QuidelOrtho Corporation (QDEL) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation's Third Quarter 2015 Earnings 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] As a reminder, this conference is being recorded. I'd now like to turn the call over to Mr. Randy Steward, Quidel's Chief Financial Officer. Please go ahead.

Thank you, operator. Good afternoon, everyone. 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, October 28, 2015. 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 and nine months ended September 30, 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 second quarter and provide updates on our product development pipeline. I will then briefly discuss our financial results and we'll then open the call for your questions. I'll now hand the call over to Doug for his comments.

Thank you, Randy and Good afternoon everyone. For today's call I'll talk briefly about our results for the quarter, our progress with a few key initiatives and our product pipeline, our view of how the markets for our products are shaping up and then some of the key assumptions and risks to our growth plan moving forward. Total revenues in the third quarter 2015 were up 14% from $41.2 million in Q3 2014 to $46.8 million. The largest driver of revenue growth in the period was Sophia up 78% in total due mainly to continued market penetration with our Sofia Influenza, RSV and Group A Strep products, which resulted largely from Sofia placements in previous quarters. In addition, Sofia test revenues increased over the prior year quarter due to the impact of initial orders from additional placements in the third quarter. Sofia placements in Q3 2015 were actually 12% higher than they were in Q3 2014. On a trailing 12-month basis through Q3 2015 the number of Sofia influenza customers ordering product increased by 50%. QuickVue revenues in the quarter were up 10% which we believe is due to share gains of our QuickVue Group A Strep products which were up 18%. Curiously despite a 30% cannibalization rate from our QuickVue influenza products to Sofia QuickVue influenza sales remained flat which suggests that the QuickVue brand remains quite strong and that workflow and the quick turnaround time on positive test results remained very important attributes for many of our customers. And finally, Thyretain sales were up 8% for the quarter and on a trailing 12-month basis were up 12% driven by growth in awareness of the product by the endocrinology community. From a product sales perspective we had a very good quarter. Randy will give you details on the declining grant revenue, but generally the reduced R&D spend for Savanna in the third quarter which reduced grant revenue that was recognized was due to gaining clarity around the regulatory pathway for the instrument and our decision to not build prototypes in the third-quarter and instead build what we are now calling alpha M units beginning in the fourth quarter that we intend to use in HIV viral load clinical trials in the back half of 2016 [ph]. If we were to adjust for the decrease in spend for the Savanna project, total revenues in Q3 2015 would have been 22% higher than the prior year quarter. On an out sales basis, meaning sales from our distribution partners to our laboratory and physician customers which excludes DHI and SPG product sales. Growth for Q3 2015 over Q3 2014 was 28%. For influenza sales alone, Q3 2015 was up 41% over the prior year quarter. Through nine months up sales growth year-over-year was 34%. We have said before in a number of venues that we believe that investments that we have made thus far has put us in a position to grow annual revenues reliably at a rate of about 10% to 15% assuming a reasonably normal respiratory disease season. In an overall IVD market that is clearly growing at a lower rate. Certainly the third quarter meets or perhaps exceeds those expectations. We have also said that we have a number of key initiatives that we are working on any of which could improve our growth trajectory and result in meaningful revenue and operating income increases. Let me touch briefly on the initiatives that are most likely to have an impact in the not-too-distant future. First, we expect to grow the influenza testing market by providing better information and by creating far greater awareness of the need to be tested and treated. Influenza is not simply the flu, something that causes us to feel bad for a few days. It is influenza, a serious respiratory disease that killed 46,000 people last year in the U.S. and hospitalized over 260 per 100,000 people 65 years of age and older. The increasing morbidity and mortality of recent and emerging influenza strains that crease a significant burden of disease will certainly create more public awareness over time of the need to see a physician and to be tested. But with Virena, our cloud based data management system and investments in marketing and scientific studies we expect to accelerate awareness by physicians, pharmacists, patients, labs and public health officials of the dangers of influenza and other respiratory diseases and of the need to be tested, treated and possibly isolated from those who are potentially immune compromised. An impossible goal, but no child or his grandmother should die of influenza which is why we developed Sofia and Virena. Regarding progress with Virena, the number of customers at the end of the third quarter sending their Sofia data to our cloud was substantial and we expect to have thousands more by early 2016 greater than the number needed to power the data visualization tools that members of the Quidel ecosystem will have access to