Apr 28, 2011
Executives
John Radak – CFO Doug Bryant – President and CEO
Analysts
Steven Crowley – Craig Hallum Capital Group Pete [ph] – William Blair & Company Zarak Khurshid – Wedbush Securities Jeff Frelick – Canaccord Ashim Anand – Natixis
Operator
Welcome to the Quidel Corporation First Quarter 2011 Earnings Conference Call. At this time, all participants are in 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
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. Today Quidel released financial results for its three months ended March 31st, 2011.
If you have not received this news release, or if you would like to be added to the company's distribution list, please call Ruben Argueta at Quidel Corporation at 858-646-8023. Please note that this conference call will include forward looking statements within the meaning of federal securities laws.
It's possible that actual results and performance could differ materially from these stated expectations. For a discussion of risk factors, please see 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 April 28, 2011. 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 for the quarter. Doug will talk about the impact of the influenza season and our progress with Thyretain in the quarter and our three projects in development.
We will then open the call to your questions. Total global revenues for the first quarter were $59.6 million compared to $28.4 million in the first quarter of 2010, an increase of 110%.
This increase in revenues in the first quarter reflects the benefit of an influenza and respiratory disease season, while no such season occurred in 2010. The following comments on revenues by product category will be compared to the prior year as if DHI was acquired on January 1, 2010.
Global revenues of infectious disease products totaled $47.6 million in the first quarter of 2011 compared to sales of $21.9 million in the first quarter of the prior year. All product lines contributed meaningfully to this growth.
Revenues in the women's health category declined slightly from $8.4 million to $8 million, reflecting the timing of orders for pregnancy tests as well as softness in our bone health product lines. Our GI product category increased 24% to $1.7 million.
Gross margin in the first quarter of 2011 increased to 66% as compared to 53% in the first quarter of the prior year, primarily due to a more favorable product mix associated with the flu and respiratory season. Operating expenses were $21.6 million in 2011 compared to $18.8 million in the prior year.
The inclusion of DHI operating expenses for a full quarter in 2011 drove most increase in the quarter. Research and development costs in the first quarter of 2011 were $7.8 million, which were flat to an acquisition adjusted first quarter of 2010.
Higher clinical trial cost associated with the florescent immunoassay analyzer and higher molecular assay development costs were offset by lower instrument development costs. Research and development costs in the second quarter should be about the same as the first quarter with an expectation that R&D spend should be lower in the second half of the year versus the first half.
As a result of our molecular development programs running ahead of schedule, we now expect R&D to be somewhat higher in 2011 versus the 2010 pro forma. Stock-based compensation expense was $1.8 million in the first quarter versus $1.2 million for the same period in 2010.
The effective tax rate for the first quarter of 2011 was 34% compared to 37.8% in the first quarter of 2010. The difference in the effective tax rates is primarily due to the inclusion of the federal R&D tax credit and acquisition-related expenses during the first quarter of 2010.
We anticipate that our tax rate for 2011 will be approximately 34%. Cash flow from operations was $26 million, allowing us to repay $30 million of debt associated with the acquisition of DHI in February 2010.
We ended the quarter with $59 million of cash and cash equivalents and $50 million of long-term debt on our balance sheet. I will now turn the call over to Doug.
Doug Bryant
Thank you, John. The first quarter of 2011 was significant because it was in fact a respiratory season.
Throughout the quarter, our commercial organization focused on maximizing revenues of our on-market products, most notably flu, Thyretain and our other respiratory disease products. The quarter was also important because we continued to make progress on the development of our three key projects; our florescent immunoassay analyzer; our cellular based analyzer, Bobcat and our molecular program.
I will speak to these development projects shortly. With regard to influenza, we benefited from a return of the cold and flu season in the first quarter.
We characterize flu season as occurring at the lighter end of the normal range in terms of severity with ILI peaking at 4.9% and then quickly falling toward the end of the quarter. As a result, we generated nearly $60 million in total revenues and are exiting the quarter with low inventory, both internally and with our distribution partners.
