Jul 22, 2009
Executives
Doug Bryant - Chief Executive Officer John Radak - Chief Financial Officer
Analysts
Zarak Khurshid - Caris & Co. Keay Nakae - Collins Stewart Ashim Anand - Natixis Bleichroeder Ross Taylor - CL King Jeff Frelick - ThinkEquity Matt Stratton - Craig-Hallum [Sarah James] - Wedbush Securities
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation second quarter 2009 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 would 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, Doug Bryant.
Earlier this afternoon, Quidel released financial results for its three months ended June 30, 2009. If you have not received this news release or if you’d like to be added to our company’s distribution list, please call Shirley Chow, 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 the 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 22, 2009.
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. For today’s call, I will report on the financial results and Doug will provide some color on our market share, give an update on our new product development activities, discuss some recent additions to our team and finally provide an outlook for the remainder of 2009.
We will then open up the call to your questions. We had a significant benefit during the quarter from the recent outbreak of flu around the world.
As the incidence of influenza like illness increased globally, awareness of the availability of rapid flu tests emerged. As a result, we supplied to several new international markets.
In addition as domestic inventories were drawn down, we began to ship our QuickVue A+B test in the US as well. Offsetting the benefit from higher flu test shipments was a decrease in sales of our core non-seasonal products, as US distributors continue to drive down the amount of their non-seasonal inventory to levels that are now at two and one and a half year lows.
We expect future sales of these products will more closely reflect in user demand going forward. Total global revenues for the quarter were $24.6 million, an increase of 12% compared to the second quarter of 2008.
This increase was driven primarily by our infectious disease products. Domestic revenues of $16.6 million were relatively constant period-over-period, while international revenues came in at $8.1 million, an increase of 73% from the second quarter of 2008.
International revenues accounted for 33% of total revenues in the second quarter. Global infectious disease revenues were $16.1 million, an increase of 70% compared to the second quarter of last year, due to a significant increase in influenza sales.
The global revenues of our reproductive and women’s health category declined 42% in the second quarter of 2009 to $5.2 million, as domestic distributors continued to reduce inventory levels. Revenues in our other products family were up down 6% to $3.3 million, also as a result of the reduction in distributor inventory levels.
As we have discussed previously, we have seen domestic distributor inventory levels fluctuate significantly over the last several quarters for our top three product lines; influenza, strep and pregnancy. During the second quarter, we implemented a new process to better control the quantities of inventory in the distribution channel.
As of the end of the second quarter, we estimate that domestic distributor inventory levels for our strep and pregnancy products are below normal levels and feel future quarter sales will be more reflective of actual end-user demand. We had also indicated that domestic distributor inventory levels for influenza tests were significantly higher at the end of the first quarter than we would like.
With the recent increase in flu activity during the second quarter, end-user demand was significant enough to draw down the vast majority of these tests throughout the distribution channel, as well as the flu inventory that we previously had on hand. With that, we believe we are well positioned with respect to distributor inventory levels as we head into this year’s cold and flu season.
Gross margin in the second quarter of 2009 increased to 59% as compared to 53% in the prior year, primarily due to a more favorable product mix in 2009. Operating expenses were $13.5 million compared to $12.8 million in the prior year and included $1.1 million of non-cash charges related to our previously announced restructuring actions.
General administrative expenses were higher than the prior year due to our CEO transition costs, as well as the costs associated with our new credit facility. Shifting attention to our six month results, revenues decreased 34% to $41.5 million from $62.8 million in 2008.
The net loss was $2.2 million or $0.07 per share as compared to net earnings of $8 million or $0.25 per diluted share in the same period of the prior year. Stock-based compensation expense was $1.7 million for the six-month period versus $1.9 million for the same period of 2008.
We continue to have a very strong cash position during the first six months of 2009. Quidel has repurchased approximately 2.1 million shares of its common stock or $18.9 million under the company’s previously announced share repurchase program.
A total of $8.1 million remains available for stock repurchase under the currently authorized program. Even after the effect of the stock repurchase, cash and cash equivalents as of June 30, 2009 were $49 million.
I will now turn the call over to Doug.
Doug Bryant
Thank you, John. In the first quarter we recorded abnormally low flu test sales as a result of a very late and mild flu season, and began the second quarter with excess flu inventory in the domestic distribution channel, but by the end of April, we were faced with an almost entirely new set of short-term business challenges as the demand for QuickVue A+B accelerated, first in international markets, then here in the United States.
