QuidelOrtho Corporation (QDEL) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation Second 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 second quarter 2017 earnings release is now available on ir.quidel.com, our Investor Relations website. We will also post our prepared remarks on the presentation tab of our IR website, following the conclusion of this call on July 26, 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, today, July 26, 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 and six months ended June 30, 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. Q2 has truly been an extraordinary quarter for Quidel. The morale at our company is quite high as you might imagine. For today's call, my prepared remarks on both our performance during the quarter and on the Triage business will be short. As I am anticipating that we'll need a bit more time today for Q&A, given our recent announcement and follow up questions that we have received from our investors. Let me begin with our revenue for the quarter and our progress on organic growth initiatives. Revenue for the quarter, the second quarter 2017 was $38.3 million compared with $39.1 million in the same period last year. Despite Q2, 2016's unusually higher influenza like illness then is typical and certainly dramatically higher than this year's Q2, our second quarter 2017 influenza test sales driven by a greater number of Sofia Influenza A+B customer than a previous influenza season were only slightly below the second quarter 2016. In fairness, however, given the additional Sofia placements we should have been about 9% to 10% in growth of influenza test sales or about $2 million more in influenza revenue. But the orders from distribution despite growth in up sales to our customers did not materialize as expected. And of course as a matter of principle, we don't manage distributor order. Even without the orders, normalizing for Grant revenue and the flu seasons, Q2 was actually a pretty good quarter. Group A Strep product revenue in the second quarter was up 10% over the prior year quarter. RSV product revenue was up 6% and Herpes product revenue was up 8%. Trailing 12 months revenue through the end of June for all products was $214.1 million versus $188.7 million one year ago. Trailing 12 months Molecular revenue was $11.5 million versus $7.1 million one year ago. Sofia trailing 12 months revenue was $64.7 million versus $48.7 million. And Influenza trailing 12 months revenue was $92.9 million versus $73.1 million. We are clearly making progress with our new products and are growing organically. In the quarter, we also demonstrated continued progress with our product development programs. We received CE Marks 510(k) clearances from the FDA and CLIA waiver for Sofia 2, for use with our Sofia RSV and Sofia Influenza A+B assay. We began actively promoting those products and I can tell you that market receptivity has been very good and encouraging. Based on feedback from our commercial organization, I can say with some certainty that Sofia 2 with Virena has legs and will meet or exceed our expectations over the next few years. I know that there is some level of excitement for Sofia Vitamin D and Sofia line as well. I don't like to comment on our submission while we are in dialogue with the FDA except to say that we are communicating routinely with the agency on these two products as we are with the Sofia Strep product for use on Sofia 2. We expect to launch all three products this year and are excited about the opportunity that each of these products represent. In the quarter, we also received FDA 510(k) clearance for our Solana C. difficile molecular assay which increases the number of products in the Solana bundle to six. We worked with one of our larger distribution partners in the United States on a Solana blitz program during the second quarter and think that with the leads generated; we could see acceleration in molecular sales as we exit the year. That certainly what our operating plan calls for. As previously discussed the number of potential targets for Solana assay is large and we expect to have at least one more assay in market before year end and more to come in 2018. We currently have 17 funded and active R&D programs at Quidel in various phases of our five phase development process. And numerous others in phase zero. We are happy to discuss any of our product development initiatives and some details including Savanna during Q&A or perhaps at the upcoming AACC meeting. Let me now move to Triage. The week before last we entered into a definitive agreement to purchase the Alere Triage and BNP assets. And I think that we did an effective job during the call and in other meetings at laying out the strategic rationale for this acquisition, which does a lot for our company and checks many of the boxes on our acquisition criteria chart. The chart that describes what we've been patiently looking for. We said during the call that we would be using the time between signing and closing to begin to validate what we had modeled in terms of synergies and other operating and financial details and that after close, we would be in a better position to provide color to our investors. In the meantime, it's clear that as investors have analyzed the deal and its impact on Quidel, there are some common questions that I should probably address today. First, a common question is how we will handle the process of integrating the two assets? From an organization perspective we've assigned the overall integration responsibility to Karen Gibson, who is our Vice President, Information System and an individual who has managed a number of highly complex projects in her career. She will be full time on a project for up to 24 months. And we have backfilled her information system's role at the senior member of her current staff. And we've engaged a well qualified consultancy as well to oversee the integration process and to help us to achieve our integration goals. We held our integration kick-off with Karen and our executive staff last Friday and with the consulting firm yesterday. There are several work streams of course and we'll be seconding highly talented members from within our organization as needed, as well as third party to complete the numerous tasks that need to be accomplished. Each of the work streams is important but the ones that I am personally following closely are R&D, international infrastructure, order to cash and commercial operational globally. While integrating the Alere assets will require work and focus, we are quite confident that we know what to do and in our ability to execute. Next, many investors having had time to read our 8-K have asked us to clarify what was meant in the language describing the real estate. The short answers are yes, the earlier San Diego campus assets are part of the transaction. And, yes, we will execute a sale on lease back as soon as possible post close. The net proceeds from the transaction which are likely to be significant will be used almost exclusively to pay down the note. And then finally, we've been asked about the Beckman BNP assets. Why the contingent consideration and what the mechanics are. So here is a quick explanation. While the agreement to distribute BNP kits used on Beckman immunoassay analyzers is for an extended period of time, it's possible that there is some risk that the business does not continue at the same level indefinitely. A risk that is not necessarily within our control. We've modeled that the business continues at the same level for five years and then declines for several years after. For each of the five years that the business continues at the current level, we are obligated to pay $8 million. If the business falls by predetermined level, our obligation terminates. In other words, our obligation to pay $8 million each year for five years is contingent upon the current revenue being maintained at a certain level. I am sure that our research and analysts will have other questions related to the acquisition, some of which we will be able to answer today. And others we'll answer later when we have more information. In summary, the second quarter 2017 was a spectacular period for us. Our core Quidel business looks solid. The Sofia and Solana program are progressing nicely. And our R&D team once again demonstrated just how good they are. And we executed on a transaction that promises to be transformational for us. And a real value creator for our shareholders. There has never been a better time to be at Quidel. Randy?

