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Executives

Randy Steward - Chief Financial Officer

Doug Bryant - President and CEO

Ruben Argueta - Investor Relations Manager

Analysts

Shaun Rodriguez - Cowen and Company

David Clair - Piper Jaffray

Matthew O’Brien - William Blair

Ross Taylor - CL King

Jeff Frelick - Canaccord

Zarak Khurshid - Wedbush

Ramesh Donthamsetty - JPMorgan

Quidel Corp. (QDEL) Q4 2012 Results Earnings Call February 12, 2013 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Quidel Corporation’s Fourth Quarter and Full Year 2012 Earnings Conference Call. At this time, all participants are in 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.

Randy Steward

Thank you, Operator. Good afternoon, everyone, and thank you for joining today’s call. With me today is our President and Chief Executive Officer, Doug Bryant; and Ruben Argueta, Investor Relations Manager.

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 materially from these stated expectations.

For a discussion of risk factors, please review Quidel’s annual report on Form 10-K, registration statements and subsequent quarterly reports on Form 10-Q as filed with the SEC.

Furthermore, this conference call contains time sensitive information that is accurate only as of the date of the live broadcast today February 12, 2013. 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 fourth quarter and full year ended December 31, 2012, if you have not received our news release or if you would like to be added to the company’s distribution list, please call Ruben at 858-646-8023.

For today’s call, Doug will report on the highlights of the fourth quarter and provide updates on our product development pipeline. I will then briefly discuss our financial results and we’ll open the call for your questions.

I’ll now hand the call over to Doug for his comment.

Doug Bryant

Thank you, Randy. Total revenues for the fourth quarter of 2012 were $53.9 million, a 40% increase over fourth quarter 2011 revenues of $38.4 million, consistent with our early January pre-announcement revenue estimate of $53 million to $54 million.

The increase in revenue was driven primarily by a sudden and early start to this year’s influenza season and our ability to respond to the demand for our flu tests, particularly given very low product inventories at our distribution partners warehouses and with physicians, offices and hospital labs.

While sales of QuickVue Influenza A+B benefited most, the Sofia, D3 Ultra, and Quidel Molecular PCR products were a contributor to the increase in revenues in the quarter as well.

Overall, we had a good quarter from our revenue perspective, but more importantly, our product development teams achieved several key milestones during the period and we are now poised to introduce a number of new products over the next several quarters.

I’d now like to update you on some of our near-term product development and commercial plans.

Let start with Sofia, our automated fluorescent immunoassay analyzer. We said many times before that success with Sofia was critical to our ability to reach $250 million in revenues by 2015 and that our objective was to have a full year impact 10,000 analyzers online and operational at that time.

In the pre-announcement, we mentioned that we had surpassed 3000 instrument placements and we’re ahead of our original internal projection forecast that had assumed more than just one assay in 2012.

At this point, given our placement proficiency to date, I will add that we remain confident that we can given further product development success reach the 10,000 instrument hurdle and that we see little technical risk with respect to introducing assays for Group A Strept, RSV and hCG, and a number of women’s health assays over the next few quarters.

Also an important part of incremental revenue in 2015 the success with our two near-term molecular programs Quidel Molecular, which refers to our PCR-based assays for use on established FDA cleared thermocyclers, and AmpliVue a handheld disposable molecular platform that combines isothermal amplification with traditional lateral flow detection.

To date, we are FDA cleared to market two PCR assays, Quidel Molecular Influenza A+B and Quidel Molecular hMPV. In development or already submitted to the FDA are several other PCR assays, seven of which we hope to introduce in 2013.

At this point our menu is focused on assays for respiratory pathogens and stool-based antigens market segments where we believe we have both technical and commercial expertise.

And as of December, we are now FDA cleared to market our first AmpliVue assays for C. difficile, a product that has received a moderate complexity CLIA designation. In development are three additional AmpliVue assays and a next-generation cartridge platform that we hope to roll out at the end of October.

Finally, the third aspect of our molecular program is Project Wildcat, a durable, low-cost, fully-integrated instrument that we will make available for use in limited resource settings for the purpose of providing through the Northwestern Global Health Foundation affordable access to HIV viral load and TB testing.

