QuidelOrtho Corporation (QDEL) Q3 2019 Earnings Report, Transcript and Summary

Thank you for standing by welcome to thank you for standing by welcome you to the Quidel Corporation Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. I'd now like to turn the call over to Mr. Ruben Argueta, Head of Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today's call. With me today are our President and Chief Executive Officer, Doug Bryant; and Randy steward, our Chief Financial Officer. Our third quarter 2019 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 new IR website following the conclusion of this call on October 30, 2019, for a period of 30 days. Please note that this conference call will include forward-looking statements within the meaning of federal securities loss. 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, October 30, 2019. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call except as required by law. Today, Quidel released financial results for the three months ended September 30, 2019. 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 will now hand the call over to Doug for his comments.

Thanks, Ruben, and good afternoon, everyone. As you saw in the press release, Quidel's third quarter performance was solid and in line with our expectations. Total revenue was $126.5 million, up 8% over the prior year quarter. Total triage revenue at $66.8 million, including triage cardiac and toxicology assays and triage BMP, was once again in the quarterly range of $64 million to $69 million that we suggested is appropriate for the business in advance of the impact of new product launches. Total influenza revenue for the quarter, which includes all immunoassay and molecular platforms, grew 36% to 29.3 million driven mainly by influenza test cartridge sales on existing as well as field placements. Sofia placements, at under 2,000 in Q3, were typical for a nonflu quarter aided a bit by a couple hundred or so instruments shipped to new Sofia Lyme customers. Regarding earnings for the quarter as Randy will discuss in more detail, there were no significant spending surprises. The overall gross margin profiles was a little elevated due to the increase in flu sales, and the fall through to EPS was as anticipated given slightly higher revenue and favorable product and geographic mix. Moving forward, we expect modest traction in the fourth quarter in Europe with high sensitive -- high-sensitivity troponin as we await the publication of a major study to demonstrate the clinical performance of our point-of-care high-sensitivity assay. We also expect to see progress with the launch of the new Triage Toxicology panel, although admittedly our launch was delayed by about one quarter and sales in Q4 will not be as we had anticipated. I have no doubt that we will be as successful in this product as we have planned, but we did have what I would call a self-inflicted wound with the launch of this product as our commercial organization in the U.S. was simply not ready to execute. We are executing, however, and I can explain more about this during the Q&A if you like. The big questions for the fourth quarter are when the RSV and flu seasons will start, and will the flu season be early and severe enough to cause distributors to reorder product as they would typically do during the last three weeks of the quarter. At this point, I can't call it. In early October, we saw [indiscernible] in our data of the approaching respiratory season as test rates began to increase. But the increases in test rates, which were across every region of the U.S., were largely due to RSV and other viruses that mimic influenza and that often precede influenza by 6 to 8 weeks. We have seen increased testing and positivity rates for RSV in Florida, which has reached epidemic levels, but to be clear, the volume of RSV test data collected by is not robust enough to be predictive in that -- in the way that millions of new data points are across the season. At this point, we are continuing to model a normal season in terms of influenza revenue for the next two quarters. Shifting gears, I will probably provide the final update on the status of the integration of the Alere assets. After just 2 years from the close of the transaction, we have effectively completed our integration process. On July 1, we went live with the integration of our warehouse operations at our Summer Ridge facility, moving off Abbott's ordering and distribution system and realizing $2.6 million in annualized synergies. We also successfully migrated Indiana and Brazil to our ERP on August 1, completing the order cash process for 88 of 89 countries. Japan, the final country, goes live November 1, which gives us control of 100% of the business. At this point, we are on track to deliver $20.4 million in synergies by year-end, slightly better than we had planned. Let's talk for a couple of minutes about product development and pipeline. Never in my 10 years with this company has the opportunity for revenue growth been as exciting. At last, not only do we hear the wind blowing, but we can see the trees moving. Finally, we become a product development company of significance, one with a potential of revenue margin growth driven in large part by the introduction of numerous new products. In the first half of 2020, we expect to introduce several new Sofia assays for toxins, Lyme tier 2, a single Sofia cartridge for flu RSV and human viruses, and simpler faster bioassays for TSI and TBI, assays for Graves and Hashimoto's diseases. In the middle of the year, we plan to launch 5 more Sofia assays H. pylori parasites [indiscernible] and Campylobacter. Before year-end, we expect to introduce Sofia Strep 98, which has demonstrated superb analytical performance in studies thus far, and Sofia assays for the 2 commonly seen in community-acquired pneumonia infectious agents, Strep pneumonia and Legionella. Then, we'll head into 2021 anticipating the loss of Savanna which could be the most important product introduction in our history. And there's still more in the pipeline to come. Overall, it was a solid quarter Both financially and operationally. And although Q4 will provide the usual challenges we face every year, we'll end the year in good shape, very well positioned for 2020 and 2021. Randy?

