Apr 24, 2014
Executives
Randall J. Steward - Chief Financial Officer and Principal Accounting Officer Douglas C.
Bryant - Chief Executive Officer, President and Director
Analysts
Shaun Rodriguez - Cowen and Company, LLC, Research Division William R. Quirk - Piper Jaffray Companies, Research Division Tejas Savant - JP Morgan Chase & Co, Research Division William B.
Bonello - Craig-Hallum Capital Group LLC, Research Division Matt Larew Zarak Khurshid - Wedbush Securities Inc., Research Division Nicholas Jansen - Raymond James & Associates, Inc., Research Division Jeffrey Frelick - Canaccord Genuity, Research Division
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Quidel Corporation First Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr.
Randy Steward, Quidel's Chief Financial Officer. Please go ahead, sir.
Randall J. Steward
Thank you, operator. Good afternoon, everyone, and thank you for joining today's call.
With me today is our President and Chief Executive Officer, Doug Bryant; and Ruben Argueta, Director of Investor Relations. Please note that this conference call will include forward-looking statements within the meaning of federal securities laws.
It is possible that actual results and performance could differ significantly from these stated expectations. For a discussion of risk factors, please review Quidel's annual report on Form 10-K, registration statements and subsequent quarterly reports on Form 10-Q as filed with the SEC.
Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, today, April 23, 2014. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law.
Today, Quidel released financial results for the 3 months ended March 31, 2014. If you have not received our news release or if you would like to be added to the company's distribution list, please call Ruben at (858) 646-8023.
For today's call, Doug will report on the highlights of the first quarter and provide updates on our product development pipeline. I will then briefly discuss our financial results, and then we'll be happy to open the call up for your questions.
I'll now hand the call over to Doug for his comments.
Douglas C. Bryant
Thank you, Randy. For the call today, I'll comment on 3 topics.
First, the latest influenza season; second, progress with new products and product development; and third, a summary of where we stand with respect to our aspirational global targets. Let me start first with the characterization of the flu season generally.
The predominant circulating straining season was the 2009 H1N1 subtype. This virus disproportionately affected persons aged 18 to 64 versus last year's predominant H3N2 strain, which disproportionately affected persons over 65 years of age.
The current flu season was characterized by a lower and narrower ILI peak than last year's ILI peak, suggesting lower influenza prevalence at least in terms of influenza illness as a percentage of physician office visits and shorter duration of the season. Another characteristic of this flu season was its relative mildness in terms of morbidity.
According to the CDC, there was a 27% decrease in the number of laboratory confirmed influenza-associated hospitalizations this season from last year, and the number of pediatric deaths was roughly half the number that occurred in the 2012, 2013 season. Through April 5, the CDC sentinel sites have reported 19% fewer ILI visits for this season versus the prior season.
Overall, it was a very mild and shorter respiratory disease season. Consequently, demand for respiratory disease products declined versus the prior year's first quarter, partially offset by Sofia and molecular revenues.
Total revenues for the first quarter of 2014 were $46.7 million, a 25% decrease from revenue in the first quarter of 2013. Despite the weakness in the season, we continue to make progress with the launch of Sofia, our next-generation automated immunoassay analyzer.
Sofia revenues for Q1 were up 57% over the prior year. And on a 12 -- excuse me, trailing 12-month basis, sales of instruments and cartridges exceeded $20 million.
Our pricing and margins have held steady, and a number of placements in the quarter was consistent with a number of placements in Q1 of 2013. Our cannibalization rate ticked up slightly to approximately 35%, and Sofia placements in the quarter were about evenly split between hospital and physician office lab accounts.
We saw a solid traction with our Sofia RSV product and believe we picked up some share with this product, as well as with our Sofia influenza A+B product. With regard to Sofia development activities, 2 clear labor packages have been submitted, with 1 more remaining to be submitted.
And we're on track to complete the development of our first 2 quantitative assays as scheduled. We also saw progress with our molecular products, particularly with AmpliVue, our handheld disposable molecular device.
We've recently seen an increase in the size of our average contractual commitment to purchase AmpliVue C. difficile, as several large customers have completed evaluation.
In addition, we just recently launched AmpliVue HSV 1+2, and we completed clinical trials for our fourth AmpliVue product. Closing our list of accomplishments with AmpliVue we're in clinical trials for 2 additional AmpliVue products at this time.
