Quidel Corp. Q3 2007 Earnings Call Transcript

| About: Quidel Corporation (QDEL)
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Quidel Corp. (NASDAQ:QDEL) Q3 2007 Earnings Call October 24, 2007 5:00 PM ET

Executives

Don Markley - Investor Relations

Caren Mason - President and ChiefExecutive Officer

John Radak - Chief FinancialOfficer.

Analysts

Zarak Khurshid - Caris & Company

Drew Teufel - Collins Stewart

Steven Crowley - Craig-HallumCapital Group

Operator

Welcome to the Quidel Third Quarter2007 Financial Results Conference Call. At this time, all participants are in alisten-only mode. Following management's prepared remarks, we'll hold aquestion-and-answer session (Operator Instructions). As a reminder, thisconference is being recorded today, October 24, 2007.

I would now like to turn theconference over to Don Markley. Please go ahead, sir.

Don Markley

Thank you. This is Don Markleywith Lippert/Heilshorn & Associates. Thank you for participating in today'scall.

Joining me from Quidel are CarenMason, President and Chief Executive Officer, and John Radak, Chief FinancialOfficer.

Earlier this afternoon, Quidelreleased financial results for its third quarter and nine months ended September 30, 2007. If you have notreceived this news release or if you'd like to be added to the company'sdistribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100, and speak with Eleanor Tang.

Please note that this conferencecall will include forward-looking statements within the meaning of FederalSecurities Laws. It is possible that actual results and performance coulddiffer materially from these stated expectations. For a discussion of riskfactors, please review Quidel's Annual Report on Form 10-K, and subsequentquarterly reports on Form 10-Q, as filed with the SEC.

Furthermore, this conference callcontains time-sensitive information that is accurate only as of the date of thelive broadcast, October 24, 2007.Quidel undertakes no obligation to revise or update any statements to reflectevents or circumstances after the date of this conference call.

I will now turn the call over toCaren Mason for a quick status update on the impact the San Diego fire situation has had on Quidel. Caren?

Caren Mason

Thanks, Don. And thank you toeveryone for joining us this afternoon. I'm sure all of you have been followingthe news reports of the wildfires in San Diegoover the last several days. In light of that situation, I want to provide youwith a brief update on how our business has been impacted.

Most importantly, our employeesare safe and secure, although many have been displaced from their homes due tomandatory evacuations in the San Diego County. We have had a skeleton crewat our San Diego facility sinceMonday of this week ensuring customers' orders are fulfilled from ourfinished-goods warehouse in the Los Angelesarea.

Our inventory levels have beenable to meet demand, and we are shipping daily. We anticipate that productionwill be at full throttle in the next few days. It is important to note that wehave been cognizant of the need to meet public health demand for our upper respiratorytests, and we have worked diligently to get the job done.

We expect to have our San Diego facility fully functioning by the beginning ofnext week at the latest, and this temporary disruption should not impact ourability to meet customer demand in the fourth quarter. My thanks to ouremployees, suppliers and distributors for their excellent performance andpartnership during this very challenging time.

And now, John will present ourfinancial results for the third quarter. John?

John Radak

Thanks, Caren, and hello toeveryone on the call. We are pleased with the performance of the business thisquarter, as we've posted another quarter of double-digit revenue growth. Includingthis quarter, we have delivered seven consecutive quarters of double-digit organicrevenue growth. And just as significantly, our operating margins expanded 520basis points, for the third quarter of 2007 compared to the same period of lastyear.

Starting with the top line. Totalrevenues for the third quarter were $27.6 million, a 16% increase over thethird quarter a year ago. This growth was driven by strong sales of ourinfectious disease tests, in particular, domestic sales of the QuickVueInfluenza Test in advance of the upcoming flu season.

Our gross margin in the 2007 thirdquarter was 60%, compared to gross margin of 56% in last year's third quarter.The improvement was mainly attributable to a favorable product and geographicmix.

Operating expenses for the thirdquarter of 2007 grew 11% to $12.7 million. The increase was primarily in salesand marketing, reflecting the personnel additions we made at the beginning ofthis year and capabilities within our sales group to address expanded marketopportunities as well as higher intangible amortization related to licenses atthe end of last year.

Operating income grewsignificantly from $2 million in the third quarter of 2006 to $3.7 million thisyear, an increase of 87%. Net income for the third quarter was $2.4 million or$0.07 per share fully diluted compared with a net income of $2.1 million or$0.06 per share fully diluted for the third quarter of 2006.

