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Executives

Doug Bryant - President and CEO

Quidel Corporation (QDEL) Credit Suisse 2011 Healthcare Conference Call Transcript November 9, 2011 9:30 AM ET

Operator

Thanks everybody for joining us here and it is my pleasure as we start the afternoon session on day 1 here to introduce Quidel, I am really glad – and the guests who have joined us is Doug Bryant to give us an overview of the company presentation and then we will move over to the Canyon Room after this for the breakout.

Dough Bryant

Good afternoon. I hope with such a huge audience that I don’t get a little nervous. I thought it was fine. I’ll be making forward-looking statements, of course.

The company has been around actually quite sometime now. We are based in San Diego and have been around since 1979. Introduced our first commercial product in the diagnostics space in 1984 that was actually a pregnancy test that became the basis for many manufacturers’ products that were out there. In other words, we were an OEM manufacturer originally and then we took our own product into the market. Shortly thereafter developed a Strep A test. And then for years we are known as a Rapid point-of-care diagnostic company that supplies easy to use tests, that were performed in physicians’ offices primarily, but also in a hospital lab segment.

In 1989 we began developing products in other areas that were in the life science research tools space mainly, bone health markers and complement pathway markers that are supplied to pharmaceutical companies and other folks that are doing research. In 1999 through collaboration with GlaxoSmithKline we developed the first Flu A/B product, which has had a couple of improvements over the years. And then, sometime after that we actually went public.

Most notably, recently, since I have been here we have put together a collaborative agreement with a company called BioHelix based in the Boston area with the intent to develop the world’s first handheld disposable molecular device. I’ll talk in a few minutes about where we stand with that effort.

In 2010, actually the very beginning of 2010 we completed the acquisition of a company called Diagnostic Hybrids, based in Athens, Ohio. This is a company that did extremely well in the virology space and also had molecular capability, as well as monoclonal antibody development and manufacturing capability. And then also in 2010 we entered into a collaborative agreement with the Northwestern University and their Global Health Foundation in an effort to develop an instrument, a fully integrated molecular diagnostic platform, inexpensive enough, and simple enough to use that it could be placed in Africa to do HIV viral load testing.

About two thirds of our business is the rapid point-of-care business, the big chunks of course are flu, Strep and hCG, they account for about 80% of our sales in total there. We do about $120 million or so in these rapid point-of-care devices. And the green, the third, or nearly a third, the 27% there Diagnostic Hybrids, these are the cellular-based assays that again are provided to our customers who have virology labs. There are about 1000 virology labs in the United States, as an example, and our customer list is about – well, it’s something north of 718, I believe. So we do quite well in that space. And then the smaller piece there the Scientific Products Group, again based up in Santa Clara, California, these are bone health markers and complement pathway markers that are in a different technology format called Microtiter.

The markets we are focused on are actually numerous and depending on the product we could be in any number of different live settings. For the Lateral Flow, which again are our rapid point-of-care devices, we are in physician’s offices, large and small, CLIA waived and moderately complex, as well as the hospital setting.

Our Direct Fluorescent Antibodies test, virology assays are sold into large reference labs and hospitals, as well as the life science research tools space. And our Microtiter assays, again are in those same larger settings. And then recently we actually launched our first molecular products in Europe, or primarily in Europe, and those are in the reference lab and large and small hospital space.

So, there are a number of different market segments than we actually address.

We have core competencies and capabilities in a number of areas, foremost we are an immunoassay development and manufacturing company. We are highly automated, in fact our drug to labor as a percentage of our cost of good sold is only 4%. So, we have pretty good capabilities to manufacture these rapid point-of-care tests in San Diego. One of the reasons that we are able to do all that it is there is that we are highly automated.

We have global distribution for all of our products, so there is not a market that we intend to be in, that we don’t already have distribution. We have a great deal of expertise around clinical trials, in fact, we do our own clinical trials internally and clearly we have the capability of putting together the package that is capable of gaining FDA class.

We have strength – brand strength around our flu test, of course, but we are also known for strep, pregnancy, herpes where we have very high market share, and Graves’ disease – we have the world’s only diverse stimulating immunoglobulin tests, it’s an FDA cleared product, and we effectively are the market for that assay.

And then finally, not to be understated, we are now a molecular company and actually have a great deal of molecular assay development.

One of the reasons that we are a molecular company is that we brought on board guys that have done this before, our Vice President of R&D, who came onboard in 2009, comes to us from a couple of different experiences where he was responsible for the development of a number of molecular products in the market. Our Chief Scientific Officer is M.D., Ph.D. from Duke and was responsible for establishing a molecular virology lab there. We ran on board a completely new business development team. We created a technology assessment group, as well. So, we now develop products and track the development of those products completely differently than we had a few years ago.

We are redefining our go-to-market strategy. Our intent is to have more control with the sales process. Not necessarily to take over from distribution for fulfilment, but we certainly aimed to have more control over price and contracting with customers’ overtime.

