Quidel's (QDEL) CEO Doug Bryant on Q4 2015 Results - Earnings Call Transcript

| About: Quidel Corporation (QDEL)

Quidel Corporation (NASDAQ:QDEL)

Q4 2015 Earnings Conference Call

February 17, 2016 5:00 PM ET

Executives

Randy Steward – Chief Financial Officer

Doug Bryant – President and Chief Executive Officer

Analysts

Jack Meehan – Barclays

Alex Nowak – Piper Jaffray

Brian Weinstein – William Blair

Nick Jansen – Raymond James

Tycho Peterson – JP Morgan

Tim Evans – Wells Fargo Securities

Mark Massaro – Canaccord Genuity

Bill Bonello – Craig-Hallum

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation’s Fourth Quarter and Full Year 2015 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]

I’d now like to turn the call over to Mr. Randy Steward, Quidel’s Chief Financial Officer. Please go ahead.

Randy Steward

Thank you, operator. Good afternoon, everyone. Thank you for joining today’s call. With me today is our President and Chief Executive Officer, Doug Bryant; and Ruben Argueta, Director of Investor Relations.

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 today, February 17, 2016. 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 12 months ended December 31, 2015. If you have not received our news release, or if you would like to be added to the company’s distribution list, please contact Ruben at 858-646-8023.

For today’s call, Doug will report on the highlights of the fourth quarter and provide updates on our product development pipeline. I will then briefly discuss our financial results and then we’ll open the call for your questions.

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

Doug Bryant

Thanks, Randy, and good afternoon, everyone. In advance of the J.P. Morgan Healthcare Conference in early January, we had announced that revenues on the fourth quarter 2015 were lower than anticipated. And that the shortfall was driven almost entirely by the delay in the onset of this year’s influenza season. For today’s call I’ll provide a bit more color and our results for the quarter, and talk briefly about our progress with a few key initiatives and our product pipeline.

Total revenues in the fourth quarter 2015 were $52.4 million, a significant reduction from $64 million in Q4 2014. Interestingly, until the last three weeks of the year we had been running meaningfully favorable to each of the prior year months and quarters including Q4. The key difference in the last three weeks of last year, it was the absence of reordering of our influenza products by our distribution partners, the difference of approximately $20 million in influenza revenues.

Further the softness in influenza revenues persisted through January as well, due to the continued delay of an influenza epidemic, which still has not occurred in many of the key state required often drive demand for influenza revenues. While the data we collected through Virena, our cloud-based surveillance and data management system, are indicating an uptick in influenza testing in prevalence in several regions of the U.S. I think it’s safe to say that our Q1 2016 revenue will be lower than we would have anticipated to some degree as well.

Despite the year-end revenue disappointment, there are several highlights that would suggest that Quidel actually had a very good year and as well positioned for growth and after levels previously communicated. First, revenues at $196.1 million for the year, where actually a record for our company even without the additional $15 million to $20 million or more that we would have expected the last three weeks of the year.

Second, given no obvious beginning of U.S. influenza epidemic, Sofia placements were surprisingly strong in Q4 as they had been in Q1 and Q3 driven by market share gains for Sofia Influenza, RSV and Group A Strep and both a professional and non-traditional segment. The ability to easily and affordably standardize across networks and near real-time access to data through our Virena system or among a number of factors that drove many decisions to mostly Sofia.

Third, the Sofia 2 immunoassay system development program is going very well. Relative to several successful R&D initiatives we’ve undertaken in the last few years, Sofia 2 has clearly been well managed and is likely to be a near-term contributor to our company’s growth. We are on time, on budget, and expect to be in U.S. trials with three Sofia products imminently.

Fourth, we made good progress with Sofia assay development. We launched Sofia Strep pneumoniae ex-U.S. and although early have won our first tenders in Europe. We continue to expect favorable FDA clear reviews for Sofia hCG and Sofia Strep A plus READ NOW Mode, the latter of which will enable high-volume physician office labs’ strep customers to perform 40 or more Sofia Strep tests per hour per instrument. And we expect to begin U.S. trials for Sofia 1, and Sofia vitamin D shortly as well.

