Earnings Call: Q3 2018

Nov 6, 2018

Ladies and gentlemen, thank you for standing by. Welcome to Quidel Corporation Third Quarter 2018 Earnings Conference Call. I'd now like to turn the call over to Mr. Ruben Arguell, 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 Q3 2018 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 November 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, November 6, 2018. 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 9 months ended September 30, 2018. 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 your questions. I'll now hand the call over to Doug for his comments. Thank you, Ruben, and good afternoon, everyone. We've got several things to talk about, so we'll get started. The integration of the Triage assets is going well and Karen's integration team is making tremendous progress on many fronts. Among several achievements for this quarter, one I'd like to highlight is our efforts in support of our commitment to quality. We've recently incorporated Quidel's quality management software at the Summers Ridge facility and have built a multi language technical support center in Europe to address the needs of our EU customer base. On the facility side, we continue to work through our opportunities across our supply chain and manufacturing processes, improving product yields, reducing scrap and increasing plant productivity. As a result, we are on track to reach $11,000,000 in run rate synergies by the end of this year. With the incorporation of the Benelux area as well as 4 other countries around the globe, we are close to having 3 quarters of the acquired business off TSAs and under our control with an expectation to be near 80% by the end of this year. By March 1, 2019, we expect to remove China from the TSA and to have all facets of that business under our control, 95% of the overall acquired business would then be under our complete control. Again, tremendous progress. In terms of the financial performance of the acquired businesses, I would say it's going well and ahead of our initial expectations. Revenue for the Triage and Beckman BNP Businesses was $65,300,000 for Q3, which exceeded the $60,000,000 to $62,000,000 we expected from the businesses after Q1, but less than the $69,000,000 we saw in Q2. However, the business did grow 4% from the prior year, in line with our expectations for the back half of this year. North America revenues were up 3% over the prior Q3, driven by 19% growth in BMP. Rest of world revenue was up 5%, driven by 7% growth in the Triage business. Overall, China was up 32% and Europe was down 15% over the Q3 of 2017 due to two factors. 1st, higher than normal inventory levels in the prior Q3 as a result of promotions run by Alire prior to the closing of the transaction. And second, the margin effect of shifting to a distributor model from direct selling in certain key EU countries. Again, the Cardiac Immunoassay segment is exceeding our expectations, and we expect Q4 2018 cardiac revenues to be equal or higher than Q3. Therefore, dollars 270,000,000 in cardiac revenues for the year that we had previously suggested looks to be within our range, which is a considerable improvement from our original forecast of $250,000,000 in 2018 made during our Analyst Day event in April. So in a nutshell, so far so good. It looks like we can more reliably predict how well we will do in Q4 and for this year and have more confidence in our ability to grow revenue in the mid single digits in 2019 and in 2020. With regard to the Danaher litigation, Beckman filed a motion for summary adjudication that is scheduled to be heard on December 7, 2018. We still view Beckman's claims as meritless and in opposition to Beckman's long standing strategy of honoring the supply agreement with its previous partners, Alere and BioSight over the last 15 years. We continue to feel confident in our position and plan to vigorously defend the validity of the supply agreement. Moving on to the legacy Quidel business, we performed nicely there as well with 2 of the 3 product categories, molecular and specialized diagnostic solutions showing growth in the quarter. The rapid immunoassay category was marginally off, only $1,100,000 lower versus the prior year quarter as distributor orders did not catch up with significant growth in outsales of influencer products throughout the quarter. Specifically, outsales of influencer products were up 19% in Q3 over the prior year quarter. Inventories in the distribution channel are below Q3 2017 levels, such that any patient driven flu demand will likely require distributor reordering in December, which we often see in a typical influenza season. In the quarter, we also received 2 FDA approvals, a Solana molecular assay for the diagnosis of pertussis and parapertussis for moderately complex labs and our easy to use CLIA waived SOPHIA II Lyme whole blood test that provides a Lyme diagnosis in a few of 3 minutes from a fingerstick blood sample and can be run-in physician offices, urgent care centers and retail clinics. The