QuidelOrtho Corporation (QDEL) Q3 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. Welcome to the Quidel Corporation Third Quarter 2008 Conference Call. At this time, all participants are in a listen-only mode. Later, instructions will be given for the question-and-answer session. (Operator Instructions). I’d now like to turn the call over to Mr. John Radak. Please go ahead. John Radak – Chief Financial Officer: Good afternoon, everyone. This is John Radak, Chief Financial Officer at Quidel. Thank you for participating in today’s call. Joining me today is our President and Chief Executive Officer, Caren Mason. Earlier this afternoon, Quidel released financial results for the third quarter ended September 30, 2008. If you have not received this news release, or if you would like to be added to the company’s distribution list, please call Shirley Chow with Porter Novelli Life Sciences at 212-601-8308. 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 materially from these stated expectations. For a discussion of risk factors, please review Quidel’s Annual Report on Form 10-K 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 October 22, 2008. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the day of this conference call. I will start today’s call with a review of the third quarter financial report. Then Caren will provide further comments on our strategic business initiatives and developments. Turning to the financial results for the third quarter of 2008, we are pleased with another solid performance of the business during the period, as we posted margin expansion and double-digit revenue growth for the third consecutive quarter. Total worldwide revenues were $31.9 million, a 16% increase over the same quarter a year ago. Our international business continue to performed well with revenue growth of 27% over the prior year's quarter, and a roughly 10 % of total revenues in the quarter. Sales of our infectious disease products, particularly the co-branded QuickVue bioMerieux influenza test accounted for the majority of international growth. Additionally, we saw domestic revenue growth of 14% during the third quarter. Looking now revenues by product family. Our worldwide infectious disease revenues increased 33% to 24.6 million compared to 18.6 million in the third quarter of 2007 led primarily by influenza product line. We are also pleased with the traction we are getting with our RSV test as we experience substantial from a small base. As part of our recent strategic sales program domestic distributor place considerable third quarter influenza stocking orders incorporation for the upcoming cold and flue season. In the third quarter of 2008 revenue from our reproductive and women’s health product family was $4 million compared to $5.9 million a decrease of 32% in the corresponding quarter of 2007. The contraction in the third quarter for the women’s health product family was expected as a strategic sales program during the second quarter shifted revenue of this non-seasonal product from the third quarter to the second quarter already gain end user unit share in future quarters. Distributors stocking numbers have declined from the high end of Q2 and we expect them to each normal levels in Q4. Additionally, we expect our product mix in the fourth quarter to be closer to a more traditional mix between seasonal and non-seasonal as opposed to the heavy pregnancy we experienced in last year unusual fourth quarter. Revenues from our other product category, which includes our H. pylori test for gastric ulcers, our fecal immunochemical test or FIT and our veterinary product line were $3.2 million in the third quarter of 2008 an increase of 5% over the third quarter of the prior year. Gross margin came in at 62.1% for the third quarter, a 260 basis point improvement over the same period last year. The majority of this improvement came from a more favorable product mix in 2008 as sales of our seasonal products met at the larger percentage of our total revenues in the quarter. Operating expenses for the third quarter of 2008 were 12.4 million which decline from the prior year period when we reported 12.7 million. as lower R&D spending due to the timing of clinical studies and amortization expense were partially offset by investments in our domestic sales organization. Operating income in the third quarter of 2008 grew 7.4 million or 23% of total revenue compared to operating income of 3.7 million or 14% of total revenue for the same quarter last year. In total net income for the third quarter 2008 was $4.7 million or $0.15 per diluted share compared to a net income of 2.4 million or $0.7 per diluted share for the prior year third quarter, an increase of a 114%. Stock based compensation expense was 1.1million for the third quarter of 2008 compared to 1 million for the third quarter of '07. Shifting our intension to our year-to-date results, revenues increased 18% to 94.6 million from 80.1 million in 2007. Year-to-date net income was 12.8 million or $0.39 per diluted share as compared to 5.5 million or $0.17 per diluted share in same period of prior year, an increase of a 129%. Operating margin for the first nine months of '08 was 21% compared to10% for the same period of prior year. Stock based compensation expense was $3 million year-to-date versus 3.4 million for the same period in '07. We continue to have a very