Jul 22, 2015
Executives
Randall J. Steward - Chief Financial Officer Douglas C.
Bryant - President, Chief Executive Officer & Director
Analysts
William R. Quirk - Piper Jaffray & Co (Broker) Nicholas M.
Jansen - Raymond James & Associates, Inc. Brian D.
Weinstein - William Blair & Co. LLC Tycho W.
Peterson - JPMorgan Securities LLC Mark Massaro - Canaccord Genuity, Inc. Zarak Khurshid - Wedbush Securities, Inc.
Tim C. Evans - Wells Fargo Securities LLC
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation's Second Quarter 2015 Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later, instructions will be given for the question-and-answer session.
I'd now like to turn the call over to Mr. Randy Steward, Quidel's Chief Financial Officer.
Please go ahead.
Randall J. Steward - Chief Financial Officer
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, July 22, 2015. 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 three and six months ended June 30, 2015. 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 second quarter and provide updates on our product development pipeline. I will then briefly discuss our financial results and we'll then open the call for your questions.
I'll now hand the call over to Doug for his comments.
Douglas C. Bryant - President, Chief Executive Officer & Director
Good afternoon, everyone. Thank you for joining today's call.
As all of you who follow Quidel know very well, our Q2 is expected to be our lowest revenue quarter of the year. It has also been the least variable quarter and easiest to plan for with few significant surprises as the incidence of respiratory disease has hugely fallen off by mid-March.
While our internal forecast did assume modest year-over-year growth, revenue in the quarter was slightly better than we had expected for a few reasons. First, flu revenue was up noticeably.
Orders for QuickVue, which one would have expected to decline versus last year due to cannibalization of the business to Sofia, actually increased slightly as the respiratory season extended into April, accounting for about 20% of the year-over-year flu revenue growth. The larger driver of flu revenue was Sofia of course, which accounted for 80% of the flue growth, driven by a Sofia placement rate that was approximately double what it was last year at this time.
Second, Group A Strep Assay revenue was also up nicely, 60% of which was due to Sofia Strep A+, which received CLIA waiver at the end of 2014. Interestingly, about one-fifth of the Strep revenue upside was due to start-ups of Lyra Group A Strep + C or G, our PCR Strep product in a number of larger new customer sites, with the remaining growth due to customers switching back from low cost private-label rapid Strep products to QuickVue.
And finally, Sofia instrument revenue from international distributors in Europe and Asia, AmpliVue sales and grant revenue were each up in the quarter, offset by decreases in animal health due in part to timing, direct fluorescent antibody products and an increase in distributor incentives consistent with the improvement in year-over-year performance. On a trailing 12-month basis ended June 30, 2015, total revenues increased 24% to $200.6 million, as compared to $161.9 million for the trailing 12-month period ended June 30, 2014.
For the trailing 12-month period ended June 30, 2015, new product revenues totaled $49.5 million, an increase of 106% from the prior trailing 12-month measure ended June 30, 2014. Revenues from non-flu new products increased 128% to $11.7 million.
And as expected, Q2 was the first full quarter without the amortization of the Alere royalty buy-out, which contributed significantly to a nice improvement to gross profit in the quarter. In addition, favorable product mix with the year-over-year increase in flu test and improved manufacturing efficiencies were big contributors to the improved gross profit in the quarter, offset somewhat by more Sofia instrument depreciation.
Overall, the year-over-year gross profit increase in Q2 2015 versus Q2 2014 was actually greater than the increase in revenue. Before turning the call over to Randy to review more detail on our financial performance in the quarter, I'll make a few very brief comments on where we are with each of the key platforms, starting with Sofia.
We are exceptionally pleased with the IVD market's reception to Sofia, which has clearly hit the mark with respect to our customers' needs for ease of use, performance, connectivity and fit with their workflow. Despite some development and regulatory approval delays, we have done very well on every segment including hospitals, physician offices, and alternate sites.
Q2 2015 was the third consecutive quarter of year-over-year improvement in Sofia placements, and we remain confident in our commercial team's ability to continue this momentum throughout the next several quarters. We are in the midst of the Group A Strep launch with Sofia and expect to follow that effort with the launch of Sofia hCG once CLIA-waived.
Future assays like Vitamin D as just one example are expected to address unmet needs in unique ways and to accelerate placements further. Because of our experience thus far and the opportunity that we see in front of us, we made the decision recently to develop a next-generation Sofia platform that provides even more benefit to our customers and expands our ability to develop more immunoassay menu for the platform.
We will provide more detail on the platform at our investor luncheon in Atlanta next week. As we said before, about half of our effort and development resources are focused on our molecular strategy.
I feel like we're just getting started, but revenues for both the Lyra and AmpliVue platforms did increase 56% in the quarter over the prior year. More recently, we have gained some traction with AmpliVue with larger customers and some of the larger Lyra customers are just now coming online mainly with the de novo products Lyra Strep A + C or G and HSV 1, HSV 2 Plus VZV (08:02).