SOPHIA II LIME assay is creating new placement opportunities for the SOPHIA II system with new customers and driving incremental assay commitments from our existing customers as well. Clearly, there's a lot that we have learned late in the Lyme disease season that we think will benefit our sales force in the spring. In terms of product development, our R and D and regulatory teams continue to execute at a nice pace and are making progress on several platforms: SOPHIA 2 assays, the SAVANNAH system and on our next growth drivers for Triage. I don't plan to go through all the projects here on the call, but I do want to discuss progress on our Triage products in development. First, we're pleased with the progress made on our next generation Triage Troponin assay, which we expect to launch at the end of this year in Europe. We plan to submit the CE mark in a few days and could be marketing the product in Europe within weeks. Learning about the market's receptivity to the test and further refining our U. S. Regulatory and commercial strategy. Our 2nd generation Triage toxicology test was submitted to the FDA at the end of September and we plan for a Q2 2019 launch. We believe that this test could be a $30,000,000 plus opportunity for us. Both products are expected to be modest revenue growth drivers for us in 2019. On the Savanna side, development continues. We expect to have several assays launched in 2020. The timeline for initial product introduction in Europe in 2019 and commercialization in the U. S. Is tight as it has been. However, we are aware of no showstoppers at this stage. We did show Savannah last week at AMP, and as expected, customers are clearly intrigued by the form factor and capabilities of the system. Overall, we had a solid quarter and are making progress on many fronts. We still expect to achieve revenues for the year of greater than $520,000,000 with a gross margin profile approaching 60%, which is an improvement over our expectations announced during our Analyst Day in April. Our integration team is executing on the integration plan. Our commercial organization is fully engaged. Our research and development network is focused on bringing new products to market. In short, our company is well positioned to be successful as we close out the year and move into 2019. Randy? Thank you, Doug. Good afternoon, everyone. As Doug had mentioned, we reported earlier today total revenues for the Q3 were $117,400,000 This compares to $50,900,000 in the Q3 of 2017. The significant increase in revenue was driven by the $65,300,000 in incremental revenue from the acquired Triage and B and P businesses, which grew 4% in the quarter. This increase was slightly offset by lower rapid immunoassay product revenues, which were $35,400,000 in the quarter compared to $36,500,000 last year. The decrease was mostly due to a 1 point $5,000,000 decline in influenza revenues over the Q3 of 2017. In the quarter, Sofia rapid immunoassay revenue was up 8% to $21,200,000 while QuickVue revenue decreased 16% to $13,100,000 Cardiac Immunoassay revenues at $65,300,000 grew 4% from the Q3 of last year. For the 1st 9 months of the year, cardiac has grown at a rate of 7% over the same period in 2017. We continue to be pleased with the performance of this product category and it speaks well to our integration efforts. Revenue in Specialized Diagnostic Solutions category increased 5% to $12,300,000 primarily due to higher complement revenue in the U. S. Molecular Diagnostic Solutions increased 60% in the quarter to $4,500,000 due to an 88% growth in Solana revenue. Gross profit in the quarter increased $40,000,000 the result of the incremental cardiac immunoassay revenue from the acquired Triage and BNP businesses. Gross margin in the Q3 of 2018 was approximately 59% as compared to 58% in the Q3 of 2017. Net of amortization of intangibles, the legacy Quidel business gross margin was 61%, Triage gross margin was 57% and Beckman BNP Business gross margin was 66%. We are starting to realize margin improvement in the triage products, the result of our manufacturing initiatives to improve yields and reduce scrap, improve direct and indirect labor efficiency and improve alignment of the manufacturing support functions. R and D expense increased by $5,600,000 in the quarter as compared to the same period last year. This increase is due to the incremental expense associated with the Savanna molecular diagnostic platform as well as increased spend in the Triage business. As Doug mentioned, at the end of Q3, we submitted the toxicology panel to the FDA and are within a few days of submitting the new troponin assay for CE Mark. We believe that our R and D expense is tracking to our and estimate that for the year, R and D spend will be in the range of $54,000,000 to $55,000,000 Sales and marketing expense was $26,500,000 in the quarter, an increase of $12,900,000 as compared to Q3 last year. The increase was largely due to incremental personnel costs associated with the global nature of our cardiovascular business. For the