Tue 6:01am QDEL QUIDEL CORP /DE/ Files SEC form 10-K, Annual Report - EDGAR Online
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™:
º •
º Clinical validation: the enabling of rapid patient management decisions leading to improved treatment and outcomes.
º •
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:
º •
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;
º •
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;
º •
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;
º •
º support payer evaluation of rapid tests and establishment of favorable reimbursement rates;
º •
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;
º •
º continue creation of strong global alliances to assure leadership in key markets;
º •
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;
º •
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
º •
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:
º •
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;
º •
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;
º •
º intellectual property protection of our products is crucial to our business;
º •
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;
º •
º the production processes for POC tests are complex, highly regulated and vary widely from product to product;
º •
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
º •
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)
---------------------- -----------------------
2007 2006 $ %
---------- --------- --------------- ----
Net product sales $ 116,890 $ 104,732 $ 12,158 12 %
Royalty income and license fees 1,175 1,283 (108 ) (8 )%
---------- --------- ---------------
Total revenues $ 118,065 $ 106,015 $ 12,050 11 %
---------- --------- ---------------
The increase was largely driven by an increase in sales of our infectious disease and reproductive and women's health products of $7.3 million and $2.4 million, respectively. The overall increase was partially offset by an expected decrease of our influenza product revenues in our Japanese market. We believe the increase in total revenue from these product groups was due to successes related to our QVB™ programs, which have resulted in strengthened customer relationships and preferred partnership programs. We believe that sales of our influenza products continue to increase as a result of increased market awareness, greater utilization and the demonstrated quality of our test. We believe our average selling price in the U.S. has continued to increase largely as a result of our clinical proof claims and product quality, while we have experienced downward pressure in the Japanese market as a result of reimbursement changes and increased competition. Sales of our infectious disease and reproductive and women's health products accounted for 88% and 89% of our total revenue for the years ended December 31, 2007 and 2006, respectively.
The revenue from royalty income and license fees for all periods primarily relate to royalty payments earned on patented technologies of ours utilized by third parties.
Cost of Sales
Cost of sales increased 8% to $48.6 million, or 41% of total revenue, for the year ended December 31, 2007 compared to $44.8 million, or 42% of total revenues, for the year ended December 31, 2006. The absolute dollar increase was primarily related to the increase in direct costs (material and labor) associated with the 11% increase in total revenues. The percentage decrease in cost of sales to revenue was primarily due to a more favorable product and geographic mix and the leveraging of fixed costs associated with higher unit volume and increased average selling prices.
--------------------------------------------------------------------------------
Operating Expenses
The following table compares operating expenses for the years ended
December 31, 2007 and 2006 (in thousands, except percentages):
For the year ended December 31,
-------------------------------------------------- Increase
2007 2006 (decrease)
----------------------- ------------------------ ----------------
As a % of As a % of
Operating total Operating total
expenses revenues expenses revenues $ %
----------- --------- ------------ --------- --------- --
Research and development $ 12,855 11 % $ 13,047 12 % $ (192 ) (1 )%
Sales and marketing 18,491 16 % 16,966 16 % 1,525 9 %
General and administrative 13,167 11 % 12,770 12 % 397 3 %
Amortization of intangible assets 5,493 5 % 4,580 4 % 913 20 %
Research and Development Expense
Our research and development expenses were relatively constant. While we may experience some fluctuation in our research and development activities associated with the timing of certain projects, the primary components of research and development expense are personnel and material costs associated with development of potential new technologies and processes and with products under development. In addition, we continue to incur costs related to intellectual property, clinical activity as well as our overall efforts under our QVB™ programs.
Sales and Marketing Expense
The increase in sales and marketing expense was primarily related to an overall increase in sales personnel and related programs and expenses, which support our leadership position and strategies to capitalize further on opportunities in POC diagnostics. Other key components of this expense relate to continued investment in assessing future product extensions and enhancements, market research (including voice of customer surveys), programs aimed at distribution partners and end-user customers and reimbursement-related activities and product shipment costs.
General and Administrative Expense
The increase in general and administrative expenses was primary driven by increased stock compensation expense and costs associated with the departure of our former Chief Financial Officer and hiring a new Chief Financial Officer.
Amortization of Intangible Assets
The increase in the amortization of intangible assets was primarily due to a license agreement entered into during late 2006 and an additional license agreement entered into during 2007.
Other Income (Expense)
Interest income was $1.9 million and $1.4 million for the years ended December 31, 2007 and 2006, respectively. The increase in interest income was largely related to the increase in our average cash balance as well as more favorable interest rates for the year ended December 31, 2007 as compared to the prior year. Interest expense was relatively constant at $0.7 million for both of the years ended December 31, 2007 and 2006. Interest expense relates to interest paid on obligations under capital leases, primarily associated with our San Diego facility.
