Quidel's CEO Presents at Bank of America Merrill Lynch Health Care Conference (Transcript)

May.15.13 | About: Quidel Corporation (QDEL)

Quidel Corporation (NASDAQ:QDEL)

Bank of America Merrill Lynch Health Care Conference Call

May 15, 2013 12:20 pm ET

Executives

Douglas C. Bryant – President and Chief Executive Officer

Analysts

Derik De Bruin – Bank of America Merrill Lynch

Derik De Bruin – Bank of America Merrill Lynch

[Starts Abruptly]

To the 2013 Bank of America Merrill Lynch Health Care Conference. I am Derik De Bruin, the BofA’s Life Sciences Tools and Diagnostics Analysts. It’s my pleasure to introduce the next company which is Quidel Corporation, and presenting today will be Doug Bryant, President and CEO. Thanks.

Douglas C. Bryant

Thank you, Derik. We will be making a number of forward-looking statements in this presentation. I’ll speak for about 10 minutes and then take your questions. Here’s a brief history of our company, starting in 2009, when I took over – I became the CEO on March 1, 2009. Prior to my arrival, the previous FDA cleared product was our RSV visually red assay which was approved in 2006.

Since then we’ve actually had nine FDA clearances and I’ll show later that in 2013, we have an expectation of an even greater number this year than any other previous year so far. And 2009 is the year, actually October we entered into a collaborative agreement with a company called BioHelix that had a proprietary isothermal enzyme technology that would become the amplification technology that we used in our product called AmpliVue.

In 2010, actually I believe, February, we closed the acquisition of diagnostic hybrids. We were interested in the direct-to-model of diagnostic hybrids, as a company who sold and continue to sell our products directly into the clinical virology segment. And it was about 700 customers – 1000 here in the United States, who do that type of testing. They had significant share. But more importantly, DHI also had a molecular program and had a number of PCR based assays that have already been developed and we believed that would accelerate our product development and the molecular diagnostic field.

In 2010, we also entered into a collaborative agreement with Northwestern and the Northwestern Global Health Foundation, an organization that had been formerly funded by the Bill & Melinda Gates Foundation to develop a fully integrated molecular diagnostic platform for the purpose of doing HIV viral load testing in Africa inexpensively.

Over a period of time, I believe around four years or so, what resulted from that initial investment was the development of a proprietary extraction technology, which is now called phase gate and that essentially the element that distinguishes our efforts to develop an integrated platform from others and I can talk during the Q&A more about that if you like.

We also embarked in that year in the development of a program called Sofia, that analyzer, which would be our next generation platform that would replace the visually red lateral-flow test. We actually received approval from the FDA. That clearance was I believe in December with the first assay, which was for flu A and B.

Also during 2011, we received the first two FDA clearances for our initial PCR assays; the first was flu A+B and also, we were cleared to market a human metapneumovirus product. We got the clear waiver for Sofia and flu in April of 2012 and that’s the time that we actually ramped up our commercial organization and began training.

We were actually fully in market with Sofia beginning in June. By the end of the year, we had placed north of 3000 analyzers in customer’s hands. I specify, in customer’s hands, because when I talk about total number of instruments, I am not talking about anywhere or somewhere or replacement, I am taking about our initial customer shipment.

And in 2012, notably we received FDA clearance for our first AmpliVue product, C. difficile. We’ve been selling in the market in first quarter and now in second quarter that’s going extremely well for us and I can talk a bit more about that and a little bit as well. Earlier this year we received two additional clearances, one for C. difficile on our PCR platform and also in RSV, Human Metapneumovirus combination assay. And then last Monday we announced that we had acquired BioHelix, the company that we had collaborated with since 2009.

Here we have an experienced team, I will tell you that many of these folks have north of 25 and close to 3 years in the diagnostics industry. Another characteristic is that we’re all older guys.

Our strategic intend has not changed since 2009. We love flu, but we would prefer longer-term to build a broader based diagnostic company that delivers revenue and margin more consistently, regardless of how big the flu season is. We have been and we will continue to develop technologies and products that give us access to market segments that are significantly larger than the flu market and that’s sort of what our mandate has been, that’s what our underlying strategy has been.