full year of 2018, we expect sales and marketing expense to be in the range of $108,000,000 to $110,000,000 driven by the full year impact of an expanded and multinational sales force supporting both the legacy products as well as the Triage and BNP businesses. G and A expense increased by $4,000,000 in the quarter, primarily due to the build out of our global support teams in Galway, Ireland and Shanghai, China. We also incurred increased compensation costs and professional fees. We estimate at this time that G and A expense for the year will be between $43,000,000 $44,000,000 Acquisition and integration costs in the Q3 were $2,500,000 driven by the integration activities associated with the Triage and BNP businesses. Doug already mentioned the quality initiatives that are underway, the transition of approximately 80% of the acquired business to our control by year end and that we are tracking to expectations with regard to capturing an annualized $11,000,000 in cost synergies as we exit 2018. We just want to reiterate that the entire Quidel team has done an excellent job of helping build Quidel's global footprint, capturing the revenues associated with the TSAs and unlocking the synergies at the Summers Ridge facility. In August, we completed the refinancing of our senior credit facility. At that time, the term loan outstanding balance of $83,200,000 was rolled into the new revolving credit loan. This refinancing reduced the interest rate by 75 basis points, increased the borrowing capacity from $25,000,000 to $175,000,000 removed the requirement to prepay the facility in advance of the convertible notes and provided more flexibility with the covenant requirements. Due to the refinancing, we recorded a non cash $1,300,000 loss on extinguishment of debt related to the previously capitalized financing costs on this facility. For the 9 months, as a result of the early payments on the term loan and the modification of the credit agreement, we have recorded $6,000,000 in non cash losses on extinguishment of debt pertaining to the senior credit facility. Interest expense for the quarter was $4,800,000 includes $1,000,000 relating to the convertible senior notes, $1,200,000 relating to the senior credit facility and $2,300,000 relating to the deferred consideration associated with the purchase of the BNP business. In the quarter, we recorded a small income tax benefit. The abnormal effective tax rate this year is due to higher discrete tax benefits for excess stock based compensation expense and the impact of the company's full valuation allowance on U. S. Earnings. With the passage of the 2017 Tax Cuts and Jobs Act, we believe our effective tax rate for 2018 should be in the range of 18% to 20% of free tax income before consideration for discrete tax items and any reversal of the valuation allowance. As of September 30, the company had $38,700,000 in cash on the balance sheet, $58,500,000 in principal amount outstanding related to the convertible notes and $83,200,000 outstanding on the revolving credit loan. And with that, we conclude our formal comments for today. Operator, we're now ready to open the call for questions. And our first question here comes from Jack Meehan with Barclays. Please proceed. Hi, this is Andrew Walt on for Jack. Could you provide some commentary on early adoption of Lime and any meaningful customer wins that you've had? Hi, Andrew. Sure. Early on, I would say that we had a number of closes almost immediately after we received approval, which was encouraging. Among those early wins, it was surprising, I guess, that over 90% of those included an agreement, not just for Lyme, but also for the other products, mainly flu, strep and RSV. So the collateral benefit that we had gained through those closes was actually larger than we had expected. We have had some larger closes, that's true. There's a couple of major urgent care centers that have agreed to bring the product online and a couple others are under evaluation at this time. So I think a good start. We'd love to have launched it in the middle of the season instead of towards the end, but other than that, a good start for that particular product launch. Great. And could you provide us with any clues on what to expect for the upcoming flu season? Thanks. Well, this is the quarter that I get to comment. I've read comments from others as I think, Andrew, you and others have as well. There's a bit of speculation on what the next influenza epidemic might look like. But to be candid, there are just too many variables. So I guess it would be easy to speculate, but hard to be right. Having said all of that, let me just at least share with you what we do know. First, most of you would have seen that the recent CDC weekly ILI report for week 43 shows the ILI percentage of office visits at 1.7%. And as everyone knows, it's deemed to be an epidemic once we cross the 2.0% of ILI visit level. Last year, week 43 was 1.5% in advance of a fairly good influenza season. In the prior year to that, it was at 1.4 percent. So I would say