Fifth, our Solana molecular program was U.S. FDA cleared mid-year in 2015, as was the first assay, a confirmatory method for Group A Strep. Now on our second quarter of launch having gained valuable insights from our experiences with our previous AmpliVue launches, we’re demonstrating our ability to compete in the molecular segment. In fact, I would say that the number and type of customers early on has been encouraging.

Sixth, our Savanna development teams, who arguably have responsibility for the most ambitious and innovative of our product development endeavors, have made tremendous progress. Recently the teams achieved another major milestone by demonstrating that our quantitative HIV-1 viral load assay performed well on a fully integrated Savanna instrument with a fully integrated cartridge assembled with assay reagents in their intended form factors.

The teams are now moving to our next big milestone, field studies in Africa, during which we hope to reproduce our internal results using fully integrated Savanna HIV-1 viral load cartridges assembles on our manufacturing line in Athens, Ohio and shipped under normal shipping conditions to the developing world. And finally in December we validated our newest manufacturing line, which further automates the assembly of Sofia and Sofia 2 test cartridges.

This higher speed line, lower labor costs and gives us the additional capacity, we expect that we will need to address with demand created by the new Sofia products that we have in various stages of product development. In closing, 2015 was in reality, a productive year for Quidel in retrospect. Our commercial organization is right where we want to be in terms of structure and training, and our execution from targeting to close is noticeably better.

Further, our relationship with and the performance of our key distribution partners have never been better, which is the testaments to the clarity of our strategy, our brand strength, and the uniqueness of our product. We also had a very productive year from a product development perspective. I mentioned where we are in respect of our Sofia and Savanna platform. In addition, there are currently numerous Solana assays in development, several of which we would expect to introduce to the market in 2016.

In 2016, we expect our commercial in R&D organizations to execute, as they have been and that these efforts will demonstrate tangibly that we are on a path towards our previously stated longer-term financial goals. In addition, we continue to look at the deployment of our capital with a particular emphasis on M&A, although we cannot speak specifically to what targets we may or may not look at or two timing.

Overall 2015 was a good year for us and I would expect 2016 to be an important next step toward the achievement of our longer-term aspiration. Randy?

Randy Steward

Thank you, Doug. As we reported earlier today, total revenues for the fourth quarter of 2015 is $52.4 million. This compares the $64 million in the fourth quarter of 2014. As Doug mentioned, our shortfall the last year and to our internal estimates, was driven by the lack of demand for our influenza products in the last three weeks of the quarter.

Global infectious disease revenues which include QuickVue, Sofia, DFA, cell culture and molecular products, decreased to $38.7 million, as compared to $50 million in the previous year. This difference was a result of the shortfall in influenza revenue which was $24.3 million in the fourth quarter, also impacted by weak respiratory season, total Strep A product sales decreased 7% to $7.8 million. Although Sofia Strep A product line grew by 209%.

RSV product sales increased 33% to $2.9 million in the fourth quarter, led by 60% growth in Sofia RSV. Even with the weak respiratory season at the end of Q4, total influenza revenue for the year reached $88.4 million and 8% increase over last year. We also achieved strong Sofia Influenza revenue growth year-over-year as full year Sofia Influenza revenue increased 40% versus last year. All of our Sofia metrics remain intact.

We have placements of over 14,000 instruments. The cannibalization rate for all assay is below 40%. Our annual Sofia revenue per customer is approximately $6,000 and we continue to steadily convert QuickVue customers to the Sofia platform.

Revenues for the women’s health category increased 6% in the fourth quarter to $9.3 million. We realized strong growth in our complement business as well as a 5% growth in Thyretain. Our pregnancy revenue was $4.3 million in the quarter. Our gastrointestinal product category revenues were $1.8 million in the quarter and the other product category was $2.6 million. Gross margin in the quarter was approximately 65%, this compares to 67% in the fourth quarter of 2014.

We estimate that the influenza revenue shortfall impacted our gross margin by approximately 250 basis points, otherwise we were tracking to our internal expectations. Research and development costs in the quarter increased versus last year due to the additional investments in our immunoassay business with the Sofia 2 instruments as well as the vitamin D and Lyme assay development.

