Quidel's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.30.13 | About: Quidel Corporation (QDEL)

Quidel Corporation (NASDAQ:QDEL)

Q2 2013 Earnings Conference Call

July 30, 2013; 05:00 p.m. ET

Executives

Doug Bryant - President & Chief Executive Officer

Randy Steward - Chief Financial Officer

Ruben Argueta - Investor Relations Manager

Analysts

Jeff Frelick - Canaccord Genuity

Bill Quirk - Piper Jaffray

Steven Crowley - Craig-Hallum Capital Group, LLC

Brian Weinstein - William Blair

Nicholas Jansen - Raymond James

Shaun Rodriguez - Cowen and Company

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Quidel Corporation, second quarter 2013 earnings conference call.

At this time all participants are in a listen-only mode. Later instructions will be given for the question-and-answer session. (Operator Instructions).

Now I like to turn the call over to Mr. Randy Steward, Quidel's Chief Financial Officer. Please go ahead, sir.

Randall 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 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, July 30, 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 three months and six months ended June 30. 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 second quarter and provide an update on our product development pipeline, as well as our near-term drivers for growth. I will then briefly discuss our financial results and we'll then open the call for your questions.

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

Doug Bryant

Thank you Randy. Total revenues for the second quarter of 2013 were $29.7 million compared to the $30.9 million for the second quarter of 2012. Two factors contributed to a modest decline in revenue for the second quarter.

First, as you recall we had an early onset to this recent season's Influenza epidemic, which then tapered significantly in February. Therefore sales of our QuickVue respiratory product that we might typically see in early Q2 did not occur, while sales of our new products, Sofia influenza and AmpliVue C. difficile were helpful in Q2.

The increase in revenues for those products was offset by a decline in QuickVue product sales, most notably Group A Strep. In addition, some orders from distribution that we would have expected at the end of Q2 did not ship and instead fell onto Q3.

Given the impact of seasonality on Q2, the first half comparison may be more relevant, although in fairness we should recognize that in Q1, 2012, sales were particularly soft.

For the first six months of this year, revenues were $91.7 million compared to $68.8 million in the first six months of 2012, a 33% increase year-over-year. For today's call I’ll focus mainly on the two programs most likely to create near-term growth, Sofia and AmpliVue and we’ll comment more briefly on the other programs as well.

Let's begin with Sofia, and our automated immunoassay analyzer. Three events occurred in the quarter that are noteworthy. First, as a proactive measure we sought and received special 510(k) clearances from the FDA for our Sofia and QuickVue influenza products, to include the detection of the Avian H7N9 Strain, among the list of other flue A-Strains that are already included in our package insert. Should H7N9 processes a major risk in the near future, we will be ready to respond.

Second, in June the FDA convened a microbiology devices panel that recommended that rapid influenza diagnostic test be reclassified from class one to class two. If this reclassification is implemented in the next few years, it would essentially mean that most, if not all, of the current visually read rapid influenza diagnostic test brands, may need to improve their ability to the second influenza. In other words, products like our own QuickVue, based on the meta-analysis that was referenced, wouldn’t to demonstrate through a clinical trial that we can achieve a sensitivity of greater than or equal to 90 percent relative to cell culture.

We believe for us anyway that this is achievable, but more importantly, Sofia is one of the few products that already exceeds this criteria, a fact that should be helpful to our placement rate, within a customer segment that has already expressed demand for Sofia's enhanced sensitivity and objectivity.

Finally, in the quarter we received 510(k) clearance from the FDA for Sofia Group A Strep. We expect that Strep A will be another important near term driver for Sofia instrument placements and that as we exit this year, we will be well-positioned to achieve our goal of at least 10,000 instrument placement before 2015.

We recently added additional sales personnel to our commercial organization and are in the process of training our sales force and distribution partners for the imminent launch of Sofia Strep A.

Currently under review at the FDA are two more Sofia products; Sofia RSV and Sofia hCG, which depending on the timing of approval could also have a positive impact on our instrument placement rate.

Regarding AmpliVue, our hands held disposable molecular device. Our sales force has been selling our assay for seat at the seal in earnest, since receiving a clear, moderate, complexity designation in the first quarter.

Receptivity to the format and technology has been very good, which gave us confidence that the acquisition of BioHelix was a good decision. The acquisition is significant for us for several reasons: One, BioHelix provides ensign development and molecular reagent manufacturing expertise, as well as technical skill sets that are complementary to Quidel’s existing molecular development programs.

