Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation Third 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. Our third 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 November 1st, 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, November 01, 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 nine months ended September 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 Angie Mazza at 312-690-6006. Following Doug's comments, I will 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 thank you everyone for joining us this afternoon. I know that there'll be an interest in hearing more about our recent transaction. Clearly Quidel has transformed its business with the addition of Alere Triage and BNP assets which occurred in early October. The combination of these businesses with our base business improves our prospects for success and shareholder value creation by unlocking growth opportunities in several new end markets both geographically and by product which is very exciting. But before I talk a bit more about this transaction let me quickly touch on our Q3 performance for legacy Quidel. Revenue for the third quarter 2017 was $50.9 million compared with 49.3 million in the third quarter of 2016. In the quarter we realized a 19% increase in Immunoassay revenues and a 13% increase in Molecular revenues over the prior year quarter. As a reminder the third quarter of 2016 included $3.8 million from the Gates Grant revenue that did not repeat in Q3 2017. Excluding the Gates Grant revenue third quarter 2017 revenues increased 12%. Sofia placements year-to-date have already surpassed any other year since inception. The dramatic increase in placement rate validates the acceptance of our Sofia 2 instrument which was launched in June. Based on this trend we believe we will achieve 28,000 to 30,000 placements within the next year or so. On average we are placing 2.6 instruments per customer with 60% of placements in the point of care setting and each instrument generating on average $4000 per year on a trailing 12 month basis. In the last several months we also demonstrated continued success in getting product to the FDA. For example on October we announced that we received regulatory clearance for our point of care Sofia Lyme Fluorescent Immunoassay. With the…

Thank you Doug. As we reported earlier today total revenues for the third quarter of 2017 were $15.9 million dollars, an increase of 3% over the prior year. And as Doug had mentioned excluding the Gates Grant revenue which is fully realized in the third quarter of 2016, revenues increased 12%. Immunoassay product revenues which includes all QuickVue, Sofia, and eye health lateral-flow products increased 19% to $36.5 million in the third quarter of 2017. Within this category Sofia products grew 39% from the third quarter of 2016 to $19.6 million while QuickVue revenue decreased 6% to $15.6 million. Total influenza revenue in the quarter was $23.9 million, this compares to $18.8 million in the third quarter of last year. The influenza immunoassay revenue split was $16.1 million from Sofia versus $4.9 million from QuickVue. QuickVue and Sofia influenza inventory and distribution is up 20% compared to the third quarter of 2016 consistent with the out sales growth. Also remember inventories at distribution in Q3 of 2016 were low after a weak 2015-2016 flu season. Revenue in the virology category which includes products from diagnostic hybrids decreased 6% in the third quarter to $8.8 million mostly driven by lower herpes revenue. A portion of the decrease due to the conversion to the Solana HSV VZV assay. Our molecular product category which includes the Lyra, Amplivue, and Solana brands increased 13% in the quarter to $2.8 million. Solana continues to be the main growth driver in this category. Royalties, grants, and other product categories decreased in the quarter to $300,000 due to the non-recurring Gates Grant revenue. From a platform perspective and as Doug mentioned we remain very encouraged by the continued commercialization of our Sofia and molecular product lines. These products grew 35% from the third quarter of the previous…

Thank you. [Operator Instructions]. First question comes from Nicholas Jansen with Raymond James. Your line is now open.

Hey guys, thanks for all the color. Just a couple maybe first on the transaction, as we think about making sure our models for 2018 are appropriately calibrated, just wanted to kind of get a sense of if we were to look at the trailing 12 months EBITDA of both organizations combining those or factoring in the higher rent expense from the sale leaseback, is that a good starting point as we think about from a base perspective and then we can layer on growth and synergies or just wanted to kind of get your thoughts on how we should be thinking about accretion in 2018?

That's a fair question Nick. I think the 100 million in EBITDA for the new business is an appropriate place to start and obviously it doesn't include cost or revenue synergies. And on the other side we would assume that we would have a normal looking respiratory season in Q1 and if that's the case I think in total we're looking at something that conservatively would be in the neighborhood of 150 million of EBITDA.

Okay, that's very helpful and then secondly just below the line Randy, any comments on kind of intangible, are there anything on those lines at least to just make sure our EPS is formulated appropriately?