While we never stocked out, our inventory became very nearly depleted causing us to restart our manufacturing processes. Since then, we’ve been manufacturing at full scale and have shifted our focus to our flu test supply chain and to ensuring we can meet our customers’ needs during the next season.
I believe that’s a testament to the strength of the Quidel management team and to our employees that we so quickly responded to these changing market conditions and were able to meet the demands of our customers worldwide without fail. Overall, I’m very pleased with how the business performed in the second quarter.
In understanding our market position as we move from a period of increased non-seasonal demand for flu tests to Q3 and Q4 when flu tests are typically ordered, we commissioned a survey of the physician office lab market to assess end user purchasing behaviors, comparing the 2008, 2009 season with the 2007, 2008 flu season. An independent research firm randomly contacted over 300 pediatricians, internists and office managers.
Of those who currently use the flu test, the research showed that 74% use our QuickVue brand of influenza tests and of those, 73% are now using QuickVue A+B. This is a shift from the previous season when a little more than 60% of QuickVue users were testing with the A+B product and interestingly, of those who used a flu test in the 2008, 2009 season, 12% did not use a flu test in the 2007, 2008 season.
While we have confidence in the firm that conducted the survey and the methodologies that they employed, we recognize that no survey is without some amounts of sampling error and certainly the percentage of physician office labs using our product will not tie precisely to market share. The survey does however give us the confidence to say that our leading market share position is firmly intact and stable and it certainly validates other independent market share data that showed that our share of the flu test market for both the acute care and POL segments has been fairly flat over the last several quarters; and by the way, those same data showed that our shares of the strep and pregnancy testing markets have remained stable as well.
In terms of new product development, let me provide a brief progress update on the programs we had previously announced. During the second quarter we made significant progress on each of the three previously disclosed programs and we continue to be on track to launch each of them for the schedule we had previously described.
As a reminder, we will launch our second generation fecal immunochemistry test before the end of this year. Our mononucleosis test is actually slightly ahead of schedule and we expect to launch that product in the first half of 2010.
Finally our flu RSV combo product is on track to start clinical trials this fall with the onset of the flu and RSV season and we expect to introduce that product before the end of 2010. In addition, we’ve started development efforts on our next three new products and as we get closer to their launch dates, I will be providing more detailed information on the specific tests, their market potentials and their expected launch dates.
In support of our strategic initiatives, we brought on board significant science and business development talent during the quarter to include a Vice President of R&D, a Vice President of Technology Assessment and a Vice President of Business Development. In addition our new Senior Vice President and Chief Scientific Officer will start in the third quarter.
When we make that announcement in the next several weeks, we will also provide the details on the entire team. As you can surmise, the outlook for the business for the remainder of 2009 is quite a bit different today than it was on our last conference call.
Let me highlight just a few important points. Clearly the domestic flu inventory overhang that existed at the end of Q1 has been remedied and domestic inventories of strep and pregnancy are at the manageable levels that we had expected them to be.
As you are aware, our flu test does not currently have a claim for the detection of the novel H1N1 virus, however, public and clinician awareness regarding the flu pandemic provides us an opportunity to implement programs and initiatives to drive higher penetration and usage of flu testing for seasonal influenza. So we plan on making some one-time sales and marketing investments in the third and fourth quarters to support this initiative.
We will fund this investment with the savings we had identified from our restructuring actions taken earlier. As we reported, our results for the second quarter were favorably affected by the increased incidence of influenza-like illness.
What effect this will have on our business in the third and fourth quarters is difficult to assess. We constructed a scenario planning model that incorporated numerous variables to determine what the demand for flu testing could be over the next three quarters.
We arrived at three possible scenarios, but as you can imagine, the potential outcomes of each vary greatly. Since May, we’ve been manufacturing A+B tests with a goal of having enough product on hand to meet the needs of our customers worldwide, in the event demand increases dramatically.
We will hold the inventory we create at our facilities and we will ship to our distribution partners the product as they need it, closely timed with the actual incidence of influenza and their out sales. Due to the combination of this change coupled with our efforts to support potentially higher demand levels, we expect our inventory levels to be substantially higher at the end of the third quarter, with those levels declining during future quarters.
