiencies. There will be some R&D project rationalization. There are a couple of projects that appear to be at the same segments, same sort of product and we'll look at that. And while not directly a synergy per se, we clearly won't be adding significant headcount to the U.S. commercial organization. In other words, we'll be using our same commercial infrastructure.

Our next question comes from Bill Quirk of Piper Jaffray.

I guess, first, can we just get an update on the Savanna spend for R&D? I mean, it looks certainly like that may have been down in the quarter or maybe you can just help us think a little bit about that, given the timing of launch?

Yes. Overall for the year, Bill, we're looking at about $8 million in spend. Help me out on the ramp though, Randy.

We'll probably be spending a little bit more in Q3 than we -- or Q4 versus the first half. But as Doug said, all-in, we're looking in the $8 million to $9 million range, which is -- it's down from the prior year, exactly, per your comment.

Okay. Got it. And then a couple of the new assets that you acquired, the InflammaDry and the AdenoPlus. Obviously, they're a drag on gross margin here in this quarter. Help us think about kind of where those things shake out over the longer term?

Yes, Bill. We're in the process of doing the manufacturing integration, moving everything into our facilities here in San Diego. We anticipate that being completed here this quarter. And we do anticipate that, once we have the new standard rule within our new -- our manufacturing facility, our margin should be somewhere around 70%.

Okay. Got it. And then lastly for me, on Sofia 2. Thanks for the color around some of the initial deals. Can you speak to, I guess, some of the -- I guess maybe elaborate a little bit on that, in terms of some of the initial placements. Are some of these going to the existing Sofia 1 accounts because of the automated Virena, for example? Just trying to figure out, they're largely kind of new to readers, some competitive takeaways, any additional color there would be great, guys.

Sure. So far, I believe that most of the Sofia 2 placements have been to either conversion of QuickVue customers over to an automated reader. We've also had some Binax conversion. I'm aware of some conversions of BD Veritors over. But I'm not aware where we've placed any Sofia 2s in the site that already had a Sofia 1.

And our next question comes from Nicholas Jansen of Raymond James.

First on me would be just in terms of the profitability breakdown between the 2 acquired assets and Triage, considering that there is the potential for that being BNP business to decelerate over time. Just trying to get a better sense of the profitability of the acquired revenue on both sides of the acquisition.

We've given, Nick, some general guidance on what we think gross margins are day 1. But Randy said during the last call, that we will be spending time between -- weekend before last and the date we close, getting a little bit more clarity around all that. Plus, we've got a number of things we're doing, in terms of trying to improve operating efficiencies so I really can't add a whole lot more to the discussion as of today.

Okay. That's fine. I'll just wait until the close then. And in terms of any sort of transition service agreement that you have tied with this transaction. Maybe you can better -- help us understand the timeline, the terms and the level of investment you'll need to put into the business when those expire.

There are numerous transition services agreements, and both parties, Quidel and Abbott, are motivated to move away from those as quickly as possible. Some of those things will take longer, for example, if registration is required in the country, it might take us longer in one country than another. Here, some of the transition services agreements in the actual manufacturing facility could take a bit longer, too, as we do some remodeling, if you will, in the factory. But I would say that, in all, the intent is to move off of those TSAs as quickly as possible. Although, we do think that a small number of them could persist. What would you say, Randy, 18 to 24 months, maybe?

Yes. Yes. Yes.

But the idea would be that would be very few of those. I'm certain Abbott is equally motivated.

Yes. And Nick, the economics are such that it's basically at cost. So neither one of us are incentivized to extend the TSA agreements. So we're both motivated, as Doug said, to get those completed as quickly as possible.

Okay. That's helpful. And then, lastly, just in terms of the quarterly performance. Just digging in a little bit more to the molecular revenue. It feels maybe that, sequentially, there wasn't as big of a step-up as maybe your aspirations for this year when you talked about your revenue expectation for molecular. Just wanted to get your sense of how we should be thinking about internal goals on that side of the house in the back half of the year?