strong cash position during '08 Quidel has repurchased approximately 485,000 shares of it's common stock for $7 million, primarily the company's previously announced share repurchase program. A total $14.7 million remains available for stock repurchase under the currently authorized program. Even after the effect of this stock repurchases cash and cash equivalents as of September 30, 2008 were $62 million. As I have mentioned on previous earning calls, we look to certain trailing 12 month metrics to better characterize the strength of the business. Revenue growth on a trailing 12 month basis at the third quarter was 12%. Our gross margin in the 12 month period ending September 30th improve substantially by 2.5% point from 59 to 61.5%. And most importantly our operating margin in the trailing 12 months increased to 24% compared to 16% a year ago. This performance reflects leveraging our business and the strength of our differentiated products in the point care diagnostics market. Finally, earlier this month we completed a new five year $120 million senior secured revolving credit facilities with a group of four banks replacing and expanding a $30 million credit agreement which was scheduled to expire in June of 2009. We established a new facility, we take advantage of opportunities to grow and further leverage our business and execute on our strategic vision. The strength our balance sheet and our ability to generate positive cash flow allowed us to complete the credit facility on attractive terms despite the worse credit market in more than half a century. Now I will turn the call over to Caren for review of the key initiative in place to sustain our healthy momentum. Caren Mason – President and Chief Executive Officer: Thank you, John. We are pleased to be reporting the result of another quarter of significant organic growth. John has provided a very through look back at our progress and we will answer your questions about our financial performance during the Q&A session later in the call. I will take a few minutes to look ahead to how we plan to continue to grow our business. With the approaching influenza season we are frequently asked about our predictions for flu incidence and its potential impact on Quidel. While the impact of the flu incidence on our near-term results is something we watch, our primary focus is on how we are going to drive further market adoption of our product and build our market share in point-of-care influenza testing, regardless of the severity of the season. We believe there is still a significant flu market that remains to be penetrated in the coming years. Based upon the CDC estimates there are approximately 30 million people that visits physicians annually in the United States for influenza like illness and less than one-third of those people are tested for influenza that was a rapid flu test. Our strategy is to build upon our success in the influenza market and to apply it across our broader product portfolio. The first and most important element of our business growth strategy is demonstrating clinical evidence and the economic value point-of-care testing office and healthcare system. Clinical proofs remains at the core of our QVB strategy and it is an important element in wining new customers. We continue to publish and present clinical data to support our differentiated QuickVue products. For example, yesterday very p percussive data was presented at the annual meeting of the society for medical decision making. Our commission to met our analysis have published peer reviewed evidence compared to clinical utility of using rapid point-of-care diagnostic test versus unaided clinical diagnosis in the management of patients with influenza. The study concluded rapid flu test including the QuickVue brand in particular can significantly improve diagnostic specificity reducing the number of self confidence by as much as much as 22 to 32% when compared to clinical diagnosis alone. The analysis showed that by using rapid flu test there was significant reduction in antibiotic use emergency reutilization and other diagnostic test such as X-rays, and complete blood count test. Thereby reducing the overall cost of providing healthcare. This is a powerful validation of the economic value of our QuickVue Influenza test and proves our point around the criticality of working with the company that has done an excellent job in evidence base medicine. The authors of this study further concluded that unaided clinical diagnosis can potentially lead to 6.4 times more incorrect diagnosis of influenza then when using rapid flu test. They suggest that improved clinical diagnostic criteria combined with the use of rapid flu test will improve diagnostic accuracy. Studies by best health to drive increase adoption and market share of our QuickVue products by validating a clinical and economic value our products provide to our customers in the point of care testing market. Third, we are pioneering new market segments. We continue to make considerable inroads in the acute care setting and are working intensely to win additional accounts and gain market share. We are at the forefront of the effort to sell the long term care facilities and retail clinics, building upon our QVB initiative to demonstrate the advantages of fast x-ray testing, long-term care facilities and retail clinics represent large opportunities