And then fundamentally, we believe that the products that we deliver must have one or more of these attributes you see in the chart. So you either have to have improved accuracy, lower cost, faster time to results or more efficient workflow or easier data handling. And I would say to be competitive particularly if you are not the first to market you have to have more than one and you can see based on the way I rated any way that we certainly are satisfying that requirement for Sofia, AmpliVue and Quidel Molecular.

As an example, we’ve demonstrated with the Sofia assays that these products perform much better than the legacy products that are out there. They are not however at lower cost and in fact we believe that we can restate the market and be able to take advantage of a bit higher price in the market. They’re also not faster in terms of time to result. Our initial flu assay is a 10 minute assay. Some of the Japanese assays are seven minutes. Sofia takes 16. So if you ask me the number one thing that physicians don’t like about Sofia is that five minute difference, believe it or not.

There is a big difference between in the physicians mind between a 10 minute assay and a 15 minute assay. And I guess that makes sense, because when you are in there you are sitting on that funny paper in the exam room, an extra five minutes is probably painful. I mentioned the FDA clearances, so far nine, but you can see by the chart on my right that we actually anticipate far greater than that this year. We have a number of products that are at the FDA now or also in the middle of the clinical trial now.

We have several other clinical trials scheduled for the back half of 2013 and we fully expect to get 10 or more assays amended to the FDA before year-end. And obviously the number of CE marks will be fewer because some of those have already been submitted, and so you cannot obviously pretty well guess based on press releases which assays are already at the FDA.

So things to watch in 2013; one, we should have a rapid acceleration of Sofia products into the market; we should be able to demonstrate a revenue ramp from those new products; and we expect fully to be in market with four assays in Q3; we will expand in the women’s health assays; and, this one is going to be a stretch, but it will be great if we were able to launch our first quantitative Sofia assay before the end of the year.

In terms of molecular development of the AmpliVue menu, we’ve obviously launched C. difficile. It will be in clinical trials shortly with Group B Strep. We hope to be in clinical trials with Pertussis in Q4. We believe that BioHelix will accelerate that assay development and now that we’ve acquired the company, I can tell you that we’ve gone from four assays in development to nine, and so effectively doubling the number of things that we have in the pipeline.

We have a cost reduction project underway which we’re highly confident that we will accomplish by October. That will reduce our cost to good sold on the AmpliVue product such that we will be around 80% gross margin, which would make this the highest margin product that we sell and it’s not seasonal.

And then development of the Quidel Molecular menu, we’ve said all along that we have two ideas there; one is to develop assays that customers want, so that they can run these assays on their existing thermal cycler platforms. And so we’ve embarked on that strategy, but also there is a secondary purpose and that is in the development of these assays, we fully intend to put them over to the Savannah cartridge.

So that in 2015, when we launch Savannah, we will have a menu of at least 20 targets and that certainly is now not only imminently achievable with our PCR development program, but by examining which assay is actually a more suitable and in isothermal format. We think that the BioHelix HDA technology will enable us to actually go faster and to develop products more quickly.

Our longer term financial objectives are not different than they have been over the last couple of years, but the chart changes a little bit, but the five things are still the same. We hope to achieve incremental sales in 2015 and that was over the 2011 number of over $100. We expect that the overall business will go from about 60% gross margin to something north of 65%, driven by these new products, which are all accretive from a P&L perspective.

And we’ve demonstrated before that we’ve got pretty good leverage across P&L that with volume, we can exceed 30% operating margin and we think that the volume that we will have in 2015 certainly helps us get to an operating margin north of 30, as always we will maximize the cash flow from the core business and just as we recently demonstrated we will peruse outside opportunities that compliment our own organic growth, and we will do that in the manner that is absolutely accretive in the short-term.

So this is the actual, just end with this slide. We internally call 2013 a year of truth. We’ve been working for 4 years to get things done and I think the team has done an excellent job of executing, but this is the year where there are a lot of things that need to get down and frankly that requires a lot of process, a lot of focus and we can’t make too many mistakes along the way.

