Jul 28, 2008
Executives
Caren Mason - President and CEO John Radak - CFO
Analysts
Zarak Khurshid - Caris & Company Jeff Frelick - Lazard Scott Gleason - Stephens Matt Hewitt - Craig-Hallum Capital Group Keay Nakae - Collins Stewart
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation’s Second Quarter 2008 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.
John Radak. Please go ahead.
John Radak
Good afternoon, everyone. This is John Radak, Chief Financial Officer at Quidel.
Thank you for participating in today’s call. Joining me today is our President and Chief Executive Officer, Caren Mason.
Earlier this afternoon, Quidel released financial results for the second quarter and six months ended June 30, 2008. If you have not received this news release, or if you would like to be added to the company’s distribution list, please call Shirley Chow with Porter Novelli Life Sciences at 212-601-8308.
Please note that this conference call will include forward-looking statements within the meaning of Federal securities laws. It is possible that actual results and performance could differ materially from these stated expectations.
For a discussion of risk factors, please review Quidel’s Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q as filed with the SEC. Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast July 23, 2008.
Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the day of this conference call. I will start today’s call with a review of the second quarter financial report.
Then Caren will provide further comments on our strategic business initiatives and developments. Turning to the financial results for the second quarter of 2008, we are pleased with the very strong performance of the business during the period, as we posted another quarter of margin expansion and double-digit revenue growth.
Total revenues were 21.9 million, an 18% increase over the same quarter a year ago. Our international business performed exceptionally well with revenue growth of 78% over the prior year’s quarter.
Influenza sales accounted for a little more than half of the dollar increase in international revenues with the remainder coming from Strep A and pregnancy. This was the first quarter that our distribution partner, bioMerieux, was actively selling our co-branded product line, and we are pleased with the transition thus far as bioMerieux continues to roll out our products across their exclusive territory.
Our international Influenza sales for the quarter was driven by end-user demand associated with preparations for the upcoming flu season, and primarily relate to sales to a former distribution partner in transition to bioMerieux. Domestically, revenues grew 8%.
Looking now at revenues by product family, our worldwide infectious disease revenues increased 18% to 9.4 million compared to 8 million in the second quarter of 2007. International sales of our QuickVue flu product, as well as strong performance of our Strep A test globally, contribute to this year-over-year growth, more than offsetting a decline in domestic flu and mononucleosis products.
In the second quarter of 2008, revenues from our reproductive and women’s health product family were 8.9 million compared to 7.3 million, an increase of 23% from the corresponding quarter of 2007. The healthy growth in the second quarter was driven by our QuickVue pregnancy test across all geographic territories.
Revenues from our other product category, which includes our H. pylori test for gastric ulcers, our fecal immunochemical test or FIT for colorectal cancer screening and our veterinary product line were 3.5 million in the second quarter of 2008, an increase of 8% over the second quarter of the prior year.
Gross margin came in at 53% for the second quarter, a 300 basis point improvement over the same period last year. The investments we have made over the last couple of years in our automated web manufacturing process allowed us to really leverage our manufacturing costs on higher unit volume sales of certain non-seasonal products.
Operating expenses for the second quarter of 2008 were $12.8 million, which remained in line with expenses for the prior-year period, when we reported 12.4 million, as lower R&D spending and amortization expense partially offset investments in our selling and marketing activities. Our operating loss for the second quarter of 2008 narrowed to 1.1 million compared to an operating loss of 3.2 million for the same quarter last year.
In turn, net loss for the second quarter of 2008 was $513,000 or $0.02 per share compared to a net loss of 1.7 million or $0.05 per share for the prior-year second quarter, a 70% improvement. Stock-based compensation expense was $900,000 for the second quarter of 2008 compared to 1.2 million for the second quarter of 2007.
Turning our attention to results for the six months ended June 30, 2008, total revenues for the first half of 2008 increased 20% to $62.8 million, compared to $52.5 million for the first half of ‘07. Year-to-date net income increased 159% in the first half of ‘08 to $8 million or $0.25 per diluted share compared to net income of $3.1 million or $0.09 per diluted share during the first six months of ‘07.