reasonably in line with what we would expect at this stage. Flu out sales, in other words, sales of our influenza products from our U. S. Distributor inventories to our customers were actually, as I commented in the script, at 19%, a little bit more color there. Sofia flu out sales were actually up 49% in Q3 versus the prior year quarter. So that portends nicely for what we might expect moving forward and certainly tells you a little bit about what we would expect in terms of potential future competitive entrants and that sort of thing. There were a combination though to be fair of cannibalization from QuickVue, which was down in terms of out sales versus the prior year, And of course, market share gains, some of which are more than likely due to the performance characteristics of Sofia, but also remember that we had the FDA reclass last year. And so there were a couple of products that were actually removed from the market. And a lot of us are scrambling to fulfill the demand from those customers who don't have a product that they can use at this time. So there's a bit of that as well. Distributor inventories were down 13%. I said lower, but it's actually pretty significant. They're down 13% in Q3 versus last year, which in a way is understandable given their out sales in the quarter were quite high and explains why orders from us in October were as large as they have been. In fact, we were actually surprised a bit by the size, the magnitude of our revenues in the 1st week in October. SOPHIA net placements in the U. S. Were 2,300 in Q3, and we shipped another 900 instruments in October, which would suggest that this is going to go quite well for us moving forward. So the key question for us in Q4 as it is every year is whether distributors will stock up in December, typically the last 2 or 3 weeks, as they might normally do once they've seen early indicators of accelerating demand driven by patients seeking care from healthcare providers. But honestly, who knows? At this stage, I see no evidence of a non normal influenza season, either higher or lower. I can only just report the facts as we see them at this stage and I would suggest that looks pretty normal so far with the exception that we seem to be doing pretty well with SOPHIA placements. And again, I think some of that has to do with still the knock on effect of the FDA reclass at the beginning of last year. I hope that answers your question, Andrew. Definitely. Thank you. Thank you. And our next question comes from John Hsu with Raymond James. Please proceed. Thank you. Good afternoon. First, just following up on your helpful color there on the flu season. Just any thoughts you could wrap in regarding there was a competitor launched recently for FLUAB and strep on the molecular side? Yes. So, I think I understand what you're saying. You're suggesting it's a launch, but it's actually a renaming of the product with a claim for a shorter assay. So the Abbott ID now is actually the ILLAR I, which we've had in market for some time. And I believe they got a clearance for a little bit shorter turnaround time on their product. But the limitations of molecular at this point, particularly at the point of care are still there. Reimbursement is still an obstacle as is cost. None of the molecular manufacturers so far has proven the ability to manufacture instruments and reagents at a level that would be needed to have any impact on the market of significance in terms of volume. Although at some point, they would solve that if there were enough demand, I suppose. At the end of the day, there are numerous reasons why SOPHIA continues to be super successful, cost, speed, performance, Virena and additional menu for things like Sofia lime. Those are certainly reasons why we I believe that we're continuing to see success. So it's a good question. Just I don't really see anything that would change our forecast, given what we see so far. Okay, great. And then sorry if I missed this, but you obviously talked about revenue still be coming in at the high end or north of $520,000,000 for the year. But I guess, did you reiterate that you expect molecular to still be north of $20,000,000 And any thoughts or color you could provide there would be helpful. No, I didn't mention what our molecular sales are. The target all along has been to get to $20,000,000 I would say we're probably, unless we have a crazy last couple of months, we're probably going to be short of that, but still within range. Okay, excellent. And then just quickly, on the integration, just want to make sure or just see regarding it sounds like you're making progress there, but regarding the go live with China, are we still on track there for kind of early 2019? Yes. As I mentioned March 1, we were debating whether to have it before the Chinese New Year or after. And the folks that are doing the training for the ERP won that debate. And so they'd rather, I guess, it makes sense, let's not train twice before and after the Chinese New Year. So they're going to wait till after the Chinese New Year to