QuidelOrtho Corp (QDEL) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation Third 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. Our third 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 on November 1, 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, November 1, 2017. 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 9 months ended September 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 Angie Mazza at (312) 690-6006. Following Doug's comments, I will 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.

Thank you, Randy, and thank you, everyone, for joining us this afternoon. I know that there will be an interest in hearing more about our recent transaction. Clearly, Quidel has transformed its business with the addition of Alere's Triage and BNP assets, which occurred in early October. The combination of these businesses with our base business improves our prospects for success and shareholder value creation by unlocking growth opportunities in several new end markets, both geographically and by products, which is very exciting.

But before I talk a bit more about this transaction, let me quickly touch on our Q3 performance for legacy Quidel. Revenue for the third quarter 2017 was $50.9 million compared with $49.3 million in the third quarter of 2016. In the quarter, we realized a 19% increase in immunoassay revenues and a 13% increase in molecular revenues over the prior year quarter. As a reminder, the third quarter of 2016 included $3.8 million from the Gates grant revenue that did not repeat in Q3 2017. Excluding the Gates grant revenue, third quarter 2017 revenues increased 12%.

Sofia placements year-to-date have already surpassed any other year since inception. The dramatic increase in placement rate validates the acceptance of our Sofia 2 instrument, which was launched in June. Based on this trend, we believe we will achieve 28,000 to 30,000 placements within the next year or so. On average, we are placing 2.6 instruments per customer, with 60% of placements in the point-of-care setting, and each instrument generating on average $4,000 per year on a trailing 12-month basis.

In the last several months, we also demonstrated continued success in getting products through the FDA. For example, on October, we announced that we received regulatory clearance for our point-of-care Sofia Lyme Fluorescent Immunoassay. With the clearance of the Sofia Lyme Fluorescent Immunoassay, we are now able to detect the antibodies to the microorganism associated with Lyme disease more rapidly in near-patient settings. This is another example of our ability to provide simple, cost-effective solutions for physician offices and hospitals that previously had to wait several days for send-out Lyme results.

As a reminder, we currently have Sofia Vitamin D and Sofia 2 CLIA waived Strep A under review at the FDA. In development, our Sofia 2 CLIA-waved Lyme whole blood; Sofia 2 CLIA-waived Vitamin D whole blood; and Sofia 2 CLIA-waived hCG, both urine -- for both urine and whole blood sample types. In addition, we are making progress with a high-sensitivity Sofia Strep A assay, a Sofia C. diff toxin assay and a Sofia procalcitonin assay. The other major product development -- excuse me, the other major product in development is, of course, Savanna, and we are extremely pleased with where we are at this point. We are looking forward to unveiling our progress and positive changes at our next Analyst Day, which we plan to hold in the spring.

With regard to Solana, we have placed roughly 500 instruments, of which, 55% are in an acute setting and 55 -- or excuse me, 45% are in the point-of-care. While we underestimated the installation cycle for this product as there is the gap between contract signature and a customer up and running and routinely ordering reagents, we have business under contract near our internal expectations and remain quite positive on the long-term outlook for Solana.

We also recently announced that we have received regulatory clearance for our Solana RSV and Human Metapneumo assay. This rapid testing solution addresses RSV and Human Metapneumo, leading causes of viral respiratory infections in both the young and elderly, and is unique to the market. Importantly, about 20% of our current customers have been waiting for the clearance of this product. The Solana RSV and Human Metapneumo assay is an easy to use rapid molecular diagnostic test that has superb clinical accuracy. This economic and focused approach to testing to detect and differentiate these infections replaces expensive syndromic panels where a laboratory is capable of performing high-complexity testing. We currently have 7 assays running on the Solana platform, with Group B Strep and Bordetella pertussis -- parapertussis are the next 2 assays to be commercialized.

Out sales data for the third quarter, meaning sales overall from distribution to our customers, were very encouraging. Our total Influenza revenue was up 23% versus the prior year, driven by incremental Sofia placements. Our Strep revenue increased 6% versus last year due to growth in both our Sofia and Solana Strep assays, offset slightly by several notable losses of QuickVue hCG hospital customers to a private-label product.