Operating expenses in the first six months of ‘08 were $25.9 million, roughly flat to the same period of the prior year, as lower research and development spending and amortization were again offset by investments in our selling and marketing activities. Gross margin for the six-month period expanded to 61% compared to 58% in the comparable period in 2007.
The improvement in gross margin was a result of improved manufacturing efficiencies and a more favorable product mix. Stock-based compensation was 1.9 million for the first six months of ‘08, compared to 2.4 million in the first half of ‘07.
Finally, year-to-date operating income increased to 172% to 12.5 million. We continue to have a very strong cash position.
For this – for the six months ended June 30, cash provided by operations increased $4.2 million over the same period of the prior year to $22.7 million. During 2008, Quidel has repurchased roughly 468,000 shares of its common stock for $6.7 million under the company’s previously announced share repurchase program.
A total of $14.7 million remains available for stock repurchase under the program. Even after the effect of the stock repurchase, our cash and cash equivalents as of June 30, 2008, were $61.1 million.
As I have mentioned on previous earnings calls, we look to certain trailing 12-month metrics to better understand the financial profile of our business. Revenue growth on a trailing 12-month basis at the end of the second quarter was 12%.
Our gross margin in the trailing 12 months improved substantially by three percentage points from 58 to 61%. And most importantly, our operating margin in the trailing 12 months was 21%, up from 15% a year ago.
This performance reflects the leverage in our business model and the strength of our Quidel Value Build strategy, which has provided the foundation for our growth and margin expansion. Now, I will turn the call over to Caren for a review of the key strategic accomplishments and developments in the quarter.
Caren Mason
Thank you, John. We are pleased to be reporting the results of another quarter of significant organic growth and continued progress in several aspects of our business.
As John reported, one of the primary drivers of our increase in total revenues was international sales. We are pleased with the performance we have seen thus far from our international partner, bioMerieux.
The bioMerieux sales representatives increased their sales presence in the international market by more than tenfold, and we believe a mutually beneficial alliance and formation of a powerful global brand provides tremendous validation of the QuickVue product line. bioMerieux sales and marketing organizations are working feverishly to complete the roll out of marketing materials and training for its sales professionals in 150 countries.
In addition, we secured infectious disease sales on countries gearing up for the Southern Hemisphere flu season as well as those adopting flu testing for the first time. Our revenues were also favorably impacted by strategic sales initiative programs covering a majority of our product portfolio with certain of our key domestic distributors.
During the second quarter of 2008, the revenue increase related to these programs was primarily driven by our non-seasonal products as we secured an increase in initial upfront stocking orders and purchase commitments for these products. Accordingly, domestic distributor inventory levels for these non-seasonal products is currently tracking in the higher range.
Our focus with our distributor partners is to gain end-user unit share in a number of non-seasonal products in coming quarters, as well as to set the stage for Influenza and RSV market expansion and the share gain. Since we last spoke during our April conference call, the domestic flu season has started late, but had a dramatic peak in activity ending very quickly.
We reflected with satisfaction on our ability to seize the opportunity to maximize our position as the market leader in rapid flu testing. For the coming season, we are continuing our collaboration with Roche.
We are working with Roche U.S. again this year by initiating programs to assist us in the flu management through the use of the QuickVue influenza test.
We are also in discussions with Roche internationally on programs to support flu management in countries outside the U.S. As we look to the upcoming flu season, we are monitoring the developments in the Southern Hemisphere for indications of the onset and the severity of the season.
On Monday of this week, the Australian Department of Health reported the number of people with flu is up by one-third compared to this time last year. The government health authorities also said the higher levels of the confirmed flu cases are possibly due to the increased awareness in testing, following the higher than normal season in 2007.
Onset of flu season was also reported in Hong Kong .Our flu surveillance assists us and our distributors in anticipating and assuring our preparedness in all of the global markets we target. However, at this time, it is too early to identify significant trends, which would help to clarify what we may expect in the upcoming Northern Hemisphere flu season.
