Earnings Call: Q1 2020

May 6, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Quidel Corporation First 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. I will now 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 Stewart, our Chief Financial Officer. Our Q1 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 May 6 for a period of 24 hours. 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 ks, 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, May 6, 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 3 months ended March 31, 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, and good afternoon, everyone. 1st quarter 2020 feels like a really long time ago. We had a good quarter in terms of product development, manufacturing and financial performance. I will be unusually brief though as I know there were or there will be several questions with respect to what we are doing with our SARS-two coronavirus assays. Total revenue for Q1 was roughly $175,000,000 driven by $80,000,000 in influenza testing revenue, which demonstrated the strength of our Sofia franchise and shows what leveraging 43,000 analyzers looks like. Favorability in respiratory disease testing was offset by a decline at the end of the quarter in patient demand for our cardiometabolic products. In terms of product development, first, the Savanna team made significant progress, which gives me a great deal of confidence as we exit this year that we'll have a highly competitive sample to answer molecular platform, one that will likely begin to take significant market share in 2021. I predict that Savanna will become within a 2 to 3 year window, our next flagship product perhaps equal to our Sofia franchise in importance. 2nd, the Triage high sensitivity Troponin team prepared and submitted our pre submission package to the FDA in advance of the dialogue we'll have with them shortly in preparation for the U. S. Clinical trial later this year. And finally, while several other assay programs remained on track, we began the development of 3 COVID-nineteen product the Lyra reverse transcriptase PCR for high volume glycoplexity labs, the SofiaSARS antigen assay and the SofiaSAROLOGY assay. On March 17, we received emergency use authorization from the FDA for lira SARS CoV-two and began immediately solidifying our supply chain and ramping up manufacturing. Before the end of the quarter, we were able to manufacture a modest volume of PCR kits, all of which were sold. The SOPHIA assays are now in the final stages of development. We suggested a summer launch for both assays and are running slightly ahead of that timetable. In terms of manufacturing in the quarter, our operations group demonstrated the strength of our supply chain and production teams, generating record levels of output when others in the industry were struggling to keep up with demand. The proven scalability of our Sofia cartridge manufacturing lines during this recent influenza epidemic portends well for our ability to meaningfully contribute to improving US public health during the COVID-nineteen epidemic. Randy? Thanks, Doug. Good afternoon, everyone. As we reported earlier today, total revenues for the Q1 of 2020 were 174 point $7,000,000 as compared to $148,000,000 in the Q1 of 2019. This 18 percent increase in revenue was driven mostly by growth in flu and other respiratory products. In the Q1 of 2020, rapid immunoassay grew 54% over the prior year, while molecular diagnostic solutions grew 45% and specialized diagnostic solutions grew 19%. Foreign currency impact was minimal at $500,000 in the quarter. For the cardiometabolic immunoassay business, revenue was $53,900,000 an 18% decrease in the Q1 of 2020 or a 17% decrease in constant currency. Of the $53,900,000 in cardiometabolic revenue, $28,500,000 was derived from the Triage business and $25,500,000 from the Beckman BNP Business. In the Q1, we saw an atypical decline in all the major geographies as patients with chest pain either would not or could not visit traditional testing centers as a result of the coronavirus pandemic. We believe this quarter trend will continue for the next couple of quarters. Rapid immunoassay product revenues increased 54% to $95,900,000 and this compares to $62,500,000 in the previous year. Within this category, Sofia products grew 52% from the Q1 of 2019 to $65,200,000 while QuickVue product revenues increased 61 percent to $29,500,000 both driven mostly by influenza. Total influenza revenue, which includes rapid immunoassay, DHI and molecular diagnostics grew 69% in the quarter to $79,600,000 The influenza rapid immunoassay revenue was $73,800,000 with approximately 70 6% of the revenue derived from the Sofia platform. Rapid immunoassay revenue for strep grew 22% in the quarter and RSV revenue grew 17%. Revenue in the specialized diagnostics solutions category increased 19% in the Q1 to $16,500,000 driven by a 36% increase in DHI respiratory revenue and 44% growth in our General Virology segment. Our Molecular Diagnostic Solutions category increased 45% in the quarter to $8,400,000 due to a 41% revenue growth in Solana. This growth was primarily driven by the respiratory season as influenza revenue grew 120% and Strep A grew 24%. Adding to the overall molecular growth, the lyra product category grew to $1,700,000 in the quarter, driven by $1,000,000 in sales of our lira SARS COV-two product, which is granted EUA approval by the FDA on March 17. Gross profit in the Q1 of 2020 increased $24,100,000 $115,000,000 primarily driven by higher sales volumes, favorable product and geographic mix and higher manufacturing overhead absorption. Gross profit margin in the Q1 of 