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QDEL > SEC Filings for QDEL > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for QUIDEL CORP /DE/

Form 10-Q for QUIDEL CORP /DE/


29-Oct-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In this quarterly report, all references to "we," "our" and "us" refer to Quidel Corporation and its subsidiaries.

Future Uncertainties and Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws that involve material risks, assumptions and uncertainties. Many possible events or factors could affect our future financial results and performance, such that our actual results and performance may differ materially from those that may be described or implied in the forward-looking statements. As such no forward-looking statement can be guaranteed. Differences in actual results and performance may arise as a result of a number of factors including, without limitation, seasonality, the timing of onset, length and severity of cold and flu seasons, the level of success in executing on our strategic initiatives, our reliance on sales of our influenza diagnostic tests, uncertainty surrounding the detection of novel influenza viruses involving human specimens, our ability to develop new products and technology, adverse changes in the competitive and economic conditions in domestic and international markets, our reliance on and actions of our major distributors, technological changes and uncertainty with research and technology development, including any future molecular-based technology, the medical reimbursement system currently in place and future changes to that system, manufacturing and production delays or difficulties, adverse regulatory actions or delays in product reviews by the U.S. Food and Drug Administration (the "FDA"), compliance with FDA and environmental regulations, our ability to meet unexpected increases in demand for our products, our ability to execute our growth strategy, including the integration of new companies or technologies, disruptions in the global capital and credit markets, our ability to hire key personnel, intellectual property, product liability, environmental or other litigation, potential required patent license fee payments not currently reflected in our costs, potential inadequacy of booked reserves and possible impairment of goodwill, and lower than anticipated acceptance, sales or market penetration of our new products. Forward-looking statements typically are identified by the use of terms such as "may," "will," "should," "might," "expect," "anticipate," "estimate," and similar words, although some forward-looking statements are expressed differently. Forward-looking statements in this Quarterly Report include, among others, statements concerning: our outlook for the remainder of 2012, including projections about our revenue, gross profit, expenses, and net earnings; projected capital expenditures for the remainder of 2012 and our source of funds for such expenditures; the sufficiency of our liquidity and capital resources; the future impact of deferred tax assets or liabilities; the expected vesting periods of unrecognized compensation expense; and our intention to maintain our emphasis on research and development, to introduce new products, and to continue to evaluate technology and Company acquisition opportunities and the source of funds for such investments. The risks described under "Risk Factors" in Item 1A of this Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2011, and elsewhere herein and in reports and registration statements that we file with the Securities and Exchange Commission (the "SEC") from time to time, should be carefully considered. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Quarterly Report. The following should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto beginning on page 3 of this Quarterly Report. We undertake no obligation to publicly release the results of any revision or update of these forward-looking statements, except as required by law.

Overview

We have a leadership position in the development, manufacturing and marketing of rapid diagnostic testing solutions. These diagnostic testing solutions primarily include applications in infectious diseases, women's health and gastrointestinal diseases. We sell our products directly to end users and distributors, in each case, for professional use in physician offices, hospitals, clinical laboratories, reference laboratories, leading universities, retail clinics and wellness screening centers. We market our products in the U.S. through a network of national and regional distributors, and a direct sales force.
Internationally, we sell and market primarily through distributor arrangements.


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Outlook

We anticipate revenue growth over the next three months as compared to the same three month period in the prior year and a related positive impact on gross profit and net earnings. We will continue our focus on prudently managing our business and delivering solid financial results, while at the same time striving to continue to introduce new products to the market and maintaining our emphasis on research and development investments and commercialization for longer term growth. Finally, we will continue to evaluate opportunities to acquire new product lines and technologies, as well as, company acquisitions.