for Quidel to sell the void in these developing markets. Finally, we are positioning hard on the international market. As John mentioned, we made excellent progress outside of the U.S during the third quarter, particularly the sales of our influenza test. This underscores the progress made in the last two quarters through our distribution partnerships with bioMerieux. Our powerful provides the foundation for Quidel to drive international market penetration and to position both Quidel and biomerieux as global leaders in the rapid point-of-care testing market. I would be demystified and not provide any color about how we are preparing for the upcoming cold and flu season, last week we attended the health industry distributors association meeting where we interacted with our US distribution partners. As John mentioned, we saw solid flu test stocking Q3 as they prepare for the Influenza season. This is significant for two reasons. First, the stocking and the stocking patterns we have seen suggest the distributors do not believe worsening macroeconomic conditions will adversely affect the number of doctors visits in flu test sales during the '08, 09 season. Secondly, although exactly predicting when the flu incidence will begin to retreat in women widespread threshold is difficult to assess, the CDC did report last week that doctor visit for influenza like illnesses are within prior years levels by this time of the year. Development of our second generation FIT test remains on track and we will continue to be excited about its potential. In addition on last quarter’s conference I mentioned some encouraging clinical data, that has been developed regarding our first generation FIT test. We now expect the data from that study to be published before the end of this calendar year. To summarize we have a multi-prompt QVB strategy to expand infectious disease market and build our market share in point-of-care diagnostics that we think will allow us to continue to achieve double digit revenue growth and continuing margin improvement. We continue to strengthen our position of rapid diagnostics leadership through our expanding customer base in the retail clinics acute care, long term care and POL markets to increase our international reach and to expand our product portfolio with clinically validated test that addressed significant market opportunities. That concludes our formal comments for today. Operator we’re now ready to open the call for questions. Third, we are pioneering new market segments. We continue to make considerable inroads in the acute care setting and are working intensely to win additional accounts and gain market share. We are at the forefront of the effort to sell the long term care facilities and retail clinics, building upon our QVB initiative to demonstrate the advantages of fast x-ray testing, long-term care facilities and retail clinics represent large opportunities for Quidel to sell the void in these developing markets. Finally, we are positioning hard on the international market. As John mentioned, we made excellent progress outside of the U.S during the third quarter, particularly the sales of our influenza test. This underscores the progress made in the last two quarters through our distribution partnerships with bioMerieux. Our powerful provides the foundation for Quidel to drive international market penetration and to position both Quidel and biomerieux as global leaders in the rapid point-of-care testing market. I would be demystified and not provide any color about how we are preparing for the upcoming cold and flu season, last week we attended the health industry distributors association meeting where we interacted with our US distribution partners. As John mentioned, we saw solid flu test stocking Q3 as they prepare for the Influenza season. This is significant for two reasons. First, the stocking and the stocking patterns we have seen suggest the distributors do not believe worsening macroeconomic conditions will adversely affect the number of doctors visits in flu test sales during the '08, 09 season. Secondly, although exactly predicting when the flu incidence will begin to retreat in women widespread threshold is difficult to assess, the CDC did report last week that doctor visit for influenza like illnesses are within prior years levels by this time of the year. Development of our second generation FIT test remains on track and we will continue to be excited about its potential. In addition on last quarter’s conference I mentioned some encouraging clinical data, that has been developed regarding our first generation FIT test. We now expect the data from that study to be published before the end of this calendar year. To summarize we have a multi-prompt QVB strategy to expand infectious disease market and build our market share in point-of-care diagnostics that we think will allow us to continue to achieve double digit revenue growth and continuing margin improvement. We continue to strengthen our position of rapid diagnostics leadership through our expanding customer base in the retail clinics acute care, long term care and POL markets to increase our international reach and to expand our product portfolio with clinically validated test that addressed significant market opportunities. That concludes our formal comments for today. Operator we’re now ready to open the call for questions.

