Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation second quarter 2020 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. If anyone has difficulty hearing the conference, please press star zero for operator assistance. I would now like to turn the call over to Mr. Ruben Argueta, Quidel's Director of Investor Relations. Please go ahead.
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 Randy Steward, our Chief Financial Officer. Our second quarter 2020 earnings release is now available on ir.quidel.com, our investor relations website. We will also post our prepared remarks on the presentations tab of our IR website following the conclusion of this call on July 30th for a period of 24 hours. Please note that this conference call will include forward-looking statements within the meaning of Federal Securities laws, including our anticipated revenues for Q3 2020. Forward-looking statements, by their nature, involve material risks, assumptions, and uncertainties. In particular, our expectations and assumptions around the impact of COVID-19 pandemic on our business, the results of operations and financial condition, and that of our suppliers, customers, and other business partners are uncertain and subject to change.
Many possible events or factors could affect our future financial results and performance, such that our actual results and performance may differ materially from those in the forward-looking statements. For a discussion of such factors, please review Quidel's most recent annual report on Form 10-K, including the section titled Risk Factors, 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, July 30, 2020. 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, 2020.
If you have not received our news release, or if you would like to be added to the company's distribution list, please contact me at 858-646-8023. Following Doug's comments, Randy will briefly discuss our financial results, then we'll open the call to take your questions. I'll now hand the call over to Doug for his comments.
Thank you, Ruben. Good afternoon, everyone. Thank you for joining us today. I hope that you and your families are well and safe. These times have certainly been challenging for everyone. Despite the country's efforts to deliver more testing, there is still a considerable backlog for sample processing, especially in central labs, accounting for the long period of time between sample results, typically taking between five to seven days or more. Obviously, getting a COVID-19 test result a week later is not helpful and not conducive to the test and contact trace process that is needed to flatten the curve and reduce the healthcare burden that we're seeing in hot spots across the country. We believe that expanding access to affordable, highly accurate, and timely diagnostic testing is the key to flattening the curve.
At Quidel, we're doing our part to help address the need for COVID-19 testing in four ways. First, using our Lyra and Lyra Direct molecular tests to help remove the sample bottlenecks in highly complex laboratories with established testing infrastructure. Second, by offering a fast frontline test with best-in-class accuracy at the point of care to our traditional and non-traditional channels. Third, by securing our supply chain and scaling up our test manufacturing and distribution for both our molecular and rapid tests by over 100%. Fourth, by developing multi-analyte COVID-19 test panels to help diagnose co-infections, rule out flu and other illnesses, and increase overall test manufacturing scale. Before we get into the quarterly results, I'd like to say that we are proud of what we as an organization have accomplished in such a short amount of time.
Over the last quarter, our people, a good portion of which are still working from home, have shown the positive, nimble, can-do spirit that is the hallmark of Quidel's culture, and together, we're doing our part to help provide answers to the most vulnerable. Quidel's second quarter results largely reflect the collective efforts of our people and offer a glimpse of what our company is capable of achieving even in the midst of a pandemic. Consistent with our pre-announcement, revenue for the second quarter of 2020 was $201.8 million, driven by growth in our rapid immunoassay and molecular categories as a result of higher sales for our COVID-19 products, which totaled $109 million in the quarter. We saw good demand for our two PCR assays, which received EUA in March and May, and very strong demand for our Sofia Antigen rapid point-of-care test, which received EUA in May.
Importantly, we were able to satisfy some of the need for RT-PCR testing in the highly complex labs by ramping up the manufacture of our Lyra A ssay to approximately 500,000 tests per week. As some of you might recall, our Lyra A ssays can be run on several thermal cycling platforms, including the ABI 7500 Standard, the ABI 7500 Fast, QIAGEN's Rotor-Gene Q, the Roche LightCycler 480, and the QuantStudio 7 Pro, which allows us to be very helpful to customers who may prefer sample-to-answer methodologies, but may not always receive the volume of reagents they require. We expect this trend to continue, seeing increasing demand throughout the end of the year. Demand for our Sofia Rapid Antigen point-of-care test continues to be strong, sustained, and frankly, more than we can satisfy.
At the moment, customers are ordering a multiple of what they had expected as the product's outstanding performance is enabling an expansion of use cases for the product. Since receiving the first EUA for an antigen test in early May, we have been on allocation, partially fulfilling customer orders, even as we continue to ramp up production to the levels we had forecasted. We anticipate continued growth over the coming months and are actively working to increase our manufacturing scale by expanding facilities, hiring additional personnel, and asking more of our supply chain. During the quarter, we also made good progress with our product pipeline, especially as it relates to diagnosing COVID-19. Currently under development is our Sofia Serology Assay that we believe could provide better clinical utility than the current tests in market.