that will be used to create the awareness and behavior that we expect in the revenue growth over time that we have forecasted in our strategic plan. Second, we expect to convert microbiology lab customers performing Group A cell culture to our Savanna Group A Strep molecular assay. Instead of waiting 48 to 72 hours to confirm a negative by culture our Savanna customers can easily report out answers the same day as the assay time is 35 minutes and the instrument can run as many as 12 samples per run. Moderately complex today we plan to submit this assay and others for clear waiver because the waiver greatly simplifies what is needed for IQCP which labs will be implementing in January. Savanna Group A Strep was 510 k cleared in June, was launched at our annual sales meeting in August and is already seeing initial success that I would characterize as very encouraging. The revenue contribution from Savanna Group A Strep that we had forecasted for 2016 and throughout the remainder of our strategic plan appears to be very achievable at this point. Third, we expect to be first-to-market with a number of unique products that many have suggested were too difficult to develop. While we have acknowledged all along that there were technical risks we believe that if we could overcome a number of development hurdles the market would be receptive and the commercial risks with these unique products would be minimal. At this stage, both Sofia vitamin D and Sofia In-Line [ph] continue to look promising and we expect to be in clinical trials with both products in early 2016. In addition, we will be first-to-market with [indiscernible] a quantitative version of Thyretain that we expect will enable our TSI assay for Graves' disease to be more easily interpreted by physicians. This new quantitative assay will allow physicians to monitor anti-thyroid drugs during the treatment of Graves' disease, a chronic autoimmune disorder that affects millions throughout the world. And we will be first-to-market with a cell based receptor assay for TBI an antibody that is locked with Thyrotropin producing hormone. This will position Quidel as the only company with FDA clearance to market two definitive thyroid receptor bioassays differentiating the different thyroid receptor antibodies stimulating and blocking in serum which together can be used to definitively diagnose patients with autoimmune thyroid disorder. We expect to be in clinical trials with these two products in early 2016 as well. In terms of the remainder of the pipeline little has changed in terms of timeline. Sofia hCG is under active review at the FDA. We expect Sofia too to be in clinical trials very early in 2016 with the first three assays Sofia Influenza, Sofia RSV and Sofia Strep A plus. With the approval of Savanna and a molecular Group A Strep assay behind us we are working diligently on a number of additional assays and expect several of these moving through clinical trials shortly. And finally with the completion of the Savanna test cartridge design we are at the point where we can begin porting our PCR assays like HIV and our Lyra assays and our proprietary HDA assays to that system. Overall we've had a good quarter from a development perspective, but we've also been successful commercially. Let me comment now on a few trends that we see in our market and with our customers that are enabling our continued success with Sofia in particular. Last year about 9 million newly insured patients began using the healthcare system according to our Gallup poll and even more are expected moving forward. The number of office visits to primary care physicians is projected to increase from 462 million visits in 2008 to 565 million visits in 2025. Family practice wait times in 2013 were already at an average of 18.5 days, which means that if you have a sick child with influenza like illness for example, your physician will need to squeeze you in to one of offices' urgent care slots. And during an influenza epidemic in the future, even more people will potentially want access to those same urgent care slots. I was told recently by a scientific advisory board member that at his large Midwest institution, physicians were expected to treat one patient every 10 minutes. In my own neighborhood a well-known brand of healthcare has a goal of 12 minutes for sick patients and 20 minutes for wellness check. It is understandable then that when physicians think of performance criteria for tests that aid in the diagnosis of illness that turnaround time and workflow are very important. It doesn't mean that specificity and sensitivity are not important. In fact these two performance characteristics have been important drivers for many of the over 10,000 users of Sofia influenza, RSV, Group A Strep and/or hCG, as the sensitivity and specificity of each of these assays are seen by many physicians as best-in-class. It is also understandable then that when with products like Sofia Influenza, Group A Strep and RSV that have excellent sensitivity and specificity particularly with pediatric samples and turnaround time, and ease of use, and connectivity with our cloud so that they can see test results within the context of what is occurring in the communities which surround them, that physicians are continuing to enter into three-year agreement to purchase Sofia products and that they are increasingly sending their the identified data to our Virena cloud. In terms of hospital labs, emergency departments and other urgent care providers, trends in the market are also favoring adoption of Sofia. As our performance in the field in Q3 would demonstrate if I could simply list the new