As for domestic distributor inventory levels of our flu and RSV products, we believe they are within acceptable levels as we enter the season and expect distributor ordering patterns to be consistent with prior year’s, dependent upon the timing of the onset of the flu season. During the second quarter, we were very pleased to enter into an agreement with Prodesse to jointly promote Prodesse’s ProFlu+ multiplex molecular diagnostic test within the United States.
ProFlu+ is an FDA 510(k) cleared, real-time PCR, closed tube test that simultaneously detects Influenza A, Influenza B and respiratory syncytial virus, RSV, which together causes the vast majority of serious respiratory infections. The agreement strengthens Quidel’s acute care focus and provides a complementary product offering to the Quidel QuickVue, rapid influenza and RSV test.
As part of the agreement, Quidel earns a fee for all product placements. We are also continuing our development work on our MChip influenza subtyping array, which is targeted for research use only for determination of Influenza A subtypes from suspected viral samples.
The product will be targeted to researchers that are currently using other molecular biology techniques for influenza surveillance in epidemiological studies. The product will contain DNA primers and probes capable of amplifying and detecting the matrix gene of influenza.
Depending upon validations, we are targeting introduction of this array for the research-use-only market during this influenza season. With regard to our fecal immunochemical testing, or FIT product, we have successfully moved full production of the generation-one FIT test to our web-based manufacturing system enabling tighter control, increased intra and interlock consistency, and greater capacity.
As part of the QVB efforts supporting this product, we have tested nearly 200 stool specimens collected by patients, who have had recent colonoscopy. These patients obtain specimens using the home stool collection system provided in our generation-one kit.
The patients comprise several categories including among others, those with confirmed colorectal cancer, those with polyps of various sizes and those with apparently normal colons. We are extremely pleased with the results of this retrospective study.
We intend to submit these results to a major forthcoming international meeting on colorectal cancer. At that meeting, we also plan to present data showing the correlation between the QuickVue result and the actual concentration of stool hemoglobin in each sample.
The quantification of stool hemoglobin levels was achieved using a new immunological laboratory method developed by our R&D team. These results show very significant differences in the level of fecal occult blood in the various categories of patients examined.
The web generation-one FIT test began shipping this month. You may have read that LabCorp has added new colon cancer screening test to its offering and we have been notified that they will no longer standardize on our test.
We are disappointed in this outcome and have learned much from this experience. We are not satisfied with the industry transition to FIT from guaiac of 3.7% of units as of Q1 of 2008.
We are redoubling our efforts to promote early screening with the web generation-one test, while the generation-two test continues in development. Our generation-two test design efforts have been expanded to include continuing feature enhancement, as we continue voice of the customer validations provided by our Medical Advisory Board and test users.
New features have required engineering enhancements, so we’re removing our clinicals and submission to the FDA out a few quarters. We believe this is absolutely necessary to assure that the next generation of testing meets the critical parameters of ease of use, patient acceptance, physician assurance, and clinical validation.
Finally, our second quarter results reflect our continued ability to deliver significant revenue growth and margin expansion, particularly through leverage of our manufacturing operations and optimization of our QVB-based marketing strategies. We continue to strengthen our position of rapid diagnostics leadership and provide evidence to support the increasingly important role that point-of-care testing plays in healthcare decision making and outcomes.
That concludes our formal comments for today. Operator, we’re now ready to open the call for questions.
Operator
(Operator Instructions). Our first question comes from the line of Zarak Khurshid from Caris & Company.
Please proceed, sir.
Zarak Khurshid - Caris & Company
Thanks. Hi, Caren and John; impressive results there.
John Radak
Thank you.
Zarak Khurshid - Caris & Company
Can you guys hear me, okay? I apologize for being on a cell phone.
John Radak
Yes.
Zarak Khurshid - Caris & Company
So just wanted to firstly touch on the strength in the pregnancy business. Just curious, what is really the driver there?
What’s particularly interesting in light of the sales that were pulled forward back in the fourth quarter and should we be expecting that business to correct at some point in the near future?
Caren Mason
I think your question is a good one, Zarak. The focus for us on pregnancy has been instilled with more vigor as a result of two pieces of information in terms of our market position.