As I mentioned earlier, we made a key acquisition, but we are also evaluating other things that we would call smaller tuck-ins that would help us with our strategic plan. And then, again, not to be over emphasized but we are now a molecular company something completely different than a few years ago.

It’s no surprise that the Flu viral typically occurs, at the same time every year it’s quite volatile, in terms of market size. And so historically we have been affected by the size of the flu season from year to year. And we intend though going forward to build a broader-based diagnostic company with products in markets in which we have significant regulatory and commercial expertise and know-how. And I will talk about some of those in a second.

We have three major areas of product development. Sofia, we are just a Fluorescent Immunoassay Analyzer, it was cleared by the FDA for sale here in the United States on October 26th. We’ll talk a little bit more about that in a second. The second program that we have in development is called Bobcat, it’s an instrument that effectively automates the reading of Direct Fluorescent Antibody slides that are performed in virology labs. And then finally we have a three-pronged molecular program that includes a product called AmpliVue, that’s actually the brand name of a handheld disposable molecular device; a series of Real-Time PCR kits that can be run on numerous different thermocycler platforms; and then finally the program I mentioned with Northwestern where we are collaborating to develop an instrument for placement in Africa to do HIV viral load testing.

Initially, within beyond that TV [ph] testing and as well as in more developed markets like the United States and Europe where we have a series, all of those kits that we will have developed for the real-time PCR obviously will be capable of being run on that new platform that we call for obvious reasons Project Wildcat. That’s Northwestern University in mascot. (inaudible) that’s where those internal names come from.

So let me talk just a little bit about the systems. You can see photos of those systems, not just scale, the Sofia Analyzer is actually quite a bit smaller than the Bobcat. I just noticed that for the first time. But Sofia is a load instrument that basically takes everything that we do today and gives an objective read. What’s different with the Flu assay, which was just cleared in the United States on October 26, those differences are few. One is obviously this assay is now read on an instrument and objective. The antibodies that we use in this particular assay are different than the current product and they have a stronger affinity and avidity and are cleaner which enables us to ramp up the sensitivity for flu without creating a lot of amounts of specific binding, in other words without creating a specificity issue.

In addition, this platform actually uses a completely different chemistry involving European label deeds that enable us to have an excitation and a detection wavelength, both of which are ultraviolet but are completely separate. And what that enables our internal development people to do is to develop assays that are significantly more sensitive and but at the same time highly specific. So the negative predictive value on these assays as demonstrated in our clinical trial here in the united states is nearly 100%.

In fact, in the clinical trial, Flu-A Nasal aspirate samples we were 99% sensitive relative to culture. And further in a study that was just presented in Malta, a couple of months ago, we compared very favourably versus the PCR assays that’s run in the Robert Koch-Institute in Berlin. And in that study, the sensitivity and most of the positive samples was actually 98%, so we were a 98% sensitive relative to PCR.

So, we look forward to launching this product, in fact our sales guys are out already this week talking to customers about the product. Importantly, we think the number of placements that we will gain early on here with this early approval by the FDA is important, because it is important from a flu market perspective, but more importantly the Strep assay which will follow as a much bigger market and opportunity for us.

So, 2012 should be a very interesting year as we launch this new platform. We talked a little bit about Bobcat, Bobcat just completed a beta site trial in Hong Kong and in New Zealand where we confirmed the algorithms that we have for analyzing eight viruses simultaneously, indeed worked quite well, and we will be starting clinical trials here in the United States in the near term. But, we have a thyroid program that is basically, that’s mainly an educational effort to physicians, helping them understand that TSI can be used to diagnose Graves’ disease definitively and then filing the molecular programs that I talked about before.

Let me give you an idea of market opportunity and the potential that we have going forward. If we just look at the space where we compete today and these numbers by the way are all US only. But, if we look at the space where we are today, the total served market, in other words the served available market for the products that we currently manufacture, and not counting something that we don’t have, is about 270 million today. In others of the things that we manufacture today, $270 million with the product is sold per year, and as I mentioned before, our sales is about a 120 million of that, so we have reasonable share in the space.

We believe Sofia will solidify our pricing in this space and the instance of flu will offer us an opportunity to potentially increase price with Strep and we believe that we with this particular instrument and a different go to market strategy, we will be able to shift share pretty dramatically over the next 12 to 24 months.

The real home run opportunity though is once we have these placements in the market, some of the quantity of assays that are typical sent out from physicians’ offices to reference labs could be done in their offices, examples of that would be Vitamin-D, TSH, Glycated Hemoglobin, PSA testing, these are things that are normally sent out that don’t necessarily need to be an reimbursement as and that segment is pretty nice. You can see also that we have a reasonably opportunity going forward. Bobcat, maybe not as dramatic, but we certainly intend to take care of the customers who currently use our products giving them a better way to perform the product. The major improvement with the Thyroid program will come when we pair TSI with a product called TBI, the Blocking Immunoglobulin and we think that there is a potential for expanding the market there.