customers that we have gained. To avoid divulging competitive intelligence I will simply say that a number of prominent networks that span numerous hospitals and clinics have committed to Sofia resulting in hundreds of new Sofia placements in the quarter many of which are installing the Virena router. We are finding that larger institutions would like to standardize as inexpensively as possible on one platform across the entirety of their network, so that essentially they are reviewing only one methodology for influenza testing for example. Virena helps these networks achieve the benefits of standardization by tracking QC [ph] and saving labor by consolidating and submitting surveillance data to the public health agencies that they support in addition to the benefits seen by providers and patients that I discussed previously. And although the hospitals and urgent care settings might weigh performance criteria differently than physicians, turnaround time is also becoming increasingly important as EDs and urgent care centers compete with each other. EDs now post wait times online and are streamlining their processes to reduce the number of patients who leave the ED without receiving treatment. Speed matters, in fact, in my hometown we can simply send a text to a number and we will receive a response in seconds indicating the closest ED and the lead time at that location. Once again, our progress with Sofia continues seemingly unabated at this point, because in a nutshell for most customers it’s a better overall solution. Overall we believe that our comprehensive strategy and approach to the markets we serve makes the most sense. Here are some of the key assumptions that we are making and some of the risks that we are seeing over what we call our long range plan. We assume that Sofia 2 has delivered at landed cost of between $300 and $350 with an expectation that it is closer to lower end of that range, that we are allowed to pursue a migration pathway to U.S. CLIA waiver and clearance and that we are in market in the next respiratory season. The risk is low and is more on timing in the two to four weeks range. We also assume that Sofia 2 assay times at one to two minutes for a positive test result and less than 10 minutes for a negative test result are fast enough in the new origin care world. We assume meaningful demand for point-of-care fingerstick assays for vitamin D and Lyme disease. Both are new assays for the FDA to review. Therefore there is risk in terms of the timing of approval we would suggest given our experience with the FDA. We assume thousands of Virena placements by the end of Q1, 2016 as I said, meaning in key metropolitan areas that will remain confidential. In those markets we assume that we can cause a shift in awareness of respiratory disease, that we can grow the testing market in those locations and these markets influence others throughout the country. We further assume that this exercise which will require a significant expense will be completed in a few years. We assume success in converting some number of the estimated $37 million Group A Strep cultures in the U.S. to Savanna Group A Strep and that this is a meaningful contributor to sales and margin beginning in 2016. We further assume success with Group B Strep, C difficile, HSV, DVD, Trichomonas and other non-flu assays beginning in 2016. We assume that Savanna is in trials in Africa in 2016. We further assume that our TB product in development achieves its cost target at around $4 per test which will greatly expand the HBDC [ph] market from TB testing and that success with TB drives the centralization of HIV viral load testing in the developing world. We assume that respiratory viral panels and other panels will get smaller driven by reimbursement and direct cost to patients which creates an opportunity for Sofia 2 and our future molecular offerings. We assume that there is a need for CLIA waived molecular platforms like Savanna and Solana and potentially other platforms that could address this opportunity. We also assume that this not a zero sum gain and that success in placing molecular platforms, ours or our competitors, does not preclude success of Sofia and our plans to grow the overall respiratory disease testing market. And finally, before concluding I would like to mention our most recent addition to our Executive team at Quidel, Ed Russell joined Quidel on October 12 as Senior Vice President, Global Commercial Operations. He was most recently responsible for leading Life Technologies North American Commercial team, a $1 billion operation. In addition to Life, Ed’s industry experience is varied and includes high level commercial and senior leadership roles at FedEx Kinko’s and Mobile Oil [ph]. Under Ed’s leadership we are bringing together all our sales and marketing operations for all products and segments worldwide under a single global commercial umbrella. I understand that Ed has always met or exceeded his annual goals as a commercial executive which is a terrific track record of success. We are thrilled to have him on the team. In closing, a comment also for those of us at Quidel who are out there every day getting things done and who maybe listening in on today’s call. We had another successful quarter as planned and through nine months we are still slightly ahead of our internal annual operating plan. Quidel is truly a great place to be and a terrific environment in which extraordinary people can build their careers. We continue to attract superior talents and I look forward to seeing the impact that our people can have on improving healthcare to the products that they deliver. Randy?