Just to remind everyone, lastyear, tax expense in the third quarter was zero. For comparison purposes, hadwe recorded tax expense in 2006 at the same rate as this year, our EPS lastyear would have been approximately $0.04 per share.

Our balance sheet remains verystrong. Cash and cash equivalents as of the end of the third quarter were $35.3million compared to $36.6 million at December 31, 2006. Year-to-date, we have repurchased approximately 1.5million shares for $17 million.

I'd also like to take a couple ofminutes to discuss trailing 12-month data and comparisons. I believe thisinformation is more revealing of our annualized strength, as the trailing12-month numbers put in perspective the quarterly seasonality of the business.

Trailing 12-month revenue ending September 30, 2007 was $118.9 million,up 17% over the comparable trailing 12-months ended September 30th 2006. Our gross margin in thetrailing 12-months improved from 58% to 59%. And most importantly, ouroperating profit in the trailing 12-months was $19.2 million, an increase of47% over the prior 12 months. This performance reflects the leverage in ourbusiness model, and the strength of our QVB strategy, which has provided thefoundation for our growth.

And now I will turn the call overto Caren for a review of the key strategic accomplishments and developments inthe quarter. Caren?

Caren Mason

Thank you, John. We're pleased tobe presenting the results of another strong quarter, trailing 12-months, andprogress in several aspects of our business. I do want to reinforce one of thekey areas John highlighted, which is the continued improvement in operatingmargin. I believe this improvement is directly related to the success ofvarious elements of our QVB strategy, which we are leveraging across a growingcustomer base and into new markets.

These elements include the strongclinical research support for our tests, our outstanding go-to-market strategyand technical support programs and a leading brand name that signifies qualityand enables partnerships with leading diagnostics and pharma companies. Anumber of the developments in the third quarter and subsequent to the close ofthe quarter, demonstrates the strength of QVB in building our business andgrowing shareholder value.

Before I get to those highlights,I want to mention that our most recent success was noted by Forbes as itincluded Quidel as 82nd on its list of America's200 Best Small Companies for the first time, in 2007.

I'm particularly pleased atachieving this recognition as the criteria for inclusion included return on equityperformance, sustained sales growth and net profit growth. In addition, Forbesrecognized Quidel in a 10-company category designated as "Safe Bet"for efficient companies with little or no debt and a solid board of directors.

All of these measurements reflectsignificant value creation for shareholders. This positive attention is atribute to the hard work and dedication of everyone at Quidel.

Moving on to a review of thequarter, our strong results were driven by the planned performance of ourinfectious disease test group, which had sales growth of 29% over the thirdquarter of 2006 and growth of 25% year-to-date.

More specifically, we saw verystrong demand for our influenza test in the U.S.,and the initial sales of our RSV test in acute-care facilities.

We believe third quarter strengthprovides an early indication of our continued success in driving physicianadoption in the POL segment, and our ability to capture more large-volumebusiness and influenza testing in the acute-care segment.

The overall growth in theinfectious disease group was achieved in spite of a decline in ourinternational influenza business, which, as we mentioned this earlier thisyear, is a reflection of the challenges of a declining reimbursement andprice-sensitive environment in Japan.

During the quarter, we werepleased to enter co-marketing agreements for our flu test with two very strongpartners. One is with Abbott U.S.Point-of-Care, which will co-market the QuickVue Influenza A+B test with their iSTATAnalyzer and CLIA-"waived" Chem 8+ Cartridge. The second is withRoche AG, which is providing our flu test to physicians and detailing atest-and-treat protocol with Tamiflu in Germany.

We believe these two agreements attestto the quality of our QuickVue test and the confidence in us by global leadersin diagnostics. We expect these agreements will effectively supplement our salesand marketing efforts in the fourth quarter and into 2008.

We continue to await CLIA-waiverfor our RSV tests for the physicians' office market. However, we areaggressively pursuing acute-care business with correlation studies underway atseveral hospital systems and the advantage of an RSV and flu test single-samplecapability. It is our hope that we will be able to achieve RSV CLIA-waiver yetin 2007.

I want to take a moment tohighlight two recent studies that illustrate how our QVB strategy supportsQuidel's long-term goals. Both studies highlight the importance ofpoint-of-care testing to properly treat cases of influenza and were presentedearlier this month at the Infectious Disease Society of America annual meeting.