Distributor inventory has grown incrementally over the second quarter in prior year, but the increase is consistent with the out sales revenue growth and incremental placements of the Sofia and Solana instruments.

Given the time of the year, I know that you have questions regarding what we are seeing with Influenza and what the season might look like. The short answer at this point is always, I don't know. However, we do have over 4,600 Sofia customers sending data to our Virena cloud, and those data suggests that there are upticks in positivity rates and testing volumes in a few states. Having said that, the CDC is reporting overall ILI percentages that are typical for this time of year. So again, we won't really know how significant this respiratory season will be until January or so.

As many of you know on Friday, September 22 of this year, the Centers for Medicare & Medicaid Services published a draft fee schedule as part of changes to Medicare reimbursement for clinical lab testing. This change in fees was directed by the Protecting Access to Medicare Act known as PAMA. As a matter of process, reimbursement data were collected from private payers to analyze the payment difference between Medicare reimbursement and private payer reimbursement. The goal of this new fee schedule is to level the reimbursement playing field and to ensure that Medicare's reimbursement levels are in line with the private payer averages. Public comments on this draft fee schedule were accepted through October 23, and a final fee schedule is expected to be published by the end of November. Once finalized, this new schedule of fees will take effect in January of 2018.

For those products decreasing in payment, the drop in reimbursement will be gradual from 2018 to 2020. As we look at the draft fee schedule and its potential impact on the pricing for our current products as well as those in our pipeline, we feel very good about our position and the decisions we have made. As you know, we have an underlying philosophy of bringing cost-effective solutions to the market and you may have heard us mention over the years that we believe that cost matters. After analyzing our product lines, 7 of our current products have increased in reimbursement, including, among others, our Influenza and Strep A rapid immunoassays. After a cost reimbursement analysis, even with some decreases in reimbursement, we believe that our products will remain very competitive, particularly given the high level of differentiation with our portfolio of products and superior cost position. Our cost position is especially important with molecular products, the reimbursement for which is expected to decline substantially over the coming years.

In summary, while the market is anticipating downward pricing pressures that results from declining reimbursement, we believe that we are very well-positioned in the market with the pricing of our current products and our pipeline.

Let me now provide a bit more color on the transaction and our integration efforts thus far. As a reminder, we acquired the Triage MeterPro cardiovascular and toxicology assets, and the BNP assay business run on Beckman Coulter analyzers from Alere. As I mentioned, this transaction is transformational for Quidel. It significantly enhances our revenue profile and expands our geographic and product diversity with substantial expansion opportunities in new markets. Further, while the installed base of Triage MeterPro instruments in the U.S. nicely complements the installed base of our Sofia and Solana platforms in the hospital segment, there will be new call points that our U.S. commercial organization can leverage as well. Internationally, the Triage MeterPro system gives us access to the rapidly evolving cardiac biomarker segment, one of the faster-growing segments in the IVD market.

The total consideration for both businesses will be up to $680 million, comprised of the previously announced $400 million purchase price for the Triage business, $40 million in contingent consideration and $240 million in deferred consideration for the BNP business. Total estimated actual revenues for all the acquired businesses in 2016 were $245 million, with Triage MeterPro contributing $146 million and BNP contributing $99 million. Total actional revenues for all of the acquired businesses on a trailing 12-month basis ending June 30, 2017, were $254 million, with Triage MeterPro contributing $147 million and BNP contributing $107 million. As we previously noted, the combined EBITDA for these businesses over both time periods was roughly $100 million.

As a refresher, Triage competes in 2 fast-growing areas of patient need, cardiology and toxicology, which are driven by an aging population, evolving lifestyle demographics and a shift towards point-of-care. The point-of-care cardiovascular testing market is estimated today at $700 million and is growing at a 10% compounded growth rate globally, driven largely by increasing cardiovascular disease in emerging markets. Over the last 12 months, Triage revenues have been flat. However, we believe with a more focused global commercial organization, the U.S. launch of a new compelling toxicology panel and continued growth of the cardiovascular business in international markets, we should realize growth in the mid-single digits as we exit 2018.