Thank you, Doug. As we reported earlier today total revenues for the third quarter of 2015 were $46.8 million as compared to $41.2 million in the third quarter of 2014 year-over-year increase of 14%. Global infectious disease revenues which include QuickVue, Sofia, DFA, cell culture and molecular products, grew 27% to $33.4 million in the third quarter of 2015. This compares to the $26.3 million in the previous year. Influenza revenues, which include Sofia, QuickVue and $2.2 million of DHI respiratory products, increased 36% to $21.8 million in the third quarter. From a Sofia platform perspective, Sofia Influenza revenue was up 70% to $13.2 million and also realized significant growth in our Sofia Strep and RSV assays. As Doug mentioned, we continue to realize an acceleration in Sofia placements. For the first nine months of the year, we have placed 67% more Sofia instruments with customers than last year. The QuickVue product category revenue was up 10% the result of increased revenue for Strep and RSV. QuickVue Influenza revenue was flat to last year. Revenues for the women’s health category increased 8% in the third quarter to $9.5 million led by 8% growth in our pregnancy business as well as 8% growth in Thyretain. Our gastrointestinal product category revenues were $1.8 million in the quarter. Revenue from our other product category decreased $2.1 million as compared to $4.1 million last year primarily due to a decrease in grant revenue associated with the Gates Foundation grant. Remember the Gates grant revenue recognition is directly tied to the spend on the Savannah project. If you exclude the Gates grant revenue from both periods the product revenue growth was 22% as Doug mentioned previously. Gross margin in the third quarter was approximately 64% compared to 59% in the third quarter of 2014. Primary drivers of the increased gross margins were improved product mix driven by higher influenza sales, expiration of the amortization of the Alere settlement and improved manufacturing efficiencies. As we have said previously, the amortization on the Alere settlement ended in February of this year and we expect that for the full-year, this will benefit our gross profit by $7.4 million as compared to last year. Total operating expenses excluding cost of sales and amortization of intangible assets were $26.4 million as compared to $28.8 million last year. Research and development costs were $8.4 million a decrease of $3.1 million from the third quarter of last year. This decrease was primarily due to lower development costs associated with our Savanna platform that were partially offset by increased investment in our Sofia 2 platform. This quarter spend on the Savanna platform was lower than originally planned because we have decreased the timing and number of Alpha development prototypes required to support the building of the Alpha cartridges and initial assays. For the full year, we now believe our R&D spend will be in the range of $37 million to $39 million. Sales and marketing expenses in the third quarter of 2015 were $12.1 million compared to $11.4 million last year. The increase in sales and marketing expense was driven by additional compensation cost mostly due to the increase in variable compensation on higher revenue. General and administrative expenses were $5.9 million in the third quarter of 2015 in line with the third quarter of last year. In the third quarter interest expense was $3.1 million driven by interest associated with the $172.5 million convertible senior note offering completed in December of 2014. As a reminder, the coupon rate is 3.25%. In the third quarter, we reported $2.7 million of interest expense related to the convertible senior notes of which $1.4 million relates to the cash coupon due semiannually and the remainder is the amortization of issuance cost and debt discount. Our tax rate for the third quarter was approximately 59% as compared to 44% for the third quarter of the prior year. The taxable income in the quarter was relatively small plus the discrete tax item disproportionately impaired the effective tax percentage. For the full year, we expect our effective tax rate to be in the range of 31% to 33%. Net loss for the third quarter of 2015 was $800,000 or $0.02 per share as compared to a net loss of $5.8 million or $0.17 per share for the third quarter of 2014. On a non-GAAP basis, net income for the third quarter of 2015 was $1.7 million or $0.05 per diluted share compared to a net loss of $500,000 or $0.01 per share for the third quarter of last year. As part of the non-GAAP calculation included in operating expenses for the third quarter of 2015 was stock compensation expense of $1.7 million and the amortization of intangibles of $2.4 million. Also added back for the non-GAAP calculation is $1.3 million related to the non-cash debt discount and debt issuance cost on our convertible senior notes. For the nine months period ended September 30, revenues increased 20% to $143.7 million compared to $120.2 million for the nine months period in 2014. Infectious disease revenues totaled $103.1 million versus $80.4 million last year an increase of 28% driven primarily by increased demand for influenza, Strep A and RSV products in the first nine months of the current year. Flu revenues increased by 42% to $64.1 million. Strep A revenues increased by 20% to $21.4 million, while RSV revenues increased 41% to $5 million. Despite the report to proceed competitive pressures in our space, we continue to realize solid growth in most product segments led by the continued success from our new products. Women’s Health segment increased 9% to $27.9 million for the first nine months as compared to $25.6 million in the same period of 2014. Growth in the category was led by our Graves disease product which grew 11% followed by our pregnancy product line which increased 5% from 2014 to $13.4 million. For the first nine months of the year, our gastrointestinal segment revenue decreased 3% from the same nine months period in 2014 at $5.6 million as a 15% growth in our C difficile product line was offset by revenue decreases in our [indiscernible] H. pylori and natural virus product lines. The revenue from our other product category was $7.3 million as compared to $8.7 million last year. This decrease is primarily due to a $1.5 million decrease in grant revenue for the year. Gross margin for the nine months was 63% compared to 56% for the nine months of 2014. This increase was driven by the expiration of the amortization of the Alere settlement as well as improved manufacturing efficiencies. For the first nine months of 2015, we recorded $9 million of interest expense, $8.2 million of which was related to the convertible senior notes. Of that $8.2 million, $4.2 million relates to the cash coupon due semiannually and the remainder of the amortization of the issuance cost and debt discount. Net loss for the first nine months of 2015 was $5.7 million or $0.17 per share as compared to a net loss of $14.2 million or $0.41 per share for the first nine months of 2014. On a non-GAAP basis net income for the first nine months of 2015 was $7.7 million or $0.22 per diluted share compared to a net loss of $1 million or $0.03 per share for the same period in 2014. For the nine months ended September 30, depreciation, amortization and other was $17.5 million as compared to $20.6 million in 2014. From a cash flow perspective operating activities provided $20.3 million in cash in the first nine months of the year and purchases of property and equipment spent $12 million. We are currently estimating full year capital expenditures of approximately $18 million. Additionally, for the first nine months of the year, the company has spent $27.6 million to repurchase shares of its common stock. As you know, we have a stock buyback program and from time to time we opportunistically review repurchasing Quidel shares. As of the end of September the company had no outstanding borrowing under its senior credit facility and had $184.4 million in cash and restricted cash. And with that, we conclude our formal comments for today. Operator, we are now ready to open the call for questions.