Two, with BioHelix, we’ve doubled the number of AmpliVue assays in development; and three, BioHelix's HDA, heal a case dependant amplification technology can also be use today quickly amplify targets for assays that can be run on a Savannah cartridge, an instrument which maybe useful on settings where shorter turnaround time and costs are important.

Regarding Savannah, our fully integrated molecular diagnostics platform, we made steady progress in the development of the instrument in the quarter. I won't go into great detail, but to give you a sense for the progress we're making, we developed and tested the assay cartridge and are now building independent test beds to demonstrate assay feasibility in the current cartridge configuration.

The next major milestone is in Q2, 2014, when we validate the assay cartridge on a fully integrated instrument. Following that, you can look for us to be presents at industry conferences like AACC, Amp and you will know then that we expect to be in market within one year of those meetings.

Overall, our company continued to execute well against our long-term strategy. I'm proud of what we accomplished in the quarter. Throughout the remainder of 2013 we will maintain an acute focus on the two things that matter, commercial execution of our new AmpliVue, Sofia and real-time PCR products and two, product development acceleration that results in the completion of U.S. clinical trials and submission to the FDA of at least ten new assays before year-end.

And now, Randy will report the second quarter financials and then we'll take your questions. Randy.

Randy Steward

Thank you Doug. As Doug mentioned in his opening remarks, total revenues for the second quarter of 2013 were $29.7 million, compared to $30.9 million in the second quarter of 2012.

Global infectious disease revenues from $17.3 million in the second quarter from $18.8 million in the prior year. This decline was primary driven by a year-over-year decrease in Strep A visual lateral flow revenue, resulting from an early end to the respiratory season and the timing of distributor orders as Dough mentioned previously.

In the quarter, influenza product revenue was $3.2 million as compared to $3 million last year. Our cellular product revenue, which includes general virology, herpes and respiratory virology panels was flat versus the same quarter of last year.

Revenues for the women’s health category were $8.4 million in the quarter as compared to $8.7 million last year. This decrease was a result of lower pregnancy product revenue, somewhat offset by a 7% growth in our Thyretain product revenues.

Our gastrointestinal product category revenues were $1.8 million, compared to $1.6 million in the second quarter of 2012. This increase was primarily driven by revenues from our AmpliVue C. difficile product.

Revenues from our other categories were $2.2 million compared to $1.9 million last year. Gross margin in the second quarter was relatively constant at 54%, compared to 54.6% in the second quarter of 2012.

Total operating expenses were $23.2 million in the quarter, as compared to $21.4 million last year. Research and development costs in the second quarter were $7.9 million, compared to $6.8 million last year. This increase resulting from increased development costs for both Savannah and Sofia.

Sales and marketing expenses decreased in the second quarter of 2013 to $7.1 million compared to $7.7 million last year. This decrease was due to lower commission expenses and lower hiring and personnel costs.

As Doug mentioned, we recently added additional sales personnel to our commercial organization. We are estimating this will add approximately $1 million to our SG&A expenses in the back half of the year.

Expenses for G&A were $6.1 million in the second quarter, compared to $5.1 million for the same period last year. In the quarter we realized expenses of approximately $400,000 associated with a 2.3% medical device excise tax that went into effect in January of this year.

We also incurred approximately $700,000 of professional services related to business development activities, mostly associated with the BioHelix acquisition and our ERP system upgrade project, which went live in San Diego on July 1.

Stock based compensation expense for the three months ended June 30 was $1.9 million and the amortization of intangibles were $3.1 million. Our tax rate in the second quarter was 76% as compared to 35% in the second quarter of last year.

During the quarter we were notified by the IRS that it had completed its review of our 2008 through 2010 tax periods and they propose no changes. As a result, the company released tax reserves of approximately $3.5 million. We realized that benefit in the quarter. Excluding the non-recurring tax benefit, the effective tax rate would have been approximately 34%.

Net loss for the second quarter was $1.8 million or $0.05 per share, as compared to a net loss of $3.1 million or $0.09 per share for the second quarter of 2012. On a non-GAAP basis excluding amortization of intangibles and stock compensation expense and the one time tax benefit, net loss for the second quarter of 2013 was $1.9 million or $0.06 per share, compared to net income of $200,000 or $0.01 per diluted share last year.