Also under development is our Sofia Influenza A+B and SARS Antigen rapid point-of-care combination test, which will provide healthcare workers with all three results. Because the assay uses the same manufacturing lines as our Sofia Flu and Sofia Antigen tests, the combo test can potentially increase our manufacturing capacity, especially as we enter into the crucial winter months, when the potential for co-circulating SARS-CoV-2 and influenza could further strain our healthcare system. Additionally, we are collaborating with BARDA to develop a four-analyte Sofia rapid point-of-care test that includes influenza A+B, SARS Antigen, and respiratory syncytial virus, that we believe could help in addressing the nation's testing shortage at the point of care. All key non-COVID product development projects have remained on track. We plan on submitting 510(k) packages for Sofia Strep A+ and C. difficile to the FDA in the fall.
With respect to TriageTrue, our high-sensitivity troponin product, we continue our discussions with the FDA and are designing a clinical strategy for our clinical trial, which we expect to start before year-end. Regarding Savanna, work continues on the instrument with the first trial planned for early next year. Regarding the Savanna cartridge, we plan to complete a high-volume cartridge evaluation in mid-August using the six assays that are part of the near-launch menu. The goal of the study is to receive final proof that the performance of the cartridge with integrated assays is optimal. Industrial design for user interface cartridge features is to be completed by the end of August. On the manufacturing side, cartridge high throughput production and assembly automation lines are under development, with the first automated modular manufacturing and assembly lines expected to be operational by November 2020.
With regard to the Savanna instrument, we're assembling 19 prototype builds that will very closely resemble the commercial instrument by means of functionality, performance, size, and appearance. Once the instrument performance is evaluated, minor refinements will lead to the prototype version that will be used during the clinical trials. In summary, the Savanna instrument and cartridge development activities are continuing according to schedule. In summary, Q2 was another typical productive quarter for us, augmented by significant demand for our COVID products, which is terrific in terms of our financial performance. At the same time, we recognize the difficulty all this growth is creating for analysts trying to model revenue and EBITDA over the next few quarters. Historically, we've not provided quarterly or annual guidance, but the variability in forecasts and expectations suggests that a revenue floor that reflects a high confidence of achievement might be useful.
Therefore, based on the current demand for our antigen test, good visibility in our ordering patterns for our Lyra SARS-CoV-2 Assays, and assuming minimal supply chain disruptions, we are confident that third quarter revenue will be at least $375 million. In all, we had a strong quarter and are confident in our business outlook. Through the hard work and perseverance of our 1,300 people across the globe, a good number of which are still working from home, we are well-positioned to change lives for the better by expanding access to highly accurate, affordable diagnostic testing to our communities. We are proud of what we've accomplished thus far and look forward to contributing to the reopening of our country. Randy?
Thank you, Doug. Good afternoon, everyone. As Doug stated, we had a very strong quarter that exceeded even our own key performance metrics. We will continue to keep focused on servicing our customers, ramping up production capacity as diligently as possible, investing in future product development while continuing to utilize our cash wisely. As we reported earlier today, total revenues for the second quarter of 2020 were $201.8 million. This compares to $108.3 million in the second quarter of 2019. The 86% increase in revenue was driven by significant demand for our products that diagnose COVID-19. This revenue growth was partially offset by declines in demand for the cardiometabolic and specialized diagnostic solutions product categories. Foreign currency impact was minimal at $600,000 in the quarter. Rapid immunoassay product revenues increased $58.8 million to $80.6 million in the second quarter of 2020.
Within this category, Sofia products grew $63.6 million to $75.2 million due to $56.3 million in Sofia SARS Antigen sales. QuickVue product revenues decreased $3.9 million to $5.0 million. For the total rapids business, 70% growth in influenza was offset by reduced demand for Strep A, down 60%, and pregnancy products down 48% due to decreased office visits associated with the COVID-19 pandemic. The influenza rapid immunoassay revenue was $15.8 million, with approximately 80% of that revenue derived from the Sofia platform. For the cardiometabolic immunoassay business, revenue was $54.2 million, a 20% decrease versus the second quarter of 2019. In constant currency, the decrease was 19%. Of the $54.2 million, $28.2 million were derived from the Triage business and $26 million from the Beckman BNP business.
The revenue decline was realized in all three major geographies as patients with chest pain either would not or could not visit traditional testing centers as a result of the COVID-19 pandemic. We believe this downward trend should improve over the next several quarters. Revenue in the specialized diagnostic solutions categories decreased 18% in the second quarter to $11.8 million. Our molecular diagnostic solutions category increased $51 million in the quarter to $55.2 million, driven by $52.7 million in sales of our Lyra SARS-CoV-2 Assay, which was granted EUA by the FDA on March 17, and our Lyra Direct SARS-CoV-2 Assay, which was granted EUA on May 18. Total influenza revenue, which includes our rapid DFA respiratory and molecular diagnostics, grew 44% in the quarter to $18.7 million.
