Ladies and gentlemen, thank you for standing by. Welcome to Quidel's Corporation Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. I'd now like to turn the call over to Mr. Ruben Argueta, Quidel's Director of Investor Relations. 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 Randy Steward, our Chief Financial Officer. Our third quarter 2018 earnings release is now available on ir.quidel.com, our Investor Relations website. We will also post our prepared remarks on the Presentations tab of our IR website following the conclusion of this call on November 6 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 6, 2018. 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 3 and 9 months ended September 30, 2018. If you have not received our news release or if you would like to be added to the company's distribution list, please contact me at 858-646-8023. Following Doug's comments, Randy will briefly discuss our financial results, then we'll open the call to your questions. I'll now hand the call over to Doug for his comments.

Thank you, Ruben, and good afternoon, everyone. I've got several things to talk about, so we'll get started. The integration of the Triage assets is going well and Karen's integration team is making tremendous progress on many fronts. Among several achievements for this quarter, one I'd like to highlight is our efforts in support of our commitments to quality. We've recently incorporated Quidel's quality management software at the Summers Ridge facility and have built a multilanguage technical support center in Europe to address the needs of our EU customer base. On the facility side, we continue to work through our opportunities across our supply chain and manufacturing processes, improving product yields, reducing scrap and increasing plant productivity. As a result, we are on track to reach $11 million in run rate synergies by the end of this year. With the incorporation of the Benelux area as well as 4 other countries around the globe, we are close to having three quarters of the acquired business off TSAs and under our control, within expectation to be near 80% by the end of this year. By March 1, 2019, we expect to remove China from the TSA and to have all facets of that business under our control. 95% of the overall acquired business would then be under our complete control. Again, tremendous progress. In terms of the financial performance of the acquired businesses, I would say it's going well and ahead of our initial expectations. Revenue for the Triage and Beckman BNP businesses was $65.3 million for Q3, which exceeded the $60 million to $62 million we expected from the businesses after Q1 but less than the $69 million we saw in Q2. However, the business did grow 4% from the prior year, in line with our expectations for the back…

Thank you, Doug. Good afternoon, everyone. As Doug had mentioned, we reported earlier today total revenues for the third quarter were $117.4 million. This compares to $50.9 million in the third quarter of 2017. The significant increase of revenue was driven by the $65.3 million in incremental revenue from the acquired Triage and BNP businesses, which grew 4% in the quarter. This increase was slightly offset by lower Rapid Immunoassay product revenues, which were $35.4 million in the quarter compared to $36.5 million last year. The decrease was mostly due to a $1.5 million decline in Influenza revenues over the third quarter of 2017. In the quarter, Sofia Rapid Immunoassay revenue was up 8% to $21.2 million, while QuickVue revenue decreased 16% to $13.1 million. Cardiac Immunoassay revenues at $65.3 million grew 4% from the third quarter of last year. For the first 9 months of the year, Cardiac has grown at a rate of 7% over the same period in 2017. We continue to be pleased with the performance of this product category and it speaks well to our integration efforts. Revenue in specialized diagnostic solutions category increased 5% to $12.3 million, primarily due to higher complement revenue in the U.S. Molecular Diagnostic Solutions increased 60% in the quarter to $4.5 million due to an 88% growth in Solana revenue. Gross profit in the quarter increased $40 million, the result of the incremental Cardiac Immunoassay revenue from the acquired Triage and BNP businesses. Gross margin in the third quarter of 2018 was approximately 59% as compared to 58% in the third quarter of 2017. Net of amortization of intangibles, the legacy Quidel business gross margin was 61%, Triage gross margin was 57% and Beckman BNP business gross margin was 66%. We are starting to realize margin improvement in the…

[Operator Instructions]. And our first question here comes from Jack Meehan with Barclays.

This is Andrew Wald on for Jack. Could you provide some commentary on the early adoption of Lyme? Any meaningful customer wins that you've had?

Andrew, sure. Early on, I would say that we had a number of closes almost immediately after we received approval, which was encouraging. Among those early wins, it was surprising, I guess, that over 90% of those included an agreement, not just for Lyme, but also for the other products, mainly flu, Strep and RSV. So the collateral benefit that we had gained through those closes was actually larger than we had expected. We have had some larger closes, that's true. There's a couple major urgent care centers that have agreed to bring the product online and a couple others are under evaluation at this time. So I think a good start, we'd love to have launched it in the middle of the season instead of towards the end. But other than that, a good start for that particular product launch.

Great. And could you provide us with any clues on what you expect for the upcoming flu season?