And then finally, you can see some numbers ranging from 160 million to 760 million, these are just based on what we have currently funded for assays in the later program. So nothing that was in what we recall a phase zero and a prototype stage would included in those numbers.

We are quite often asked because, the appearance is that we are pipeline company, we have all these things that we are trying to deliver overtime, what are the milestones that we should be looking out for. Certainly, regulatory approval and clearances is the next step after we developed a product. I will suggest that often the commercial effort is under called and people make an assumption that we can automatically sell these products, that’s not necessarily true, and we have lot of work to do, but certainly gaining key regulatory approvals is very important, and you can see that just recently we had FDA cleared both the instrument and the first assay flu. We will have Strep assay shortly, more than likely in 2012 and then followed by an RSV assay, those are the three immediate products that should be launched.

In Europe, we have already gained CE Mark for go saying two products, Sofia, the analyzer and the flu assay, as well as a flu Real-Time PCR assay and a Human Metapneumovirus Real-Time PCR assay, and we have several others teed up behind that.

So over the next couple of years we intend, as I mentioned before, to be a broader-based molecular company. We clearly think that we can continue to move diagnostics closer to the patient, we think the economics work better as well. We intend to have a more diverse customer base, and as I mentioned before, also to own more of that customer relationship.

We continue to work on expanding our geographic reach, historically this company has been primarily US-based and only about 15% of the sales ex-US and a big chunk of those were in Japan where there is a big flu market. Clearly, with this new set of products we have an opportunity to expand geographically and we are working on that today.

Greater line of sight and an understanding what our customers are doing because our sales people will be controlling that relationship and then finally just more product offering across multiple segments and overall a broader-based diagnostic company.

This is the last slide which just shows how we have done over the last few years in terms of revenue and operating income on a GAAP basis. There is a couple of things I think that are worth pointing out. We have said all along that once we get to the 250 million to 300 million of revenue range that we fully think that we could get to an operating margin north of 30%. We say that because we think there is a lot of leverage across the P&L. If you look at 2008, for example, both the left and right hand side there, and you are real good at doing math in your heads, you could see that we did in 2008 something around 22% or 23% in operating income or margin, excuse me. And then in 2009 simply because of volume, more volume through the factory in San Diego we were actually north of 32%. So we know that as we launch new products and so long as we keep control of our cost that we are going be able to get somewhere north of that 30%. And that’s the game plan.

I think we have maybe time for a question, but if nobody has any question we can also just march over to the next room.

Question-and-Answer-Session

Unidentified Analyst

Any questions out there, I can throw one out there. Do you have a couple of minutes, I could maybe you could just, one thing I would ask is you touched a little bit on this (inaudible) here and there about the geographic expansion and just you spoke as your pattern, could you maybe give a little more color on that, and just in terms of the regulatory environment in the US versus other outside the US?

Dough Bryant

Sure, sure. Well first on the regulatory – to the regulatory question. CE marking has significantly more straight forward as process. Once we submit the data to the agency, to a third-party there, we would typically expect approval within 10 days or so. When we submitted the package here for Sofia in the United States, it took 88 days. But, if you talk to my peers, you would learn that 88 days is pretty short relative to some FDA approval at times. And so the FDA approval times can be variable, certainly in Europe it is pretty straight forward. Then if you look at other countries, some of them are countries in which where you manufacture the products matters. If you are a US manufacturer they would like you to be FDA cleared before you ship products there. There are others that accept CE marking and there are those that have their own registrations like China and Japan.

In terms of what we have actually gotten done, we have set up an entity in Germany, we have our own small direct sales force, already we intent to go direct there as a way of demonstrating that we can and do that there. We also operate with distributers in other key countries.

In China, we have put in motion our effort to set up a WFOE, Wholly Owned Foreign Enterprise. So in other number of countries we have projects underway to bring products, now that we have things that are potentially more useful in those market segments.

Operator

One Quick question back there.

Unidentified Analyst

(inaudible) taking down inventory.

Dough Bryant

Our inventories are quite low. It wouldn’t be a matter of taking down inventory as much as allowing inventories to come down, yes.

Unidentified Analyst

(inaudible)

Dough Bryant

Yes. We are right at the level where if the season picks up dramatically that we are going to have to ship our partner’s product, there we are down to something like 400,000 test, or so out there. And in a typically flu season, these guys will order a 300,000 tests a week. So we are right at the level where they still have product in warehouses, but there is a not a lot of it. So in terms of where we are at in the season, I just read a document a few minutes ago from one of our finance people, I guess we are apparently about 42% better off in terms of where we were last year in the flu season. Although, I will tell you that if you look ILI rates they are not a whole lot more than 1%. So 1% of physician office visits are for flu, which is still typical for this time of year, but not high. So we are looking at normal so far.

Operator

Okay. We’ll just cut it there and then again we have a break out in the Canyon room.

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