We expect very little flu over the next two quarters with some flu sales in December depending on the timing of the next flu season. With regard to Thyretain, we continue to do the things that are necessary to create awareness of TSI and Grave's disease.
In addition to personal selling, we have established the speaker’s bureau and have conducted a number of symposia for physicians. Six papers have now been published on Thyretain and another coupled are due to be published shortly.
It's difficult to establish precise cause and effect, but in March we did see a stair step increase in the number of tests run in the month, which was distributed evenly across all our reference lab customers. Next I’d like to review our progress with new product development, beginning with the florescent immunoassay analyzer, our automated next-generation rapid point of care diagnostic system.
We are very excited about this product because it gives us, at the very minimum, an opportunity to solidify our existing market share to expand geographically, and to solidify our position as price leader, all of which we consider to be a solid base hit. We view the total addressable market for our planned menu to be about $270 million, but the analyzer also serves as a platform that can potentially address the higher volume quantitative assay market, which we estimate to be about $1 billion for just the top four quantitative assays.
We characterize that opportunity as a homerun, because it significantly expands the space in which we participate. We achieved a significant milestone with this program with the completion of clinical trials for influenza A+B assay and we are track to launch in the U.S.
in Q4 pending FDA clearance with the second assay plan to follow shortly. Our next product development activity is the Bobcat, an automated instrument that eliminates the need to manually interpret FastPoint, a multiplexed DFA slide used to identify cells that have been affected by up to eight different viruses.
The opportunity for Bobcat lies in pricing upside and in solidifying our market share among the top 700 accounts. We define that as the conservative opportunity, but the exciting proposition lies in moving to the moderately complex market and converting the 4,800 hospitals that currently send out their virology testing requirements to other hospitals and reference labs.
To us, this represents an incremental $60 million market opportunity. With the rapid fall-off in the influenza season, we missed our opportunity to complete clinical trials in the US for the flu A+B assays.
Instead, we intend to conduct beta site trials this summer in the southern hemisphere, where the respiratory season will have already begun. Our molecular program represents our third product development program comprising of three-pronged approach.
First, the non-instrumented disposable molecular device that is the result of our collaboration with BioHelix. Second, the open box PCR based molecular assay kits developed for use on our customers' existing thermocycling equipment.
And third, our fully integrated molecular system that offers sample and result out simplicity. Beginning with the non-instrumented disposable platform, these are assays that do not require an expensive thermocycler and for certain assays will not require extraction.
The only piece of equipment required is a heating block that is already commonly available in most labs. We believe we can sell these assays in larger hospital laboratories for use on their second and third shifts as well as to smaller hospitals that have previously not performed molecular testing for reasons related to either cost, volume or ease of use.
Our first two assays are nearing clinical trials and pending a favorable response from the FDA, we expect to launch in the U.S. as early as the end of the year.
Our open box molecular assays were developed in-house by our molecular assay development teams in San Diego and Athens, Ohio. We have improved the workflow of these assays to reduce the number of steps in the process and the amount of time needed to run them on commercially available thermocyclers.
We will soon complete clinical trials for our first two assays and expect to launch ex-US this fall. And depending on the timing of U.S.
FDA clearance, we could launch here in the U.S. as early as the end of the year.
Our final molecular platform is project Wildcat, a fully integrated molecular testing solution that performs extraction, amplification and detection, all in one instrument. We partnered with Northwestern University and the Northwestern University Global Health Foundation to create a lower cost molecular testing platform for use in developing countries.
Our belief is that when we develop such a product that is inexpensive and easy enough to use to address these markets, this type of product could be a game changer in the highly developed markets. We estimate that the total addressable U.S.
market for the first two platforms, the non-instrumented cassette and the open box assays, is about $160 million. The addition of Wildcat with the open box menu to our other two platforms expands the total addressable market to about $760 million.