Well, this is the quarter that I get to comment. I've read comments from others as I think, Andrew, you and others have as well. There's a bit of speculation on what the next Influenza epidemic might look like. But to be candid, there are just too many variables. So I guess it would be easy to speculate but hard to be right. Having said all of that, let me just at least share with you what we do know. First, most of you would have seen that the recent CDC weekly ILI report for week 43 shows the ILI percentage of office visits at 1.7%. And as everyone knows, it's deemed to be an epidemic once we cross the 2.0% of ILI visit level. Last year, week 43 was 1.5% in advance of a fairly good Influenza season and the prior year to that, it was at 1.4%. So I would say reasonably in line with what we would expect at this stage. Flu out sales - in other words, sales of our Influenza products from our U.S. distributor inventories to our customers. We're actually, as I commented in the script, at 19%, a little bit more color there. Sofia flu out sales were actually up 49% in Q3 versus the prior year quarter. So that portends nicely for what we might expect moving forward and certainly tells you a little bit about what we expect in terms of potential future competitive entrance and that sort of thing. There were combination, though, to be fair of cannibalization from QuickVue, which was down in terms of out sales versus the prior year. And, of course, market share gains, some of which are more than likely due to the performance characteristics of Sofia, but also remember that we had the FDA…

Definitely.

And our next question comes from John Chu [ph] from Raymond James.

First, just following up on your helpful color there on the flu season. Just any thoughts you could wrap in regarding there was a competitor launch recently for flu AB and Strep on the molecular side.

Yes. So I think I understand what you're saying. You're suggesting it's a launch but it's actually a renaming of the product with a claim for a shorter assay. So the Abbott ID now is actually the Alere i, which we had in market for some time. And I believe they got a clearance for a little bit shorter turnaround time on their product. But the limitations of molecular at this point, particularly at the point-of-care, are still there. Reimbursement is still an obstacle as is cost. None of the molecular manufacturers so far has proven the ability to manufacture instruments and reagents to a level that would be needed to have any impact on the market with significance in terms of volume. Although at some point they would solve that if there was enough demand, I suppose. At the end of the day, there are numerous reasons why Sofia continues to be super successful: cost, speed, performance, Virena and additional menu for things like Sofia Lyme. Those are certainly reasons why I believe that we're continuing to see success. That's a good question, it's just I don't really see anything that would change our forecast given what we see so far.

Okay, great. And then, sorry if I missed this. But you obviously talked about revenue still be - coming in at the high end or north of $520 million for the year. But I guess, did you reiterate that you expect molecular to still be north of $20 million? And any thoughts or color you could provide there would be helpful.

No, I didn't mention what our molecular sales are. The target all along has been to get to $20 million, I would say. We're probably - unless we have a crazy last couple of months, we are probably going to be short of that, but still within range.

Okay, excellent. And then just quickly. On the integration, just want to make sure or just see regarding, it sounds like you're making progress there but regarding the go live with China, are we still on track there for kind of early 2019?

Yes. As I mentioned March 1, we were debating whether to have it before the Chinese New Year or after. And the folks that are doing the training for the ERP 1, that debate. And so they'd rather - I guess it makes sense, let's not train twice before and after the Chinese New Year. So they're going to wait until after the Chinese New Year to go live. But we clearly will be ready to go on either side of the holiday there.

And our next question comes from Bill Quirk with Piper Jaffray.

First question, Doug, first question is congrats on the toxicology filing. Can you help us think a little bit about that $30 million opportunity? And I guess, more so I'm thinking about kind of the commercial timing about thinking about people being in contracts, having to generally come out of contracts so we can bid on the business? I'm just trying to get a general idea of is this a 2, 3 or kind of 5-year ramp to that $30 million opportunity?

I'll give you the short answer. I think it's a couple of years based on what Randy and I reviewed with the product manager. We spent well over an hour - I'm looking at Randy at the moment - and going through a lot of detail around where the customers were in terms of their status, whether there truly is pent up demand, we concluded that indeed there is. We looked at how the product compares with our existing product as well as how it compared with competitors. And we think for the same reasons that the folks at Biosite and then Alere saw around a $50 million business, we think we can get nearly back at that level fairly reasonably. And the forecast that we looked at said we'd get it done certainly in that 2 to 3-year window.

Okay, got it. Appreciate the color there. And then apologies if you touched on this already in the call, it's been a busy afternoon. But any update, Doug, on kind of the next generation Triage or, for lack of a better term, the next-generation Triage, just the idea that we can combine some of the chemistries together on to a single platform, just wondering if you have an update on that? And if not, could you, please?