As was noted in our fourth quarter press release, we’ll be receiving some help from the Bill and Melinda Gates Foundation for the HIV portion of this endeavor. Program remains very much on track and we hope to provide further detail on our progress during our Analyst Day, which will be held on March 7th.

Overall, I think we had a productive quarter. Our R&D teams completed development programs and ran numerous required studies. Our clinical and regulatory staff conducted clinical trials and prepared and submitted a number of packages to the FDA. Our operations organizations sized up and manufactured the products that were needed.

Our commercial teams continued with efforts to place Sofia analyzers and prepared for the launch of AmpliVue C. difficile. Our parking lots have been full and in general, we once again did what we said we would do. And 2012 now behind us, we look forward in anticipation of what we might accomplish in 2013.

And now, Randy will report the fourth quarter financials and then we’ll take your questions. Randy?

Randy Steward

Thank you, Doug. As mentioned for the fourth quarter of 2012 total revenues were $53.9 million, compared to $38.4 million in the fourth quarter of 2011. Global sales of infectious disease products increased by 62% to $44.2 million in the fourth quarter from $27.3 million in the fourth quarter of 2011.

This was primarily driven due to increased sales of our influenza products totaling $26.3 million in the quarter, included in this total, are our QuickVue, Sofia, DHI and molecular products.

Revenues for the women’s health category declined by 14% in the quarter to $7 million, largely due to the timing of pregnancy orders by our distributors, including our international business where some of the volume is based on tenders and manufacturing priorities. For the full year, our pregnancy revenue was equal to 2011.

Our gastrointestinal product category revenues were $1.5 million in the quarter, compared to $1.7 million in the fourth quarter of 2011.

As Doug mentioned in his formal remarks, we have been awarded a grant from the Bill and Melinda Gates Foundation totalling up to $8.3 million and is dependent on achieving certain milestones through 2015. In the fourth quarter of 2012, we realized approximately $400,000 of grant revenue which is included in total revenues.

Gross margin in the fourth quarter of 2012 was 67%, compared to 60% in the fourth quarter of 2011. The gross margin improvement was favorably impacted by product mix and volume due to the early onset of the respiratory disease season.

Total operating expenses were $22.2 million in the quarter, as compared to $21 million for the fourth quarter of 2011.

Research and development costs in the fourth quarter were $7.3 million, compared to $6.8 million in the fourth quarter of 2011. Included in research and development expenses is a $1.7 million expense reimbursement from Life Technologies related to our previously disclosed assay development collaboration agreement. The increase expense versus last year was driven by additional investment in our R&D projects including molecular assays, Project Wildcat and clinical trial costs.

Sales and marketing expenses in the fourth quarter of 2012 were $8.3 million, compared to $6.8 million in the fourth quarter of 2011. The increase was a result of higher compensation cost associated with increased revenue, Sofia placement, as well as a larger sales organization.

Expenses for G&A were $4.8 million, compared to $5.7 million last year. This decrease is due to reduced professional expenses including legal related costs.

Stock-based compensation expense for the three months ended December 2012 was $1.6 million and amortization of intangibles was $4.1 million.

Our tax rate for the fourth quarter was 36.9% as compared to 30.1% in the fourth quarter of last year. This difference is primarily due to the exclusion of federal research and development tax credit for 2012.

Since research and development tax credit for 2012 was not approve legislatively until January of this year, the benefit of tax credit of $500,000 for accounting purposes cannot be recognized until the quarter in which it was approved, that being in the first quarter of 2013.

Net income for the fourth quarter of 2012 was $8.7 million or $0.26 per diluted share as compared to net income of $1 million or $0.03 per diluted share for the fourth quarter of last year.

On a non-GAAP basis, excluding amortization of intangibles, stock compensation expense and including the benefits of 2012 R&D tax credit, net income for the fourth quarter was $12.5 million or $0.37 per diluted share, compared to net income of $4.9 million or $0.15 per diluted share for the same period in 2011. During the fourth quarter the company paid down $14 million on it senior credit facility.