In June, Solana, our isothermal assay platform, was 510(k) cleared by the FDA along with the first assay for Group A Strep, which does not require culture confirmation of negative test results. Among a number of Solana assay development projects, the CLIA-waived version of Solana Group A Strep is well underway and looks promising.
And finally, a quick update on Savanna, we're on track per our previous communications and expect to be manufacturing test cartridges in our molecular manufacturing facility in Ohio this summer. In closing, we had a good quarter, and through six months, we're slightly ahead of our internal annual operating plan.
The commercial teams are in place, doing well, and with the approval of Solana Group A Strep, now have with a couple of minor exceptions, every product that they need to meet our goals for the year. As I've said to a few different audiences, Quidel is solidly at the stage at which we can deliver top-line growth in the 10% to 15% range, while we deliver against a number of aspirational opportunities, any of which could change our growth trajectory in the not-too-distant future.
I like where we are right now. It's a good place to be.
Randy?
Randall J. Steward - Chief Financial Officer
Thank you, Doug. As we reported earlier today, total revenues for the second quarter of 2015 were $34.9 million, as compared to $31.5 million in the second quarter of 2014, a year-over-year increase of 11%.
Global Infectious Disease revenues, which include QuickVue, Sofia, DFA, cell culture and molecular products, grew 17% to $21.3 million in the second quarter of 2015, as compared to $18.3 million in the previous year. Influenza revenues, which include Sofia, QuickVue and the DHI respiratory products, increased 38% to $9 million in the quarter.
This compared to $6.6 million last year. From a platform perspective, Sofia influenza revenue was up 135% from the second quarter of 2014 to $3.8 million, while QuickVue influenza revenue increased 25% to $2.7 million.
These increases were the result of additional Sofia instrument placements versus last year, which drove increased market share. Total Strep A revenue grew 13% to $6.8 million in the quarter and RSV product revenue grew 18% as compared to last year.
Revenues for the women's health category increased 5% to $9.1 million, led by a 9% growth in Thyretain. Our pregnancy revenue grew 3% in the quarter to $4.4 million.
Our gastrointestinal product category revenues were flat to the second quarter of last year at $1.9 million. Revenue from our other products category was $2.6 million in the quarter, consistent with last year.
As Doug mentioned, gross margin in the second quarter of 2015 was approximately 56%. This compares to 49% in the second quarter of 2014.
Primary drivers of the increased gross margins were improved product mix driven by higher influenza sales, expiration of the amortization of the Alere settlement and improved manufacturing efficiencies, somewhat offset by the increased depreciation of the Sofia instruments. As we have said previously, the amortization on the Alere settlement ended in February of this year and we expect that for the full-year, this will benefit our gross profit by $7.4 million.
Total operating expenses excluding cost of sales and amortization of intangible assets in the quarter were $27 million, compared to $23.4 million last year. R&D costs were $9.1 million in the quarter, an increase of $1 million from the second quarter of 2014.
This increase was primarily due to the increased development costs associated with our next-generation Sofia instrument. The spend on our Savanna platform was equal to last year.
As we have previously communicated, we believe our full-year spend for research and development will be in the range of $40 million to $42 million. We do anticipate an increase in spend in the back half of the year as compared to the first half.
This relates to the next-generation Sofia instrument and Savanna platform. Sales and marketing expenses in the second quarter of 2015 were $11.6 million, compared to $9.4 million last year.
The increase in sales and marketing expense was driven by the additional investment in sales personnel for both the hospital and POL market. General and administrative expenses were $6.3 million in the second quarter, compared to $5.8 million in the second quarter of last year.
This increase was primarily due to increased stock compensation expense and professional service fees. In the second quarter, interest expense was $3.1 million, driven by interest associated with the $172.5 million convertible senior note offering completed in December of 2014.
In the second quarter, we recorded $2.7 million of interest expense related to the convertible senior notes, of which $1.4 million relates to the 3.25% cash coupon due semiannually. Our tax rate for the second quarter was approximately 31%.
This compares to the 33% for the second quarter of the prior year. Tax rate was lower compared to prior year primarily due to the change in the valuation allowance related to certain state deferred tax assets.
For the full-year, we expect our effective tax rate to be in the range of 31% to 33%. Net loss for the second quarter of 2015 was $8.9 million or $0.26 per share, as compared to a net loss of $6.9 million or $0.20 per share for the second quarter of 2014.
On a non-GAAP basis, excluding amortization of intangibles, stock-based compensation expense and certain non-reoccurring items, net loss for the second quarter of 2015 was $4.8 million or $0.14 per share, compared to a net loss of $3.4 million or $0.10 per share for the second quarter of 2014. Revenues for the six-month period ended June 30, 2015 were $96.2 million, compared to $78.2 million for the six-month period in 2014.
Infectious Disease revenues were $69.7 million versus $54.1 million last year, an increase of 29%, driven by increased demand for respiratory products in the first half of the year. For the first six months, influenza revenues increased by 45%, Strep A revenues increased by 16%, while RSV revenues increased 29%.
The women's health segment increased 9% to $18.4 million, as compared to $16.8 million for the six months last year. A 14% growth in Thyretain was the major growth contributor.