Gross profit in the second quarter increased $89.6 million to $148.8 million, driven by the demand for the SARS Coronavirus- 2 Assays, which drove improved product mix. In addition, higher volumes contributed to increased manufacturing overhead absorption. Gross profit margin in the second quarter of 2020 improved to 74%. In the quarter, we realized a significant improvement in our profitability profile. Over the short term, we do not incur material variable operating cost increases. Thus, in quarters where we realize significant revenue and gross profit growth, we see a large portion of the gross profit dollars roll into operating income. In the second quarter, our total operating expenses measured as a percent of revenue declined by 17 percentage points versus last year to 32% of revenues, helping improve our operating income in the quarter to 41% of revenue.
We see this trend continuing into the third and fourth quarters as well. We are increasing our R&D spend this year as we continue to invest in additional COVID-19 Assay, our Savanna project, new Sofia Assay, and next generation platforms, such as our internally named Project Sniffles. We will also continue to invest in our sales and marketing organization as we expand our customer base and profile. For the full year, we are currently estimating our R&D spend to be in the range of $70 million-$75 million. Our G&A spend for the full year should be in the range of $60 million-$65 million. As it relates to the provision for income taxes, we recorded $12.5 million in income tax provision in the quarter, and the effective tax rate was 16%.
From the federal statutory tax rate of 21%, the difference in the effective tax rate was primarily a result of discrete tax benefits recorded for excess tax benefits of stock-based compensation. Currently, we are estimating full year effective tax rate between 21% and 22% due to the increase in pre-tax income versus prior years. At the end of June, we had $72.6 million in cash and cash equivalents. During the second quarter, the company generated almost $60 million in cash flow from operations. This number would've been even larger had it not been for approximately $43 million investment in accounts receivable and inventory as we accelerate our growth and ramp up to support increased production of SARS Assay. In the quarter, the company also invested $7.5 million in capital expenditures.
In April, we made the third annual Abbott payment of $48 million and now have $136 million remaining on the deferred and contingent consideration that will be paid over the next three years. Also in the quarter, we repurchased approximately 247,000 shares of Quidel stock for approximately $42 million. We have no outstanding balance on our $175 million revolving credit facility and only $13 million remaining in convertible bond debt, and that matures this December. In short, we have minimal debt, access to credit, good cash flow, which places us in a good position to support our future initiatives. Those initiatives include increasing our R&D investment, strengthening and expanding our supply chain, ramping up our manufacturing capacity, and pursuing M&A. With that, we conclude our formal comments for today. Operator, we're now ready to open the call for questions.
As a reminder, to ask a question, you need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile a Q&A roster. Your first question is from Brian Weinstein with William Blair.
Hi, guys. Good afternoon. This is Andrew on for Brian. Maybe we can first start.
Hey, Andrew.
with the guidance for the third quarter. Hey, Doug. The guidance for the third quarter and the assumptions sort of behind the COVID revenue that's built into that. First, I guess I want to clarify that this floor only includes the two currently approved, or EUA products for COVID, and then I guess bigger picture, how should we be thinking about the build in terms of the production capacity ramp through the quarter, any bulk orders you have, and then pricing for those products?
Where do I start?
A lot there, right?
Yeah. What was the first piece of the question, Andrew? The COVID revenue associated. Yeah. We have three EUA products. It's a little confusing because two of them are the Lyra product. There's the kit that requires extraction, then there's the Direct kit, and now there's the Sofia SARS Antigen. The Q3 forecast does not include COVID products beyond that. In other words, doesn't include the serology product or the combo product.
Okay. Yeah.
Do you wanna talk about capacity?
Yeah, that'd be great.
Okay. Well, without revealing things that our competitors would like to know, we've said before that our theoretical max capacity with our current plant and equipment is 1.8 million tests per week. That's 7.2 million tests per month. Managing the supply chain to achieve that output consistently is the variable and is difficult given the timing of delivery of all components that we need each week. Therefore, the likelihood of achieving that level on a consistent basis is not super high, of course, at least not at this time. Our output is highly dependent on receiving all components, and shipments of certain items have been quite inconsistent. Although, I will say that it's getting better due largely to our activities to vertically integrate a number of those components.
That's all I can say about that without, you know, teaching future competitors what they should be worried about.
Did you have another one after that, Andrew?
Yeah, and it was just on pricing. Is that really staying relatively in line with your expectations, and is that what's factored in moving forward?