Because there is always uncertainty around development activities and clinical trials, our programs always remain subject to change in terms of content and timing. Nonetheless, we made significant advances in support of our goals and we believe that we’re on the right course.
I am excited about the opportunities and I look forward to sharing more details with you in the future. That concludes our formal comments for today.
Operator, we are now ready to open the call for questions
Operator
Thank you. (Operator Instructions) And your first question comes from the line of Steven Crowley of Craig Hallum Capital Group.
Steven Crowley – Craig Hallum Capital Group
Good afternoon, gentlemen, and congratulations on the strong overall performance in Q1.
John Radak
Thanks Steve.
Doug Bryant
Thanks Steve.
Steven Crowley – Craig Hallum Capital Group
Couple of questions on -- actually one question first on the flu business. I am wondering if you could update or at least give us some color on your sense for the number of sites that were performing flu tests in Q1 maybe versus historical norms.
Doug Bryant
Sure. In terms of the number of customers, I can only really speak to our own data, Steve.
The number of physician sites ordering QuickVue Influenza in Q1 was about 8,000 for again physician sites. And that's about 100% more than in 2010 during the same period, so it's doubling number of sites.
The number of actual users is likely to be higher of course as the 2010 season was actually non-existent. And we know that physician's may have – still had inventory that took them through this recent season.
So it's at least a doubling of the number of physicians. And I think we could have predicted some of that.
In terms of hospital customers, the number is up as well from about 800 to about 1,600 hospitals.
Steven Crowley – Craig Hallum Capital Group
And do you think the majority of that is because of greater acceptance of your test or market share gains?
Doug Bryant
I think it's greater acceptance. We saw a significant growth in 2009 due to the pandemic and it appears that many of those may have stock and we’re now probably at the same level that we saw prior to the pandemic, if not just barely more than that.
Steven Crowley – Craig Hallum Capital Group
Okay. In terms of a couple of questions on the fluorescence immunoassay platform, and the improved performance, you talked about in the analyst day like an order of magnitude better sensitivity potentially out of that platform.
I'm wondering in the qualitative domain that you typically operate with lateral flow, whether that improvement in performance really just allows you to put some distance between you and your competitors in the historical domain of lateral flow or whether that kind of performance actually could move you into the domain of some other technologies that are used for qualitative tests. And I guess as a related question, I'll stop there, about what will it take for you – for the system to be able to do the quantitative testing that you have alluded to?
Doug Bryant
The improved performance I think as I said earlier will solidify our position in the marketplace and I would characterize that again as a solid base. And as I said, I think the ability to do quantitation dramatically increases our market opportunity.
So the question I think that you are asking is, will that, will it be required in order to deliver quantitative essay capability. I can say simply that without changing anything on the instrument itself, we have demonstrated already feasibility with one of the higher volume quantitative assays ordered by physicians.
And in the assay before optimization looks very good so far, and we've demonstrated that across a dynamic range of about 2.5 logs, we can generate results with less than 10% CVs. And we are showing an analytical sensitivity in about the 50 picogram range.
So far looks very good, at least one in a row, one assay, the first assay that we looked at looks very good. So I think in short we've demonstrated internally at least that we can develop quantitative assays on this analyzer without changing any of the parameters.
Steven Crowley – Craig Hallum Capital Group
Okay. And it doesn't sound like there is some huge technological hurdle that stare you in the face.
I mean, there might be some optimization and some tweaks, but there is not a big hurdle with chemistry or instrument?
Doug Bryant
With one assays, so far, Steve.
Steven Crowley – Craig Hallum Capital Group
Okay. All right.
That's real help. While, I'll hop back in the queue.
Thanks so much.
Operator
Your next question comes from the line of Brian Weinstein with William Blair & Company.
Pete – William Blair & Company
Hi guys, this is actually Pete [ph] for Brian today.
Doug Bryant
Hey, Pedan.