Thank you, Doug. Good afternoon, everyone. As we reported earlier today, revenues for the third quarter of 2019 were $126.5 million. This compares to $117.4 million in the third quarter of 2018, an increase of 8%. On a constant-currency basis, revenue growth was also 8%, reflecting the minimal negative impact of foreign exchange of $500,000 in the quarter. Rapid Immunoassay revenue increased 20% to $42.5 million from the third quarter of 2018 due to strong results for our -- from our Sofia franchise, which grew 35%. Flu revenue for the rapid category was $26.6 million, an increase of 37%, while Strep a increased 6% and RSV increased 10%. For the third quarter, Sofia revenue was $28.7 million compared to $21.2 million in Q3 of the prior year, and [indiscernible] revenue was $12.7 million as compared to $13.1 million in Q3 of 2018. Rapid Immunoassay inventory at distribution is up 7% from the third quarter of last year. More specifically, influenza inventories and distribution were up 28% versus last year's third quarter and up 12% versus Q3 of 2017. In the cardiac immunoassay category, revenue totaled $66.8 million in the quarter versus $65.3 million in the same period last year, a 2% increase. On a constant-currency basis, cardiac revenue for the third quarter was up 3%. Within the category, triage revenue was $33.8 million, a decline of 2% from the third quarter of 2018. On a constant-currency basis, triage revenue was down 1% versus last year. As reported on a geographic basis, triage realized 6% revenue growth in North America, growth in Asia-Pacific and Latin America, which was offset by declines in China, Europe, Middle East, Africa. On the [indiscernible] BNP side, revenue increased 7% over the third quarter of 2018 to $33 million. And on a constant-currency basis, BNP was up 8%. Geographically, revenue growth for the business was realized in all geographies except for North America, which was down slightly by 2%. Revenue in the Specialized Diagnostic Solutions category increased 1% in the third quarter to $12.5 million as our culture business declined by 2% and our MicroVue bone health and business grew a combined 17% in the quarter. Our Molecular Diagnostic Solutions category increased 5% to $4.7 million driven by 20% growth from Solana assay revenue. AmpliVue revenue declined 25% in the quarter as we continued to migrate [indiscernible] customers over to the Solana platform. Gross profit in the quarter of 2019 increased $6.2 million to $75.9 million and was driven by higher sales volumes, improved product mix and lower scrap, partially offset by lower overhead factory absorption and a negative FX impact. Gross margin in the third quarter of 2019 was approximately 60% compared to 59% in the third quarter of 2018. The increase was due to the factors described within the net gross profit improvement. Based on product mix and the prevalence of influenza, we estimate our Q4 gross margin to be in the range of 61% to 62%. R&D expense decreased by $1.1 million in the third quarter as compared to the same period last year. This decrease was due primarily to lower spending on projects related to cardiovascular and Solana platforms as they were largely completed in 2018. Based on our current project priorities, we expect R&D spend to be in a range of $13 million to $14 million for Q4. Sales and marketing expense was $26.6 million in the quarter, roughly flat to the third quarter of last year. We expect sales and marketing spend for Q4 to be between 20% to 21% of revenue. G&A expense increased by $1.5 million in the quarter primarily due to increased facility costs from the expansion required to integrate the acquired cardiovascular business and professional service fees incurred in the period, partially offset by lower transition service fees. Acquisition and integration costs in the third quarter were $4.5 million, up from $2.5 million in the third quarter last year primarily due to the noncash impairment loss recorded for a facility leased as we move our company headquarters over to our Summer Ridge facility in November as well as increase in professional service fees. Interest expense for the quarter was $3.2 million and includes $300,000 related to the convertible senior notes, $300,000 related to the end of facility and $1.9 million related to the deferred consideration associated with the purchase of BNP business. On a trailing 12-month basis as compared to the prior period, we realized an $11.6 million reduction in interest expense due to the reduction in debt of approximately $168.4 million. Over the last 12 months, we paid down our revolving credit facility by $75 million, reduced our convertible note by $45.4 million and paid $48 million on the deferred and contingent consideration. In the quarter, we recorded $1.3 million in an income tax provision. The expense for the quarter was favorably impacted by excess tax benefit from stock-based compensation. We believe our effective tax rate for full year 2019 should be within the range of 18% to 20% of pretax income before consideration for discrete tax items. And we continued to strengthen our balance sheet. In the quarter, we generated $6.4 million in free cash flow after spending $6.9 million in capital expenditures. We used a portion of the cash to pay down another $10 million on the revolving credit facility. Additionally, the remaining $8.2 million balance of the revolving credit facility was paid in full in October 2019. In the quarter, we had depreciation of $4.8 million and amortization of $7.0 million. As of September 30, the company had $28.9 million in cash on the balance sheet and $13.1 million in principal amount outstanding related to the convertible notes. The outstanding principal balance on deferred and contingent consideration for the acquired cardiac assets remains at approximately $184 million. And with that, we conclude our formal comments for today. Operator, we're now ready to open the call for questions.

