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Call Start: 10:00

Call End: 10:46

Quidel Corporation (NASDAQ:QDEL)

Q3 2009 Earnings Call

October 19, 2009 10:00 am ET

Executives

John M. Radak - Chief Financial Officer

Douglas C. Bryant, President, Chief Executive Officer, Director

Analysts

Ashim Anand - Natixis Bleichroeder

Steven Crowley - Craig-Hallum Capital Group, LLC

Zarak Khurshid - Caris & Company

Brian Jeep - Sidoti & Company, LLC

Jeffrey Frelick - ThinkEquity, LLC

Ross Taylor - CL King & Associates

Scott Gleason - Stephenis Inc.

Brian Weinstein - William Blair & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Quidel Corporation third quarter 2009 conference call. At this time, all participants are in a listen-only mode. (Operator's Instructions) I'd now like to turn the call over to Mr. John Radak. Please go ahead, sir.

John M. Radak

Good morning. This is John Radak, Chief Financial Officer at Quidel. Thank you for participating in today's call. Joining me today is our President and Chief Executive Officer, Doug Bryant.

Last Friday Quidel released financial results for its three months ended September 30th, 2009. If you have not received this news release or if you would like to be added to our company's distribution, please call Andrew Levy at Porter Novelli Life Sciences at area code 619-849-5376.

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 and subsequent quarterly reports on Form 10-Q, as filed with the SEC.

Furthermore, this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, October 19, 2009. 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.

Before we begin and since we have received some inquiries, let me first address our change this quarter in approaching our announcement of quarterly earnings. As many of you know, our past practice has been to release our financial results after the market closes and hold our previously scheduled conference call shortly thereafter. However, due to the unprecedented results for the quarter, management and our audit committee determined it was in the best interest of our shareholders to release these results as soon as practicable after the conclusion of our financial disclosure approval process. That process was accelerated somewhat and concluded last Friday morning at our audit committee meeting. Co ordinally, we released results promptly last Friday and scheduled this conference call as soon as possible thereafter to allow for notice to participate. We appreciate your understanding of our approach this quarter under the circumstances.

For today's call, I will report on the financial results for the quarter and year to date, and Doug will provide some color on our longer-term flu growth prospects, give an update on our new product pipeline, and finally provide an outlook for the remainder of 2009 and this year's flu season. We will then open the call to your questions.

We had a very significant benefit during the quarter from our influenza test sales driven by a considerable increase in influenza like illness beginning in mid August. The total global revenues for the quarter were $56.2 million, an increase of 76% compared to the third quarter of 2008. Domestic revenues were $45.6 million, an increase of 60% period over period, while international revenues came in at $10.6 million, an increase of 221% from the third quarter of 2008. International revenues accounted for 19% of total revenues in the third quarter of 2009 compared to 10% in the third quarter of 2008.

Global infectious disease revenues were $47 million versus $24.6 million in the third quarter of last year, an increase of 91%, driven by a significant increase in influenza sales. The emergence of the 2009 H1N1 virus, and an increase in a number of physicians using rapid flu tests to aid in the diagnosis of influenza, are the key contributing factors.

In a domestic market, as of the CDCs October 10th Flu Report for Week 40, the percentage of patient visits for ILI has climbed dramatically to 6.1%, almost three times the national baseline of 2.3%. On a regional level the percentage of outpatient visits for ILI ranged from 1.8% to 12.9% during week 40 and increased in nine of the 10 surveillance regions compared to the previous week.

All 10 regions reported a proportion of outpatient visits for ILI above their region specific baseline levels. In addition, 41 states reported widespread flu activity, up from 37 states in the prior week. In addition to our flu sales, strep sales were also a positive contributor to the growth rate in the quarter.

Global revenues of our reproductive and women's health category increased 38% in third quarter of 2009 to $5.5 million. Revenues from other products were up 11% to $3.6 million, resulting from strong sales of our autoimmune and compliment product lines, as well as from sales of our veterinary products.