There are those, including myself, who might question where -- whether there will be revenue synergies that can be realized given the differences between the cardiovascular and infectious disease markets. That's a fair question and probably one that is best answered by those with experience in commercializing products across multiple customer segments. Having previously led commercial organizations globally when multiple new product lines were added very successfully to an existing sales organization, let me provide a couple of thoughts that might be helpful.

First, for urgent care centers, emergency departments, clinics and larger physician office practices and small hospital labs, the call points are very much the same. And in larger hospital settings when that may not be the case, there are still significant efficiencies to be gained in parking a car in one location and making multiple calls. And finally, it's still point-of-care immunoassay. It's not hematology or next-gen sequencing or any other segment that would require a great deal of training and product knowledge. My conclusion, having done this before, is that my sales team can handle point-of-care cardiovascular and we will see revenue synergies.

Turning to integration planning. We are in full execution mode. The integration team has coordinated and facilitated a cross-functional global strategic plan. The transition service agreements with Abbott are in place and functioning appropriately. The workforce planning efforts that have met day 1 expectations and are now working on filling the gaps of what was not requested on day 1, as well as the future state of our workforce. On the commercial side of the business, we have communicated with all international distributors, customers and employees as well as developed the commercial governance model for all support requirements. We currently have employed 50 commercial salespeople to support the Triage-BNP businesses outside the U.S.

For our U.S. commercial team, our sales reps have been trained and have a list of the Triage customers in their geographic territories, which they have already begun calling on. We are working closely with the Triage operations R&D regulatory personnel to share information and knowledge and to start understanding how we build a stronger team and prioritize our projects as we head into 2018.

As I mentioned before, completing the next-gen toxicology and high-sensitivity troponin projects are our highest priority, and we will lock down our next-gen immunoassay platform plan shortly with an expectation that this new platform will run most, if not all, our future immunoassay products. To date, we have not identified any negative surprises and remain very bullish on the opportunities we identified during our due diligence.

In summary, the last several months have kicked off a new chapter for Quidel. Our core Quidel business looks solid, the Sofia and Solana programs are progressing nicely and our entire team, once again, demonstrated just how good they are. We have also welcomed our new colleagues from Alere, and they are actively participating in the integration process. We are excited about what the future holds for us as we believe our strong foundation, coupled with the significant benefits of this transaction, will be a real value creator for our shareholders. There has never been a time -- never been a better time to be at Quidel and there has never been a better time to be a Quidel shareholder.

Randy?

Thank you, Doug. As we reported earlier today, total revenues for the third quarter of 2017 were $50.9 million, an increase of 3% over the prior year. And as Doug has mentioned, excluding the Gates grant revenue, which is fully realized in the third quarter 2016, revenues increased 12%. Immunoassay product revenues, which includes all QuickVue, Sofia and iHealth lateral flow products increased 19% to $36.5 million in the third quarter of 2017. Within this category, Sofia products grew 39% from the third quarter of 2016 to $19.6 million, while QuickVue revenue decreased 6% to $15.6 million.

Total Influenza revenue in the quarter was $23.9 million. This compares to $18.8 million in the third quarter of last year. The Influenza immunoassay revenue split was $16.1 million from Sofia versus $4.9 million from QuickVue. QuickVue and Sofia Influenza inventory at distribution is up 20% compared to the third quarter of 2016, consistent with the out sales growth. Also remember, inventories at distribution in Q3 at 2016 were low after a weak 2015, 2016 flu season.

Revenue in the Virology category, which includes products from Diagnostic Hybrids, decreased 6% in the third quarter to $8.8 million, mostly driven by lower herpes revenue, a portion of the decrease due to the conversion to the Solana HSV/VZV assay.

Our molecular product category, which includes the Lyra, AmpliVue and Solana brands increased 13% in the quarter to $2.8 million. Solana continues to be the main growth driver in this category.

Royalties, grants and other product category decreased in the quarter to $300,000 due to the non-reoccurring Gates grant revenue.

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 35% from the third quarter of the previous year to $22.4 million and made up 40% of total revenues in the quarter. Also worth noting, Strep A revenues increased by 6% to $7.7 million and RSV revenues increased 55%.