[Operator Instructions]. Your first question comes from the line of Brian Weinstein from William Blair.

I guess Doug, I'll take you up on the opportunity to follow up on the commentary related to the [indiscernible] talks. Can you give us more on the self-inflicted wounds and kind of what's going on there and how you're dealing with those? And then I'll ask a second question in a second.

Sure, of course. This is really straightforward. We trained sales organization on toxicology very early in the year. And due to the delay in the product launch, we made a commercial decision to train ourselves one more time. And so instead of launching in the third quarter as we normally would with a new product, some of the guys were working on things and waited after the training to actually send their reps out to the field. So I would say that's a pretty good definition of a self-inflicted wound. And the reason I mentioned it is because with all the 2020 products we have queued up, we can't launch products like that we can't have guys waiting for a couple of months to be trained in order to go out and start talking to customers. So we've had recently a pretty lengthy couple of days meeting -- meetings where we discussed all that. And I think we have a pretty good understanding of how we are going to get that done. I don't know how many product launches I think are coming up, but I think it's at least 5 or 6 that we're going to do next year. And obviously we can't wait to have an all hands on deck sort of sales training before we go out and start talking to customers. So pretty straightforward, Brian.

Got it. And with respect to influenza in the levels of distribution, Randy, I think you gave some numbers that indicated it was meaningfully higher at this point versus last year and even 2017. How should we think about what that might mean for the fourth quarter? Because flue numbers were obviously a little bit stronger than we thought here. Should we taking some out of the fourth quarter still and thinking about the overall season roughly the same? Any thoughts on that would be appreciated.

I'll let Randy chime in as well if he likes. But as we exited the second quarter, we had fairly low, I -- not the lowest ever, but fairly low distributor inventory. so it was natural that they order some. I think some distributors ordered more product than they normally would, anticipating a large season. There was a lot of rumors about the flu in Australia, et cetera. I do think there's at least a couple million-dollar swing in any quarter that can move from one quarter to another come. And I think what we have in this case is probably a couple million more in Q3 than we might normally have. Although when you look year-over-year, it's only about 8% more versus Q3 last year that was ordered in. So do you want to add something, Randy?