Assuming all goes well, we could exit 2014 with an AmpliVue meeting with 6 infectious disease assays. We've also made great progress with Lyra, the brand name for our real-time PCR-based assays that are specifically developed to run on a laboratory's existing thermocycling equipment.
We recently received FDA clearance for our latest molecular assay for cryogenic Strep A and C or G. The assay followed the FDA's de novo pathway, which means that it's the first of its kind in the marketplace and is now available for sale in the United States.
One other de novo Lyra assay is under review by the FDA as well, and 2 other Lyra assays are currently in clinical trials. And finally, a word about Savanna, formerly known as Project Wildcat, which is the highly robust cartridge based fully integrated molecular diagnostic system and tendered initially as a low-cost HIV viral load testing solution for the developing world.
We're on track with our previously disclosed timeline. And in fact, because a number of technical hurdles that are now behind us, have made the decision to increase our R&D spend on the project this year, as we now believe that, with the spend, we can start clinical trials in Africa earlier and can accelerate many development for the developed markets.
Randy will talk about this and the impact to our overall R&D spend in a few minutes. In summary, while the weak flu season had a dampening effect on our financial performance, we nevertheless had a highly productive quarter, accomplishing a number of tasks and objectives that we believe will contribute ultimately to the achievement of the aspirational targets we first unveiled at our Analyst Day in 2011.
At that time, we said that while it will be technically challenging, we intended to become a broader based diagnostic company and that we have the assets and capabilities to expand well beyond our existing rapid point of care business. We said that with the recent FDA clearance, to market Sofia in the United States, we would stabilized our existing business and would develop quantitative assays that would give us access to larger markets.
We also said we would enter the molecular diagnostic segment and that we could create brands through the introduction of unique instrument and assay solutions. We noted, of course, that R&D and product development by their nature were always somewhat uncertain and fluid, subject to change in terms of content and timing.
While uncertainty around development activities, clinical trials and clearances by regulatory agencies as part of the new product development process, I am very pleased for the most part with our ability to do what we said we would do and to make significant progress towards our goal of becoming a broader based diagnostic company. In 2011, we said that the achievement of the vision of becoming a broader based diagnostic company could occur at the point when we had recorded $100 million in annualized incremental revenue from new products and that we aspire to accomplish this by 2015.
As we noted at that time, among other factors critical to our ability to achieve this incremental revenue was success with Sofia. And our objective was to have 10,000 Sofia analyzers online and operational, each billing about $10,000 per year.
While timing is subject to change, as I said before, due to the risks, which I'll talk about in a minute, based on our experience thus far, with current Sofia placements and where we are with many development, we still believe that the goals for the number of analyzers placed in the billings replacement are achievable. At our current cannibalization rate, incremental revenue would be $65 million.
We also said that our target for revenues for AmpliVue and Lyra customers was $25 million. Currently, our annual run rate for molecular assays is approximately $4 million.
Therefore, based on our experience with our current molecular products and customer contracts and what we believe will be demand for the products that we expect to launch in the near term, we still believe that this target is achievable. So clearly, in 2014, there's work to be done and milestones that need to be accomplished, activities and events that could affect the timing of the achievement of our goals.
To be specific, our outlook for the following year assumes that we have clear labor for all current Sofia products marketed in the United States. And while we are confident that this will be accomplished, it's not done yet.
We also assume that we complete the development of quantitative assays this year in time to realize some level of revenue in 2015. Further, we assume that the acceptance of the AmpliVue workflow creates collateral benefit across a broader menu and that the size of our customer base accelerates.
And finally, we expect that the evaluations of our Lyra products that are expected to be conducted by a smaller number of very large customers will be successfully completed before year end and that we will have a base of business as we begin 2015. So although Q1 was very productive for us, we have more to do this year.
The good news, however, is that we have the skills and capability to get things done, and much of what we need to happen as well under our control. Well, back into the history of execution gives me confidence to say that we are well on our way to the achievement of our goal of becoming a broader based diagnostic company.
Randy?
Randall J. Steward
Thank you, Doug. As Doug mentioned in his opening remarks, total revenues for the first quarter of 2014 were $46.7 million as compared to $62 million in the first quarter of 2013.
