Quidel Corporation (NASDAQ:QDEL)
JPMorgan Healthcare Conference
January 11, 2012 11:00 AM ET
Doug Bryant - CEO
Good morning. We’re going to go ahead and get started. Welcome to day three of the JPMorgan Healthcare Conference. I’d like to remind you all that please silence your cell phones. I am very happy to have this morning Quidel’s CEO, Doug Bryant. The breakout here will be in the Olympic Room.
Thanks, Kevin [ph]. Good morning, everyone. We will be making some forward-looking statements. Our company is one with a fairly rich and long history. We actually commercialized our first in vitro diagnostic product in 1984, became known as a company that manufactured pregnancy tests and that was the basis for our business for some time.
We introduced one of the early strep tests as well the following year and then a few years later. We became one of the early developers and manufactures of the flu A/B test. We’ve done a number of things over the years to improve the productivity of manufacturing and you see and up there for 2007. By 2007, we had almost fully automated all of our manufacturing processes and in fact today direct labor is only about 4% of cost of goods sold.
So, highly automated, highly reproducible products that we manufacture these rapid point-of-care tests in Santiago. We do about 50 million tests per year, that’s growing and I’ll talk more about that in a little bit.
I came on board in January/February in 2009. I actually took this job March 1st. Later that year, we entered into a development agreement with a company called BioHelix to develop a handheld molecular device and I’ll talk a little bit more about where we are at with that products in the next slide or two.
In 2010, the very beginning of 2010, actually at this conference at that time we announced that we had acquired Diagnostic Hybrids, a maker of cellular-based assays that they develop and manufacture in Athens, Ohio.
In 2010, we also announced a collaborative agreement with the Northwestern Engineering School and collaboration also with a Northwestern Global Health Foundation, the purpose of which is to develop a fully integrated molecular platform that would be inexpensive enough to place in Africa to do HIV viral load testing. So, I’ll talk a bit more later about where we are at with that project.
And then in 2011, 2011 was actually a very good year for us. I’ll talk about some of the details again later, but we did launch Sofia, our next generation lateral flow technology. We’ve actually shipped a number of countries including this one, customers in those countries. And then, we actually received at the very end of the year FDA clearance for our first two molecular assays.
Today about two-thirds of our business is the rapid point-of-care business, still the remaining third is made up of the DHI business in combination with some life science research products that we manufacture in Santa Clara. Flu is a big product for us still although doing the math for 2012 assuming a neural [ph] flu season, flu should account for about 27%, 28% of our sales.
Because of the products that we manufacture, those that fit the highly complex lab as well as those that fit in the doctor’s office, we have a number of points upon which we call. If you look at the lateral flow technology, that’s the rapid point-of-care technology, that actually is applicable in almost every segment in healthcare at least in terms of diagnostics.
And you see there DFA/cell that’s the DHI business. Those products are mainly pointed at the very large hospital reference lab. There are about 1000 clinical virology labs in the United States obviously as a percentage number of hospitals that’s quite small. And then you see where our market products shift, as well as our molecular products.
Our company has a number of competencies. Foremost we are an immune assay development and manufacturing company. I described the extent to which we are automated, but we are known for highly reliable products in that space. We have a global distribution network here in the U.S. We use in addition to direct selling efforts we use some of the larger well-known distribution partners ex-U.S. depending on the country.
We similarly have a good distribution network. We certainly have demonstrated recently that we now have to get things 510 (NYSE:K) cleared by the FDA and I will admit that of course most of those things are in the categories where we know something about it. So, that really has not necessarily been that difficult. And I would say for the most part we’ve been able to hit our timelines based on those approvals.
We have brand strength in flu of course, strep. We manufacture about 15 million strep tests per year, pretty big volume test for us and similar volumes of pregnancy tests. Well known in the space for herpes, which is terrific at a cocktail party. Our people know a lot about it. And then we are also well-known in the Graves’ disease space. We had a number of issues over the history of the business.
We actually had tried to take onboard a different technology that would replace our existing business and unfortunately it didn’t work real well, so we had to do a bit of a restart and when I came on onboard in early 2009, we actually didn’t have a product in the pipeline. So, we had to bring on onboard a number of people including R&D talent, business development folks, et cetera.
I think, we’ve made a lot of progress. We said at that time, we wanted to do three things, in fact one of the first presentations I made; I said based upon my observation of where this business is we needed to do. Three things, first, although I don’t think the audience necessarily thought this was believable, I said we would develop and manufacture two to three new assays per year and as I am going to describe in a minute, we were exceeding that of course.
