QuidelOrtho Corp (QDEL) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) I'd now like to turn the call over to Mr. Ruben Argueta, Quidel's Director of Investor Relations. 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 Randy Steward, our Chief Financial Officer.

Our fourth quarter and full year 2018 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 February 13 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, February 13, 2019. 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 months and full year ended December 31, 2018. If you have not received our news release or if you would like to be added to the company's distribution list, please contact me at (858) 646-8023. Following Doug's comments, Randy will briefly discuss our financial results, then we'll open the call to your questions.

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

Thank you, Ruben, and good afternoon, everyone. Thanks for listening in on the call. We have a lot to do this year, 2019, and there are many great, exciting opportunities ahead of us. So I won't spend too much time after today looking in the rearview mirror. Having said that, Q4 2018 was a solid quarter for us and 2018 overall was extraordinary.

Early in the year at our Analyst Day in Chicago, we communicated several milestones and several expectations for the year. We said, first, that our commercial leadership and their teams could fully absorb the larger sales and marketing responsibilities, establishing a solid revenue baseline for the acquired Triage products, while continuing to grow our legacy immunoassay and molecular businesses as we had in the past. We said that we would do this by recruiting and installing the necessary people and infrastructure internationally but would not need to add significant resources for the U.S. We said that we believed that we would reach $250 million for the combined Triage businesses globally. Instead, we did $267 million in revenue for the year. We said that we would deliver 10% in revenue growth for the base driven by new Sofia and Solana placements. Instead, we did 11%.

In terms of the integration of the newly acquired assets, we said that by the end of the year, 95% of order to cash for the Triage businesses would be under our control and that we would achieve $10 million in annual run rate savings. By the end of Q1 2019 when the Chinese business goes live, we will be at 96%. And at the end of 2018, our cost savings run rate was at $13.3 million.

And finally, in terms of financial performance, we said that we plan to reach 32% in terms of EBITDA as a percentage of revenue for the year and that with cash and through a share exchange for our convertible debt, we intended to lower our leverage ratio to below 1.5x. For 2018, EBITDA was 33% of revenue, and our leverage ratio at year-end was at 0.9x. In summary, each of the key metrics that we announced at our Analyst Day was accomplished, except for a minor delay with bringing China onboard and under our complete control.

Before moving off 2018, allow me to mention a few other notable achievements. First, we placed nearly 10,000 Sofia instruments net of replacements. Sofia truly is a flagship product for us, and the franchise is doing extremely well.

Second, the molecular franchise is gaining traction with Solana reagent kit revenue doubling year-over-year helped greatly by the newer products, HSV/VZV and C. difficile.

And third, our R&D and regulatory teams haven't slowed down at all. Three products, Sofia Vitamin D, Sofia Lyme with the European bugs added and TriageTrue High Sensitivity Troponin I, each received the CE Mark and are cleared for sale in Europe. Four products, the CLIA-waived whole blood finger-stick version of Sofia Lyme; the serum version of the Lyme test; Solana Bordetella Complete, which includes both pertussis and parapertussis; and QuickVue Influenza, which meets the FDA's reclass guidelines, were each FDA cleared to be marketed in the United States. And we made progress on the 21 significant R&D programs that are currently funded, including Savanna reagents, the instrument and test cartridges.

Moving forward, as I said earlier, 2019 is expected to be another highly productive year for us on many fronts. In addition to selling our current products, our global commercial teams will have new products to commercialize. European team will be spending time on a limited, targeted launch of TriageTrue Troponin I as well as the Sofia Vitamin D and Lyme disease assays.

And in the U.S., the commercial organization will be focused on adding Sofia Lyme to the thousands of Sofia 2 CLIA-waived sites starting this summer. Importantly, we will do all that leveraging the current infrastructure as we did when we added the cardiovascular and toxicology portfolio, which continues to be a focus. In fact, as I mentioned earlier, 2018 revenues were $267 million.

During the Q&A, Randy can take you through the puts and takes that created the lumpiness that we saw during the year. But at the end of the day, we think that we have a handle on the overall growth rate regardless of when and in which quarter our distribution partners order products. For 2019, we expect to grow those businesses year-over-year in total by 4%.