Domestic revenues declined by 27% to $39.6 million, which -- while international revenues declined by 5% to $7.1 million. Global infectious disease revenues, which includes QuickVue, Sofia and molecular products, were $35.8 million in the first quarter as compared to $49.4 million in the first quarter of 2013.
The decrease was primarily due to reduced demand for our virology read [ph] influenza and Strep A products. Flu sales in the quarter were $18.3 million, a 37% decline for the first quarter of last year.
In the quarter, we did realize a 50% increase in total Sofia revenue versus last year, which partially offsets a decline in total influenza revenue, as the HI respiratory product sales realized a decrease in sales of 6% in the quarter. Revenue for women's health category declined by 6% to $8.1 million, led by a 10% decline in our pregnancy business, the result of one international customer not repeating a Q1 2013 order.
This decline was partially offset by a 24% increase in our autoimmune complement and thyroid product line. Our gastrointestinal product category revenues were $1.6 million compared to $1.5 million in the first quarter of last year, driven by increased AmpliVue C.
difficile revenue. Gross margin in the first quarter of 2014 was 57% compared to 68% last year.
The decrease in gross margin was mostly impacted by product mix and lower influenza test volume this year as compared to last year. Also affecting the margin negatively was the additional absorption cost expense in the quarter due to lower production volume versus last year.
Excluding the impact of the Alere royalty amortization that will expire in February of 2015, gross margins would have increased by approximately 5 percentage points to 62% in 2014 and 73% in 2013. Total operating expenses were $28.6 million in the first quarter of 2014 compared to $25.3 million last year.
Research and development costs in the first quarter were $9.1 million compared to $7.5 million last year. The incremental spend was mostly the result of 2 items.
First, included in research and development expenses for 2013 was a $1.1 million expense reimbursement from Life Technologies related to our previously disclosed assay development collaboration agreement. There is no expense reimbursement realized from this agreement in the first quarter of this year.
Second, R&D expense increased by approximately $500,000 due to the acquisition of BioHelix in May last year and Angiotech in August of last year. Sales and marketing expenses in the first quarter were $9.9 million compared to $8.4 million in the first quarter of 2013.
The increases in sales and marketing is due to an increase in personnel in excess of 20% as compared to last year. As we have stated previously, we believe this increase in personnel will help support the introduction of new products we have commercialized to date, as well as the new products we plan on introducing going forward.
Expenses for G&A were $7.4 million in the first quarter compared to $7.5 million last year. Included in operating expenses for the quarter were stock-based compensation expense of $2.2 million and amortization of intangibles of $4.8 million.
Our tax rate for the quarter was 36% as compared to 27% last year. In the first quarter of 2013, we realized a full year benefit of the 2012 federal research and development credit of approximately $500,000, as well as the first quarter of 2013 benefit relating to the full year 2013 research activities.
Since the Federal Research and Development Tax Credit for 2014 has not yet been approved by Congress, there is no such credit for the first quarter of 2014. Net loss for the first quarter was $1.5 million or $0.04 per share as compared to a net income of $12.4 million or $0.30 per diluted share for the first quarter of 2013.
On a non-GAAP basis, excluding amortization of intangibles and stock-based compensation expense, and including the benefit of the research and development tax credit in 2013, net income for the quarter of 2014 was $2.9 million or $0.08 per diluted share compared to net income of $17 million or $0.49 per diluted share for the same period in 2013. In the first quarter, the company generated cash from operating activities of $22.2 million and incurred $4 million in capital expenditures.
As of the end of March, the company had no debt outstanding under its senior credit facility and had $25.7 million in total cash. As Doug mentioned in his comments, we are pleased with the progress we have made with Savanna to date and are accelerating our investment in this project this year.
We now anticipate our current full year spend in 2014 for research and development to be in the range of $33 million to $35 million, of which the second quarter will be the most significant spend, estimated to be slightly higher than our first quarter spend. For sales and marketing, we're currently projecting total expenses in the range of $38 million to $40 million, slightly higher than previous comments, due to the increased size of our direct sales organization.
As we move forward, we will continue to review the size of our direct sales organization in order to take advantage of market opportunities. And with that, we conclude our formal comments for today.
Operator, we're now ready to open the call for questions.
