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QDEL > SEC Filings for QDEL > Form 10-Q on 24-Apr-2013All Recent SEC Filings

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Form 10-Q for QUIDEL CORP /DE/


24-Apr-2013

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, fluctuations in our operating results resulting from seasonality; the timing of the onset, length and severity of cold and flu seasons; government and media attention focused on influenza and the related potential impact on humans from novel influenza viruses; adverse changes in competitive conditions in domestic and international markets; the reimbursement system currently in place and future changes to that system; changes in economic conditions in our domestic and international markets; changes in sales levels as it relates to the absorption of our fixed costs; lower than anticipated market penetration of our products; the quantity of our product in our distributors' inventory or distribution channels and changes in the buying patterns of our distributors; our development of new technologies, products and markets; our development and protection of intellectual property; our reliance on a limited number of key distributors; our reliance on sales of our influenza diagnostics tests; our ability to manage our growth strategy, including our ability to integrate companies or technologies we have acquired or may acquire; intellectual property risks, including but not limited to, infringement litigation; limitations and covenants in our senior credit facility; that we may incur significant additional indebtedness; our need for additional funds to finance our operating needs; volatility and disruption in the global capital and credit markets; acceptance of our products among physicians and other healthcare providers; competition with other providers of POC diagnostic products; changes in government policies; adverse actions or delays in product reviews by the U.S. Food and Drug Administration (the "FDA"); compliance with other government regulations, such as safe working conditions, manufacturing practices, environmental protection, fire hazard and disposal of hazardous substances; third-party reimbursement policies; our ability to meet demand for our products; interruptions in our supply of raw materials; product defects; business risks not covered by insurance; the loss of key personnel; international risks, including but not limited to, compliance with product registration requirements, exposure to currency exchange fluctuations, longer payment cycles, lower selling prices and greater difficulty in collecting accounts receivable, reduced protection of intellectual property rights, political and economic instability, taxes, and diversion of lower priced international products into US markets; our failure to maintain adequate internal control over financial reporting; volatility in our stock price; dilution resulting from future sales of our equity; and provisions in our charter documents and Delaware law that might delay stockholder actions with respect to business combinations or the election of directors. 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 upcoming fiscal year, including projections about our revenue, gross margins, and expenses; the sufficiency of our liquidity and capital resources; the sufficiency of our tax position and the future impact of deferred tax assets or liabilities; the expected vesting periods of unrecognized compensation expense; expected receipts of milestone payments relating to grants and collaborative agreements; that we may enter into foreign currency risk sharing agreements; and our intention to continue to evaluate technology and Company acquisition opportunities. 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, 2012, 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 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, public health 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 in Japan and Europe through distributor arrangements.


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Outlook

We anticipate revenue and earnings growth for fiscal year 2013 as compared to 2012, driven primarily by increased sales and margin of Sofia™ and molecular assays. We expect to continue a significant investment in research and development, divided relatively equally between the Sofia and molecular programs. Further, we expect a modest increase in the size of our U.S. sales organization concomitant with an expected higher number of product introductions versus prior years. While our main focus is on prudently managing our business and delivering solid financial results, we will continue to evaluate opportunities to acquire new product lines, technologies and companies that would enable us to more quickly build a broader-based diagnostic company.

Three months ended March 31, 2013 compared to the three months ended March 31, 2012

Total Revenues

The following table compares total revenues for the three months ended March 31,
2013 and 2012 (in thousands, except percentages):



                                                  For the three months
                                                    ended March 31,               Increase (Decrease)
                                                  2013             2012             $                %
Infectious disease net product sales           $    49,406       $ 26,354      $     23,052           87 %
Women's health net product sales                     8,613          8,259               354            4 %
Gastrointestinal disease net product sales           1,526          1,610               (84 )         -5 %
Other net product sales                              1,474          1,301               173           13 %
Royalty, license fees and grant revenue                976            436               540          124 %

Total revenues                                 $    61,995       $ 37,960      $     24,035           63 %

For the three months ended March 31, 2013, total revenue increased 63% to $62.0 million from $38.0 million for the three months ended March 31, 2012. The increase in total revenues was largely related to a stronger 2012/2013 cold and flu season as compared to the prior season. The increase in total revenues was also driven by sales of Sofia related products in the three months ended March 31, 2013 as compared to minimal Sofia related sales for the three months ended March 31, 2012 as the product had just been recently launched. Revenues in other product categories remained relatively constant period over period.