Results of Operations

Three months ended September 30, 2012 compared to the three months ended September 30, 2011

Total Revenues

The following table compares total revenues for the three months ended
September 30, 2012 and 2011 (in thousands, except percentages):



                                                      For the three months              Increase
                                                      ended September 30,              (Decrease)
                                                      2012             2011          $            %
Infectious disease net product sales               $    21,622       $ 21,996      $ (374 )        (2 )%
Women's health net product sales                         8,741          8,145         596           7 %
Gastrointestinal disease net product sales               1,584          1,719        (135 )        (8 )%
Other net product sales                                    540            689        (149 )       (22 )%
Royalty, license fees and grant revenue                    511            559         (48 )        (9 )%

Total revenues                                     $    32,998       $ 33,108      $ (110 )         0 %

The increase in women's health net product sales was driven primarily by an increase in sales from our pregnancy products of $0.4 million. This increase was offset by a decrease in infectious disease product sales driven primarily by a decrease in sales from our flu products of $0.5 million. The revenue from our royalty, license fees and grant revenue category for all periods primarily relates to royalty payments earned on our patented technologies utilized by third parties.

Cost of Sales

Cost of sales was $14.9 million, or 45% of total revenues for the three months ended September 30, 2012, compared to $15.0 million, or 45% of total revenues for the three months ended September 30, 2011. The absolute dollar value of cost of sales was relatively constant for direct and indirect costs for both periods.

Operating Expenses

The following table compares operating expenses for the three months ended
September 30, 2012 and 2011 (in thousands, except percentages):



                                                         For the three  months
                                                          ended September 30,
                                                  2012                             2011                   Increase (Decrease)
                                                       As a %  of                       As a % of
                                       Operating         total           Operating        total
                                       expenses         revenues         expenses        revenues            $               %
Research and development              $     5,085               15 %    $     5,884             18 %    $      (799 )        (14 )%
Sales and marketing                         7,776               24 %          6,487             20 %          1,289           20 %
General and administrative                  4,759               14 %          5,194             16 %           (435 )         (8 )%
Amortization of intangible assets
from acquired businesses and                                                                                                  (4 )
technology                                  1,728                5 %          1,791              5 %            (63 )            %


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Research and Development Expense

Research and development expense for the three months ended September 30, 2012 decreased from $5.9 million to $5.1 million primarily due to a research and development reimbursement of $1.3 million associated with the collaboration agreement described in Note 11 to the consolidated financial statements. Excluding this reimbursement, research and development increased by $0.5 million for costs associated with the development of potential new technologies and with products under development.

Research and development expenses include direct external costs such as fees paid to consultants, and internal direct and indirect costs such as compensation and other expenses for research and development personnel, supplies and materials, clinical trials and studies, facility costs and depreciation.

Due to the risks inherent in the product development process and given the early-stage of development of certain projects, we are unable to estimate with meaningful certainty the costs we will incur in the continued development of our product candidates for commercialization. In addition, we have not historically tracked research and development costs by individual project. However, we expect our research and development costs to be substantial as we move other product candidates into preclinical and clinical trials and advance our existing product candidates into later stages of development.

Sales and Marketing Expense

Sales and marketing expense for the three months ended September 30, 2012 increased from $6.5 million to $7.8 million due to additional investments of $1.3 million in our sales organization including an increase in personnel, travel, training costs, and incentives related to Sofia instrument placements. Other key components of this expense relate to continued investment in assessing future product extensions and enhancements and market research.

General and Administrative Expense

General and administrative expense for the three months ended September 30, 2012 decreased from $5.2 million to $4.8 million primarily due to a decrease in the incentive compensation accrual of $0.2 million for the three months ended September 30, 2012 because of a weak 2011/2012 cold and flu season.

Amortization of Intangible Assets from Acquired Businesses and Technology

Amortization of intangible assets from acquired businesses consists of customer relationships, purchased technology and patents and trademarks acquired in connection with our acquisition of DHI. Amortization of intangible assets from acquired technology consists primarily of expense associated with purchased technology.