Earlier in 2009 we implemented a process to better manage the quantities of inventory in the domestic distribution channel. As of the end of the third quarter, we estimate that domestic distributor inventory levels for our strep and pregnancy products continue to be below normal levels and that the third quarter sales were reflective of actual end user demand.

With regard to influenza tests, we estimate that the majority of our domestic distributor inventories are at roughly three week supply of current end-user demand. We have also recently surveyed physicians, and based upon their feedback, believe their test on hand to be relatively low as well, with 75-percent of them expecting to reorder in the near term.

Since early August we have seen week over week increases in distributor out sales with a corresponding growth in order volume. We continue to manufacture at very high levels and believe we are well positioned to respond to demand from end users, which at this point continues to increase.

Growth margin in the third quarter of 2009 increased to 69% as compared to 62% in the prior year, primarily due to a more favorable product mix in 2009. Operating expenses were $14.2 million compared to $12.4 million in the prior year. This increase was due to higher variable compensation cost, increased marketing programs aimed at flu awareness, and the costs associated with our new credit facility.

For our nine month results, revenues increases 3% to $97.7 million from $94.6 million in 2008. Our net income was $12.8 million of $0.42 per diluted share as compared to net income of $12.8 million or $0.39 per diluted share in the same period of the prior year.

Included in our 2009 year to date results are restructuring charges of $2 million or $0.04 per share. Stock based compensation expense was $2.5 million for the nine-month period versus $3 million for the same period of 2008.

We continue to have a very strong cash position. During 2009, Quidel has repurchased approximately 2.1 million shares of its common stock for $18.9 million under the company's previously announced share repurchase program. A total of $8.1 million remains available for stock repurchase under the current board authorized program.

Even after the effect of the share repurchases, cash, cash equivalents, and marketable securities as of September 30th, 2009, were $65.3 million, an increase of $7.4 million from the end of 2008.

I will now turn the call over to Doug.

Douglas C. Bryant

Thank you, John. Before I address the longer-term strategic initiatives under way, I wanted to briefly comment on the third quarter results and our accomplishments since our last conference call. Obviously it was a great quarter for us and the financial results speak for themselves. However, results like these do not just happen. We have successfully executed on several of the tactical objectives we set out for ourselves in the second quarter and I would like to mention just a few of those.

First, we manufactured 9 million flu tests since restarting our flu production line at the end of April of this year. We eliminated the excess inventory in the domestic distribution channel. We discontinued the practice of providing financial incentives to end users and to our distribution partners to buy large quantities of flu tests in anticipation of the start of the flu season. We implemented a new process to monitor domestic orders to help ensure that our distributors to not overstock the flu test. We launched an Internet-based flu awareness promotion program targeted at physicians and patients and we signed a joint development and commercialization agreement with BioHelix to develop molecular diagnostic tests, an initiative I will talk about in further detail in a moment.

Now I will talk about our long-term flu growth prospects. During the quarter we all read articles in the process that questioned either the accuracy or the utility of rapid flu tests as an aid to physicians in diagnosing and treating patients who present with ILI. Despite these reports, physician usage of these tests has increased dramatically, and as a result, our sales of both QuickVue Influenza A+B and A/B are robust and ongoing.

There are a number of factors that we believe have contributed to the use of our rapid flu test. Studies published in peer review journals demonstrate that the clinical sensitivity of unaided diagnosis without a test is quite low. In one perspective study, the sensitivity of unaided clinical diagnosis of flu in 2,288 patients, was 38%, and the positive predicted value was 32%.

In another study, the positive predicted value of an influenza diagnosis increased from 32% to 92% with a positive rapid antigen test. These studies have been in circulation for awhile. What I think may be happening now is that with huge numbers of patients presenting with ILI, physicians are increasingly recognizing the difficulty of diagnosing flu without a test and the value of using a 10 minute test even when the test is likely less than 100%.