Gross margin in the third quarter was approximately 62%. This compares to 64% in the third quarter of 2016. The Gates grant revenue improved the gross margin in 2016 by approximately 3 percentage points. Product mix increased product margins in the quarter, but was mostly offset by the depreciation on our instrumented systems.

R&D expense decreased by $1.3 million in the quarter as compared to last year due to a decrease in spending for outside services for the Savanna and Sofia platforms.

Sales and marketing expenses for the quarter increased $1 million compared to last year as we added the commercial team for the iHealth business. G&A expense increased 3% for the third quarter versus last year.

Also in the third quarter, we recorded $4.6 million in professional services related to due diligence and integration activities associated with the Triage and the BNP acquisition.

In the quarter, we realized a tax expense of $200,000. We have recorded this provision based on the assumption that for the full year, we have a taxable income in certain state and foreign jurisdictions.

Net loss for the third quarter of 2017 was $5.5 million and $0.16 per share as compared to net loss of $600,000 or $0.02 per share for the third quarter of 2016. On an adjusted basis, earnings per share was $0.17 per diluted share as compared to $0.10 per diluted share for the third quarter of 2016. For the first 9 months ended September 2017, our net cash position increased by approximately $3.5 million. The add back of noncash items associated with depreciation, amortization and stock-based compensation contributed $27.9 million to operating cash flow during the 9-month period.

We also spent $12.8 million on property, equipment and intangibles and used approximately $13.7 million for the acquisition of the InflammaDry and AdenoPlus diagnostic businesses from RPS Diagnostics. As of the end of the third quarter, the company had $173 million in cash.

With regard to the Triage and the BNP transactions, I'll provide you with a few quick updates. As it relates to cost synergy expectations, it is important to note that we have owned the asset for 3-plus weeks. We are working diligently to evaluate the synergy opportunity and expect to provide an update in the coming weeks. We have stated that we believe the synergies will come from improved manufacturing and operating efficiencies as well as duplicative costs in other factional areas.

In terms of expectations for the fourth quarter for the Triage and BNP business, we have just completed our day 1 commercial fulfillment but still have a lot of work to do to fill in some of the gaps. As Doug mentioned, we closed the transaction October 6, and as such, the quarter results will be shy 1 week. We also believe there is excess inventory in certain markets and as a result, we want to right size these inventories in the fourth quarter. Based on this, we believe the fourth quarter revenue will be softer than the normal trend.

Let me quickly provide an update on the sale leaseback transaction, which is progressing nicely. To date, we have contacted over 40 firms nationally and have positive initial responses from approximately 20% of them. We remain confident in our ability to complete the transaction prior to the end of the first quarter of 2018, and we believe the proceeds from the transaction will be at least $100 million. As we previously stated, with a sale leaseback transaction, we will realize an increase in our operating expenses of approximately $5 million to $6 million per year.

In terms of go-forward capital allocation, we will use cash flow from operations to reduce our debt in the short term. We have stated that over the next couple of years, this business should generate excellent cash flow and we should be able to reduce our leverage ratio by 0.5 to 1 turn annually over the next several years.

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

(Operator Instructions) First question comes from Nicholas Jansen with Raymond James.

Just a couple maybe, first on the transaction. As we think about making sure our models for 2018 are appropriately calibrated, just wanted to kind of get a sense of if we were to look at the trailing 12 months EBITDA of both organizations, combining those, factoring in the higher rent expense from the sale leaseback, is that a good starting point as we think about from a base perspective and then we can layer on growth and synergies? I just wanted to kind of get your thoughts on how we should be thinking about accretion in '18?

No, it's a fair question, Nick. I think the $100 million in EBITDA for the new business is an appropriate place to start and, obviously, doesn't include cost or revenue synergies. And on the other side, we would assume that we would have a normal-looking respiratory season in Q1. And if that's the case, I think, in total, we're looking at something that conservatively would be in the neighborhood of $150 million in EBITDA.

Okay, that's very helpful. And then secondly, just below the line, Randy. Any comments on kind of intangibles or anything along those lines, at least. Just to make sure our EPS is formulated appropriately?

Yes, Nick, we're currently in the process of evaluating the assets and doing the -- that allocation between intangibles, tangible property and goodwill. We will be filing the 8-K here by mid-December and we'll provide you some further comment at/or prior to that filing in mid-December. But we're working through that currently with an outside firm.