Yeah Nick we are currently in the process of evaluating the assets and doing that allocation between intangibles, tangible property, and goodwill. We will be filing the 8-K here by mid December and we will provide you some further comment at or prior to that filing in mid December. But we're working through that currently with an outside firm.

Great and then my last question just on the core business itself, on molecular, it does feel like the ramp has been maybe a little bit slower than what you would have thought from the booking to revenue conversion. I think you made the comment Doug that the underlying bookings are probably closer to that aspirational target that you had this year, but just wanted to kind of flesh out how we should be thinking about molecular growth in the medium term?

I think as we exit the year we will be able to show a reasonable run rate that is certainly much closer to what we have aspired to achieve. I did candidly say that there is a gap between closing and getting customers started. I would say confidently that our commercial team knows what to do. Some of it are things that we would do with the existing infrastructure but we also will consider adding other resources that will help us get customers trained and up and running more quickly. So, we know what to do to close the gap and I'm actually pretty enthused by what we're seeing in terms of the new contracts that I have visibility to.

That's helpful. If I could squeeze one more in, in terms of just kind of your 4Q comments surrounding the pro-forma acquired revenue being a bit softer than normal trend due to one last week and just the inventory dynamics that you are trying to rectify as we head into 2018, could you maybe help us define what softer than normal trend is so as we think about making sure our numbers are squared away?

You know it varies by geography but I'll just tell you that my new guys on the ground in China believe that they had an excess of seven weeks or so on inventory. And I see other geographies where some clear loading occurred although it's not rational in my view, it did occur. And we're going to have to believe these inventory in order to get, what's the right term Randy, right sized. So, I hope that's enough color but without saying anything.

That's fair, thanks for talking all the remaining quarter.

Thanks Nick.

Thank you and our next question comes from Jack Meehan with Barclays. Your line is now open.

Hi, thanks, good afternoon. I want to start with Sofia 2, it is a great progress on placements. Could you give us some color around the trajectory in the past of 30,000. Are you seeing demand ahead of the FDA regulation of flu testing in January and then finally given some of the early commentary you provided, are you trying to drive cannibalization of QuickVue and legacy Sofia as you go?

All great questions. Several dynamics are at play, one is the FDA reclass. There are some assays that don't meet those guidelines and they need somewhere to go and we've been the recipient of a pretty big chunk of that. In addition I would say the time to results for positives has been a huge benefit. I would also say in some of the larger causes that with Virena and the ability to standardize across entire networks that that has certainly been a factor. Performance of the assays actually has been another factor that has been important. And finally yes, we are trying to convert our QuickVue business and as we have been for a couple years now over to what we think is a better solution for our customer's long run. The interesting thing though that we've learned in the process is how strong that QuickVue brand actually is. We have customers that unless we pull the product from the market are not going to move. We know who they are, we are working on them but we will still even as we exit this year move into first quarter, we still have some very, very large customers that love the brand, love the product, and don't want to switch. So, that's kind of what's happening out there. At the end of the day though we are thousands of placements and then in Q3 and likely the same in Q4 and Q1 of next year. And so we will give a number as we do every year or have J.P. Morgan in January. I think people probably are anticipating that the number is significantly higher. I'm kind of telling you that already though aren’t I. And so within a year or so I think we will get to that 28,000 to 30,000 that we had suggested. Probably for the last 24 months we've been saying that, right Randy.

Yes.

Do you think the overall opportunity could be bigger than the 30,000 and how you decide that?

First answer is yes. Secondly I don't know. The extent to which millennials and other patients start seeking more and more healthcare in alternate sites and the extent to when patients demand to have a result while they are sitting in front of a physician or a caretaker or a healthcare provider that's probably going to dictate where a lot of this is going. I see pretty big moves in urgent care right now. I also see hospitals standardizing and making decisions for clinics. So it's interesting, just a couple years ago people had forecasted the demise of rapid point of care assays suggesting that molecular was the solution moving forward. And that certainly has been an interesting factor but we are now seeing papers and publications where people are saying yeah, that's all good but we still need answers while the patient is sitting in front of us and we need to be economic, we need it to be standardized. So, the second part of your question, I don't know how far this thing is going to go but I certainly think we're going to be about 30,000.