It's a great question. I would tell you that the idea of combining the 2, meaning you might eliminate the Sofia side of things, that's something to be investigated moving forward. But I will say that I had a very encouraging discussion with my head of R&D around technologies that we might incorporate into the platform that would improve the product performance dramatically, both on the chemistry side as well the instrument side. So stand by, but we do have a game plan and we do have some thoughts on what we might do moving forward. Clearly, at this stage, it's early days. But I would have to say I'm pretty encouraged by what I was told that we might be able to get done here in the next couple of years.

Sounds good. Last one for me, Doug. It sounds like this is kind of more than just sketched on a piece of paper at this point. So is this something that you anticipate introducing to The Street within the next year and that we can kind of start, I don't know, a multiyear countdown or something to that effect on the potential commercialization?

Sure. I think within a year we would be able to tell you more of a time line. I don't think we're going to be willing to discuss what exactly we're working on from a technology perspective because some of it is really truly new and innovative. But certainly, giving you all a feeling for what the time line looks like, we should be able to do within a year.

And our next question here comes from Brian Weinstein with William Blair.

This is actually Andrew Brackmann on for Brian. I wanted to first start with Cardiac. Your comments here are $65 and a million, which is down quarter-over-quarter. Could you maybe talk a little bit about some of the seasonality that you see in that business? And then by our math, it looks like Triage in North America was down a little bit, maybe some additional color there.

Sure. I think you hit the nail on the head, Andrew. Q3 is the low quarter for the Triage business. And I think we're sort of in line with what we had thought we would do. It's certainly north of what we had originally projected. So I'm pretty comfortable with that. The U.S. business, it is true on the Triage side, is a bit flat to declining, offset by the BNP business. So that's pretty much what we had suggested that we would see as well. So we're not surprised by the $65 million in Q3. Now as I commented, I would expect that Q4 we would see something at that level or higher given the pattern that we've seen over the last couple of years.

Got it. And then on Sofia, could you maybe talk about your utilization assumptions for that product going forward. And then second one on that, you mentioned the CDC data for your flu assumptions. So maybe you can talk about the Virena data that you're seeing on that pipeline?

Utilization assumptions. Utilization is increasing due to a couple of factors. One is that we've been running at an assay program and been pretty successful with that. We've had a pretty sizable and noticeable increase in Group A Strep, for example, in Sofia. But the number of assays used per box is increasing, that's one way to look at. The other way to look at it is on a dollar basis per box that I suspect will change over the next couple quarters as well. And certainly many new additions like Lyme helped out a great deal. So we've said originally that our idea was to have something approaching a $10,000 per year per box, that's still a pretty big ask but I think we're moving in the right direction. And it's still possible, depending on what we introduce on the box moving forward. And then on Virena, the number of users now is 9,000, a bit of reporting. And so that's gone well. In terms of what we're seeing for positivity rates, we do see some upticks in states that sort of are running a little ahead of the CDC's map. The CDC's map right now shows all green except, I think, 1 state's yellow, but still showing early by the CDC's traditional surveillance systems whereas we're seeing little pockets here and there, we're spiking in. Unfortunately, we've had the first mortality events of the year that occurred already in several places throughout the U.S. unfortunately as well.

And our next question comes from Alex Nowak with Craig-Hallum Capital.

This is Will Sinsky [ph] on for Alex today. My first one is, and I apologize if you touched on it a little bit earlier, but how should we think about the margins for Triage today? And just where they could go for the next 1 to 2 years?

Well, what we've said is we've got a game plan to improve the productivity yields, [indiscernible]. We said we would go from 50 to something, high 50s approaching 60 actually, ultimately. And I think we're on our way.

Yes. We actually reported 57% for the quarter.

57% is where we're at. And as we exit something in the 58 to 60 ranges is possible.

Perfect. That's great. And then on the high-sensitivity troponin test, have you touched on it a little bit? You're going to be submitting that CE Mark in the next few days for the EU. But if you just want to touch on your U.S. strategy, that would be very helpful, too.

Well, the U.S. strategy is in flux, depending on how well we do in Europe. Specifically, we're going to be running a study shortly, large number of characterized samples. Assuming that goes well and as well as the previous study that we just concluded, I think that it's a different set of regulatory issues that we have to address in the U.S. but at the end of the day it's likely, depending on the success in Europe, that we would move forward with the clinical trial in the U.S. Before we would embark on a trial, though, we would want to be convinced that we're going to get the claim that we think that we ought have in order to be a point-of-care high-sensitivity product in the U.S.