For the full year ended December 2012, total revenues were $155.7 million, compared to $158.6 million in 2011. The decrease was primarily driven by 1% decline in sales of infectious disease products in 2012 when compared to 2011 as a first half of 2012 witness relatively milder flu and respiratory disease season than that of 2011.

Gross margin for the year was 61%, compared to 60% in 2011, while revenues were down by approximately $2.9 million related to the very weak flu season in the first quarter of 2012, gross margins were relatively constant for full year 2012 as compared to 2011.

This was largely due to two one-time charges in 2011 totalling $1.3 million. The Alere royalty buyout and the disposal of inventory associated with discontinued product, both of which were partially offset by increase depreciation for Sofia leased instruments of approximately $400,000 in 2012.

Operating expenses for the 12 months were $85.6 million versus the prior year amount of $82 million.

Research and development expenses for 2012 were $27.7 million, compared to $26.3 million in 2011. This increase is due to expenses related to continued investment in our Sofia and molecular platforms.

Also included in research and development, there is a $3 million expense reduction as a result of our collaboration agreement with Life Technologies. For 2013, we are currently estimating an incremental $1 million to $2 million reimbursement from Life Technologies on our R&D expense.

Sales and marketing costs for 2012 were $30.3 million versus $25.8 million last year and was due to increased compensation cost, driven by a larger sales force as well as Sofia placement incentives. G&A expense in 2012 was $20.6 million versus $22.8 million in 2011, the result of lower incentive compensation expense and a reduction in professional cost as compared to last year.

Net income for the full year was $5 million or $0.15 per diluted share compared to net income of $7.6 million or $0.23 per diluted share for the same period last year. On a non-GAAP basis, excluding amortization of intangibles, stock-compensation expense and including the effect of 2012 research and development tax credit, net income for the full-year 2012 was $19.1 million or $0.56 per diluted share compared to net income of $19.8 million or $0.59 per diluted share for 2011.

Stock-based compensation for the full year was $6.6 million compared to $7.5 million for 2011. Amortization of intangibles was $15 million as compared to $11.8 million for the same period in 2011.

For the full year, our effective tax rate was 34.4%, compared to 33.5% in 2011. As we recorded the federal research and development tax credit that applies to 2012, the effective tax rate would’ve been approximately 28%.

For the year, we paid down $37 million on our credit facility and the balance as of December 31, 2012 was $5 million, of which we paid off the remaining balance in January of this year. Cash on hand at year-end was $17 million.

And with that, we conclude our formal comments for today. Operator, we are now ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Shaun Rodriguez from Cowen and Company. Please proceed.

Shaun Rodriguez - Cowen and Company

Hi guys. Good afternoon.

Doug Bryant

Hi Shaun.

Shaun Rodriguez - Cowen and Company

Maybe, could you talk about this year’s flu season in the context of some of the general guidance that you shared in the past about, sort of a normalized flu season yielding somewhere between $50 million and $60 million in rapid flu revenues for you guys with roughly one-third, two-third distribution across Q4 and Q1. So I guess the question is both how you’re viewing the magnitude as well as the pacing of this flu season relative to those general guidelines that you’ve shared in the past?

Doug Bryant

Sure. There are really, Shaun, two perspectives to consider when looking at Q4 2012 and Q1 2013 flu dynamics. The first is what’s happening at Quidel that might have an impact. And the second is when the season starts and stops in terms of patient visits and tests and the shape of and area underneath the curve.

I can address each briefly starting with our perspective. Going into the seasons, inventories had both -- the end-user and distribution partner sites were exceptionally low for both QuickVue and Sofia. And of course, there is rarely any inventory in the field for our clinical virology products because of the short shelf life.

So at both of our manufacturing facilities, we have been making as much product as we can and have been shipping immediately, and in fact here in San Diego, we’ve been making product seven days a week with two 10 hour shifts per day since December and are still not able to meet the demand for Sofia reagents.

So our sales pretty much line up with end-user demand, except for Sofia where there is a lag and we’re still playing a bit of catch-up. In terms of the other perspective, in terms of the early start and potential early end of the flu season in Q1 and what that means regarding proportionality, I can make a couple of comments.