go live. But we clearly will be ready to go on either side of the holiday there. Great. Thank you very much. Thank you. And our next question comes from Bill Quirk with Piper Jaffray. Please proceed. Great. Thank you. Good afternoon, everybody. First question, Doug, I guess congrats. Hi Bill. Hi. First question is, I guess, congrats on the toxicology filing. Can you help us think a little bit about that $30,000,000 opportunity? And I guess more so I'm thinking about kind of the commercial timing about thinking about people being in contracts having to generally come out of contracts where you can bid on the business. I'm just trying to get a general idea of is this a 2, 3 or kind of 5 year ramp to that $30,000,000 opportunity? I'll give you the short answer. I think it's a couple of years based on what Randy and I reviewed with the product manager. We spent well over an hour, I'm looking at Randy at the moment, and going through a lot of detail around where the customers were in terms of their status, whether there truly is pent up demand. We concluded that indeed there is. We looked at how the product compares with our existing product as well as how it compared with competitors. And we think for the same reasons that the folks at BioSight and then Alire saw around a $50,000,000 business, we think we can get nearly back at that level fairly reasonably. And the forecast that we looked at said we'd get it done certainly in that 2 to 3 year window. Okay, got it. Appreciate the color there. And then and apologies if you touched on this a little earlier in the call, it's been a busy afternoon. But any update, Doug, on kind of the next generation Triage or for lack of a better term, in a way, next generation triage, just the idea that we could combine some of the chemistries together onto a single platform. Just wondering if you update on that and if not, could you please? Thank you. It's a great question. I would tell you that the idea of combining the 2, meaning you would you might eliminate the SOPHIA side of things, that's something to be investigated moving forward. But I will say that I had a very encouraging discussion with my Head of R and D around technologies that we might incorporate into the platform that would improve the product performance dramatically, both on the chemistry side as well as the instrument side. Stand by, but we do have a game plan and we do have some thoughts on what we might do moving forward. Clearly, at this stage, it's early days. But I would have to say, Bill, I'm pretty encouraged by what I was told that we might be able to get done here in the next couple of years. Sounds good. And then I guess just last one for me, Doug. Do you I mean, it sounds like this is kind of more than just sketched on a piece of paper at this point. So is this something that you anticipate introducing to the Street within the next year and then we can kind of start, I don't know, multi year countdown or something to that effect on the potential commercialization? Sure. I think within a year we would be able to tell you more of a timeline. I don't think we're going to be willing to discuss what exactly we're working on from a technology perspective because some of it is really truly new and innovative. But certainly giving you all a feeling for what the timeline looks like, we should be up to do within a year. Very good. Thanks, guys. Thanks, Bill. Thank you. And our next question here comes from Brian Weinstein with William Blair. Please proceed. Hi, guys. Good afternoon. This is actually Andrew Brackmann on for Brian. I wanted to first start with cardiac. Your comments here are $65,000,000 which is down quarter over quarter. Could you maybe talk a little bit about some of the seasonality that you see in that business? And then by our math, it looks like Triage in North America was down a little bit, maybe some additional color there? Thanks. Sure. I think you hit the nail on the head, Andrew. Q3 is the low quarter for the Triage business. And I think we're sort of in line with what we had thought we would do. It's certainly north of what we had originally projected. So I'm pretty comfortable with that. The U. S. Business, it is true on the Triage side is a bit flat to declining offset by the BNP business. So that's pretty much what we had suggested that we would see as well. So we're not surprised by the $65,000,000 in Q3. As I commented, I would expect that Q4, we would see something at that level or higher, given the pattern that we've seen over the last couple of years. Got it. And then on SOPHIA, could you maybe talk about your utilization assumptions for that product going forward? And then a second one on that, you mentioned the CDC data for your flu assumption. So maybe you could talk about the Virena data that you're seeing on that platform? Utilization assumptions, utilization is increasing due to a couple of factors. One is that we've been running an add an assay program and have been pretty successful with that. We've had a pretty sizable increase in group A strep, for