[Operator Instructions]. Your first question comes from the line of Steve Crowley with Craig-Hallum. Please proceed with your question.

Hi this Matt calling for Steve a couple of quick question if I could. First congratulations on the quarter. Looking at the RSV test, does that imply that you guys are able to bundle, the upper respiratory products and that’s been resonating well or we just want practice strength for the RSV test.

Well, first of all pediatrician, we have a very strong market shares as you know in the POL market especially the pediatrician. So, they are very interested now in adding the RSV test, they have an opportunity with a single specimen to be able to ran both an RSV and flu test by Quidel. So that is working very well for us.

That’s right. And secondly, could you provide a little bit more color on the progression of the bioMerieux partnership I guess, where is it versus your prior expectations and any update on the core development agreement that you guys have discussed in the past?

Yes, we are pleased with the progress with our bioMerieux partnership is that the entire results in Q3. Remember that we really got started with this in May. So we are very happy with progress, we loved what happened in Australia during that continence influenza and our CCs and with our bioMerieux co-branded product. In terms of the core development agreement, we are making progress, our agreed upon pipeline of proposed product for development is close to being finalized, and so, we are hoping to give you a more color on that for sure in the next call if not early in the year as we make our rounds.

Alright. Thank you very much.

Thank you Matt.

Your next question comes from the line of Keay Nakae with Collins Stewart. Please proceed with your question.

Yes good afternoon. John with respect to R&D in the quarter it was flat sequentially I think we are expecting that number to be higher so how should we think about that going forward?

Yeah we had a couple of things one was some clinical studies got moved out in terms of timing of when we ended up starting those. So those will hit in Q4. We also were expecting to going on more of the open R&D positions in Q3 earlier than Q3 but those came on board later in Q3. So we will see an uptick in Q4 for R&D.

Okay. And with respect to your other product line, the past couple of quarters have been positively impacted by sales of your vet product, has that sort of washed out and how should we think about growth in the other product category going forward?

Yeah, I mean, I think mid single digits is a reasonable number for the other product category, the veterinary business performed pretty well in Q3, and so, we are – that business – that segment of our product category will, the big element that will impact the growth rate there will be as we begin to really drive conversion in the FIT market.

Okay. And then, Caren, as far as looking forward new product might launched under the QuickVue brand name next year can you give us a little color there?

As I said earlier where we be, we have a pipeline of product in infectious disease and reproductive health that we are either developing ourselves that we are either potentially sourcing and selling as well as the core development and some deal with bioMerieux . In terms of actually identifying the product themselves and when we can expect them to enter the market we plan to have that ready for sure for discussion, probably I would say we will start talking analyst conference is on early January, but I can tell you that is – we are very pleased enthusiastic at the partnership and we are excited about the opportunity to bring some of those products forward even in 2009.

Okay. And is it too soon in '08 to have any of the products from co-developed with b bioMerieux you commence?

Yes.

Okay. All right. Thank you.

Thank you, Keay.

Thanks Kay.

Your next question comes from the line of Zarak Khurshid with Caris & Company. Please proceed with your question.

Hi, good afternoon. Thanks for taking my questions. I just want to start maybe with kind of the ubiquitous macro-economic question. How is this challenging environment having an affect on the end-user demand for your products? And is it changing the way your distributors are operating specifically with respect to inventory levels?

As we said in our prepared remarks, we assigned inventory levels at normalized volume for expectations in the flu season as planned. In Q3, we were pleased to see that sales to end-users were very strong. So when you put those two data points together, at this time and with our discussion with distributors as late as last Friday, everyone is continuing, going forward, recognizing that flu knows not macro-economic conditions and that individuals will visit their doctors to make sure that especially in the case of their children, they are getting proper care.

Sounds pretty good. And then with respect to the share buyback plan. It doesn’t look like you purchased any shares in the third quarter. Would you anticipate buying back shares in the fourth quarter?

Zarak, our policy is not to comment on what we are currently doing relative to our share buyback program except to talk about what we disclosed in our SEC filing.

Understood. And then going back to the RSV product, it sounds like that is starting to gain some nice traction. I wanted to maybe get a better sense for what’s driving the strength there? Is it more a function of this new – the features of the test or in which you are taking share from someone else or is it just sort of new opportunity, new market that’s developing for that test?

I think it’s a combination of both. There is no doubt that we are definitely having conversions. We are especially aggressive in the acute care market where we undertake what we call the QV, Quidel value build correlation challenge. And today, we want to count 69% of the time that our product goes head to head versus competitors. So obviously there is some share that we are winning there. On top of it, there is a lot in the literature and a lot that’s going on, discussed recently at the American Pediatric Association Meeting, about the fact that RSV that goes undiagnosed is definitely proving to have consequences for those children later in life, more asthma, a lot more urine infections, et cetera, pulmonary conditions that are tied directly to undiagnosed RC. So you put it all of that together and we see RSV being a real nice growth for Quidel over the years to come.