The first study conducted byclinical researchers associated with Texas A&M University included 876pediatric patients and demonstrated that physicians who received flu testresults were four times more likely to prescribe anti-viral treatments forchildren with the flu and were significantly less likely to prescribeantibiotics for children with influenza than were physicians who did notreceive test results.

Separately, initial results of anongoing study conducted in Australia, demonstrated that nursing homes receivingactive surveillance with rapid tests and intervention with anti-virals showed asignificantly reduced rate of flu outbreaks, a shorter time between initialoutbreak and treatment and a shorter duration of outbreaks compared to nursinghomes not using rapid influenza tests.

I am pleased to point out thatboth of these clinical studies used the QuickVue Influenza Test to supporttheir research.

Moving to other segments of ourbusiness. Sales in our reproductive health segment were down 6%, compared tothe third quarter a year ago and are up 2% year-to-date. You may recall thatour increase in this segment was 13% in Q2 of this year, which was severalpercentage points ahead of market growth. We expect this segment to achieveabove market growth for the year.

The remaining rapid test productcategory, which includes veterinary and iFOB tests among others, was flat forQ3 compared to prior year, yet is 31% ahead of prior year-to-date. We expectstrength here in the fourth quarter as well.

Before we go to the Q&A, I wantto briefly provide a 12-month outlook for our business. As we've stated before,we expect continued revenue growth and margin improvement. We believe that theclinical comparison studies at hospitals, which I discussed, will supportcontinued growth in flu test sales.

We plan continued stronginvestment in research and development. This increased spending in R&D alsoincludes a reallocation of spendaway from our LTFI program, as we recently decided to discontinue thisprogram in light of other, more promising technologies. And, we will continueto develop new partnership programs both in marketing and research.

Operator, we're now ready to openup the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Onemoment, please, for our first question. Our first question comes from ZarakKhurshid with Caris & Company.

Zarak Khurshid - Caris & Company

Hi, Caren. Hi, John. Greatquarter. And best wishes to the Quidel family there in light of the fire.

Caren Mason

Thank you.

Johan Radak

Thank you.

Zarak Khurshid - Caris & Company

So, first question. Could youbreak out, perhaps, the split of the big three products? Or their growth rates?

John Radak

We're not splitting out the bigthree anymore. We talked about infectious disease and reproductive and women'shealth and other products. So I can tell you that the infectious diseasebusiness grew 29% in the quarter. And that was $18.6 million. Reproductive andwomen's health declined 6% to $5.9 million. And other products came in at $3.1million, a growth of 2%.

Zarak Khurshid - Caris & Company

Okay. And then could you perhapsquantify the acute-care market for flu testing? And maybe perhaps give us someinsight as to how well penetrated that is today and maybe a split of your flubusiness, acute versus physician office? Then I'll jump back in the queue.Thanks.

Caren Mason

Thanks, Zarak. We believe thatthe acute-care market is growing. We've seen a lot of interest in our flu testsas we've really amassed an exceptionally strong effort this year with ourdistribution partners to go after large, acute-care systems, integrateddelivery networks and others.

We had that very niceannouncement about the Adventist Health System, which we're excited about. Andthere are others where we have been awarded a dual-source or letter ofcommitment. That give us some real excitement about what we'll be able to talkabout in the quarters to come, with regard to new users of QuickVue A+B testsand our RSV tests.

With regard to splits, we believethat that acute-care segment for us will grow dramatically in this season, certainlyin excess of 30, 35% or more. Our target's way above that; of course, we alwaysgo for the gold. But we're confident that we're going to continue to grow theacute-care split, get more conversions as we do more of these great clinicalstudies.

We're getting a lot of interestas a result of what we're reporting about the proper use of anti-virals, thestopping of the improper prescribing of antibiotics. We know how difficult thatprocess is today with so many bacterial infections being resistant with theimproper diagnosing of antibiotics. So just all of the arrows are pointing upfor the market to expand for both POL, acute-care, and also alternate marketsites, retail clinics, etc.

Operator

Your next question comes fromKeay Nakae with Collins Stewart.

Drew Teufel - Collins Stewart

Yes. Hi. This is actually DrewTeufel for Keay.

Caren Mason

Hi, Drew.

Drew Teufel - Collins Stewart

How are you?

Caren Mason

Good.