No, that's right.

Which is kind of where we're at, so probably you'll never know going into the last three weeks of the year whether all that inventory will be depleted, which would necessitate an order from particularly the bigger distributors. So I shouldn't say fingers crossed, we're hoping for more flu. But if we don't see an acceleration of flu, which sometimes happens, I could see how we might be 1 million or so heavy in the fourth quarter.

Your next question comes from Bill Quirk of Piper Jaffray

This is Rachel on for Bill. Do you have any potential -- do you have any thoughts on the potential mismatch between vaccines and [indiscernible] strains this year? We've seen a few press releases of late about it, so I was wondering your thoughts about that. then I have a follow-up.

Even on a best year, immunologists would tell you the effectivity of the flu vaccine is only about 30%. So It's not that I would not recommend that everybody get a flu vaccination. I certainly got mine. I think there's a concept of herd immunity is helpful, so please get your vaccination. But whether we call the strains right or not doesn't seem to have a great deal of impact coming really, although there's a lot written about it. You certainly heard about the mismatch last year on one of the strains. That's probably not super helpful, Rachel, but that's the reality is the vaccination rates and how precise the vaccine is against the viruses that are circulating, it doesn't seem to have a real big impact on severity this season or on the volume of testing.

That's helpful. And last question, can you give as an update on Beckman's litigation [indiscernible] and any next steps that you foresee?

Sure. So regarding the litigation matter, I'll just provide a quick update. And then probably we'll not take -- not probably. I won't be taking follow-up questions. Where we are is the Court of Appeal issued a written order regarding our writ petition, Quidel's writ petition on August 29 of this year ruling in our favor. Beckman then petitioned for rehearing by the same court, and that petition was denied on September 13. Beckman then filed a petition for review for California Supreme Court challenging the Court of Appeals' order that granted Quidel's writ petition. Quidel has filed its answer, and we expect the court to decide whether to take the case by the end of the year. Because of certain developments in another case regarding the same business law, we understand that there is a significant possibility the court will grant review to clarify the law in this area. If that happens, we remain confident that we will prevail. If the court, on the other hand, does not grant the review, we will return to the trial court where we also are highly confident that we will prevail.

Your next question comes from Jack Meehan of Barclays

Doug, I appreciate all the excitement on the new product development. I was wondering if you can give us mark to market on the Savanna cartridge design and when you expect to start trials.

Yes. we're in great shape with Savanna now, I'm happy to report. We have 7 panels, assay panels, that are well underway. Many are close to being ready to move into cartridge. We do have a cartridge design that we are highly confident we can manufacture in millions of tests at very high yields. And now we're in the process of moving to the instrument development phase. So we should have instrument in at least one or more cartridge pipes ready for submission toward the end of next year just as we previously had said. And we're still anticipating being on the market in the United States [indiscernible]. So compared with the last quarter, I would say our confidence level has gone up significantly.

Do you still expect clinical trials to start by the end of the year, beginning of next year?

This year?

Yes.

No, no, no. We will be ready with a cartridge and the instrument toward the end of next year. Yes.

Sorry, I was referring to clinical trial...

Well, the instrument is not developed yet, so we won't be in clinical trials until the end of 2020.

Okay. And then I was wondering if you could maybe just give us a review of the Lyme season and how much that contributed to Sofia, and what that was doing in terms of placement rates over the summer.