Other Income (Expense)

Interest expense primarily relates to interest paid on borrowings under the Senior Credit Facility and interest paid on our lease obligation associated with our San Diego facility. The reduction in the outstanding principle balance under the line of credit from $42.0 million as of September 30, 2011 to $19.0 million as of September 30, 2012 resulted in a reduction to interest expense of $0.2 million.

Income Taxes

As of the three months ended September 30, 2012 and September 30, 2011, our expected annual effective tax rate was 55.7% and 34.0%, respectively. We recognized a tax benefit of $0.9 million and $0.6 million for the three months ended September 30, 2012 and 2011, respectively. The primary difference between the September 30, 2012 and September 30, 2011 effective tax rate is due to the exclusion of the federal research and development tax credit due to the expiration of the statute. In addition, we reduced our reserve for uncertain tax positions resulting from a federal statutory audit.


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Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Total Revenues

The following table compares total revenues for the nine months ended
September 30, 2012 and 2011 (in thousands, except percentages):



                                                   For the nine months               Increase
                                                   ended September 30,              (Decrease)
                                                   2012           2011             $             %
Infectious disease net product sales            $   66,735      $  84,894      $ (18,159 )       (21 )%
Women's health net product sales                    25,638         24,556          1,082           4 %
Gastrointestinal disease net product sales           4,790          5,254           (464 )        (9 )%
Other net product sales                              3,266          3,708           (442 )       (12 )%
Royalty, license fees and grant revenue              1,387          1,800           (413 )       (23 )%

Total revenues                                  $  101,816      $ 120,212      $ (18,396 )       (15 )%

The decrease in total revenues was largely related to a weak 2011/2012 cold and flu season. This had an adverse impact on our infectious disease products, including influenza, Group A Strep, RSV and DFA respiratory. This was partially offset by stronger sales in our women's health product line driven by increased sales of our thyroid products of $0.5 million and increased sales from our pregnancy products of $0.4 million. Revenues in other product categories remained relatively constant period over period.

The revenue from our royalty, license fees and grant revenue category for all periods primarily relate to royalty payments earned on our patented technologies utilized by third parties.

Cost of Sales

Cost of sales decreased 8% to $43.7 million, or 43% of total revenues for the nine months ended September 30, 2012, compared to $47.6 million, or 40% of total revenues for the nine months ended September 30, 2011. The absolute dollar decrease in cost of sales is primarily related to the variable nature of direct costs (material and labor) associated with the 15% decrease in total revenues. The increase in cost of sales as a percent of total revenue is primarily due to a shift in product mix as flu volume was lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 because of a weak 2011/2012 cold and flu season.

Operating Expenses

The following table compares operating expenses for the nine months ended
September 30, 2012 and 2011 (in thousands, except percentages):



                                                          For the nine  months
                                                          ended September 30,
                                                  2012                             2011                   Increase (Decrease)
                                                       As a %  of                       As a % of
                                       Operating         total           Operating        total
                                       expenses         revenues         expenses        revenues            $               %
Research and development              $    20,433               20 %    $    19,559             16 %    $        874           4 %
Sales and marketing                        21,989               22 %         18,996             16 %           2,993          16 %
General and administrative                 15,812               16 %         17,135             14 %          (1,323 )        (8 )%
Amortization of intangible assets
from acquired businesses and
technology                                  5,165                5 %          5,342              4 %            (177 )        (3 )%

Research and Development Expense

Research and development expense increased from $19.6 million to $20.4 million for the nine months ended September 30, 2012 primarily due to an overall increase of $2.3 million for costs associated with the development of potential new technologies and with products under development. The increase was partially offset by the research and development reimbursement of $1.3 million associated with the collaboration agreement described in Note 11 to the consolidated financial statements.

Research and development expenses include direct external costs such as fees paid to consultants, and internal direct and indirect costs such as compensation and other expenses for research and development personnel, supplies and materials, clinical trials and studies, facility costs and depreciation.