So for us internally, perhaps you can understand that this really is an important year for us and there are number of things that we need to get done. We will successfully launch three additional assays and Sofia, those are Group A Strep, RSV and hCG. As I mentioned before, we have a number of submissions that we need to make this year to the FDA and then actually other regulatory agencies outside the United States as well, and I will be happy to talk about that too if you want.

We don’t spend a lot of time talking about our wireless program, but I will just tell you that we have the ability to send data from Sofia into our cloud and to have various public health agencies pull those data’s down, these are de-identified data that have gender, age, test result, et cetera. We’ve demonstrated that in a couple of different settings here in the United States and ex-U.S. and I can’t tell you that I understand what the commercial opportunity there is, but I can certainly think to make the product viable and interesting.

We’re going to continue to build commercial infrastructure to support the new product launches. We have an ambitious goal this year, that’s to exit with a thousand AmpliVue customers. I think that it was greatly enhanced now, and we have that goal to C. diff and I would say, with C. difficile and HSV 1 and 2, and a couple others we more than likely will be successful in chasing that goal.

We on an operations perspective, we’ve got high speed manufacturing project called Pergo that will help us avoid additional capital equipment as we ramp up between now and 2015. As I mentioned we are going to complete the next generation AmpliVue by October, and we are at the moment building inventory of all the products for Sofia in anticipation of higher volumes as we go through the remainder of 2013.

I will stop there and see the questions you might have.

Question-and-Answer Session

Derik De Bruin – Bank of America Merrill Lynch

Great I think just sort of a starting question, let’s just talk about the build out of commercial infrastructure and the manufacturing construction, I mean there was a little bit of a delay and I guess in Q1, you had some trouble meeting some demands for flu cartridges. I guess as you ramp things up and start doing this, this is like how are you sort of making sure that you don’t run into same type of problem.

Douglas C. Bryant

We had specific things that required a process improvement. Those have been implemented and we are manufacturing, the Sofia flu cartridge at significantly higher volumes than we were as we exited 2012. So we should be in good shape. We’ve gone through this process before where we had to figure how to ramp up, we did in 2009. You all will recall it, we had a pandemic and we ended up manufacturing significantly more tests than we did before.

So, great engineering group and our operations team, there we recently have all that automation today. Most of the equipment that we have is all developed internally. And so, I’m pretty confident that we will have enough inventory as we enter this season. Okay, I would be shocked if we have a back order.

Derik De Bruin – Bank of America Merrill Lynch

Could you talk a little bit more about – see, I mean you obviously – you’re not the – it’s not the only sort of platform out there. It is the BD Veritor that’s out there. Could you talk about how it sort of compares on a performance basis and product and…?

Douglas C. Bryant

Well, I don’t spend a lot of time talking negatively by comparative products. I will tell you that the products itself the BD Veritor product is a reasonable product. It certainly performs better than the visually red lateral core products. They have from what I can tell, pretty good looking data. And I think they’ve done reasonably well at securing their own B direct flue business, that’s for sure.

And we don’t necessarily compete so much directly with them. We did extremely well in the physician office segment, as we exited 2013, that’s not necessarily that company’s strength. On the other hand, the hospital segment is not necessarily our strength and so the number of customers that we got and the season was only a few hundred relative to well north of 3000.

But I think they are viable competitor, I definitely think both they and us are demonstrating the customers preferred and improved accuracy and they like the objectivity.

Derik De Bruin – Bank of America Merrill Lynch

So you talked about doing some quantitative determinations you think Sofia – could you talk a little bit more about how do you quantify that on that particular product? How do you…Yeah, basically on using that?

Douglas C. Bryant

Well, it will be very similar to the way you would quantitate any immune assay, where you look at your signal and you compare that with a standard curve.

Derik De Bruin – Bank of America Merrill Lynch

Okay.