Pricing is consistent with the prior quarter. We have one price in the marketplace for our SARS Antigen product, and that we believe enables an affordable product price that's well under reimbursement and also is a significant deterrent to shipping product ex-U.S. We do not believe that it is appropriate for us to price less than that ex-U.S., we have one price for U.S. customers and very little product that has been shipped ex-U.S.
Okay. That's helpful. Then I guess maybe switching to the demand side of things, and you gave some commentary on this in your prepared remarks, but maybe, I guess, can you be a little bit more specific in terms of what you're seeing for the underlying demand of the antigen product? I guess what I'm trying to get to is really the idea of if you weren't constrained by any sort of production capacity, what do you think your average weekly volume demand would be for, the antigen product going into different channels?
Well, we've talked before about ramping up to our max capacity, and we're in the process of doing that. This last several weeks.
Have been fine and have been closer to what we would've said before that we had hoped to be at this time. We're in good shape from a manufacturing perspective of the pouch itself, which contains the cartridge. There are other elements that go in the kit, and generally those are the elements that might cause variability from week to week. As you can imagine, one week we can have super high amount of product we're shipping out of the factory here, and then the next week we could be slightly lower depending on the arrival of certain elements that need to go into the kit. At the same time, we are manufacturing at a very high level, the actual cassette itself. The cassette itself is not that constrained. It's all the other elements that actually go into the kit.
Customer demand.
Yeah. Customer demand, at one point in time, we had orders that were five times our capacity. That softened a little bit. We entered the market thinking that we were going to preferentially ship our customers who either already had Sofias or we felt that could use Sofias the most efficiently in their practices in order to get testing done for healthcare providers and first responders. In other words, people who knew how to batch product and could run higher volumes. That's where we started. We went to those customers early on. Those customers, frankly, had very little idea about how many tests that they actually were going to need. These customers signed up for a volume of X. Very shortly after that ordered four times X. We had to ramp up to meet that.
Most of the product that we have shipping today is to our traditional customer base. Some of those customers are new to us, but it's still in the same category. I would say if you're looking for a single area where it really has accelerated, I would say in the urgent care segment in particular, has gone wild, if you will. Right now, we don't have any inventory, Andrew. At the end of every day, there is none. There is not a box, there isn't a kit on the antigen product.
On the Lyra side, we have a little bit more flexibility and we have been trying to build a little bit of inventory, although I would say that the commercial organization recently has been signing up a number of customers that are larger than our former customer, and that does create a little bit of variability in terms of what we keep in inventory. Right now, we do have a little bit of inventory of the SARS for the Lyra products, but again, that's not likely to last very long either. The demand at this point, if you added up what we're able to do, what our other competitor in the market says they're going to be able to do, and then you think that Abbott would be coming on board at some point in time soon, potentially by August or September, I'm just making that assumption.
Let's assume that their scale is better than ours because of the size of the company. We add all three of us together, and we compare that with what the Admiral says that they would like to have ship in September, and we still won't meet the demand. That's the current state.
Got it. Okay. That's great color. Thanks for that. Last one, if I could sneak in. FDA seems to be considering at-home testing a little bit more willingly right now. I guess the question for you guys is, can you play into that market via QuickVue? If so, how should we be thinking about your guys' market potential there considering your capacity? Thanks.
Yeah, I think what you're referring to, Andrew, is at home a collection, then to be sent to a lab. That's, I think, what the FDA would be comfortable with based on what I'm reading. Therefore, QuickVue would not be an appropriate product for that segment because you're thinking that people are actually going to run the test at home. The other factor we're considering is that earlier on, we saw a pretty significant difference in terms of analytical sensitivity between the Sofia chemistry, in other words, fluorescence immunoassay, and QuickVue, which is basic colorimetric, much like the old pregnancy tests. The difference between those two products in terms of analytical sensitivity is about two logs. In other words, Sofia relative to QuickVue on an analytic basis is about 100 x more sensitive. Therefore, we don't plan to enter the space with a colorimetric assay.
We don't think that that is what we should be doing, and we've determined that we will not be using QuickVue at this time. Even ex U.S., I don't see why we would ship a product that we know is not as sensitive as the Sofia product.
Got it. Okay. Thanks, guys.
Thank you, Andrew.
Welcome.
Your next question, line of Alex Nowak with Craig-Hallum Capital.
Great. Good afternoon, everyone. Just kind of following up on Andrew's capacity question. Do you even have control if you wanted to get through that 1.8 million test per week max capacity? The reason I ask is it sounds like you're really constrained by outside factors here. Becton Dickinson just announced a couple months ago they just got $24 million by the U.S. government to expand their capacity. If there isn't enough swabs or whatnot, how could anyone really increase capacity on their own? Aren't you pretty much dependent on outside suppliers at this point?