We said we wanted a greater control of the sales channel. We wanted to be able to speak more directly to our customers and I’ll talk about what we've done in that regard there and in fact this year we're building out more direct commercial infrastructure both here and in Germany.
And then finally we said we wanted to be in short order, a molecular diagnostic company, something that perhaps also was not entirely believable but as I just announced a second ago, we now are a molecular company as of December, 2011.
At the end of the day, we intend to build a broader base diagnostic company but in products or with products there are market segments in which we have significant regulatory and commercial expertise. None of things that you’ll hear us describe are outside of what we know how to do.
We have essentially three major R&D programs ongoing, the first of which is called Sofia. It’s a fluorescent immunoassay analyzer that gives the printable result. It provides for connectivity to a laboratory information system and provides dramatically improved product performance for things in the infectious disease space.
In addition, we have been working for a couple of years now on an instrument called Bobcat, which automates the interpretation of the DFA slide. Today, traditionally it takes about 90 minutes to set up and read a slide in a dark room with the fluorescent microscope. It requires a highly skilled technologist. This instrument basically takes that reading process and automates it. And through a new liquid DFA format actually, it shortens the assay time down dramatically.
And then finally we actually had in the molecular space, we have three different programs. We have what we believe to be the world’s first handheld non-instrumented molecular device. It does not require a thermal cycler; it requires only a heater block and some common sense.
We also are the developer now of a number of real time assays. We do this for two reasons, one of which is that throughout the world there are a number of laboratory developed tests. Customers tell us that they would rather have kits for these products. But in addition to that we're also building a menu so that when we do launch Wildcat, the instrument that we are co-developing with Northwestern at the end of 2013 we'll have a menu.
And then of course Wildcat, as I just mentioned is that integrated platform we intend to complete by the end of 2013 for ex-U.S. shipment and then with regulatory approval in 2014 here in the U.S.
So here are the features and benefits and of these products. Generally, I mentioned Sofia at the start. This is an objectively read product. The easiest way to think about this, the value of the objectivity of these tests is that today whether it’s in a doctor’s office or it’s a patient who buys a pregnancy test over the counter, there are number of people who don’t necessarily read those results correctly. In the case of a pregnancy test, the woman or the man who purchases the pregnancy test is looking for the presence of a blue line and depending on whether they are hopeful that it’s positive or hopeful that it’s negative can cause one to interpret the test differently. Our IR manger sits in front and smiles here because his wife is one of those who was unable to correctly interpret a pregnancy test.
But the ability to take that test and in the case of products in over the counter the ability to actually objectively read that product has a lot of value.
In the case of Sofia, we actually developed a product though, primarily because we wanted to see improved sensitivity for our assays, in particular flu.
As we came out of 2009 during the pandemic, it was pretty clear that these tests were performing in a manner less than desirable. They weren’t sensitive enough.
In fact the best test on the market, which was ours at that time, the CDC set was only 70% sensitive for Flu A. And that’s actually not good enough.
When you look at the data from our clinical trial here in the United States, you see that for example for Flu A and nasopharyngeal swabs, our sensitivity relative to culture was 99% and the negative predicted value was 100%. And in a study in Germany where they compared our product to the national reference labs, PCR products in the same flu A type samples; we had 98% positive predictive agreement relative to that PCR assay. So, dramatically improved product. We believe, it’s cleavable [ph] and we expect to have a clear waiver not later than the end of Q1.
Bobcat, as I mentioned is a product that automates the reading of the slides that many of our customers run. Of those 1,000 virology customers in the United States, 70% of those are our customers. So, this is a pretty important product for them.
I mentioned before that we would be starting beta trials in New Zealand and in Hong Kong we completed those trials this summer and then we began U.S. clinical trials here in November.
Thyroid is another program. We have the only FDA cleared TSI test, which is confirmatory for Graves’ disease. It’s a small product for us growing fairly rapidly, but still at this stage not a major contributor to our growth. And finally, we talked about the molecular program.
When you look at what the market sizes look like for us, today here in the United States where Sofia will compete, there is about a $270 million market for the things that we manufacture. And of that, we do about $120 million.
So, there is some room to go up in terms of share, but the real opportunity is that the Sofia analyzer also does quantitative assay. So, the things like TSH or PSA or vitamin D can be developed and are being developed for use on the Sofia platform and when we do enter those markets, you can see on the right hand side that the market potential is actually significantly larger.
The same is true in Bobcat. Bobcat is an instrument that we developed for our current customer, but it’s credulous that there might be customers who don’t do virology today, but rather send it out.