Great. And then my last question, just on the core business itself. On molecular, it does feel like the ramp has been maybe a little bit slower than what you would have thought from a booking to revenue conversion. I think you made the comment, Doug, that the underlying bookings are probably closer to that aspirational target that you had this year. But just wanted to kind of flesh out how we should be thinking about molecular growth in the medium term?

I think as we exit the year, we'll be able to show a reasonable run rate that is certainly much closer to what we had aspired to achieve. I did candidly say that there is a gap between closing and getting customers started. I would say confidently that our commercial team knows what to do. Some of it is -- are things that we would do with the existing infrastructure, but we also will consider adding other resources that would help us get customers trained and up and running more quickly. So we know what to do to close the gap. And I'm actually pretty enthused by what we're seeing in terms of the new contracts that I have visibility to.

That's helpful. If I can squeeze one more in, in terms of just kind of your 4Q comments surrounding the pro forma acquired revenue being a bit softer than normal trend due to the 1 less week and just the inventory dynamics that you're trying to rectify as we head into '18. Could you maybe help us define what softer-than-normal trend is so as we think about making sure our numbers are squared away?

Well, it varies by geography, but I'll just tell you that my new guys on the ground in China believe that they had in excess of 7 weeks or so in inventory. And I see other geographies where some clear loading occurred, although it's not rational in my view, it did occur. And we're going to have to bleed through some inventory in order to get, what's the right term, Randy, rightsized. So I hope that's enough color but without saying anything.

And our next question comes from Jack Meehan with Barclays.

I want to start with Sofia 2. So great progress on placements. Could you give us some color around the trajectory in the path to 30,000? Are you seeing demand ahead of the FDA regulation of flu testing in January? And then finally, given some of your early commentary you provided, are you trying to drive cannibalization of QuickVue and legacy Sofia as you go?

All great questions. Several dynamics are at play. One is the FDA reclass. There are some assays that don't meet those guidelines and they need somewhere to go, and we've been the recipient of a pretty big chunk of that. In addition, I would say the time to result for positives has been a huge benefit. I would also say in some of the larger closes that with Virena and the ability to standardize across entire networks, that, that has certainly been a factor. Performance of the assay actually has been another factor that has been important. And finally, yes, we are trying to convert our QuickVue business, as we have been for a couple of years now, over to what we think is a better solution for our customers long run. The interesting thing though that we've learned in the process is how strong that QuickVue brand actually is. We have customers that unless we pull the product from the market are not going to move, we know who they are, we're working on them. But we will still as we -- even as we exit this year and move in the first quarter, we still have some very, very large customers that love the brand, love the product that don't want to switch. So that's kind of what's happening out there. At the end of the day though, we are thousands of placements in Q3 and likely the same in Q4 and Q1 of next year. And so we will give a number, as we do every year or have, at JP Morgan in January. I think people probably are anticipating that the number is significantly higher, I'm kind of telling you that already though, aren't I? And so within a year or so, I think we will get to that 28,000 to 30,000 that we have suggested. Probably for the last 24 months we have been saying that, right, Randy?

Yes.

Do you think the overall opportunity could be bigger than the 30,000? And how do you size that?

First answer is yes. Secondly, I don't know. The extent to which Millennials and other patients start seeking more and more health care in alternate sites and the extent to which patients demand to have a result while they are sitting in front of a physician or a caretaker or a health care provider, that's probably going to dictate where a lot of this is going. I see pretty big moves in urgent care right now. I also see hospital standardizing and making decisions for clinics. So it's interesting. Just a couple of years ago, people had forecasted the demise of rapid point-of-care assays suggesting that molecular was the solution moving forward, and that certainly has been an interesting factor. But we are now seeing papers and publications where people are saying, "Yes, that's all good, but we still need answers while the patient's sitting in front of us, and we need it to be economic, we need it to be standardized." So the second part of your question, I don't know how far this thing is going to go, but I certainly think we're going to be above 30,000.

