QuidelOrtho Corporation (QDEL) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Quidel Corporation First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, instructions will be given for question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Randy Steward, Quidel's Chief Financial Officer. Please go ahead.

Thank you, operator. Good afternoon, everyone. Thank you for joining today's call. With me today is our President and Chief Executive Officer, Doug Bryant and Ruben Argueta, Director of Investor Relations. Please note that this conference call will include forward-looking statements within the meaning of federal securities laws. It is possible that actual results and performance could differ significantly from these stated expectations. For a discussion of risk factors, please review Quidel's Annual Report on Form 10-K, registration statements and subsequent quarterly reports on Form 10-Q, as filed with the SEC. Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, today, April 23rd. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law. Today, Quidel released financial results for the three months ended March 31, 2015. If you have not received our news release or if you would like to be added to the company's distribution list, please call Ruben at 858-646-8023. For today's call, Doug will report on the highlights of the first quarter, the flu season and provide updates on our product development pipeline. I will then briefly discuss our financial results and then we will open the call for your questions. I will now turn the call over to Doug for his comments.

Good afternoon, everyone. Before starting, you may notice that I sound like I have a respiratory illness and that is because I do. In fact, I would not be here except for the earnings call. I say all that not for sympathy, but to let you know that the tone you hear right now is my most enthusiastic, so those of you who send a note to me later and ask me what's wrong, I do not know if it is flu or not, but it is something respiratory. I am pleased to report on another good quarter and a good start to the year. With regard to the flu season, the CDC's proportionate patient visits for influence alike illness, otherwise known as IOI remains elevated in the first quarter of the year, which reminiscent of the 2012-2013 influenza season in terms of the duration, what we would characterize as a normal flu season that was not especially severe. Nonetheless, we did see strong demand for our flu products as well as strong demand for Strep A and RSV. The demand for our products was not limited solely to those product lines. We also saw increased demand across several others of our products, including a molecular assays and Thyretain. Revenues in the first quarter were $61.3 million, up $14.6 million or 31% over the first quarter of the prior year. Growth in the quarter came from influenza and Strep A products across all platforms as well as some Sofia RSV and from our AmpliVue and Lyra molecular products. Thyretain was up 18% year-over-year. New product revenues in the first quarter grew 104% from last year's first quarter to $16.1 million, and on a trailing 12-month basis, new product revenues increased over 100% from quarter one of 2014 to $45.8 million. Of that totaled, $10.1 million were attributed to new non-flu products, an increase of 137% from the trailing 12-month total from quarter one of the prior year. We fully expect this trend to continue well into the near to mid-term due to the several drivers. First, the commercialization of Sofia Strep A+; Second, the continued growth from our AmpliVue and Lyra molecular assays, and third, the commercial introduction of Savanna later in the year, and of course we have additional products in the pipeline that we intend to launch in 2016. Beginning with Sofia Strep A+, we received CLIA-waived from the FDA for our next-generation Strep A product at the end of 2014. Earlier in Q1, we introduce our next-generation Sophia Sofia Strep A+ product and the response has been good thus far. Likes Sofia influenza and RSV, Strep A+ has succeeded in creating further customer interest in the Sofia platform. We achieved the most Sofia instrument placements of any first quarter since launch assisted by the launch of Strep A+. In fact, with just three CLIA-waived Sofia assays, we moved through the 10,000 instrument milestone early in the quarter. With hCG Vitamin D and others in our pipeline, we remain confident that we can accomplish our longer-term target of 20,000 to 30,000 worldwide Sofia instrument placements. Regarding our molecular products, AmpliVue C. difficile, again, led the growth in a molecular assay revenue in the first quarter of 2014. Recent introductions of AmpliVue Group B Strep, Group A Strep, HSV 1, HSV 2 and pertussis also contributed as well. In our conversations with customers, we have noticed that having a broad an interesting menu does matter and the introduction of each new essay brings with it an incremental opportunity to extend the relationship with the customer. We recently received 510(k) clearance for our AmpliVue Trichomonas assay from the FDA. As we begin the second quarter, our sales force now has six AmpliVue assays to sell that can grow our non-influenza based products. Our Lyra product line also grew in the quarter, building brand awareness for our molecular assays in the various institutions that have adopted the assays. Again, we are finding that although some of our molecular assays may be niche products that aren't necessarily generating considerable revenue, products such as HSV 1+2/VZV and Group A Strep+C/G prove to be compelling enough to engage customer and are helpful in building our brand in the in the molecular space. We have also found that having a broad menu of respiratory assays has helped. Although the molecular sales process can be lengthy when customers in highly complex labs complete the validation process and come online, they do so with large volume commitment. Savanna, an instrument designed to run our HDA isothermal amplification assays remains on the schedule that we previously communicated. We submitted the 510(k) package to the FDA in the first quarter for both, the Savanna instrument and the Group A Strep assay and expect to be in market in the U.S. this summer. I am pleased to announce that we received CE Mark today for both, the Savanna instrument and Group A Strep, another milestone, an indicator of our progress. Savanna, our fully integrated sample-to-answer platform is making good progress as well. We validated modifications made to the cartridge, plan to have the cartridge design lockdown in May and expect to be manufacturing the cartridge in Ohio this summer. Overall, we had a good start to the year. We saw normal flu season with good revenue and share gain. Revenue from new products is growing. Finally, the launch of Solana will give us further momentum as we finish the year. Randy?