Sales and marketing expenses in the fourth quarter were $12.1 million. In the quarter, we accelerated our spend on marketing, specifically focusing on the Virena cloud-based system and data visualization capability.

General and administrative expenses were $7.4 million in the quarter. $500,000 increase over the prior year mostly related to investments in the Information Services Group. In the fourth quarter interest expense was $3.0 million of which $2.8 million related to the convertible senior notes. Of that $2.8 million, $1.4 million relates to the 3.25% cash coupon.

In the fourth quarter, we realized a small income tax expense of $50,000. The taxable income in the quarter was relatively small as well, thus the discrete tax item disproportionately impacted the effective tax rate percentage and the income tax expense. For the full year, our effective tax rate was approximately 35%.

Net loss for the fourth quarter of 2015 was $400,000 or negative $0.01 per share as compared to net income of $7.1 million or $0.20 per diluted share for the fourth quarter of 2014. On a non-GAAP basis, net income for the fourth quarter was $3.5 million or $0.10 per diluted share compared to net income of $13.3 million and $0.37 per share for the fourth quarter of 2014.

Let’s talk briefly about our 12-month financial result. As Doug mentioned, revenues for the 12-month period were the highest in Quidel’s history at $196.1 million. And we are pleased with the traction we are getting with our new product platform and assay. Infectious disease revenues totaled $141.9 million versus $130.4 million last year, an increase of 9% driven by solid increased demand for influenza, Strep A and RSV products. For the 12 months, flu revenues increased 8% to $88.4 million. Strep A revenues increased 11% to $29.3 million, and RSV revenues increased 37% to $7.8 million.

The women’s health segment increased 8% to $37.2 million for the 12 months of 2015. Growth in the category was led by our Graves disease product which grew 10%, while our pregnancy product line increased 4% to $17.8 million.

For 2015, our gastrointestinal segment revenues were $7.2 million, down slightly versus last year as a 17% growth in our C difficile product line was offset by revenue decreases in some of our other product line. The revenue from our other product category was $9.9 million of which $5.1 million was related to the grant from the Gates Foundation, was a development of the Savanna platform.

Gross margin for the full year was 63% as compared to 60% for 2014. This increase is due to improved manufacturing efficiencies with higher volume plus the expiration of the amortization of the Alere settlement. For 2016 we believe that with normal flu volume in the back half of the year, we should be able to improve our gross margin to 65%.

R&D expense for 2015 was $35.5 million, approximately 45% of our product development was for immunoassay business specifically Sofia 2, vitamin D, and Lyme. 55% of the R&D’s spend was focused on our molecular platform and support of Solana and Savanna.

As Doug mentioned in his comments, we achieved a major milestone with our Savanna platform successfully running a quantitative HIV assay and an integrated instrument in cartridge environment. With these results we continue to gain confidence in our ability to commercialize our Savanna platform in the 2017 and 2018 time period as we rollout additional assays on our Solana instrument this year. 2016, we’re estimating our total R&D expenses to be in the range of $35 million to $37 million.

Sales and marketing expense increased by $4.8 million in 2015 to $47.9 million primarily due to the full year effect of the 2014 sales force expansion. We currently believe we have the right size and talent in our sales and marketing team to support our revenue growth in the near-term. For 2016 we’re estimating the sales and marketing expense will increase by 5% to 7%.

G&A expenses were $29.4 million for the year. The increase versus the prior year is mostly the result of a one-time business development activities that concluded in the first quarter of 2015. For 2016 we’re estimating the G&A expense should be in the range of $25 million to $27 million. The year-over-year reduction is mostly due to the deferment of the medical device excise tax.

As noted by our expense estimates, we believe we have the right size organization and appropriate number of R&D projects to support our revenue growth expectations, while we strive to improve our profitability.

