Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation First Quarter 2017 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]. I'd now like to turn the call over to Mr. Randy Steward, Quidel's Chief Financial Officer. Please go ahead.

Thank you, operator. Good afternoon everyone and thank you for joining today's call. With me today is our President and Chief Executive Officer, Doug Bryant, and Ruben Argueta, Director of Investor Relations. Our first quarter 2017 earnings release is now available on ir.quidel.com, our Investor Relations web site. We will also post our prepared remarks on the presentation tab of our IR web site, following the conclusion of this call on April 24, for a period of 24 hours. Please note that this conference call will include forward-looking statements within the meaning of Federal securities laws. It is possible that actual results and performance could differ significantly from these stated expectations. For a discussion of risk factors, please review Quidel's annual report on Form 10-K, registration statements and subsequent quarterly reports on Form 10-Q, as filed with the SEC. Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, April 24, 2017. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law. Today, Quidel released financial results for the three months ended March 31, 2017. If you have not received our news release, or if you would like to be added to the company's distribution list, please contact Ruben at 858-646-8023. Following Doug's comments, I will briefly discuss our financial results and then we'll 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 will give you my thoughts on our first quarter revenue and some insights into our performance during the recent influenza and Group A Strep epidemics. I will also talk a bit about our progress with our molecular franchise and provide an update on our product development efforts. We are off to a good start in 2017. Total revenue for the first quarter was $72.7 million, well above the prior year quarter, and somewhat better than our own expectations as well, driven largely by influenza and Group A Strep test sales. Our Virena test data are improving our insight into each respiratory season. However, there are still several variables that affect both the magnitude of any respiratory season and our performance. For example, where and when an influenza epidemic starts and stops is an important factor. The morbidity of circulating strains is also a factor that drives patient volumes, as is the percentage of patients that will test positive. Competitive dynamics and the difference between the capabilities and limitations of each of the products in the markets, drives customer choice and can also be a factor that affects our performance. During our fourth quarter earnings call in early February, we noted that the CDC's ILI data were suggesting a slower start to the influenza season. However, our Virena data actually showed that the season appeared to have started reasonably on time, earlier in some states and later in others, and that positivity rates in January have been above 25% on average, which is high. In addition, we mentioned that inventories of our influenza test kits at distribution at that time were low, and that Sofia placements, as we exited the year, were on track with our expectations, and were continuing…

Thank you, Doug. As we reported earlier today, total revenues in the first quarter of 2017 were $73.7 million, increase of 46% over the prior year. Immunoassay product revenues, which include all QuickVue and Sofia lateral flow products, increased 77% to $57.5 million in the first quarter of this year. Within this category, Sofia products grew 97% from the first quarter of 2016 to $25.2 million, while QuickVue revenue increased 64% to $32.4 million. Total influenza revenue in the quarter as reported, was $40.8 million, of which $38.3 million was from the immunoassay products. The influenza immunoassay revenue split was $20 million from Sofia versus $18.3 million from QuickVue. As Doug mentioned, we realized slightly higher QuickVue revenue in the quarter than anticipated. We believe this is an indication that turnaround time is very important to a physician's patient workflow. Total inventory at distribution is down 25% from December of 2016. The influenza portion of the total inventory is down 47% sequentially and down 12% versus first quarter of last year. Revenue in the virology category, which includes products from diagnostic hybrids decreased 8% in the first quarter to $10 million. A portion of this decline was planned, as we move our cell culture customers over to our molecular products, both Lyra and Solana. Going forward, we have a couple of product extensions to the thyroid category under development, that are expected to reverse this trend. Our molecular product category, which includes Lyra, AmpliVue and Solana brands, increased 48% in the quarter to $3.1 million. Solana continues to be the main growth driver in this category. We are pleased with the placements to-date and placements projected for the remainder of the year. Royalties, grants and other product category decreased in the quarter to $500,000, due to lack of grant revenue…

[Operator Instructions]. And our first question comes from Jack Meehan from Barclays. Your line is open.

Hi, thanks. Good afternoon guys. I wanted to start -- could you elaborate on the Solana traction in the quarter, and just the types of customers that you see adopting the instrument. Did that drive all the molecular revenue increase and just any product level commentary there will be great?