Excellent. And then lastly, I will jump back in the queue. Qualitatively, can you remind us how the gross margins look on the Clear waived RSV test relative to the flu product and the corporate average?

They are higher than the corporate average and inline with the flu products.

Okay, great. Congratulations on a nice quarter.

Thank you, Zarak.

Thank you.

[Operator Instructions]. Your next question comes from the line of Un Kwon-Casado with Pacific Growth Equities. Please proceed with your question.

Hi, good afternoon.

Welcome back.

Thank you. Good to be back. I was wondering if your gross margins came in really strong in the quarter. Besides product mix, is there other operational improvements that drove that expansion?

Well, as you know, we have been – a number of our products have been on web manufacturing over both in the third quarter of ’07 and in the third quarter of ’08. So we get a little – that helps us a little bit. But we didn’t have as much volume, the volume from our non-seasonal products in the quarter, so we didn’t get that kind of a leverage. So most of that was product mix.

And then so going forward as far as potential margin improvement is concerned, should we be modeling in operational improvements into your margins or is it going to be largely driven by product mix given that your flu franchise is going fast than the rest of your businesses?

We have lots of initiatives underway in our manufacturing operation to drive efficiencies. The things that is tough to predict going forward is what might happen relative to raw material costs and so forth. But I think we still have opportunities to see some improvement there.

Okay. And then with respect to the flu market, could you talk a little bit about what you are seeing as far as pricing is concerned from your competitors and whether that’s having any pressures on your business?

Our focus is really to sell a value equivalent of the way our tests performs and the confidence that end-users have come to rely on with our product as well as the rather thick volume of proof that we have produced over time and continue to produce. As we speak, more side by side clinical studies are underway, which we will be addressing in the months to come. In each of these studies and the way that we work with distributors and end-users we talk significantly about the performance of our product in clinical studies that are independent side by side as well as what we know that individuals do, for example, laboratorians during the year who like to take a look at our test versus other tests. As a matter of fact, the CDC has in their most recent publication started to address where they thought sensitivity deficiencies were taking place. I am pleased to say that certainly not with the Quidel test. So when it comes to price points, yes, there are always pressure especially by competitors who are focusing on filling plants with products rather than the continuation of producing very aggressive clinical and economic validation for the product such as Quidel is working in getting the ANA to absolutely approve a dual-coding process for our flu tests.

So the take home is that you are not having to come down on pricing to stay competitive for certain contracts?

We never lead with price. But what we will do is when there is opportunities for increased volumes, we will meet those opportunities appropriately.

Okay, got it. And then just lastly, it looks like the international market could present a nice opportunity for upside to your flu business. What percentage of your flu business did that represent last season and this quarter you said 10% and so do you expect that to be relative mix for this year?

Well, I think the 10% is the total international business of our total.

Okay.

Revenues. And so Q3 of ’07, it represented about -- international is about 9% of the business. On a year to date basis, it’s roughly 12, 13%.

Okay. And then could we use the same proportion for your flu revenue in this quarter?

Yes, that’s probably okay to do.

Okay. And so I know that last season or last year for example, you experienced some drag to the growth because of Japan and so is bioMerieux really expanding beyond those geographies or where they are having the most success?

Our success of bioMerieux has really been in the Australian, New Zealand, Southern Hemisphere flu season of course, that’s where we have got real data. We also have some nice orders from the Middle Eastern countries. And so, we really have to get through the season to see but there is focus in Germany and in other European countries as well, which have traditionally looked this influenza testing as an important part of their care.

Great. Thanks very much.

Thanks.

Your final question comes from the line of Keay Nakae with Collins Stewart. Please proceed with your question.

Yeah, John I just wanted to ask you about the other net items, about 160k on the income statement?

Yeah, that was a settlement of some assets that we sold, again some non-operating assets.

All right, very good.

Okay.

And this concludes the question-and-answer portion of today’s call. I will turn the call back over to Caren Mason for any closing remarks.

Thank you very much. We appreciate very much your being here this afternoon and for your continued support. We look forward to updating you on our progress again when we report fourth quarter and year-end results. Take care everyone.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.