Well, if you're speaking about swabs specifically, we are looking at manufacturing our own, and we have secured alternate suppliers. Much of that volume is coming online this month. We are taking things under our own hands. One of the antibodies that we had been securing externally, we are manufacturing now, and we will have our own manufacturing, which will ensure that we do not have a shortage on that critical supply. If we look at the things that are really important, which are the things that are required in the cartridge, all of those things we have a great deal of control over. The swabs were a concern because we use a nasal foam swab. We don't use the flock swab that other people do. We were constrained by the amount that we were getting from one individual manufacturer.
We now have at least a couple different avenues in looking at all that. That, really, your question is to my comment about vertically integrating key components, because we're not interested in just getting to the 1.8 per week, Alex. We're interested in lines seven, eight, nine, and 10, which would give us another 200 million tests that we could manufacture by the middle of next year. Right? That's going to require a lot more swabs than we're ordering today. I'm not worried about getting to 1.8. I'm worried about getting to 200 million a year, and that's what we're working on. That's the game plan that we're looking at. Short term, did we have some issues with swabs last month? Yes, we did. We had kits waiting for swabs to be put in the kits.
We were able to ship all that out and that was somewhat of a short-term fix. Again, I'll just say, if this is redundant, I apologize, but we're not worried about getting to 1.8. We're worried about what happens when we go online with the next four automated manufacturing lines. I've got to feed that. That's what I'm worried about.
Okay. That's really helpful. Just heading into this flu season here, can you elaborate on the company's plans for distributing the combined COVID and flu test? Is the plan really to switch over all the flu testing to a combined panel? Just with the conversations you're having directly with HHS, more people within the U.S. Government and then also your distributors and providers, can you just elaborate how the U.S. Government is really getting positioned to manage this upcoming flu season? Because if they don't manage it properly, I think we all know what the result's going to be.
First, I'll talk about the combo assay. We built a number of flu kits. I think that we have the ability to, for flu only, if we want to ship millions of tests over the next couple quarters for influenza. We are in reasonably good shape. If we had a very large flu season, though, is what we worried about, would we have the ability to supply the market in the event that anybody with flu-like symptoms is getting tested for both flu and SARS? We worried about that event. Having the combo assay enables us to reduce the incremental demand that we would have on flu product. Again, we have inventory now of influenza only. Of course, we're not building influenza right now. We're building SARS antigen kits.
We hope, pending clearance via the FDA, we will have the ability to flex to a combo product. Because the ability to move in and out of the products is reasonably quick, we think that we can react to whatever the market would require. There are some speculating that the flu season will be light because of what we've seen in the southern hemisphere. Maybe. If that's the case, maybe the inventory that we have on hand already takes care of that. Which is great, because then we just manufacture SARS, and we have no decrease in SARS antigen manufacturing. In the event that I'm wrong, and it's a bigger season, then we still have the ability, and we would ask customers to buy the combination product because we more than likely would not have much flu volume left. Right?
That's sort of the game plan, and because of the way we manufacture, we have extraordinary flexibility.
Okay. Got it. Just last question.
You had a question about the HHS, right?
Yeah, if you don't mind, Doug. Yeah.
I haven't had any conversation yet with anybody from HHS regarding influenza other than we did receive comment that they like the idea of having a combination product.
Okay. Understood. Thank you. Then just last question, just on the potential for retail partnerships, either with grocery stores or pharmacies. I think we both think that could be a good way of expanding tests out there so people can get it quickly. Can you elaborate on if these contracts and negotiations are taking place, and really, what is the limiting factor to seeing an announcement? Is it a function of having enough inventory to launch the deals, or is it more of a discussion around pricing and how they think about the economics in a particular grocery store or pharmacy? Just any color there would be really helpful.
Yeah. Early on, we had a number of conversations with the folks that you're talking about, and we would like to be able to ship the number of instruments that they would require in order to do what they want to do. We've been on allocation pretty much from the start of this process, and we focused initially on making sure that in this first tier of our traditional market segments, that we supplied those customers first. The folks that we have been working with understand that we, because of instrument availability, would not be able to meet their needs until the September timeframe. Will those customers or those potential customers still be around at that time? Maybe so. There really hasn't been a discussion, though, to your pricing question about price. I don't think that price is actually the obstacle.
I think the reimbursement is appropriate to max, if signed up for that national limit at $45.23. Our product is priced well below that, and I think it's affordable and appropriate. There's not been any discussion about price. The main thing is how many instruments can you get me, and how quickly can you get them here? We've had people ask us for 700 instruments. We've had people asking us for 350 instruments, 270 instruments, I saw an email a couple of days ago. Those are big commitments, and then on top of that, HHS, of course, asked us for 2,000. Our main constraint right now in terms of expanding beyond our current traditional customers is mainly the instrument.