It was certainly a big part of the molecular increase. Solana placements continued, and then we also had customers coming online that had evaluated our Group A Strep assays, and then finally, we also added some menu with -- mainly with HSV/VZV, but as I mentioned, we also have a small number of early influenza customers as well.

Do you continue to see adoption from the alternate site piece of the customer raise [ph] for Solana?

We do. Particularly, the urgent care center. There are a couple of very larger urgent care center clauses [ph] that contributed.

That's helpful. And then Randy, I just was wondering if you can elaborate on the inventory comments you made. I didn't catch all the metrics, but were you implying that customer's exhibit the quarter at inventory levels below the already low levels from last quarter?

Yes, that's correct Jack. They were across all -- across early Strep, Flu, RSV and hCG, all of them were lower than where they were at the end of December. And then certainly flue was below where they were, Q1 of 2016 as well. So we are in very good position with inventory levels, as we move into the second and third quarters.

Good. And maybe just the last one for me, I know it's always tough to pencil in [ph] what you are seeing for the second quarter, given just that time of the year for flu, but, given that the flu season extended into April, is there, any sort of range that you feel comfortable for flu in the second quarter?

No. I don't think it's really even possible to predict a range at this stage. I would say, that it's not like it was last year, where the season actually went well into April. Although, we do see some positivity in our Virena data, and we do see some positivity for Influenza B. Actually, I wouldn't even use last year's Q2 for modeling purposes at this stage.

That's helpful. Thanks and congrats.

Thanks Jack.

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

Hey guys, thanks for taking the questions. Maybe you could talk a little bit about -- just remind us on Sofia 2 versus Sofia. Can you just talk through the economic impact across the P&L and across the assays themselves and the instruments and how we should just be thinking about it, if you start rolling out Sofia 2s versus Sofias?

Sofia 2, Brian, is roughly a fourth of the cost of Sofia 1. So that's mainly the economic difference. We still plan on placing those rather than selling them, so that does have an impact for us, in terms of our costs. On the cartridges themselves, there is the same cartridge for influenza, RSV and strep, the first three assays on Sofia 2, and so the cartridge cost is identical.

Okay, great. Thanks for those reminders. As for kind of share in the quarter, I might have missed it, but could you comment at all about what you guys thought from a share gain perspective, especially with Alere going through some of the difficulties they have. So can you just talk a little bit about the overall market environment in that context, and also, have you been able to take any personnel from Alere, as they are going through their troubles?

The answer to all those is yes. Starting with just market share, generally, I think it's safe to say that both instrumented immunoassay platforms did well in the quarter. In other words, we replaced a lot of Sofias. Our cannibalization remained approximately where it was before, the mid-30s, and I would suggest that the other instrument [indiscernible], which as everybody knows, there was BD. I would guess had similar success. And probably not just at the expense of Alere, but also several of the other smaller players. And in terms of personnel, we continue to recruit and hire top talented people, regardless of where they come from. Some of them happen to have come from Alere though. In fairness, I would say that that's true.

Okay. Last one for me, on gross margins, you guys have shown higher gross margin quarters before ongoing revenue; for instance 72% gross margins on $64 million in revenue in December of 2014. Here we were a little bit below on gross margins, relative to kind of where those numbers had been, given the revenue numbers. Can you talk about some of the differences now between gross margin and what you had seen previously, when you had seen kind of revenue numbers that were close to or similar to what we just saw this quarter?

Yeah. It's a great question Brian. Recall though, the 2014 was the largest fourth quarter flu that we ever had and -- prior to this one; and it was a higher percentage of the total. So we have other products now that have contributed in this quarter, that weren't in that fourth quarter of 2014. And as you know, flu, can be very accretive, its among the highest, if not the highest gross margin of any product that we have. So that's the reason we see, on lower sales a financial higher on gross margin profile.

And one other data point Brian is, we do have a lot more instruments out there, so the appreciation probably is higher now than back it was in Q4 of 2014 as well.

Oh yeah.

Great. Thank you for the answers guys.

You bet.

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

Great. Thanks. Good afternoon everyone. This is Alex Nowak filling out for Bill today. Congrats on the great quarter. On the Sofia 2 launch, I just had two clarifying questions; so first, the FDA approval for the influenza test on Sofia 2, that does include the rapid read mode, and then just second, you do expect to receive CLIA waiver for flu before the start of the next flu season, correct?