First, the demand for QuickVue, our highest volume products, of course, is slowing at a rate that would suggest that we will experience the typical bell-shape curve that we’re used to seeing. And if that turns out to be true, in other words, the slope remains about the same, then the area underneath the curve will be larger than we had projected.

And our sales of our flu products will be at least as big as our original, internal projections for Q1. Assuming that our current forecast is correct and that our flu season spans across Q1 and Q4 only then slightly more than 40% of this season will have occurred in Q4 2012 and slightly less than 60% will have occurred in Q1 2013.

So a little bit different than we’ve modeled before, Shaun. So if we were to provide a range, I would say that for Q1 2013 that you would see somewhere between 55% and something less than 60% of the total flu season if that makes sense.

Shaun Rodriguez - Cowen and Company

Yeah. No, it does. That’s really helpful. I appreciate that. And then maybe a couple parter here on Becton Dickinson’s updates. So I guess first of all, could you just share your general thoughts on BD’s update that they have placed about 4,000 of their Veritor systems and so I guess, number one are you surprised by that neither direction.

Secondly, given that it seems that Sofia has stacked up pretty favorably to that system and in published comparisons where do you think you’re losing placements to them and why? And then maybe lastly, assuming a good proportion of those placements are going to lapse that didn’t do a detailed head-to-head for whatever reason, are there specific areas of the market where you think you might be at a material reach disadvantage against them.

Doug Bryant

That’s a lot there, Shaun. But I’ll give it a shot.

Shaun Rodriguez - Cowen and Company

I’m sorry about that.

Doug Bryant

Okay. Let me make a few comments on Sofia instrument placement dynamics that may be helpful because I think you’re arriving at a conclusion that might be different if you had some of these facts. First our sales force is targeted at specific customers and they have been. And as a result, a higher percentage of our Sofia placements have been competitive takeaways and have been for the most part in medium-to-larger volume settings.

The number of times that we’ve competed directly with BD’s reflectance meter has actually been few. I would guess because of the type customer that we’re targeting. We shipped Sofia instruments directly to end users whether that’s in a physician office or a hospital lab. Therefore, the number of instruments that we’ve stated that we have shipped is in direct proportion to the number of customers who are actually using our Sofia influenza product.

And 90% of those are in the United States. And I can’t comment on the number of competitive reflectance meters, in other words, the BD meters in use because obviously I didn’t ship them. If we assume for a second though that our statement that we’ve shipped more than 3,000 means that we’ve shipped only 3,000 and that all instruments shipped from both companies are at end-user locations.

Then 7,000 divided by what we use per site, which is 1.4 gives you about 5000 customers. There are about 30,000 rapid flu customers in the U.S. so together the two companies are in the best case, about 1/6 of the market that has been penetrated. And by the way, there are a lot more Strep and hCG customers than there are flu customers.

So there is even more than that to go after. So in a nutshell, I would say we’re not losing to BD in head to head. In fact, we don’t see BD much. So I can’t comment on the number. I assume it’s true. I assume they’ve shipped them somewhere but perhaps we don’t see them because they are not in the accounts that we’re targeting.

Shaun Rodriguez - Cowen and Company

Yeah. Makes sense. Thanks guys. Very helpful.

Doug Bryant

Sure. Thank you.

Operator

Your next question comes from the line of David Clair from Piper Jaffray. Please proceed.

David Clair - Piper Jaffray

Hi. Good afternoon, everybody. It’s Dave Clair in for Bill Quirk.

Doug Bryant

Hi Dave.

Randy Steward

Hi Dave.

David Clair - Piper Jaffray

How are you guys?

Doug Bryant

Fine. Thank you.

David Clair - Piper Jaffray

Good. So first question from me, I was just hoping to get some more details on the AmpliVue C. diff launch. What technology are you displacing in accounts and are you seeing repeat orders and what as the ASP?

Doug Bryant

Okay. So taking that here. I’ll just give you a brief overview, Dave, first, we’re FDA cleared to market AmpliVue C. difficile since December. Our molecular specialist and hospital system directors were trained early January and our general account managers were trained last week.