We’re certainly going to make it easier for those customers to run those assays. This is a multiplex product that does eight viruses simultaneously. We think there is potential market there and if so, it could increase that size pretty significantly as well.
We see a similar sort of analysis for TSI, we're looking at, TSI stands for Thyroid Stimulating Immune Globulin. We're also developing a TBII blocking immune globulin as well. And when we do we believe that we can expand the market there. And again these are US numbers.
There is also obviously opportunity ex-US. And then a similar analysis to look at what we've got going on today but then what the market looks like once we actually launched wildcat.
These the assays I mentioned that have been cleared so far, I want to take a minute and I actually this morning had to take a couple of notes because in fact, we actually have a number of things going on and so I want to make sure I adequately kept track and brought everybody up to speed with where we are at with respect to our pipeline.
In terms of the real time PCR assays, as you see on the chart there we've actually got two approved. We have another four assays that are going to go into clinical trials here in the US eminently. So within the next weeks we will be in clinical trials with four additional assays.
The next wave of assays, those that are currently funded and development, the account there is another six assays and then we believe that in 2013 and beyond we'll be looking at the development of between eight and 12 assays per year. So by the time the wildcat actually launches we will have significant menu that can be run there.
In terms of Sofia, as mentioned we have one assay approved here in the US so far, another in clinical trials ongoing today. We have two assays that are actually approved in Europe. We have another five that are currently funded that are in development and we expect at least three of those five to be potentially in market or in clinical trails at the end of 2012.
And then in 2013 we're looking at probably five to six additional assays. That's just given the current spin and current infrastructure within our R&D organization. I talked already about Bobcat we're in clinical trails now.
Unlike the other assays that we believe we have pretty predictable approval paths, I will admit to the audience that we're not sure about Bobcat.
This is actually the world's first of its kind and although we do have a predicate device, our own product against which we can compare, I don't really know fully what the regulatory cycle is going to look like. So we hope to be in market by the end of 2012 but I am not going to put it in my model anyway.
And in terms of ample flue, the handheld molecular device. We have one assay in clinical trails now started last year in which and which will wrap up this month. We have another that's about to start. So we have two assays there and there are two further assays that should be in market by year-end.
So we'll have two assays that will launch mid-year 2012. Those are both hospital acquired infection type assays and then we will have two further we hope but certainly confidently I can say at least one of the two will be in market by the end of 2012.
So far we’ve done a pretty good job of predicting our development times and our regulatory approvals. I don’t see anything so far that would tell me that we have anything different at this stage.
When we look at our business today, we talked about 2009 are the things that we needed to do. 2011 was a year in which we actually solved a number of technical challenges. These are challenges that will not need to be solved again, but they’re incorporated in these existing products.
So, the reason I’d tell you that is it should get faster. And when I tell you that we’re going to have more assays developed with each year that goes on, we say that with a great deal of confidence actually because we know that we don’t have to go back and redo the same things over and over again.
So, 2011 was the year in which we did solve a number of technical hurdles, those things were behind this, so the 2012 the things I said we are going to develop for, put in clinical trials, we can say again with a great deal of confidence, 2012 then becomes a year in which we just simply need to execute and at the same time build more commercial infrastructure both here in the United States as well as ex-U.S., so that in 2013 we can have rapid acceleration of the top line.
We have to have rapid acceleration of the top line in 2013 if we’re going to hit what we said that we would do in 2015, which is an incremental $100 million in revenue at a fall through of at least a 30% at the operating margin level that’s essentially the game plan.
So, when we get there in 2015, we will have built a broader based business, we will also be a molecular company, in fact we will be able to address the entirety of the diagnostic continuum beginning in the doctor’s office to the highly complex lab.
At the same time, we will continue to move diagnostics closer to patient. We’ll have a more diverse customer base. Flu obviously becomes an upside rather than the key driver to our margin.
We’ll have expanded geographic reach, greater line of site to our end-users and in fact let me give you an example what the Sofia product here in the US; we’re actually contracting directly with the end-user. That’s not something that we had done in previous years. So, we have already taken steps to gain greater control of the sales channel.
And then finally we’ll have product offerings across multiple segments. This is the business model. You can see easily that we’ve got a great deal of leverage.
Leverage obviously works both ways, but as our volume does increase and we do accelerate our top line, we fully expect to go from a company that historically was doing well at an operating margin, slightly north of 20% to a company that easily is north of 30%.
So, I see I’m just slightly ahead of schedule, but I will stop here, and we can move to the Olympic Room for questions.
[Break-out Q&A session not part of the webcast]