Great, Nick. Thanks for the question. Actually, we would have anticipated pretty slow takeoff the first couple of quarters. We did introduce C. difficile, which a larger volume product in the second quarter. We did, as I mentioned in my comments, spend some time with one of the larger distributors making a lot of sales calls. We do expect to introduce another product here shortly. So all along, we've expected a bit of a hockey stick. I don't like to plan that way but I do realize that, at some point in time, we're going to have enough momentum and with hundreds of analyzers going in, we'll see acceleration. Will we achieve the number that we had in our operating plan, something that starts with a 2? I hope so. But we have to see an acceleration to get there.

Our next question is from Tycho Peterson of JPMorgan.

Can you perhaps -- I know you didn't want to comment specifically on margins for the Triage portfolio and how you expect them to trend over time, but given that -- I mean, obviously, international expansion is a big focus for Triage and reaccelerating growth there in the portfolio. Can you at least qualitatively help us understand, if there's a delta in gross margin from the U.S. versus OUS side? And what are the key things that you can do to perhaps narrow that differential?

Well, it would be very common for international diagnostic businesses to have lower gross margin ex U.S. than they do in the U.S. Pricing in the U.S. would naturally be higher. But at the same time, those P&Ls won't be burdened to the same extent. So when you look at the operating margin, you can expect to see some pretty comparable margins that -- yes, contribution at the bottom. So I hope that makes sense. There's not a whole lot you can do with pricing in the marketplace. For example, in a place like China, it is what it is. So we certainly wouldn't go in with the intent to raise price as a strategy. But hopefully, with volume improvement over time, that will help the gross margins for the whole business.

Got it. That makes sense. And then is there anything unusual, in terms of evaluating that business, relative to what you see in the core portfolio? Or does it sort of follow a similar dynamic?

There is some seasonality, as you would guess, because patients present with shortness of breath symptoms more often in the winter than they would in the summer. I think that's just -- it's common. But the good news here is winter comes every year, and patients, therefore, unfortunately, present to their health care providers with shortness of breath which will require cardiac biomarkers. So unlike flu, we don't know the magnitude and we don't know how long it persists. With the Triage products, it appears to be weather-related.

Got it. That makes sense. And then one final quick one on Virena. I know you were running an application pilot in one state, I think you mentioned that last quarter. Has that been expanded now? And if so, what has physician response been like? Are people -- are more and more units turning on that sort of connectivity?

Yes. You were referring to a pilot we ran with the community app. I think that went -- it went well enough that we are considering whether we would expand that, and we are now analyzing what do we need to do to improve the app. So I really don't have a lot to tell you, whether we're going to move forward in that and at what rate. But we are certainly are encouraged enough that we're looking pretty closely at it. The people who have used it, like it. They spend more time on it. I'm not an expert on clicks and how long and all that stuff, but the people who do know these things tell me that the pilot went pretty well.

Our next question comes from Mark Massaro of Canaccord Genuity.

The first one is for you, Doug. Can you characterize, or maybe quantify, your degree of confidence in closing the acquisition of the Alere assets by September 30?

I'm highly confident that we're going to get this closed. I did mention in the call last week that there are certain risks to all that. At the beginning, you would have said the FTC would be a risk, the EC was a risk, the Canadian antitrust group would be somewhat of a risk. But now I think we're just down to the EC, as far as I can tell. And we're working through that now. It's ongoing. I don't see any questions, so far, that we haven't been able to answer, in my view, satisfactorily. So there is one remaining risk, as far as I can tell. But my projection would be, that we can get past this and that this thing -- this acquisition closes in September.

Great. That's really helpful. The Alere Triage MeterPro had a similar installed base as your Sofia 1 analyzer. Have you had time yet to maybe map out where you think you could potentially take the Triage installed base with time? And maybe related to that, can you speak to how menu expansion on Triage may accelerate that rate?