So far we’ve taken orders. We’ve shipped product to a number of early adopters. We have many side-by-side evaluations underway comparing ourselves with the usual suspects out there. And I would say we’re encouraged by the initial reception so far.

Repeat orders, I would be surprised if we have one. We do have some initial shipments to customers who have issued POs and have converted. But I don’t know factually that I have a repeat order at this stage because we’re just starting. ASPs are so far north of $20.

David Clair - Piper Jaffray

Okay. Thanks for that.

Doug Bryant

I will add if you don’t mind that we have creased based on our initial feedback, we have increased our manufacturing forecast to make sure that we can handle the demand in the vent, the launch is more successful than we had planned. And we’re still on track to launch and even lower-cost next-generation cartridge at the end of October. So that’s the latest on AmpliVue.

David Clair - Piper Jaffray

Okay. And then, do you think you’re going to have enough disease prevalence this time round, to submit bobcat.

Doug Bryant

We restarted clinical trials this flu season. I think the disease prevalence is fine but so far it’s still not satisfied with sensitivity of Flu B. We may look at a few tweaks to see if we can improve the performance. For example, we could look at swapping of Flu B 44 but frankly any significant further work that we might do, would have a fairly, hefty opportunity cost, given the much higher value the other things that are R&D group is working on. I’ll make a decision regarding our ex-U.S. launch very soon and I expect to provide an update at our Analyst Day in March.

David Clair - Piper Jaffray

Okay. Thanks. Congrats on the quarter.

Doug Bryant

Thank you.

Operator

Your next question comes from the line of Brian Weinstein from William Blair. Please proceed.

Matthew O’Brien - William Blair

Hi, guys. This is actually, Matt, in for Brian. How you doing?

Doug Bryant

Hey, Matt.

Randy Steward

Hi, Matt.

Matthew O’Brien - William Blair

So quick question, a follow-up to Shaun’s, regarding account wins. You said before you were seeing about 10% new accounts, 40% cancellation, so maybe about 40% share wins. Are you still in the ballpark or has this mix shifted?

Doug Bryant

No. Let me be clear. As of last week, 69% of our physician office, Sofia accounts are competitive conversion and 78% of our hospital accounts are competitive conversions. So obviously, our cannibalization rate is lower than we had initially thought.

Matthew O’Brien - William Blair

Okay. Great. Thanks, Doug. And then just looking out sort of the next set of assays here on Sofia. I think one was at the FDA as of mid-January and the other two expected to be submitted in first quarter. Do you have any update regarding the assays there?

Doug Bryant

Yeah. The first essay actually went into last year, first week I think of December. And we expect to submit the second one eminently and we are still on track to have the third into the FDA before the end of the quarter.

Matthew O’Brien - William Blair

Okay. Thanks, Doug.

Doug Bryant

So pretty much on schedule.

Operator

Your next question comes from the line of Steven Crowley from Craig-Hallum Capital Group. Please proceed.

Unidentified Analyst

Good afternoon, gentlemen. This is Steve for Steve, congratulating you on a good quarter. Now, you mentioned that you’re having trouble, maybe a high-class problem keeping up with Sofia consumable demand. I trust that’s a function of both the number of placements and the activity in the flu season.

I’m wondering if you had any quirks in terms of your ability to produce the performance of a test that’s required anything or whether it’s been relatively smooth, and whether or not keeping up with demand on the consumables is actually inhibited the number of placements you could have made in recent periods.

Doug Bryant

So we were caught off guard, Steve, by the demand during the season and our yields have not been as highest we would’ve expected. And so that actually has had an impact on the number of shipments, the timing of those Sofia instrument shipments. We are still taking orders at approximately the same rate as we did before we hit this flu season. But we have slowed down the installs, because we want to make sure that any install we do, of course they can get a reagent product.

So we expect to come out of that in the next couple of weeks under the to be in good shape, we will continued to manufacture throughout the remainder of this year to make sure that as we head into the next season, maybe again in December 2013 that we have plenty product company.