Royalty, license fees and grant revenue primarily relates to $0.6 million earned for the three months ended March 31, 2013 in conjunction with the Bill and Melinda Gates Foundation grant as more fully described in Note 1 in the Notes to the Consolidated Financial Statements included in this quarterly report.

Cost of Sales

Cost of sales was $19.5 million, or 32% of total revenues for the three months ended March 31, 2013, compared to $14.8 million, or 39% of total revenues for the three months ended March 31, 2012. The absolute dollar increase in cost of sales is primarily related to the variable nature of direct costs (material and labor) associated with the 63% increase in total revenues. The decrease in cost of sales as a percentage of total revenues is primarily driven by a shift in product mix as flu sales were higher in the first quarter of 2013 compared to 2012.


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Operating Expenses

The following table compares operating expenses for the three months ended
March 31, 2013 and 2012 (in thousands, except percentages):



                                                         For the three  months
                                                            ended March 31,
                                                  2013                             2012                   Increase (Decrease)
                                                       As a %  of                       As a % of
                                       Operating         total           Operating        total
                                       expenses         revenues         expenses        revenues            $               %
Research and development              $     7,524               12 %    $     8,504             22 %    $      (980 )        -12 %
Sales and marketing                         8,442               14 %          6,536             17 %          1,906           29 %
General and administrative                  7,529               12 %          5,924             16 %          1,605           27 %
Amortization of intangible assets
from acquired businesses and
technology                                  1,764                3 %          1,718              5 %             46            3 %

Research and Development Expense

Research and development expense for the three months ended March 31, 2013 decreased from $8.5 million to $7.5 million primarily due to the reimbursement of $1.1 million of costs in the first quarter of 2013 associated with our collaboration agreement with Life Technologies Corporation, as more fully described in Note 1 in the Notes to the Consolidated Financial Statements included in this quarterly report.

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, and 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 March 31, 2013 increased from $6.5 million to $8.4 million. Starting at the end of the first quarter of 2012 and continuing throughout 2012, we made a substantial investment in our sales organization to support new product growth, including an increase in personnel, travel, and training costs related to new products. Other key components of this expense relate to continued investment in existing products and customer marketing programs.

General and Administrative Expense

General and administrative expense for the three months ended March 31, 2013 increased from $5.9 million to $7.5 million primarily due to the 2.3% medical devise excise tax that went into effect in 2013, resulting in $0.7 million of expense in the three months ended March 31, 2013. The increase was also partially due to $0.4 million of professional services related to business development activities. An additional driver of the increase was an increase in incentive compensation of $0.3 million for the three months ended March 31, 2013 related to an increase in total revenues and earnings.

We expect general and administrative expenses to increase in the remaining nine months of 2013 relative to 2012 as a result of the 2.3% medical device excise tax.

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 Diagnostic Hybrids, Inc. ("DHI"). Amortization of intangible assets from acquired technology consists primarily of expense associated with purchased technology.


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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 principal balance under the line of credit from $19.0 million as of March 31, 2012 to $0 as of March 31, 2013 resulted in a reduction to interest expense of $0.2 million for the three months ended March 31, 2013.

Income Taxes

Our effective tax rate for the three months ended March 31, 2013 and 2012 was 27.2% and 37.0%, respectively. We recognized an income tax expense of $4.6 million and $30,000 for the three months ended March 31, 2013 and 2012, respectively. On January 3, 2013, the American Taxpayer Relief Act of 2012 was signed into law reinstating the federal research and development credit for the 2012 and 2013 years. As a result, the benefit related to the 2012 federal research and development credit of approximately $0.5 million was recorded in the first quarter of 2013 as a discrete item. The benefit related to 2013 is included in the full year effective tax rate.