Great. And then I have one on Triage. You hinted a little bit of the revenue synergies, can you just elaborate a little bit more on the bundling opportunity and what share of either Sofia or Triage placements will be appropriate for that cross-sell? And within that, how are you -- are you changing the compensation structure for any of the sales team to drive those sale?

So we've just been running this business for a very short period of time. And I haven't personally made a great deal or a great number of sales calls. But I can tell you just from my own personal experience being on a call during which the primary purpose was to talk about the value of Virena, which, by the way, we closed. But before I say in front of my audience here at the table -- we closed, but before leaving I just said, "By the way, do you mind if I ask just one more question?" They said, "Of course, yes." And I said, "Well, how are you handling your shortness of breath customers?" And the answer was that it wasn't standardized across the 50 or 60 sites. They have some people just evaluating and triaging their patients -- pardon the name -- but triaging their patients with a stethoscope to those actually using biomarkers. But the customer was instantly interested in talking about the topic. So I don't think my salespeople are going to find it dramatically different than my own experience. I'm anxious to see the reports as we get into this. But I think it's going to be a pretty easy conversation to bring up while we're in places. The overlap to which you were suggesting that we might have is actually pretty significant, more so than I thought. We're not done with the analysis at this stage, but the preliminary data that I've been privy to suggests that there's quite an overlap, but at the same time, there are opportunities to cross-sell, that is selling Triage in the sites that have Sofia and vice versa. The bundle itself is an advantage with the customer, but it's also an advantage with the distributor. That's true in the U.S. That's true ex U.S. And then market share, I -- honestly, I have no idea what additional share we're going to be able to pick up, but I'm pretty impressed -- positively impressed with what we're seeing so far.

Our next question comes from Brian Weinstein with William Blair.

This is actually Andrew Brackmann on for Brian today. I wanted to start on the Alere asset. You said you think that you can get to the mid-single digits there on the top line with the invigorated sales force. But what additionally beyond just an increased call point needs to be done here? Is there really anything in your strategy that you need to execute on?

Yes. We need to get the toxicology product into the market that we have been forecasting. We mentioned that before. And we need to continue to see the same sort of growth level that you see in China and other international markets. So we're not dependent entirely on the U.S. hitting it out of the park by selling all the products. That is a factor. Instead, we're looking at the international growth as well as the new product introduction.

Okay. And then you said that the overall point-of-care market was growing closer to 10. Longer term, do you see anything that's really going to hold you back from getting to that growth rate?

No, but there's work to be done. We've envisioned a better instrument platform. We have envisioned high-sensitivity troponin assay. I say that as if we've already accomplished it. But to be fair and honest, those are things that will require significant resource and time.

Our next question comes from Tycho Peterson with JP Morgan.

Doug, I'm wondering how much of the strong immunoassay quarter was due to stocking at distributors ahead of the flu season? And just your overall thoughts in inventory levels right now with distributors?

That's a great question, Tycho. That's why during my comments, I suggested the out sales number. The out sales number are actually running ahead of distribution. So inventories at distribution would logically be lower. So it doesn't mean there wasn't some stocking here and there, but overall, again, out sales are outpacing orders, to me.

And then on Triage, obviously a lot of questions on the revenue side. A question for you on gross margins. Just as we think about kind of optimizing the manufacturing process in San Diego, improving yields and I think you even discussed adding a new line, can you maybe talk to some of those moving pieces and when you think you can start to get some gross margin leverage?

Sure. As we've said within the Triage business, it currently is around a 50% gross product margin. And we've said through efficiencies that we believe over a 1- to 3-year time period, it had historically been maybe closer to 60%. We're not sure we can get all the way there, but we believe that there is some good upside. And it's going to probably take us 2 to 3 years to get there, but we think high 50% is a reasonable target for us.

Okay. And then on the commercial and integration. I guess, as we think about you trying to cross-train the sales force in the midst of peak flu season, how do you kind of manage the risk there given that sales force obviously needs to focus on what could be a decent flu season?

We're doing the trainings regionally. I'm actually through module 1 of the training personally. But we've asked the guys to do a lot of work online. And then we're holding regional trainings with sort of taking a day to 2 days, I believe. While they're there, we're obviously focused on other things, the legacy products as well. So this would not be uncommon for us do some sort of training at the regional level. Obviously, we also will do a national training, I think, which will occur in February. But we're not really distracted any more than we would be normally. It would be a part of our normal commercial training cadence. So it's a fair question. But we're really not taking people out of the field for very long.