Unidentified Analyst

And in terms of being able to get the systems that you ship into workflow and cater to the demand for systems that were shipped, you feel like you’ve done a generally good job with those folks who committed to the platform early?

Doug Bryant

We’ve invested a lot in training of customers, and I will say proudly actually that it’s gone quite well. And our calls and customer service related to instrument issues are very few.

Unidentified Analyst

And the whole issue of getting these systems that have a little bit different workflow obviously than visually red test. Firmly into those work flows was -- I trust -- this flu season was really helpful in doing that. But I’m always concerned about unintended consequences where flu was really so busy where they relegated doctors to using more visually red Test even though they want to use more of Sofia were or were a lot of soapy trust into pretty high velocity use.

Doug Bryant

The Sophia that went into use, uncomfortable on saying fit nicely into the workflow and there were no issues there. We obviously hung on to some quick few customers that would’ve preferred to have shifted over. And that is you know honestly a bit of a disappointment that we couldn’t satisfy the entire demand.

But having said that been caught off guard by more demand than we anticipated, is a problem that this is okay.

Unidentified Analyst

Yeah. Relatively high-class for sure. Now, in terms of the gross profit margin, influences in the quarter with the reimbursement of some development on Wildcat by the Gates Foundation, it wasn’t that much but did that come on as pretty much revenue without much cost of goods? And I guess another question I got. I will let you answer that and then I’ll give you the follow-up.

Doug Bryant

Yeah. Straight through, it’s revenue with no cost and it was $400,000.

Unidentified Analyst

A double question here. How would you expect that to be a quarterly run rate on the pace of development? How should we think about that, and then your comments about Sofia and some of the inefficiencies there would lead me to believe that there might have been some drag in the period from Sofia, when does that become more normalized?

Doug Bryant

Let me answer the first question. In terms of how to plan for the Gates funding, the easiest way would be to assume that that would be straight-line between now and 2016. Let’s say beginning of 2016.

Unidentified Analyst

Okay.

Doug Bryant

And in terms of the drag by Sofia, I’m not really sure I understand what you mean.

Randy Steward

We did comment, Steve, in the quarter there was about $4,000 of Sofia depreciation.

Unidentified Analyst

Okay. But in terms of the growth…

Randy Steward

In otherwise, the margins are very similar between QuickVue and Sophia.

Unidentified Analyst

Okay. Very, very good. And just one more question and I will hop back in the queue. In terms of Wildcat, obviously it appears that you’re continuing to make progress at a least respectable pace. Some of the technical hurdles there and accomplishments I’m sure you’ll detail at the March Analyst Day, but can you give us a little bit of a flavor for how things are going with that program and whether or not it’s making nice forward progress?

Doug Bryant

Well, first thing for the question. I’d like to stay at a high level for today’s call and just say Wildcat is progressing nicely, and we remain confident that we can hit our cost targets for both instrument and cartridge.

We are committed first and foremost to doing what we said that we would do for the Northwestern Global Health Foundation and the folks at the Bill and Melinda Gates Foundation. And doing so, we still believe that, Steve, the customers in the development world will also benefit from a low-cost fully integrated platform and to that end we continued to expand our menu for PCR Assays, mainly for infectious diseases. And as you guessed, we will share more detail on the progress against timelines at the Analyst Day in March.

Unidentified Analyst

Great. Thanks for taking my questions.

Doug Bryant

You are welcome.

Randy Steward

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Ross Taylor from CL King. Please proceed.

Ross Taylor - CL King

Hi. How about few short questions? First, I just wanted a little bit more color on the new cartridge that you talked about for ample view in October. Is there anything to that besides the lower cost feature that you mentioned in response to an earlier question?

Doug Bryant

It’s more ergonomically friendly, meaning the average female lab technician finds it easier to squeeze the trigger. And as you -- Ross, there’s a pretty significant cost benefit.

Ross Taylor - CL King

And just three modeling related questions. The milestone payments from Bill and Melinda Gates Foundation, is there going to be some incremental R&D spend associated with that project or is this really just kind of offset or pay for something you already planning to do and we probably incorporated into our models already? How should we think about that? Is it net to zero or is it kind of a benefit?