--------------------------------------------------------------------------------
Income Taxes
We recognized income tax expense of $6.9 million for the year ended December 31, 2007 versus a tax benefit of $5.9 million for the year ended December 31, 2006. Income tax expense for 2007 includes a reduction of $0.7 million for the completion of a research and development tax credit study for prior years. For 2006, we recorded a tax benefit which was primarily related to a decrease in the deferred tax valuation allowance during the fourth quarter ended December 31, 2006 and recognizes the deferred tax asset amount considered by management, more likely than not, to be realized.
Comparison of years ended December 31, 2006 and 2005
Total Revenues
The following table compares total revenues for the years ended December 31, 2006 and 2005 (in thousands, except percentages):
For the year ended
December 31, Increase (decrease)
----------------------- ------------------------
2006 2005 $ %
---------- --------- -------------- ------
Net product sales $ 104,732 $ 88,731 $ 16,001 18 %
Research contracts, license fees and 1,283 3,568 (2,285 ) (64 )%
royalty income
---------- --------- --------------
Total revenues $ 106,015 $ 92,299 $ 13,716 15 %
---------- --------- --------------
The increase in total revenue was largely driven by an increase in sales of our infectious disease products of $14.3 million. The overall increase was partially offset by a decrease of influenza product revenues in our Japanese market. For the year ended December 31, 2006, we believe revenue from these products continued to increase due to successes related to our QVB™ programs, which have resulted in strengthened customer relationships and preferred partnership programs. We believe that sales of our infectious disease products continued to increase as a result of increased market awareness and the demonstrated quality of our test. We believe our average selling price in the U.S. continued to increase largely as a result of our clinical proof claims and product quality, while we experienced downward pressure in the Japanese market as a result of reimbursement changes and increased competition. This product line collectively accounted for 65% and 59% of our total revenue for the years ended December 31, 2006 and 2005, respectively.
Research Contracts, License Fees and Royalty Income
The decrease for the year ended December 31, 2006 was primarily related to research contract revenue that we earned during the year ended December 31, 2005 in connection with achieving certain milestones under a joint development agreement with another company. During the second quarter of 2005, the joint development agreement was terminated. The balance of this revenue for all periods primarily relates to royalty payments earned on patented technologies of ours utilized by third parties.
Cost of Sales
Cost of sales increased 21% to $44.8 million, or 42% of total revenue for the year ended December 31, 2006 compared to $37.1 million, or 40% of total revenues for the year ended December 31, 2005. The absolute dollar increase was primarily related to the increase in direct costs (material and labor) associated with the 15% increase in total revenues. The percentage increase in cost of sales to revenue was primarily due to the 8.5% royalty we began paying on the majority of our products during the second quarter of 2005 related to the patent litigation settlement with Inverness Medical Innovations, Inc. ("IMA") and strategic investments in our operational infrastructure, partially
--------------------------------------------------------------------------------
offset by a more favorable product and geographic mix, higher unit volume and increased average selling prices.
In connection with the patent litigation settlement entered into during the second quarter of 2005, we were required, as of May 2005, to pay an 8.5% royalty on net sales of our current influenza, Group A Strep, pregnancy, H. pylori, mononucleosis, Chlamydia, iFOB, RSV and veterinary products. These product sales accounted for 92% of total revenue for the year ended December 31, 2006 and 88% for the year ended December 31, 2005. Also for the year ended December 31, 2006, the cost of sales as a percentage of total revenues was favorably impacted compared to 2005 as we fulfilled the terms of an agreement with another party related to the development of our influenza product during the first quarter of 2005. We are no longer required to pay this party a 6% royalty on sales of our influenza product.
Operating Expenses
The following table compares operating expenses for the years ended
December 31, 2006 and 2005 (in thousands, except percentages):
For the year ended December 31,
------------------------------------------------- Increase
2006 2005 (decrease)
----------------------- ----------------------- -------------
As a % of As a % of
Operating total Operating total
expenses revenues expenses revenues $ %
----------- --------- ----------- --------- ------- ---
Research and development $ 13,047 12 % $ 12,829 14 % $ 218 2 %
Sales and marketing 16,966 16 % 16,121 17 % 845 5 %
General and administrative 12,770 12 % 13,062 14 % (292 ) (2 )%
Amortization of intangible assets 4,580 4 % 1,476 2 % 3,104 210 %
Research and Development Expense
Our research and development expenses were relatively constant. The primary components of this expense are personnel and material costs associated with development of potential new technologies and processes and with products under development. In addition, we continued to incur substantial costs related to clinical trials as well as our overall effort under our QVB™ programs.
Sales and Marketing Expense
The primary components of this expense relate to continued investment in assessing future product extensions and enhancements, market research (including voice of customer surveys), programs aimed at distribution partners and end-user customers and reimbursement-related activities and product shipment costs. We also increased our sales force to further support our leadership position and seek to take advantage of further opportunities in POC diagnostics.
General and Administrative Expense
The decrease in general and administrative expenses for the year ended December 31, 2006 was primarily due to decreased legal fees of $2.3 million associated primarily with the settlement of our intellectual property litigation with IMA during 2005, partially offset by increases in personnel costs associated with stock-based compensation and management incentive plans.