Let me start by saying, where each of us has our instruments. For Quidel, with Sofia, we have a mix of hospital labs, both large and small. Emergency departments, sometimes. Quite a few physician offices, both large and small. The Triage MeterPro, on the other hand, is very well-placed in the smaller hospital labs that don't have the large immunoassay analyzers. I think the company has done very well in that segment. I think there could be some overlap with Sofia, but I think there's opportunity on both sides to address that particular market. We're also doing very well, as I said before, with Sofia in the urgent care setting. And interestingly enough, it appears, so far, that the Triage MeterPro is in those -- is in many of those sites. So there is some overlap, but there's also some opportunity to -- for the organization to use both sets of customer databases.

Great. And just my final question on some of the international investments you indicated previously that you're looking to make for the acquired Alere products. Can you provide a little more detail if this is going to be a function of expanding distributors, potentially going direct or maybe bringing in some sales management?

It's all 3 of those things, Mark. In different degrees, depending on which country you're talking about, there are countries where it's clearly been a direct sales presence. And in those situations, we will be hiring management, as well as putting salespeople on the ground. There are others that we are calling hybrid, where we have sales people on the ground, but we're helping distribution sell the product. And so that, obviously, has a smaller impact in terms of the number of hires. And there are some countries where, frankly, it is very highly dependent on a distributor on the ground and those countries require even fewer people, so it's a mix. And the model that we had going into this, I can tell you based on the conversation I had probably an hour ago, we've already figured out is not precisely accurate. What we were told by country, as we learn more, isn't exactly what we think we're going to end up with on day one. So it's going to be reasonably close in terms of numbers, but it's not always as we had thought. But overall, those are the 3 buckets. And it looks like depending on the country, we'll be hiring some -- in some countries, many people, and in some, not so much.

And I'm sorry, if I can, is there any way to quantify what the spend would be, presumably if it's distributors it should be -- we really shouldn't see it, right? So any incremental color on spend associated with international expansion would be helpful.

We will certainly get there sometime between sign and close. If the information I have had originally have turned out to be precisely accurate, I could probably answer the question today. It's going to be close but I don't have a good number for you yet, Mark. And I don't want to give you a number that I've got to correct later.

(Operator Instructions) Our next question comes from David Westenberg of CL King.

So you noticed -- you noted the BNP payment being contingent on factors that are outside your hand. Can you clarify whether this is a purely product reception issue or if it's another kind of situation out of your hand?

Yes, let me help you because it's not doctors outside of my control. The antibodies will be manufactured at the San Diego campus. Those antibodies are provided to Beckman. Beckman uses those antibodies in the manufacture of the BNP kit. Those kits are shipped back to the San Diego campus which, after September, will be another Quidel San Diego campus. We will then ship the product to distributors. And in some cases, end users who have Beckman analyzers. And effectively, we will be selling those products. We will sell those products in some countries directly. And in some countries, through a distributor. So we really don't have control over what that customer does, ultimately, with their immunoassay decisions. Obviously, we could try to influence that. But for the most part, these are decisions by customers around which immunoassay analyzer they're going to use. So once they've made that decision, then we have a customer to which we -- we'll more than likely be shipping a BNP kit. Does that make sense, Dave?

Yes, that was incredibly helpful. So when you talk about international synergies with the Triage asset, so if Triage is positioned really well in, say, country A, can you talk about the synergies and how you can come in with Quidel, maybe Infectious Disease product, in that said geography? Just a little more color on how that international synergy is going to work.

I don't think it matters which country. I think that with the combination of the 2 products in the segment, we have an opportunity to create a bundle that is, therefore, more valuable. It's more valuable at the end-user level, of course, but it's also valuable in terms of working with the distribution. I can say that, in one instance I'm aware of already, a customer was reluctant to go with Sofia 2. It was a multisite deal that we had ongoing. It was reluctant to go with us because if they unbundled their Alere bundle, that included Triage, then their Triage pricing was going to go up. When we explained that we would be acquiring that asset, the customer then was very happy to sign to the Sofia 2 agreement. So I think there's the bundling and unbundling that will be extremely valuable, depending on the country and the situation.

