QDEL

Quidel Corporation (QDEL)

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Quidel Corp. (QDEL)

Q3 2010 Earnings Call

October 27, 2010 05:00 pm ET

Executives

Doug Bryant – President and Chief Executive Officer

John Radak – Chief Financial Officer

Analysts

Zarak Khurshid – Wedbush Securities

Scott Gleason – Stephens

Pete Vitali -- William Blair Company

Steven Crowley – Craig-Hallum Capital Group

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation third quarter 2010 conference call. At this time, all participants are in a listen-only mode. Later, instructions will be given for the question-and-answer session. (Operator instructions)

I would like to turn the call over to Mr. John Radak. Please go ahead.

John Radak

This is John Radak, Chief Financial Officer at Quidel. Thank you for participating in today's call. Joining me today is our President and Chief Executive Officer, Doug Bryant.

Today Quidel released financial results for its three months ended September 30, 2010. If you have not received this news release, or if you would like to be added to the company's distribution list, please call Ruben Argeta (ph) at Quidel Corporation at 858-646-8023.

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 materially from these stated expectations. For a discussion of risk factors, please review Quidel's Annual Report on Form 10-K, 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, October 27, 2010. 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.

For today’s call, I will report on the financial results for the quarter and year to date, provide details on the DHI acquisition synergies, and speak to our financing activities. Doug will provide color on our near term and longer term business growth prospects, and give an update on our new product pipeline. We will then open the call to your questions.

Total global revenues for the quarter were lower, when compared to Q3 of 2009, primarily due to the benefit associated with last year’s flu pandemic. Excluding the impact of influenza on the combined businesses, our revenues in total grew approximately 4% in Q3 of 2010, over the same period of the prior year.

DHI contributed $9.4 million of revenue in the quarter, international revenues accounted for 11% of total revenues in Q3 2010. In the following comments on revenues, I will compare our business on a pro forma basis, as if DHI had been acquired at the start of 2009. For Q3 2010, global infectious disease revenues were $16.2 million versus $56.9 million in the prior year Q3, which benefitted from last year’s flu pandemic.

Global flu sales in Q3 2010 were modest, as is more typical for this time of year, and were reflective of distributor outsales. DHI Respiratory and General Neurology revenues declined 42% and 39% respectively from Q3 2009, again, primarily as a result of the benefit in 2009 of the flu pandemic. In 2010, revenues were favorably impacted by 9% growth in the herpes product line, compared to Q3 2009, this product has been growing consistently in the 5 to 10% range over the last several quarters.

Global sales of strep A increased 5% over the prior year quarter. The global revenues of our reproductive and women’s health category increased 13% in Q3 2010, to $8.7 million. This increase was driven primarily by pregnancy issues, and a 21% growth in the thyroxine product line.

The gastrointestinal disorders category, made up primarily of H.pylori, enterovirus, and iFOB was up 18% from Q3 2009, to $1.7 million. Other product revenues were $1.7 million in Q3 2010, a $500,000 decline from the prior year, reflecting some softness in our veterinary product line.

Gross margin in Q3 2010 decreased 55% as compared to 69% in the prior year, primarily as a result of an unfavorable product mix shift, associated with significantly fewer flu sales this year, versus last year. Operating expenses were $18.8 million, compared to $14.2 million in the prior year, this includes $4 million of DHI’s operating expenses in the current period, as well as $1.6 million of intangible asset amortization associated with the DHI acquisition.

Research and development costs were $6.1 million, in line with our expectations. Stock based compensation expense was $1.3 million for the quarter, versus $0.8 million for the same period in 2009. With regard to the DHI integration, we have successfully implemented the majority of the cost synergies, and we anticipate $6 million in total synergy related savings for 2010.

In addition, we are working toward cross selling revenue opportunities identified earlier in the year. As you saw from our earnings press release today, in Q3 2010, we recognized tax expense on a pre-tax loss. This was because included in a tax provision is $3.2 million of tax expense to reduce the tax benefits recorded in Q1 and Q2, to our current estimated effective tax rate.

The effective tax rate has declined in Q2, primarily as a result of a reduction in our forecast of full year pre-tax income. On our last quarter conference call, we indicated that we expected our full year effective tax rate to approximate 40%, assuming Congress extends the Federal research credit. Today, with the same assumption regarding the Federal research credit, we expect the full year effective tax rate to approximate 38%.

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