Net loss for the 12 months was $6.1 million or $0.18 per share. On a non-GAAP basis, net income for the 12 months was $11.2 million or $0.32 per diluted share. For the 12 months ended December, depreciation, amortization and other was $23.9 million, as compared to $28.4 million in 2014. For the year, we spent $17 million on property and equipment and during the year we spent $30.9 million to purchase shares of our common stock, effectively offsetting the dilution of our stock compensation program over the last couple of years. As of the end of December, the company had no outstanding borrowing under the senior credit facility and had $191.5 million in cash and restricted cash.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Jack Meehan with Barclays. Your line is now open. Please go ahead.

Jack Meehan

Hi, thanks. Good afternoon, guys. I just wanted to start maybe with Doug, I’m curious given obviously there’s a lot of moving perks with the flu revenue in the quarter and to start the year. I was wondering what gives you the conviction that you’re taking share in flu market. And then I’m curious what impact do you think that some of the new molecular entrance have had.

Doug Bryant

First, I’ll say that we are required as part of our compensation program to actually determine what our share loss or gain has been and we’re able to successfully defend our position that we’ve gained a number of share points in this space. And there are a number of different vehicles for determining that including third-party data.

Sofia placements even in a soft market have continued, but they’re not what we would expect in a normal robust season, but they have been pretty strong throughout the quarter and they continue even now in a soft market. They are at a level consistent with a low level of flu, however, particularly in the physician office segment. But in the hospital segment we continue to gain share in shucks due to the standardization that we’re able to help our customers achieve with their platforms.

Jack Meehan

Got it. That’s helpful. And then, just as my follow-up, just a little bit more visibility on the Sofia 2.0 trials, where do those stand today? What’s the timeline through the year, so when we should see announcements from you and the team? And then just the three assays could you remind me, what those three are?

Doug Bryant

The three assays, Sofia Influenza A+B, RSV and Group A Strep, we use the same Sofia test cartridge that we use in Sofia 1. And so, we will be demonstrating the equivalence of the two instruments, Sofia 1 and Sofia 2 actually achieving the same test results. So most of the studies that we’re engaged in will be internal studies and those studies will begin imminently. In addition to that, of course we’ll do a user study to make sure that folks find the Sofia 2 platform to be as easy to use as the Sofia 1 as you would normally do in CLIA waiver trial.

Given the fact that it’s next-generation technology, and then it's touch screen based and obvious to the user, I don’t think we’re going to find an issue with that. So we’ll start trial reasonably soon. And we would expect to complete those trials in time for a dual submission 510(k) and CLIA waiver application to the FDA sometime later this year.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Bill Quirk with Piper Jaffray. Your line is now open. Please go ahead.

Alex Nowak

Great, thanks. Good afternoon everyone, this is actually Alex Nowak filling in for Bill today. So, a three part question on Solana, but first what are your reps hearing from customers when contacted about Solana? Second, who are the current Solana users so far? Are these going to be the new to molecular users or are they coming from another molecular instrument? And three, what is the major reason these customers switch from another molecular instrument to Solana? Is it automation? Yes, if you could provide any color that would be great. Thanks.

Doug Bryant

Sure. I think that I need to describe what we’re actually doing because it sounds like you think, Alex, that we’re competing with other molecular platforms. And so far that’s not been the case. Our position is that there is a dilemma that faces physicians who cannot – to get a confirmatory result back with soon enough to make a good decision with regard to writing a script for an antibiotic or not. Solana Group A Strep or any other product could give a confirmatory assay in a short period of time would be helpful. So our customer that we’re targeting is the customer running culture. And we’re able to demonstrate that Solana works very nicely into a workflow, which usually demands testing of a lot of samples.

Further because of our low cost of goods sold position we’re able actually to provide the customer with a means of getting all this done pretty close to being within their existing budget. So workflow matters because of the high volume, cost also matters, in our success so far has been in converting people who are running a larger volumes, cultures in order to do confirmatory testing. For example, the individual who spoke for us at the American Molecular Pathology meeting that’s a long ago, actually before bringing on board Solana was running about 30,000 cultures per year.

So again that that volume converting a customer from culture over the molecular required that the product be reasonably priced. I hope that answers your question.

Alex Nowak

Yes, it does. That’s very, very helpful, and thanks for the clarification around that. Just a follow-up to that, how many Solana instruments are installed to-date?