Thank you, Doug. As we reported earlier today, and as Doug mentioned total revenues for the second quarter of 2017 were $38.3 million, a slight decrease over the prior year. As Doug mentioned in his remarks, distribution sales lagged out by out sales results in the quarter. We did realize a slight year-over-year increase in revenue excluding the Gates Grant revenue. Immunoassay product revenues which include all QuickVue and Sofia lateral flow products increased 1% and $22 million in the second quarter. Within this category, Sofia products grew 21% to $27.9 million, while QuickVue revenue decreased 10% to $13.8 million. Total influenza revenue in the quarter was $10.1 million as compared to $10.4 million in the second quarter of 2016. The influenza immunoassay revenue split was $5.3 million from Sofia versus $2.7 million from QuickVue. QuickVue and Sofia influenza inventory at distribution is in line with prior year levels and prior quarter. Revenues in the Virology category which includes products from diagnostic hybrid decreased 7% in the second quarter to $9.2 million. A major driver was the 18% decline in respiratory products included in our influenza discussion. Our Molecular product category, which includes Alere, AmpliVue and Solana brands, increased 44% in the quarter to $3.2 million. Solana continues to be the main growth driver in this category. And based on the placements today and placements projected from the remainder of the year, we remain optimistic that we will continue to realize strong growth in this category. Royalties, grants and other product category decreased in the quarter to $800,000, due to the decrease in grant revenue as revenue associated with the Gate Foundation grant were fully recognized by the third quarter of last year. From the platform perspective, and as Doug mentioned, we remain very encouraged by the continued commercialization of our Sofia and molecular product lines. These products grew 27% from the second quarter of the previous year to $11.1 million and made up 29% of total revenues in the quarter. Also worth noting and as Doug stated Strep A revenues increased by 10% to $8.5 million, RSV revenues increased 6% and Herpes grew 8% versus same period last year. Our pregnancy revenues did decline 8% in a quarter due to continued competition from private label. Gross margin in the second quarter of 2017 was approximately 54%. This compares to 56% in the second quarter of 2016. This difference was primarily driven by the decrease in Grant revenue, as well as increased depreciation on our instrumented system, the impact being magnified by our normally lower second quarter revenue versus the other three quarters. For the year, we continue to believe we can achieve a gross margin in the range of 64% to 65%. R&D expenses decreased by $2 million in the quarter, due to decrease in development spending for the Savanna molecular platform and reduced spending on clinical trials as compared to last year. Sales and marketing expense for the second quarter was slightly above last year mostly due to the RPS acquisition and our investment in their commercial team. The slight increase in G&A expense was due to higher incentive compensation. In the second quarter of 2017, we recorded one time cost of $2.4 million and professional services related to business development activity associated with the announced definitive agreement to acquire Alere Triage asset. Our tax rate for the first quarter was approximately 14%; this compares 34% for the second quarter of last year. The effective tax rate was lower compared to as we expected to utilize net operating loss and R&D tax credit carry forwards to offset 2017 domestic taxable income. The company recorded a full valuation allowance against these tax benefits during 2016. Net loss for the second quarter was $11.8 million and $0.35 per share, this compares to a net loss of $7.8 million or $0.24 per share for the second quarter of 2016. On a non-GAAP basis, net loss for the first quarter of 2017 was $4 million or $0.12 per diluted share, as compare to net loss of $3.4 million, or $0.11 per share for the second quarter of last year. During the six months ended June, our net cash position increased by approximately $5.5 million. Through six months, the major contributors to operating cash flows or a net income of $2.4 million, a net working capital contribution of $3.4 million and the add back of non-cash items of $18.4 million associated with depreciation, amortization and stock based compensation. During the first six months, we spent $8.1 million on property, equipment and intangibles. We also used approximately $14 million for the acquisition of InflammaDry and AdenoPlus diagnostic business from our RPS diagnostic. As for end of the second quarter, the company had $175 million in 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 we will take our first question from Jack Meehan of Barclays. Your line is open.

