Form 10-K for QUIDEL CORP /DE/
4-Mar-2008
Annual Report
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
The following discussion of our financial condition and results of operation contains forward-looking statements within the meaning of the federal securities laws that involve material risks and uncertainties. This discussion should be read in conjunction with "A Warning About Forward-Looking Statements" on page 2 and "Risk Factors" under Item 1A of this Annual Report. In addition, our discussion of the financial condition and results of operation of Quidel Corporation in this Item 7 should be read in conjunction with our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report.
Executive Summary
We have a leadership position in the development, manufacturing and marketing of rapid diagnostic solutions at the point-of-care ("POC") in infectious diseases and reproductive and women's health. We focus on POC testing solutions specifically developed for the physician office lab ("POL") and acute care markets globally. We primarily earn revenue from sales of products for use in physician offices, hospitals, clinical laboratories, retail clinics and wellness screening centers. We market our products in the U.S. through a network of national and regional distributors, supported by a direct sales force. Internationally, we sell and market primarily in Japan and Europe by channeling products through distributor organizations and sales agents. Starting in May 2008, bioMerieux S.A. ("bioMerieux") will become our exclusive distributor for all of our current QuickVue® rapid diagnostic tests in all regions except the U.S., Japan and Scandinavia.
A majority of our total revenues relate to three product families. For the years ended December 31, 2007, 2006 and 2005, we derived approximately 81%, 82% and 78%, respectively, of our total revenues from sales of our influenza, Group A Strep and pregnancy tests. Additionally, a significant portion of our total revenue are from a relatively small number of distributors. Approximately 52%, 59% and 63% of our total revenue for the years ended December 31, 2007, 2006 and 2005, respectively, were related to sales through our four largest distributors in each of those periods.
We also develop research products through our Specialty Products Group (the "SPG") with an emphasis on potential future rapid test applications. The SPG is currently responsible for more than 100 of our clinical and research products used worldwide in reference laboratories and in research applications at leading universities and biotechnology companies. The SPG revenues, income and assets are less than 10% of our overall operations.
Our net revenue increased to $118.1 million for the year ended December 31, 2007 from $106.0 million for the year ended December 31, 2006. This was largely driven by increased domestic sales of our infectious disease and reproductive and women's health products as we continued to focus our efforts to strengthen market and brand leadership in infectious disease and reproductive and women's health by delivering economic and clinical proof through our efforts with our Quidel Value Build™ ("QVB™") program. Our POC testing solutions are designed to provide specialized results that meet two important value criteria that we have branded as QVB™:
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º Clinical validation: the enabling of rapid patient management decisions leading to improved treatment and outcomes.
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º Economic validation: the reduction of overall costs associated with patient testing with emphasis upon critical reimbursement and payer performance criteria.
We focus on ensuring market leadership and providing points of differentiation by specializing in the diagnosis and monitoring of selected disease states. In order to support our value proposition as a company that markets the highest quality products in support of better medical outcomes, we are highlighting our QVB™ through the development of new innovations and the communication of new
solutions in the field of rapid diagnostic testing. Our QVB™ includes significant work in understanding the needs of the end-use customer, building products that meet those needs, providing proof studies to validate rapid diagnostic testing at the point-of-care and leveraging the work of researchers and key opinion leaders studying our tests and technology to help enhance the health and well being of people around the globe. Our marketing strategy includes ensuring each of our key product portfolios is supported by economic and clinical validation that shows hospitals, acute care facilities and POC clinicians that these tests deliver high quality results in a cost-effective manner.