Doug Bryant

Well, we’re not prepared to discuss that quite yet there are numerous I can tell you based on the fact that most customers are getting more than one and many are getting several. The number of instruments is really not so relevant. I can tell you that the average customer is this higher volume size maybe not to the $30,000 per year, but they certainly reach a meaningful in terms of volumes. And as I said in my earlier comments, I think we’re pleased with both the receptivity of our message, but also the types of customers that we’re seeing so far.

Alex Nowak

Okay, perfect. Thank you.

Doug Bryant

Sure.

Operator

Thank you. Our next question comes from the line of Brian Weinstein with William Blair. Your line is now open. Please go ahead.

Brian Weinstein

Hi, thanks for taking my question guys, good afternoon. On flu, just going back to kind of some of the market dynamics you said you’ve taken share. But can you talk about efforts that you’ve undertaken and if they’ve been successful or not in terms of expanding the flu market. In other words are we seeing a greater percentage of docs that are testing that sort of raising all boats here? As you kind of go through those efforts. And can you just remind us what some of those efforts are?

Doug Bryant

Sure. I would say the number one cause for market expansion as far as we can tell is the introduction of instrumented systems into the market. Of course, we can talk all day long about Sofia, but we also have a competitor, VD who introduced the product as well simultaneously. So you’ve seen thousands of analyzers go up by these two companies combined and I think the physicians have more confidence in an objectively read results. They like the speed of course, but having an answer that requires less interpretation by the staff has been an important factor. And I would say that in your question with regard to the number of physicians feeling more comfortable and testing has increased.

In addition of course, the data management aspect, I think has been an important factor for some, but I will admit that it’s still early on. When we talk about Virena placements where there’s a percentage we’re still 10% or more of our placements are actually on Virena at this stage. We’re working hard of course increase that number. In areas where we do have Virena placements we do see higher utility and higher testing rates as well. So two factors, one is more physicians are testing I think because of the objective of the results. And two, to a lesser extent at least so far the access to data management is helping as well in terms of the number of tests that a physician actually does.

Brian Weinstein

So are you able to quantify kind of, what Virena is actually driving in terms of revenues at this point, I mean you talked about sales and marketing spend increasing around some of that, but if you identified really a business model to get paid directly for Virena?

Randy Steward

I’ll answer the latter question. First we’re exploring the value of the data and what that could mean in terms of our success in monetizing that. There are a number of different models that we’re looking at. But we haven’t settled yet on what our game plan is. What was the first part Brian?

Brian Weinstein

Yes, Virena.

Randy Steward

Are we seeing some – we able to quantitate and do we have a model. Yes, we have a model, we’ve been embedded that expectation into our strategic plan. As I look at the strategic plan is very little in 2016. 2017 we do see a growth in flu at the level of about 3% of our total growth for the year in 2017 is attributed – to the expansion of the market due to Virena. But again that’s just expanding the number of tests run.

Brian Weinstein

Okay. I’ll get back in queue.

Operator

Thank you, our next question comes from the line of Nick Jansen with Raymond James. Your line is now open. Please go ahead.

Nick Jansen

Hi guys, my first question will be surrounding just kind of what you are seeing thus far in the first quarter. I think Doug obviously you said January, certainly hasn’t seen any real flu season development of material size. So I just want to know if you could perhaps maybe quantify for us as we think about 1Q revenue expectations on how you won. How you were thinking about the quarter to make sure our models are aligned appropriately at least for the flu aspect of it? Thanks.

Doug Bryant

Well, I can’t help with you the number per se, but what I can tell you is a couple of qualitative – I will give you a couple of qualitative comments. First as I said January was soft. We do collect Virena data, which unfortunately aren’t available to the public. But we now show not only an increase in a number of tests being performed at those sites. But we also see an increase in the prevalence, seriously this year we are seeing upticks in volume in places and space that we haven’t seen previous, which I have no explanation for. The states that we normally see early and the start of an epidemic now have started finally. But I don’t think that the ordering that will occur will be enough to offset the softness that we’ve seen in January. Even though we know the inventory, the distribution at the moment are quite low.