Doug Bryant

You more than likely have modeled the cost of this already. What this does for us obviously is to make sure that we are able to spend at the rate that keeps us on track for their timelines.

Ross Taylor - CL King

Okay. G&A spend in the quarter was lower than I would’ve expected. I mean, how much, if you can give any color as to how much G&A might increase during the course of calendar 2013?

Randy Steward

G&A was favorably impacted because of a -- kind of a one-time event, so as we go into 2013 I would kind of model out in the probably $5 million, $5.5 million range of quarter.

Doug Bryant

Yeah. Specifically, we were reversing a accrual on our fourth quarter where debt was tagged for legal expense but does not know necessary.

Ross Taylor - CL King

Okay. All right that helped. And final question -- the R&D tax credit, can you give us some rough guidance as to what your tax rate might be in 2013?

Randy Steward

Yeah. Sometimes, it is allotted to accounting treatment and so that benefit of $500,000 will impact our effective tax rate in Q1, so it’s kind of a one-time excluding that we’re estimating our effective tax rate to be in the low 30%, 31%, 32%.

Ross Taylor - CL King

Okay. All right. That’s helpful. Thank you.

Doug Bryant

You bet.

Operator

Your next question comes from the line of Jeff Frelick from Canaccord. Please proceed.

Jeff Frelick - Canaccord

Good afternoon, folks.

Doug Bryant

Hi, Joe.

Jeff Frelick - Canaccord

Doug, can you give us just some color on some of the commonalities you’re seeing with Sofia customers thus far?

Doug Bryant

Commonality in terms of what sort of things?

Jeff Frelick - Canaccord

Like on physician office side, size of practice, appetite for taking on additional test beyond flu, stuff like that.

Doug Bryant

Sure. Sure. I would say the larger number of customer agreements that we have in place and I believe I have said several times before them, most of our agreements are three year agreements. They require that 300 to 500 tests be purchased per year, although experience tells me that the severity of the season is more important than what the customer commitment actually is.

Beyond that, we have various win diagrams that describe the overlap between our flu customer base and stroked RSV and hCG customers. And it’s not surprising that the number of stroke customers is far larger than the number of flu customer. The number of hCG customers for us anyway is approximately the same size as the flu customer base. So we believe based on no -- really commentary from customer, that there is some level of pent-up demand for an objectively read strep and RSV assay in particular. And we for sure believe that an objectively read pregnancy test will be received quite well.

Jeff Frelick - Canaccord

Great. Thanks. And then maybe question for Randy given the menu expansion on tap this year with Sofia, should be assume the gross margins start to improve in 2013?

Randy Steward

Yeah. I think we see estimated 1% to 2% improvement. As we get into the back half of the year with those additional Sofia assays.

Jeff Frelick - Canaccord

Okay. And a last question, could you just comment, Randy, maybe on the strep activity this respiratory season and where does inventories stand exiting in the quarter?

Randy Steward

Relating to inventories, you mean at distribution.

Jeff Frelick - Canaccord

Yeah.

Randy Steward

Certainly, they’re extremely low. Don’t have the exact numbers but pretty much every thing that we’ve shipped in, has been, shipped through. So inventories like I said are extremely low relating to strep pretty much on expectations as we enter into Q1. We did ship priority in manufacturing but certainly didn’t have a significant impact on the strep business.

Jeff Frelick - Canaccord

Great. Thanks, guys.

Operator

And your next question comes from the line of Zarak Khurshid from Wedbush. Please proceed.

Doug Bryant

Hey, Zarak.

Zarak Khurshid - Wedbush

Hey, guys. Good afternoon. Thanks for taking the question. Nice year, nice finish to the year there. I think, did you see flu was 27.4 million in the quarter and can you just clarify.

Randy Steward

26.3.

Zarak Khurshid - Wedbush

26.3, okay. And can you just clarify what exactly was in that, how much of that was rapid versus the DHI related flu business?