Well just overall, I would say where we're at with Lyme is real busy growing and developing a physician office segment that doesn't exist today to include urgent care for a Tier 1 assay. And I believe we'll get even more help with the introduction of the Tier 2 assay, which would be effectively a confirmatory assay and also a replacement for Western blot, all of which could be done in a physician's office while the patient waits. So we think that will add some value. We did ship a couple of hundred Sofias in Q3 to Lyme customers, 70% of which included flu and RSV on their contracts. We have hundreds of contracts right now, mainly in the Northeast, but we're in the hundreds, not the thousands yet. So it's still early days. I didn't think it was an instant market. I knew we had to spend some time developing the market. We had allocated several million dollars towards a number of marketing campaign to create awareness in areas of the country that had some level of prevalence. And so far, I'd say we're reasonably pleased with what's going on, although it's back to the wind blowing and the trees moving. So we hear the wind blowing, but the trees, Jack, are not moving yet at this point.

Your next question comes from Mark Massaro of Canaccord Genuity

Looking back at what I would call the mother of all flu seasons, this is about 2017 into 2018. And then looking back at other new seasons in the last, call it, 7 years, typically, Q4 has flu revenue of at least 5 million to 10 million of revenue above the Q3 level just on a sequential basis. Yet you just reported a pretty big beat on flu here in Q3. I guess the simple question is do you expect a sequential increase in flu revenue in Q4? And do you think it can be similar to that range of estimates that I just mentioned?

The short answer, Mark, it depends. I'll let Randy come in, in a second, but let me give you a snapshot as of today of our data. we look across , we're running less than 15% positivity in virtually every region, except for the southeast in Louisiana and parts of Texas. If you were to go on map.quidel.com, you actually see the flu map and you see where things are happening. So it has started, and what you see is a pretty good beginning of a flu season there in Florida. Miami right now reporting positivity rates of 24%, so Miami actually is in a flu season now. Tampa is at 19%, and so they're just about right on the cusp of being an epidemic range as well. And Louisiana actually has spots as well as the 2 big markets in Texas. So I don't know what's going to happen. It's got to go more than that obviously, but when it does go, it will ramp up quickly. If it does ramp up before the last 3 weeks of the year, again, those distributors got to reorder. We had years where 70%, 80% of the quarter were in the last 3 weeks of December, and we've had years where that was absolutely not the case. I get how you're trying to model going from one quarter and sequentially going to the next. I would say normally you would be right, Mark. And I'm not telling you something different, I'm just telling you what we see so far. We do see flu, we see it ramping up to epidemic proportions in a small number of areas.

And just to add on to that, Mark, consistently Q4 and Q1 have been somewhere between 65%, 75% of our full flu season. So as you know, it can shift a little bit between Q4 and Q1 as well. And certainly for the last 5 Q3s, the flu revenue has been 20 million or north in any event. So we're kind of aligning the same way we have in several of the other previous years.

That's helpful.

If it were normal, Mark, and we're seeing normal, if it were normal, it's going to be sequentially higher, yes.

Okay. A question on the guidance, I don't think you addressed it. But earlier in the year, you talked about a constant-currency basis revenue guide for the year of 535 million. With what you discussed with the toxicology delay, are you still on track to hit that?

No, and that was about $4 million in the fourth quarter. So we are short there. We've got obviously some FX headwinds, but you'll allow me not to count that by your question asking for constant currency. But -- So we've got what we said what we would do minus FX, minus that toxicology delay.

Okay. And maybe on a reported basis, would that look similar to 530 million?

We've got about $5 million FX.

Okay. I want to go back to the question that Brian asked about just the rationale for the delay. So based on my understanding of your comments, Doug, you talked about how you did two trainings. You trained them early in the year and then you trained them again. I could maybe use some clarification as to why they were trained a second time and why they didn't go out the first time.

Because of the delay, there was too much time between the training and when we launched. So I was actually at arguably our best region of the country. And I was expecting to perform at a very high level, I went to their meeting. -- They were trained at that meeting and they hadn't served any calls yet. So I was a little bit -- what's the right word? Disappointed? No, that doesn't sound strong enough, does it? i was not happy. So -- because that shouldn't happen. We were trained once. I do understand let's have a big splash and all that. But at the same time, there was so much going on in Q3 that will push back their meetings to when they could get it done and et cetera, et cetera, et cetera. I'm -- I shared with you all that detail because it's easily fixable and I don't expect it to affect the longer-term prospects for the product, but it was definitely a self-inflicted wound.