The difficulty in diagnosing influenza by clinical signs and symptoms alone during this pandemic year is further compounded by the absence of fever in a significant portion, perhaps as many as 25% of patients infected with influenza. And indeed, the number of physicians testing for flu who had never used rapid flu tests in previous seasons is in the thousands through September.

We are not sure if this number will continue to increase over the next three to six months with the continuation of the flu season, but we can say that as we finish the 2008-2009 season, we believe that market penetration, the number of ILI cases that resulted in a rapid flu test, was about 30%. We now believe that the percentage penetration will clearly be much higher by the end of the coming traditional influenza season.

How much higher? We really don't have a better feel and we won't until we exit the first quarter of 2010. For Quidel, the dramatic increase in flu sales in Q3, perhaps extending into Q4 and into Q1 2010 will be important for us, particularly for earnings and for cash generation. It certainly allows us to fund some of our growth initiatives earlier and perhaps more aggressively. And while we clearly would not anticipate a pandemic every season, nor the volume of testing we are currently seeing, what the season has done is to accelerate penetration and growth of the influenza testing market, a market in which we are the clear market leader both in terms of share and brand image.

This is very important to our longer-term future. You can imagine that in what might be a typical flu season for 2010-2011 and years beyond, with the potential accelerated market penetration following this year, the typical market may have increased from 8 million tests today to 12 million tests, if the penetration is 45%, and to 16 million tests if the penetration is 60%, or double what it is today.

In addition, consider that with the public's increased awareness that flu can be a serious health risk, the 30 million people who visit their physicians with ILI symptoms in a typical year may increase as well as 60 million people or so per year usually report having had flu-like symptoms according to the CDC.

Next I will talk about new product introductions and our pipeline. On Friday we announced that our specialty products group had launched a new product for the detection of the C5A peptide mediator in several inflammatory diseases. While this is a niche product targeted to the research use only market, our specialty products team continues to work on new product development initiatives, in particular bone health and compliment system markers, and to look for opportunities to turn RUO products into lateral flow assays for the clinical rapid testing market.

On October 6th we announced that we had signed a joint development and commercialization agreement with BioHelix. BioHelix's isothermal amplification technology, HDA, is the core of a novel cost effective instrument-free platform that presents a unique opportunity for us to develop molecular diagnostic assays. We are very excited about this agreement and are working diligently with them to develop product plans for the co development of a number of assays. We expect to describe our assay pipeline in more detail in future quarterly earnings' conference calls.

In terms of other new products under development, let me provide a quick update on the near-term programs we have discussed before. We submitted our 510(k) to the FDA on our second generation fecal immunochemical test for colorectal cancer screening and we are working through the FDA's process. We expect to launch as soon as possible, after we receive 510(k) clearance.

We began clinical studies on our flu RSV combo test and expect those to run through the flu RSV season. So we are still tracking towards a launch for the 2010-2011 flu season, and we continue to be on track to relaunch on our mononucleosis test in the first quarter of 2010.

And now an outlook for Q4 and the remainder of the flu season; the outlook for the business for the remainder of 2009 is very positive. Let me highlight just a few important points. Patient visits for influenza-like illness continues to increase in the domestic market and we are seeing significant weekly orders for our influenza test. We expect to see elevated levels of ILI driving flu test sales in Q4 and reorder rates by physicians have remained steady. We anticipate continued strength in the international flu markets in Q4 as well. Our strep and pregnancy sales will continue to be tied to end user demand.

We are frequently asked about the outlook for 2010, but the unpredictable course of pandemic influenza and the uncertainty about its impact on seasonal influenza, particularly on an influenza B and (inaudible) influenza A prevalence during the forthcoming winter, makes forecasting almost impossible, even for professional epidemiologists.

Nevertheless, we have seen a second peak in some other countries who also experienced the pandemic and it certainly is quite possible that we will see something similar in Q1 in the United States and possibly with higher physician penetration as I explained earlier. Assuming this to be the case, we will continue to manufacture at least through the end of this year.