Operator
[Operator Instructions] And your first question comes from the line of Shaun Rodriguez with Cowen Company.
Shaun Rodriguez - Cowen and Company, LLC, Research Division
So my first one is really relative to the performance and expectations. So it looks like flu came in $7 million below your base case scenario.
But at least relative to where consensus was, the total revenue number was about $17 million below. So I'd like to understand the pieces a bit better.
And clearly, there are implications of a weaker flu season outside of the influenza line, but you don't break out some of the other product lines within that where there is a correlation with flu. So can you just give us a better sense for what growth was within and outside the respiratory disease category?
Randall J. Steward
Well, Shaun, we can't really speak on behalf of what consensus was. We did give guidance previously relating to the flu that it was -- the lower end was approximately $20 million.
I think $25 million mid-case and a high case. As we indicated, we did see a fall-off of the flu volumes certainly by mid-February, late February time period.
Relating to the other products, certainly, on the DHI space -- side that was also -- had implications from the respiratory season. So we did see a slight increase there, although that was offset by what we saw was good growth in our [indiscernible] business.
We did see small -- slight growth in hCG, other than a loss of one order on the international side. And as we mentioned, Strep was down slightly from a year ago as well.
So I think those are the pieces.
Shaun Rodriguez - Cowen and Company, LLC, Research Division
Okay. And next, on AmpliVue.
Just a couple questions related to that. So can you give us a sense for how you're tracking on placements towards the 1,000 placement goal you laid out earlier?
I apologize if you mentioned that, but I'll just rattle through follow-up here as well. Any notable impact from the recent group B Strep approval on the placement rate or any commentary you could provide on the proportion of sites that are planning to do more than one test using the AmpliVue format?
And then lastly, any commentary on average utilization, specifically really within AmpliVue C. diff customers, really just trying to get a sense for what kind of the average volume is for one of your AmpliVue customers.
Douglas C. Bryant
Well, first, we're still in the low 100 in terms of number of customers, and they're mainly C. difficile customers.
I do know that we have a very small number of group B Strep customers. The average size of the customer is in that 600 test per year.
That is likely to change in the next few months as some of these larger customers come online, however. So we are seeing a little bit of a difference in the type of customer that we are engaged with.
Originally, we were focused very highly on the very small customer. And now we're focused more on the hospital system that would incorporate both hospitals and clinics.
And those are the types of closes that are -- that we're seeing more recently. In terms of how we're going to approach the number of customers as we go through the next couple of quarters, we still think 1,000 customers or so is a good target for us.
We're very interested in understanding how we will do with the product that we believe is our first unique product offering, and that is AmpliVue HIV (sic) [HSV] 1+2. And we're just launching that product this quarter.
None of the competitors, at least in the decentralized form factors, has a product for HSV 1+2 at this time. So the question that we hope to answer soon is how leverageable those newly created customer relationships will be going forward.
But the short answer to your question, Shaun, on 1,000 is I think that's still a very viable target for us over the next few quarters.
Operator
And your next question comes from the line of Bill Quirk with Piper Jaffray.
William R. Quirk - Piper Jaffray Companies, Research Division
First question. Doug, just wanted to, I guess, delve a little bit on Shaun's question regarding the flu season.
And I guess, specific to that, the season started fairly slow, but you guys, in part because of some share gains from Sofia and some of the associated minimums, I think put up a much better number than, I think, many of us have been looking for in the fourth quarter. And I guess -- and perhaps incorrectly so, got the sense that Sofia would allow Quidel to kind of, I guess, smooth out some of the seasonal effects of respiratory.
And so can you just talk to, I guess, the underlying assumptions there regarding inventory that the customers take on when they purchase Sofia? And then also, I guess, in general, just kind of where inventory is in the channel.
Douglas C. Bryant
Sure. As we exited Q4, inventories in the channel were low.
And so as we went into the first couple of weeks of January, we actually had very large orders. And normally, we would expect then a replenishment of that moving forward.
And as Randy stated, as we went into February, it became pretty apparent that we were on a fairly mild influenza season. And our distribution partners, as you would expect, from that point to the end of the quarter managed their inventories down quite well.
And so maybe, Randy, you want to comment on what's out there right now at distribution?