For the first six months of the year, our gastrointestinal segment was flat with the same six-month period in 2014 at $3.6 million. The revenue from our other products category was $4.5 million.
This compares to $3.7 million last year. This growth comes from the increased grant revenue associated with the Bill and Melinda Gates Foundation grant.
Gross margin for the first six months of 2015 was 62% compared to 54% over the first six months of 2014. This improvement was driven by the same factors as in the second quarter, product mix, the expiration of the amortization of the Alere settlement and improved manufacturing efficiencies, somewhat offset by the increased depreciation on the Sofia instruments.
Total operating expenses excluding amortization of intangibles were $56.3 million versus $49.6 million last year. Research and development was fairly constant year-over-year.
Sales and marketing increased due to the additional personnel in our sales organization, and G&A was fairly constant to last year, except for the increase in the first quarter of this year relating to non-reoccurring professional development cost. For the first six months of 2015, we recorded $6 million of interest expense, of which $2.9 million relates to the cash coupon due semiannually on the senior convertible notes and the remainder is the amortization of issuance cost and debt discount.
Net loss for the first six months was $4.9 million or $0.14 per share, as compared to a net loss of $8.4 million or $0.25 per share for the first six months of 2014. On a non-GAAP basis, which excludes amortization of intangibles, stock-based comp expense and certain non-reoccurring items, net income for the first half of 2015 was $6 million or $0.17 per diluted share, compared to a net loss of $500,000 or $0.01 per share for the same period in 2014.
For the first six months of 2015, depreciation, amortization and other was $11.8 million, as compared to $13.7 million in 2014. From a cash flow perspective, $3.8 million of cash was added to our cash balance in the first half of 2015, operating activities provided $23.3 million of cash, and we purchased property and equipment of $7.3 million in the first half.
Additionally, as part of the company's share repurchase program, the company purchased approximately 632,000 shares of common stock for $14.4 million in the second quarter. As of the end of June, the company had no outstanding borrowings under its senior credit facility and had $209.6 million in cash and restricted cash.
And with that, we conclude our formal comments for today. Operator, we now are ready to open the call up for questions.
Operator
Thank you. Our first question comes from Bill Quirk with Piper Jaffray.
Your line is open.
William R. Quirk - Piper Jaffray & Co (Broker)
Great, thank you. So, I guess the first question is can you talk a little bit about the competitive environment within point-of-care flu?
It certainly seems based on the comments in the release and your prepared comments that it really was not a factor in the quarter.
Douglas C. Bryant - President, Chief Executive Officer & Director
You're right, Bill. It wasn't a factor.
At this stage, we see really very little activity from the two most recent competitive entrants. For sure, we see very, very little on the POL.
Some modest interest I think in hospitals. You might want to talk to some of our molecular competitors about what they think about that.
But from our perspective, that has had no impact so far. And for a number of reasons, at least one of the new competitors isn't actually shipping product at the moment, so that may be a factor.
Our Sofia placement rate though, as we tried to imply in the prepared comments, has been unaffected. And truthfully, if you were to check with the folks at BD and ask them about their Veritor placement rate, I would think they would be unaffected as well.
William R. Quirk - Piper Jaffray & Co (Broker)
Got it. And then, Doug, just I guess kind of just staying on the topic for a minute and I guess more so on the broader category, you have some really nice kind of broad-based performance in flu.
Any concerns at all that there might be a little extra inventory in the channel here that we're going have to work our way through in the third quarter?
Douglas C. Bryant - President, Chief Executive Officer & Director
Not at all. Inventory levels are reasonably low.
What we saw was ordering that continued into April. That's why we ended up with the QuickVue sales.
And I would say that the Sofia numbers are driven not by necessarily a continuation of flu season into the second quarter, but rather the fact that we continued to close new customers, each of whom would have taken on-board inventory. So, the inventory you're seeing out there today is at end user level.
It's not at distribution.
William R. Quirk - Piper Jaffray & Co (Broker)
Okay, got it. And then just maybe one for Randy here, and I'll jump in the queue.
Can you elaborate a little bit on the step-up here in R&D expenses in the back half of the year? Obviously, it implies a pretty significant step-up.
I'm assuming this is at least somewhat tied to the Savanna cartridge manufacturing, which I think should be classified as R&D. And then I guess, the second part to that is, should we continue to expect to see that elevated spend level as we exit the year and look into 2016?
Thank you.
Randall J. Steward - Chief Financial Officer
You bet. Yeah, the two programs that we're accelerating.
We really kicked off our next-generation Sofia platform in the second quarter, so we see the acceleration of that spend as we get into clinical studies in the first part of 2016. And then also you're right, we are excited about the opportunity with Savanna, and we are starting manufacturing of the cartridge in the back half of the year in the summer.
So, those two are accelerating spend here in the back half of the year.
Douglas C. Bryant - President, Chief Executive Officer & Director
We'll also (22:56) building units as well, lots of (22:57) units for Savanna.