In terms of near-term product development in 2019, we expect to initiate clinical trials for Sofia 2 Strep 98 and for Sofia 2 C. difficile in a month or so, both of which we plan to commercialize in early 2020, if not sooner, depending on the timing of FDA clearance.

Regarding Savanna, our excitement increases as we move closer to product launch. There are always technical issues to resolve, but our confidence in our ability to launch an exceptional product is quite high. I've said before that we intend to have a flawless launch with 4 or more multiplexed assay cartridges, FDA cleared and immediately available to our customers. Therefore, the timing of our launch is highly dependent on us conducting multiple clinical trials simultaneously, CE Mark and then review by the FDA, of course.

And just so everyone knows, I will trade off timing of launch, just to hit a date, for flawless execution and significant market impact with the initial global launches of Savanna. I think it's that important to us. Having said all that, notwithstanding a major obstacle that I'm not aware off, I see nothing that would have a material impact, favorable or unfavorable, on the 2023 forecast that we presented at our Analyst Day last year.

Switching gears. It's February and in fact the same Valentine's Day week of the month in the last 2 years when influenza peaked before declining. So it's probably a very good time to talk about flu this quarter. Using data in our Virena database and looking at the period ending Friday, February 8, we see a very slight reduction in positivity rates for a handful of states and a slight hint that Influenza B may be starting to come up. There are still a lot of Influenza A in the United States. However, I think we can expect the positivity rates to remain high for a few more weeks. Therefore, people presenting with ILI should continue to be tested, and we should expect little reduction in test rates. Positivity rates for those patients tested in most states are at 25% to 35%, which is still very high.

In terms of volumes of test, it's important to look at the states with larger populations with greater propensity to test. California and Florida positivity rates and volumes have been high for several weeks now, and Texas is still climbing. New York and North Carolina are still quite high. There are some states with positivity rates above 40%, but those are lower-volume states. Another way to assess the magnitude of the season is to look graphically at out-sales by week from distribution to our customers over that last few seasons.

Despite an apparent slower ramp-up this season versus last year, the last 4 weeks have shown an acceleration that is unprecedented. At this point, the range of testing that we had suggested for this quarter, which was a reduction from last year's Q1, seems appropriate, and we are sticking with our internal projection for influenza testing revenue at this point.

Finally, before closing, I'll comment briefly on the Beckman matter. With respect to the ongoing Beckman litigation, on January 18 of this year, we filed our petition for writ of mandate with the Court of Appeal seeking immediate appellate review of the court's December 7, 2018 ruling. Whether the Court of Appeal will review the merits of the writ petition is discretionary, and it's common for the Court of Appeal to require the parties to complete the underlying trial court litigation before appellate review. While we believe that our writ is well-founded and should be granted now, we acknowledge that on most occasions, Courts of Appeal prefer to hear all matters after the end of the entire case.

On February 7, 2019, the trial court stayed the remaining litigation on Beckman's second cause of action pending a decision from the Court of Appeal on whether it will hear the merits of Quidel's writ petition. The trial court also vacated all deadlines in the matter, including the trial date. Once the Court of Appeal issues its decision on whether to review the merits of Quidel's writ petition, the parties are to report back to the trial court. We expect that to occur in the March or April time frame. And once again, we remain extremely confident that at the end of this process, that we will prevail and our agreements with Beckman will remain in effect.

In conclusion, what a quarter, what a year and what a company. 2018 was truly a year for the ages, a year not possible without the unbelievable talent and can-do attitude that we have across all of the company's functions. And importantly, a year that positions us for solid growth over the next several years. We're excited, we're productive and we're happy.

Randy?

Thank you, Doug. Good afternoon, everyone. As we reported earlier today, total revenues for the fourth quarter of 2018 were $132.6 million. This compares to $114.9 million in the fourth quarter of 2017. The 15% increase was primarily due to a 34% increase in Cardiac Immunoassay revenue, a 30% growth in Molecular Diagnostic Solutions and a 3% growth in Rapid Immunoassay. These increases were slightly offset by a 6% decline in our Specialized Diagnostic Solutions.