Great. Appreciate it. Just one last one. Abbott saw unveiled a new line of molecular instruments that seemed to challenge turnaround times for your immunoassay franchise. If you could just give us your thoughts, maybe a little bit of color there just on the competition what you're seeing, that would be extremely helpful, too.

Sure, Will. We actually had the question just a little bit earlier. And the Abbott product is actually the Alere I renamed. And it has a new claim for shorter turnaround time, but all other factors are virtually the same. And so there will be customers, of course - there has been over the last couple years who might consider molecular and a lot of that depends on their workflow situation, it also depends on reimbursement and whether they can actually get reimbursement. So there are a couple of drivers that would cause a customer to look at molecular, and I think that would be appropriate depending on what their needs are. But the market in total doesn't seem to be that receptive at least at the point-of-care to molecular entrants. It could change over time, of course. But at this point our Sofia placements would tell you that for the most part, that's not true.

And our next question comes from Tycho Peterson with JPMorgan.

This is Eleni on for Tycho. Maybe to start off within molecular. Could you drill down and provide some more granularity on what drove the 60% yearly growth? And whether you expect these drivers to persist through next quarter and into next year?

The main drivers of Solana molecular growth, which is super high percentage of our growth, are driven by gains with Group A Strep, which you might recall that product is confirmatory for Group A Strep. Also, we've done pretty nicely with HSV-VZV. And then more recently, we've also seen quite a few gains with C. diff.

Okay, great. And then with respect to cross-selling, what are the opportunities you're currently seeing in U.S. as well as outside U.S. markets?

Across the entirety of our product line?

Yes, correct.

Well, as we like to say, it's more efficient if our sales force can park their car once. And we try, therefore, to address all the products once we've parked the car. So we didn't need to hire additional people in order to bring onboard the cardiovascular products because the car was already parked there.

Okay, great. And then one last one. Could you talk to the trends you've seen regionally and whether the headwinds in Europe is something you foresee going into next quarter?

No. I wouldn't suggest that, that would be true. In Q3 2017, one of the factors was loading of the channel and, of course, that's not going to reoccur in Q4 because Q4 we took over the business last year. So there may be headwinds, but that wouldn't be one.

And our next question comes from Mark Massaro with Canaccord Genuity.

Sorry, if you cover this, I miss the prepared remarks. But Doug, on the Lyme disease test, it is the first FDA-cleared rapid Lyme test. So I've got a number of questions. One, are you seeing both demand from urgent care and pharmacy and is one stronger than the other and can you talk about the funnel there? And then, 2, as it relates to seasonality in the northern part of the country, it's getting colder. I would suspect the incidence of Lyme disease might be down a little bit. Can you speak about whether or not you expect to sell this product fairly robustly throughout the year?

Well, in order that you asked the questions, Mark. Yes, Sofia Lyme is the first CLIA-waived finger-stick whole blood product. And we, of course, are promoting it broadly across several different segments with a pretty big focus on the Northeast and the upper Midwest, of course. Lyme disease does fall off in the winter, I'm told, as soon as the first major freeze, of course. But we won't stop promoting the product in terms of word-of-mouth. And the reason we think that's important is we want awareness to be out there that you can go to your retail clinic or to your urgent care center or even to your own physician and get tested, and we hope to create that awareness by springtime when you would expect to see the demand reoccur. So I did just mention those categories. I would say right now in terms of volume, the big customers tend to be urgent care centers, but we have closes across the category, individual physicians as well as clinics. The bigger, more noticeable closes, I'd say, at least the ones I hear about by e-mail are on the big urgent care centers.

Got it. And I happened to notice at AMP that there was a new box in your booth, are you able to share anything about that box at this time? Or maybe give us a sense for what you think that could do as we think about 2019?

Yes. You did spot the new thing in the booth. It is true that we have a great deal of interest in the category for good reason. The CDC estimates that somewhere around 48 million people get sick from foodborne illnesses and a big number of those are hospitalized. And so it's a big issue. We think that if this looks like the market for this product ex-U.S. that the PAM, the potential available market, could be somewhere in the 6 million to 10 million range, I'm not suggesting that would be what we would do. But we think it's a really interesting category and we think that the product that has 9 different analytes, 9 pathogens, if you will, is pretty interesting. I don't know if you saw the workshop but it was well attended, and a lot of customers ended up finding us on the booth floor and so we had a lot of conversations there. That's a work in progress, though. And so I can't really comment further on it, but we like the category, we like the opportunity.