Randall J. Steward
Sure. I mean as we look at the period of July through March last year versus this year, you look at our sell-in and our -- and the sell-through we get from our sales report, and they're very identical.
So the inventory is pretty consistent as we entered the quarter and as we exited the quarter compared to last year.
William R. Quirk - Piper Jaffray Companies, Research Division
Okay. And then just given the magnitude of the impact from flu, why not preannounce the quarter again [ph]?
Douglas C. Bryant
We published and disclosed at least 3 different opportunities that we had low, a mid and a high case. Relative to the low case, we were reasonably close and therefore, made the decision that preannouncing was not necessary.
William R. Quirk - Piper Jaffray Companies, Research Division
Okay, got it. And then just a question for Randy.
I'm sorry, I may have missed some of your G&A comments. But can you just help us think about what was the big sequential delta there in G&A, Randy?
Randall J. Steward
Sequential delta. You mean versus last year or the same...
William R. Quirk - Piper Jaffray Companies, Research Division
Sorry, versus 4Q. Yes.
We see it's -- that's a little bit here that's over the past couple of quarters. I was hoping you could just add a little bit of color there and just help us think about is this the right run rate to think about?
Should this come in with your seasonally like quarters, et cetera?
Randall J. Steward
Yes. I think probably the biggest difference is from stock compensation expense we did in the fourth quarter had a slight increase there.
But I think as you look at Q1, I would assume that's very consistent with the run rate for the rest of the year. From a salary FTE or anything, there's no changes between 2013 and 2014 assumptions.
It's what we have guided [ph].
Operator
And your next question comes from the line of Tycho Peterson with JPMorgan.
Tejas Savant - JP Morgan Chase & Co, Research Division
This is Tejas in for Tycho. Just wanted to get an update in terms of your Savanna timelines.
I mean, I know you said last quarter, you're thinking of introducing it maybe in early 3Q. Is that still correct?
Douglas C. Bryant
There are a couple key development milestones for this year. First, this summer, we expect to demonstrate that HIV performs well on a fully integrated platform, fully integrated Savanna and to complete the phase of development that we call feasibility.
And second, we will build the first set of instruments that we expect to ship to Africa in the fourth quarter. And we are building the initial lower volume cartridge assembly line and plan to transfer that to a molecular manufacturing facility in Ohio in the next few months.
And we've also said before that we expect to unveil the product at this year's AACC, which will be in July in Chicago, and that is still true.
Operator
And your next question comes from the line of Bill Bonello with Craig-Hallum.
William B. Bonello - Craig-Hallum Capital Group LLC, Research Division
So I'm also going to sort of backtrack to Shaun's questioning but maybe phrased a slightly different way. If we back out just the flu revenue that you report from this quarter and prior quarters, revenue was down both year-over-year and sequentially.
And so I am trying to figure out if -- how much of that is because of other respiratory that's not in that flu business. And if you can give us any sense of sort of the underlying growth of the businesses that aren't sort of so seasonably variable.
Douglas C. Bryant
Sure, Bill. Before I answer, though, I wanted to say to you and I see Matt Errand [ph] is on the line as well, that I was very sorry to hear about Steve.
And on behalf of Quidel, we'd like to pass along our condolences.
William B. Bonello - Craig-Hallum Capital Group LLC, Research Division
Thank you very much. That's very kind of you.
Douglas C. Bryant
Sure, sure. With the exception of our team, there's very little that would drive growth in our closed [ph] business.
What we've seen varies a little bit, the ranges and a couple of percent, 4% or 5% across several quarters depending on what point you want to look at. I would add though that with the planned acceleration of molecular, assuming no risks from Sofia Strep A, we estimate growth on a trailing 12-month in Q3 would be about 7%.
And we expect that same analysis for Q4 to yield a growth rate of about 13%. Depending on the timing of CLIA or Sofia Strep, obviously, our growth rate would then be slightly higher.
So I do understand that you're asking about the underlying business and are there issues there. There are no issues, but it's reasonably low growth.
William B. Bonello - Craig-Hallum Capital Group LLC, Research Division
Sure. Okay, that's extraordinarily helpful.
And then the second piece is, and just to have you clarify something you've said, Doug. I just wasn't sure if I was following your map on the new revenue expectations.