In summary, we're highly confident that we'll achieve meaningful double-digit revenue growth in the fourth quarter of 2009 and are positioned well for growth over the longer term. That concludes our formal comments today. Operator, we are now ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator's Instructions) Please standby for your first question. And our first question comes from the line of Ashim Anand. Please proceed.

Ashim Anand - Natixis Bleichroeder

Congrats, guys on a wonderful quarter and on the BioHelix deal. First question is if you can give us some idea on your market share especially as you did so well this quarter, if you have any idea what your market share would be in the US?

Douglas C. Bryant

It is really, Ashim, impossible to tell at this point. We have gained, as I said, thousands of brand new customers, but so must have our competitors. We did not do end user promotions which provide incentive to customers to stockpile, but our competitors actually did, and we will not know the impact of that until the end of Q1, the end of the flu season.

And in terms of existing customers, especially the very large ones, we retained a very high percentage, but did lose a small number due to price, more than offset by takeaways from our competitors. And again, we will have to see how it shakes out after Q1.

Ashim Anand - Natixis Bleichroeder

Okay. And tell us about BioHelix, if you can tell us on the technology that is based on HDA, helicase-dependent amplification. Does BioHelix actually own the whole IP of it or is there some contingent by other companies?

Douglas C. Bryant

BioHelix has exclusive rights regarding the whole IP.

Ashim Anand - Natixis Bleichroeder

Okay. And in terms of their system, how does it look presently and how would it change — I know this is still in the works, if you can give us an idea of how it would change in terms of how you would like it to be when you launch your products on it?

Douglas C. Bryant

Are you asking, Ashim, about the form factor of the device itself?

Ashim Anand - Natixis Bleichroeder

Yeah. The present analyzer that they have is called the iso-amp molecular analyzer. You would kind of design a new system completely or there would be changes to that system in terms of the products you launch?

Douglas C. Bryant

Yeah. So there are some uses for the device as it exists today and there are changes that we have discussed with them preliminarily as well. So we see the platform as evolving from where it is today, but clearly there is an advantage to having something that works for at least a certain subset of the assays that we are interested in.

Ashim Anand - Natixis Bleichroeder

Okay. And lastly, if you can give us some financial details if you would make that public at this point in terms of BioHelix?

Douglas C. Bryant

Well, we can't describe specifically the details. What we can say is that we're both funding the development as well as a co development partner. In other words, we have head count that will be helping out as well.

Ashim Anand - Natixis Bleichroeder

Okay. Wonderful, thanks a lot.

Operator

And our next question comes from the line of Steven Crowley with Craig-Hallum Capital Group, please proceed.

Steven Crowley - Craig-Hallum Capital Group, LLC

A couple of questions for you. It sounded like you had a good quarter internationally and there is some optimism for the fourth quarter. Can you give us a little feel for maybe where you saw the strength and whether or not that business is coming in big lumps or kind of on a regular rate basis to you?

Douglas C. Bryant

We have had a really good international participation as you suggest, Steve. Japan, in particular, is up significantly. Mexico continues also to be at a peak in terms of sales. Other countries perhaps worth mentioning, we have shipped product to Taiwan and Thailand in particular. And then I would have to say fairly widespread participation internationally with an increase in the number of countries that are actually purchasing product.

Steven Crowley - Craig-Hallum Capital Group, LLC

So your confidence in Q4 is really not predicated on a large tender or a large piece, it is a more a combination of a bunch of things?

Douglas C. Bryant

No. It is a continuation of what we are seeing right now, Steve.

Steven Crowley - Craig-Hallum Capital Group, LLC

And in terms of the competitive landscape here domestically, you gave us some color. Are your competitors from what you can gather, do they have availability of product for customers or are you at an advantage position in terms of an availability of product?