example, on SOPHIA. But the number of assays used per box is increasing. That's one way to look at. The other way to look at it is on a dollar basis per box that I suspect will change over the next couple of quarters as well. And certainly menu additions like lime helped that a great deal. So we've said originally that our idea was to have something approaching a $10,000 per year per box. That's still a pretty big ask, but I think we're moving in the right direction. And it's still possible depending on what we introduce on the box moving forward. And then on Virena, the number of users now it's 9,000 that are reporting. And so that's gone well. In terms of what we're seeing for positivity rates, we do see some upticks in states that sort of are running a little ahead of the CDC's map. The CDC's map right now shows all green except I think one state is yellow, but still showing early by the CDC's traditional surveillance systems, whereas we're seeing little pockets here and there where it's spiking. And unfortunately, we've had the first mortality events of the year have occurred already in several places throughout the U. S, unfortunately, as well. Thank you. And our next question comes from Alex Nowak with Craig Hallum Capital. Please proceed. Hey, good afternoon, everyone. This is Will Fisinski on for Alex today. Thanks for taking the questions. My first one is, and I apologize if you touched on it a little bit earlier, but how should we think about the margins for Triage today, and just where they could go for the next 1 to 2 years? Well, what we said is we've got a game plan to improve the productivity, yields, direction of scrap. We said we would go from 50 to something High 50s? High 50s, approaching 60 actually, ultimately. And I think we're on our way. Yes. We actually reported 57% for the quarter. So 57% is where we're at. And as we exit that, something in the 58% to 60% range is possible. Perfect. That's great. Thanks for that. And then on the high sensitivity troponin test, I know you touched on it a little bit. You're going to be submitting that CE mark in the next few days for the EU. But if you just want to touch on your U. S. Strategy, that'd be very helpful too. Thanks. Well, the U. S. Strategy is in flux depending on how well we do in Europe. Specifically, we're going to be running a study shortly on a large number of characterized samples, Assuming that goes well and as well as the previous study that we just concluded, I think that it's a different set of regulatory issues that we have to address in the U. S. But at the end of the day, it's likely, depending on the success in Europe, that we would move forward with the clinical trial in the U. S. Before we would embark on a trial, though, we would want to be convinced that we're going to get the claim that we think that we ought to have in order to be a point of care high sensitivity product in the U. S. Great. Thanks again. I appreciate it. And then just one last one. Abbott saw unveiled a new line of molecular instruments that seemed to challenge turnaround times for your immunoassay franchise. If you could just give us your thoughts, maybe a little bit of color there, just on the competition and what you're seeing, that'd be extremely helpful too. And thanks again. Sure, Will. We actually had the question just a little bit earlier. The Abbott product is actually the Elear eye renamed. And it has a new claim for shorter turnaround time, but all other factors are virtually the same. And so there will be customers, of course, as there has been over the last couple of years who might consider molecular and a lot of that depends on their workflow situation, also depends on reimbursement and whether they can actually get reimbursement. So there are a couple of drivers that would cause a customer to look at molecular and I think that would be appropriate depending on what their needs are. But the market in total doesn't seem to be that receptive, at least at the point of care to molecular entrance. Could change over time, of course, but at this point, our SOPHIA placements would tell you that for the most part that's not true. Perfect. Thanks. I appreciate it. And that's it for me. Thanks guys. Thank you. Thank you. And our next question comes from Tycho Peterson with JPMorgan. Please proceed. Hi. This is Eleni on for Tycho. Thanks for taking the question. Maybe to start off, within Molecular, could you drill down and provide some more granularity on what drove the 60% yearly growth and whether you expect these drivers to persist through next quarter and into next year? The main drivers of Solana molecular growth, which is super high percentage of our growth are driven by gains with group A Strep, which you might recall that product is confirmatory for group A Strep. Also, we've done pretty nicely with HSV VZV. And then more recently, we've also seen quite a few gains with C. Diff. Okay, great. And then with respect to cross selling, what are the opportunities you're currently seeing in U. S. As well as outside U. S. Markets? Across