In summary, we have adjusted our short-term focus to capitalize on the potential opportunities before us, but remain committed to the long term growth strategy that we’ve described previously and I look forward to reporting on our progress against those milestones in the future. That concludes our formal comments for today.
Operator, we are now ready to open the call for questions.
Operator
(Operator Instructions) Your first question comes from the line of Zarak Khurshid with Caris & Co.
Zarak Khurshid - Caris & Co.
Hi guys. Good afternoon.
Thanks for taking the questions. Nice quarter, nice rebound.
To what extent do you think the new international business will be kind of ongoing and consistent once we enter the flu and cold season; and maybe if you could just describe who those customers are?
Doug Bryant
Well the experience in the second quarter enabled us to establish relationships that we had not had previously. It also enabled bioMerieux to become quite active in promoting flu in advance of the upcoming season.
So I would expect that going forward we could benefit from the activity that we started in the second quarter. Specifically, we shipped a great deal of product to Mexico in the quarter.
We now know that they have reordered and we also shipped product to countries in Europe, but those were countries that typically already had, as well as Argentina and Brazil and in addition, I think we shipped to a couple of the South American countries as well.
Zarak Khurshid - Caris & Co.
Great. Doug could you just remind us some of the changes that you instituted with the I guess the sales force that allowed you to kind of better gauge what’s in the channel and if you’ve made any other types of changes to the infrastructure over the last quarter?
Doug Bryant
The most significant change we made was the processes that John and his team and the finance organization put together with our folks in order entry, to ensure that each order that we get from our distributors more closely matches out sales. In a couple of instances so far we’ve actually gotten back with individuals on orders and have either changed them or actually canceled them.
So we know the system that we’ve put in place actually works. In addition, in terms of actual commercial infrastructure, we’ve recently created a small managed care organization team and they are primarily focused on the State of California and the HMO and IPA segments.
Zarak Khurshid - Caris & Co.
Great, thank you.
Operator
Your next question comes from the line of Keay Nakae with Collins Stewart; please proceed.
Keay Nakae - Collins Stewart
Yes, good afternoon. Dough, through July are you still seeing meaningful pull through of the product, the flu product?
Doug Bryant
Sure, we are still seeing sales. I will point you to the data though on percentage of people who present to physicians and those who present with ILI, Influence-Like Illness.
The percentage is still running well below 2% and as you remember, the CDC’s baseline percentage is 2.5%. So even today, even though there is non-seasonal demand for flu, it’s still at a level that’s quite a bit lower than an actual flu season.
Having said that, in the southern hemisphere, you’re also hearing about increased level of flu and we are certainly shipping product there, but we are not shipping product at a level that you would expect during the season.
Keay Nakae - Collins Stewart
Very good and then as far as the mix of flu inventory that still might be in the channel, it sounds like A+B is obviously gone, but how about some of the other SKUs? What does that look like?
Doug Bryant
Well A/B in particular, there is still some inventory, in particular at one of the larger distributors, but other than that, we also look at for example strep. Strep is now down at very low levels and so is HCG.
So going forward into Q3 and Q4, we expect pretty typical out sales, mainly because we now understand our market share is stable, but we would expect sales to be as usual.
Keay Nakae - Collins Stewart
Okay. So thinking about Q3 in particular, normally we see a build of inventory of flu tests in the channel.
Are you going to manage that differently this year? Obviously they’ve run down A+B; maybe they typically would start stocking earlier in previous years.
You guys are more than willing to accommodate early inventory stocking, but with the way you’re trying to manage the distributor inventory, how should we think about that perhaps being different, but obviously complicated by H1N1?
Doug Bryant
The most important change is that we are not incenting the distributor to take onboard inventory, and then we are closely monitoring out sales and we are shipping product accordingly. We will obviously allow inventory build at the end user level; whether that be the acute care lab or the physician office lab.
So to the extent that that product is moving into those offices and labs, then that will be what we ship.
Keay Nakae - Collins Stewart
Okay and finally; I’ll get back in queue, but can you give us some of your findings of the market share that you had for strep, pregnancy and flu, separated by acute care and physician office lab?
Doug Bryant
Sure. I can tell you generally that in terms of strep, we run close to 40% overall and HCG, we’re about a third of the market and holding stable.
Keay Nakae - Collins Stewart
Any noticeable differences in your market share for flu in either physician office lab or acute care?