2020 improved to 65.8%. R and D expense increased by $2,400,000 in the Q1 as compared to the same period in 2019. The increase is due to higher employee related costs, increased spending on clinical trials, development of COVID-nineteen assays and next generation platform development projects. Sales and marketing expense in the Q1 increased by $1,100,000 as compared to the same period last year due to higher employee related costs driven by increased revenue in the quarter. G and A expenses increased by $900,000 in the quarter, primarily due to greater employee related costs, driven by improved financial performance in the quarter. As it relates to the provision for income taxes, we recorded $8,600,000 in income tax provision in the quarter and the effective tax rate was 17.6%. From the statutory tax rate of 21%, the effective tax rate benefited from foreign derived intangible income, R and D tax credits and stock based compensation, somewhat offset by state taxes and other one time discrete items. As of the end of March, we had $108,800,000 in cash and cash equivalents. In April, we made the 3rd annual Avid payment and now have $136,000,000 principal balance remaining on the deferred and contingent consideration to be paid over the next 3 years. We have no outstanding debt balance on our $175,000,000 revolving credit facility and only $13,000,000 remaining in convertible bond debt, which matures this December. In short, we have minimal debt, access to credit and good cash flow, which places us in a great position to support our future initiatives. And with that, we conclude our formal comments for today. Operator, we're now ready to open the call for questions. Your first question will be from the line of Alex Nowak with Craig Hallum Capital. Please go ahead. Great. Good afternoon, everyone. Doug, can you help us out from a market opportunity here on the COVID SOPHIA test? Have you run any scenarios thinking about what COVID testing could be as a percentage of what you're doing from flu over the next several years? Because I think a lot of people out here are trying to figure out how frequently are you going to be testing for COVID in the post COVID world? Is this going to be a test that runs just this year? Or is this something that's going to be recurring for a longer time period? Interesting question and I don't have an answer for you. I really can't speculate on what will happen moving forward. I would guess that we will be doing fairly high volume testing for sometime into next year. Beyond that, will this be a seasonal virus that we see quite often? Will we test for it routinely? Will the vaccine have any impact on that? If it's a vaccine like flu, then you could guess that we'll be doing testing just like we do for flu today. If it's a vaccine that is very, very useful then perhaps we wouldn't need to test as frequently. So it's an interesting question. I understand why you're asking it, but I don't really have a good answer for you. Understood. And when you're speaking with distributors today about preparing for the next flu season, what are you hearing from them? Are they stocking up expecting a ton of flu testing in this next flu season to rule out COVID? Or are they somewhat expecting a light flu season because we're all being told to socially distance and wash our hands, etcetera? We're not really hearing much from distribution in that regard. What we're preparing for is some level of volume that we saw recently. And in that regard we're manufacturing pretty significant volumes that we'll keep an inventory in advance of that recognizing that we will likely take those same manufacturing lines and begin manufacturing both the COVID antigen product as well as the serology assays. Okay, got it. And just last question if I can. I think this pandemic really highlights the need for point of care testing for COVID, but also just a range of diseases, illnesses. As you're talking with customers today, are you seeing more demand in recent weeks to place a Sofia in a spot you typically wouldn't see 1? I'm thinking the traditional retail clinics, the pharmacies, even the grocery chain centers, Just wanted to know if this is really going to expand the scope and the use case of point of care diagnostics going forward? I think you're right. We have seen evidence of that prior to this and this is going to accelerate it. And you have a question from the line of Brian Weinstein with William Blair. Please go ahead. Your line is open. Hi, guys. Good afternoon. This is Andrew Brackmann on today. Thanks for taking the questions. Doug, maybe to start off with your commentary on the SOPHIA antigen and serology assays for COVID-nineteen. Could you maybe provide a little bit more color on some of the key hurdles that are still out there for bringing these to market? Anything you can say on the timeline there, a little bit more firmer than summertime on when each of these will be made available? And then how should we be thinking about pricing for these tests, both the standalone SARS CoV-two and potentially combined flu AB plus SARS CoV-two assay? Thanks. I'm pretty sure that was more than one question. Just trying to keep you on your feet. So let's start with timing. We are running ahead of what we have suggested before and I can't be more specific than that other than we are manufacturing product. We do have an intent to as a first step to ship about 40,000 tests into the market imminently in order to do studies that will be useful in demonstrating the performance of this product. And so that's the first step. What we intend to do moving forward is then to the Daycom Board customers in the traditional professional