Hi, thanks. Good afternoon. I wanted to start actually with the Sofia 2 product launch. And obviously some good update since last quarter with the CLIA waivers for flu and RSV. Could you just talk about any data points have related to early momentum? Obviously we aren't on flu season but just any interest from alternate sites or large hospital systems related to the new product.

Sure. Hi, Jack. We've seen a lot of early success actually across the board. Our hospital systems, physician office labs and in particular urgent care setting. In fact, we had a number of recent closes that I believe we are tied to the attributes of both Sofia 2 and Virena. And particular the Virena data and access to those data are real benefit to larger networks. Whether that be urgent care center and or integrated delivery hospital networks. Those networks can track their QC; they can understand what's going on in their communities with respect to influenza strep, RSV et cetera. But importantly also Sofia 2 is early read. The ability to read positives and as early as 3 minutes and with most of the positive actually positive at 8 minutes are less. That's been an important factor in and lot of those decisions. So it's cool product. Of course I am biased but it's a very attractive looking in vitro diagnostic immunoassay analyzer that does lot for the customer. It's an inexpensive and it's portable. Again, as I commented in my prepared remarks, the receptivity has been extremely good.

As you talk with some of the distributors as they prepare for the launch. And I know Randy commented about the inventory levels year-over-year. Do you think there -- it's possibly you could actually see the inventory levels start to pickup as we go into the back half of the year as people gear up for the launch in the US?

I believe we will see that. And I would guess that it would be disproportionately more so on the Sofia test cartridges than it would be on QuickVue product this year. Sofia sales are larger than QuickVue but you'll see more of a movement I think Q3, Q4 this year.

Got it. And Randy one that -- this is obviously a good problem to have with the recent stock performance but you blown away through the $32 conversion price now for the converts. Could you just help us what should we be watching for from an accounting perspective? Is there anything that would change -- that we should be modeling in the share count or the other financial statements related to that?

Yes. I agree. It is the nice problem to have. Yes, and as a result of the stock price being above the conversion price we do have to incorporate an increase in our shares outstanding. And as you've seen in our prior documents that we've stated that we plan to sell over conversions through what's call the combination settlement. So we anticipate selling the principal and cash and then potentially the incremental increase in either cash and/or equity. So based on that assumption, Jack, we probably -- the accretion or the increase in our outstanding share prices somewhere probably at today's stock price around 25,000 shares. So it doesn't have a significant impact at all in the dilution.