First of all, we know that in acute care we have done an excellent job of securing new business and we’re working with our acute care distributors to focus on the opportunity to even expand more in that space. In the POL, we’ve been challenged by some private label activity as well as some price pressures.
And so, our focus with our distributors both in POL and in acute care is to really begin to push more aggressively to build back more unit share in the category. Our distributors have agreed to do that with us and our strategic sales initiative got underway in Q2.
With regard to Q4 and the leveling of inventory over time, our expectation is that our distributors have moved through that and will be moving through the inventory they acquired in the previous quarter in the quarters to come.
Zarak Khurshid - Caris & Company
Okay, great. And then, just quickly if you could talk about the strength – International strength relating to bioMerieux, is it more of a function of kind of initial stocking or – I guess, what is the demand, the real kind of end-user demand component to that strength, and should we kind of see that sort of, I guess, level off entering – as we enter the flu and cold season, and maybe pick up in the – at the end of the year?
Caren Mason
I think that’s a – I think that’s a good explanation. In bioMerieux (inaudible) fulfilling order that previous distributors had pre-sold.
So I think the opportunity for us in going forward with them is definitely very significant and we’ll be watching with you over time. We have – we’re working very well with them.
So our expectation is over the next couple of quarters that we’ll start to see what we can then track on quarterly demand. We’re gearing up for the respiratory season ahead of us.
We’re seeing some revenue definitely being generated in the Southern Hemisphere. So, we’re excited and enthusiastic, which you can probably tell from our prepared remarks as well as my comments.
But I’m not – I can’t predict exactly what the actual levels will be quarter-by-quarter until we get some traction behind us.
Zarak Khurshid - Caris & Company
Sure, thanks. And then, quickly, how would you characterize domestically the levels of flu product in the channel today, and I’ll jump back in the queue?
Thanks.
Caren Mason
Thanks, Zarak. As we indicated in our remarks, we believe that the inventory levels are at an appropriate level as we go into the season.
Next question?
Operator
Our next question comes from the line of Jeff Frelick with Lazard. Please proceed.
Jeff Frelick - Lazard
Hi, Caren. Can you tell me what the geographic revenue growth was for U.S.
and OUS?
Caren Mason
Yes.
John Radak
The U.S. growth was 8% in the quarter and the international growth was 78%.
Jeff Frelick - Lazard
Okay. Thanks, John.
And then in a normal Southern Hemisphere flu season, when do you typically see re-order rates occur?
Caren Mason
The season has really just kicked off and then in June there were some incidence. In July – in the middle of July, we’re seeing definitely increased incidences I’ve referred to.
We should start to see over the next two to three weeks the peak, is my guess, and we’ll probably be finished by September, so you would expect re-orders in the next two to three weeks.
Jeff Frelick - Lazard
Okay. And then, I had trouble hearing your comment on Zarak’s question, but did you say you’ve instituted strategic pricing with pregnancy with some select distributors in the U.S.?
Caren Mason
Actually, we’ve offered distributors strategic selling partnerships that go in multiple quarters over a number of our product categories. And those are underway.
You saw most of the result of that as we kicked off in Q2 with some non-seasonal product initiatives.
Jeff Frelick - Lazard
Okay. But it will run?
Caren Mason
It keeps running. Yes.
Jeff Frelick - Lazard
In across several product categories?
Caren Mason
Yes, it does.
Jeff Frelick - Lazard
Okay. All right.
Thank you very much. I’ll jump back in queue.
Caren Mason
Thanks, Jeff.
Operator
Our next question comes from the line of Scott Gleason with Stephens. Please proceed.
Scott Gleason - Stephens
Hey, Caren and John, thanks for taking my question.
John Radak
Sure. You’re welcome.
Scott Gleason - Stephens
Just to start off, you guys have seen some really good expense control and especially on the R&D line, we’ve seen total R&D expenditure go down for the last five quarters. John, can you give us a little sense of what we should think of there going forward, is 29 – 2.9 million a good run rate for the second half of the year?