the entirety of our product line? Yes, correct. Well, as we like to say, it's more efficient if our sales force can park their car once. And we try, therefore, to address all the products once we've parked the car. So we didn't need to hire additional people in order to bring onboard the cardiovascular products because the car was already parked there. Okay, great. And then one last one. Could you talk to the trends you've seen regionally and whether the headwinds in Europe is something you foresee going into next quarter? Thank you. No, I wouldn't suggest that, that would be true. In Q3 2017, one of the factors was loading of the channel. And of course, that's not going to reoccur in Q4 because Q4, we took over the business last year. So there may be headwinds, but that wouldn't be one. Great. Thanks. Sure. Thank you. And our next question comes from Mark Massaro with Canaccord Genuity. Please proceed. Hey, guys. Thanks for the questions. And sorry if you covered this, I missed the prepared remarks. But, Doug, on the Lyme disease test, it is the 1st FDA cleared rapid Lyme test. So I've got a number of questions. One is, are you seeing both demand from urgent care and pharmacy? And is one stronger than the other? And can you talk about the funnel there? And then 2, as it relates to seasonality, in the northern part of the country, it's getting colder. I would suspect the incidence of Lyme disease might be down a little bit. Can you speak about whether or not you expect to sell this product fairly robustly throughout the year? Well, in order that you asked the questions, Mark, yes, Sofia Lyme is the 1st CLIA waived fingerstick whole blood product. And we, of course, are promoting it broadly across several different segments with a pretty big focus on the Northeast and the upper Midwest, of course. Lyme disease does fall off in the winter, I'm told as soon as the first major freeze, of course, but we won't stop promoting that product in terms of word-of-mouth. And the reason we think that's important is we want awareness to be out there that you can go to your retail clinic or to your urgent care center or even to your own physician and get tested. And we hope to create that awareness by springtime when you would expect to see the demand reoccur. So I did just mention those categories. I would say right now in terms of volume, the big customers tend to be urgent care centers. But we have closes across the category, individual physicians as well as clinics. The bigger, more noticeable closes, I'd say, at least the ones I hear about by e mail are on the big urgent care centers. Got it. And I happen to notice at AMP that there was a new box in your booth. Are you able to share anything about that box at this time or maybe give us a sense for what you think that could do as we think about 2019? Yes. That's you did spot the new thing in the booth. It is true that we have a great deal of interest in the category for good reason. The CDC estimates that somewhere around 48,000,000 people get sick from foodborne illnesses and a big number of those are hospitalized. And so it's a big issue. We think that if this looks like the market for this product ex U. S. That the PAM anyway, the potential available market could be somewhere in the 6 to 10,000,000 range. I'm not suggesting that would be what we would do, but we think it's a really interesting category. And we think that the product that has 9 different analytes, 9 pathogens if you will is pretty interesting. I don't know if you saw the workshop, but it was well attended and a lot of customers ended up finding us on the booth floor. And so we had a lot of conversations there. That's work in progress though. And so I can't really comment further on it. But we like the category. We like the opportunity. That's super helpful. And I would suspect that you are looking to become a distributor of this product products? Should we think of a normal medtech distributor percentage as we just think about what kind of impact that might have to your business next year? Yes, I think that's a safe way to think about it. Obviously, the pricing in this category is quite nice. And so I think there's room anytime that's the case, there's and there's a lot of margin. There's room for both the manufacturer and the distributor to make money. Great. My last question, you've already been asked about the Oleari twice now. I think there was some misperception that molecular testing is broadly reimbursed all across every state in the country, but I don't think that's true. So could you just maybe spend a little bit of time talking about some of the regional barriers to reimbursement for molecular flu testing? Well, I think you actually just made the case, Mark. Reimbursement isn't universal across each of the states. And particularly on the private payer side, there's a lot of differences region to region and there's some parts of the country that don't reimburse for molecular at the point of care at all. And so in the hospital setting on the outpatient basis, that's