Douglas C. Bryant

So there are some new answers with this technology that make it different, but effectively that’s about the same thing. So far we have demonstrated that we can develop TSH. We have a prototype, we expect to do a quantitative hCG and that’s actually I think going to give us a lot of organizational learning. We’ve had a couple of recent breakthroughs with our Vitamin D program. And so I would say those three are probably the most likely quantitative assays that we would see first.

Derik De Bruin – Bank of America Merrill Lynch

Okay.

Douglas C. Bryant

…into the market place. I haven’t spoken a whole lot about women’s health, but there is some obvious things that we should be doing there.

Derik De Bruin – Bank of America Merrill Lynch

You mentioned BioHelix a couple of times, could you just go about a bit more details about that acquisition and what it brings to the company?

Douglas C. Bryant

Sure, well we disclosed that we made a payment of $10 million in cash upfront and then there are a series of burnouts, there are R&D burnouts that earn up to about $3 million in connection with 510(k) clearances of products or rather submissions. And within the 24 months period and for us there is commercial earn out that is about $10 million based on product sales over a 5 year period of time. So the max would be around $24 million – it will be $23 million. What else can I tell you, Dr. Kong, will stay on board with us. He is the President of BioHelix. He reports directly to me.

There are principally three things that caused us to want to do this rather than continuing the collaboration. I mentioned already that we doubled the pipeline and so I would say the reason we did that is because we’ve launched CDIP. Our guys are selling in the market today and we are closing customers and we are shipping products and based on the receptivity to the format, we’ve decided to buy the company now.

Previously, I would say people were asking, well how is the market going to respond, it’s something that’s absolutely unique? There is nothing out there like it. So how do you know that customers are going to like it, and I would tell people, I don’t. I used to say, we are either going to sell a lot of this or nothing. It’s just one of those things and the good news is, it’s nothing. And so customers like the format. They are calling out the [squeezy] thing and we are gaining customers everyday.

So based on that, spending $10 million upfront and getting all the other things are going to get along with this acquisition is – it looks to me cautiously acquire, always thinks the acquisition looks good, but we get control of our HDA, the underlying technology and then we believe that the HDA has potentially as I mentioned before, to be integrated into the Savannah program and we actually believe that it will speed up the Savannah program and it will enable us to get our cost of goods sold down on the cartridge.

We’ve previously announced that we were aiming for $2 to $3 a cartridge which would be quite low and that’s certainly possible with HDA given that the cartridge would be simpler and we’re not going to pay a royalty.

Derik De Bruin – Bank of America Merrill Lynch

Right. I think, just for some people that are not really advanced in there, we thought I guess it’s essentially, it’s a hand-held device that [disposable] device with a isothermal amplification and obviously we’re taking about Savannah doing isothermal if you wanted to take that into Africa, want to do that, it’s a better sort of match word.

Douglas C. Bryant

The reason I like HDA is because I think it will get quicker to the U.S. market.

Derik De Bruin – Bank of America Merrill Lynch

Got you, okay. So could you just talk a little bit – you’ve launched the C. diff assay, it is something that’s different, who you are going up against with your new accounts or winning?

Douglas C. Bryant

What we – without diverging our absolute commercial strategy I would say that there is a demand from folks who don’t do molecular testing today to move to molecular method. There are a number of reasons they haven’t thus far, but what we are seeing is a pretty good acceleration of customers who formally did EIA and GDH.

Derik De Bruin – Bank of America Merrill Lynch

As a methodology?

Douglas C. Bryant

The reason they are doing GDH is because they are worried about sensitivity, right. So they become an automatic target, so anybody doing EIA and GDH has already said, I am interested in sensitivity, so molecular whether you do it with our products or somebody else’s is far better than that technology, that’s where we’re going.

Derik De Bruin – Bank of America Merrill Lynch

I think you sense it as a chance of bridge between the normal (inaudible) world?

Douglas C. Bryant

Yes.

Derik De Bruin – Bank of America Merrill Lynch

Yeah, okay.

Douglas C. Bryant

Our test is obviously molecular. We are amplifying DNA, but it’s unique because we combine that with our own lateral flu detection.