John Radak
No. We – at the end of 2007, we terminated development effort on our Layered Thin Film technology, and that freed up a large amount of R&D dollars in our Santa Clara facility that we are in the process of rebuilding and replacing down here in San Diego, so the 2.9 is a, really a, probably a low point in our R&D spend and we would expect that will ramp-up over the following couple of quarters.
Scott Gleason - Stephens
Okay, thanks. Then on the pricing front, it looks like CMS this year is going to implement a 4.5% CPI adjustment.
Do you guys have a sense that you’ll be able to carry any of that on in terms of pricing increases when you start looking at next year’s pricing?
Caren Mason
I think we have to be careful there because all of the costs associated with distribution, fuel, et cetera. So I – we’re going to maximize our premium brand position and work with distribution appropriately to be able to raise prices wherever appropriate.
We expect that that would be most likely be in our infectious disease categories. We continue to prove the value of those products as superior in the marketplace.
So, I think, we’ll be judicious in that, conditions are challenging for everyone, but at the same time we’ll also take opportunity wherever we feel it is appropriate.
Scott Gleason - Stephens
Okay, thanks.
Caren Mason
Especially for...
Scott Gleason - Stephens
And then probably just on the second generation fecal occult blood test, you guys mentioned that would be pushed back a few quarters. Can you maybe give a little more definitive date as far as when we could expect a market launch or I guess a more definitive timeline?
Caren Mason
Well we’re in the midst right now of engineering in a number of changes that we believe are strengthening the products even more so. So, we’re definitely into 2009 before we start our clinicals.
We believe, though, that we will still obviously see an introduction in 2009, hopefully earlier than later. By that I mean probably around mid-year.
The opportunity here for us is that this is a major game changer. I would call our new test more of a medical device than our current format.
And as a result of that, there are a lot of opportunities for enhancements that we’re going to take advantage of. We feel that with the recent information that we got clinically on our generation-one web-based product that that product will do just fine as we move ahead in our efforts to get more business in that product category.
So, we’re going to do the right thing on gen-two and get it out there, so that it meets all the criteria that our mAb and our key users in test sites have indicated.
Scott Gleason - Stephens
And then, Caren, have you guys got a sense from the FDA whether your current clear waiver will be able to stand for the second generation product or if you have to resubmit?
Caren Mason
It’s automatic.
Scott Gleason - Stephens
Okay. So, you’ll be able to carry over the existing clear waiver?
Caren Mason
Yes.
Scott Gleason - Stephens
Okay, thanks. That’s all I have.
Thanks a lot.
Caren Mason
You’re welcome.
Operator
Our next question comes from the line of Matt Hewitt with Craig-Hallum Capital Group. Please proceed.
Matt Hewitt - Craig-Hallum Capital Group
Congratulations on the first quarter. A couple of questions.
First off, can you break out as far as what were international sales as a percentage of the mix? We know what they were as far as up year-over-year, but can you break that out as – to the current quarter?
Caren Mason
16%.
Matt Hewitt - Craig-Hallum Capital Group
I’m sorry. Could you repeat that?
Caren Mason
Wait a minute. 16%, yes.
Matt Hewitt - Craig-Hallum Capital Group
16%, excellent. Also, the bioMerieux, we’ve heard that things are ramping well there.
Initially, you had spoken that was more of – more than just a sales and marketing partnership. Can you tell us anything regarding the development side, and if and when there will be a product ready for that piece?
Caren Mason
Our joint development agreement with bioMerieux is progressing well. We have identified the pipeline of products that we’ll be working on together.
And as soon as we get the thumbs up from them to publicize that and we complete the agreement, we will do so.
Matt Hewitt - Craig-Hallum Capital Group
All right. And I guess the last question, in the press release you talked about strategic sales initiatives launched with several domestic distributors.
Could you provide a little bit more color there?
Caren Mason
Yeah. Just at a high level, our interest as we have developed partnerships with distributors overtime was to be able to get to a point where we could work on committed volumes over longer periods of time rather than incentivize with targeting.
So that gives us the opportunity now through our premium brand position to get that done. So the strategic sales initiative gives us, as a manufacturer partner and with our sales lead partners, the opportunity to really be able to better predict quarters as they move – as we move ahead throughout the year.