different, of course, but when it comes to clinics and individual physician office practices, even for our own products, we're trying to sell Solana as well. So we're a little bit familiar with the topic. And I'd have to say, we struggle in certain parts of the country to get our I Would love to hear your thoughts on the Palmetto decision. I know that a lot of the respiratory syndromic panels are reimbursed on inpatients, but there's still a fair amount of those used on outpatients. I guess, how should we think about your ability to take share from some of these larger panels as we head into 2019? Well, thanks for the question. First, I would remind you, Mark, that I have said on a couple of different occasions that I thought that reimbursement climate for the larger panels would change. We also spent a lot of time on list customer interviews, which are in the 100, to confirm the notion that a smaller panel that addressed the number of positives in the high 90s relative to the bigger panels would be desired. And so that's the basis upon which we thought about how we developed the Savanna product and the cartridges and the size of the panel. So we suggested that this might happen. And now we see that at least 1 of the MAX has issued a final conclusion on the matter and I think that affects if I recall I didn't add them all up, I think it affects customers in 11 states, something like that. So this doesn't change the way we think about Savanna because we've been thinking this was going to happen for a while. And I would just say from your perspective, it probably makes Savanna just look more interesting, but we're not surprised. And this whole notion was the basis for us developing the product over the last couple of years. Yes. Good call. Thanks guys. Thanks Mark. Thank you. And our next question comes from David Westenberg with CL King. Please proceed. Hey, thanks for taking the question and congrats on the World Series victory there. So Hey, Dave. Thank you very much, Dave. So can you give any maybe percentage or even maybe some qualitative data in terms of adoption of test menu outside of flu for some of your Sofia II customers? I'm mainly going back to all those placements you got in Q1 when you're basically getting out as fast as you can manufacture. Or have they adopted other outside of flu? Can you give us a percentage of maybe what have adopted outside of flu if you have that? And maybe kind of give us a little bit of what kind of test they'd be ordering outside of flu right now or common ones that you'd be ordering? Well, I mentioned earlier, Dave, and I'll be more specific that Sofia Strep was on the increase. Sofia Strep actually grew 50% in Q3 versus the prior year quarter. And so obviously, that's not off a big basis as it is with flu, but it's noticeable. We've been running internally a program to revisit with customers who already have Sofia and introduce them to strep and RSV in particular, and that's gone extremely well. And then more recently, obviously, with the introduction of Lyme, at minimum, we're having a number of conversations in many of those. Even though the volumes were likely to be small, many of those result in customers wanting to take a look at the product, which then allows us again to have the conversation around our menu across the entirety of what we have to offer. Great. And then maybe just a quick one on capital deployment. It looks like you guys are below 2 turns, maybe even close to 1 turn in terms of debt. Would there be any changes near term to your capital deployment strategy? And if you are looking at acquisitions, can you kind of maybe talk about the near termness in terms of your acquisition pipeline? Partnerships with folks partnerships with folks who might be able to help us put menu on either Sofia or Savanna more quickly. And so I unless we were surprised by something that's out there that we're just not aware of at this stage, I wouldn't count on us using cash for an M and A. Could be some minor investments and things again that might help us bring onboard product. And we've got a couple of those in the works, but those are very small and not material in terms of cash spend. We continue to look at paying down debt, of course, and we are generating a lot of cash. And our free cash position at the end of the year is still likely to be somewhere around 100,000,000 dollars and that's prior to us making the annual payment that we make to Abbott of $48,000,000 So net of that, we would have somewhere around $50,000,000 Got it. All right. Well, thank you very much. Thank you, Dave. Yes. Thanks, Dave. All right. That is all the time we have today. Please proceed your Well, thanks everyone for your support and of course for your interest in Quidel. We had another great quarter and I believe that we're well positioned to achieve all our growth objectives for the year and I think we're super well positioned for 2019 2020 as well. So take care everybody. Ladies and gentlemen, thank you for your participation and ask that you please disconnect your lines.