All in, are you maintaining the total guidance for new revenue expectations or was there a change when we add everything up?
Douglas C. Bryant
There is no change. But obviously, we're expecting several things to happen in order for that timing to still hold true.
But we still see a very clear path to where we'd like to be in terms of new incremental revenue.
William B. Bonello - Craig-Hallum Capital Group LLC, Research Division
Okay. And then just the final question.
There's a number of different microbiology conferences coming up over the next couple of months. Anything interesting from your standpoint that we should be looking for at those conferences?
Douglas C. Bryant
Well, we will be at ASM, which is coming up reasonably soon. We're also, I guess, from this weekend, we'll be at CVS.
So there will be a number of papers presented there as we have in years past. Then next, after that would be -- so there's the CVS meeting in Daytona, then there's the ASM in Boston.
And then, I guess, the next major show that we would be at would be the AACC in Chicago.
William B. Bonello - Craig-Hallum Capital Group LLC, Research Division
Okay. But do look for some presentations or posters or something at some of those.
Douglas C. Bryant
Yes, sir.
Operator
And your next question comes from the line of Matt Larew with William Blair.
Matt Larew
Just one for me here. Is there any additional commentary you can provide on sort of the CLIA waiver progress, both when you expect to submit that third CLIA waiver?
And if there have been any hurdles or anything you had to go back and work with the agency on that has led to sort of these increased delays?
Douglas C. Bryant
The status of CLIA waiver. We have, of course, 3 products, as I mentioned a while ago, 2 of which have been submitted, 1 we expect imminently.
The other will follow shortly. And we plan to submit the data on the last product, which is Strep, in the next few months.
So there is no concern that we have at this time based on the data that we've collected. So I would say we're reasonably confident that it will happen.
But of course, the timing is what we don't have control of.
Operator
And your next question comes from the line of Zarak Khurshid with Wedbush Securities.
Zarak Khurshid - Wedbush Securities Inc., Research Division
I guess, Doug, first, could you provide your updated thoughts and clarity on the emerging market strategy, given Sofia is large and growing footprint there globally? Just curious how you're thinking about the menu, the cartridge pricing.
And then are you planning on going head-to-head with them in that geography?
Douglas C. Bryant
Well, what I can say first is that this program was initially driven by our collaboration with Northwestern, which has a clear full-on profit program. Further, we're funded by the Bill and Melinda Gates Foundation to develop a low-cost, fully integrated platform.
So I assume based on both Northwestern's desire and the Bill and Melinda Gates Foundation willingness to fund, that there is some need that we will be fulfilling by developing a low-cost integrated analyzer. I don't know about the head-to-head aspect.
What I would say is that our cost to goods sold was likely to be significantly less than what we see out there by competitors, including Sofia. We've committed to not only that low cost of goods sold, but then a margin that is reasonably attractive from their perspective.
So again, I don't know about the head-to-head part, but we believe that we will have completed the program, the reasonably new term, and that we will have a fairly competitive offering for HIV viral load initially and then potentially TB beyond that.
Zarak Khurshid - Wedbush Securities Inc., Research Division
Great. And then maybe a follow-up for Randy.
In terms of the Life Tech expense reimbursement, how should we be thinking about that potentially coming back in the future?
Randall J. Steward
We have one last assay that we're getting 510(k) approval, and we estimate that will occur in Q2, and that will be approximately $400,000 benefit to us. And that will then complete the initial phase of the agreement with Life Technologies.
Zarak Khurshid - Wedbush Securities Inc., Research Division
Great. And then you mentioned the molecular revenues.
Just curious if you could break out AmpliVue versus Lyra has won significantly more than the other.
Randall J. Steward
It we certainly take that into consideration. We don't really give guidance on the top line.
But certainly, as it becomes more significant, as we break out infectious disease and women's health, we can certainly provide more color on what's driving that growth.
Douglas C. Bryant
[indiscernible] at 50-50 at this time.
Randall J. Steward
Yes, yes.
Operator
And your next question comes from the line of Nicholas Jansen with Raymond James and Associates.
Nicholas Jansen - Raymond James & Associates, Inc., Research Division
A quick question regarding your outlook for margins. It looks like '14 is going to be a more transition year as you accelerate R&D spend and you don't have the -- all of these types of new products to have leverage on.