Okay. And then last one on QuickVue, you called out the private label dynamic. That's not necessarily a new trend. I'm just curious if things have changed in the last couple of quarters. Have they gotten -- I guess, have competitive pressures intensified there. And how do you think about private label in general impacting the broader portfolio?

Well, private label has been -- you're right, Tycho, around quite some time, we've had some specific losses with hCG. We had hoped to be in market with Sofia now in the CLIA-waived space, which would have been helpful, that was our game plan. We're still working on that and expect to have something in market at some state soon. The trend is not anything different than it has been before. Clearly, if a distributor can commoditize a market, they've shown that they will. Our job is to produce a product that has more value. In excess of the customer, you don't want to do that. So -- but your question about, is there a difference? I'd say, no it's not different, but it is an offset. And so I like to be fair and talk about the things that are going well and what the offsets are.

Our next question comes from Bill Quirk from Piper Jaffray.

First off, Doug, help us -- I realize that it's early on the toxicology and the high-sensitivity troponin as well as the new instrument, but how should we be thinking about the overall development time here? I mean, presumably, this is, what, a 2-year sort of series of projects or should we be thinking longer than that?

I think 2 years is a fair time frame. If you ask my R&D organization, they would lobby for longer. But at the end of the day, we've got to do a couple of things with the existing products. And we also have to plan for the future. Ideally, I'd like to have 1 immunoassay platform out there that could do, not only our Infectious Disease menu, but also the cardiovascular products. When you think about managing this different instrument platforms across the globe, it's not very efficient. So in the shorter-term, you can expect improved products, and that would happen certainly within 2 years. Brand new instrument platform that did everything we wanted it to do is probably going to take a little bit longer.

And should we assume, Doug, that the tox assays are going to be going back on the existing Triage? Or would this be a product for, call it, Triage 2.0?

Well, the Triage instrument itself doesn't control for temperature or flow rate, which would be 2 things that we would like to have if we were an R&D person in order to achieve low-end precision, which, obviously, requires, a gain in sensitivity. So we've got to do something one way or another. What I'm thinking, Bill, actually is not something that looks a lot like Triage at all but something that would accommodate, again, both the Infectious Disease and those cardiovascular assays. That would be the longer-term. Shorter-term, there are some things we can do the Triage 2.0, if you will, there are probably some things that we can do. But we have to evaluate the mix between doing shorter-term fixes and what's best for our company longer-term. And so that's a delicate thing that we're working through and I'm not really ready to talk a whole lot about that having just run the business for 3 weeks. But I do expect to have a pretty good answer to that question when we see you in the spring.

Okay, understood. And then just last one for me, and maybe this goes back over to Randy. Sorry to keep picking on the 4Q Alere estimate here, and I appreciate Doug's comments about up to 7 weeks of inventory sitting in certain locations like China. But should we be thinking down 5, down 10, greater than that? Just trying to get a handle on that. Sorry for nitpicking here, but just trying to get some additional color.

Yes. We prefer -- kind of too early, we're still kind of looking at it country-by-country. There is no seasonality in the business so we're just trying to give you some guidance of full year divided by 4. Fourth quarter is probably going to be lighter than that. But specific dollar amounts, we'd prefer not to state anything at this point.

And our last question comes from Mark Massaro with Canaccord Genuity.

I guess, the first one for you Doug is on PAMA. I appreciate your comments on the call but generally speaking, it seems like a lot of the immunoassay test fared quite well relative to some of the molecular and panel companies. Can you just speak at a high level to your degree of satisfaction with the PAMA dropped rates? Did you make -- did you submit comments? And just longer-term, if you can just speak to how you think that your strategy fits in to where you think pricing is going?