Cardiac Immunoassay revenue was $62.9 million, a growth of 34% in the fourth quarter of 2018. Revenue growth for cardiac was mostly due to the incremental revenue in China as we returned to more consistent ordering patterns from our customers. Also, in Q4 of 2017, we minimized shipments to China in order to reduce the amount of inventory at distribution. The total year-over-year cardiac revenue improvement in China was approximately $14 million. Of the $62.9 million in cardiac revenue, the split was $35.9 million for the Triage business and $27 million for the Beckman BNP business.

First, let's talk about Triage. From a geographical perspective, Triage revenue grew approximately $8 million in China from the fourth quarter of the prior year due to the discussed normalized ordering patterns. The U.S. grew 17% from the fourth quarter of the prior year, and Europe was down approximately 5%. With regard to the $27 million Beckman BNP business, this product grew 28% or $6 million as compared to last year, again, driven by China. In the quarter, both U.S. and Europe, Middle East, Africa were down approximately 1%.

For the full year, Cardiac Immunoassay revenue grew to $266.5 million. Included in this amount, total Triage business revenue was $148.1 million, and the geographic split for this Triage revenue was $65.5 million in the U.S., $33.6 million in China and Europe, Middle East, Africa was $24.6 million. The remaining $24 million, approximately $12 million of that was in Asia other than China, and the remaining $12 million was in Latin America and Canada.

The Beckman BNP business was $118.4 million for the year, consisting of $72.3 million in the U.S., $20.8 million in Europe, Middle East, Africa and $20.7 million in China. These 3 geographies make up more than 95% of the total BNP revenue.

The Cardiac Immunoassay category is going to experience some lumpiness in revenues from quarter-to-quarter due to logistical and geographic factors as well as timing in shipments of orders by distribution based on inventory levels. The big picture is that there is solid demand for the products, and we are optimistic about our ability to grow the business. As Doug stated previously, for 2019, we expect to grow the Cardiac Immunoassay business by about 4% to reach approximately $277 million for next year.

Rapid Immunoassay product revenues increased 3% to $50.4 million in the fourth quarter of 2018. This compares to $49.1 million in the previous year. Within this category, Sofia products grew 17% from the fourth quarter of 2017 to $33.9 million, while QuickVue product revenues declined 19% to $15.4 million.

Total Influenza revenue, which includes Rapid Immunoassay, DHI Respiratory and Molecular Diagnostics, grew 4% in the quarter to $34.9 million. The Influenza Rapid Immunoassay revenue split was $26.3 million from Sofia versus $4.9 million from QuickVue. Total Strep revenue was up 2%, and RSV was up 20%.

Revenue in the Specialized Diagnostic Solutions category decreased 6% in the fourth quarter to $13.4 million driven by a 5% decrease in our DHI revenues.

On the Molecular Diagnostic Solutions category, it increased 30% in the quarter to $5.8 million due to a 71% growth in Solana. We continue to see strong growth with our Solana platform, as Doug mentioned, specifically with the Strep A assay. We believe that we will continue to realize increasing demand for the Solana platform. We expect to grow molecular revenue by a minimum 20% in 2019 driven by incremental Solana instrument placements and increased assay utilization.

Gross profit in the fourth quarter of 2018 increased $23 million to $82.1 million. The dollar growth was due to increased sales volumes and improved product mix from Cardiac Immunoassay and Sofia products. Gross profit margin in the fourth quarter of 2018 was approximately 62% as compared to 51% in the fourth quarter of 2017. Excluding acquisition-related costs, inventory step-up amortization and amortization of intangibles, the legacy Quidel business gross margin was 69%, Triage gross margin was 52% and the Beckman Coulter BNP business gross margin was 63%. For the full year, we achieved the upper end of our full year guidance, achieving a GAAP gross margin of 60%, a very solid performance.

R&D expense increased by $2 million in the fourth quarter as compared to last year. This increase is due to investments made towards our Savanna project. We expect that our R&D expense in 2019 should be similar to 2018 and be between the range of $50 million to $55 million as we continue to invest in Sofia menu expansion and Savanna.

Sales and marketing expense in the fourth quarter of 2018 was in line with the fourth quarter of 2017. For the full year 2019, we expect sales and marketing expense as a percentage of revenue to be between 50 and 100 basis points less than in 2018.