That's super helpful and I would suspect that you are looking to become a distributor of this product. So should we think of a normal med tech distributor percentage as we just think about what kind of impact that might have to your business next year?

Yes. I think that's a safe way to think about it. Obviously, the pricing in this category is quite nice. And so I think there's room, anytime that's the case, and there's a lot of margin. There's room for both the manufacturer and the distributor to make money.

Great. My last question. You've already been asked about the Alere i twice now. I think there's some misperception that molecular testing is probably reimbursed all across every state in the country, but I don't think that's true. Could you just maybe spend a little bit of time talking about some of the regional barriers to reimbursement for molecular flu testing?

Well, I think you actually just made the case, Mark. Reimbursement isn't universal across each of the states. And particularly on the private payer side, there's a lot of differences region to region, and there's some parts of the country that don't reimburse for molecular at the point-of-care at all. And so in the hospital setting on the outpatient basis, that's different, of course. But when it comes to clinics and individual physician office practices, even for our own products, we're trying to sell Solana as well. So we're a little bit familiar with the topic. And I have to say, we struggle in certain parts of the country to get our customers to be reimbursed. And there's not a whole lot we are able to do about that at the moment.

Sorry, if I can sneak one last one in. Would love to hear your thoughts on the Palmetto decision. I know that a lot of the respiratory syndromic panels are reimbursed on inpatients, but there's still a fair amount of those used on outpatients. I guess, how should we think about your ability to take share from some of these larger panels as we head into 2019?

First, I would remind you, Mark, that I have said on a couple of different occasions that I thought that reimbursement climate for the larger panels would change. We also spend a lot of time on those customers interviews, which are in the hundreds, to confirm the notion that a smaller panel that addressed the number of positives in the high 90s relative to the bigger panels would be desired. And so that's the basis upon which we thought about how we developed the Savanna product and the cartridges and the size of the panel. So we suggested that this might happen, and now that we see that at least one of the max has issued a final conclusion on the matter and I think that affects, if I recall it and add them all up, I think it affects customers in 11 states, something like that. So this doesn't change the way we think about Savanna because we've been thinking this was going to happen for a while. And I would just say from your perspective it probably makes Savanna just look more interesting, but we're not surprised. And this whole notion was the basis for us developing the product over the last couple of years.

And our next question comes from David Westenberg with CL King.

So can you give any, A, maybe percentage or even maybe some qualitative data in terms of adoption of test menu outside of flu for some of your Sofia 2 customers? I'm mainly going back to all those placements you got in Q1 when you were basically getting them out as fast as you can manufacture. Have they adopted other outside of flu? Can you give us a percentage of maybe what have adopted outside of flu if you have that? And maybe kind of give us a little bit of what kind of test they'd be ordering outside of flu right now or common ones [indiscernible]?

I mentioned earlier, Dave, and I'll be more specific that Sofia Strep was on the increase. Sofia Strep actually grew 50% in Q3 versus the prior year quarter. And so, obviously, that's not off of a big basis as it is with flu, but it's noticeable. We've been running internally a program to revisit with customers who already have Sofia and introduce them to Strep and RSV in particular. And that's gone extremely well. And then more recently, obviously, with the introduction of Lyme, at minimum, we're having a number of conversations and many of those - even though the volumes were likely to be small, many of those result in customers wanting to take a look at the product, which then allows us again to have the conversation around our menu across the entirety of what we have to offer.

Maybe just a quick one on capital deployment. It looks like you guys are below 2 turns maybe even close to 1 turn in terms of debt. Would there be any changes near term to your capital deployment strategy? And if you are looking at acquisitions, can you kind of maybe talk about the near term in terms of your acquisition pipeline?

At the moment, I would say, I would characterize our M&A activity around partnerships with folks who might be able to help us put menu on either Sofia or Savanna more quickly. And so unless we're surprised by something that's out there that we're just not aware of at this stage, I wouldn't count on us using cash for an M&A. Could be some minor investments and things again that might help us bring onboard product. And we've got a couple of those in the works, but those are very small and not material in terms of cash spend. We continue to look at paying down debt, of course. And we are generating a lot of cash and our free cash position at the end of the year is still likely to be somewhere around $100 million, and that's prior to us making the annual payment that we make to Abbott of $48 million. So net of that, we would have somewhere around $50 million.

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

Well, thanks, everyone, for your support and, of course, for your interest in Quidel. We had another great quarter, and I believe that we're well positioned to achieve all our growth objectives for the year. And I think we're super well positioned for 2019 and 2020 as well. So take care everybody.

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