Okay. And then one last one for me, you talked a lot about the trees moving. Can you speak whether the trees are moving on the M&A front? You recently talked about 3 to 5 targets potentially on your plate with the goal of acquiring $150 million to $250 million of revenue. So should we think about achieving that potentially with 1 or 2 deals? Or do you see a larger number of smaller deals?

It's certainly easier to do deals that would have bigger chunks of that $150 million. The integration of a smaller company is not any easier than a larger one. And so I would say a smaller number would be preferred, Mark. So there's a lot of [indiscernible] to get there.

[Operator Instructions]. Your next question comes from Alex Nowak with Craig-Hallum Capital

Doug, just kind of following up on that, with the toxicology delayed to next year, can you kind of ballpark what the contribution here could be for new products including pox, Lyme, troponin and all the new Sofia assets you mentioned? What contribution those can have in 2020?

That's a terrific question. We have done a first pass of our 2020 plan, but we're still modeling and forecasting. We'll present to our Board in a few weeks. And so probably it would be bad form if I gave you a number now before I ramp on my board. But certainly we will be prepared to discuss the impact of these new products when we present at JPMorgan in January.

Okay. Got it, understood. Going back to one of the core tenets of the triage acquisition, now two years removed one of things moving legacy Quidel products into the market outside the U.S. I would say as you mentioned, all the infrastructure is now in place. You're launching a number of tests here in the next 12 months. How should we be thinking about that potential expansion into new geographies?

We just got approval for -- are you whispering to me, Randy?

Yes.

We just got approval in China for Sofia. For example, we've got a couple of things we're working on in Japan as another example. Plus we're actually leveraging infrastructure we put in place. If you look at China right now, we've -- we're up 84% Q3 2019 over Q3 2018 in China with our legacy products, in part because we've got a larger commercial organization representing those products. And then we've got the infrastructure there. I'm not telling you we're hitting it out of the park yet, but we clearly are taking advantage of the infrastructure that we're putting in place and have put in place across the globe.

Okay. Got it. Just lastly can you provide some details on the deal that was announced a couple of weeks ago? I didn't see a press release from you, but it looks like you will be commercializing or be distributing their GI assay through your channel. Just curious how that's going to compete with the Sofia GI test that you're developing.

Well, this is a different segment than anything else we do today. It's more in line with how we go to market with our Alere products where we target the larger institution that has a high complexity lab. And so the number of facilities out there is fewer. Therefore, we're mainly using our molecular sales force, a small team there to represent the product. We do have a model. Obviously, we wouldn't have done a deal without a model. But we're using the team now to explore actually what opportunities are out there that are actionable in the 2020 time frame. And we'll be putting those numbers into our plan for 2020. And we should have a forecast for that shortly, but I couldn't really speak to the magnitude at this point. I would say, though, that with each of the ones that I know about, that we've been talking to, the opportunities are fairly significant. So then the question becomes, which account actually is going to close and when are they going to close in 2020. And it should be reasonably easy to model, but it's also reasonably easy to get wrong if you're -- if you model some big account, and you don't get it. So stand by. We think it's an interesting opportunity. We think it's an interesting segment, and I'm glad we did the deal.

Your next question comes from Tycho Peterson with JPMorgan

This is Eleni on for Tycho. Going back to your questions on triage, I was wondering, you called out some declines in China, Middle East and Africa. Could you talk about the dynamics you're seeing there?

Go ahead, Randy.

Yes. I mean there's nothing significantly different from prior quarters. Again in China, we're going through 37 different distributors and stuff. So you kind of see some quarter to quarter some variances. Overall, I think in China, we're seeing on the triage business mid-single-digit growth on a year-to-date basis, so that continues to be a good growth area for us. Europe, Middle East, Africa, we -- it's been pretty flat for the year and that kind of continues plus or minus 1%, 2%.