--------------------------------------------------------------------------------
Patent Litigation Settlement
As previously disclosed, during the second quarter of 2005 we entered into an agreement to settle certain patent litigation with IMA and recorded a charge of $17.0 million in the first quarter of 2005, which amount was paid in April 2005.
Amortization of Intangible Assets
The increase in amortization of intangible assets for the year ended December 31, 2006 was primarily due to the amortization of intellectual property related to two license agreements entered into during late 2005 and an additional license agreement entered into during late 2006.
Other Income (Expense)
Interest income was $1.4 million and $0.7 million for the years ended December 31, 2006 and 2005, respectively, and relates primarily to interest earned on our cash and cash equivalents balance. Interest expense was $0.8 million for both of the years ended December 31, 2006 and 2005 and relates to interest paid on obligations under capital leases, which are primarily related to our San Diego facility. Other income increased to $0.5 million for the year ended December 31, 2006 from $0.1 million for the year ended . . .
News 
Market Data 
Discover 
~ Google Finance: http://www.google.com/finance?q=QDEL 
~ Yahoo! Finance ~ Stats: http://finance.yahoo.com/q/ks?s=QDEL+Key+Statistics 
Finviz: http://finviz.com/quote.ashx?t=QDEL 
~ BusyStock: http://busystock.com/i.php?s=QDEL&v=2 
QUIDEL Corp.
10165 McKellar Court
San Diego, CA 92121
http://www.quidel.com
IR: http://phx.corporate-ir.net/phoenix.zhtml?c=94060&p=irol-irhome
Phone: (858) 552-1100
Fax: (858) 453-4338
Email: ir@quidel.com
Quidel Corporation is engaged in the development, manufacturing and marketing of rapid diagnostic solutions at the professional point-of-care (POC) in infectious diseases and reproductive health. The Company focuses on POC testing solutions specifically developed for the physician office lab and acute care markets globally. It sells its products to professionals for use in physician offices, hospitals, clinical laboratories and wellness screening centers. In addition to its rapid diagnostic business, the Company also develops research products through its Specialty Products Group (the SPG), with an emphasis on potential future rapid test applications. The SPG is responsible for more than 100 of its clinical and research products used worldwide in reference laboratories and in research applications at universities and biotechnology companies. The Company markets its products in the United States through a network of national and regional distributors, supported by a direct sales force.
QDEL also provides POC and other diagnostic tests under QuickVue, QuickVue+, QuickVue Advance, RapidVue, and Metra brand names. The company offers POC diagnostics products for infectious diseases, such as Influenza, Group A Strep, and Mononucleosis, as well as for reproductive health, which include pregnancy, Chlamydia, and Bacterial Vaginosis. In the oncology/gastrointestinal area, Quidel offers Immunoassay fecal occult blood test, an immunochemical diagnostic tool to detect the presence of blood in stool specimens; and a serological rapid test that measures antibodies circulating in the blood caused by Helicobacter pylori. It also provides RSV Test, a rapid immunoassay for Respiratory Syncitial Virus. In addition, the company produces clinical and research products for the assessment of osteoporosis and the evaluation of bone resorbtion/formation. Further, Quidel offers veterinary products, as well as clinical laboratory and research tests used in the measurement of circulating immune complexes, complement deficiencies, and complement activation. The company sells its products to professionals for use in physician offices, hospitals, clinical laboratories, and wellness screening centers through a network of national and regional distributors supported by a direct sales force in the United States, as well as through distributor organizations and sales agents in Japan and Europe. Quidel was founded in 1979 and is headquartered in San Diego, California.
Outstanding Shares: 32,679,222 ( as of Oct 24, 2007 )
Float: 28.89 Mil
52wk High: 21.07 --> 10/30/07
52wk Low: 10.12 --> 3/5/07
P/E Ratio : 22.34x
Institution Holdings: 81.80% (as of 1/1/08)
Total Held: 26.73 Mil Institutions: 117
________________________________________________________________________________________________________________________________
RECENT EVENTS
Quidel Corporation Earnings Call scheduled for Thu, Feb 21
16-Jan-08 Quidel upgraded by Pacific Growth Equities
3-Jan-08 QUIDEL CORP /DE/ Files SEC form 8-K, Entry into a Material Definitive Agreement, Change in Directors or Principal Off
7-Nov-07 QUIDEL CORP /DE/ Files SEC form 8-K, Change in Directors or Principal Officers, Financial Statements and Exhibits
30-Oct-07 Price hit new 52-week high ($21.07)
26-Oct-07 QUIDEL CORP /DE/ Files SEC form 10-Q, Quarterly Report
24-Oct-07 Quidel Corporation Earnings Call scheduled for 5:00 pm ET today
24-Oct-07 QUIDEL CORP /DE/ Files SEC form 8-K, Results of Operations and Financial Condition, Financial Statements and Exhibits
________________________________________________________________________________________________________________________________