Douglas C. Bryant

I don't really want to speak specifically, Steve, to what our competitors may or may not be doing. I can just say that we are positioned very well in terms of our manufacturing capacity, and as we mentioned earlier, we have the ability to make a bit more if we need to.

Steven Crowley - Craig-Hallum Capital Group, LLC

And then in terms of a strength in your non-influenza products, you mentioned that strep was a contributor to growth this quarter — are you seeing a phenomenon where you are getting any positive pull through of those products from the strength you are seeing in influenza?

Douglas C. Bryant

We are definitely seeing pull through with step. It is quite typical, whether the patient presents to the hospital or the physician that the physician will request both the flu and a strep test. In addition, our sales of RSV continue to grow, although off a smaller base.

Steven Crowley - Craig-Hallum Capital Group, LLC

Okay. And then just a couple of questions for John and I will jump back in the queue. In terms of the expenses, John, a pretty significant bump in G&A expense in Q3 off of Q2 levels. Is that a new higher level or was there something quirky to the jump that we should be aware of? And then in terms of R&D, Doug, it sounds like you want to be more aggressive there. How does that translate into a bump in R&D expenses as we look forward here maybe in the fourth quarter?

John M. Radak

Steve, on the G&A increase, the sequential increase from Q2 to Q3 was driven primarily by variable compensation.

Steven Crowley - Craig-Hallum Capital Group, LLC

On the G&A side it is still variable comp? Is that related to some of the new hires?

John M. Radak

Some of it will be new hire related, but it is for a more broadly based compensation program.

Steven Crowley - Craig-Hallum Capital Group, LLC

Should we think about that as a kind of a new run rate for G&A?

John M. Radak

Well, it might not be that high.

Steven Crowley - Craig-Hallum Capital Group, LLC

Okay. And then in terms of R&D — and thanks for taking my questions, guys.

Douglas C. Bryant

Sure. In terms of R&D we will have a small use of cash in Q4 due to the BioHelix agreement, but it will not be significant. And as we ramp up with some headcount, we could see an increase in Q4 as well, but again, that will not be significant either.

Steven Crowley - Craig-Hallum Capital Group, LLC

So your comments about accelerating some of your investments don't sound like they'll impact things to a significant degree over the very short term here, certainly not the fourth quarter?

Douglas C. Bryant

No. We will have an impact on fourth quarter, but it won't be material. And we clearly want to look at other things that we would add from a technology perspective and certainly having the cash now allows us to do that more easily.

Steven Crowley - Craig-Hallum Capital Group, LLC

Thanks again.

Operator

And our next question comes from the line of Zarak Khurshid with Caris & Company, please proceed.

Zarak Khurshid - Caris & Company

Hi. Thanks for taking my questions, John and Doug. Congrats on the great numbers. You talked a little bit about Mexico being in a peak, I was just curious to what extent is that business sustainable? I think they had pretty decent orders in the spring, but could you talk about what are kind of the drivers there and again how sustainable that business is?

Douglas C. Bryant

Well, they have reordered since the spring and we were awarded the tender there. Is that sustainable longer term? That is very difficult to predict. Certainly it would not seem that it would be sustainable at this volume, but what we like about the international business is that more and more countries that had never actually done testing before at all are now testing. So it becomes a new market for us, even in a typical season.

Zarak Khurshid - Caris & Company

And then we understand that Japan has been a little bit difficult of a geography in recent paths, perhaps a little more cost conscious than other areas. So the strength there, can you describe kind of what is driving the business there? IS there something else that has changed to make selling there easier?

Douglas C. Bryant

No. Nothing really has changed from a commercialization perspective. The change recently is due exclusively to increased demand because of just more flu.

Zarak Khurshid - Caris & Company

Sure, okay. And then it sounds like penetration will indeed be higher by the time we get to the end of the season, what types of things are you doing specifically to ensure that these new users stick next year?

Douglas C. Bryant

Well, I mentioned earlier that we did invest in an Internet-based promotion program with a couple of different Internet service providers. In addition, we would look to agreements with both hospitals and with some physicians' groups that would be more longstanding.