Thank you, Doug. As Doug reported earlier, total revenues for the first quarter of 2015 were $61.3 million as compared to $46.7 million in the first quarter of 2014, the year-over-year increase of 31%. Global infectious disease revenues, which include QuickVue Sofia DHI cell culture and molecular products, grew 35% to $48.4 million in the first quarter of 2015, as compared to $35.8 million in the previous year. Influenza revenues, which includes Sofia, QuickVue, and the DHI respiratory products rose 47% to $33.3 million in the quarter as compared to $22.6 million in the first quarter of the prior year. From a platform perspective, Sofia influenza revenue was up 91% from the first quarter of 2014, while QuickVue influenza revenue increased 44%. Strep A revenue grew 19% to $8.1 million in the quarter and RSV product revenue increased 33% from the first quarter of last year. Revenues for the women's health category increased 14% in the first quarter to $9.3 million, led by 18% growth in Thyretain and 43% growth in our autoimmune complement product lines. Our pregnancy revenue grew 4% in the quarter to $45.4 million. Our gastrointestinal product category revenues grew 7% to $1.7 million in the first quarter compared to $1.6 million last year, driven by the continued growth in our AmpliVue C. difficile revenue. Revenue from our other products category was $1.9 million in the quarter. This is compared to $1.1 million in the first quarter of 2014. The increase was mostly due to $500,000 increase in grant revenue from the Bill and Melinda Gates Foundation. Gross margin in the first quarter of 2015 was approximately 66% compared to 57% in the first quarter of last year. The increase in gross margin was primarily due to the expiration of Alere royalty amortization and improved absorption in our manufacturing facilities, each contributing approximately 4 percentage points in improved margin. As we said previously, the amortization on Alere royalty expired in February and we expect that for the full-year this will benefit our gross profit by $7.4 million versus last year. Total operating expenses, excluding cost of sales and amortization of intangible assets, in the quarter were $29.3 million compared to $26.2 million last year. Research and development costs were $8.1 million in the quarter, a decrease of $1 million from the first quarter of 2014. This decrease was primarily due to decreased development costs associated with our molecular programs. We still believe, our full-year spend for research and development will be in the previously communicated range of $40 million to $42 million. We have planned several R&D projects that we will be initiating in the back half of the year that will offset the spend favorability that we realize this quarter. Sales and marketing expenses in the first quarter of 2015 were $11.4 million compared to $9.9 million last year. This increase in sales and marketing expense was driven by increase in commissions due to higher revenue as well as the added investment and sales personnel that we have made over the last year. General and administrative expenses were $9.9 million in the first quarter of 2015, a $2.6 million increase versus last year, a high percentage of which was a result of non-recurring professional development costs associated with the business development opportunity that was under review and the decision was made in the first quarter not to move forward with that opportunity. In the first quarter, interest expense was $2.9 million, driven by interest associated with the $172.5 million senior convertible note offering completed in December of 2014. The coupon rate is 3.25%. In the first quarter, we recorded $2.7 million of interest expense related to the senior convertible note of which $1.4 million relates to the coupon due semiannually and the remainder of the amortization of issuance costs and debt discounts. Our tax rate for the first quarter was approximately 31%. The effective tax rate was lower compared to the first quarter of 2014, mostly due to the change in valuation allowance related to certain state deferred tax assets. For the full year, we expect our effective tax rate to be approximately the same. Net income for the first quarter was $4 million or $0.11 per diluted share as compared to net loss of $1.5 million or $0.04 per share for the first quarter of 2014. On a non-GAAP basis, excluding amortization of intangibles, stock-based compensation expense and certain non-recurring items net income for the first quarter of 2015 was $10.8 million or $0.30 per diluted share compared to net income of $2.9 million or $0.08 per diluted share for the first quarter of 2014. As part of the non-GAAP calculation, included an operating expenses for the first quarter 2015, with stock-based compensation expense of $2.1 million, amortization of intangibles of $3 million and non-recurring business development cost of $2.3 million. Also added back the non-GAAP calculation is $1.3 million related to the non-cash debt discount and debt issuance costs on the convertible notes. From the cash flow perspective, $28.5 million of cash was added to our cash balance in the first quarter. Operating activities provided $31.8 million of cash and purchase of property and equipment used $2.9 million in the quarter. As of the end of March, the company had no outstanding borrowings under its senior credit facility and had $232.9 million in cash and restricted cash. With that, we conclude our formal comments for today. Operator, we now are ready to open the call for question.