[Operator Instructions] And our first question comes from the line of Brian Weinstein with William Blair. Your line is open.

Hi guys. Thanks for taking the questions. I thought maybe we could just start with you guys put up a very strong number for Influenza, I was wondering if there was any kind of stocking impact that you saw, you were seeing ahead of the season that might impact kind of what the total number would be for the season or is this sort of just normal kind of course of business that you guys are seeing with the increased number of Sofias that are out there?

Thanks Brian. It is an increase in the number of Sofias that is driving most of the activity. You heard us talk about what we shifted distribution, but you also heard that they shipped lot of products to their customers. So I would say it is normal stocking in advance of what is perceived to be a light to normal flu season that is expected and that is what you are seeing. I don’t think you are seeing abnormally large stocking, at least not at this point.

Perfect and given the number of Sofias that you guys have out there at this point and kind of what you are seeing on your base business, what would a light to normal season look like for you guys in terms of revenue over the course of the season?

Well we used to say that our typical year was $40 million to $50 million. A year or so ago we are talking about something larger than that and now I think Brian I have to recalibrate that. What we are looking, where would you want to call it at this stage Randy.

It’s probably in the $70 million range.

I think slightly more than that, yes.

I just want to make sure that did you say $70 million, I just couldn’t hear you, Randy. I’m sorry.

Yes, yes, 70. Yes.

Okay, perfect. And then can you talk a little bit about Solana, when we hedge on the road you were talking about some early contract wins there annualizing there some pretty big numbers, have you seen continued increase in interest in Solana over the last couple of weeks and where do you think that product is sort of annualizing as far as what the wins are that you guys have taken on so far?

You are right that we had early success. We trained our sales organization at the end of August, so we don’t have a great deal of experience, but we do already have active customers. We have a 90-day forecast that is already larger than what we had forecasted for the entirety of 2016. Sales forecast I would caveat that comment by saying the sales forecast can sometimes be optimistic, but I’m encouraged to see the names of the customers and the numbers of customers as well and I would just suggest that at least at this stage we look like we’re in really good shape to do what we said we were going to do next year and then in the year following that.

Okay. And then last one from me can you just comment a little bit on what you’re seeing specifically in and in the physician office space with the molecular competitors in there, are you seeing any kind of changes to how they’re thinking about utilizing your product or utilizing molecular technologies?

As I tried to imply in my prepared comments, we see continued success with Sofia at this point unabated.

Okay, thanks.

Thanks Brian.

Thank you. Our next question comes from the line of Bill Quirk with Piper Jaffray. Your line is open.

Great, thanks. Good afternoon everybody.

Hey Bill.

So I guess, first question is just any comment guys on the potential merger here between Walgreens and Rite Aid and how do you think about kind of the I guess the consumerism side of some of these kind of rapid clinic approaches and then how that might affect the outlook for some of your products longer term?

We have seen some consolidation. You mentioned one, there was another one previous with that with CVS' acquisition of the Target Clinic. I can only comment that almost all of us in the market are watching that space pretty closely and I think it’s a state by state case, but it’s clear to me that over time pharmacists will be able to do more and that the number of physicians we have on board today and those that will be trained moving forward are not significant enough, are not enough to handle the increase in patient volumes. So the volumes got to go somewhere and we see that has being the logical place in addition to the urgent care centers of course as well. Is that what you are asking?