Thanks, Mark. First, I didn't make comment with respect to the draft. We've been following this now for quite some time and are reasonably familiar with what has been going on. And we had done our own preliminary estimates of what the impact to our various products might be. So we weren't surprised by anything so far. There are some where you see the impact likely over the 3-year period to be quite dramatic on the immunoassay side. I think Vitamin D would be a good example, where I think the national limit's in the mid-40s maybe, and it's dropping down potentially as low as 27, 28. So that would be a pretty big drop for something that we have in our pipeline. For the existing immunoassay products, we knew relative to private payer rates where we were and we didn't expect to change. I think what's happening in molecular is mainly because a percentage of higher rates, it's just a bigger number. So I don't think there's anything that's different other than just math. For us, we've always contended that for our small company, the best way forward was to have a solutions-oriented approach to what we develop. And also with some -- the idea in mind that we weren't necessarily competing directly with other molecular players but instead, trying to provide something of benefit to health care. An example would be our Strep assay on Solana. The idea is not to compete with others who have a molecular Strep, but to convince people who are doing culture that it's better for the patient, better for antibiotic stewardship to switch and now you can because we've priced the product such that we're not going to break the budget of the lab director, certainly not the microbiology director. So for us, reimbursement really isn't something that we're focused on. But you could say that as reimbursement comes down, the lower-cost manufacturers would have an advantage. But again, that -- I wouldn't say that's the principal part of our strategy, but it's certainly helpful to have a low cost of goods sold position.

Great. And as it relates to the -- some of the personnel. I believe you indicated that roughly 50 people were trained outside the U.S. Can you speak to whether or not those folks were already with Quidel or with -- or whether or not they transferred from Alere? Whether they were direct or distributors?

Yes. The 50 that we're talking about internationally are the folks coming over from Alere. We made, to be specific, just to provide you an example, we made offers for 20 of the commercial people in China, 19 of them came over. In addition, there are probably, over time, another 9 or 10 that we would like to join. We'll just see how that happens over time. But these are all people who are already selling the Alere products. The same is true for the European situation, smaller numbers. But country-by-country, there's a small number of people that we would have made offers to. So far, that's gone fairly well for us. But what else can I say, they're all -- they're not our people, they're -- these are the new -- we did have a small number of people, as you know, Mark, from before that were supporting distribution partners ex U.S. But that would be very small compared with the number that are coming over.

That's really helpful. And you provided some numbers on BNP and Triage. Just to make sure, BNP, I believe you said, is tracking at around $107 million, that's an 8% increase. I think you're guiding us to somewhere around mid-single digits exiting '18. Should we be thinking of BNP kind of tracking ahead of the growth of Triage? And could you just speak to some of the growth drivers around those targets?

I would love to be able to tell you, Mark, that growing from $99 million to $107 million is a trend because you're looking at a 6-month difference in time, right? There's the year-end 2016 number at $99 million and the June 30 end on a 12-month basis being $107 million. I'd love to be able to tell you that, but I cannot. Until we get actual numbers, which we're expecting here in the next few weeks, I can't really answer the question. So I apologize. I'd answer it for you, but -- and I'd love to tell you it's real growth, but I'm not -- I can't really say that right now.

Great. And just last one from me. Can you speak to any receptivity you've had in the Lyme disease test? Congrats on the approval. Just confirm that it is your intention to get CLIA waived on this -- on this particular one? Or is the bigger expectation that it will be the second approval on the second-generation Sofia?

I'm a little confused by the question. So I'm going to answer it and then, you tell me if I'm answering your question. We did just get approval for mod complex product, which we are launching imminently. Receptivity among folks that I've talked to has been high, including a couple of conversations we've had with distribution partners. I think that this is not the ideal time to launch the Lyme disease product. However, I feel like we should be able to demonstrate some traction. The other product, which is on Sofia 2, we expect to be in market with in time for the next -- the start of the next Lyme disease season, if you will. That product is a whole blood fingerstick CLIA-waived product. Did I answer that?

Yes. That -- yes, I just want to confirm, is it your intention to obtain a CLIA waiver on the Sofia 1 Lyme test?

No.

And there are no further questions in queue. Doug, please proceed with any closing remarks.

Sure. I see we're already at the top of the next hour so thanks, everyone, for your support and for your interest in Quidel. We had another great quarter and a great year actually, and I believe that we're well-positioned to achieve our growth objectives. Thanks again, and take care, everyone.

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