Derik De Bruin – Bank of America Merrill Lynch

Right. So you have a relationship with Life Technologies or the Quad Video Digital PCR product. You can talk a little bit about that relationship and you sort of – you’ll have that represent your plans?

Douglas C. Bryant

Well, have exclusive rights to the platform for infectious disease testing and we think the product is good. We have been developing PCR assays to fit on that platform and of course they can have access to those products as well. I think the relationship has gone pretty good. We do need menu though – what companies like – why if recognizes that when you develop a new instrument, you need menu, because it’s hard to display other products if you don’t have something that consolidates. So it’s a little early to tell how well we will do, but I would say, once we get to the eight to 10 assay range where you can go onto a customer and say, hey, like you run all those on this platform, I think that life will be fairly well.

Derik De Bruin – Bank of America Merrill Lynch

Could you actually we will open up the floor to any question? Great. So could you talk a little bit more about Savannah and just that technology pipeline and what that product offers?

Douglas C. Bryant

We believe that one of the impairments to more rapid decentralization with molecular has been the cost of the instrument and the cost of the cartridge. It’s very difficult to say that one person’s PCR is going to be dramatically better than the other. So I think the timely results and cost both on the instrument and the cartridge is going to be key elements. So our target is to build an instrument for under $10,000 and to deliver reagents into the market between I would say $2 to $3. And if we can incorporate isothermal amplification, we will be able for those products or (inaudible), we can do products that are dramatically faster.

I think that the 200 plus bed hospitals that previously hasn’t solved their molecule gap and in the future whether it’s after somebody else, we will be able to acquire an instrument that’s not so expensive to maintain and to run.

Derik De Bruin – Bank of America Merrill Lynch

Great. You didn’t really talk a lot about your women’s health business, but you do have a very robust pregnancy test business, it grew I think was 7% in the first quarter. Just talk about how you see that business developing and whether products are adding in women’s health?

Douglas C. Bryant

Yeah I think we should be more specific because you know, lots of people say women health what does that mean? We want to develop rapid diagnostic test that fits the OB/GYN segment, so the OB/GYN’s office, there are north of 2000 OB/GYN offices that are moderately complexion and of course there are many others that are clear wet.

Products that can be run in the office rather than sending a patient to the emergency room or to the labor and delivery clinic and I think we will be valuable, the research that we have done. So if there is pent-up demands for certain types of products to be rung on the OB/GYN office. We think the quantitative hCG selling footsteps, quantitative TSH fits there, rupture of membranes is a good product for that segment. So its fetal fibronectin, which comes off and sometimes sent.

So these are the types of things that we are looking at.

Derik De Bruin – Bank of America Merrill Lynch

Great. I guess that when you think about the business you have been here since 2009 I guess. What do you think is something necessarily doesn’t appreciate or understand about the business and I guess what I guess is when you see with investors what aim and exceptions are there?

Douglas C. Bryant

That is a great question. My response is probably not too helpful to our cause. I think that people assume that we are going to get these things developed and whenever we do they just get sold and that’s actually not true. Once you get a product cleared and to be marketed, that’s when the hard part starts.

Commercializing product is a lot harder than many people think. I think honestly that many folks doing analysis on our company just automatically assume we’re going to sell this stuff and I would say, I appreciate the enthusiasm, but that’s a lot of hard work, it’s not that we don’t think we’re going to get it done. I have hired numerous guys over the last couple of years that are pretty talented and I think they are learning a lot and getting things done.

But we still have to build out that organization a little bit larger than we are today to be successful and then the other thing is, we don’t do super well ex-U.S. and it’s because we don’t have appropriate infracture ex-U.S. Some of these products could fit pretty well, but we just – so things that the street is not appreciating probably aren’t helpful, but that’s my answer anyway.

Derik De Bruin – Bank of America Merrill Lynch

Great. And if there is no further questions I think we will call it the meeting with a minute to spare.

Douglas C. Bryant

Sure.

Derik De Bruin – Bank of America Merrill Lynch

Thanks a lot. I appreciate it.

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