It is and I guess just maybe cast in a topic Doug, I mean certainly you have talked in the past about the potential to get Sofia into some of these locations. I suspect there have been a couple of pilots that are run, just curious kind of what are you thinking here in terms of kind of broader adoption within some of these rapid clinics?

Well, let me just give you a couple of examples and that might just add a little bit more color. Recently we closed back to back two very large national urgent care chains. The first of which and I don’t want to get it wrong, but I believe there were 110 sites and they each have now a Sofia and they each now report their data to the Virena cloud and the cloud based system was probably the major driver to it. In addition, we closed another one that was approximately the same size and in this particular case they have never actually done flu testing before. So they had done Strep testing, but not flu testing. So it was all brand new, but again driven by the ability to see the test data, but also see those test data within the context of referring around them and the communities. And so those would be just examples without providing too much information to competitors who will either be on the line or reading the transcript later. I would rather stay away from specifics other than to say it is a pretty interesting opportunity for us. We think we are ahead of this a little bit at the moment and so we go on and assess as we can.

Understood and then just, I guess last one from me, is just help us think a little bit about now that you have – had a lot of success getting Sofia out into the field obviously it is driving the top line here even ahead of the flu season. Help us think a little bit about kind of what percentage of those systems are using more than one assay? And I guess I’m trying to think through here is obviously giving a lot of optionality to that clinician when somebody walks in with a respiratory condition and obviously they could be using one of the handful of the Sofia tests, thanks.

Sure. Bill that’s a great question, we clearly track the number of assays that are on per instrument and sort of key goal that we have in place for our sales team, this key goal that we try to discuss with our distribution partners as well. We’re not as far along as we would hope at this stage and I would just tell you that for two reasons one is the FDA clearance that we have for the Strep product is it does not include yet READ NOW Mode [ph] and I think I had talked a little bit about that before. We have a number of customers that are used to reading a Strep result in 90 seconds and they don’t really want to wait five minutes to get a Strep result on Sofia and it’s creating a bit of an issue in the larger sites that find it problematic if they are running new things sequentially. So as soon as we get READ NOW Mode which I would expect sometime soon, we would I think be able to change the number of customers that are running through Strep on their instruments. RSV is handy, almost flu customers or almost all RSV customers say they will run our flu tests, so that is helpful. And then again as I mentioned in my comments we’re under active review at the FDA right now with our Sofia hCG assay clearly. So it is still early on. We got enough of it. You can either be disappointed or you can be optimistic as it looks like we have got a lot of upside once we get those things in confidence.

Sounds good. Thanks a lot guys.

Thanks Bill.

Thank you.

And our next question comes from the line of Mark Massaro with Canaccord Genuity. Your line is open.

Hey guys, thanks for taking the questions. Recently we have seen multiple compression in a lot of healthcare stocks and I would have to surmise that some of the private company valuations possibly could be impacted by that. You guys have a pretty healthy balance sheet and just wanted you to comment on some of the business developments, initiatives that you have and if you could comment maybe on the landscape of potentially acquiring another platform, what type of multiples you are seeing or people are asking for? And then if you could maybe comment on your prior comments on potentially expanding distribution outside the U.S.?

Okay. Let me see if I remember all of those Mark. We have an active business development program. We look at a number of things in our space. We are very interested in things that add either technology that we think we need or perhaps even more importantly fit into the channel where we develop more leverage. So things that fit where we place Sofia today or events of course. In terms of valuations, I don’t know. I would say we feel a lot of expectation around few times revenues and a lot of the early stage companies of course don’t have a whole lot of EBITDA. So most of those companies are not typically valued on EBITDA, at least we don’t find it useful to compute those multiples. And then outside the U.S. we’re doing pretty well. I would say that we've got a couple of products that fits those markets better than they do here. In other words they are designed for those markets. Those are forthcoming. We also are in the process of getting our products registered in some of the key countries like China and Japan et cetera that we haven’t had before and so there is a bit of upside for us we think going forward there.

Great. And just as a follow on to that question, are there any opportunities that look attractive, more attractive now than they did previously and I’m just trying to get a sense of how soon we might expect to see deploy capital to acquire something?

It’s a great question, but I think Mark you know I can’t answer the question. Again, we continue to look; there are a number of interesting things out there. The valuations are actually crazy right now, so it’s possible that we could come to terms on something that we would really like to have, but other than that I can’t really – I can’t add too much more color beyond that.

Okay. And can you provide the dollar amount that Solana contributed in the quarter?