We expect in recent conversations recently with the FDA that we will have CLIA waiver imminently. I would say, within weeks or so. All the claims on Sofia 2 for each of the sample types is the same, except for -- in the case of nasal swabs in VTM, which is a 510(k) claim is not in the Sofia 2 products. But every physician with a CLIA led site can run all the sample types that they did before, including nasal swabs. And the reason I mentioned that of course, is that, we already know that several others are expected not to get a nasal swab claim, and you may have read recently, a competitor announced that they had gotten 510(k) clients, and they only had nasal pharyngeal swabs and nasal aspirates, and here we like to say that, even the dullest child sees that nasal pharyngeal swap coming. Kids do not like nasal pharyngeal swabs. So not having a nasal swab claim is pretty darn important.

Okay. That's helpful. And then just a follow-up on Jack's question, can you give any high level overview remarks on why distributors are carrying lower inventory now than they have historically, especially given -- we just went through a pretty strong flu season in Q1?

No, I think it's normal that they would burn through inventory as they exit, and you might have heard me say that, even we were surprised by how long this season persisted in the quarter. So I am just guessing that our distribution partners were equally surprised that the customers continued to order all the way through the end of the quarter. So they did burn through their inventory, and if I were them at this point, I wouldn't be ordering a lot more, given that we are heading into -- the middle of Q2 shortly.

Okay. No that makes sense. And then just last question for me, is there any update on the capital deployment strategies and your thoughts on M&A over 2017? Thanks.

No change there. We continue to look for markers that are in our channel, and that look like they would add to our growth rate, that restricts the number of things we look at of course, but we continue to look -- but as Randy stated, we do have cash on the balance sheet at the moment.

Great. Thank you.

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

Hey, thanks. Maybe just a couple of clarifications on expectations around Sofia 2; you know, if we think about your install base, I think around, 18,000 or so Sofia systems, can you maybe just talk about how much of the initial adoption you think is swap outs versus incremental greenfield placements? And any updated thoughts on anticipated consumable fall through there?

Tycho, at the launch, we don't actually have a strategy that says we are swapping out Sofia 1s or Sofia 2 placements. Initially, there will be customers that are new, that will get Sofia 2. There may even be some customers that are new, that get Sofia 1 as well, particularly if they are looking at Lyme or Vitamin D, which actually both run on Sofia 1. So I don't really have a good answer for you right now, because we don't intend to swap them out. Now of course, that could change over time, as we add assays and people want additional boxes, but that would come with additional pull through. So we are, you mentioned 18, I would tell you we had a good quarter for first quarter 2017, so the 2018 would be a little bit on the low side. But we would expect to do 12,000 or so more of the Sofia 2s moving forward over the next three or four years.

Okay. And then on Solana, you called out a big customer last quarter, I think with 86 systems. Can you maybe just talk a little bit about visibility on other kind of large chunky orders? How much of the mix is coming from multi-system orders versus singles and doubles, and any updated commentary there on utilization levels too?

The number of very large customers is few, Tycho. They are just -- they are typically greater than 1 million, but the number is actually quite small. But the greater number of customers is out -- actually the large physician office practice, that has the capability of doing mod complex assays. And in some states, we actually have customers that are now intending to gain their mod complex license, in order to bring on board Solana. So that's encouraging as well.

Okay. And then last one on margins, if we think about your longer term target of 30% EBITDA margin, can you maybe just talk a little bit about when we will start to see maybe R&D leverage in the model? As we think about some of the menu expansion plans you have talked about? Do we start to see a little bit more R&D leverage heading into 2018?

Well, certainly we have said, Tycho, that we intend to hold pretty much where we are at with R&D spend, and that creates leverage moving forward. We are coming to the end of Savanna, that's very helpful in that regard. We just finished Sofia 2, that's helpful. Offsetting that of course would be accelerated menu development, and then the clinical trials associated with that, because that for us obviously is expensed in R&D as well. So I would think that you would be able to maintain our phenomenal spend in R&D for the next few years anyway. So 2018, as you mentioned would be a year during which we should be able to shell 30% EBITDA margin, given their leverage.

Okay. Thank you.