Thank you. [Operator Instructions] Our first question comes from Nicholas Jansen of Raymond James. Your line is now open.

Hey, guys. Thanks for taking my questions. First on flu, I think your commentary back in February was you expected somewhat flattish revenue, sequentially, and it looked like it was down $2 million, so was the end of the season a little bit more abrupt than what you were expecting? Maybe just some color there would be great.

I think what we saw was a very robust end of the fourth quarter and in the normal first quarter. As we said before, the season looked a lot like between 2012-2013, so $2 million at the end of the fourth quarter versus the first quarter [ph].

Okay. That is helpful. Then secondly, thinking about the Sofia product line roadmap, you have a couple of your competitors looking to get CLIA-waived, one has already CLIA-waived for flu one, potentially CLIA-waived for next year's flu season. Maybe just broadly kind of address some of the competitive noise that is out there and how you think Sofia matches, and then also can Solana be CLIA-waived at some point? Thanks.

Sure. Nick, we treat every new potential entrant into our space with the respect that they deserve and we have certainly kept a close watch more on molecular competitors are doing, including the new entrant that you just mentioned. Behind that product [ph] Alere it is called now is no different and I am confident based on what the product actually is and what many customers are saying that there is no serious threat to either the price or the volume of our core respiratory business. I would fully anticipate that any volume shift to molecular products would be offset by the increase in volume that moves visually with Rapid's two products like Sofia. That is certainly what we saw with the introduction of multiplexes repertory bio analysts. In other words, I would say that I do not believe that it is a zero-sum game actually when you look in some detail at this flu season. For this last flu season our overall QuickVue revenue was up 44%. Now, when the normalize for seasonality, we would subtract from that something like 30%. In other words, we believe 30% of 44% was due to just the fact that there was a much bigger season this year than the previous, so you are still looking at the fact that even with our QuickVue business, which we are not actively promoting that business is still increasing and in fact if our math is correct, it looks like an increased due to new QuickVue customers by about 14%. When you look at Sofia, it is up 91%, so when we correct for the seasonality, subtracting again 30%, assuming that the math holds then I would say that 60% of increase that we saw was due to new Sofia customers. Even if the molecular competitor, including the one you just mentioned or others, we know that the GeneXpert is potentially going to be CLIA-waived as well. Even if the molecular competitor does have some success, and I am not suggesting that they won't have any, I do not see how this is likely to negatively affect our core business in a meaningful way. There are just way too many customers out there. Now we look at maybe, of our own customer base, something in the 30,000 range, that is a lot of customers and many of them are very small. Again, I am not completely discounting what competitors are doing. We are certainly keeping an eye on them, but at this stage based on what we know, we are certainly not overly concerned. Now, on the Solana product Solana will be a terrific product in the hospital and the reference lab segment and we have plans for those assays to be CLIA-waived as you mentioned, Nick. The reason however that we do not talk a lot about Solana in the physician office segment and certainly not counting on any contribution in our strategic plan, there is a couple of reasons. First, I am not sure that a higher reimbursement will be a sustained benefit for the physician moving forward. Expecting that reimbursement for molecular assays will decline is not shooting too far ahead back in my view. Why should a private payer reimburse at a significantly higher rate for product that is essentially molecular and name, simply because you have amplified RNA. If a negative still needs to be confirmed in the case of influenza or sent out the cultured in the case of Group A Strep. Should a payer reimbursement product is not