Doug Bryant
No, that in fact as I described a few minutes ago in the physician office segment, it still remains we believe above 70% and in the acute care setting, we’re in that 30% range.
Keay Nakae - Collins Stewart
Very good, thanks.
Operator
Your next question comes from Ashim Anand with Natixis Bleichroeder; please proceed.
Ashim Anand - Natixis Bleichroeder
Congrats on a good quarter guys.
Doug Bryant
Thanks.
Ashim Anand - Natixis Bleichroeder
Questions; one, on tax rate, taxes are significantly low this quarter. Can you comment on a going forward basis how should we think about it?
John Radak
The effective tax rate is consistent; it’s actually flat with the prior quarter.
Ashim Anand - Natixis Bleichroeder
In terms of the clinical trials for RSV and influenza combo, you plan to start it this year. Any projections on when you think you might be able to launch?
Like do you think you might be able to launch in 2010 flu season, that product?
Doug Bryant
Yes, again we’ll start clinicals here shortly and we intend to launch the product in the back half of 2010.
Ashim Anand - Natixis Bleichroeder
Finally, you guys have been working on this MChip, BChip and ABR-Chips; those things are still under development or those things have been shelved?
Doug Bryant
That program I assume was discontinued.
Ashim Anand - Natixis Bleichroeder
Okay. Thank you very much guys.
Operator
Your next question comes from the line of Ross Taylor with CL King; please proceed.
Ross Taylor - CL King
Hi, I have a couple of questions. First of all, I think Doug in your prepared remarks you mentioned that there were three scenarios or some potential scenarios you attempted to model for demand in the upcoming season.
Can you quantify or describe in any detail what those might have been or sort of what your range of expectations might be for the upcoming season?
Doug Bryant
Well, we modeled based on a number of factors. I can’t tell you the range of tests that we arrived at, but I can tell you that we looked at a lot of different things, including attack rates, vaccine effectiveness, uptake, number of physicians performing tests, etc.
I actually looked at 16 variables and all three of the scenarios what we would view are worse case scenarios, yielded very high numbers.
Ross Taylor - CL King
Okay, and you also mentioned in connection with that, you were planning to build your own inventories now and I’m assuming that’s finished product and I just wondered if much of a season doesn’t materialize, would you be at risk for having product on your own shelves that might expire and not be usable at some point in the future.
Doug Bryant
The manufacturing process again has restarted. We are holding the product at the pouched stage, which is prior to final kitting.
At that stage the product has 30 months dating, provided we hold it at that stage in whip, then we are able to effectively maximize our dating and we don’t think there’s a great deal of risk then, that we’ll be stuck with inventory.
Ross Taylor - CL King
Okay, all right. Last question, I just wondered over the last couple of months if you’d seen much change in behavior at the end user or the physician office level or, if you had seen new customers buying flu tests that previously had not been using flu tests.
Doug Bryant
Well we don’t have an entire market survey, but the survey that I just mentioned that we had commissioned of over 300 physicians suggested that there was a 12% increase in the number of physicians who were testing this last season versus the previous 2007, 2008 season.
Ross Taylor - CL King
Yes, I guess I was wondering if it’s more recently in response to the swine flu; whether you thoughts had been a much change in behavior or just greater market penetration.
Doug Bryant
We certainly have a lot of anecdotal evidence, but I would hesitate to try to quantify, but the short answer is yes, there are more physicians testing as a result of what’s been going on than before. I can’t quantify it for you though, I’m sorry.
Ross Taylor - CL King
All right, fair enough. That’s helpful.
Thanks very much.
Operator
Your next question comes from the line of Jeff Frelick with ThinkEquity; please proceed.
Jeff Frelick – ThinkEquity
Hey, good afternoon Dough and John. First question; so with respect to you guys filling some inventory, holding it as opposed to some advising the distributors to stock it, how much flu inventory are they willing to at least bring in and carry some inventory?
Can you kind of quantify that in terms of weeks or number of kits, anything like that?
Doug Bryant
We built a program around enabling them to stock, physicians, at least one inventory turn. Whether the individual physician though takes on board more than they have in the past, we are going to allow that as well.
Jeff Frelick – ThinkEquity
Then with respect to the strep and HCG inventories, just so I’m clear on that, do you have any sense of out sales by the distributor for strep and HCG? Have they brought levels down, just not reordering or is there anything happening that sales got just a little stagnant in the quarter on out sales by the dealer?