Pete – William Blair & Company
Hey. My questions first on the flu season, so it doesn't seem like you guys quite the hit $50 to $60 million that you've said a normal season typically is.
I was wondering if you could characterize what you will consider then to be a normal season?
Doug Bryant
Well, as we try to suggest -- we view this to be on the lighter side of normal. If you did the math on what we said previously, you would have arrived at a conclusion that we should do on a normal season around $30 million -- north of $30 million in flu test sales.
We don't normally break out flu separately, as you know but for this discussion, I will. In Q1, we had sales of $25 million, which was almost entirely U.S.
So that's why we would characterize it on the lighter side. And I would say that anticipating your next question as if it was lighter, how do you know about market share?
Yesterday our main competitor on the space reported flu sales of $19.5 million in flu test sales for the quarter, but the difference between the two company sales is not really that meaningful in terms of share, as I tried to explain before. I would guess that we probably had less inventory at year-end with our distribution partners than they did.
And in fact, if you were to total their sales for Q4 2010 and this quarter and do the same for ours, the sales would be nearly the same.
Pete – William Blair & Company
Okay.
Doug Bryant
And if we were to look at sales to physicians in hospitals, I would guess that neither of us gained nor lost significant share during the season.
Pete – William Blair & Company
And then – sorry and then going to the debt pay down, what was the rationale behind this and does this make an acquisition most likely in the near term?
Doug Bryant
No. We felt that -- as I said at the Analyst Day, we would keep between $50 and $60 million of cash on the balance sheet and to the extent that we generate cash from operations, we would use that to pay down debt.
Pete – William Blair & Company
Great. Thanks guys.
Doug Bryant
You're welcome Pete.
Operator
The next question comes from the line of Zarak Khurshid of Wedbush Securities.
Zarak Khurshid – Wedbush Securities
Hi, Doug and John. Thanks for taking the question guys.
Congrats on a nice quarter and…
John Radak
Thanks Zarak.
Zarak Khurshid – Wedbush Securities
Sure. So, given that this is the first meaningful kind of non-epidemic flu quarter since you changed to the less promotional selling strategy, I was just wondering if you could kind of just -- in general just reflect on that process and if there are any challenges with that approach now with the kind of normalized flu business?
John Radak
Yeah. No, I think with the approach of the way that we deal with this distribution and stocking them, we don't think it had any impact at all on the business.
Zarak Khurshid – Wedbush Securities
Okay. And then just on the pricing front, how should one be thinking about annual sort of raises to the pricing and pricing competition in general?
John Radak
Well, as I described a couple of minutes ago, the shares seem quite stable, both companies tend to do same thing in the market in terms of promotional programs. And I would say -- you could say that we were, therefore, equally effective or perhaps equally ineffective, but price does not seem to be one of the drivers in the market at this time.
Zarak Khurshid – Wedbush Securities
Okay. Thanks.
I’ll hop back in the queue.
Operator
Your next question comes from the line of Jeff Frelick of Canaccord.
Jeff Frelick – Canaccord
Thanks. Hey Doug, could you -- I know you touched on the inventory for flu exiting the quarter.
How about for strep and pregnancy, how is distributor inventory looking?
Doug Bryant
They are looking very low.
Jeff Frelick – Canaccord
Okay.
Doug Bryant
They continue to manage those at a very low level.
Jeff Frelick – Canaccord
And then in the quarter with respect to contracts with hospitals or in way of delivering networks, any update there with picking up any new contracts in the quarter?
Doug Bryant
Nothing significant that would be -- and certainly nothing material. We obviously have a health systems group who make contact and try to persuade, but we don't have anything that would be significant enough to report.
Jeff Frelick – Canaccord
Okay. And last question, you had mentioned that you did see a little bit of step-up in March with respect to Thyretain, did that kind of carry over into April?
Doug Bryant
We won't know yet based on the ways that we actually build our large reference lab customers, they report back to us at the end of the month on what was used and then we invoice them.