In the quarter we just…

Really at the beginning of September, so it is not significant for the quarter.

There may have been some purchases in the instruments I don’t know. I agree with the timing of that.

Okay. And then last one from me, Sofia Vitamin D and Lyme are these going to be PMA submissions and would it be fair to think by early 2017 we might see these on the market?

They are not PMAs. The first question I think and I see fairly straightforward process with each, I would say those at point of care, CLIA waived assays for these products would be first and I am not anticipating a super quicker review time as we have seen on some of our other products. So I would see a typical 510 k clearance and probably CLIA waiver submission after that for one or more of these products depending on what we learn in our conversations in the future with the FDA. We have had preliminary conversations already of course, but we will give more clarity as we get a little bit closer to submission.

Great, thanks guys.

Now just, Randy just reminding him me I didn’t give you the timeframe, I think clearance on these products in 2016 is possible.

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

Hi guys, it’s Steve on for Tycho. First question is just on the Cloud platform, it sounds like the number of users is growing pretty rapidly. Is that driven mainly by high percentage of new Sofia placements coming with the router or are you also shipping routers to existing Sofia users separately? And then it sounds like you think it will hit critical mass in terms of user as in 1Q 2016, A is that the right way to think about it and B what give you the confidence that you will see that kind of a ramp?

Great question Steve. First the routers are going out with new placements of course, but we are also going back to customers who already have Sofias and we are asking for additional commitment on their term in order for us to provide the router. And we do believe we will have critical mass by Q1 and we are actually well on our way to do that, the number that have been shipped recently has been accelerating dramatically and one of the factors is that we are absolutely just focused on it.

Got it, thanks. And then just as the Solana rollout progresses can you remind us how you are thinking about kind of the cannibalization of AmpliVue users, I mean is that still being seen as net benefit from the margin perspective given the lower cost?

Yes, we have a number of AmpliVue users mainly at [indiscernible] – that we expect to convert to Solana once we are in market with Solana through this year and it is a pretty significant improvement in gross margins, yes.

Got it. Thanks for the color. Congrats on the quarter.

Thanks.

Thank you. Our next question comes from the line of Jack Meehan with Barclays. Your line is open.

Hi thanks and good afternoon. I just want to start and ask about the momentum with Sofia and maybe the success that you are seeing with the Group A Strep customers, just how is that going so far and then how do you see this placement pace continuing over the next couple of quarters?

I’ll answer it in a reverse order if you don’t mind. The placement rate that we saw in Q3, we are actually seeing continuing into Q4 and actually now increasing as if we would expect it to in Q4. And I don’t see any reason why that wouldn’t continue through Q1 as well based on what we are seeing, what we see in the forecast. Historically, but moving forward what we’re seeing according to our sales team is there is continued interest and I think that actually with approval of again READ NOW Mode on Strep and then with CLIA waiver on hCG we may then see an acceleration beyond that.

And then remind me Jack what the first question was? I'm sorry.

Yes, just the beginning around the Group A customers that you are trying to penetrate there?

Well, interestingly in the very large hospital based customer with both hospitals and clinics in the bigger deals we actually are seeing commitments for all the products even pre-commitments on hCG when we get through the FDA. So the agreements that we're putting in place with these very large customers that I mentioned in my prepared comments all came with Group A Strep. The biggest upside there were in terms of numbers is always on the physician side where that's where they are having the problem with this. They need the read now in order to line them all up to do more than once and then feed the Sofia and 45 seconds at a time.

Got it, that makes sense and then just one last one around, I appreciate all the commentary around the clinical trials that are coming up, but just the punch line around the margin targets and just your visibility into the R&D pulling back second half of next year and when you think you achieve EBITDA margin targets? Thanks.

Well the EBITDA margin that we said we were aiming was greater than 30% and in fact Randy and I was just going through it yesterday morning in some detail and we're committed to that number in 2017 and we're thinking that we will have made significant progress in 2016 toward that goal.

Great, thanks.

Thank you.

Thank you. Our next question comes from the line of Zarak Khurshid with Wedbush Securities. Your line is open.

Hey Zarak.

Hey guys, good afternoon. Thanks for taking the questions. Doug, I was wondering if you could clarify your decision on not building the Savanna prototypes and just the net effect on this Savanna program at a high-level? Thanks.