Liquidity and Capital Resources

As of March 31, 2013 and December 31, 2012, our principal sources of liquidity
consisted of the following (in thousands):



                                                          March 31,          December 31,
                                                             2013                2012
Cash and cash equivalents                                 $   44,375        $       14,856
Restricted cash included in prepaid expenses and
other current assets                                           1,523                 2,156

Cash, cash equivalents, and restricted cash               $   45,898        $       17,012

Working capital including cash, cash equivalents,
and restricted cash                                       $   68,738        $       52,271

Amount available to borrow under the Senior Credit
Facility                                                  $  140,000        $      110,359

During the year ended December 31, 2012, we received cash, pursuant to a grant agreement, which is restricted as to use until expenditures contemplated in the grant are made. As of March 31, 2013 and December 31, 2012, we recorded this restricted cash as a component of prepaid expenses and other current assets as we anticipate making expenditures under the grant in 2013. The amount available to us under our Senior Credit Facility can fluctuate from time to time due to, among other factors, our funded debt to adjusted EBITDA ratio.

Cash provided by operating activities was $34.4 million during the three months ended March 31, 2013. We had net income of $12.4 million, including non-cash charges of $9.2 million of depreciation and amortization of intangible assets and property and equipment, and stock-based compensation. We also had a decrease in accounts receivable of $18.5 million due to the seasonal nature of our business. Cash provided by operating activities was $3.7 million during the three months ended March 31, 2012. We had net income of $51,000, including non-cash charges of $7.4 million of depreciation and amortization of intangible assets and property and equipment, and stock-based compensation.

Our investing activities used $3.7 million during the three months ended March 31, 2013 primarily related to the acquisition of production equipment, instruments available for lease and building improvements. Our investing activities used $15.9 million during the three months ended March 31, 2012 primarily related to the acquisition of intangibles associated with our exercise of an option under an agreement with Alere, 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 three months ended March 31, 2012.

Cash used for financing activities of $1.2 million during the three months ended March 31, 2013 primarily related to repayments under our Senior Credit Facility of $5.0 million, which were partially offset by proceeds from issuance of common stock, net of repurchases of $3.0 million. Cash used for financing activities of $27.6 million during the three


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months ended March 31, 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 as well as 31,304 shares of our common stock withheld from employees in connection with payment of minimum tax withholding obligations related to the lapse of restrictions on certain restricted stock awards at a cost of approximately $0.5 million.

On August 10, 2012, we entered into an amended and restated $140.0 million Senior Credit Facility, which matures on August 10, 2017. The Senior Credit Facility amended and restated our $120.0 million senior secured credit facility dated October 8, 2008. As part of this amendment, we incurred an additional $1.0 million in deferred financing costs related to the Senior Credit Facility. We had previously recorded $0.6 million related to the original credit facility. As of March 31, 2013 and December 31, 2012, we had $1.4 million and $1.5 million of deferred financing costs 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 highest 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 margin 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. The weighted average interest rate was 1.46% for the three months ended March 31, 2013. 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) 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. 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 our funded debt to adjusted EBITDA ratio. At March 31, 2013 and December 31, 2012, we had $0 and $5.0 million outstanding under the Senior Credit Facility, respectively. As of March 31, 2013, 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 addition, we intend to continue to evaluate candidates for acquisitions or technology licensing. If we determine to proceed with any such transactions, we may need to incur additional debt, or issue additional equity, to successfully complete the transactions. Based on our current cash position and our current assessment of future operating results, we believe that our existing sources of liquidity will be adequate to meet our operating needs during the next 12 months.

Off-Balance Sheet Arrangements

At March 31, 2013, we did not have any relationships or other arrangements with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

New Accounting Standard

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, ("ASU 2012-02"), to simplify the testing for a decrease in value of intangible assets such as trademarks, patents, and distribution rights. The amended standard reduces the cost of accounting for indefinite-lived intangible assets, especially in cases where the likelihood of impairment is low. The changes permit businesses and other organizations to first use subjective criteria to determine if an intangible asset has lost value. The amendments to U.S. GAAP were effective January 1, 2013. The adoption of ASU 2012-02 did not have a material effect on our consolidated financial position or results of operations.


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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, customer programs and incentives, reserve for uncollectible accounts, inventory valuation, intangible assets, software development costs, stock-based compensation, restructuring, contingencies and litigation, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

A comprehensive discussion of our critical accounting policies and management estimates is included in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2012.

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