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Quidel Corp. (NASDAQ:QDEL)

Credit Suisse 2012 Healthcare Conference Call

November 14, 2012 1:30 pm ET

Executives

Douglas C. Bryant – President and Chief Executive Officer

Analysts

Vamil Divan – Credit Suisse Securities (NYSE:USA) LLC (Broker)

Vamil Divan – Credit Suisse Securities (USA) LLC (Broker)

Okay, good afternoon, everyone. Thanks for joining us. Again, thanks for attending our conference in general and coming here to hear about Quidel. My name is Vamil Divan, I’m the tools and diagnostics analyst here at Credit Suisse. And it’s my pleasure to introduce Doug Bryant, the CEO of the company to come and give us an overview of the presentation and then maybe a few minutes for questions afterwards and I think we’ll do an informal breakout right in this room right after the sessions over as well.

Douglas C. Bryant

Thank you. Hi, I’m Doug Bryant with Quidel. With me are Randy Steward, our CFO; and Ruben Argueta, our Investor Relations Manager.

Here is our slide listing our Safe Harbor. We will be making forward-looking statements in this presentation. I can’t read that fast. I thought it was just a reading last year’s issue, but currently I’m discovering that I’ve got more eyesight issues that need to be solved.

We are well positioned to grow in a market, the diagnostic market, which is quite attractive in a rapidly growing sector of healthcare. In recent years, we vamped our R&D organization and have created an interesting product of pipeline that now totals over 20 products and developed. I don’t talk more in a few minutes about with some of those products are and what we can expect in the next few quarters.

We’ve increased our commercial footprint actually worldwide in a small way in Europe and in Asia and in Latin America. But also here in the U.S., we have doubled our commercial organization from what it was in 2011. So we’re well positioned as we developed these new products to have a commercial organization that will execute worldwide, but more importantly here in the United States.

We are solid company from a financial perspective, healthy balance, good revenues, and we have low debt. Our company has a reasonably lengthy history for our segment beginning in 1979. Our company for the most part in the early days it was recognized as being a rapid point-of-care diagnostic company and tests like Strep and hCG for pregnancy and flu were the primarily products.

I came on Board in early 2009, one of the things that became apparent was that we needed to restart R&D and we began the process of bringing on Board scientific talent throughout the year. In 2009, in fact in October of 2009, we entered into a collaborative agreement with BioHelix of Boston area based company. That had a unique and proprietary amplification technology that would enable us to develop our product, which we now call AmpliVue to do the world’s, to develop the world’s first handheld disposable molecular diagnostic device. In other words, diagnostic device that combined molecular technology with lateral-flow detection in a disposable format, which we hope to demonstrate, some will be very easy to use and does not require an instrument.

In 2010 early on, we had another couple of agreements that we put in place, the first of which was Northwestern. We entered into an agreement with Northwestern and the Northwestern Global Health Foundation to develop an integrated molecular platform that would be inexpensive enough to do inexpensive HIV viral load testing in the developing world and in particular Africa. We also completed the acquisition of Diagnostic Hybrids, a cellular virology company, based in Athens, Ohio.

Also during 2011 later, we launched the Sofia Analyzer, which is our next-generation lateral-flow detection platform and the first assay Influenza A+B. We also received FDA clearance for a couple of molecular assays as well, and so in total for 2011 as we exited the year, we had four FDA clearances, previous to that the company had not had an FDA cleared product since 2006. So 2011 was the year which we demonstrated that the R&D organization that we had put in place was indeed effective and we were on our way.

Early in 2012, we achieved the CLIA Waiver for a Sofia Analyzer and the Influenza A+B assay. And then throughout this year since then, we’ve been pretty active here in the Untied States in placing Sofia Analyzers.

This is a quick overview of our financial position historically. You can see that we had a spike in revenues in 2009 as a result of the pandemic. Our sales in that year were a $164 million, of that $100 million related to flu. You saw the following year the effect what the business looks like when there is no or hardly any flu and then in 2011, you can see what the business looks like with somewhat of a nominal flu season.