Great. And if I can squeeze in one final one. I can hop back in the queue too. Just what was Solana revenue in the quarter and how much that grow year-over-year?

Solana revenue was about $1.3 million of the $3.1 in total Molecular sales for the quarter.

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

You guys seems taken the question first, I just want to reconcile the distribution comments. Randy, I think you were saying that distribution is sort of normal levels but then things didn't materialize that you guys thought were going to materialize. So just -- can you just reconcile those comments for me? Maybe I misunderstood them.

Yes. I'll answer that. Most distributors are about at the same level, one particular - most are lower and one in particular despite out sales did not order process in quarter so most of them I am talking about were due to one distributor in particular. So overall distributor inventory should be slightly down versus what they should be.

And especially as Doug had mention as we see an increase in the number of Sofia instrument compared to a year ago, our inventory is being down slightly where in theory it say the inventory should be higher versus a year ago.

Exactly. That was what my comment was intended to mean.

So then for the third quarter you would expect maybe a greater impact from kind of buy in or sort of making up whether they're at now plus kind of getting back to a normal level.

It's possible. It's certainly possible. But there are so many factors that drive when distributors order product but rationally, yes, they should be ordering product in Q3.

Okay. And then as it relates to the asset that you are acquiring in the -- the EBITDA margins on that business appeared to be somewhat kind in low 20s, where do you think that those can go over time as part of your organization.

Yes. What we commented Brian was that certainly with this acquisition it wasn't going to change our long-term objectives on EBITDA margin of all-in being in excess of 30%. So we continue to believe that's true with the combination of the two assets.

And my last question and it will be Doug you mentioned in your comments about validating synergies. I don't believe that there is a synergy that sort of baked into your base case but if there were, can you just describe what those synergies are that you guys are working for? Thank you.

Sure, Brian. The buckets of synergies that we are going to be looking at early on are improving manufacturing efficiencies. There will be some R&D project rationalization. There are couple projects that appeared to be the same segment same sort of product. And we'll look at that. And while not directly a synergy per se we clearly won't be adding significant headcount to the US commercial organization. In another words we will be using our same commercial infrastructure.

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

Great, thanks. Good afternoon, everybody. I guess first can we just get an update on the Savana spend for R&D? I mean it look certainly like they have been down in the quarter. Maybe you can just help us think a little bit about that given the timing of launch. Thanks.

Yes. Overall for the year, Bill, we really kind about $8 million in spend. Help me out on the ramp though Randy.

We'll probably be spending a little bit more in Q3 than Q4 versus the first half but as Doug said, all-in we are looking into $8 million to $9 million range which is down from the prior year, exactly for your comment.

Okay, got it .And then a couple of new assets that you acquired. The InflammaDry and AdenoPlus, obviously they were dragging on gross margin here this quarter. Help us think about kind of where those things shake out over the longer term? Thanks.

Yes, Bill. We are in the process of doing the manufacturing integration, moving everything into our facility here in San Diego. We anticipate that being completed here this quarter. And we do anticipate that once we have the new standard role within our new manufacturing facility, our margin should be somewhere around 70%.

Okay, got it. And then last one for me on Sofia 2. Thanks for the color around some of the initial deals. Can you speak to I guess some of the -- I guess maybe elaborate a little bit on that in terms of some of the initial placement? Are some of these going into existing Sofia 1 account because of the automated Virena for example? Just try to figure out there largely kind of new to readers and competitive takeaway, any additional color that would be great, Doug. Thank you.

Sure. So far I believe that most of the Sofia 2 placements have been to either conversion of QuickVue customers over to an automated reader. We've also have some Binax conversion. I am aware of some conversion of BD Veritors over but I am not aware where we placed any Sofia 2 on a site that already had a Sofia 1.

And our next question comes from Nicholas Jansen of Raymond James. Your line is open.

Hey guys, thanks for the questions. So first on me would be just in terms of the profitability breakdown between the two acquired assets in Triage. Considering that there is the potential for that BNP business to decelerate over time just trying to get a better sense of the profitability of the acquired revenue on both side of the acquisition. Thanks.

We've given Nick some general guidance and what we think gross margins are day one. But Randy said during the last call that we will be spending time between week ends before last. And the day we close giving a little bit more clarity around all that. Plus we got a number of things we are doing in terms of trying to improve operating efficiencies. So I really can't add a whole lot more to the discussion as of today.