segment, in particular those that would help us in addressing testing for hospital, healthcare providers and first responders. And so we have a number of VIN work streams beyond that. We'll next target pharmacies and schools and all those things before we'll get to companies that want to do testing either themselves or through third parties like occupational health companies. And then there's another category, dentists, ophthalmologists, optometrists and finally the travel industry. So in terms of timing, I think more about timing in terms of ramping up manufacturing. We will as I said, we'll ship an initial tranche that we use for test with key customers and then we'll be building to a number that is a subset of our total capacity. In that regard, we currently have capacity to do about 84,000,000 tests per year for all of the SOPHIA assays. On top of that, we can do another 30,000,000 QuickView assays. We're also adding a 7th manufacturing line that will give us additional Sofia cartridge capacity of another 30,000,000 tests. And right now the manufacturing plan is to ramp to a number that is more like 50,000,000 to 60,000,000 tests that we would allocate for both antigen product and the serology product. In other words, we would get to a point within several weeks moving forward from here to the ability to ship something north of a 1,000,000 tests a week. So in terms of timing, I'm more concerned about us ramping up so that we can address immediately what's required to do those healthcare providers and first responders. And then there's a whole series of things that we want to get to moving forward. But the most important element of all that, the biggest challenge is securing and locking down our supply chain and ramping up manufacturing. So that's where we're at. I can't be more explicit than that, I don't think, Andrew. That's perfect. Thanks for all that color. Anything that you could say though on pricing for these assets? We've determined the price. We'll launch the COVID antigen assay first at a price per test that takes into consideration our increased cost of labor and raw materials for both assays and instruments. We're first looking at what our opportunity costs have been because we've moved people on other projects over to these projects. We'll look at the performance of the product relative to other point of care assay products that are currently in market and other factors. And then our price will become well known as soon as we start selling it. It's not very helpful to get a model. Completely understand, but appreciate that color. And then just sort of last one for me. There seems to be a pretty large opportunity to deploy Virena here to track COVID once you launch these tests. Any details you can provide on how we should be thinking about the business model for that capability moving forward? Well, we've restatured the CDC through our context here and may make adjustments to allow for additional data that they say needs to be collected. I think that will increase the value of that information we provide, which will then provide significant value to our overall product offering, which will help with placements and secure our Sofia franchise. I think it will be an added value that others are going to struggle to mimic. I know there's a lot of expectation around whether we should be charging folks for data and is there a means of monetizing what we've done and I would just say that at this time we want to do the best for public health that we can. And right now, we don't have an intent to charge for data that's collected. We will provide that to the CDC, to state, county and city public health departments as they require and we'll do that at no charge. The benefit to us from a monetary perspective would obviously be that we would hope to be a preferred supplier of these types of products. And that's I think that's how we'll recoup the investment we've made there. I do recognize that a lot of people are saying, boy, those data are valuable. Is there a way that you can monetize that? And maybe there is moving forward, but right now I just don't feel like that's the right thing for us to do. I got you. Thanks guys. Thanks, Andrew. Your next question will be from the line of Tycho Peterson with JPMorgan. Please go ahead. Hey, good afternoon. Doug, can you talk a little bit about Lyra? You did $1,000,000 You said you sold all the PCR kits you can manufacture. You're now doing kind of 500,000 tests per week. How do you think about the trajectory of that going forward? Yes. What an exercise that was for us. We'll admit it. The bill of materials on these assays is long and there's a lot of components and we struggled at the outset to secure our supply chain. So we only made a handful of assays in March. We made I think 130,000 tests. The first million got sold in March and then the remainder of those kits were sold early April. And then we've ramped to about 1,500,000 tests that we did in April and we're going to be moving forward at effectively 1,000 kits a day, which is 480,000 tests per week. Some folks are going to say, well, can you manufacture Saturday, Sunday? My answer there would be, we are, but we're manufacturing our other stuff on Saturdays Sundays. So I suppose we could make more if we had to, but for 180,000 tests is where we're at now and it's pretty solid. Early on, we had trouble getting probes and primers. Our principal supplier of enzymes said they forgot our order. We had to lock down all sorts of chemicals and components of this process. The guys in Ohio that are manufacturing this product did a tremendous job for us. We're now solid at 1,000 kits a day, 408,000 tests a