Nick Jansen

Okay. That’s very helpful. And then we think about Sofia 2 launch, in terms of the customer roll-out in the adoption. Is this the game plan is to replace existing Sofia customers with Sofia 2, is it to go after the market that hasn’t yet adopted Sofia. Just wanted to get a better view of that trajectory that you are expecting from an uptick perspective and is there any deals associated with these physicians who have adopted one, where they can get a two and then just substitute, just your thoughts on the roll-out? Thank you.

Doug Bryant

Sure. As we roll this out, we will have inventory of Sofia 1 that we are now drawing down and with a launch of Sofia 2, the boxes that will go after there will be Sofia 2s and not Sofia 1. But it is not tend to replace the existing installations that are out there which are normally on reagent rental agreement. As we come up for renewal, of course we could consider flipping those over to Sofia 2. Now if a customer requires Sofia 2, because it was an assay that is a Sofia 2 only assays and of course we are going to have to swap the instrument or just simply provide an additional instrument.

We of course are encouraged by our ability to achieve the cost target on Sofia 2. So, we are very, so much interested in rolling out that as quickly as we can. Plus, I think the customers are going to like the product better, as well and we’ll be able to put menus like Lyme for example, that simply we can’t do on Sofia 1, makes sense?

Nick Jansen

Thanks, Doug. Appreciate the comments. I’ll hop back in queue.

Operator

Thank you. Our next question comes from the line of Tycho Peterson with JP Morgan. Your line is now open. Please go ahead.

Tycho Peterson

Thanks, Doug. On Solana can you maybe talk to whether you’re seeing higher or lower than expected cannibalization of AmpliVue. And then you mentioned a couple of times that the types of customers emerging was interesting, can you maybe just elaborate on whether you’re seeing customers you didn’t expect?

Doug Bryant

First, I’m not aware that one of the customers closed so far has cannibalized AmpliVue. It’s almost a different customer set. AmpliVue is a handheld device that is really suited to lower volume. Whereas the Solana, we’re looking at customers who would typically like to run several at a time. I would say that, we have been pleasantly surprised that the concept that we’re selling really does resonate. And people are looking to solve these antibiotic stewardship issues.

And I do think some of the customers are taking some time to evaluate. And look at their various options, but for the most part the time from targeting to close has been reasonably quick. And I would say I’m little bit surprised in some of these that they’ve gone as quickly as they can. We have some individuals in our sales force who seem to have been pretty prolific in finding customers who – for whom this solution meets their needs.

Tycho Peterson

Okay. And then maybe a bigger picture question. First on your cash position, obviously you’ve got a fair amount. Can you maybe just talk on M&A, I mean, are you seeing more targets given the market volatility? And then conversely there’s obviously been some consolidation with Alere going to Abbott, does that change your view of kind of competitive dynamics in the market?

Randy Steward

Well, first yes, we do have a number of active targets that were exploring. At the moment, I don’t know that they’re more actionable than they were before. I don’t see that – it changes our view, having had a year now since we actually raised the fund. In terms of the Abbott/Alere announcement, I think the biggest change is the number of investment bankers who are asking to compete but other than that our targets are pretty much the same, I don’t see a big change in the market at least thus far. I don’t see pricing of the targets being more over the last time than they were before. It is true obviously that the number of things that we are looking at is quite small.

Tycho Peterson

Okay and then just lastly on Virena, I know you had a couple of questions earlier, but are you able to use that to help you manage supply chain in terms of kind of proactively reaching out more to some of the higher volume customers. I’m just wondering if you can use that at this point to manage that?

Randy Steward

That certainly is a possibility and I would say also our customers think its possibility that they can manage their own supply chain. So that is a factor, certainly in the non-traditional segment that’s a factor that’s a big discussion topic.

Tycho Peterson

Okay, thank you.

Randy Steward

Thanks you, Tycho.

Operator

Thank you. Our next question comes from Tim Evans with Wells Fargo Securities. Your line is now open. Please go ahead.

