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QDEL > SEC Filings for QDEL > Form 10-Q on 25-Oct-2013All Recent SEC Filings

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Form 10-Q for QUIDEL CORP /DE/


25-Oct-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 remainder of fiscal year 2013, including projections about our revenue, and expenses including the components thereof; the impact of legal claims and litigation matters and the sufficiency of our accruals for such matters; the sufficiency of our liquidity and capital resources; the sufficiency of our tax positions and the future impact of deferred tax assets or liabilities; the expected vesting periods of unrecognized compensation expense; the amount and timing of facility restructuring changes; expected receipts of milestone payments relating to grants and collaborative agreements and expenditures by us relating thereto; 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


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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.

Outlook

We continue to expect revenue and earnings growth for fiscal year 2013 as compared to 2012, driven primarily by increased sales of Sofia™ and molecular assays. We anticipate continued investment in research and development, divided relatively equally between the Sofia and molecular programs. In addition, we continue to invest in our U.S. sales organization and related marketing programs both of which are associated with recent product launches. 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 September 30, 2013 compared to the three months ended September 30, 2012

Total Revenues

The following table compares total revenues for the three months ended
September 30, 2013 and 2012 (in thousands, except percentages):



                                                  For the three months          Increase
                                                  ended September 30,          (Decrease)
                                                  2013             2012             $             %
Infectious disease net product sales           $    22,468       $ 21,622      $       846          4 %
Women's health net product sales                     8,118          8,741             (623 )       -7 %
Gastrointestinal disease net product sales           1,449          1,584             (135 )       -9 %
Other net product sales                                502            540              (38 )       -7 %
Royalty, license fees and grant revenue              1,002            511              491         96 %

Total revenues                                 $    33,539       $ 32,998      $       541          2 %

For the three months ended September 30, 2013, total revenue increased slightly to $33.5 million from $33.0 million for the three months ended September 30, 2012. The increase in total revenues was largely related to an increase in influenza sales offset by the timing of orders for our pregnancy and Group A Strep products. 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 September 30, 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 $15.3 million, or 46% of total revenues for the three months ended September 30, 2013, and was relatively constant compared to $14.9 million, or 45% of total revenues for the three months ended September 30, 2012.


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Operating Expenses

The following table compares operating expenses for the three months ended
September 30, 2013 and 2012 (in thousands, except percentages):



                                                           For the three months
                                                           ended September 30,
                                                   2013                            2012                   Increase (Decrease)
                                                        As a % of                       As a % of
                                         Operating        total          Operating        total
                                         expenses        revenues        expenses        revenues            $              %
Research and development                $     7,462             22 %    $     5,085             15 %    $     2,377           47 %
Sales and marketing                           8,658             26 %          7,776             24 %            882           11 %
General and administrative                    5,795             17 %          4,759             14 %          1,036           22 %
Amortization of intangible assets
from acquired businesses and
technology                                    2,171              6 %          1,728              5 %            443           26 %
Facility restructuring charge                   124              0 %             -              -               124          N/A

Research and Development Expense

Research and development expense for the three months ended September 30, 2013 increased from $5.1 million to $7.5 million primarily due to increased efforts associated with the development of and clinical trials related to our Savanna instrument and molecular assays.

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 September 30, 2013 increased from $7.8 million to $8.7 million driven by increased investment in our sales organization, including 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 September 30, 2013 increased from $4.8 million to $5.8 million largely related to the medical device excise tax that went into effect in 2013, resulting in $0.4 million of expense in the three months ended September 30, 2013. The increase also included $0.3 million of costs associated with the recent implementation of our new enterprise resource planning (ERP) system and $0.2 million of professional services related to business development activities.

We expect general and administrative expenses to increase in the remaining three 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 acquisitions of Diagnostic Hybrids, Inc. ("DHI"), BioHelix, and Andiatec. Amortization of intangible assets from acquired technology consists primarily of expense associated with purchased technology.

We expect amortization of intangible assets from acquired businesses and technology to increase in the remaining three months of 2013 relative to 2012 as a result of the BioHelix and Andiatec acquisitions during 2013.


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Facility Restructuring Charge

In 2013, we announced a plan to relocate our Santa Clara, California manufacturing operations to our facility in Ohio. Restructuring expense amounted to $0.1 million in the three months ended September 30, 2013. We estimate costs of $1.8 million will be incurred in 2013. Actual and expected expenses include employee benefits and facility relocation costs. We anticipate annual savings of $2.0 million beginning in 2014.

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 September 30, 2012 to $0 as of September 30, 2013 resulted in a reduction to interest expense of $0.1 million for the three months ended September 30, 2013.

Income Taxes

Our effective tax rate for the three months ended September 30, 2013 and 2012 was 29% and 56%, respectively. We recognized an income tax benefit of $1.8 million and $0.9 million for the three months ended September 30, 2013 and 2012, respectively. The primary difference between the September 30, 2013 and September 30, 2012 effective tax rate is due to the exclusion of the federal research and development credit due to the expiration of the statute in 2012.

Nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Total Revenues

The following table compares total revenues for the nine months ended
September 30, 2013 and 2012 (in thousands, except percentages):



                                                  For the nine months
                                                  ended September 30,            Increase (Decrease)
                                                  2013           2012              $                %
Infectious disease net product sales           $   89,199      $  66,735      $     22,464           34 %
Women's health net product sales                   25,112         25,638              (526 )         -2 %
Gastrointestinal disease net product sales          4,804          4,790                14            0 %
Other net product sales                             3,140          3,266              (126 )         -4 %
Royalty, license fees and grant revenue             2,985          1,387             1,598          115 %

Total revenues                                 $  125,240      $ 101,816      $     23,424           23 %

For the nine months ended September 30, 2013, total revenue increased 23% to $125.2 million from $101.8 million for the nine months ended September 30, 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 nine months ended September 30, 2013 as compared to minimal Sofia related sales for the nine months ended September 30, 2012 as the product had just been recently launched. This was somewhat offset by a slight decline in strep and pregnancy products due to timing of orders. Revenues in other product categories remained relatively constant period over period.

Royalty, license fees and grant revenue primarily relates to $1.9 million earned for the nine months ended September 30, 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.


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Cost of Sales

Cost of sales was $48.3 million, or 39% of total revenues for the nine months ended September 30, 2013, compared to $43.7 million, or 43% of total revenues for the nine months ended September 30, 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 23% 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, which have higher margins, were significantly higher in the first quarter of 2013 compared to 2012.

Operating Expenses

The following table compares operating expenses for the nine months ended
September 30, 2013 and 2012 (in thousands, except percentages):



                                                          For the nine months
                                                          ended September 30,
                                                  2013                           2012                   Increase (Decrease)
                                                       As a % of                      As a % of
                                        Operating        total         Operating        total
                                        expenses        revenues       expenses        revenues            $              %
Research and development               $    22,896             18 %   $    20,433             20 %    $     2,463         12.1 %
Sales and marketing                         24,162             19 %        21,989             22 %          2,173          9.9 %
General and administrative                  19,337             15 %        15,812             16 %          3,525         22.3 %
Amortization of intangible assets
from acquired businesses and
technology                                   5,957              5 %         5,165              5 %            792         15.3 %
Facility restructuring charge                  493              0 %            -              -               493          N/A

Research and Development Expense

Research and development expense for the nine months ended September 30, 2013 increased from $20.4 million to $22.9 million. The increase was due to increased development efforts associated with the development of our Savanna instrument and molecular assays including clinical trial costs for these products for the nine months ended September 30, 2013, which was partially offset by the reimbursement of $1.4 million of costs associated with our collaboration agreement with Life Technologies Corporation.

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 nine months ended September 30, 2013 increased from $22.0 million to $24.2 million. Starting at the end of the first quarter of 2012 and continuing through September 2013, we made a substantial investment in our sales organization to support new product growth, including an increase in personnel, commissions, 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.


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General and Administrative Expense

General and administrative expense for the nine months ended September 30, 2013 increased from $15.8 million to $19.3 million primarily due to the 2.3% medical device excise tax that went into effect in 2013, resulting in $1.5 million of expense in the nine months ended September 30, 2013. The increase was also partially due to $0.9 million of professional services related to business development activities and $0.7 million related to costs incurred for our new ERP system.

We expect general and administrative expenses to increase in the remaining three 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 acquisitions of DHI, BioHelix, and Andiatec. Amortization of intangible assets from acquired technology consists primarily of expense associated with purchased technology.

We expect amortization of intangible assets from acquired businesses and technology to increase in the remaining three months of 2013 relative to 2012 as a result of the BioHelix and Andiatec acquisitions during 2013.

Facility Restructuring Charge

In 2013, we announced a plan to relocate our Santa Clara, California manufacturing operations to our facility in Ohio. Restructuring expense amounted to $0.5 million in the nine months ended September 30, 2013. We estimate costs of $1.8 million will be incurred in 2013. Actual and expected expenses include employee benefits and facility relocation costs. We anticipate annual savings of $2.0 million beginning in 2014.

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 September 30, 2012 to $0 as of September 30, 2013 resulted in a reduction to interest expense of $0.4 million for the nine months ended September 30, 2013.

Income Taxes

For the nine months ended September 30, 2013 we recognized an income tax benefit of $2.7 million on pretax income of $3.5 million. During the three months ended June 30, 2013, we were notified by the Internal Revenue Service that the Congressional Joint Committee of Taxation had completed its review of and proposed no changes to our tax returns filed for the tax periods 2008 through 2010. As a result, we released tax reserves and related interest of approximately $3.5 million as a discrete item in the same quarter. Additionally, 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. Accordingly, 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 research activities is included in the full year effective tax rate.

For the nine months ended September 30, 2012, we recognized an income tax benefit of $2.5 million on a pretax loss of $6.2 million, which represents an effective tax rate of 40%.


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Liquidity and Capital Resources

As of September 30, 2013 and December 31, 2012, our principal sources of
liquidity consisted of the following (in thousands):



                                                      September 30,          December 31,
                                                          2013                   2012
Cash and cash equivalents                            $        10,248        $       14,856
Restricted cash included in prepaid expenses
and other current assets                                          -                  2,156

Cash, cash equivalents, and restricted cash          $        10,248        $       17,012


Working capital including cash, cash
equivalents, and restricted cash                     $        49,350        $       52,271


Amount available to borrow under the Senior
Credit Facility                                      $       132,000        $      110,000

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 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. None of the cash received under the grant was restricted at September 30, 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 $24.2 million during the nine months ended September 30, 2013. We had net income of $6.3 million and non-cash charges of $23.9 million related to depreciation and amortization of intangible assets and property, plant and equipment and stock-based compensation. We also had a decrease in accounts receivable of $13.2 million and an increase in inventories of $11.7 million due to the seasonal nature of our business as the 2012/2013 cold and flu season began earlier in the fourth quarter of 2012. 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 and non-cash charges of $21.5 million related to depreciation and amortization of intangible assets and . . .

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