Great and then I have one on Triage, you hinted a little bit on the revenue synergies, can you just elaborate a little bit more on the bundling opportunity and what share of either Sofia or Triage placements will be appropriate for that cross sell and within that how are you -- are you changing the compensation structure for any of the sales team to drive this sale?

That's a lot of questions there Jack. Good line of questioning.

Keeping it busy on a Wednesday afternoon.

So we've just been running this business for a very short period of time. And I haven't personally made a great deal or a great number of sales calls but I can tell you just from my own personal experience being in a call during which the primary purpose was to talk about the value of Virena which by the way we closed but before I say in front of my audience here we closed but before leaving I just said, by the way do you mind if I ask just one more question. They said of course yes, and I said well, how are you handling your shortness of breath customers and the info was that it wasn't standardized across the 50 or 60 sites. They had some people just evaluating and triaging their patients, pardon the name, but triaging their patients with a stethoscope to those actually using biomarkers. But the customers was instantly interested in talking about the topic. So I don't think my sales people are going to find it dramatically different than my own experience. I'm anxious to see the reports as we get into this but I think it's going to be a pretty easy conversation to bring up while we're in place. The overlap to which you were suggesting that we might have is actually pretty significant, more so than I thought. We're not done with the analysis at this stage but the preliminary data that I've been privy to suggest that there is quite an overlap but at the same time there are opportunities to cross sell that is selling Triage in the sites that have Sofia and vice versa. The bundle itself is an advantage with the customer but it's also an advantage with the distributor. That's true in the U.S. and that is true ex-U.S. And then market share, honestly I have no idea what additional share we're going to be able to pick up but I'm pretty impressed, positively impressed with what we're seeing so far.

Great, thanks Doug.

Thank you, our next question comes from Brian Weinstein with William Blair. Your line is now open.

Hey guys, good afternoon. This is actually Andrew Brackmann on for Brian today. I wanted to start on the earlier assets you said you think that you can get to the mid single digits there on the top line with the invigorated sales force but what additionally beyond just an increase call point needs to be done here, is there really anything in your strategy that you need to execute?

Yeah, we need to get the toxicology product into the market, they are even forecasting, we mentioned that before. And we need to continue to see the same sort of growth level that you see in China and other international markets. So we're not dependent entirely on the U.S. hitting it out of the park by selling all the products, that is a factor instead we're looking at the international growth as well as the new product introduction.

Okay, and then you said that the overall point of care market was growing closer to 10, longer-term do you see anything that's really going to hold you back from getting to that growth rate?

No, but there's work to be done. We've envisioned better instrument platform, we've envisioned high sensitivity Troponin assay. You know I say that as if we've already accomplished it but to be fair and honest those are things that will require significant resource and time.

Got it, thanks guys.

Thank you, our next question comes from Tycho Peterson with J.P. Morgan. Your line is now open.

Hey thanks. Doug, I am wondering how much of the strong Immunoassay a quarter was due to stocking at distributors ahead of the flu season and just your overall thoughts on inventory levels right now with distributors?

That's a great question Tycho, that's why during my comments I suggested the out sales number. The out sales number are actually running ahead of distribution so inventories at distribution would logically be lower. So, it doesn't mean there wasn't some stocking here and there but overall again out sales are out pacing orders me.

Okay, and then on Triage, obviously a lot of questions on the revenue side, question to you on gross margins. Just as we think about kind of optimizing the manufacturing process in San Diego improving yields and that you have even discussed adding a new line, can you maybe talk to some of those moving pieces and when you think you can start to get some gross margin leverage?

Sure, as we've said within the Triage business what it currently is around a 50% gross product margin and we've said through efficiencies that we believe over one to three year time period they have historically been maybe closer to the 60%. We're not sure we can get all the way there but we believe that there is some good upside and it's going to probably take us two to three years to get there. But we think high 50% is a reasonable target for us.

Okay, and then on the commercial integration, I guess as we think about you trying to cross train the sales force in the midst of peak flu season how do you kind of manage the risk there given that sales force obviously needs to focus on what could be a decent flu season?