Randall J. Steward - Chief Financial Officer
Yeah.
Douglas C. Bryant - President, Chief Executive Officer & Director
And then I'll just add to your comment, Randy, that for the Sofia 2, the next-generation of Sofia platform that that expense we expect to fall dramatically in January, because about that time as well we'll be going into clinical trials.
Randall J. Steward - Chief Financial Officer
Yeah.
Douglas C. Bryant - President, Chief Executive Officer & Director
So we will see in the first quarter some clinical trial expense, but thereafter Sofia 2 R&D expense would fall off pretty sharply.
Randall J. Steward - Chief Financial Officer
Yeah. And so certainly, Bill, we do not expect our 2016 R&D spend to be to the level it was in 2015.
Operator
Thank you. Our next question comes from Nicholas Jansen with Raymond James & Associates.
Your line is open.
Nicholas M. Jansen - Raymond James & Associates, Inc.
Hey, guys. I just wanted to touch base on Strep and kind of what you're seeing thus far with the CLIA approval, and as Bill mentioned, kind of the competitive landscape.
Just trying to how you're thinking about Molecular Strep. I know the time to resolve is much more important given the volume of Strep customers.
So, just trying to get a better sense of your views of the Strep opportunity and what Sofia 2.0 could bring to the table with Strep that maybe Sofia 1.0 couldn't do.
Douglas C. Bryant - President, Chief Executive Officer & Director
Hi, Nick. That's several questions in a row there.
On the Sofia 2 specific...
Nicholas M. Jansen - Raymond James & Associates, Inc.
Sorry about that.
Douglas C. Bryant - President, Chief Executive Officer & Director
That's okay. On Sofia 2 specifically, I prepared a strategic plan update for the analyst luncheon that we're holding next Tuesday at the AACC.
I believe you're attending. And we'll talk about each of the platforms, including Sofia 2 in some detail.
So I'd rather, for today's call, focus on the quarter and our performance and then save the strategic questions for next Tuesday, and then remind me of the other was on (24:49)...
Nicholas M. Jansen - Raymond James & Associates, Inc.
Strep A with Sofia 1.0, just kind of what you're seeing thus far and the time to result for your platform versus some of the moleculars that have been approved, just wanted to kind of get your better sense of the competition on point-of-care for Strep. I know you addressed flu with Bill's question, but just wanted to kind of touch base on Strep.
Douglas C. Bryant - President, Chief Executive Officer & Director
Strep on Sofia is going reasonably well. I would say that at the higher end of the market, we're going to need the additional claim of what we call the READ NOW Mode, so that our higher volume customers can start them all at once and simply insert the test cartridge into the instrument.
It's a little bit better for their workflow. What we're finding is that in the larger volume setting that the customer does not want to wait five minutes for the test result.
They're used to seeing, particularly with a pediatric patient, a positive pop at the minute and a half to 2-minute level, and a large number of their positives actually can be read within that window. So waiting five minutes, believe it or not, has been a little bit problematic for those customers at the higher end of the market.
We are doing pretty well though at the, I would call, medium level, medium volume customer segment, and I would expect again when we get the claim for READ NOW instead of just WALK AWAY that that will improve our placement rate even further. With regard to Group A Strep on Solana, of course, we just now gotten clearance.
We're in the process of launching that product. We expect a small number of instruments to be shipped shortly.
The customers that we have that are imminent now are larger and promising, and so I don't know what that would portend for the future. But so far, it looks pretty good.
And then each of these instances, these are not customers who are running a molecular test on the front-end. These are rather customers who are reflecting their negative rapids to Solana versus sending them to a lot of the de-cultured (27:07).
Nicholas M. Jansen - Raymond James & Associates, Inc.
Thanks for that detail. And my last one, it looks like you did buy back some stock in the quarter.
I think that's something new at least recently. I just wanted to kind of get your sense of why the decision to repurchase shares and your views on capital allocation going forward.
I know you guys were looking at some M&A activity in the first quarter, but just trying to get a better sense of capital deployment priorities. Thanks.
Douglas C. Bryant - President, Chief Executive Officer & Director
We've had a repurchase program and authorization to purchase up to $50 million (27:38) in stock for a very long time. We've re-upped that from time-to-time.
We consistently evaluate where we are, our internal evaluation of where we think we should be in from time-to-time. We've made a decision to purchase shares.
In terms of M&A, we continue to look at opportunities. We don't necessarily have anything that's in front of us that's imminent.
I think as everybody is well aware, we did look at an opportunity that we discontinued in the first quarter and for good reasons. And then we have obviously still cash on the balance sheet in the event we do find something that's compelling.
I would say that given the strength of our organic story, the number of things that we find interesting are quite few, and therefore, I would not anticipate that we would be doing anything imminently.
Nicholas M. Jansen - Raymond James & Associates, Inc.
Great, Doug. Look forward to seeing you next week.
Thanks.
Douglas C. Bryant - President, Chief Executive Officer & Director
See you, Nick.
Operator
Thank you. Our next question comes from Brian Weinstein with William Blair.
Your line is open.