We believe that the trend among healthcare providers to adopt POC testing continues to increase, and demographic changes, reimbursement policies, a shortage of skilled laboratory workers and the availability of clinically valuable tests will increase growth in this diagnostic category. More and more employers, health plans and payers are recognizing that POC testing is a cost-effective means for improving the quality of care and patient satisfaction. Continuous improvements in technologies are resulting in a growing number of new diagnostic tests that combine high levels of accuracy with rapid, easy-to-use product formats. It is our mission to further establish our significant leadership position in POC rapid diagnostics. In order to accomplish this mission, our strategy is to:
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º provide clinicians with validated, evidence-based proof which encompasses the clinical efficacy and economic efficiency of our rapid POC tests for the professional market. In conjunction with our QVB™ commitment, we expect to present ongoing information that supports the adoption of rapid POC testing;
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º continue to focus on strengthening our market and brand leadership in infectious diseases and reproductive and women's health by acquiring, developing and introducing clinically and economically superior diagnostic solutions;
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º drive growth by establishing dedicated distributor partnerships with aggressive performance metrics and expanding our sales organization to assure physician and laboratorian satisfaction through direct relationships with Integrated Delivery Networks and hospitals;
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º support payer evaluation of rapid tests and establishment of favorable reimbursement rates;
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º as healthcare management continues to move closer to the patient, develop test formats which meet the rigorous requirements for over-the-counter test performance;
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º continue creation of strong global alliances to assure leadership in key markets;
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º drive profit through further refinement of our manufacturing efficiencies and productivity improvements, with continued focus on profitable products and markets and our effort to create exceptional competency in new product development process management;
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º continue to focus our research and development efforts on three areas:
1) new proprietary product platform development, 2) the creation of improved products and new products for existing markets, and
3) products developed under collaborations with other companies for new and existing markets; and
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º identify and commercialize new markers, products and collaborations in bone health through the SPG. We believe we can capitalize upon our existing microwell plate platform core competencies and long-standing collaborations with key researchers worldwide, which may assist with identifying, developing and producing unique diagnostic and research products targeted at disease state mastery. We characterize this direction as a dedicated focus on Research to Rapids™. These assays and reagents may be used by customers throughout the continuum-of-care in the diagnosis of disease and monitoring of therapy to the development of novel therapeutics.
As a business in a highly regulated and competitive industry, we face many risks and challenges and we also have opportunities. There are many economic and industry factors that affect our business; some of the more important factors are outlined below:
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º sales of our infectious disease products, which have collectively accounted for approximately 64%, 65% and 59% of total revenue for the years ended December 31, 2007, 2006 and 2005, respectively, are subject to and significantly affected by the seasonal demands of the cold and flu seasons;
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º sales of our products can be affected significantly by many competitive factors, including convenience, price and product performance as well as the distribution, advertising, promotion and brand name recognition of the marketer;
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º intellectual property protection of our products is crucial to our business;
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º the testing, manufacture and commercialization of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies;
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º the production processes for POC tests are complex, highly regulated and vary widely from product to product;
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º to successfully compete for business in our industry, we believe our POC testing solutions must be designed to provide specific results for clinical and economic validation; and
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º there has been a trend toward industry consolidation in our markets over the last several years.
We have entered into an agreement to form a long-term global alliance with bioMerieux in the area of rapid clinical diagnostics for the point-of-care. Starting in May 2008, bioMerieux will become our primary distributor for our current QuickVue® rapid diagnostic tests in all regions except the U.S., Japan and Scandinavia.
In September 2007, we entered an exclusive partnership to provide Roche Pharma AG with the QuickVue® Influenza A+B rapid diagnostic test for marketing activities related to its Tamiflu® (Oseltamivir) antiviral drug for the 2007-2008 influenza season in Germany. The agreement will leverage the strength and speed of the QuickVue® rapid test to help characterize influenza infection along with the Tamiflu® treatment to improve patient recovery time. Subsequently, we also launched a pilot program with Roche in the U.S. for the 2007-08 flu season, which complements the collaboration already underway in Germany.
Outlook
For fiscal year 2008, we anticipate continued year-over-year revenue growth in our infectious disease and reproductive and women's health product lines. We expect gross margins will continue to be positively affected by a more favorable product and geographical mix, increased unit volumes and to a lesser extent increased average selling prices. While we experienced significant year-over-year growth of our immunoassay fecal occult blood test ("iFOB") in 2007, we continue to expect a gradual conversion of the fecal occult blood test market from the current guaiac-based test to an immunochemical-based test. Successful conversion of this market requires changing physician behavior through education, focused in part on clinical and economic validation. Additionally, we expect our respiratory syncytial virus ("RSV") product to be a well-received companion test to our QuickVue® Influenza test so that physicians are well prepared to diagnose and appropriately manage patients with influenza and/or RSV. We received Clinical Laboratory Improvement Amendments of 1988 ("CLIA") waiver on our RSV test in February 2008. Internationally, we expect our global alliance with bioMerieux to increase the reach of our products to markets around the world. Over recent historical
periods, the company has grown operating expenses at a rate less than our revenue growth rate, and we expect this to continue for fiscal 2008.
You should also refer to the discussion in Item 1A, "Risk Factors" in Part I of this Annual Report for further discussion of risks related to our business.
Results of Operations
Comparison of years ended December 31, 2007 and 2006
Total Revenues
The following table compares total revenues for the years ended December 31, 2007 and 2006 (in thousands, except percentages):
For the year ended
December 31, Increase (decrease)
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2007 2006 $ %
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Net product sales $ 116,890 $ 104,732 $ 12,158 12 %
Royalty income and license fees 1,175 1,283 (108 ) (8 )%
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Total revenues $ 118,065 $ 106,015 $ 12,050 11 %
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