Revenues for the six-month period ended June 30 were $91.7 million compared to $68.6 million for the six months period in 2012. Infectious disease revenues were $66.7 million versus $45.1 million last year, an increase of 48%, largely due to growth from our Influenza products. For the fix months Strep A revenues decreased by 10%, while RSV revenues increased 27%.

Our cellular product revenues grew by 10%, driven by increased respiratory viral panel revenues. The women’s health segment was $17 million for the first half of the year, compared to $16.9 million in the first half of last year.

For the first six months our gastrointestinal segment was $3.4 million compared to $3.2 million for the same period last year. The revenue from our other categories was $4.6 million, this compares to $3.6 million last year.

Gross margin for the six months was 63.8% compared to 58.1% for the six months of last year. This improvement is driven by increased influenza sales versus last year and the positive impact on product mix.

Net income for the six months of 2013 was $10.6 million or $0.30 per diluted share, as compared to net loss of $3.1 million or $0.09 per share for the six months of 2012. On a non-GAAP basis, excluding amortization of intangibles and stock compensation expense and the one-time tax benefits, and excluding the benefits of the research and development tax credit in 2012, net income for the first half of 2013 was $14.7 million or $0.42 per diluted share, compared to net income of $4 million or $0.12 per diluted share for the same period in 2012.

At the end of June, the inventory value was $24.7 million. This increase as compared to last quarter and last year was driven by increased visual lateral flow and Sofia Influenza inventory, as well as an inventory build for our new molecular products.

For the first six months of the year the company invested $11.7 million in capital, primarily related to Sofia Instruments, the continued molecular manufacturing expansion in Athens, Ohio and the ERP system upgrade, as well as normal manufacturing maintenance.

In the quarter the company completed the acquisition of BioHelix for a net cash of $9.2 million. As of June 30, the company had $22.8 million in total cash and no outstanding borrowings under its senior credit facility.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). That question comes from the line of Jeff Frelick at Canaccord. Please go ahead Jeff.

Jeff Frelick - Canaccord Genuity

Hey. Good afternoon, folks. Can you hear me okay?

Doug Bryant

We can hear you fine, Jeff.

Jeff Frelick - Canaccord Genuity

Great, thanks. Sorry about that. Hey Doug, so just a little more clarity on your comment on the shipment, the timing of the shipments to distribution, was it across most of the product line or was it specific to one or two products? Were you referring to just Strep shipments, could you just clarify that please?

Doug Bryant

Well, inventories at distribution right now are actually quite low, and so normally we would have expected shipments for all of the major products. So influences, Strep, hCG. hCG in particular, I think is especially low at this time, and obviously some of that shift in Q3.

The big driver though of course was the fact that the prevalence that Strep dropped off pretty dramatically about the middle of February and its typically we might see some sales that leak into April as a result and that’s mainly the delta that you see.

Jeff Frelick - Canaccord Genuity

Okay. And then just maybe an update on kind of the next – and again, congratulations on the Sofia Strep approval, and then just maybe help us understand what are the next steps there, if you can share any timing as you submit for clear waiver.

Doug Bryant

Well, a quick update on the launch itself. We are just getting started really. We’ve added the product to our agreements with key distribution partners and are in the process of training their sales organization. While making AmpliVue sales calls on hospitals, our folks are now also talking to customers about Strep and I think so far the feedback has been positive, and what was the other part of you question, Jeff.

Jeff Frelick - Canaccord Genuity

Just on the next steps, moving the Strep A to a clear waiver.

Doug Bryant

Well, what we would say for all of our Sofia products generally that we intend to pursue clear waiver, but because of the variability of approval times, because approval times are much more variable, then they are with 510(k) clearance. We are not going to comment on when we submit and when we expect to get approval.

The reason I’m a little bit hedging there Jeff is that you recall that when we submitted for Sofia Influenza, we got approval for 510(k) right away, but then it took some time before we actually got clear waiver.

So we will do whatever is necessary to get clear waiver, we believe with all of our products, but the timing is going to be variable and in the meantime our guys are out there selling in to the moderate complexity segment.

Jeff Frelick - Canaccord Genuity

Okay and this is my last question guys on the Sofia Strep orders, are distributors complete training. When would you expect them to start buying some products? So is it safe to assume we started seeing that occur during the third quarter? Is that kind of fair when you wrap up training with the distributor partners?