So how should we think about 2015 and beyond on a GAAP gross margin as you roll off the Lyra royalty and then kind of benefit from some of these new products? I'm just trying to get the sense, has anything changed relative to prior comments on, let's say, 25% or so of GAAP property margins?
Douglas C. Bryant
I don't think there's a significant change. Of course, if we do have ongoing increases with R&D, that could affect it.
But in terms of gross margin, we pick up about 5...
Randall J. Steward
2 to 3 percentage points.
Douglas C. Bryant
Across the entirety of the business, right?
Randall J. Steward
Yes.
Douglas C. Bryant
So for example, Randy, in this quarter, the difference between with or without the amortization is...
Randall J. Steward
Five percentage points.
Douglas C. Bryant
Is from 57% to 62%, right?
Randall J. Steward
Yes.
Randall J. Steward
I mean, I think, Nick, we're very confident that going into 2015, our gross margins with the new products are certainly accretive to our existing gross margins. So that gives us confidence in our 65% gross margin target.
And then, as we said on the operating expense line, we'll invest in our sales organization as we continue to look at market opportunities.
Douglas C. Bryant
Yes, what I would add to that, Randy, is with the exception of Sofia hCG and Strep A, all the new product gross margins are expected to be flu-like or better.
Operator
And your next question comes from the line of Jeff Frelick with Canaccord.
Jeffrey Frelick - Canaccord Genuity, Research Division
Just on the patient declines in -- with respect to the office visits. Any sense, was that impacted maybe by weather, by reluctance with co-pays, any color that you can shed there, Doug or Randy?
Douglas C. Bryant
Each of those that you suggest, Jeff, has a possibility. It would be difficult for us though to speculate.
I've seen the transcripts of other calls and a bunch of people describe issues as being weather related. Certainly, it is true that fewer people visited physicians in the quarter period.
It is also true that hospitalizations as a result of flu, which is not specifically related [indiscernible] was down 27%. So I think it's a combination both of patient visits and just milder flu period.
Jeffrey Frelick - Canaccord Genuity, Research Division
Okay. And with respect to -- Randy, you called out maybe a sales and marketing increase as you expand the sales force.
Would that salesforce -- would that organization be more focused if you had to be more directed towards the POL marketplace or a hospital setting?
Randall J. Steward
I think we're looking really, Jeff, in 2 areas. One is on the molecular side, as we expand that product line and then as well as in the POL, the moderately complex section is also another area we want to focus on.
Jeffrey Frelick - Canaccord Genuity, Research Division
Okay. And then last question.
Sofia placements in the quarter. I know the patient volumes kind of fell off the back half of the quarter.
But were replacements for Sofia, were they in line with your target or expectations for -- in the first quarter?
Douglas C. Bryant
They were approximately what they were first quarter 2013, and they were evenly split between POL and the hospital. So I would say we would have expected more POL placements than we had and fewer hospital.
So I don't know how to read that, but that should help the mix fill out. So I would say the answer is it's impossible to tell the extent to which replacement rate was affected by the low prevalence of flu.
I would guess it had some dampening effect, but it's really hard to gauge and certainly wasn't significantly different again from Q1 2013.
Operator
And your next question comes from the line of Bill Bonello with Craig-Hallum.
William B. Bonello - Craig-Hallum Capital Group LLC, Research Division
So I just wanted to revisit the little bit of color that you gave on how you're thinking about growth over the rest of the year and just to make sure I understood your comments right. And I know it's not formal guidance but -- or guidance at all.
But when you talk about trailing 12 potentially being up 7% by Q3, 13% by Q4, is that even including the fact that revenue was down meaningfully this quarter? In other words, you're thinking a pretty meaningful year-over-year growth with the new customer additions?
Or is that kind of backing out a flu impact?
Douglas C. Bryant
That's without flu.
William B. Bonello - Craig-Hallum Capital Group LLC, Research Division
Without the flu. Okay, great.
That's really helpful.
Operator
And that's all the time we have today. Please proceed with your presentation or any closing remarks.
Douglas C. Bryant
Well, this concludes the call for today. Thanks, everybody, for your time this afternoon and for your continued support.
Operator
Ladies and gentlemen, we thank you for your participation and ask that you please disconnect your lines. Goodbye.