significantly better performance than Sofia or [ph] and not as good as existing PCR methods. I know that at least one large private payer has asked these question, perhaps others have as well. We believe fundamentally that healthcare costs must come down and the manufacturers with low cost of goods sold physicians will be in a position to succeed over time. That's why we are so excited about what we are doing with Solana, but not in the physician office because of the second and probably more importantly than what is related to work flow. We are told over and over again by physicians and their staffs, the assays of any significant volume need to be [ph]. The number one complaint we have when converting our quick view plus customers to Sofia is that for flu we have increased the time to a negative result from [ph]. Although we are doing well with the Sofia Strep A launch, the number one obstacle is that the Sofia that with Sophia the lab can only run one tested time it takes five minutes. With Solana, we can run 12 test in about 30 to 45 minutes depending on the assay, but by the end the patient is already gone, so I do not view Solana to be a competitor in that space, but honestly I do not see how molecular products at this stage based on what I see out there are going to be in space at least in the space at least in the next three to five years, so that is a long winded, Nick.

Thank you. Our next question comes from Brian Weinstein of William Blair. Your line is now open.

Hi, guys. This is Matt Larew in for Brian this afternoon. Just one for me, yes how we are doing identification of so I don't use a lot of be a competitor, but honestly I don't I don't see how molecular products at this stage before the out there are going unit basically from the next five years that the long-winded answer next I had to do that withdrew from brand afternoon and management and sufficient to meet reported $10 million in non-flu new products were trailing 12-month basis, which I think is around about 10% of extra revenue over that time. If you kind of forecast now thinking about Solana, the additional products in the bag for AmpliVue and Lyra as well developing, so see a menu. Could you give us a sense directionally, if we are talking 12 months from now, where would you be satisfied that number is at?

Well, again, we are company that does not provide guidance, so that one is a difficult one sort of answering that, given our performance in Q1, which is as we expected, our forecast for the year which would include some benefit from to line the back half at least internally at this moment remains unchanged.

Okay. Then the second one, you mentioned the costs incurred related to evaluating a business development opportunity. Housing out with the cash burn on the books just wondering, Doug, your thoughts what's out there or if there are things that have changed, dynamics that have changed and sort of your intentions there?

Our intent for a long period of time now has been to look at a lot of opportunities hoping that we can find something that give us broader geographic coverage, potentially gives us something that is additive to our molecular strategy and/or gives us leverage in the point-of-care space. Recently we had such an asset and we were going after that in a meaningful way. Unfortunately, everything that we had hoped to be a part of that company was not and we have fairly disciplined approach to the way we look at things. The expense that you see is related to giving lots of advice from a professional services and I think you could expect not necessarily for us to - that every quarter, but every once in a while we would be looking at a company that did more of those three things. Then the last piece is, we have not look at anything seriously that would be accretive in the very near-term and that would be obviously a key criteria for us as well.

Okay. Thanks, Doug. I will get back in the line.

Sure.

Thank you. Our next question comes from Mark Massaro of Canaccord Genuity. Your line is now open.

Hi. This is Dave in for Mark. Thanks for taking my question. Can you guys give us a - do you know what the FX in the corner and what the impact was on revenue and how we should think about that and in the?

Our revenue as a percentage of the total is small that is ex-U.S. and some of that is in dollars, so our FX exposure is minimal.