Thank you. Our next question comes from David Westenberg from C.L. King. Your line is open.

Hey guys, thanks for taking my question. Congrats on a good quarter.

Thanks David.

So can you talk about some of the uses you are seeing for Virena data, in this sort of heavy flu season?

Well right now, we see our very large customers using the data to track QC across their networks and to see volumes and positivity rates across their networks. One of our urgent care firms actually uses it as a means of tracking their market share on their own. I think individual physicians have the ability to see positivity rates in their neighborhoods and communities. We are piloting an app that allows somebody to look at all that on a cell phone. I think we are just in one state so far, is that right? We are in one state so far, piloting that app. But that's where we are at, at this point. We still need more of our Sofia installations with our routers turned on, and we probably will go through another couple of quarters, before we get to where we want to be, so that we can have pretty rich and robust data across the 50 larger metropolitan areas. I would just say, we are probably a season away from being there.

Great, thank you. And then, can you talk about some effects that you might have on a late -- some effects that late flu season might have on a subsequent flu year or is it just kind of random as always?

It's not necessarily random, but I mentioned several different factors create an impact on the magnitude. So this year, we saw an H3N2 that clearly the population has not seen, and I would suggest, maybe the vaccine did not provide protection enough against. That created the patient population that fell pretty bad. So at the end, that seemed [ph], their healthcare providers and getting tested. Positivity rates has an impact. In one particular state, we saw positivity rates for a period of time that were greater than 50%. That really created an impact on patient volumes. So another thing that we can predict, moving forward -- I hate to answer it this way, but there is really no way of correlating what just happened with what might happen in the next influenza epidemic. To include when and where it actually starts. So what we have learned by having access to these data, is that previously, we didn't know a lot. And now we know, that there is a lot of variables that contribute to this and in this particular season, there were just a number of factors that created a lot of illness.

Got you. And then just a housekeeping question for Randy, I missed it, you called out something on the sales and marketing line, and the reason why it went up, and missed what that was?

It was really driven by two things; one was compensation increase, commissions as a result of the higher revenue, as well as continued investment in the Virena platform.

Okay. Got you. Thank you guys.

Thank you. [Operator Instructions]. And our next question comes from Mark Massaro from Canaccord Genuity. Your line is open.

Hey guys. Thanks for the questions and congrats on an excellent quarter.

Yes. Thanks Mark.

The first one is on Solana; you know, nice little sequential increase in revenue. I guess, could you speak to the sides of the install base on that platform?

It's in the 100s still.

Okay. And as far as assay development on Solana? I know you have a number of assays that you mentioned, including C diff, Pertussis and others; but, given other molecular companies have come out and had success with assays like CTNG and MRSA, can you just speak to some of the diversification opportunities you have in that platform, and any plans on those two assays in particular?

We have been looking at those two assays. I think those two assays are great candidates for Savanna, but not necessarily, unfortunately for Solana. CTNG, CT is okay, NG is harder; because of the way we amplify. That's going to be a difficult one for us. And then --

And about MRSA.

Oh, MRSA. MRSA because of the number of targets that [indiscernible] as well. So both are great candidates for Savanna, and we'd love to be in a position, where we are launching Savanna with an STD panel. I think that would be terrific, also an HAI panel. But that's what we are thinking there. But they are not unfortunately, Mark, great candidates for an isothermal platform.

I understand. I think that is consistent with what you said at your Analyst Day as well. Great. And then the last one I had is just on -- just the timing of Savanna. Can you just remind us where you are at? I know you are at kind of late stage development of your platform. You have talked about 2018, and just want to see if, as a reminder, the 2018 timeframe is O-U.S. I believe; so can you remind us when you think this could enter the U.S. market?

Well we still are hopeful that we can get into the back half of 2018, but conservatively, we are saying, we will definitely have the instrument by the end of the year. The question is, will we have made it through clinical trials and with what menu. So that's about as open and frank as I can be, at this stage, based on what we know.

Great. Great quarter.

Thanks Mark.

Thanks Mark.

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

I would just like to say, thanks everyone for attending the call, for your support, and of course, your interest in Quidel. It was a good quarter. We got a lot of things done. We look forward to the remainder of the year, and I think we are pretty well positioned to achieve the things that we said we would achieve this year. Take care everyone.

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