And then as well you can see the R&D investment over time, you see that in 2011, we spend about $26 million and this year, we’ll spend something approaching $30 million. In terms of the balance sheet at the end of our third quarter, we had $17.8 million in cash on the balance sheet and about $19 million in terms of the note that we had on our credit facility.

Here is the management team as it stands today of the eight people listed here. Five of them are new with me since 2009. There people Dr. Tamerius, Rob Bujarski, our General Counsel, and Scott McLeod, our Senior Vice President, Operations were here when I arrived. So the other five folks including myself are all new since 2009.

We have significant core competency in a couple areas and those are the areas that we try to leverage as we think about the products that we will develop moving forward, principally and historically we’ve been a market leader and developing a manufacturing of point-of-care assays. These are assays that are run in 15 minutes or less in physicians offices, but also as well in other settings including hospitals.

We have a significant molecular assay development team, some of which we acquired to the acquisition of Diagnostic Hybrids. We have really good brand strength with our products, particularly in respiratory disease, other infectious diseases and in the women’s health category. And then obviously we’ve now demonstrated that we do have regulatory expertise, not only do we have FDA cleared products, but we also have had a number of CE Mark products as well.

And Finally, I’ll say that I think that the distribution network that we had in place and that continues today is quite good. But we have a number of agreements in place with key distributors here in the United States. Those are folks like Cardinal and Fisher on the hospital side primarily. And then on the physician side, PSS, McKesson and Henry Schein, some of the folks that represent our products here, and we’ve always use distribution ex-U.S. with our products and we plan to moving forward.

The biggest chunk of our business ex-U.S., by the way is Japan. That’s our largest ex-U.S. and a country. We have a bit of business in Europe as well, particularly in a Scandinavian countries and a very little business in Latin America.

When we think about our business, we bucket those things in three categories. The first of which are rapid tests. A QuickVue is the product name for our legacy products, these are visually red lateral flow devices. I look for color development that indicates the presence of the analyzer that I’m looking for. The next-generation product as I mentioned is Sofia, I’ll talk a bit more about the attributes of that product. But this is an automated instrument that objectively reads similar assays to our legacy products, but also enables us to connotate we believe moving forward, which could expand the markets that we should be able to participate in.

In the middle, our cellular products, and those are principally the products that we acquired to the acquisition of DHI. The visually red products are DFA tests that are run under a fluorescent microscope and are run typically in the clinical virology labs that are in the major hospitals throughout the U.S. The instrument that you see to the right there is called STELLA formally Bobcat. And STELLA will automate the reading of those same liquid DFA assays that we have in our marketplace today.

And then to the right you see in the molecular category we have the same concept where the visually red assays we will call AmpliVue, these are tests that are run in a handheld cartridge, the first of which will be C. difficile, and we’ll talk more about that in a minute. And then to the right you see the product called Savanna formally project Wildcat. This is the instrument that we’re developing in collaboration with Northwestern.

We have a number of investments and system infrastructure that we have been making over the last couple of years. I’ve mentioned that we’ve significantly increased our R&D infrastructure and our spend, focused on things that are in categories where we know something about in particular infectious disease and women’s health. We’ve also made investment in project management and process expertise pins the way we developed product when I arrive does not same way we develop product today, and I think you’ll see an acceleration moving forward with a number of our products that we’re actually able to move through the regulatory process.

Evidence of that you’ll see in the first quarter of 2013.

We’ve also as I mentioned briefly before I made a fairly significant investment in sales and marketing, but we didn’t do that until rather recently until we were closer to launching some of these products. We’ve also made an investment in proprietary technology, some of which has resulted in a filing an issuance of various patents.

An example of that would be through the collaboration with Northwestern, we have the rights to a technology called phase-gate, which is a methodology for extracting RNA and DNA from various samples. It will also I think the useful and extraction of proteins over time, but we filed a series of patents on that particular technology.