Jeff Frelick – Canaccord
Okay. Great.
Thanks guys.
Doug Bryant
We did see about 17% step-up over the previous month and again that’s one data point.
Jeff Frelick – Canaccord
Okay. Thank you.
Doug Bryant
You’re welcome.
Operator
Your next question comes from the line of Steven Crowley of Craig-Hallum Capital Group.
Steven Crowley – Craig-Hallum Capital Group
Yes, guys. Just a couple of follow-ups and I was going to ask about the extent of the step-up.
Doug, did you just say that the business in March was up 17% sequentially, so from February?
Doug Bryant
That’s right.
Steven Crowley – Craig-Hallum Capital Group
Okay. That is encouraging.
There were some discussions that sounded pretty intriguing at the Analyst Day about some guideline changes in terms of treating hyperthyroidism and how that might create some therapeutic drug monitoring applications for Thyretain. When is that schedule to happen?
That's still in front of us that didn't happen already, did it?
Doug Bryant
No, that's still in front of us. And we look forward to reading those recommendations when they come out.
I do think I probably should comment on the game plan overall for Thyretain. As you know, Steve, we've got a number of assets to the program we have a physician office sales force that continues to make calls on internal medicine, OB/GYN and endocrinology practices.
One other activity is organizing local physician education programs and inviting physicians to attend and those programs are a bit like the program that you saw at analyst -- during the analyst day. Through April 15th though we've conducted now 10 of these regional physician education symposia, which have been attended by about 200 physicians and we have 19 more programs scheduled through mid June.
And in March, for example, we conducted programs in Virginia, California, Texas, Illinois and Massachusetts. At the moment, our speaker's bureau consisted nine internal medicine, OB/GYN and endocrinologist key opinion leaders.
You saw two of those speaking at Analyst Day and each of which -- each of whom use our product and recommend earlier use of Thyretain. So and we also have, as I mentioned the health systems guys who continue to talk with health plan administrators using our economic benefit model.
And then, recently we launched a webinar that's called Thyroid Graves' Disease; Diagnostic and Therapeutic Challenges, which also highlights the challenges of timely accurate diagnosis and subsequent clinical management of hyperthyroidism. So, all those things I would say individually is difficult to determine their impact, but in total we think that we’re seeing for the first time at least a minor step up in volume and we’ll continue to watch that and see how it goes.
Steven Crowley – Craig-Hallum Capital Group
Great, now one another question. In terms of the BioHelix consumable molecular diagnostics platform, it's a very slick form factor that you were able to show us at the Analyst Day.
In terms of your marketing plan, are there some papers and data that will be coming out hopefully in front of or coincident with FDA approval of that product that you feel is critical to the launch or the capabilities and form factor seem to be pretty slick on its own, but what's the marketing plan -- introduction plan around that product?
Doug Bryant
Any launch in our space requires publishing papers that demonstrate the clinical performance of the assay or the instrument and that was obviously big part of the game plan -- plan of the marketing plan, Steve. So, yes, we have data that we would -- in collaboration with investigators like to publish and that will be forthcoming.
Steven Crowley – Craig-Hallum Capital Group
Okay. And on the FIA, fluorescent immunoassay platform, you mentioned that you completed the clinical trial on the first assay.
So, I assume that will be off to regulatory in the relative near future?
Doug Bryant
There are number of experiments that we continue to run internally that are the normal course of putting a package together for FDA submissions and we are still working on those. Following that, we would send the data package off to the FDA for 510(k) clearance.
And I hate to speak specifically about a timeframe there. I’d just say it's in the reasonable near future.
Steven Crowley – Craig-Hallum Capital Group
Right. Okay.
Thanks a lot for taking my questions.
Doug Bryant
You're welcome Steve.
Operator
(Operator Instructions) You have a follow-up from the line of Zarak Khurshid of Wedbush.