The actual amount just so it is minimal was $80 in the quarter.

Okay.

Even international business most of it build in U.S. dollars.

Got it. Thank you. That is helpful. Just a follow-up on Solana, can you give us a little more color on what is coming after Group A Strep and what the timing is going to be. I think you have flu A and B after that. Can you just give us a little more color on what you are thinking on menu on that?

Sure. Well, clearly a Group A Strep is under active revenue at the FDA, which we have CE Mark as of today. You know that’s moving along as scheduled. We also said previously that we would be in studies with our flu products this summer and that is still on track. We are also working on a couple of other products. We have got HSV 1, HSV 2 assay. We have also got a Trichomonas assay in development, CT assay. Then like everybody else, we are looking at MRSA and C. diff.

Great. Thank you very much.

Thank you. Our next question comes from the line of Shaun Rodriguez of Cowen & Company. Your line is now open.

Hi. This is Ryan Blicker filling in for Shawn. Thanks for taking my question.

Sure.

Thinking about Solana for a second, how should we think about the impact of Solana launch an AmpliVue and Lyra? Will you be really actively trying to convert your customer there when there as many overlap or would it be relatively distinct?

The AmpliVue menu that we have today will stay with that number for the near-term and unless we get customer feedback that tells us that they want assays in that format, so most of the ongoing development in the isothermal category is where assays that we intend to go on Solana. It is possible that some of those larger volume AmpliVue customers may want to convert to Solana. If they do, that is okay with us because our cost of goods sold on Solana is dramatically lower, so we would view cannibalization at that instance to be highly favorable. Those two products though are not in overlap with Lyra at all. Lyra is designed for customers who already have a thermocycler, were mainly in the larger labs. Those products though when they are moved to Savanna and our ported over to the Savanna test cartridge would become available to be run in the lower volume settings and that is where we have to be careful between the mix between for Solana and Savanna, but for Lyra itself we had a two-pronged strategy one is to developed products for the larger volume customer and develop this product then we would be interested in porting over to Savanna, but your question on cannibalization from AmpliVue to Solana is a good one and we would hope to encourage that.

Okay. Thanks. I am just following up I guess. If you could, would you be winning to quantify for the quarter and maybe in 2015, how much revenue was generated just from AmpliVue and Lyra?

We have not actually disclosed that previously. I would say to you though that both are meaningful in terms of AmpliVue is slightly, but both are actually meaningful. The reason is, because AmpliVue you have far more customers of course, but every time the Lyra customers start up it is big sales.

Okay. Thanks. Then maybe just one more if I can. Given the recent - of flu revenue last quarter looking at in Q1 or maybe over the last two quarters just taking the sense of the whole season, would you be going to provide how much revenue was Sofia QuickVue and DHI?

No. We really have not. I mean, we are given the total flu, but we have not provided specifics relating to the different platform at this point.

Okay. Thank you.

Thank you. Our next question comes from the line of Tycho Peterson of JPMorgan. Your line is now open.

Hi, guys. This is [indiscernible] on for Tycho. Can you hear me okay?

We can. Thanks.

Yes.

I think, you mentioned last quarter you expect the sales force to be relatively flat on a year. Is that still the way you are thinking about it or there any areas, where you might try to add some incremental heads given all the new launches?

I think, we are in good shape for the moment. We have gone through a significant hiring process over the last three years. We believe that we have the right numbers for both, the POL and the hospital segment. We did make an investment last year in more molecular talent, so I think that we are fully staffed there as well. At the moment, I think the statement we to plan to stay flat still holds true.

Great. Thanks. Then just quick on R&D, you mentioned despite coming a little lower than we have expected or you still plan on that minimum $40 million to $42 million territory, so when should we kind of expect the spend to ramp, would that be a Q2 event or should we be thinking about that more in Q3?

It is pretty much evenly over the next three quarters. Some of the shortfall on spend, if you will, was less spending on Savanna than we had anticipated. We do have a couple other significant projects that are starting in the next couple of quarters, so they should make up the difference.

Okay. Great. Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Jose Haresco of JPMorgan Securities. Your line is now open.