Doug Bryant

Sure. I would expect all of the major distributors to carry some level of inventory. Although, I think the expectation now, after a few years of shipping product within 48 hours, that they are not going to load a lot of inventory into all their distribution centers. So I would expect in Q3 a modest inventory build.

Operator

Thanks for your question. We’ve got another question for you. The next question is from the line of Bill Quirk of Piper Jaffray. Please go ahead, Bill.

Bill Quirk - Piper Jaffray

Thanks. Good afternoon everybody. A couple of questions from me, and one is just a bit of a follow-up on Jeff’s question. Doug could you actually just quantify the number of orders that went from the second quarter in the third quarter? In other words, under a perfect scenario, kind of what would that revenue dealt with those.

Doug Bryant

I can’t comment on the actual number. I can tell you that each of the major distributors probably had some orders that didn’t get shipped in Q2. But again, I’ll remind everyone that these days we don’t ship a ton of product with each order as we used to maybe five or six years ago. So the big driver to the delta as I said before was the seasonality at Strep.

Bill Quirk - Piper Jaffray

And then secondly, I realize it’s early, but can you talk a little bit about your experience with AmpliVue and what type of customers are you going into, what type of business are you seeing? Are these competitive takeaways? Are these customers who previously haven’t (inaudible)? Any color there would be great. Thank you.

Doug Bryant

Sure. Well, given the number of competitors that we see on the line, on this call, I’ll be somewhat frugal with my comments and stick to things that we have said publicly before and that is that our initial target was the EIA customer; EIA and GDH customer and we’ve seen some success in that segment.

In addition, we have seen some success selling into the integrated delivery network space, and obviously we are pleased with how it’s going so far. Just, as you can imagine; just within the last 60 days we’ve taken a significant number of orders and we have a number of customers, but I’ll also add that we are pretty pleased with the way the product is now performing in the field post launch.

Operator

Thank you for your question. We have another question for you now. This question is from the line of Steven Crowley of Craig-Hallum Capital Group. Please go ahead.

Steven Crowley - Craig-Hallum Capital Group, LLC

Good afternoon, gentlemen.

Doug Bryant

Hey, Steve.

Randy Steward

Hey Steve.

Steven Crowley - Craig-Hallum Capital Group, LLC

Obviously there are quite a few developments that you laid out for us. In terms of Sofia Strep and the significance of this launch in the overall scheme of things for Sofia and maybe even relative to flu, could you help us characterize the relative significance of this launch and the benefits you’re bringing to the marketplace, that have helped the distributors on the product.

Doug Bryant

In terms of Strep A impact on Sofia placements, I’ll just point out Steve the obvious, that there are far more Strep customers than there are flu customers and the unit volume of those customers is five times greater or more. So for us Strep is a significant opportunity, even though initially we are just going to launch into the moderate complexity segment.

So as you can imagine, about two thirds of our current volume is within the larger customer who typically would be the folks who are of moderate complexity, capability, in addition to the fact that we are also launching in hospitals.

So I would characterize the Strep A impact as potentially pretty significant for us in terms of the placements and then I would add that if we are successful in restating the market to a price more appropriate for the value that we are providing, I think that would be particularly helpful.

Steven Crowley - Craig-Hallum Capital Group, LLC

Great. Now, in terms of your priority you mentioned a few objectives with BioHelix and incorporating that technology potentially into Savannah, into new assays in the development pipeline, can you help us understand your prioritization, what you've been able to determine so far, are the highest priority projects for you within that opportunity set?

Doug Bryant

Well, the first priority is the eight assays that are on our development list and we would hope to have each of those available as we head into 2015. I would also add that there is and earn out associated with a number of those and so we want to make sure that we're extremely helpful to (inaudible) and the team there in the Boston area and make sure those get out as expeditiously as possible, so that's the number one priority.

Right now we're also exploring what are the appropriate targets for real-time HDA assays that can be used in the Savannah cartridge and I think that's going to be particularly useful for us. And then in addition over the next 12 to 24 months, we will be looking at ways to speeds up the enzyme even further.

So those are really the three priority. We do have other things that are assets to that acquisition, other things that we’re working on, that we’ll potentially disclose as we get a little closer, but those are the top three priority.