Okay. Got it. Well, thank you for all your efforts here to help fight this pandemic. Really appreciate it.
You're welcome. Thank you.
Your next question coming of Jack Meehan with Nephron Research.
Thanks. Good afternoon, guys.
Hey, Jack.
Hey.
Maybe just first a modeling question. The third quarter forecast, looking for over $375 million of sales, can you just give us a sense for what that assumes for COVID sales for Sofia and Lyra?
Sure. It assumes that we ship everything that we make for SARS antigen, and it assumes that we begin to ship some of these larger customers that Robert Bujarski and the team are signing up.
Got it. Okay, if you're manufacturing, if it's a million Sofia tests per week at $20, I can use $250 million for Sofia?
Yeah, that's directionally good.
Okay. I was curious, just to build on this concept of the multiplex test, what commentary has the FDA and BARDA given you around what they're looking for in terms of performance for the flu A, B, COVID, RSV, and is that going to require a trial to bring that to market in the fall?
We are running studies currently and expect to be submitting sometime soon on that product. What we're seeing is product performance on the flu side almost identical to what we saw in our standalone product, and we see equally on the SARS side, we're seeing equivalent performance as well. Assuming that we can find the samples reasonably quickly and get the numbers that are required, I don't see what difficulty we would have in getting an EUA. I do think that not just our company, but for others as well, that the FDA would be receptive to the notion of combining some of these assays, up to and including RSV as well. First we'll do the combo product, including flu only, A + B, plus the coronavirus, and then later this year, we'll be moving forward with the assay that includes RSV as well.
Got it. You guys have a pretty high-class problem right now with all the cash generation from the COVID sales, I was curious if you could just walk us through your philosophy around how you're planning to reinvest that and thoughts around potential and likelihood of an appetite to do some M&A.
Well, first priority is, of course, increasing our capacity to manufacture, which will also include, by the way, an additional distribution center, which Randy's in the process of negotiating on currently. That's the number one priority for cash. Of course, we owe Abbott a payment every year as well, as we said before. You're right, there's still a lot of cash left, and we still have access to capital. We do have a couple things in mind. We think that the world is going to change slightly moving forward, how people access healthcare is likely to change, and we're trying to think about what sort of acquisitions we would do that would help us learn more moving forward and how we might take what we do very well and how that blends into a different world where we have telehealth, healthcare IT, et cetera.
We're looking at some of those opportunities. Some of the other things that we were looking at before may be actionable as well, but suddenly, although one or two of them look quite good to us, they don't necessarily represent something as strategic as what I'm thinking about in terms of what the healthcare world looks like moving forward. We're trying to be thoughtful in our approach. The money's not burning a hole in my pocket, as my mother would say. We're going to do something that's obvious and appropriate, and we're not in a hurry.
Sounds good. If I can squeeze in one more on the new product side. This concept of home testing Sniffles would work pretty well right now. If you could just give us a little bit more of an update around timeline for that and how the progress is going, that would be great.
Yeah, that is a great question. Really when you think of diagnostic testing at home, can you rely on the fact that the patient can actually do the whole thing by themselves? With diabetes testing, pricking a finger, taking a sample, pretty straightforward. With infectious disease testing, it's not always so straightforward. I've got to get a good sample collection, and then I've got to run the test properly. Even though it's CLIA waived, is it really ready to be at home and tested in that manner? I think it might be. I don't know that the FDA would agree with me. The FDA is really concerned, I would guess, about in a low prevalence situation, can I run the test and what does the positive test result mean, et cetera.
Here's my thought, that first step has to be that we launch in a world where the physician is involved somehow, either in directing the patient to collect the sample, to have potentially front-end devices that make it almost impossible not to do the test properly. This is what we're thinking about. Those are the investments that we're thinking about making, is how do you make it so the average person is not going to make a mistake, and that they're going to get good advice from a physician. I just don't think it's going to be the world where I'm going to take a diabetes meter home, and I'm going to test myself every day. I don't think we're there yet. That's my view. I could be wrong.
That's why we're thinking about what are the right strategic moves for us, what are the right things for us to be thinking about so that we operate in this world where maybe there's something between where we're at today and somebody buying something off the counter, taking it home, running it themselves. Just my view. Of course, you asked, so I gave it to you.
Just Sniffles, where that stands in terms of development?
Well, technically by the end of the year, we're going to have a product. The question is how long does the regulatory process take? We'll begin studies early next year. I do think the guys would really like to start studies during this upcoming respiratory season. That's the goal. I think they'll be ready. We'll have to worry about what the prevalence is out there. If the prevalence for the things we're looking for is high, we'll get through the studies quickly. If it's not so high, it'll take a while. I'm hopeful that we can get through all that in this upcoming respiratory season.