Zarak Khurshid - Caris & Company

Okay. And then in terms of pricing, were there any changes there? And then out of curiosity, where are we on kind of the capacity curve — any constraints on the manufacturing?

Douglas C. Bryant

In terms of pricing, our pricing actually is absolutely steady and in fact, this particular season, if you will — we have not done any end user promotion whatsoever. In previous year, we may have done a buy X number of kits get a kit free in order to promote stocking, particularly at the physician level and the hospital level in Q3, and we have not done that. So we do not actually have a significant impact at all on price.

In terms of capacity, as we pointed out, we are going to continue to manufacture at a high rate through the end of Q4 and we do have additional capacity if we need it.

Zarak Khurshid - Caris & Company

Fantastic And then last question and I will jump back in the queue. The BioHelix deal, was that driven by the new biz-dev team that you brought in or is that something that was in the works previously?

Douglas C. Bryant

I think it's a combination of both. We had clearly had a relationship with the folks from BioHelix before and had been in ongoing discussions. I think what the team today brought on board, those folks helped us do a better technology assessments to better understand what the relationship needed to look like. And as a result — I think the team did a pretty good job of getting the deal put together fairly quickly.

Zarak Khurshid - Caris & Company

Congratulations, thanks.

Operator

And our next question comes from the line of Brian Jeep with Sidoti & Company. Please proceed.

Brian Jeep - Sidoti & Company, LLC

Good morning, gentlemen. Most of my questions have been answered, but just a couple of quick ones. I know you are not giving specific guidance for the fourth quarter, but can you give us a sense of your thoughts, will it be up or down from the third quarter? Can you give us that at least?

Douglas C. Bryant

Well, what we did say is it would be meaningful double digits versus prior year.

Brian Jeep - Sidoti & Company, LLC

Okay. No relationship to the third quarter though?

Douglas C. Bryant

No. We didn't comment about sequential relationships.

Brian Jeep - Sidoti & Company, LLC

Okay. And you talked about capacity a little bit, but any stock option in the third quarter or were you able to meet every order that came in?

Douglas C. Bryant

Yeah. Every order shipped.

Brian Jeep - Sidoti & Company, LLC

Okay. And finally on the cash side, you have got a pretty nice cash position now and I know you talked about the BioHelix that cost them a little bit more next quarter, but did not repurchase any shares this quarter and wondered what your thoughts were on repurchases or what you might do with the cash?

Douglas C. Bryant

We still have, John, what is it, 8 million left on the repurchase program? So that is still open to us should we choose to do that. What would you add, John?

John M. Radak

Well, I think just from a utilization of cash on the balance sheet, obviously our first desire is to grow the business and we have got some good talent on board now in terms of the biz-dev team and we are looking at a number of different opportunities.

Brian Jeep - Sidoti & Company, LLC

All right. Terrific, thank you very much.

Operator

And our next question comes from the line of Jeffrey Frelick with ThinkEquity. Please proceed.

Jeffrey Frelick - Thick Equity, LLC

Oh great, good morning, Doug. Any change to the percent mix for sales to hospitals versus physician offices?

Douglas C. Bryant

No. Not significant. You will have seen in the news probably there were a number of hospitals who were inundated with patients and the volumes in those places has increased dramatically. And in addition you have got, as I said, more physicians testing and that propped up the sales on the physician office lab side. So overall I would say the mix is about the same.

Jeffrey Frelick - Thick Equity, LLC

Okay. And then do you have a sense of where product shipments are sent on a geographical basis or do you guys ship right into large distribution centers?

Douglas C. Bryant

No. We know where it is shipped.

Jeffrey Frelick - Thick Equity, LLC

And are you seeing any shift with regional activity as you kind of look with the CDC regional activity as it kind of moves from regional to widespread and widespread back to regional — does the order pattern kind of mimic that?

Douglas C. Bryant

It does.