Doug Bryant
No, out sales have been consistent and our shares have been consistent. So what we’re seeing is essentially just simply that and inventory drawdown.
Jeff Frelick – ThinkEquity
Okay. Thanks guys.
Operator
We have a follow-up question from the line of Keay Nakae with Collins Stewart; please proceed.
Keay Nakae - Collins Stewart
A couple of questions for John on the income statement, expense items. For G&A, anything that’s going to noticeably change for the balance of the year from the number you just posted?
John Radak
No, not dramatically.
Keay Nakae - Collins Stewart
Okay and then for sales and marketing; Doug, you mentioned a bit of a marketing campaign in the fall, but absent that it should just simply track sales volume?
Doug Bryant
Sure, it should be consistent with sales volume. We are going to have some efforts as I pointed out, but they will be offset by the savings that suggested we would have do to the restructuring.
Keay Nakae - Collins Stewart
Okay and the final question on FIT. Where are you at in terms of the approval of that, CLIA waiver?
Can you help us out?
John Radak
Sure, we submitted the 510K data and we are awaiting a response from the FDA.
Keay Nakae - Collins Stewart
And how long ago did you submit that?
John Radak
Well we don’t specifically state because that then would tie to launch dates and alerting competitors as to when we actually intend to launch it, wouldn’t be a great idea, but I will tell you that we have submitted it and we are comfortable in saying that we will have approval prior to year end.
Keay Nakae - Collins Stewart
And with that approval, how restricted will it be based on CLIA?
Doug Bryant
Well, we expect a clear approval.
Keay Nakae - Collins Stewart
Within the same timeframe before you launch?
Doug Bryant
Yes.
Keay Nakae - Collins Stewart
Okay, thanks.
Operator
Your next question comes from the line of Steve Crowley with Craig-Hallum; please proceed.
Matt Stratton – Craig-Hallum
Hi guys. This is Matt calling for Steve.
Congratulations on the good quarter. A question; would it be possible to get some color or an update on the molecular strategy; how close you are to putting your first stake in the ground there and how has that strategy evolved since you first announced that you were going in that direction a couple months ago?
Doug Bryant
Sure Matt. We’ve had an active program for three years and during that time, we have developed a prototype assay and that work continues.
In addition, we are making progress on an agreement that would give us a fairly quick entry into the segment and then we’ve also identified other technologies and platforms that we have an interest in. In addition, we formed a molecular business unit and appointed a molecular business unit manager to that assignment and we’ve also hired more R&D talent with the molecular biology background necessary to get product out the door for us.
Matt Stratton – Craig-Hallum
Alright and just a little bit more on the growth rates for strep and pregnancy; I think in your press release you mentioned they’re at 2.5 year lows. Given some of the nuances over the last couple of years as far as big stocking quarters and whatnot, what kind of growth rates should we be thinking about as we look at those two product lines?
Doug Bryant
When you said growth rate its 2.5 year lows. I think the comment we made was that inventory is at 2.5 year lows.
Matt Stratton – Craig-Hallum
Correct, sorry.
Doug Bryant
Okay, so I would expect low single digit growth in both those two markets.
Matt Stratton – Craig-Hallum
Alright, thank you. Thanks for answering my questions.
Operator
(Operator Instructions) Your next question comes from the line of [Sarah James] with Wedbush Securities; please proceed.
Sarah James - Wedbush Securities
I was hoping to get a little bit more color on the seasonality of how you expect the inventory to flow out. Typically I would expect to see more of it coming out in January, but recently HHS made some comments that there could be a second wave of the flu season in September, October and I was wondering if you think that’s likely.
Is that something you have modeled into one of your scenarios?
Doug Bryant
We certainly looked at the timing in looking at our scenarios, but it would be very difficult for us to predict whether there would be this wave occurring in September. So our current thinking and planning is around a normal flu season, which would suggest that we would put inventory into the channel in Q3, Q4; perhaps with greater out sales in Q4 and the bulk of those out sales occurring in Q1 2010.
Operator
That is all the time we have today. Please proceed with your presentation or any closing remarks.
Doug Bryant
Okay. This concludes the call for today.
John and I thank you again for your time this afternoon and your continued support. Take care everybody.
Operator
Ladies and gentlemen, we thank you for your participation and ask that you please disconnect your lines. Good bye.