Triage business. To add in China, the Triage business, the Triage BMP portion, they're actually growing quite rapidly. So it's a bit of a mix right now in China.

Okay. That's helpful. And then in terms of Sofia placements, you saw strong placements this quarter. And you mentioned 8500 [ph] or so from the new Sofia Lyme customers. I was wondering how we should expect the cadence going forward.

Well, I'm hoping we get somewhat of a stair step move when we introduce the product in some of the larger urgent care centers in the northeast and upper Midwest. I don't see it as sort of a linear progression. And I think also with word of mouth, I'm certainly hoping for a big jump in awareness. And instead of going from a couple of hundred in a quarter to maybe double that the next quarter, et cetera, I expect that we'll hit an inflection point and it will be in the thousands. It will go from hundreds to thousands pretty quickly if we're successful. I think that's more in line with what we would expect. We certainly saw when we introduced Sofia initially, we were moving along quite slowly. Then boom, we had awareness and it jumped. So I'm hoping we see the same thing.

And then going back to your comments on contributions from toxicology and troponin in the second half of this year, you had previously mentioned 3 million to 5 million. I know you said because of the delay, that will impact. You probably won't see contributions in this range. But I was just wondering given the pent-up demand and the large customer list you mentioned for particularly toxicology last quarter, if there is any potential upside there.

Sure, there's upside. I suppose we're guilty of being somewhat conservative. That's probably our reputation, but all things being equal, if we don't see it jump from a couple of very large customers, you might end up being down by about 4 million relative to what we had forecasted. But could we do better than that? Possibly, but there's not a lot of time between now and the end of year.

Your next question comes from John from Raymond James

Staying on Sofia, could you give us a snapshot where you are in terms of placements at this point, and maybe just a level set on the annualized annuity replacement?

Sure, that's a great question. We were just asking ourselves where we were going to be at the end of the year. I think we're going to exceed 40,000. So you don't have to wait till JPMorgan for me to say that. We're going to beat 40,000.

Okay. Great. And then on the annuity replacement, I think you said at different times that you're kind of tracking in that $4,000 range or so annualized. Is that a good way to think about kind of where we are now as we level set for next year with all the new menu coming on?

Yes. It's hard, and I hope you're not modeling by taking the number of times and trying to figure it out because we can't do it that way. What's happening is we're moving at different segments with different box, urgent care, you're going to end up with big numbers, but at the same time realizing the cost of Sofia 2 is dramatically less than originally Sofia 1. we're now moving into smaller accounts that we weren't in before. so -- And those are less than the $4,000. And I would say over time, we would hope to have Sofia placements more decentralized, which would mean that on a per-unit basis, the pricing would be higher, but it might be lower volume. So I would suggest it's probably going to move down from $4,000.

Okay. Got it. And then sounds like the integration is largely complete here with the last country coming on in November. Can you just remind us what's left in cost synergies? I think there's a tail into 2020. And then clearly the team has done a nice job. Are there other projects you can outline for us as we think about margin expansion from here looking into 2020?

Well, what we said was we'll be at 20 million by year three. And year two, we're already at 20. I know that you're hopeful, but I would suggest that we've gotten where we thought we were going to be approximately a year earlier. And I'm looking at Randy, he saying please, don't tell him that there's more.

Sorry, John.

I don't know where he gets it. Doesn't mean it's not there. We do have what we call business transformation group that is looking for lots of different ways that we can improve the way we do things. I'll give you just an example. We will looking at our cost to process an order globally. I think we're a little high and we think there's things we can do to get back down. But I would say that's more business transformation across the entirety of the business. Now that I've got the infrastructure at the tip of the integration, we're now repurposing those people to continue to look for other things. So that's a really long answer to say that I think there's more to do, but it wouldn't be directly related to that recent acquisition, if that makes sense.

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, your interest in Quidel. Q3 was another solid quarter and we're in good shape as we finish out the year and head into 2020. Thanks again everybody.

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