G&A expense increased by $3.6 million in the quarter primarily due to incremental costs associated with the globalization of our infrastructure. We expect G&A expense to be between $48 million and $50 million for the full year as we complete the globalization of that infrastructure.

In the fourth quarter, interest expense was $4.5 million, a significant reduction from Q4 of last year. In 2018, we reduced our senior credit and revolving credit facility by $201.8 million and our convertible debt by $108.8 million as well as making the first $48 million payment to Abbott on the BNP deferred and contingent consideration.

In the quarter, we recorded an income tax benefit of $9.7 million, mostly the result of reversing our tax valuation allowance. For the full year, we start with the enactment of the Tax Cuts and Jobs Act, the U.S. federal corporate tax rate was reduced from 35% to 21% effective January 1, 2018. In the year, the company released $13.4 million of its valuation allowance against its net deferred tax asset balance since it is more likely than not that a portion of these deferred tax assets will be utilized in the future before they expire.

Additionally, this overall tax provision includes beneficial impacts of $9.3 million from equity compensation gains to employees that occurred during the year and $3.6 million from the generation of federal and state research credits. The significant drivers of year-over-year differences in the income tax provision are the increased profitability offset by the change in the corporate tax rate, increased stock-based comp activity and the impact from the reversal of the valuation allowance.

Net income for the fourth quarter was $32.5 million or $0.82 per diluted share. This compares to a net loss of $5.1 million or negative $0.15 per share for the fourth quarter of 2017. For the full year, we achieved net income of $74.2 million, GAAP EPS of $1.86 and non-GAAP EPS of $3.04, a very rewarding year.

As Doug mentioned previously, our capital deployment strategy in 2018 was to aggressively delever the business with the goal of reducing our leverage ratio from over 4x to 1.5x by year-end. As stated previously, we accelerated our debt reduction initiatives in 2018. The result is that we exceeded our internal target and are now under 1x leverage.

As of today, we have paid down an additional $20 million on our revolving credit facility and now have an outstanding revolving credit facility obligation of $33 million with a borrowing capacity of approximately $142 million. From a balance sheet perspective, our company is very strong and well positioned for M&A, licensing or other partnership opportunities in support of our long-term growth objectives.

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

(Operator Instructions) Our first question comes from John Hsu from Raymond James.

If we could just start, Randy, with the 2019 guidance. I apologize if I missed this. I got the growth of at least 20% in molecular and obviously the 4% growth in the cardiac business all together. But can you just maybe break that apart a little bit as far as what you're expecting for the BNP versus the Triage assets? And then also for immunoassay or for the legacy business, I might have missed it, but do you have any thoughts around what your expectation is there?

Yes. So I'll give you -- this is Doug. I'll give you the overall and then Randy can break it down by (inaudible) components. So our marketing guys basically reviewed ongoing run rates, looked at gains and losses, instrument placement rates and we rolled up a number that effectively for the year is about $276 million. Whether that's an accurate number or not, John, honestly, if we hit it precisely, I probably will promote all the marketing guys, right? So it's going to be either slightly under that or slightly over that. But right now I can tell you that just in January alone, we've placed more Triage instruments in North America than we did in any previous quarter. So we're pretty confident that what we're seeing in terms of demand is real, and we're seeing similar experience across the globe. And so we're pretty comfortable that the $276 million is a reasonable stab at what we think we're going to do in 2019. And we don't know each other that well, John, so I don't know if I can joke with you or not, but we didn't employ the Goldilocks method of calculation. We didn't say, well, 3%'s too low and 5%'s too high and 4% is just right. What we did instead is we rolled it up bottoms-up, we said $276 million is our number and then we divided that by the $267 million that we did in 2018 and that happens to be 4%. There's no magic of 4. It's just a matter of dividing 276 by 267. And again, I can tell you for sure that if the marketing guys are precisely on the number, it would be the first time in my 33 -- well, 35 years of trying to put forecast together. But I think we have a reasonable number that we forecasted for that. And Randy, why don't you break out the growth rates by the category?