So, we went on a multi-quarter program for committed volumes and we’re confident and happy about Phase I of this process.
Matt Hewitt - Craig-Hallum Capital Group
Excellent. Thank you.
Caren Mason
You’re welcome.
Operator
Our next question comes from the line of Keay Nakae with Collins Stewart. Please proceed.
Keay Nakae - Collins Stewart
Good afternoon folks.
Caren Mason
Good afternoon.
Keay Nakae - Collins Stewart
Caren, can you update us on what you think your market share in the influenza market is coming out of the last season?
Caren Mason
Okay. We are going to defer market share discussions until after the end of the Q2 period when we get those results.
We don’t have them yet. We usually get them about eight weeks, which is too late for this call.
And so, we would like to be able to give analysis not only of U.S., but global position, so bear with us and we’ll get with you in the next quarter.
Keay Nakae - Collins Stewart
Okay. As far as the upcoming season, can you give us a sense for what kind of success you’re having with GPO Broadlane?
Caren Mason
I think we’re really pleased with our success thus far with Broadlane. We have converted a number of hospitals.
As you may be aware in these committed purchasing agreements, there is usually one – there is usually two categories or vendors selected for each product. And what we are doing with our health systems team on the acute care side is very aggressively going after getting as much of that business as possible.
So we’re pleased with the progress so far.
Keay Nakae - Collins Stewart
Okay. With respect to some of the line items on the income statement, John, with respect to G&A, we did have a sequential decline there, that that number – how should we think about that going forward for the rest of the year, the 3.1 that you did in Q2?
John Radak
Yes, the Q2 number was abnormally low and benefited by a lot lower stock compensation expense, which will rebound in Q3 and then also lower management incentive bonus accruals in the quarter as we time those expenses with – when we earn the profits.
Keay Nakae - Collins Stewart
Okay. So something closer to what you did in Q1 is maybe more appropriate?
John Radak
Yes.
Keay Nakae - Collins Stewart
Okay, very good. And then finally, Caren, going back to an earlier question you were asked about bioMerieux and the initial stocking.
I know you answered it but I could not hear what you said, so --
Caren Mason
Okay. I apologize for that.
The initial stocking with bioMerieux, we’re really enthusiastic about our ability to get them the product and get them marketing the product at ECCMID in Europe as well as through all of their distribution outlets and through all of their direct representation as well. So, our hope is that we’ll know better to guide you after we get two to three quarters under our belt and have our first infectious disease season under way.
Right now, everything that we’re seeing is really encouraging. So, we’re happy with their initial order.
We’re happy with some of the order flow through into end users, and we’ll be able to better identify in the next couple of quarters what our actual run rate on it will look like.
Keay Nakae - Collins Stewart
And was the stocking across all product lines?
Caren Mason
Yes.
Keay Nakae - Collins Stewart
Okay, all right. Well, very good.
We’ll look for those numbers going forward.
Caren Mason
Okay, great.
Operator
We have a follow-up question from the line of Zarak Khurshid from Caris & Company. Please proceed.
Zarak Khurshid - Caris & Company
Thanks for taking the follow-up question. You guys have had great success levering the improvements with the web automated manufacturing process.
Just curious, also on the cost side, have you locked in some of the input prices? And how are kind of the price of plastics and reagents potentially affecting that cost of goods and the potential continued improvement on the gross margins going forward?
Thank you.
John Radak
Yes. The proportion of our costs that are represented by plastics is really very small.
So we don’t expect that that will be a significant impact to us going forward. And then, with respect to other reagents and so forth, we’re not seeing a tremendous amount of cost price pressure there yet.
Zarak Khurshid - Caris & Company
Thank you.
Operator
This is all the time we have today. Please proceed with your presentation or any closing remarks.
Caren Mason
John and I thank you again for your time this afternoon and for your continued support. We look forward to updating you on our progress again when we report the third quarter results.
Thanks and take care, everyone.
John Radak
Bye-bye.
Operator
Ladies and gentlemen, that concludes your conference call for today. We thank you for you participation and ask that you please disconnect your lines.
Have a great day.