Hi, guys. Good afternoon. Thanks for taking the question.

Hi, Jose.

I am sorry if I missed this, but how should we think about gross margins and SG&A for the remainder of the year?

Yes. I think we have given some previous guidance for the full-year that we believe our gross margins will be approximately in the 64%, 65% range.

Okay.

…and we really have not. Yes?

The SG&A, if you are not doing ton of hiring as soon as there is not at anything that changed that moves that needle rather than just commissions or is there a something else that is happening that we should be aware of?

Yes. The run rate for sales and marketing in SG&A other than remember we have the non-recurring business development cost in Q1. Otherwise, yes, they are pretty consistent for the next three quarters.

Okay. Thank you. As you guys think about moving in molecular and I think you mentioned a couple of minutes ago that docile 1 [ph] under 10 minutes. Qualitatively as we think about product profiles for molecular in the point-of-care setting, what are the different types of variables or qualities that you guys are looking at or a what your customers are asking for that, we should look to be that are going to be integrated in either this generation or even next generation of products?

Well, I think that generally could just say, Jose, that faster, easier to use, less expensive and accurate and they need to be in a physician office setting reimbursable those are the drivers of that particular segment, so that is when we look at it, I see a number of things that we can do on a qualitative basis and we certainly addressed some of those already, but more importantly, we see a larger market for the quantitative assays things like vitamin D and others. On the molecular front, workflows is such a huge factor in the physician's office that things has to be very simple, but they also have to be quite quick. I am not sure the technology is there, you can certainly speed of the assays, but the trade-off obviously by speeding and - the sensitivity is diminished and that is a non-starter particularly, well sensitivity and specificity both, non-starters if you have a problem there.

Okay. Last question, [ph] answer this one, but if you think about the new product revenue and given that it has grown so well over the last year or so, how should we think about that as a percentage of sales, say, a year from now or three years from now?

Well, I will relate that to our original aspirational goal, where we said that we with our pipeline we try to address incremental revenues of around $100 million net of cannibalization. A big chunk of that was the course of Sofia, which we said we would generate around $65 million. The four assays that we have been talking about and of course we still are waiting for hCG got us to about $59 million and the $65 million at least in our model. A big chunk of that was related to molecular of course and we said that we have approximately $25 million, all of which could be incremental to us. Obviously, that has gone a bit slower than we had anticipated. I do not know if it is next year necessarily or the year after, but we still seeing that those products that we are developing certainly have the potential to get us to that $100 million incremental, which would put us in about the $250 million range.

Thank you. [Operator Instructions] Our next question comes from Bill Quirk of Piper Jaffray. Your line is now open.

Hi. Good afternoon, everybody. It is actually Dave Clair in for Bill.

Hi, Dave.

Hey, first question for me. I was just hoping you could you remind us how many customers are currently using the QuickVue Group A Strep assay. Then what are your expectations for converting this group of the Sofia?

Yes. I am going to give you a general area versus the specific number. Of course, we know specifically how many customers we have, but I will just tell you that in total across the physician offices and the hospital segment and other locations that we are somewhere around 20,000 customers.

For QuickVue?

Yes.

What are your expectations for conversion over the Sofia among that?

Well, in our model originally if you went back and scrubbed all the presentation and transcript, we would have said that 50% cannibalization would be great. I can't forecast it for you at this stage, because we just got CLIA waiver. I can that we are still just under the 1,000 customer month, so that is relative to the total that comes from [ph].

Okay. Thanks for that. Can you talk about Sofia's potential in the walk in clinic? I think you have some trials going on there. Just any updates should be great.

You are just talking about urgent care?

Urgent care. Yes.

Well, we have a number of pilots. I think, you are aware Dave that looking at Sofia interestingly they are more interest in Sofia's Streps than they are flu or have them and those are going pretty well. I do not really have any feedback yet, because a lot of these we have just installed and we will look at how they do over the next couple of quarters, but it is certainly an interesting segment. Isn't it?

Yes. Okay. Thanks guys.

Thank you, Dave.

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

Thanks, everyone for your support and for your interest and Quidel. We had a great quarter and I believe that we are very well positioned to achieve our growth objectives. Take care, everyone.

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