Zarak Khurshid – Wedbush Securities
Hi. Thanks for taking the follow-up.
So, with the recent 510(k) approval for Sapient's flu cartridge, your own molecular efforts there and the couple of others in the field, what's your sense for what's happening for molecular food testing today and what is the trend in that space?
Doug Bryant
Okay, good. Until I review the clinical performance data, which would be in the 510(k) for the (inaudible) assay, I can't really comment on how well I could expect a product like that to do.
What I can say is that because of the number of different flu isolates and sequences that clinical sensitivity is an important criterion for molecular assay customers. Accordingly, one of the design specifications for Quidel's PCR based assay is that we achieved greater than 95% sensitive when compared with an FDA cleared PCR assay.
Our market research shows that if we cannot achieve greater than 95% clinical sensitivity then we should not launch. And preliminarily though, Zarak I can tell you that we intend to launch.
Secondly, I would just say, of course, relative to rapid diagnostic tests and culture, any molecular assay will be sensitive enough, but time to result and cost are still big hurdles. We view molecular, including our own assays, to be an important additional assay in the diagnostic continuum and so far this has been true.
I've just shared a few minutes ago the fact that not only has the number of testing sites for rapid point of care diagnostic testing not declined, but it's actually increased. So, we've seen very little cannibalization from rapids to molecular or DSA for that matter.
So, we view molecular testing to be important but I think it would be additional to what you see out there today.
Zarak Khurshid – Wedbush Securities
In addition -- it seems like there is a lot more talk about multiplexed tasks and panels for upper respiratory disease and other areas. How do you think about multiplexed types of tests as potential competition or threat to your franchise long-term?
Doug Bryant
We like the concept of multiplexing and running the smaller plexes seems to be what customers are asking us to develop. I would say though that in some cases, we test out those concepts with customers who tell us that they don't necessarily want to have that particular combination, because it's not the way it's ordered.
So, I think on our end, I think our strength will be the ability to react quickly to when customers say they want certain assays paired together, but also to launch them either individually or in pairs or in small multiplexed panels depending on what the customer wants. There are customers who do like the larger plexes and certainly there are couple of companies out there that do have those panels and they have use in the utility I do think for surveillance and those assays are very interesting to small set of customers, but overall general clinical practice, physicians tend not to order very large panels.
So, we’ll see how it goes. We remain, I think flexible on our end to whichever way the customer base wants to go.
Zarak Khurshid – Wedbush Securities
Okay. Thanks, Doug.
Operator
Your next question comes from the line of Ashim Anand from Natixis.
Ashim Anand – Natixis
Thanks for taking my questions. And I’m sorry if you are already asked this.
I was switching between calls. Have you guys broken out Thyretain sales this quarter?
Doug Bryant
I'm sorry. Could you repeat the question?
Ashim Anand – Natixis
The Thyretain sales.
Doug Bryant
We did not break it out, but it was roughly about the same as last quarter of about $1.5 million.
Ashim Anand – Natixis
Okay. Wonderful.
And also if you can give us a feel of how was the inventory for influenza product at the end of second quarter?
Doug Bryant
It’s about…
Ashim Anand – Natixis
Distributor inventory.
Doug Bryant
First of all, Ashim, means at the end of first quarter, I’m sure. At the end of first quarter…
Ashim Anand – Natixis
First quarter, yeah. Sorry.
Doug Bryant
The inventory was actually quite well. Do you want to give a number, John?
John Radak
It was in the neighborhood of 300,000 testing channels.
Ashim Anand – Natixis
Thanks a lot, guys.
Doug Bryant
You’re welcome.
Operator
That is all the time we have today. Please proceed with your presentation for any closing remarks.
Doug Bryant
This concludes the call for today. John and I thank you again for your time this afternoon and for your continued support.
Take care, everyone.
Operator
Ladies and gentlemen, we thank you for your participation and ask that you disconnect your line. Goodbye.