Brian D. Weinstein - William Blair & Co. LLC
Hey guys, good afternoon. Thanks for taking the questions.
Maybe we can start on the sales force, the expanded the sales force. Can you just talk to us, if you're willing to, about the size of the sales force?
At this point, are you through kind of where you think you need to be to expand it? And what are the primary competition metrics that you guys are using?
Is it still – for a Sofia product, is it about placements? Is it about utilization at this point and getting multiple products?
What are the things that you're using there?
Douglas C. Bryant - President, Chief Executive Officer & Director
Generally, we have about what we think we need in terms of sales force. The additional spend here was the completion of the hiring and training of those last folks.
We have what we think we need in terms of the physician office segment, a group of which is supporting distribution. We also have folks that are calling on the larger practices, including in the moderately complex segment.
And then separate from that, we have folks calling on the hospitals and the integrated delivery networks. So, we think that we're fully staffed.
We think that we have what we need for continued sales of Sofia, and we think we have what we need in terms of the launch of our molecular products. And I think that our experience in the last quarter has shown that we think we can be successful on that in that particular arena.
In terms of Sofia, I think what you're asking, Brian – and follow-up if I'm missing the mark here, but our strategy with Sofia is to solidify our price and volume of our legacy products, but then also establish a base that we can sell into once we have these unique products like Vitamin D and others that I'll talk about next week. But I think we're pretty comfortable with the placement rates that we've achieved so far.
We'd like to be further ahead and would be we think if we already had CLIA-waived hCG. But having said all that, I think we're in good shape.
We will finish up the launch of Strep as we head into the back-end of this year, and as we finish up with some of those activities, we'll be perfectly in position we think to launch Sofia CLIA-waived hCG. So, then going into 2016, obviously, those new products would be dependent on regulatory approval.
Did that sort of answer your question?
Brian D. Weinstein - William Blair & Co. LLC
Yeah. I can follow-up off-line with some follow-ups on that line of questioning.
But the other question I had for you was, as we look just Solana getting multiple products out into the market in a CLIA-waived setting in Sofia of course as well, I'm still trying to understand how those get segmented to your customers. What customers do you think would be more Solana versus Sofia based and how do your reps kind of detail that and present that to the physician or the ordering clinician?
Douglas C. Bryant - President, Chief Executive Officer & Director
Well, at the moment, we just have the one Solana Assay Group A Strep. I can talk about that, and then obviously, would be very willing to discuss this in some detail on Tuesday.
But briefly I would say that we have a product that addresses everything that you would want to do with regard to Strep testing, except for culture. We have rapid test on the front-end, including our QuickVue product line, which still has a very significant market share.
We are seeing some success with Sofia, as I mentioned before. Our view is that the value of molecular is more on the confirmation of the negative than it is to do the test on the front-end, because what we found in our experience is that workflow really does matter in these physician offices.
So, even though we will have a CLIA-waived Solana Group A Strep product, which I think even our hospital customers will appreciate because of the elimination of all the validation work, I don't really see Solana Group A Strep or a molecular product period as being a front-line for Strep testing. Strep testing is too high in volume and the customers are very concerned about workflow.
So, this is not the first time I've stated this of course. But I see us as being able to provide from the very front-end to AmpliVue if the customer prefers that methodology.
We can also do it 12 at a time of Solana and we can do it 96 or more at a time with our Lyra product. So, with Strep, we have a product that basically meets the needs of the customer whichever way they want to go.
Brian D. Weinstein - William Blair & Co. LLC
Thank you.
Operator
Thank you. Our next question comes from Tycho Peterson with JPMorgan.
Your line is open.
Tycho W. Peterson - JPMorgan Securities LLC
Hey, thanks. Maybe, Doug, just first on Solana, can you just talk a little bit about cannibalization with your existing AmpliVue user base and I guess how do we think about your long-term commitment to AmpliVue?
Should we just think about you kind of phasing that out over time or what are your thoughts there?
Douglas C. Bryant - President, Chief Executive Officer & Director
That's a terrific question, Tycho. Logic would tell you that if you have a lower cost of goods sold option, you'd like to migrate your customers over to that.
And that certainly would be interesting in our view. Our cost of goods sold with Solana is about a fourth of what it is on AmpliVue.
So clearly, I would like some of that to happen. At the same time, it's interesting that we do have kind of an interesting following even though not as large as we had hoped of AmpliVue customers.
So I'd like to move those folks over to Solana over time if that's what the customer wanted. But I think what we're going to find is some of this is going to be a little stickier than we thought.
And that might actually cause us to develop other products for the AmpliVue product line that we hadn't necessarily thought of. I'll give you an example that might make it a little bit more clear.
Pertussis is one of those diseases that you have outbreaks, but until you have an outbreak, there really is no volume. And so, having a higher volume way to do pertussis doesn't seem to make as much sense.
So, I see the AmpliVue pertussis product, which is out there in a number of sites now on the shelves being very handy and a very good format with long shelf life. I think that there is a segment there with things that aren't super high volume that might make sense.