Okay. That's fine. I'll just wait until the close then. In terms of any sort of transition service agreement that you have that tied with this transaction. Maybe we can better -- hope it understand the timeline, the terms and a level of investment you'll need to put into the business when those expire.

There is numerous transition services agreement and both parties, Quidel and Abbott are motivated to move away from those as quickly as possible .Some of those things will take longer. For example, if registration is required in a country, it might take us longer in one country than another. Here some of the transition services agreement in the actual manufacturing facility could take a bit longer to as we do some remodeling if you will in the factory. But I'd say that in all of the attempt is to move off of those TSAs as quickly as possible. Although we do think that a small number of them could persist what would say Randy, 18 to 24 months maybe.

Yes

But the idea would be -- that would be very few of those. I am certain Abbott is equally motivated.

Yes, Nick, the economics are such it's basically a cost. So neither one of us are incentivized to extend the TSA agreement. So we are both motivated Doug said to get those completed as quickly as possible.

Okay, that's helpful. And then lastly just in terms of the quarterly performance. Just digging in a little bit more for the Molecular revenue. It feels maybe that sequentially there wasn't as big of step up as maybe your aspiration for this year when you talked about kind of your revenue expectation from Molecular. Just want to get your sense of how should we be thinking about internal goals on that side of the house in the back half of the year. Thanks.

Great, Nick. Thanks for the question. Actually we would have anticipated pretty slow take off the first couple of quarters. We did introduce C. difficile is a larger volume product in the second quarter. We did -- as I mentioned in my comment, spend some time with one of the larger distributors making lot of sales calls. We do expect to introduce another product shortly. So all along we've expected a bit of hockey stick, I don't like to plan that way. But I do realize that at some point in time we are going to have enough momentum and with hundreds of analyzers going in we'll see acceleration. Will we achieve the number that we have in our operating plan? Something that starts with the two, I hope so. But we have to see an acceleration to get there.

Our next question is from Tycho Peterson of JPMorgan. Your line is open.

Hey, guys. Thanks for taking the question. Can you perhaps -- I know you don't want to comment specifically on margin for the Triage portfolio and how you expect them to spend over time. But given that I mean obviously international expansion is a big focus for Triage and reaccelerating growth there in the portfolio. Can you at least qualitatively help us understand if there is a delta in gross margin on the US versus or US site and what are sort of the things that you can do to perhaps narrow that differential?

Well, it would be very common for international diagnostic businesses to have a lower gross margin x-US than they do in US. Pricing in US would naturally be higher but at the same time those P&Ls won't be burden to the same extent. So when you look at the operating margin, you can expect to see some pretty comparable margins that yes contribution at the bottom. So I hope that make sense. There is not a whole lot you can do with pricing in the marketplace. For example, in a place like China, it is what it is. So we certainly wouldn't go in with intend to raise price as a strategy. But hopefully with volume improvement over time that will help the gross margins for the whole business.

Got it. That makes sense. And then is there anything unusual in term of seasonality in that business relative to what you see in the core portfolio or does it sort follow similar dynamic?

There is some seasonality as you would guess because patients present with shortness of breath symptoms more often in the winter than they would in the summer. I think that just it's common. But the good news here is winter comes every year. And patients therefore unfortunately present to their healthcare provider with shortness of breath which will require cardiac biomarkers. So unlike flu we don't know the magnitude and we don't know how long it persists, with the Triage products that appear to be weather related.

Got it. That makes sense and then one final quick one on Virena. I know you are running an application pilot in 1 to 8, I think you mentioned that last quarter. Has that been extended now? And if so, what has physicians' response been like, are people more and more going to turning on that sort of connectivity.

Yes. You are referring to a pilot we ran with the community app, I think they went well enough that we are considering whether we would expand that and we are now analyzing what do we need to improve the app. So I really don't have a lot to tell you whether we are going to move forward in at what rate. But we certainly are encouraged enough to we are looking pretty closely at it. The people who have used it like it. They spend more time on it. I am not an expert on clicks and how long and all that stuff, but people who do know these things tell me that the pilot went pretty well.