Due to the risks inherent in the product development process and given the early-stage of development of certain projects, we are unable to estimate with meaningful certainty the costs we will incur in the continued development of our


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product candidates for commercialization. In addition, we do not currently track research and development costs by individual project. However, we expect our research and development costs to be substantial as we move other product candidates into preclinical and clinical trials and advance our existing product candidates into later stages of development.

Sales and Marketing Expense

Sales and marketing expense increased from $19.0 million to $22.0 million for the nine months ended September 30, 2012 due to increased costs of $3.0 million for additional investments in our sales organization, including an increase in personnel and corresponding travel and training costs. Other key components of this expense relate to continued investment in assessing future product extensions and enhancements and market research.

General and Administrative Expense

General and administrative costs decreased from $17.1 million to $15.8 million for the nine months ended September 30, 2012 primarily due to a decrease in the incentive compensation accrual of $0.9 million because of a weak 2011/2012 cold and flu season.

Amortization of Intangible Assets from Acquired Businesses and Technology

Amortization of intangible assets from acquired businesses consists of customer relationships, purchased technology and patents and trademarks acquired in connection with the acquisition of DHI. Amortization of intangible assets from acquired technology consists primarily of expense associated with purchased technology.

Other Income (Expense)

Interest expense primarily relates to interest paid on borrowings under the Senior Credit Facility and interest paid on our lease obligation associated with our San Diego facility. The reduction in the outstanding principle balance under the line of credit from $42.0 million as of September 30, 2011 to $19.0 million as of September 30, 2012 resulted in a reduction to interest expense of $0.7 million.

Income Taxes

The effective tax rate for the nine months ended September 30, 2012 and 2011 was 40.0% and 34.0%, respectively. We recognized a tax benefit of $2.5 million and a tax expense of $3.4 million for the nine months ended September 30, 2012 and 2011, respectively. The primary difference between the September 30, 2012 and September 30, 2011 effective tax rate is due to the exclusion of the federal research and development tax credit due to the expiration of the statute. In addition, we reduced our reserve for uncertain tax positions resulting from a federal statutory audit.

Liquidity and Capital Resources

As of September 30, 2012, our principal sources of liquidity consisted of $17.8 million in cash and cash equivalents, and $60.0 million available to us under our Senior Credit Facility, which can fluctuate from time to time due to, among other factors, our funded debt to adjusted earnings before interest, taxes, depreciation, amortization and stock compensation ("adjusted EBITDA") ratio. Our working capital as of September 30, 2012 was $53.7 million.

Cash provided by operating activities was $5.9 million during the nine months ended September 30, 2012. We had a net loss of $3.7 million, including non-cash charges of $21.5 million of depreciation and amortization of intangible assets and property and equipment, and stock-based compensation. Other significant changes in operating assets and liabilities include an increase in deferred tax assets net of liabilities of $2.4 million, accounts receivable of $2.5 million, and inventory of $2.1 million all of which are related to the seasonal nature of our business. Prepaid expenses and other current assets increased by $2.6 million primarily due to a $2.5 million receivable as described in Note 11 to the consolidated financial statements. Cash provided by operating activities was $34.3 million during the nine months ended September 30, 2011. We had net earnings of $6.7 million, including non-cash charges of $17.9 million of depreciation and amortization of intangible assets and property and equipment, and stock-based compensation. The most significant changes in operating assets and liabilities included an increase in accounts receivable of $3.8 million and decreases in inventories and income tax receivable of $2.9 million and $8.3 million, respectively. The increase in accounts receivable and the decrease in inventory are related to the seasonal nature of our business, while the decrease in income tax receivable is due to a tax refund received during the nine months ended September 30, 2011.