Got you. And then just a really quick one on the Triage instrument. I think you said the market is growing at roughly 10%. This asset is underperforming in the market, but you think it can go to single digit. Just confirm that. And then in terms of the -- is this mostly a capital purchase model? And if so, how are the instrument prices trending on that instrument?

I'll go in reverse order. These are placed on a reagent agreement plan and are not normally sold. So that's the answer there. We said before that we, in our model, we see ourselves getting to a mid-single-digit growth rate on the business in total. And obviously, we think that's possible. Others have modeled something higher. We have been known to model conservatively, and we believe that that mid-single digits is where we're aimed, in the near term. Longer term, growth will be driven by new products and that's obviously why I'm especially interested in the combination of the 2 groups and the R&D integration and what that looks like.

And we have another question from Jack Meehan of Barclays.

Just like the flu season, I'm back. Had a question related to the Alere San Diego facility. If I remember correctly, I think this is the facility, previously it had a warning letter. Could you update us on the status of that and the remediation plans or whether you think it's an issue or not?

Sure. In 2012, the company was inspected. I believe it was one of the cardiac markets that stimulated the inspection. While there, the FDA decided to inspect the entire facility and all products. And in some instances, determined that certain controls needed to be put in place in the manufacturing process. The company has worked through all of those. And in some cases, that's resulted in lower yields on the product. And that's why we're acutely interested in getting in there with our manufacturing expertise to automate some of those processes and to see if we can improve those yields. And in some instances, that improvement yield may require a new product. And in fact, that's what I was commenting on in the last call, is that we think that we're going to stand a pretty good chance with the new toxicology product, of getting a product in the market, performs well enough to pass the FDA's scrutiny but also, one that we can manufacture more efficiently and at higher gross margin. So, yes, we're excited about the opportunity. We think we know what to do based on our early due diligence and we've modeled some of that.

Got it. Does the -- just to be clear, does the warning letter, is that still outstanding at this point?

Sure. I mean, it's relevant. But the company, again, has taken all the steps necessary to address those concerns that the FDA had.

Great. And then final one. You talked about pregnancy, I believe, I heard down 8% year-over-year. Could you give an update on the pregnancy Sofia 2 assay? And just the thoughts, whether that could hit the market sometime before the end of 2017?

That's a great question. Obviously, we've lost some share on hCG, and that's to -- it's to private label hCG. The product has become, I guess, commoditized, if you will. The prices are low. And effectively, we need to develop that product for Sofia 2 and expect to do that. Now I don't have any date for you on that. It's a project that's in what we call phase 0 at this point, meaning, we're taking a look at can we do it? What's it going to cost? What's the return? But I expect to be past phase 0 reasonably soon.

And our next question is from Nicholas Jansen of Raymond James.

One, just quick follow-up on the sale leaseback comment. I'm just trying to get a better sense of, in terms of magnitude of size, how do we think about the pro forma leverage. I think on the last call you talked about low 4s on a trailing 12 basis. Just how do we think about it? Does that move the needle meaningfully, in a sort of context that you will get your capital structure? And if it does, how do you guys think about your positioning as a much larger organization with strong cash flow as a continued consolidator of diagnostic assets?

Sure. The short answer on the leverage, instead of being around 4x, we can go down by 1 term fairly quickly. And we've been presented with a preliminary proposal that suggested pretty big range of value for the real estate. So we're a little bit reluctant to throw out numbers. But at this stage, we're comfortable in saying that the net value should certainly be north of $100 million. And you are right with the cash flow from operations of the 2 businesses combined, it looks pretty good. We could be a consolidator of, certainly, more assets than we were exposed to before.

Okay. Well, that sounds like that's the last question. So thanks, everyone, for your support, and obviously, your interest in Quidel. We had a great quarter and I believe that we are now very well positioned to achieve our growth objectives, perhaps, even more so than we have ever been before. So all the best, everybody.

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