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

Hi, guys. Thanks for the questions. The first one is for you, Doug. Can you characterize or maybe quantify your degree of confidence in closing the acquisition of Alere assets by September 30th?

I am highly confident that we are going to get this closed. I did mention in the call last week that there are certain risks to all that. At the beginning you would have said the FTC would be a risk, the EC was a risk, the Canadian any trust, group would be some what of risk. But now I think we are just down to the EC, as far as I can tell and we are working through that now. It's on going; I don't see any questions so far that we haven't been able to answer in my view satisfactorily. So there is one remaining risk as far as I can tell. But my projection would be that we get pass this. And that this thing, this acquisition closes in September.

Great. That's really helpful. The Alere Triage MeterPro has a similar installed base as your Sofia 1 analyzer. Have you got time yet to maybe map out where you think you could potentially take the Triage installed base with time and maybe a related to that, can you speak to how menu expansion on Triage may accelerate that rate?

Let me start by saying where each of us has our instrument. Where Quidel with Sofia we have a mix of hospital labs, both large and small. Emergency departments sometimes. Quite a few physicians' offices both large and small. The Triage MeterPro on the other hand is very well placed in the smaller hospital labs that don't have the large immunoassay analyzers. I think the company has done very well on that segment. I think there could be some overlap with Sofia but I think there is opportunity on both sides to address that particular market. We are also doing very well as I said before with Sofia and urgent care setting. And interestingly enough it appears so far that the Triage MeterPro is in those in many of those sites. So there is some overlap but there is also some opportunity to -- for the organization to use both sets of customer databases.

Great. And great just my final question on some of the international investments you indicated previously that you are looking to make for the acquired earlier products. Can you provide a little more detail if this is going to be a function of expanding distributors potentially going direct or maybe bringing some sales management?

It's all three those things, Mark. And different degrees depending on which country you are talking about. There are countries where it's clearly been a direct sales present. And in those situations we will be hiring management as well as putting sales people on the ground. There are others that we are calling hybrid where we have sales people on the ground but we are helping distribution to sell the product. And so that obviously has the smaller impact in terms of the number of hires. And there are some countries where frankly is very highly depended on distributor on the ground. And those countries require even fewer people so it's a mix and the model that we have going into this, I can tell you based on the conversation I had probably an hour ago, we've already figured out is not precisely accurate. What we were told by country as we learn more isn't exactly what we think we are going to end up with on day one. So it's going to be reasonably close in terms of numbers but it's not always as we had thought. But overall those are three buckets and looks like depending on a country we will be -- in some countries many people and some not so much.

I am sorry. If I can, is there any way to quantify what spend would be presumably if it's distributors that should be we really shouldn't see it right so any incremental color on spend associated with international expansion would be helpful.

We will certainly get there sometime between sign and close. If the information I had originally had turned out to be precisely accurate, I can probably answer the question today. It's going to be close but I don't have a good number for you, Mark. And I don't want to give you a number that I got to correct later.

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

Hi, guys. Thanks for taking the question. So you noticed -- you noted the BNP payments being contingent on factors that are outside your hand. Can you clarify whether this is a purely production reception issue or if is another kind of situation out of your hand?

It's -- help because it's not doctors outside of my control. The antibodies will be manufactured at the San Diego campus; those antibodies are provided to Beckman. Beckman uses those antibodies in the manufacture of the kit. Those kits are shipped back to the San Diego campus which after September will be another quite else San Diego campus, we will then shift the product to distributors and in some cases end users who have Beckman analyzers. And effectively we will be selling those products. We will sell those products in some countries directly. And in some countries through a distributor. So we really don't have control over what that customer does ultimately with their immunoassay decisions, obviously we could try to influence that but for the most part, these are decisions by customers around which immunoassay analyzer they are going to use. So once they made that decision then we have a customer to which we will more than likely be shipping a BNP kit. Does that make sense, Dave?

Yes, that was incredibly helpful. Thank you so much .So when you talk about international synergies with the Triage asset, so if Triage is positioned really well in a country, can you talk about the synergies and how you can come in with Quidel making may infectious disease products in that said geography? And just little more color on how that international synergies going to work.