week. As we exit June the last week, our forecast, which is put together by customer basis as is roughly 2 thirds of our manufacturing capacity. So we think by the end of June we'll have a run rate of what we're shipping on a weekly basis that would be roughly 2 thirds of that 480,000 tests that we would have manufactured that week. So that's what we think we're going to be. I like the fact that we'll have a little bit of inventory that was a concern of ours. We didn't want to start up customers that we couldn't supply routinely and sustainably. So that's kind of where we're at. It's been a great experience for us. A lot of people I think were surprised that we could do all this in short order. But we've got a great team in terms of scientific count, but also in terms of our supply chain and our operations guide. So nice little additional business that we've added on to our overall infrastructure. And then as we think about Sofia, I appreciate you don't want to talk explicitly pricing, but if we think about flu pricing, is there any reason it should be materially different for the antigen test? I think you get about $10 to your shares on the SOPHIA flu? It will be higher and the volumes will be dramatically higher. And maybe lastly, I mean, I know you had the question before about how you think about the market evolving, but you've got high throughput manufacturers, Roche and Hologic scaling up, you've got the syndromic players. How do you think about how much of this market ends up getting centralized versus decentralized? And can you talk a little bit about how you see the SOPHIA test stacking up versus some of the syndromic panels that COVID will be added to? This market will become extraordinarily tests because they can't be done by molecular methods. And I do respect what the molecular players are doing and trying to increase their capacity. And I'm glad they're doing it. But at the end of the day, the constraint on the molecular side is more on the lab than it is on the manufacturers. So I think it will be beneficial to public health that these large Panther systems, not just the Panther Fusion can run the assays and I'm appreciative of what that company is doing. But at the end of the day, if we're going to be doing a 1,000,000 tests a day, we can't get there by molecular methods. And so it's going to be useful not only that I enter the market with the volume that we're talking about, but we need BD, we need Abbott, we need Roche, we need all of the players to be developing rapid antigen tests and rapid serology tests as well. Otherwise, we're not going to get everybody tested in a meaningful number that will be useful to get people back to work. So this is a huge task, but it's not just on the IVD manufacturers, it's also on the people who have to run it. People who have to do the swabbing, accessioning the samples, getting the samples to where they need to be and there's extreme value in being able to test on the spot and not have to wait. I know for my own company that I'm thankful that we're going to be able to test everybody under 15 minutes and we'll be able to tell them whether they can enter the building and stay working. Lastly, just anything you can say on specificity or sensitivity for the serology test? Obviously, there have been press reports about mix quality of the tests that were brought to market earlier. I assume your quality is going to be much higher, but any numbers you can give us on performance? Sure. Let me talk about the engine first. What we've done, which is what all of the rapid antigen folks will have to do is you'll have to look at samples that you know are positive of ITCR for patients and then you'll need to run those tests as you have the samples against your own product. And when we do that even in that diluted format which is not how we would do the test in the field, Even at that diluted sample, we are of a sensitivity that meets the hurdle required and exceeds actually noticeably what the FDA would expect. Once we actually run those samples clinically on patients in the field on dry swabs, we expect an improvement of LOD of about 8 folds. And so, we will see an assay with Sofia that effectively is equivalent to an isothermal methodology even though it's molecular, but still short of what PCR tests are. In terms of specificity, the specificity there will be quite high as we go into the market there. This is also why we're focused early on in getting 40,000 tests or so out there so we can run a lot of actual patient samples in order to give people confidence that this product is as good as what you see out there today. On the serology side, I have a lot of concerns about serology because even if I manufacture a product that's 99% specific and 90% sensitive, which I think most of us are going to be able to do. The positive predictive value is really unknown. I don't know what the prevalence out there is. So if the prevalence is only 1%, I know you know how to do the math on positive predictive value, But if you take on 1,000 samples with 90% sensitivity, 99% specificity, I'm dividing 9 by 19 and coming up with 47%, which is less than a coin flip on a positive sample that you're going to test for. Now if we're at 10% then the math changes and now I'm at 91%. So the test may be put together very well and we may be able to demonstrate in our hands that we're highly specific and highly sensitive, but if the prevalence is low, there's going to be a time that these tests are not going to be as useful. So I see a world where we're going to be doing both for a while. We're going to be doing antigen and we're going to be doing serology. Now there is a benefit of having the