That's fair. Thanks, Doug.
Thank you.
Your next question is in the line of Steven Mah with Piper Jaffray. Sorry, Piper Sandler.
Hey, guys. Congratulations on the quarter. Thanks for taking the questions.
Thanks, Steven.
Thanks.
Hey, real quick on the 375 guide, some of your competitors have suggested that there's going to be a bump, assuming return to work, return to school in Q3, and then a potential slowdown in Q4 or step down. How do you guys think about that? Do you think it's going to be like that, or is it going to be more of a steady demand for your COVID-19 tests?
No, we're seeing steady. Right now, again, I have a multiple of orders beyond what I can make, and we're not even in the step-up yet. I see for us that the demand, again, will far exceed what all of the manufacturers in the rapid antigen space can produce for at least the next several quarters. I would imagine that just as we're thinking about expanding manufacturing, that the other two that I mentioned are doing it as well. Even with all that, it's going to be a while until we can meet that demand. If their schedule is like mine, that means somewhere during the middle of next year, we would have increased capacity, and then we can figure out, do we test all 76 million school kids, and how often do we test them? Is it weekly?
I don't know. Are we going to be able to test for the dental community, right? We're not even going to get to that until we can get through all this other. In a nutshell.
Yeah. Okay. No, that makes sense.
The categories of testing that could be demanded, we're not even going to get to the employee testing until sometime next year.
Right. Yeah, no, that makes sense. It's a good problem to have. I know installed base doesn't really matter because, yeah, you're already selling as many kits and tests as you can, but could you just let us know what the installed base for Sofia is? Because I can imagine, once people are at capacity, that's going to be a differentiating factor, that you have a very large installed base there. If you can just give an update on Sofia.
Yeah, there's two factors there too. It's a really good question. We're at about 50,000 analyzers right now, and then Randy has said before that we should be doing about 500 a week for a bit, but we're actually running a little bit favorable to that at the moment. Instead of 2,000 a month, we're closer to 2,500 a month. By September, we should be somewhere between 7,500 boxes a month to 10,000, depending, again, it's a supply chain. We've got one element that we're trying to ramp up some people that are making a part of this instrument. If we can get that done, we can potentially get to 10,000 faster than we thought.
Okay.
There's still to be done there. What was the other part of your question, Steve?
Oh, no, that was it. Yeah, just to continue, could you just remind us how many RT-PCR instruments are out there, the LightCycler and QuantStudio and ABIs that can run the Lyra?
I wouldn't even be able to hazard a guess. If you're talking about in hospital-
It's a lot.
labs, I could probably come up with a number. If you want to include public health, that's again, another tranche. Then you've got all the folks that have all these instruments for the life science research segment. We do see a little bit of a move of these labs that may have been doing sequencing or something else now acquiring thermal cyclers in order to do COVID testing. Your question's a good one. I don't know that there's anybody that can answer it for you, though.
No, I haven't seen any data on that.
Okay. Yeah, no problem. My last question real quick. On the combo panels, have you had discussions with FDA? Is there a chance that they'll have you do a 510 given that flu and RSV are already there, and you'd need a 510 for those? Do you think they would make an exception if it was a combo?
I think the fact that you've got an EUA product there, regardless of whether the other assays are cleared or not, by definition, would make that an EUA. I'd have to confer with my regulatory guys.
Okay
to be sure, but my sense tells me this is an EUA, which for most companies would be followed by larger data set and more testing than was done on the EUA in order to get a 510. This wouldn't be news to anybody. I don't think there's a diagnostic company that would not be thinking they're going to take their EUA product, continue to do testing in order to potentially get a 510 clearance, and also to look at other claims. For example, on the idea of asymptomatic testing, these tests when they first came out were not authorized to be used in individuals who were asymptomatic. They were only in the product claims.
In the meantime, the FDA has, in its FAQ, a comment on that that says, "Most EUA-authorized SARS-CoV-2 diagnostic tests have been authorized for use in individuals suspected of COVID-19 by their healthcare providers. Individuals suspected of COVID-19 infection or exposure can be symptomatic, pre-symptomatic, or asymptomatic. Testing of any of these individuals is at the discretion of the healthcare provider ordering the test." Theoretically, it doesn't matter. However, we're going to continue to do studies, and we are today on this, in order to potentially have a claim for asymptomatics. I think that's appropriate. For 510, I don't think there's an IVD manufacturer out there that's not continuing to do studies in order to seek better claims moving forward, even though we have this excellent guidance from the FDA on how the test could be used anyway.
Does that help, Steve?
Yeah, it does. Yeah, thanks. Appreciate all the time. Thank you.