Sure. For Triage, we're looking at mid-single digits. We see growth both within the U.S. and in Europe. We see China being pretty stable on a year-over-year basis. Within the BNP business, we see that up approximately around 3%, again, growth in the U.S. and in China. Europe, we're predicting a slight decline. That's mostly due to kind of changing over from [direct] to -- through distribution to a certain degree. So that's kind of the geographic drivers for 2019. You had mentioned molecular. I think the other one is in the Rapid Immunoassay. As we've said, we anticipate a 10%-plus growth. That's somewhat offset by what your estimate is in Q1 of 2019 for year-over-year flu, which obviously is pretty significant. Consensus is pretty -- is less than versus Q1 of 2018. Those are the pieces, John.

Okay. Great. That's very helpful. I guess just if we could switch gears to synergies. Congratulations, you hit on most of your targets. $13.3 million run rate, obviously better than even the $11 million that you had been expecting. So how do we think about what's left to do and maybe how the synergies roll in? And maybe, could there be potentially some upside to that $20 million number?

Well, the $20 million is by 2020. As we exit this year, as we explained initially at the Analyst Day, we expect the run rate as we exit 2019 to be at $15.5 million and again, that's some pretty serious forecasting accuracy. But we're still working very hard in the factory to improve yields, and most of that will come from there.

Okay. Great. And then just last one for me, you obviously gave some updated thoughts around the Beckman litigation. Just to be clear, within the numbers that you provided specifically to the cardiac business, is there any change or any impact to the 2019 operating plan associated with litigation?

No. When we did the call earlier, I said very specifically that we are not making a change to our 29 target -- 2019, excuse me, John, targets.

Our next question comes from Jack Meehan from Barclays.

I have a multipart question I want to start with on the cardiac side, and appreciate all the granular detail you provided. The fourth quarter was a little lighter than we were expecting at $63 million. So my question is, is there any seasonal factors which drove the revenues below the recent baseline we've seen in previous quarters? And then the 4% growth you're forecasting for 2019, just what pacing should we expect? And what contribution from the new tox assay are you building in?

Okay. I think I can remember all that. I think the underlying -- well, actually, on the $63 million specifically, there are a couple drivers, I'll let Randy address that, but they're not demand related. They are distribution related. So Randy?

Yes. Jack, as I mentioned, in Europe, we gained control of Europe in August and they had a go-to-direct-market strategy. We're pretty much use -- going through distributions. So that's about a 10% haircut on that European business that we realized in Q4. The other piece was we did have a distributor in the U.S. that we ended up shipping direct cause of some shelf life and need for product we ended up shipping direct. That had a slight impact downward on the U.S. business for Q4 as well.

So theoretically, the damage in the quarter was a couple, $3 million, something like that. So remember, when initially we were talking about this, we said $60 million to $62 million a quarter. That was our stab at the time based on what we had available to us. And then we started seeing some quarters that were higher than that. And I believe I said that, boy, it feels like, even though we had just shipped, I think, $68 million in the first quarter, I said it really doesn't feel like $68 million. Feels more to me like $65 million. Again, we do our best to forecast based on the information we have. And then in the second quarter, we did even more, which would make my $65 million also look bad. And then we had in Q3, Q4 offsets due to some distribution ordering patterns. And effectively, instead of doing $65 million a quarter, we ended up doing just about $67 million per quarter on average. And some of that could have been in any quarter at any time. We do feel like we have a handle on why the quarters look the way they do. But again, my $65 million was not right. We actually did something like $66.75 million, I think, on average. And this is -- to your point also, Jack, I can't really fully predict for every quarter that it's going to be shipped the way we think it's going to be shipped to our distribution partners based on their orders and their inventory levels. But based on the underlying demand for instruments and starting from a customer -- individual customer up and adding that all up, counting losses and offset by gains with new instrument placements, I'm pretty comfortable that we're going to get to $276 million. The timing of each quarter is not exactly under our control. So I don't like that quite yet, but at least I understand that. In our point right now, we're simply focused on how do we grow the demand for the product with the most we can grow. And I'm pretty pleased so far actually. As I said before, we're actually shipping more instruments in North America or at least through this quarter. We've already shipped more than we have in any other previous quarter, and that's just through January. So I'm pretty pleased how we're doing, and I hope that we haven't underquote the number too much.

Great. And in terms of building out that demand, just an update on the timing of the tox approval with the FDA. Do you still think the second quarter? And within the 4% growth, what contribution are you building in the back half?