Jeffrey Frelick - Thick Equity, LLC

Okay. And then I know I asked a couple of questions just kind of on 4Q, maybe a different way is — if I looked at reordering rates for late 3Q versus early 4Q, is the trend similar, improving? How should we think of that?

Douglas C. Bryant

It actually has been improving week over week.

Jeffrey Frelick - Thick Equity, LLC

Okay great. Thank you. I will jump back in queue.

Operator

And our next question comes from the line of Ross Taylor with CL King. Please proceed.

Ross Taylor - CL King & Associates

Hi. Most of my questions have been answered, but maybe two or three left. I don't know if you can talk at all about how your flu demand progressed during the quarter given that there was some underlying flu in July and August and then it started to ramp up, but was your flu demand pretty steady or did it ramp up with the ILI rates?

Douglas C. Bryant

It accelerated, Ross. You look at July August, and we mentioned that before that in those two months where flu is typically not ordered, the tests are not ordered at all. You saw actually that among our customers who ordered product, 15% of them had never ordered before. So there was that initial stocking. But as we have commented before, that stocking appeared to be at pretty average levels and I would take that was due to a number of factors, one of which was that we didn't have a buy in, we didn't have an end user promotion. And then what we saw going into September was a dramatic acceleration of that.

Ross Taylor - CL King & Associates

Okay. That helps. And then last question, and maybe this would help with gauging future demand, but how frequently do physicians typically order the flu product? Is it once a week or more or less often than that?

Douglas C. Bryant

Well, history would tell us that it was monthly, but in this particular case we saw a large number of physicians reordering more frequently. And we also track, as best we can, actual reorder rates and those have remained high and steady.

Ross Taylor - CL King & Associates

Okay that helps. Thanks very much.

Operator

And our next question comes from the line of Scott Gleason. Please proceed.

Scott Gleason - Stephenis Inc.

Hey, Doug and John. Thanks for taking my question and congratulation on the great job you guys have done managing this whole process. I guess first, Doug, when we look at the customer creation aspect that you referenced in your comments, can you maybe talk a little bit how on a percentage basis, how many new physician practices do you have that are first time customers versus previous years?

And then I guess also when we think about internationally, can you talk maybe a little bit about what percent of revenues were from countries that historically had kind of not ordered from Quidel?

Douglas C. Bryant

Sure. I am hesitating a little, Scott. I can tell you that the new customer numbers are in the thousands, but we haven't had an opportunity to analyze it in detail. So, I can't tell you as percentage, for example, how much they represent of the total.

I can say that the new customers, when they first ordered, ordered actually slightly less than average. But what I don't know is exactly how much they ordered in September as the followup, in other words the reorder of what they ordered. So we are still digging through the data and we'll be able to answer that certainly on the next call.

Scott Gleason - Stephenis Inc.

Okay, great. And I guess when we think about cash on hand, somebody asked about stock buybacks, share repurchases — I think one perception, Doug, is that a lot of people thought you guys were going to maybe do an acquisition on the molecular side. Can you maybe talk about your strategy there in a little more detail and if BioHelix is kind of the platform that you have kind of leveraged yourself towards or if you are also looking at other alternatives beyond that?

Douglas C. Bryant

We continue to look at other alternatives, of course. And in this particular instance it made more sense to do the deal the way we did it. I will say that internally we continue to assess technologies and actually do R&D work internally to assess those technologies and thus far we haven't found anything that has met our criteria in terms of acquisition.

Scott Gleason - Stephenis Inc.

Okay, great. And then I guess last question for John. Obviously you guys have been manufacturing to the hilt. At some point, that creates potential questions about fixed-cost absorption when we look at additional manufacturing levels and future periods. Can you maybe walk us through kind of what you guys are thinking there, John, and the impact on the margin structure going forward?

John M. Radak

Sure. In terms of manufacturing flu tests, because of the ASP difference obviously between flu and some of our other tests, we can manufacture lots of — we have lots of capacity to make flu tests and that is the part of the business obviously that has grown the fastest.