Steven Crowley - Craig-Hallum Capital Group, LLC

Great. The last question for me relates to the panel meeting of the FDA and now that the dust has settled, any tactical consequences that you’ve seen or market reaction that’s been obvious to you in the real work and what’s your best read now. Again, now that the dust has settled a little bit, on the implications if any for the up coming cold and flu season.

Doug Bryant

I have not seen or and certainly have not from our guys, any impact or any discussion with regard to the microbiology devices panel session.

The impact to any of us in the space in the next season, I think is likely to be quite small. We would hope although, I’m not sure how we’ll position this, but I would hope with the sensitivity that we see with Sofia that would create even further demand for the product that has that kind of performance, plus gives the user the comfort of and objective read.

But again, I’m not certainly forecasting anything further in terms of upside into the next flu season, that’s for sure.

Operator

Thank you for your question. (Operator Instructions). I have another question in the queue. This one’s from Brian Weinstein of William Blair. Please go ahead, Brian.

Brian Weinstein - William Blair

Hey guys, I apologize for the backgrounds noise. A couple of quick ones. First, Doug can you gives us an update on the next gen AmpliVue timing. I think that we are thinking about something kind of in the fall for that? Is that still on track?

Doug Bryant

We’ve got two assays in clinical trials right now for AmpliVue and so those trials will go reasonably quickly and then we will certainly submit. Obviously we are not in control of timing in terms of approval, but I think your guess is pretty good.

Brian Weinstein - William Blair

Okay. And then do you care to comment at all on the Open Box assays? We haven’t heard a whole lot on that. Is there anything kind of brewing in there? Was there any contribution from those in the quarter?

Doug Bryant

There would be very little in terms of sales, because we are talking about flu and then we have also C. difficile that’s available.

I probably should take the opportunity to review, Brian the timeline. In fact, we said again in the call here today that we expect to have ten assays submitted, so let me just review where we’re at, because it’s related to the open box assays.

We’ve submitted to the FDA so far this year four. Two of those were Sofia; two of those were the open box.

In clinical trials at the moment we have four assays and as I mention, two of those are AmpliVue, the other two are open box, and then we have three trials that should start in September and two of those are open box and one of those is AmpliVue.

Brian Weinstein - William Blair

Okay, that is helpful. Are you at this point able to tell us a little bit more about what those open box assays are? I’m just looking at my schedule here and I don’t know that I have five of there. So can you kind of review what those five actually are?

Doug Bryant

I’d rather not. I’m sure there will be an opportunity for me to review them publicly, to disclose and in fact I’m quite confident if I go back to investor conference transcripts, I can pull them all out, but I don’t have them all off the top of my head at the moment. I don’t want to make a mistake.

Brian Weinstein - William Blair

Okay, and then as far as your goals for AmpliVue, we heard you talk, I think probably about, I think targeting a 1000. I’m trying to recall the time frame of that, but you kind of said that you were moving towards your placement goal, of not Sofia, but are you moving toward your placement goals and are you happy with kind of the up-tick moving towards those goals on AmpliVue as well? That’s it from me, thanks.

Doug Bryant

Okay. Good question Brian. Based on what we are seeing in the field so far, I’m still confident that we can achieve a customer base of at least a thousand customers for AmpliVue.

The question is obviously when. It depends in part on how many additional assays we can launch in the near-term, as well as our success of course with C. difficile. Overall, again we are pleased with the up-tick and the product is performing well and I think our customers would say that they like the format, which is obviously very important. And the product is obviously performing quite well in customer’s hands, which is very encouraging.

So overall we are pretty confident we are going to get to 1000. Can we get there by year-end? We are going to have to really - well we need some help from the other assays. I would say it that way.

Operator

Thanks very much for your question. We have another question for you now. This one is from the line of Nicholas Jansen of Raymond James & Associates. Please go ahead.

Nicholas Jansen - Raymond James

Hey guys, sorry for the background noise, but maybe just a little update on the competitive landscape with regards to the objective graders. How are you performing relative to some of your peers in that front? Certainly Veritor has been quite – a pretty good launch so far. So just trying Sofia versus Veritor and kind of your head-to-head competition in the retail market. Thanks.

Doug Bryant

I think you have to look at it in two different ways. One is the physician office segment and the other is the hospital segment. In the physician office segment, we did not see a lot of Veritor activity and certainly we would say that we certainly held our own.