I can't speak specifically to FDA timing. I think our guys are confident that we'll be through the process in the March, April time frame. And that I know the guys in the factory are gearing up to manufacture kits and the labeling and all that at this time. So I think we're pretty comfortable with that first half estimate that we said before.

Great. And then last one. Savanna. I agree with you. I prefer a flawless launch, maximum potential. But I have to ask where we stand with the cartridge design in preparation for the clinical trials? Do you think those start by mid-2019?

It's a great question because that's the key to the -- what we've shown in the Gantt chart. So right now we've got to finish the final cartridge design for manufacturability, and we've got to start making a lot of cartridges because with each of the assays, we're thinking we need, in total, tens of thousands of cartridges. And so we got to get started soon. And if that slips a little bit, fine. But I think my point that I'm trying to make, Jack, is that there is a tendency in companies to say, "I'm going to meet my timeline. I'm going to get an instrument with one assay cleared by the FDA, and I'm going to count that as launch." And we're not going to do that. I'm not going to actually start selling product until I have 4 or more things that I can immediately ship to customers. And if that causes us to move back a month or so in order to do that because I didn't get enough cartridges out there for the clinical trials early on or that we have some issue with respect to the FDA, I'm going to make that trade-off any day because I know that it's so critical when you're launching a new instrument system to make a big impact within the first 120 days. And that's pretty hard to do when you only have one thing on the analyzer. So that's enough. I've been going on for too many minutes here on that topic. But I feel pretty passionately about the idea that we want 4 or 5 things on the instrument when we launch. And I'm hopeful that we can certainly CE Mark it. But if I don't have the product, I'm not going to launch.

Our next question comes from Brian Weinstein with William Blair.

To keep on the cardiology theme here, can you talk about what spurred growth here really kind of going forward? You kind of mentioned, I think, in the last question. But specifically, are there competitive wins here? Is it new accounts? Is it utilization? And then with your comment about shipping more instruments in January than any other quarter, what specifically is going on that's driving that at this point? Is it sort of a new marketing campaign? I think Abbott had talked to maybe about a little bit of weakness in their business there. Are you taking advantage of that? Just a little bit more color on all that would be great.

Sure. About 2/3 of our business actually for Triage is in the hospital segment, and we continue to do well in the smaller hospitals. So that's a factor. But the other side, I was actually a little bit surprised, as you might be, too, Brian, that 1/3 of the business is in the [we group as] POL. And in the POL category, we include urgent cares. And so right now I think the chart I said -- saw just the other day, Randy, showed that we're in 4,700 urgent cares and most of those have a Triage MeterPro. So we're doing extremely well, and that's probably the segment there. And I don't know about other competitors and what they're doing and what they're not doing, but we're pretty competitive in that space.

Okay. And then on flu, I want to make sure I heard this comment right. Did you say that the last 4 weeks had shown an unprecedented acceleration? I just want to make sure that I heard that right.

Yes, you heard it right. Look, I was just looking at the chart this morning. I was a little bit surprised. So if you look at even last year that was a phenomenal flu season and you look at out-sales in the same week, they were higher, those out-sales, for that period of time. But the slope of the weeks is pretty vertical right now and -- but that's -- to be fair, that's offsetting a pretty slow start, right? So I'm not changing our number for the quarter. But I do feel pretty comfortable we're going to get to our number, and I think that's the most important thing. Now the other factor is anytime you see a chart for flu, you also realize the next week could be going back the other way. So -- and it is Valentine's week, right? So I don't know what that means. But the last couple years, this week, it started going back the other way. So if it does start going back the other way, I still think that we're going to make our number for the first quarter. But I would prefer to see a couple weeks for it to keep going because at the end of the day, I need, obviously, distribution partners to feel like their inventories are getting too low. And I need them to feel that before we get too close to the end of March cause towards the end of March, normally, they are products, and I think you know that.

Our next question comes from Tycho Peterson from JPMorgan.

Question, I guess, on margins. Triage gross margin ticked down a bit to 53%, I think, from 57%. Can you maybe just touch on that? And what's your kind of expectation for Triage margins for '19?

Can you repeat that, Tycho? We had a little problem on -- did you say we were...