We are looking at opportunities, in terms of our new product development programs, to make some capital investments, but those would be related to new product launches.

Scott Gleason - Stephenis Inc.

Okay. Thanks for taking my questions.

Operator

Next question comes from the line of Brian Weinstein.

Brian Weinstein - William Blair & Company

Hi, good morning. Not much left to pick from here, but I think you said the majority of distributors are at a three week level of inventory, what is typical that you would see in the peak of a normal season and what is the ideal level that you guys would like to see that at?

Douglas C. Bryant

We are actually at ideal levels now. Historically you will remember that we had too much in the channel. So that is when John and his finance team put in place measures to ensure that we didn't overstock our distributors. So this has been good for us and good for them. We are holding products at the pouch level which is at its greatest dating, and I think that our distribution partners are pretty confident that we can deliver when we need to so they don't have to hold a lot of inventory either and take that risk. So, I think three weeks for us, given the season, is about right.

Brian Weinstein - William Blair & Company

Okay. Someone might have tried to ask this one way, I will try and ask it a different way. With the new customer pickups, did you see them more in the hospital side or in the physician office side?

Douglas C. Bryant

Well, at the end of the day a physician has to order the test. So whether that test is sent to the hospital or whether the physician does it in his office, I guess is not so important. I would say that a very high percentage of hospitals already do some form of rapid testing already, so you wouldn't see an increase in sheer numbers, but there what we saw was an increase in volume. Does that make sense?

Brian Weinstein - William Blair & Company

Yeah. That makes sense. Did you see any effect from the various molecular offerings that are out there in terms of maybe somebody using a molecular as a first line as opposed to a reflex test? Did you see any of that in the quarter that might have affected the business in any way?

Douglas C. Bryant

We have heard anecdotally that there would be a hospital or so that would have been considering that, but remember that most hospitals are not running molecular tests. They don't have the equipment and they don't have the staff to properly run highly complex molecular diagnostic assays. So I think it's entirely possible that there would be some hospitals that might consider that, but the numbers wouldn't be large. The universe of those customers is not very large.

Brian Weinstein - William Blair & Company

Okay great. Thank you very much.

Operator

And our last question comes from the line of Steven Crowley with Craig-Hallum Capital. Please proceed.

Steven Crowley - Craig-Hallum Capital Group, LLC

Yes. Just a couple of followups, one for you, John. In terms of some balance sheet items, would it be possible or could you give us receivables in inventory at the end of the period or at least ballpark level for those numbers?

John M. Radak

Sure. Inventory at the end of the quarter was $12.9 million and the AR balance was $25.4 million.

Steven Crowley - Craig-Hallum Capital Group, LLC

Okay, great. And then one followup for you, Doug. Even though it hasn't shown up in the CDC data, we started to see some more local news stories talking about the emergence of seasonal flu, or at least some evidence that it is out there. You guys typically have a little earlier and better vantage point on influenza. What are you seeing related to seasonal flu here?

Douglas C. Bryant

We are seeing very little of the (inaudible) — very little seasonal influenza.

Steven Crowley - Craig-Hallum Capital Group, LLC

And do you have any thoughts whatsoever on the implications for seasonal flu of the big incidence of H1N1 here or no crystal ball?

Douglas C. Bryant

As I tried to state earlier, I think it's almost impossible to predict. Again, we do see cases of second peaks in other countries. Whether that will happen here or not we don't know, and then of course we haven't seen seasonal flu so much anywhere, including the United States.

Steven Crowley - Craig-Hallum Capital Group, LLC

Great. Thanks for the color.

Operator

And there are no further questions. At this time I would like to turn the call back over to Doug for closing remarks.

Douglas C. Bryant

All right. This concludes the call for today. John and I thank you again for your time this afternoon and for your continued support. Take care, everybody.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and everyone, have a wonderful day.

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