So it's certainly a great question. It would be great if I could convert it all over to Solana, but at the same time we're seeing some customers with individual and interesting need that we should consider.
Tycho W. Peterson - JPMorgan Securities LLC
Okay, that's helpful. And then on Sofia, you've been talking more recently about connectivity, that aspect as being a differentiator.
Can you may be just talk about the degree to which users are taking advantage of that feature and then how...?
Douglas C. Bryant - President, Chief Executive Officer & Director
Sure. The numbers that are coming online has increased pretty dramatically in the last several months.
We expect that to continue. I can't give specific numbers.
I'd be happy to discuss it in a bit more detail next week as to what our actual strategy is. But we do see connectivity as an important feature and we see a growing number of customers that agree with us.
So, we're connected not just through our cloud-based system, in which we collect the identified data, but we're also connected to laboratory information systems and EMR. So the whole connectivity piece, we believe, is going to become increasingly important, not just in hospitals, not just in physician offices, but also in these alternate sites.
Tycho W. Peterson - JPMorgan Securities LLC
And then I guess how well are you doing selling to the alternate sites? Just going back to Brian's question before about your sales investments, do you need to invest more in that channel or...?
Douglas C. Bryant - President, Chief Executive Officer & Director
We've made a pretty significant investment at this stage in that. We have a number of alternate sites that have Sofias, some of which are contractually committed, some of which are in what I would call pilot phases.
I haven't seen an explosion in terms of the numbers yet, but it is noticeable. And I suspect that within the next year or so, we will see a number of different alternative sites with all sorts of testing not just what we do, but other tests as well.
So I would say it's still early, but as I'll explain again next week with our specific strategy, it's definitely something that we've made an investment in and continue to look at very closely.
Tycho W. Peterson - JPMorgan Securities LLC
Okay. And then last one, I know you don't want to talk a lot about Sofia 2 at this point on the market opportunity and the like.
But you have talked about COGS in the past, $250 (38:35) or so. Can you maybe just talk about how we should think about the margin profile?
And I guess what I'm getting at is, is this something that has the potential to drive you above kind of a low to mid-60s gross margin business as we think about the next couple of years?
Douglas C. Bryant - President, Chief Executive Officer & Director
Well, it's definitely helpful, because as you can imagine, we have a growing depreciation expense associated with a very large number of Sofias now. Moving forward, effectively having each placement to be one-fourth of that is going to be helpful moving forward, so which helps us in a number of ways.
With our current customer base, of course, that size of customers, but also the lower volume customers that we previously haven't been able to reach. Further, Sofia 2 helps with workflow because instead of having one or two Sofias on the lab bench, the Sofia 2 has been expensive enough to be placed in exam rooms where they can do the testing immediately.
So, we see a cost reduction opportunity. We also see an opportunity to gain share at the lower end of the market, but also gain share at the higher end of the market as well because of workflow.
Operator
Thank you. Our next question comes from Mark Massaro with Canaccord Genuity.
Your line is open.
Mark Massaro - Canaccord Genuity, Inc.
Hey, thanks for taking the question. In the alternative site market, are you seeing an increase in activity in terms of conversations to adopt new technologies, or are you seeing just kind of more of the same in terms of pilot projects?
Or are you seeing an uptick in RFPs and perhaps some meaningful contracts that might be signed in the next six months or so?
Douglas C. Bryant - President, Chief Executive Officer & Director
Short answer is yes, the activity has increased noticeably and significantly. And it's almost – I can't think of, Mark, a major big-box retailer that might have an interest in testing, who hasn't already been involved in a conversation.
So, within the next six months, so I would say that we would have something to talk about because we're going to be approaching the next season. Strep is a big product for us in that particular segment, so is flu.
So, yeah, within the next six months, I would think that we and others will probably see a lot of activity.
Mark Massaro - Canaccord Genuity, Inc.
Great. And relative to some of the molecular entrants that have compelling platforms, how do you see your Sofia platform competing against them?
I know you have Solana in the wings. But can you just remind us of your differentiation with Sofia in terms of how you think you're going to win some of this business going forward?
Douglas C. Bryant - President, Chief Executive Officer & Director
Well, first, I'll start, Mark, and I don't want to sound arrogant because we certainly are not. But we have won a sizeable piece of that market already.
We continue to do well on the segment despite the fact that there's a lot of conversation with regard to molecular. I would say, again, the biggest differentiating factor with any of the rapid products versus the molecular products is simply workflow and time to resolve.
I think that's the biggest issue. The other thing that's a factor is a couple of us out there, including Sofia, have pretty good product performance that is not that far off from molecular.
So, molecular in name but not molecular in performance. So, I see our ability to compete based on performance as not significantly different than it was, and certainly on a workflow basis, none of the molecular players, including ourselves, have a product that's going to fit those requirements.
And at the end of the day, I think connectivity is going to matter. And so, connectivity is something that none of the molecular players has addressed either.
We certainly intend to with Solana. But again, I'll say this today once more and I'll probably say it again several other times, our intent with our molecular strategy is not thinking that we're going to have a CLIA-waived platform that's going to go into physician office, because frankly speaking I don't think the workflow fits.