Tim Evans

Thanks, Doug, I’d like to take a big step back here and I ask a strategic question. Really the company remains highly levered to respiratory viral illness and you have made some efforts internally to diversify away. You had a substantial amount of cash on the balance sheet now for over a year with deals really haven’t materialized. How realistic do you think it is for us to think that over the next two or three years Quidel might be able to take a substantial step toward that diversification plan?

Doug Bryant

That’s a very good question, Tim, the one that we constantly ask ourselves. If you look at 2016 most of the growth that we have projected for the year comes from our core business. That’s absolutely true and the big part of that still remains our flu product. But if you look at the two other major drivers have growth for us just this year we’ve got Solana, and when we within our forecast look at the growth.

We are looking at a contribution of around 5%. And then we look at Sofia and the new products. And we pair that with the economics of Sofia, which have improved with our distribution partners, we are looking at another 4%. So those two combined are not as large as the core business. Yes, but then when you look at 2017 and 2018 those two categories that I just mentioned become a much stronger contributors to our growth. For example in our model of 2017 Solana suddenly becomes another 5% on a larger base.

Sofia though, nearly doubled in terms of its growth potential to 10% of our total business again on a larger basis. So those two things combined are non-flu and pretty significant. I did mention earlier in that same model, that I’m still forecasting because of Virena to grow the market a bit and we do have in our model 3% growth of flu, due to that particular factor.

Savanna in 2017 we show only a 2% contribution to the total in terms of growth. But then in 2018, those numbers look pretty solid again Savanna another 5% perhaps conservatively Savanna just slightly more than 5% and then Sofia we see still because the other new products being introduced all which are non-flu and actually immunoassay based and not susceptible by the way to system molecular competition, we see that as another 10%.

So I want to take you all the way through the 2020 obviously we have a model that does that, but I would beginning in 2017 and 2018 time we should able to demonstrate that while we try to continue to grow through because we like flu. We will have meaningful contribution from the other products that aren’t so closely tied to the respiratory season.

Tim Evans

Okay and then just one other one real quick. We had a – the announcement that one of your big competitors just kind of get taken out. What kind of feedback are you getting from customers, do you see this impacting the competitive dynamic at all? Thanks.

Doug Bryant

I actually do and I see there is an opportunity for us in a number of ways which I won’t go upon in next call but we are absolutely exploring look positive benefit this could mean to us.

Tim Evans

Thanks.

Operator

Thank you. Our next question comes from the line of Mark Massaro with Canaccord Genuity. Your line is now open. Please go ahead.

Mark Massaro

Hey, guys thanks for taking the questions. I appreciate the color on the first three assays on next up on Solana but maybe you’re looking beyond those – I think in the past you’ve discussed assays like C. diff, MRSA and CT/NG. Could you comment how these are progressing in development and do you think we might expect them to hit the U.S. market sometime in 2017?

Doug Bryant

2017 is a possibility through the one that you mentioned yes, assuming that all the things go as planned of course that’s not always true. But I think it’s a reasonable expectation that you would see some contribution in 2017 some of the products that you mentioned.

Mark Massaro

Okay, great. And R&D spend declined a couple of million in 2015. I wanted to ask about Savanna and if there is any change in your – the pace of bring test to the market I think you’ve stated that you want to launch with or – close to launch on Savanna. Is there any change at all in your outlook, I believe you still are targeting 2017 OUS. And if I’m – if I interpreted your comments in the call correctly 2018 in the U.S. any change at all there on R&D spend as we think about 2016 and 2017?

Doug Bryant

Other than we are coming down slightly, Randy do you want to comment?

Randy Steward

Yes, I think as we mentioned we found a little faster pace to get our batting instrument so we were able to reduce the cost without I guess the second, the timeline to significantly so we still believe first half of 2017 is developing well and we still believe back half of 2017 is still has a potential for U.S. launch. So nothing is changed from what we communicated previously, Mark.

Mark Massaro

Okay.

Doug Bryant

That we’re pretty much on track and have been for most of the back half of 2015 and now going into 2016 just last week and we met the milestone that I talked about earlier. So we feel really got at this stage that we should be able to forecast what our spend is based on what remains to be done between now and March.