Yes, it was a question on Triage gross margins, which looked like they ticked down a bit. Can you maybe touch on that? And then what's embedded in guidance for Triage margins for '19?

Yes, it's more of just factory absorption, a little more volume in Q3 than Q4 as the result of the holidays or some, but nothing other than that. As Doug mentioned, we exceeded our synergy number, which more than half of that was driven from factory yield. So we anticipate for 2019 to see an incremental improvement in our gross margin over 2018 driven by new products as well as a continued yield improvements in the cardiovascular business.

Okay. And then Doug, on Sofia, can you talk on Lyme, how the rollout's gone there? What's kind of embedded in the outlook for this year? And if we think about kind of pull-through to get to the 10,000 pull-through target, how important is Lyme to getting you there on Sofia?

I think it's pretty critical that we maximize the Lyme launch. The timing of approval wasn't ideal. But as we head into summer, particularly with activity in the northeast, we're hopeful that we can gain some noticeable traction. The other thing that I pointed out previously is that interestingly, with each new Lyme disease close that we experienced thus far, about 90% of those also came with flu and Strep and RSV. So it's interesting that the collateral benefit of the Lyme close, if you will, is larger in terms of revenue and margin than the Lyme. So right now I have to say that just in the last few weeks, I'm thinking about how can I resource this launch to an even greater extent. And so we're going to be focused on and I do think we have a pretty good chance of making a noticeable impact. And that makes us a lot more comfortable that moving towards that $10,000 per account is reasonable.

Okay. And then last one on flu, I appreciate kind of the real-time color here. As we think about market share, can you maybe touch on how you think about your market share versus last year? I know with the FDA reclass, you picked up some shares. So how sustainable are some of those share gains that you experienced last year in your view?

I think they're sticky because many of them were in large, integrated delivery networks or urgent care centers where they value the Virena data. So I think the stickiness is quite good. It's hard for us to forecast at this stage, believe it or not, what our actual gain is. It's probably in the -- modestly, I could say probably in the 3% to 5% share gain. It actually would surprise me if it's more than that. But it's very difficult for us to get enough data to actually judge what our share is. Previous years, we spent a lot of dollars doing surveys to customers to try and estimate. But we stopped doing that because I'm not sure how I accurate the data are.

Our next question comes from Bill Quirk from Piper Jaffray.

Just sticking on -- I guess kind of building off of Tycho's last question, if we look at flu for the fourth quarter, it was up 4%. Look at the ILI data, it was down about 13% for the quarter. So I guess help us, I guess, parse that out a little bit between, clearly, some of that was share gains. But was there any kind of weird behavior going on with the distributors at all in the quarter?

No. Not really, not really. But you're addressing an interesting perspective and it's -- the cause is my inability to answer the market share question. If we were shipping directly to every end user, I'd know what my market share is. We'd figure it out. But here, because of timing of orders and all of that, it's really hard for us to know precisely. But having said all that, we didn't see anything unusual on how our distribution partners ordered product last year in the fourth quarter.

Got it. Okay. Understood. And then a couple of additional ones for me. Randy, thanks for the comments regarding all of the debt repayment and also the comment regarding would look at smaller deals. I guess, can you help us think about some of those capital priorities at this point? Is it pretty much majority focused on additional transactions? And if so, kind of what's the status of potential deal flow that you guys are looking at, at present?

Well, I'll give the debt side and then I'll let Doug talk about potential M&A stuff. From a capital perspective, we have a $48 million payment due on April 1 to Abbott. We still have a debt. So short term, in the next 2 to 3 quarters, we'll focus on that. But certainly, it does give us significantly more leverage than we had last year relating to potential M&A deals.

Yes, we continue to look at things that are fit. I think what we learned in the Alere asset acquisition is that fit probably is the most important criterion, and we were able to fold in things, 2 asset categories into the existing infrastructure in North America. And then we used the cash and all that to build out the infrastructure in our international team. So now moving forward, things that would fit into those 2, the international and North American channels, makes a lot of sense to us. So we continue to look at a lot of things, and there are a couple things that look interesting, I'll just say that. But obviously, if we were further down the path, then -- well, I've just expressed we couldn't talk about it. But there are some things that we think do fit, and I think we proved that, with the Alere asset acquisition, that fit matters.