We do evaluate additional strategic alliances, in other words we are continuing to look at M&A, but I would say rather opportunistically. Given what we have in our portfolio, in our bandwidth, we certainly don’t want to do anything. That would be a distraction to where we had moving forward and so most of the things that we are looking at are not significant in size, but rather give us either access to technology that we’re interested in or give us geographic coverage that would be helpful to us.

Here is the history, since 2009 of the share price, of the most important aspect of the slide though is the revenue breakdown that you see down below. Our mandate is to build a broader base diagnostic company that is not so dependent on flu in the volatility of flu seasons. And you can see that over time, we have been making progress of reducing the percentage of our total that is exclusive and in fact in 2013 we project that we will have a few sales about 26% of our overall revenue for the year.

Here is the list of our ownership, which you can see on the left hand chart, shows that we do have significant insider ownership, in fact as of June 2012. We were at about 20%. And so I think this is important to recognize that management is completely aligned with the shareholder. On the right hand side, you’ll see some of the folks that are investors in our company. And we have particular concentration with institutional owners.

Here you’ll see examples of analyst’s comments, which I think are fairly reflective of where we are in terms of our strategic development. We’re not at the end of the game here, we’re probably in the middle of the game, we have a number of products in development, we have a number of products likely to be approved in 2013, and yet we still are at the stage where we have to demonstrate that we can get those things done.

2013 will be a pivotal year for us the year during which we hope to demonstrate that we can accelerate the top line. We do think we have a highly leveragable P&L. And I think that 2013 will be very useful for us in demonstrating that we are getting down what we said that we would do.

The first comment on the left refers to a 100 million of new product revenues in 2014. It could be 2014, it could be 2015, but what we hope to accomplish with this product portfolio is incremental sales of a 100 million about 65% of that is tied to the Sofia product about 25% of that is tied to the development of molecular products, and the remainder of that is across our core businesses, as well as the introduction of the STELLA platform that I talked about before. We certainly have a lot of confidence and our ability [Audio Dip] new products to market, but clearly as I mentioned the proof is in the revenue and that revenue we hope to begin to deliver in 2013.

Here is a brief overview of the four major programs that we had in place at the time we presented in Boston at our Analyst Day, which was in 2011 in March I think. So in March of 2011, we said we had four solid base hits, any one of which could be a home run. In our strategic plan, the numbers have moved slightly over the last couple of years, but we’re still confident we can hit the 100 million incremental target. Sofia now for us has become more important. Certainly, molecular continues to be important, but still on a Thyretain program are interesting opportunities, but we don’t expect given the timing between now and 2015 that they will contribute as much as the previous two.

With Sofia this is an FDA cleared system that basically we hope will be a game changer in the point of care market and so far rather optimistic given our placement rate. Again, we talked about STELLA, but we think of the 700 or so DSA customers we have in the United States, certainly many of those would like to have an instrument that would help them out from a workflow perspective and we look forward to seeing whether we can get that product approved sometime in 2013.

The Thyretain program continues to go without significant investment. But this is the only FDA cleared assay for TSH receptor antibody product that is effectively confirmatory for Graves Disease that awareness by endocrinologist and physicians, who see the presentation of hyperthyroidism. That product is going extremely well for us. It continues to do well. We would forecast that to continue to grow between 10% to 15% per year and it is one of our higher margin products.

And then finally, on the right we actually have three molecular programs. I talked a little bit about the AmpliVue. In addition, we are developing a number of Real-Time PCR assays, which as we launch them, we will make available to customers to run on the thermocyclers that they choose. In the longer-term, the reason that we’re developing those target, so that we can put them in our cartridge-based system that will be run on the product that we now called Savanna, the low cost fully integrated molecular platform that will introduce first in Africa to do HIV viral load testing and TB.