Next question, the line of Andrew Cooper with Raymond James.
Thanks for squeezing me in. A lot's been covered, so maybe just one from me. Just as we think about the comments around vertical integration and bringing some things in-house, is that an area I guess two things, actually. One, is there any margin impact that you would call out from doing some of those things, whether immediately or sort of over the longer term? Two, is that an area when you think about M&A that you could do something that's maybe a little bit more sizable than what I know you're working on in terms of bringing an antibody production process in-house? Just anything to help us think about what you could be thinking about there would be great.
Yeah, no, thanks for the question. It's important that I qualify this. The things that we're looking at integrating into our supply chain are not high-value items. The cost differential would not cause me to think I should go buy somebody that does that. Yeah, it's not really super valuable sort of items that we're talking about here. That would not be on our M&A list. I hope that's what you're actually asking.
I guess just to add to that, is there any sort of margin ramification from bringing some of these things in-house, or to your point, they're more some of the almost commoditized type products where there's not a big cost difference between what you can make it for and it's more about just securing the supply?
Yeah, they're not significantly differentiable, therefore the cost delta is de minimis.
Yeah. As you said, it's more the control of the supply chain, controlling our own destiny to a certain degree.
Yeah. We want to own it so somebody else can't come buy it.
Okay. No, that's helpful. I'll stop there and look forward to catching up offline. Thanks.
Yeah.
Thanks, Andrew.
All right.
Your next question, line of Tycho Peterson.
Hi, guys. This is Casey on for Tycho. Thanks for squeezing me in as well.
Hey, Casey.
Yeah, maybe just a quick one on sort of any pushback you've gotten from contract negotiations in terms of quality of antigen testing as a whole. I know we've seen several reports from different places. There's one specifically in Vermont where they had, I think it was 35 positive antigen tests for COVID, and when they reflexed those to PCR, only two returned positive. Maybe can you talk about any sort of pushback you've seen on any sort of quality issues regarding antigen testing versus PCR? Maybe just to follow up with that, can you comment at all about how you view reference labs utilizing pooling of samples as potentially being a competitive threat to antigen testing? Thanks.
Sure. First, there have been a small number of potential false positives, not necessarily pushback. We haven't received any pushback. What I would say is the number of false positives is very small, actually, in relation to the millions of tests that have been performed. With each of the customer inquiries that we receive, we log them into our quality management system, and we begin to work with the customer to determine root cause. The situation you're referring to in Vermont, I can't quite comment because we haven't gotten to root cause yet. Even though the number of inquiries has been few in number, and it's really not easy to comment because of the small numbers, thus far, we have not determined that there are any problems once we've gotten to root cause that are related to the performance of the product.
Not only are we in dialogue with the customer, we're also in dialogue with the FDA. At this point in time, there are no concerns whatsoever regarding that. In terms of pooling, I don't know how that really affects our business at all. Again, the number of millions of tests being required in the point-of-care segment, where people want the test in 15 minutes, is I don't have the right word. Huge doesn't sound like a big enough word. It's unfathomable what the demand looks like right now for a rapid point-of-care antigen assay that basically performs just like a PCR assay in most situations. I don't see that the pooling will be an impact at all. It will potentially help the reference labs, though, with clearing some of the backlog.
I had a friend of mine call me this morning, he was concerned and wanted to get a test. They were told they couldn't get it for 13 days. Could he find out where he could go to get one faster than that? I do think the pooling may have an impact, but I will tell you that I think that people are going to be concerned about sensitivity. Anytime you take a sample and you dilute it, you're going to be having an impact on sensitivity. That's just a fact. If I were looking at it, pooling, I would be worried about sensitivity. The question is, do low-level positives matter? Does it matter if you miss a low-level positive? That's debatable. There are some people that say that those people are not infectious.
I would have to say I've heard from several others that they are concerned that people are thinking that, and that low-level positives actually matter, which frankly, that's a good thing if you're a PCR manufacturer because you're saying that sensitivity does matter, right? That's a tough one. That's a tough one, Casey.
Gotcha. Thank you.
Sure. All right, I think we're at the end. I haven't heard the operator say that we have no more time, but I will say thanks everybody for your support and your interest in Quidel. We obviously had a good quarter, and we're in good shape to achieve our growth objectives over the next few years. Not only are we working on COVID products and doing obviously quite nicely, but we've got Savanna, which, if it weren't for this, would be the thing that we would be talking about all the time. We've got a number of Sofia products that we're launching as well. Gosh, what happens if we are the first point-of-care assay in the U.S. with a high-sensitivity troponin? That could be helpful too. So long, everybody.
Ladies and gentlemen, thank you for your participation. I ask that you please disconnect your line. Goodbye.