serology of actually determining what the prevalence is, right? But it's going to be some time before we actually understand what that prevalence is. So as I look at it, I'm more concerned about what the prevalence is, not the performance of our assay and the other assays that I see that are out there. Now you did refer to assays that weren't validated and I'm not even going to comment on that. I think that was a mistake to allow assays to be imported into the United States that have not been validated and I really don't want to speak more about that. Understood. Thanks for the color. Sure. And again, if you do have any questions or comments, Your next question will come from the line of Andrew Cooper with Raymond James. Please go ahead. Hey, thanks guys. A lot has already been asked, but I guess just kind of one piece looking maybe a little bit beyond just COVID-nineteen. As we think about flu, obviously, I think there was a lift as early on in the process you were looking to rule out anything that could have looked like COVID-nineteen and that sort of changed as things progressed. So are your flu volumes still elevated because of the coronavirus pandemic or have those sort of started to tail off more like your typical seasonality that you might see in May? They have tailed off, Andrew. I will say that the beginning of Q2 though was reasonably strong. So if you take our typical second quarter and you're trying to model, you probably ratchet that up just a bit. But it has now tailed off. We're not seeing anything in May of significance. Okay. That's helpful. And I guess maybe jumping into the COVID kind of discussions, In terms of Sofia and you talked about potentially some incremental demand that other avenues of care, what's your capacity from an instrument perspective if you get this test launched at the time line you expect in your as far as we know the first kind of first rapid antigen with any scale coming to market, what's your ability to ramp that 43,000 to something higher by whether it's end of year, just sort of how you think about that trajectory? Yes, instruments active in the U. S. Right now to be very accurate are right at 36,000. We have on hand something approaching 5,000 and then we've got 1,000 that are being built right now. Our monthly normal manufacturing would be at about 1,000 moving forward, but we've also added another party that's helping us out. And we hope to ramp to about 7,000 analyzers a month beginning in September. So we firmly believe that the number of analyzers giving all those work streams that I talked about are going to be necessary and we're going about as fast as we can to make sure we have all those analyzers out there before certainly before the Q4. Okay, great. Really helpful. And then maybe a little bit longer term as you think about sort of those dynamics and there's players out there talking about home based testing and I think what you can do with Sofia3 or Snipples kind of has that changed the way you think about that product and how it could be used and deployed out into kind of the real world or any comment around that would be of interest? Thanks. We always thought that a combination of telehealth and what we're doing with sniffles makes sense. This experience is just confirming that causing us to think, boy, we got to go faster here. The number of patients that are now enrolled in telehealth increased dramatically in the Q1. And so I think moving forward, it's going to be increasingly an access point to healthcare. So, I love the fact that we've got the product in development. It's on schedule for year end. We are thinking through how we partner with others to make this happen. I'm staying away from the at home testing so much because I don't know what the tolerance will be for this particular virus in terms of how the FDA thinks about testing at home, but certainly under the care of a physician through telehealth, I think sniffles is going to be important. I guess that was is there another question or? He is not in the queue any longer. Okay, perfect. Perfect. Well, before I say thanks everyone and see you later and all that, I will mention that this has really been an interesting start to the year. We certainly have had to change direction and all that, but at the same time, we have stayed focused the things that we've been working on. And in particular, I have to say that if it weren't for the COVID discussion, I would be spending a lot of time right now talking about Savannah. We are now more convinced that we're going to do well with this product. We've made significant progress over the last several months. Our thermal cycling times now are down to 10 seconds per cycle. We think that we can do a reverse transcriptase assay, our RVP, our respiratory viral panel, which more than likely will include COVID-nineteen, we think we can do in 18 minutes tops. We're working on actually decreasing that and for DNA assay those panels, we think we can get that down to 13 minutes. So isothermal speed and footprint with Savanna but with PCR performance. We think that we're going to make significant progress with our molecular franchise once we introduce Savanna in 2021. So if it weren't for this other distraction, we would be spending a lot of time talking about because I really do think that that's our next franchise, that's our next flagship product. So with that, I'll say thanks for everyone for your support and your interest in our company. We did have a strong start to the year and we're in really good shape to achieve our objectives over the next few years. Thanks again. Thank you. Thank you again for joining today's conference. You may now disconnect.