Mark Massaro - Canaccord Genuity, Inc.
Great. And maybe my last question.
You're doing a nice job with Sofia traction. Can you update us on your installed base there?
Douglas C. Bryant - President, Chief Executive Officer & Director
You're asking me for numbers, and we've said that we would tell everybody when we went past 10,000 and we said that. I think it would be probably reasonable for us to tell you when we push through 20,000 and I'll certainly do that.
Mark Massaro - Canaccord Genuity, Inc.
Great, thank you.
Operator
Thank you. Our next question comes from Zarak Khurshid with Wedbush Securities.
Your line is open.
Zarak Khurshid - Wedbush Securities, Inc.
Great. Hey guys, good afternoon.
Thanks for taking the questions.
Douglas C. Bryant - President, Chief Executive Officer & Director
Hey, Zarak.
Zarak Khurshid - Wedbush Securities, Inc.
Hey, Doug. Just to follow up kind of on the last comments there, any way that you can quantify the relative spend on Savanna versus the other projects?
And as we think out three years or so, what's most attractive to you and then how does Savanna rank now given kind of your recent immunoassay momentum?
Randall J. Steward - Chief Financial Officer
Hey, Zarak, this is Randy.
Zarak Khurshid - Wedbush Securities, Inc.
Hey, Randy.
Randall J. Steward - Chief Financial Officer
We've said that about half of our R&D spend is on all of our molecular platforms. We haven't specifically identified Savanna, but it's certainly a major contributor of the molecular spend.
We are ramping up as we build out instruments and the cartridge. So certainly, sometime next year we'll be more into the manufacturing cycle and out of the R&D spend.
We like the next-generation Sofia platform, and we'll continue to ramp up our assay build on our molecular platforms.
Zarak Khurshid - Wedbush Securities, Inc.
Got it. And just kind of the second part of the question, Doug, I mean, as you think about sort of the rapidly evolving space, how does Savanna rank in your sort of through your (45:37) crystal ball in terms of kind of a real needle-mover for the business versus immunoassay?
Douglas C. Bryant - President, Chief Executive Officer & Director
Well, I think it's a pretty big opportunity for us. I think that others have demonstrated that there is a demand for sample to answer.
And that if we could get the cost down, which we've suggested that we will, we think that we can move more testing from this traditional way that infectious diseases have been assayed to molecular methods. It's been a long time since PCR first was developed and there's been really not a whole lot of movement from immunoassay and culture to molecular.
We think that a big reason for that is cost as we've said before, and therefore, we think Savanna is an opportunity for us in that three-year window that you're talking about.
Zarak Khurshid - Wedbush Securities, Inc.
Great. And then the last one on just kind of the Sofia business and I was wondering if you could provide some color on the competitive takeaways versus QuickVue conversions and ultimately, how much of the QuickVue business do you think will be converted?
Thanks.
Douglas C. Bryant - President, Chief Executive Officer & Director
Sure. Our cannibalization rate has not changed a whole lot.
It's been the mid-30s maybe. I think we've said before 35% or so.
Randall J. Steward - Chief Financial Officer
Yeah.
Douglas C. Bryant - President, Chief Executive Officer & Director
I would love moving forward with Sofia 2 to convert more of that, and I would think that by the end of 2016 certainly as we move into 2017 a much higher percentage of the QuickVue business would be cannibalized to Sofia 2. At the moment though, as we've said before, we've done a really nice job in the middle of that Pareto (47:29) that shows the volumes by customer, and we're not able to address really very well with Sofia the low end of the market.
We have a huge number of customers that don't buy really significant number of kits per year. And then at a very high end, there are workflow issues, as I alluded to before, which prevent us from converting some of those larger QuickVue customers.
So, we think with Sofia 2 that we will be able to move both left and right on that chart and that our cannibalization rate will come up. We had said early on that we thought by now we have about 50% converted.
Interestingly enough, that hasn't happened, so most of our placements have been actually competitive takeaways, which I would say we're not displeased with, but certainly we'd like to cannibalize some of that QuickVue business over.
Zarak Khurshid - Wedbush Securities, Inc.
Wonderful. Thanks.
Operator
Thank you. Our next question comes from Tim Evans of Wells Fargo Securities.
Your line is open.
Tim C. Evans - Wells Fargo Securities LLC
Thanks. I kind of wanted to tap into that crystal ball myself if I could.
Looking now to maybe five years, can you talk about the flu market as you see it evolving? What percentage of the market in particular do you think is ripe for penetration with molecular products versus kind of this second-gen immunoassay product?
How do you see that breaking out as the market matures years down the road?
Douglas C. Bryant - President, Chief Executive Officer & Director
That one is probably the hardest question, Tim, what happens in five years with the flu market. I would say that if we are successful with connectivity and with the alternate site strategy that it's possible that we and maybe with the help of other manufacturers as well would be able to create more flu awareness in the United States and the flu market will grow.