To the menu question, Mark I think you are very well aware that we developed a number of PCR assays that are FDA cleared we also have set a large number of – also CE marked in addition we have a number of HDA assays any one of those we can port over fairly quickly to the Savanna test cartridge and I think we’ve already demonstrated that.

So now for us its matter of which assays to bring out and which order depending on which customers we’re trying to serve and what makes most sense from our – from the perspective of our commercial organization. So I don’t know precisely what the number will be in the first wave and the second wave at this stage, but we are in a process of actually looking at that and determining what the batting order should be.

Mark Massaro

Okay, great. Thank you.

Doug Bryant

Sure.

Randall Steward

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Bill Bonello with Craig-Hallum. Your line is now open. Please go ahead.

Bill Bonello

Yes. Couple of questions, first of all just in terms of Solana, and the customers that you’re finding there for the Strep testing, do these tend to be sort of in a multi-hospital health systems with related physician clinics where the physicians are doing rapid testing in their offices, and they’re sending the confirmatory testing to some centralized hospital lab and that’s the entity that’s considering switching from culture to molecular, and then if so, do the clients need to go through some kind of outcome study to demonstrate that having faster confirmatory results actually changes physician behavior at all?

Doug Bryant

First some of our closes so far have been part of networks, that’s true. Some of them have also been either children’s hospitals or tied to children’s hospitals. We’ve also seen just very large pediatric practices who either send their negative test results out or who already do their own culture and then simply moving over. I don’t think it’s a difficult conversation for our sales organization to have. And there will be people who will object to moving to molecular of course and, but it’s not time to result for sure.

Let me give you an example. There are some laboratorians who have a concern about what they do with the C or G. They do culture for A today, but they also do culture for C or G. Pyogenic C or G also is an issue and can be treated with the same antibiotic compound. So doing a molecular Group A Strep assay doesn’t necessarily solve for that particular customer, what they’re going to do with their Cs or Gs. So those are – that would be an example of the conversation where you have to sort of discuss the merits of doing the molecular giving the customer the answer or ready to provide the answer to their physician quicker versus wanting to be more thorough, and actually reflects the C or G's in the absence of a Strep A positive.

So it’s not all smooth sailing, and there are certainly impediments to moving from culture to a molecular. But for the most part, the overwhelming desire is to give the physician an answer in a timely manner.

Bill Bonello

Okay and then just separately can you comment a little bit more on sort of the opportunity for vitamin D in line. You might have talked about the timing, but I might have missed that when you said it. But more so, sort of what you see the market opportunity there, why the need for that those test results to be delivered at point of care versus sent off to a central lab et cetera.

Doug Bryant

This is a very good question, Bill. Because I think there is a little confusion on the part of some of the folks that covered us. We are not developing an assay that is being used to diagnose whether a customer or a patient using is in need of a Vitamin D, needed by prescription or over-the-counter. We are providing as a test that enables physicians who routinely monitor patients who are deficient for Vitamin D to ensure that they’re actually benefiting from taking Vitamin D. So for example, there are certain nephrology practices, there are certain cardiology practices there are certain OB/Gynies that routinely test their patients.

That’s why when we do our market analysis we are not looking at this huge Vitamin D market, we are only looking at a potential available market that is somewhere between 16 million and 18 million tests per year.

Bill Bonello

That’s extraordinarily helpful and Lyme?

Doug Bryant

Lyme is a much smaller market, if you are looking at people who are currently diagnosed. We do think that it is an underserved market, and we think it is one where early on the number of tests will be smaller, but that has a potential to growth. And I think it has the potential also to differentiate us in our platform, from others who might want to compete with it.

Bill Bonello

Great. Thank you.

Doug Bryant

Sure.

Operator

That is all the time we have today. Please proceed with your presentation or any closing remark.

Doug Bryant

Great. Thanks everyone for your support and your interest. We had what I think it was a great quarter and a nice finish to the end of the year. And I certainly believe that we are well-positioned to achieve our longer-term financial objectives. Take care, everyone.

Operator

Ladies and gentleman, we thank you for your participation. And ask that you please disconnect your line. Good bye.

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