I don't think it matters which country. I think that with the combination of the two products in the segment, we have an opportunity to create a bundle that is therefore more valuable, it's more valuable at the end user level of course but it's also valuable in terms of working with distribution. I can say that in one instance I am aware of already a customer was reluctant to go with Sofia 2 over the multi site deal that we had on going, it was reluctant to go with this because if they unbundled their layer bundle that included Triage then their Triage pricing was going to go up. When we explain that we would be acquiring that asset the customer then was very happy to sign to the Sofia 2 agreement. So I think there is the bundling and unbundling that will be extremely valuable depending on the country and the situation.

Got you. And then just a really quick one on the Triage instrument. I think you said the market is growing at roughly 10% this asset is underperforming in the market but you think it can go to single digit. Just to confirm that and then in terms of -- is this mostly a capital purchase model. And if so, how are the instrument prices trending on that instrument?

I'll go in reverse order. These are placed on a region agreement plan and are not normally sold. So that's the answer there. We said before that we in our model we see ourselves getting to a mid single digit growth rate on the business in total. And obviously we think that's possible. Others have model something higher. We've been known to model conservatively and we believe that mid single digit is where are aimed in the near term. Longer term growth will be driven by new products. And that's obviously why I am especially interested in the combination of the two groups and the R&D integration and what that looks like.

And we have another question from Jack Meehan of Barclays. Your line is open.

Thanks. Just like the flu season I am back. Had a question related to the earlier San Diego facility? If I remember correctly I think this is a facility previously it had a warning letter, could you update us on the status of that and remediation plans or whether you think it's an issue or not.

Sure. In 2012 the company wasn't expected, I believe it was one of the cardiac markets that stimulated the inspection. While there the FDA decided to inspect the entire facility and all products. And in some instances this determines that the certain controls need to be put in place in the manufacturing process. The company has worked through all those and in some cases that's resulted in lower yields in the product. And that's why we are acutely interested in getting in there with our manufacturing expertise to automate some of those processes and to see if we can improve those yields. In some instances that improvement in yield may require a new product and in fact that's what I was commenting on in the last call is that we think that we are going to stand a pretty good chance with the new toxicology product of getting a product in the market, performance well enough to pass the FDA's scrutiny but also one that we can manufacture more efficiently in high gross margin. So that works sided about the opportunity. We think we know what to do based on our early due diligence and we model some of that.

Got it. Does the -- just to be clear, does the warning letter, is that still outstanding at this point?

Sure. I mean it's relevant but the company again has taken all the steps necessary to address those concerns that the FDA had.

Great. And then final one, you talked about pregnancy; I believe I heard down 8% year-over-year. Could you give an update on the pregnancy Sofia 2 assay and just the thoughts whether that could hit the market sometime before the end of 2017?

That's a great question. Obviously, we've lost some share on hCG, and it's to private label hCG. The product has become I guess commoditized if you will. The prices are low and effectively we need to develop that product for Sofia 2 and expect to do that. I don't have any date for you. It's a project that's been what we call space zero at this point, meaning we are taking a look at, can we do, what it's going to cost with the return, but I expect to be past space zero reasonably soon.

And our next question is from Nicholas Jansen of Raymond James. Your line is now open.

Hey, one just quick follows up on the sales lease back comment. I am just trying to get a better sense of -- in terms of magnitude of size, how do we think about the pro forma leverage? I think on the last call you talked about low cores on a trailing 12 basis just how we think about is it -- does that move the needle meaningfully in a sort of context that you will get your capital structures and EBITDA. How do you guys think about your positioning as a much larger organization with strong cash flow as a continued consolidator of diagnostic assets? Thanks.

Sure. The short answer on the leverage instead of being around 4x we go down by one term fairly quickly. We've been presenting with the preliminary proposal that suggest a pretty big range of value for the real estate. So we are little bit reluctant to throw out numbers. But at this stage we are comfortable on saying that the net value should certainly be north of $100 million. And you are right with the cash flow from operations that the two businesses combined, it looks pretty good. We could be a consolidator or certainly more asset than we were exposed to before.

Okay. Well, that sounds like that's the last question. So thanks everyone for your support. And obviously your interest in Quidel. We had a great quarter and I believe that we are now very well positioned to achieve our growth objectives perhaps even more so than we have ever been before. So all the best everybody.

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