We got very good advice from somebody who is at Gates that has great deal of regulatory experience and looking at our timeline and what we were planning on doing she came in and advised us that what we were doing was not necessary and so we're basically skipping from one step to the next and the units that we're building this quarter will be much closer to the final design of the product and so therefore much closer to that will finally go to clinically trials with in the back half. So we basically saved a bit of time and a bit of expense by not building those first what I would call a prototype. It was really something that we couldn’t take up to the field, but instead we could use internally for assay development et cetera. We have we believe a plan that says we need X number of those internally and then the ones that we need will forego these what we call as I said Alpha M [ph] I think and must be manufacturing a more mature. So in other words if I can restate it, this unit that we're building now in this quarter is very close to the unit that we would call a beta unit and those are the units we're going to go to trial with.

Got it, thanks for the color there and could you just maybe talk a little bit about your current views on the multiplexing and how the Savanna menu may incorporate to put levels of wax over time?

I can comment. I don’t think it is necessarily my view. I was reading most recently in one of the publications produced for pathologists an that described the issues related to multiplexing. I think that physicians like to have these multiplex panels and I think they have the preference for them. But at the same time there have been some problems created as well and with reimbursement an issue and now patients being charged for these panels there is some discussion around of the idea that panels are good, but maybe we should have smaller panels and followup testing if they are negative, et cetera. So I know that, that's likely to change over time. With our products, Savanna is the product that we have in the market today. You know apparently we can multiplex a number of things simultaneously. We can either deal with PCR and Savanna, but we can also do with HDA and Savanna.

Great thanks and then could you just breakout the actual number of Sofia placements in the quarter?

We did and we just said that they are 12% higher than they were last year. I think in Randy's comment he said we're up 67% for it through nine months. As you know, last year at JP Morgan I announced where we were at, at that time and my intent would be to do the same things here. Then I would just tell you that the number that we will see at the beginning of 2016, the one that we will talk about at JP Morgan will be significantly higher than the number we suggested earlier this year at JP Morgan.

Great, thanks for the comment and then the driver of that in your view is new menu or greater awareness of Sofia or the cloud capabilities or what's driving that acceleration?

It is a big different depending on the segment. If you are looking at the traditional hospital lab ED setting you are looking at standardization and cross integrated delivery networks and you are seeing that he cloud based symptom enables them to track QC across the entire system. Sofia then allows them to use the same test and in the big centers they do in the clinics and there are advantages there. Also there are centers obviously that are larger than some of their data through state county and federal public health and the Virena system does all that for them as well. So those are drivers in that segment and the pharmacy, retail clinic, urgent care, I would say that Sofia is cost effective and the cloud based system is a differentiator. In terms of physicians I would net to you that at this stage until we have the data visualization tool, it will be harder to demonstrate to a physician who is not using our product yet what the benefit would be and so that's something that we're focused on. That's why we intend to have enough of the Sofias out there with data being sent through the cloud in order to power the data visualization tool that we need. So again what's driving it right now are the current products and I think the cloud based system helps a lot.

Thank you. And our next question comes from the line of Nick Jansen with Raymond James. Your line is open.

Hey guys most of mine have been answered, but maybe just a little bit more on Virena. Is here any way you can potentially monetize that beyond just kind of providing data to [indiscernible] system about, is there any way you can walk with the CDC or other regional public health plans whereby you could actually charge money for that data as you think about it mapping the U.S. where [indiscernible]? Thanks.

Thanks Nick. You asked me a question and l actually don’t have a great answer for it yet today, but I will say that we've now been looking at consultants and I think our head of IT has it down to three that we're looking at. That might help us understand what are options are because this is not an area where we have a great deal of expertise. Most of us are diagnostic people that have in the diagnostic space for a very long time and I will be honest with you, I'm not super knowledgeable on what we can do to monetize the data at this point. So again, I think I'll have an answer for you shortly once we've spent some time getting some good advice.

Certainly an opportunity we just haven’t monetized it at this point.

Okay that's great and then secondly, you are thinking about the molecular entrants into this space, so you view that as a good for the category as a whole and do you think some of the perhaps strong flu revenue that you are seeing right now is a function of better awareness in this of better tests and I would put Sofia in that category?

Again as I've said before Nick, our view is this is not a zero sum game. Your question is a good one, is having better technologies available will that over time create more awareness? I think it will. It is obviously way too early to suggest that any of that has occurred yet. Right? I mean the products that we're talking about in a market have not been that there for no longer than a year for sure. So I don’t think it would be possible to say this, their entry at this point has created awareness, but you've certainly raised an interesting point.

Thanks guys, nice job.

Thank you, Nick.

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

Thanks everyone for your support and for your interest in Quidel. We appreciate it. We had a great quarter as we said and I believe that we are well positioned to achieve our growth objectives. Thank you everyone.