Okay. Got it. So just a little bit like Jan Vertonghen [and screwing the] Champions League, it's rare that you're close on a deal, but obviously not unheard of. And last comment from me, question rather, is thinking about, Doug, you've talked historically about the legacy tox business at Biosite and the level that, that was running at prior to some of those assays coming off the market. How are you thinking given the FDA filing? And how long it will take you to get back to those levels?

Yes, thanks, Bill. To be specific, what we've modeled is that fourth year revenue will be in the 30s. So can we get there faster than that? Maybe. So I think we can do pretty well in the next couple of years because we think that there's pent-up demand for the product, product -- or a customer demand that we couldn't address before. So conservatively, I would say fourth year revenue post launch should be in the 30s.

Yes. It's currently (inaudible).

Our next question comes from Alex Nowak from Craig-Hallum Capital.

Just [a head on the bills] in Tycho's question, was there more inventory in the channel exiting 2018 compared to the end of 2017? You quantified this on other quarters, but I don't think you mentioned it on this call, in particular.

Yes, no, we did not mention it. My oversight. But it's pretty consistent with where it was Q4 2017. So no significant changes and actually doing Strep, RSV and/or flu.

Okay. That's helpful. And then Doug, I just want to make sure I got the time lines right here for the Beckman lawsuit. Is August still when we're expecting to hear next on the original case? And then the appeals review, it will be done in parallel or could be done after that main case and we'll know about that here in March or April?

Yes, thanks for clarifying. I did mention that, that date is no longer applicable. And so let me just walk through a couple things that might be useful. First of all, the court's decision to stay the litigation, and that's what we're talking about here, was not surprising because courts typically stay litigation if they're waiting to hear from an appellate court, if they think it would be more efficient to do it that way. Courts typically vacate the trial dates upon entry of the stay, and that's what happened here. They vacated the trial date. So there is no trial date right now. This is normal. The stay does not affect our petition to the Court of Appeal. So if anything, it actually enhances the likelihood that the Court of Appeal will consider the merits of the petition. In its application for the stay, Beckman stated it, "will urge the Court of Appeal to accept the petition for appellate review." So Beckman has joined us in the idea that hearing this sooner rather than later is a good idea. The impact of the court's order, if any, will be minimal. So if the Court of Appeal decides to hear the petition now, the order will have no effect because Quidel's in favor of the stay in that circumstance. And if the Court of Appeal denies our petition, the only effect of the order is a slight delay in the trial date, which is going to happen, and our subsequent appeal. And we do not believe this delay will be lengthy. And again, we're confident the Court of Appeal will agree with our position whether they hear the appeal now or whether they hear it after the trial. So I've over-answered your question.

No, I think I got this. I think just to summarize, the next thing we'll hear will probably come in March or April, and we should know more on the next path then at that point.

That's right.

And our final question comes from Mark Massaro from Canaccord Genuity.

This is Max on for Mark. So it's been about 3 months since Palmetto's noncoverage decision for large respiratory panels became effective. I know that for the last 2 years you've been operating under the assumption that this would be the case. I guess, how do you feel that the market is responding to the decision if anything versus your expectations?

I don't think I have an opinion quite yet. I mean, I really haven't looked at it, Max. So I shouldn't opine on something. I shouldn't speculate. As we get closer to launch, of course, we're going to know about what customers are doing and all that. So I apologize, but I don't really have a good answer for you.

No problem. So you have indicated that you see the potential for 70,000 to 80,000 total Sofia placements over time. And I guess for the remaining 35,000 to 45,000 potential placements, what geographical regions would you be honing in on? And is there a particular type of customer you'll be targeting?

Well, the U.S. and Europe for sure are good markets for us and I think China once we're approved there. The next wave of things that we're launching will be gastrointestinal related, and we have a game plan that have, I think, 5 or 6 new targets done within the next couple years. So that, I think, is going to be helpful for us.

And that is all the questions we have for today. Please proceed with your presentation or any closing remarks.

So thanks to everyone, for your support and for your interest in Quidel. We had a great year, and we're in terrific shape to achieve our growth objectives over the next few years. We know what to do from here, and we have the right people to get the job done. Thanks again for being on the call.

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