But then later, to do a number of different analyze in a typical hospital setting here in the United States of where we’re have molecular testing is done. The total number of targets that we would expect with Savanna at launch, I’ve said before is 20, those are still inter plan and fully funded in on target for delivery by 2015. So with each of these platforms, there is what I would call the basic opportunity and then there is the home run opportunity.

For Sofia, for the assays that we made today is the total available market in the U.S. alone is about $270 million, and of course we do something north of a $100 million typically in year of those products. So our share in that space is quite good, but there is room to grow there. The real home run that was when we develop quantitative assays where the markets are larger and we previously suggested that some of those assays would be things like vitamin D, TSH quantitative hCG and others.

On the virology side with Stella, I think that there is an opportunity to promote the liquid DFA format to solidify our position there, and we see the reasonable upside to be around $40 million. At one point we saw that there will be an opportunity to decentralize that market somewhat. But I think by the time we get out into the market either later in 2013 or 2014 that many of the places where this would have been a good placement opportunity may indeed have moved to a molecular solution by then.

So I’m not suggesting we won’t do better than we had the [net basic] opportunity but I think it’s less likely than we thought two years ago. And then similarly I think we are chasing a market on the Thyretain to somewhere up $30 million. And lastly, I would say that when you look at our molecular program, it’s easy to see how we would get from where we are to $25 million by 2015 given about $160 million opportunity. Longer-term once we have Savanna in the marketplace then the number just I guess larger the number of infectious disease, panels, and other products that we would go after is just a significantly larger market.

So thanks to watch for in 2013, one is rapid menu development. On Sofia itself, we previously disclosed that we expect RSV, Sofia RSV, Sofia Strep A, and Sofia hCG for pregnancy testing to be available for marketing here in the United States in Q1. There are a number of other molecular products that we expect as well in fact, we expect to be in market in 2013 early with AmpliVue C. difficile.

The revenue ramp from the new products should increase, as I said our expectation is to see revenue acceleration in 2013, and we would expect one of the three or four quantitative assays that we are working on to be available on 2013 as well.

We’ve talked about AmpliVue. I just mentioned that I’ve got a both, Q4 2012, but certainly we would expect very early in 2013 to have that product in market here in the United States. Here is the cartoon that describes the Sofia itself in addition to improved product performance for flu and other tests physicians and laboratorians who are interested in other features, feel safe measures that make it almost impossible to make a mistake. We’ve got a 2D barcode that identifies the assay and the parameters and only allows the operator to read it effectively one time.

So you can’t be confused by whether you run an assay or not. It does have a completely different technology. The assay itself cannot be read visually. Your OPM labeled beats on a conjugate fluorescent in ultraviolet wavelength, and therefore I read only by the instrument. The connectivity is the huge driver as well as the objectivity of the result.

I won’t spend a lot of time here, but effectively you can run a couple different models, one of which is you can set the cartridge in the instrument. It will time itself or you can run it on the counter and just set in the instrument and it takes about 45 seconds to read the result.

The Real-Time assays that we’re developing from molecular are available here in the United States at least those have been FDA cleared so far build on in Cepheid SmartCycler and ABI 7500 Fast DX. You may have read also that these assays will be available on Life Technologies new QuantStudio DX and we’ll be hearing more about that as we move forward. And then there is the AmpliVue cartridge that you can see on the right hand side.

This is the procedure and we hope this will be approved as a modernly complex assay, but this is the procedure for running C. difficile, which you can see requires just a quick swab and delusion tube. We like this sample for 10 minutes at 95 degrees. We go into a reaction tube, a little PCR tube, the bottom of which has the lyophilized pellet. It can’t contain the probes, the primers and the enzyme that goes into the cartridge.

When they handle or squeeze that force down that sample, PCR tube and a delusion buffer bold. The liquid sample looks up in nitrocellulose film and on the lines themselves are happens are absents or anti-absence to absent that tagged into the probe. And on this particular I don’t know if you can see it on the slide, but this shows profit. This is actually a positive for Toxin A and we have control line indicates that the assay was performed correctly. So unlike some other methodologies, the internal control is actually contained within the assay. This is not separate control that you need to run.