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Our investing activities used $23.1 million during the nine months ended September 30, 2012 primarily related to the acquisition of intangibles associated with our exercise of a buyout clause under the Alere Amendment. During the nine months ended September 30, 2012, we exercised the buy-out right under the Alere Amendment, which allowed us to buy-out any remaining future royalty obligation for a fixed cash payment in the amount of $15.7 million less $1.0 million of specified third quarter 2011 royalties. In addition, we used cash for investing activities associated with the acquisition of production and scientific equipment, and building improvements during the nine months ended September 30, 2012. Our investing activities used $17.5 million during the nine months ended September 30, 2011 primarily related to the acquisition of licensed technology associated with the Alere Amendment as discussed in Note 11 to the Consolidated Financial Statements. In addition, we acquired production and scientific equipment, and building improvements during the nine months ended September 30, 2011.

We are planning approximately $5.5 million in capital expenditures for the remainder of 2012. The primary purpose for our capital expenditures is to acquire manufacturing and scientific equipment, implement facility improvements, the purchase or development of information technology and leased instruments under customer rental agreements. We plan to fund these capital expenditures with cash flow from operations and other available sources of liquidity. We have $4.1 million in firm purchase commitments with respect to such planned capital expenditures as of the date of filing this report.

Cash used for financing activities of $26.2 million during the nine months ended September 30, 2012 was primarily related to repayments under our Senior Credit Facility of $23.0 million, and repurchases of 200,400 shares of our common stock under our share repurchase program at a cost of approximately $2.9 million. Our financing activities generated $27.5 million of cash during the nine months ended September 30, 2011. This was primarily related to proceeds from the sale of our common stock, partly offset by repayments made under the line of credit, both of which occurred during the first quarter of 2011.

On August 10, 2012, we entered into an amended and restated $140.0 million senior secured syndicated credit facility (the "Senior Credit Facility"), which matures on August 10, 2017. The Senior Credit Facility amends and restates our $120.0 million senior secured credit facility dated October 8, 2008. As part of this amendment, we incurred $1.0 million in deferred financing costs related to the Senior Credit Facility in addition to the $0.6 million we had previously recorded related to the original credit facility. As of September 30, 2012, we had $1.6 million included as a portion of other non-current assets. The Senior Credit Facility bears interest at either LIBOR or the base rate plus in each case the applicable margin. The base rate is equal to the higher of (i) the lender's prime rate, (ii) the federal funds rate plus one-half of one percent and (iii) LIBOR plus one percent. The applicable rate is generally determined in accordance with a performance pricing grid based on our leverage ratio and ranges from 1.25% to 2.50% for LIBOR rate loans and from 0.25% to 1.50% for base rate loans (weighted average interest rate of 1.72% at September 30, 2012). The agreement governing the Senior Credit Facility is subject to certain customary limitations, including among others: limitation on liens; limitation on mergers, consolidations and sales of assets; limitation on debt; limitation on dividends, stock redemptions and the redemption and/or prepayment of other debt; limitation on investments (including loans and advances) and acquisitions; limitation on transactions with affiliates; and limitation on disposition of assets. We are also subject to financial covenants which include a funded debt to adjusted EBITDA ratio (as defined in the Senior Credit Facility, with adjusted EBITDA generally calculated as earnings before, among other adjustments, interest, taxes, depreciation, amortization, and stock-based compensation) not to exceed 3:1 as of the end of each fiscal quarter, and an interest coverage ratio of not less than 3:1 as of the end of each fiscal quarter. The Senior Credit Facility is secured by substantially all of our present and future assets and properties. As of September 30, 2012, we had $60.0 million available under the Senior Credit Facility. Our ability to borrow under the Senior Credit Facility fluctuates from time to time due to, among other factors, our borrowings under the facility and its funded debt to adjusted EBITDA ratio. As of September 30, 2012, we had $19.0 million outstanding under the Senior Credit Facility. As of September 30, 2012, we were in compliance with all financial covenants.

Our cash requirements fluctuate as a result of numerous factors, such as the extent to which we generate cash from operations, progress in research and development projects, competition and technological developments and the time and expenditures required to obtain governmental approval of our products. In . . .

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