So this is one reason why I say that even though there are molecular products that will address certain needs better than immunoassay products that we don't feel threatened by that. So right now, let's say there is 1 million or so molecular tests that are done per year in the U.S., that could grow to some number more than that and probably should.
But as a percentage, I don't know that it would change much. There's still going to be a need on a very front-end to do very quick rapid testing.
The other factor that changes the game a little bit is if the immunoassay products actually improve just a little bit in terms of sensitivity and are at a point where they are greater than 98% in terms of sensitivity relative to culture and certainly in the 90s relative to other PCR products and the lower bound element of the 95% confidence interval would be let's say greater than 90%, it would be hard to suggest that a molecular test is necessary when in fact a negative test result by that immunoassay method would matter, in other words, the number of false negatives being quite small. So it will be interesting to see whether there is a dramatic migration to molecular methods if indeed the immunoassay manufacturers including ourselves are able to improve with their products.
And certainly all of us are interested in doing that. So again crystal ball, I don't know.
I would see molecular testing increasing pretty nicely. I think it makes sense.
At the same time, I think the market is going to grow.
Tim C. Evans - Wells Fargo Securities LLC
That's very helpful. I want to ask about the next-gen Sofia.
What was the real trigger here to get you start thinking about that and how long has that kind of been in development?
Douglas C. Bryant - President, Chief Executive Officer & Director
Well, in terms of full funding, we've started in the second quarter. In terms of pre-development cost, if you will, in other words (52:05), we've been talking about this for some time ever since our new R&D Director arrived last June.
And there are two things that we think are key. One is we've got to get the cost of the instrument down, so that we can address both the low end of market and again the higher end of the market because of workflow.
And the other thing is that we would like to have access to larger markets. We'll talk on Tuesday about the parameters within which we operate for Sofia 1 and the extended parameters within which we think we would be needing to operate with Sofia 2.
And what you'll see is when we look at each of these four major parameters, the opportunities for menu expansion are far greater with Sofia 2 because of the difference in OpEx and a number of other factors. So again, stay tuned for the reception next Tuesday, but two things are the drivers.
One is cost and the other is the ability to expand our immunoassay menu...
Tim C. Evans - Wells Fargo Securities LLC
Okay.
Douglas C. Bryant - President, Chief Executive Officer & Director
And the things that (53:21) we think are going to matter.
Tim C. Evans - Wells Fargo Securities LLC
Okay. And then last question, I wondered if you could just comment a little bit on Thyretain, what's really driving the growth there?
Douglas C. Bryant - President, Chief Executive Officer & Director
It's just awareness and it's global. It's global awareness of the ability to accurately diagnose Graves' disease, that's it, because we're not spending any money on marketing.
We certainly don't have anybody selling it. So it's all just word of mouth among endocrinologists and other thoughts leaders who are treating these Graves' disease patients.
Operator
Thank you. Our next question comes from Bill Quirk of Piper Jaffray.
Your line is open.
William R. Quirk - Piper Jaffray & Co (Broker)
Yeah, thanks for taking the follow-up question, guys. Sorry, one more on Sofia 2 and that is, Doug, given the changes that you're making to the instrument, is this a Letter to File or do you think you're going to have to go through the formal 510(k) process for all the assays?
Douglas C. Bryant - President, Chief Executive Officer & Director
No, this will be a 510(k). The initial product – not to reveal too much, the initial product is intended to use the same test cartridge initially.
So, the first one out the door is likely to be a reasonably straightforward 510(k) clearance process, but it will require a 510(k).
William R. Quirk - Piper Jaffray & Co (Broker)
Got it. Okay.
All right, that's very helpful. And then, sorry, just bouncing over to Solana, obviously there's been a lot of discussion here.
But can you talk about the – in the initial weeks since the approval, kind of just help us think a little bit about lead generation? And I guess specifically what I'm trying to get at is what is the sort of very early read on your mix between those would-be customers who already have molecular versus those that may be new to molecular?
Douglas C. Bryant - President, Chief Executive Officer & Director
Well, again, it's a good question. But really we pointed at replacing (55:23) backup cell culture.
So we're not really ever in a situation where we're discussing somebody else's molecular product.
Randall J. Steward - Chief Financial Officer
Too early.
William R. Quirk - Piper Jaffray & Co (Broker)
Got it. Thank you.
Douglas C. Bryant - President, Chief Executive Officer & Director
That is true (55:37).
Randall J. Steward - Chief Financial Officer
Too early.
Douglas C. Bryant - President, Chief Executive Officer & Director
Yeah. Great.
Operator
That is all the time we have today. Please proceed with your presentation or any closing remarks.
Douglas C. Bryant - President, Chief Executive Officer & Director
Well, that'll do it for us. Thanks everyone for your support and of course for your interest in Quidel.
Again, we had a great quarter and I believe that we're well positioned to achieve our growth objectives for the year and beyond. Take care, everybody, and I look forward to seeing most of you next week in Atlanta.
Operator
Ladies and gentlemen, we thank you for your participation and ask that you please disconnect your lines. Good-bye.