So in summary, historically we’ve been a market leader in the development of these rapid point of care test, we do extremely well in this space. We expect to continue that and to do even better moving forward with the introduction of Sofia. We have proprietary next-generation technology incorporated in Sofia that we think that will prove to be incredibly effective in the marketplace.

The four programs that we mentioned Sofia, STELLA, Thyretain and the molecular programs are on total we expect to deliver on the incremental $100 million in 2015, we hope at that time also it will be north of 30% in terms of operating margin, and we are well on our way to getting there. We are allocating appropriate professional and financial resources to make R&D and our commercial efforts first-in-class. And so far with the Sofia launch, we are clearly demonstrating that we’ve turned the corner and that we can sell products that we are developing.

And that concludes the presentation. I’ll stick around for a few minutes if anybody wants to ask a follow-up question.

Question-and-Answer Session

Douglas C. Bryant

Yes sir?

Unidentified Analyst

(Question Inaudible)

Douglas C. Bryant

14 is a major step up here in our strategic plan. 2013, we still see an additional R&D investment, because the Wildcat program and that will drive some of that. And also because of the timing of these assays that we are introducing, we won’t have a full year. So 2014 is kind of the breakout year where we see a significant increase in the operating margin.

Unidentified Analyst

(Question Inaudible)

Douglas C. Bryant

What’s changed in R&D? Well, the biggest change of course is in the number of people and how they are divided. We are about 50% on the molecular side of our personnel on molecular and about 50% on Sofia at this stage.

Moving forward, we’ve completed the STELLA project, the instrument, therefore there are people moving off of those projects there. We had discontinued in HIV program those people have moved into other Simons as well. So I would say, the number of people and the mix is the biggest thing. From a process perspective, there is a significant difference between managing two or three R&D programs during a year and managing north of 20%. And you can imagine that there are certainly more efficient ways when you have multiple projects going to get things done. I’ll give you an example.

Instead of taking historically a two man team and working through the molecular diagnostic development process from start to finish with those two people. Today, we would have a group of people looking at Bioinformatics, for one assay they would move that to the next step and then other team would handle probe and primer design et cetera around. And so we would be more specialized by phase of development and that would be common sense change that you would make simply because we’ve got more assays moving through. Yes, sir.

Unidentified Analyst

(Question Inaudible)

Douglas C. Bryant

Well, as we’ve described, if we are to achieve $250 million in revenue in 2015, about $25 million of that would be molecular. So that’s about 10% molecular. Is that conservative of goal? Perhaps, but I think at this time, where we’re at today and I think it’s better to be reasonable in terms of our projections. We would expect Sofia to be about $100 million of that or about 40% in that 65% of that would be new. And something you’re looking at our core business and some significant percentage of which would have been cannibalized to Sofia being the big bulk of the remainder. Is that helpful? Okay.

Unidentified Analyst

(Question Inaudible)

Douglas C. Bryant

Sure. Let me characterize the market a bit. Historically what was due to be best-in-class in terms of C. dif testing would be to run the GDH on a front end to improve sensitivity followed by an EIA on the back end. And I think that now there are enough data out there that would suggest that molecular methods are much better at diagnosing a C. dif infection.

And of the $5 million or so test they had been done before about $1.5 million of those have now converted to molecular methods. So what we see is something around, 3.5 million, 3.7 million tests divided by 2.2 on average per patient, so somewhere around 1.7 million opportunities to convert a customer to do a molecular method. Many of those customers will not have access to capital, and so there are some competitors who would not be an option.

And we believe that there is an opportunity for non-instrumented method to convert somebody who is doing GDH and EIA over to AmpliVue C. difficile. It’s simple to use, it’s certainly as easy to use as the illumigene product from Meridian, it doesn’t require an instrument. And because of our cost to manufacturers, I hope we’ll have the cost advantage as well in the market. Anything else? Okay, thanks very much.

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