You know we're doing the trainings regionally. I'm actually through module 1 of the training personally. But we've asked the guys to do a lot of work online. And then we're holding regional trainings we start taking a day to two days I believe. While they're there we're obviously focused on other things, the legacy products as well. So this would not be uncommon for us to do some sort of training at the regional level. Obviously we also will do a national training I think which will occur in February. But we're not really distracted any more than we would be normally. It would be a part of our normal commercial training cadence so it's fair question. But we're really not taking people out of the field for very long.

Okay, and then last one on QuickVue, you called out the private label dynamic that's not necessarily a new trend, I am just curious if things have changed in the last couple of quarters, I think -- I guess very competitive pressures intensified there and how do you think about private label in general impacting the product portfolio?

Well private label has been, you're right cycle around quite some time. We've had some specific losses with HCG, we had hoped to be in market with Sofia now CLIA waive space which would have been helpful, that was our game plan. We're still working on that and expect to have something in market at some stage soon. The trend is not anything different than it has been before. Clearly if a distributor can commoditize the market they've shown that they will. Our job is to produce a product that has more value and that says to the customer you don't want to do that. But your question about is there a difference I'd say no, it's not different but it is an offset and so I like to be fair and talk about the things that are going well and what the options are.

Okay, thank you.

Thank you, our next question comes from Bill Quirk with Piper Jaffrey. Your line is now open.

Great, thanks to everybody. First off Doug help us -- I realize that it's early on the toxicology and the high sensitivity with Troponin as well as a new instrument, but how should we be thinking about the overall development time here, I mean presumably this is what a two year sort of series of projects or should we be thinking longer than that?

I think two years is a fair timeframe. If you ask my R&D organization they would lobby for longer. But at the end of the day we've got to do a couple things with the existing products. And we also plan for the future. Ideally I'd like to have one Immunoassay platform out there that could do not only our infectious disease menu but also the cardiovascular products. When you think about managing just different instrument platforms across the globe it's not very efficient. So, in the shorter-term you can expect improved products and that would happen certainly within two years. Brand new instrument platform that did everything we wanted it to do, it's probably going to take a little bit longer.

And should we assume Doug that the toxassays [ph] are going to be going back on the existing Triage or this be a product for call it Triage 2.0?

Well the Triage instrument itself doesn't control for temperature or flow rate which would be two things that we would like to have if we were an R&D person in order to achieve low end precision which obviously requires a gain in sensitivity. So, we got to do something one way or another. What I'm thinking Bill actually is not something that looks a lot like Triage at all but something that would accommodate again both the infectious disease and those cardiovascular assays. That would be the longer-term. Shorter term there are some things we can do to Triage 2.0 if you will. There are probably some things that we can do but we have to evaluate this. The mix between short-term fixes and what's best for our company longer-term. And so that's a delicate thing that we're working through and I'm not really ready to talk a whole lot about having just run the business for three weeks. But I do expect to have a pretty good answer to that question when we see you in the spring.

Okay, I understand. And then just last one for me, and maybe this goes back over to Randy. Sorry to keep picking on the 4Q we're -- estimate here and I appreciate Doug's comments about upto seven weeks of inventory sitting at certain locations like China but should we be thinking down five, down 10, greater than that, I am just trying to get a handle on that and sorry for nitpicking here but just trying to get some additional color? Thanks.

Yeah, we prefer it. It is kind of too early. We're still working, we are kind of looking at it country by country. There is no seasonality in the business so we're just trying to give you some guidance of full year divided by four. Fourth quarter is probably going to be wider than that but specific dollar amounts we prefer not to state anything at this point.

Okay, got it. Thanks guys.

Thank you and our last question comes from Mark Massaro with Canaccord Genuity. Your line is now open.

Hey guys, thanks for the questions. I guess the first one for you Doug is on PAMA. I appreciate your comments on the call but generally speaking it seems like a lot of the Immunoassay tests fared quite well relative to some of the molecular and panel companies, can you just speak at a high level to your degree of satisfaction with the payment trap rates, did you make -- did you submit comments and just longer-term if you can just speak to how you think that your strategy fits into where you think pricing is going?