Randy Steward

Yeah. We really -- in fact, I don’t have a book in front of me. So -- and then I would say that based on the number of customers we have on the molecular side, at that stage, it’s quite small. I will say though that the number of customers in total who do flu testing, we now know is quiet small and they tend to be larger volume sides. And so we did -- we have so far -- had an increase in sales as we’ve move through the end of the year into the first quarter on the molecular side but at that stage it was still so pretty low.

Zarak Khurshid - Wedbush

Okay. We would you say that the DHI business is kind of going to mirror, the kind of the big year couple years back with swine flu, I think DHI had a pretty decent season?

Randy Steward

Well, I think, Zarak, we did some math and it was about 15% increase over the quarter in 2011, Q4 2011. That was about Q4, 2012 was about 15% growth, right. Maybe that’s helpful?

Zarak Khurshid - Wedbush

Yeah. Got it. Yeah, that’s very helpful. And then on the Sofia yields, just curious why were the yields not as high. And is this still, sort of, reel to reel manufacturing process similar to the older rapid tests? I guess, is there any fundamental difference or reason why you would not be able to improve those yields going forward?

Doug Bryant

We identified a number of things that we needed to do in order to insure that we had high quality product. And it’s very important at launch and moving forward that the product does what we, say, it’s going to do in the package insert.

So we have been performing a higher rate of QC on the reals that we normally would. And we’ve been selecting product that absolutely meets those specs and it’s gotten better. And I would assume that over the next several weeks we’ll have an operation where we fully up the speed. Unfortunately, we didn’t start that in December, and that’s our fault. We didn’t anticipate that demand is going to be that high.

So that’s the constraining factor, and obviously another factor is that, this is a cassette-based product, where as the old product was a dipstick. So we’re now are pick-n-place equipment which is in demand. So we only have so much capacity and that’s another constrain so those are a couple of factors.

Zarak Khurshid - Wedbush

Got it. Very helpful. And then lastly, sorry to beat a dead horse named Sofia here, but are the 69% or so competitive takeaways. Are those conversions of customers that are using in objective reader? Are they generally people that are using one of the other rapid tests out there?

Doug Bryant

Generally, one of the other rapid tests and so what I said in terms of BD earlier works both ways. We’re also not taking business from BD. When I say, we don’t see them, we don’t really complete a lot with them in the accounts that we have primarily closed. I’m not saying that we never see them, but there’s not a lot of crossover so far. So the short answer your question is the takeaways are coming from the typical legacy visually read competitors.

Zarak Khurshid - Wedbush

Great. Thank you.

Operator

Your next question comes from the line of Tycho Peterson from J.P. Morgan. Please proceed.

Ramesh Donthamsetty - J.P. Morgan

Hi, guys. Ramesh on for Tycho. Sorry, I jumped on a little bit late. Just in terms of bobcat expectations for 2013, what should we be looking for in timelines?

Randy Steward

We may have some sales of bobcat in 2013 ex-U.S. but as I said earlier we’re not comfortable with the data we’re seeing right now on the clinical trial. And we maybe looking at a few tweaks to see if we can improve the performance but we don’t want to spend a lot of time on it in 2013 because frankly we’ve got a lot going on and the other step that we have going on has much higher value to us.

So we may continue to make tweaks and then move to -- and then do what’s necessary from a regulatory perspective ex-U.S. but as I’ll confirm here in early March at our Analyst Day, I don’t expect that we’re going to do much in the U.S. in the near-term with bobcat.

Ramesh Donthamsetty - J.P. Morgan

Okay. and then just us a follow-up on I guess the 3,000 placements, today I guess can you help us segment them a little bit better. I think you said you have done well in medium to high throughput centers. Is there any sort of segmentation that we can think about where you have the largest strength to that?

Doug Bryant

I think what might be helpful is to just do an overview where the placements are. 80% of the placements are in U.S. physician offices. 10% of our placements are in U.S. hospitals, and 10% are ex-U.S.

Ramesh Donthamsetty - J.P. Morgan

Okay. That’s helpful guys. Thank you.

Operator

That is the time we have for today, please proceed with your presentation or any closing remarks.

Doug Bryant

This concludes the call for today. Thanks for your time everybody and for your continued support. Take care.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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