Drew Teufel - Collins Stewart

Just a couple questions aboutinventory levels at distributors; can you give us any color on that or wherethose levels are at?

Caren Mason

Well, the distributors are in processin the fourth quarter, making sure that all of their customer base and allthese new converted customers have tests on the shelves appropriately, as westart to see influenza at this time. We know that there is influenzasporadically across the country, and some areas are experiencing more regionalinfluenza.

So we don't have a full look fromdistribution for this stocking time until we get to about mid-quarter or to theend of the quarter. But our belief is that we're going to have a quick movementof that inventory, and we will continue to replenish throughout the end of thisyear.

Drew Teufel - Collins Stewart

Okay. And just switching over tothe FOB, any word on the timing of the clinical data from the study on that?

Caren Mason

We'll have that ready by the endof the year and report on that in Q1 of '08.

Drew Teufel - Collins Stewart

Okay. Great. Thanks.

Caren Mason

Thank you.

John Radak

Thank you.

Operator

(Operator Instructions) Your nextquestion comes from Steven Crowley of Craig-Hallum Capital Group.

Steven Crowley - Craig-Hallum Capital Group

Good afternoon, folks.

Caren Mason

Good afternoon, Steve.

John Radak

Hi, Steve.

Steven Crowley - Craig-Hallum Capital Group

A couple questions for you. Youmentioned your significant pending or your objective for there to be a significantinvestment in R&D. In the quarter, R&D was flat year-over-year, probablya bit less than we had expected. It appears you're telegraphing a moreambitious effort there, and I'm wondering if you could give us a sense for howmuch more money you might be spending there and your priorities in R&D.

Caren Mason

Sure. I think, Steve, I'll startwith our priorities in R&D. We are really focusing on an enhancement to ourcurrent technology. And instruments may be part of that enhancement. We alsohave a team of people that are working on molecular systems and solutions toexploit our worldwide ownership of the MChip and Flu Chip technology. And wealso have a team of people that are looking at alternate market development anddesign, including OTC. So there is a lot going on in terms of expansion. Withregard to percent of revenue, I'll turn it over to John for a discussion.

John Radak

Yes. Steve, I think we'retargeting R&D to be in the 11 to 12% of revenue range on a trailing12-month or annual basis. There could be quarters in which that might spike up,depending upon the kind of activities that we might be doing in the quarter.

Caren Mason

Yes. I think just to add one note,there has been some delayed spending, and that, we believe, will pick up againin Q4 and Q1, of course, and into '08.

Steven Crowley - Craig-Hallum Capital Group

Okay. Excellent. In terms of anupdate on iFOB, what can you tell us about signs of market traction or anyevidence about growing traction around iFOB? And an update on yoursecond-generation tests.

And as part of my follow-up,maybe, John, just a bookkeeping item or two about the balance sheet, accountsreceivable and inventories at the end of the period? Thanks.

Caren Mason

Okay. On iFOB, we are continuingto see, and gladly so, more studies being published that support the use ofimmunochemical over guaiac. We believe that the iFOB test will definitely havetraction over the months and years to come as a first line defense forscreening over today's guaiac.

Our generation-2 product is veryexciting. The design and the development of that product is meeting andexceeding our targets. We are confident in that product in its opportunity andability to delight end users, the patients themselves, the physicians who will prescribethem and any lab services companies who want to work with us as well.

We believe we have some veryunique ways of delivering the products and services around the iFOB products,so that that along with outstanding marketing, distributor partnerships andreally good end user, consumer based advertising and education in the springwill set us up perfectly for Q2 of '08.

I'll turn it over then to you,John, with regard to Steve's other questions.

John Radak

So, with respect to the balancesheet, receivables at the end of September of '07 stood at roughly about $17million versus $18.1 million at December of '06. And inventory stood at $11.6million at the end of the quarter versus $9.6 million at the end of the prioryear.

Steven Crowley - Craig-Hallum Capital Group

Great. Thanks for taking myquestions. I'll hop back in the queue.

Caren Mason

Thanks, Steve.

John Radak

Thanks, Steve.

Operator

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

Caren Mason

Thank you again for your timethis afternoon and for your continued support. I look forward to updating youon our progress again, when we report yearend results. Take care, everyone.

John Radak

Thank you.

Operator

Ladies and gentlemen, thatconcludes your conference call for today. We thank you for your participationand ask that you please disconnect your lines.

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