Thanks Mark. First, I didn't make comments with respect to the draft. We've been following this now for quite some time and are reasonably familiar with what has been going on and we had done our own preliminary estimates of what the impact to our various products might be. So we weren't surprised by anything so far. There are some where you see the impact likely over the three year period to be quite dramatic on the immunoassay side. I think Vitamin D would be a good example where I think the national limits in the mid 40's maybe and it's dropping down potentially as low as 27-28 so that would be a pretty big drop for something that we have in our pipeline. For the existing immunoassay products we knew relative to private payer rates where we were and we didn't expect to change. I think what's happening in molecular is mainly because the percentage of higher rates is just a bigger number. So I don't think there's anything that's different other than just math. For us we've always contended that for our small company the best way forward was to have a solutions oriented approach to what we developed and also with the idea in mind that we weren't necessarily competing directly with other molecular players but instead trying to provide something of benefit to healthcare. An example would be our Strep assay on Solana. The idea is not to compete with others who have a molecular Strep but to convince people who are doing culture that it's better for the patient, better for antibiotic stewardship to switch. And now you can because we've priced the product such that we're not going to break the budget of the lab director, and certainly not the microbiology director. So for us reimbursement really isn't something that we're focused on but you could say that as reimbursement comes down the lower cost manufacturers would have an advantage. But again that I wouldn't say that it's a principal part of our strategy but it's certainly helpful to have a low cost to good skill position.

Great, thank you for that. And as it relates to the -- some of the personnel, I believe you indicated that roughly 50 people were trained outside the U.S. Can you speak to whether or not those folks were already with Quidel or with -- or whether or not they transferred from Alere, whether they were direct or distributors?

Yeah the 50 that we're talking about internationally are the folks coming over from the Alere. We made to be specific, just to provide you an example we made offers for 20 at the commercial people in China, 19 of them came over. In addition that probably over time in another 9 or 10 that we would like to join. You know we'll just see how that happens over time but these are all people who are already selling the Alere products. The same is true for the European situation, the smaller numbers. But country by country there is a small number of people that we would have made offers to. So far that's going fairly well for us. But what else can I say, they're all -- they're not our people, these are the neighborhood. We did have a small number of people as you know Mark from before that were supporting distribution partners ex-U.S. but that would be very small compared with the number that are coming over.

Well, that's really helpful and you provided some numbers on BNP and Triage, just to make sure BNP I believe you said it's tracking at around 107 million, that's an 8% increase, I think you're guiding us to somewhere around mid single-digits exiting 2018 should we be thinking of BNP kind of tracking ahead of the growth of Triage and can you just speak to some of the gross -- growth drivers around those targets?

I would love to be able to tell you Mark that growing from 99 to 107 is a trend because you're looking at a six month difference in time right. There is the year in 2016 number at 99 and the June 30th and on a 12 month basis being 107. I'd love to be able to tell you that but I cannot until we get actual numbers which we're expecting here in the next few weeks. I can't really answer the question. So, I apologize. I'd answer it for you but again I would love to tell you it's real growth but I can't really say that right now.

Great, and just last one for me, can you speak to any receptivity you've had on the Lyme disease test, congrats on the approval and just confirm that it is your intention to get CLIA waived on this particular one or is the bigger expectation that it will be the second approval on the second generation of Sofia?

Rather confused by the question so I'm going to answer it and then you tell me if I'm answering your question. We did just get approval for a mod complex product which we're launching imminently. Receptivity among folks that I've talked to has been high including a couple of conversations we've had with distribution partners. I think that this is not the ideal time to launch a Lyme disease product however. I feel like we should be able to demonstrate some traction. The other product which is on Sofia 2 we expect to be in market with -- in time for the next -- the start of the next Lyme disease season if you will. That product is a whole blood finger stick CLIA waive product. So did I answer that.

Yes, I just want to confirm is it your intention to obtain a CLIA waiver on the Sofia 1 Lyme test?

No.

Okay, that's it, thank you very much guys.

Okay, good I am glad.

Thanks Mark.

And there are no further questions in queue. Doug please proceed with any closing remarks.

Sure, I see we are already at the top of the next hour so thanks everyone for your support and for your interest in Quidel. We had another great quarter and a great year actually and I believe that we're well positioned to achieve our growth objectives. Thanks again and take care everyone.

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