On the hospital side, I would guess that they had some success converting their BD direct business to the Veritor and I have not heard anything negative about the product or its performance and in fact, I would view it to be a viable competitor, but just probably competing at a different space.

Operator

Thank you very much. Nicholas. We have another question for you. This one is from Shaun Rodriguez from Cowen and Company. Please go ahead.

Shaun Rodriguez - Cowen and Company

Hi guys. Good afternoon. Thanks for taking the question. So a different angle on a previous question. On AmpliVue last quarter you noted that although most of your placement were the labs doing GDA, tritoxin (ph), immunoassay. You did see some competitive molecular wins and this did include some of the higher volume variety. Could you just talk about how this higher volume mix looked in Q2 and if you’ve noticed any notable competitive response on the pricing front specifically?

Doug Bryant

Yes, that’s actually a terrific question Shaun. If you look at our March sales, which I’m not going to go into that little details. But if you were to look at March sales, you would see that a big chunk of our business was driven by a very small number of customers. So the smaller number of customers I would say are taking a while to come online, but the largest customers actually at this stage are the bigger part of our business.

Shaun Rodriguez - Cowen and Company

Okay, that’s helpful. And you’ve talked about MRSA and Group B Strep tests in later stage development for AmpliVue. So these along with C. difficile are also available from a couple of other vendors.

So do you have a sense at this point for the proportion of your early AmpliVue customers, where you might be able to get them to add these other tests or at least the proportion that are already running, competitive MRSA or Group B Strep tests, where at least there is a direct opportunity to get competitors swap out there.

Doug Bryant

We would love to think that there is a lot of synergy between C. diff and other tests, but I don’t actually see that as the case. Group B Strep for example, in our view is a slightly different market and so we look at it a little bit differently.

The MRSA product that we have in development, I would think it would be a similar question, with the same customer who runs C. difficile also MRSA, different segment. And further, the product that we intended to launch initially for MRSA was a blood culture conformation assay, not a screening assay.

Shaun Rodriguez - Cowen and Company

Right, okay. That’s a helpful clarification. And then lastly, I guess maybe this is for Randy. Can you talk about the impact of the BioHelix acquisition on your gross margin expectations for AmpliVue, given I think there was a royalty component there, as well as on R&D, given you’re taking those activities in-house. And actually finally, maybe this is back to Doug, an update on some of their existing licenses that I think you were planning to maybe have to re-negotiate as you fold that in?

Randy Steward

Yes. Certainly with the BioHelix acquisition we are seeing gross margins on their business synergistic to our margins, so they are up around 70%. So they are certainly complementary to our existing business.

On an annualized basis, from and R&D investment perspective, we are estimating R&D investment of about $2.5 million as we move forward over the next 12 months or so as they continue to expand, roll out additional AmpliVue assays.

And I’m sorry, we were getting cost reduction opportunities as well since we aren’t paying the margins that were required when BioHelix was separate were us. So we’re getting the benefit on the costs side as well.

Doug Bryant

And then he asked about licensing, which I’ll just address. We have a couple folks that we are talking to about out-licensing opportunities and we’ve concluded nothing at this stage.

Shaun Rodriguez - Cowen and Company

That’s it for me guys. Thank you very much.

Doug Bryant

Thanks Shaun.

Randy Steward

Thanks Shaun.

Operator

(Operator Instructions). We have another question from the line of Bill Quirk of Piper Jaffray. Please go ahead.

Bill Quirk - Piper Jaffray

Hi, thanks. A real quick follow-up for me guys, and you mentioned this in your prepared comments. I apologize if I missed it. The next timing and milestone for Savannah, Doug can you repeat that? Thank you.

Doug Bryant

Sure. I think what we said was the next major milestone was Q2, 2014 and we intend to validate that the cartridge works on a fully integrated instrument. And then I also said that following that then, we would be able to take the product to shows and if and when we did that, you would know that we are within a year of launch.

Bill Quirk - Piper Jaffray

Got it. 2Q ‘14. Thank you.

Operator

Thank you for your question. And that’s all the time we have today. Please proceed with your presentation or any closing remarks. Thank you.

Doug Bryant

Well, this concludes the calling for today. Thank you for your time this afternoon and for your continued support. Take care everyone.

Operator

Thank you ladies and gentlemen. That concludes your conference. You may now disconnect. Thank you for joining us. Do enjoy the rest of your day today.

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