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QUIDEL CORP /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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, changes in the buying patterns of our distributors and changes in the health care market and consolidation of our customer base; our development and protection of intellectual property; our development of new technologies, products and markets; 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 diagnostic products; adverse actions or delays in product reviews by the U.S. Food and Drug Administration (the "FDA"); changes in government policies; 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 and exposure to other litigation claims; interruption to our computer systems; competition for and loss of management and key personnel; international risks, including but not limited to, compliance with product registration requirements, exposure to currency exchange fluctuations and foreign currency exchange risk sharing arrangements, 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; 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," "plan," "intend," "goal," "project," "strategy," "future," 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 this fiscal year, including projections about our revenue, gross margins, and expenses; projected capital expenditures for this fiscal year, including the components thereof, and our source of funds for such expenditures; the sufficiency of our liquidity and capital resources; our strategy, goals and objectives; including, among others, continuing to make substantial investment in research and development and sales and marketing; that we may enter into additional foreign currency exchange risk sharing arrangements; our exposure to claims and litigation; expectations regarding grant revenues and expenditures in the remainder of 2014; that we will continue to incur substantial royalty and license expenses; the exposure of our money market assets to market fluctuation risk; 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, 2013, 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 7 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. 15-------------------------------------------------------------------------------- Table of Contents 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. Outlook We continue to see momentum in sales of Sofia and molecular assays. For the remainder of 2014, we will continue to focus on prudently managing our business and delivering long-term sustainable growth through the creation of a broader based diagnostic company targeting larger and faster growing markets. We anticipate continued and significant investment in research and development, focused primarily on 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. We also 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 June 30, 2014 compared to the three months ended June 30, 2013 Total Revenues The following table compares total revenues for the three months ended June 30, 2014 and 2013 (in thousands, except percentages): For the three months ended June 30, Increase (Decrease) 2014 2013 $ % Infectious disease net product sales $ 18,260 $ 17,322 $ 938 5 % Women's health net product sales 8,704 8,381 323 4 % Gastrointestinal disease net product sales 1,939 1,829 110 6 % Other net product sales 1,634 1,166 468 40 % Royalty, license fees and grant revenue 951 1,008 (57 ) (6 )% Total revenues $ 31,488 $ 29,706 $ 1,782 6 % For the three months ended June 30, 2014, total revenue increased to $31.5 million from $29.7 million for the three months ended June 30, 2013. The increase in total revenues was primarily due to stronger Influenza, Strep and Respiratory Syncytial Virus sales largely driven by market share gains on the Sofia platform. The increase in total revenues was also driven by $0.3 million higher veterinary product sales due to timing of customer orders. Royalty, license fees and grant revenue primarily relates to $0.7 million earned in both the three months ended June 30, 2014 and 2013, respectively, in conjunction with the Bill and Melinda Gates Foundation grant. Cost of Sales Cost of sales was $15.9 million, or 51% of total revenues for the three months ended June 30, 2014 compared to $13.7 million, or 46% of total revenues for the three months ended June 30, 2013. The increase in cost of sales as a percentage of total revenues is primarily driven by product mix, lower production volumes resulting in a decreased leverage of fixed overhead costs, and increased depreciation expense related to Sofia instruments. Operating Expenses The following table compares operating expenses for the three months ended June 30, 2014 and 2013 (in thousands, except percentages): 16-------------------------------------------------------------------------------- Table of Contents Three months ended June 30, 2014 2013 As a % of As a % of Operating total Operating total Increase (Decrease) expenses revenues expenses revenues $ % Research and development $ 8,127 26 % $ 7,945 27 % $ 182 2 % Sales and marketing $ 9,393 30 % $ 7,120 24 % $ 2,273 32 % General and administrative $ 5,843 19 % $ 5,901 20 % $ (58 ) (1 )% Amortization of intangible assets from acquired businesses and technology $ 2,208 7 % $ 2,022 7 % $ 186 9 % Research and Development Expense Research and development expense for the three months ended June 30, 2014 increased from $7.9 million to $8.1 million primarily due to increases of $0.9 million for Savanna project (our fully integrated molecular system program) costs and $0.6 million related to the acquisitions of BioHelix and AnDiaTec. This was offset by a reimbursement of research and development costs associated with a third-party collaboration agreement of $0.4 million for the three months ended June 30, 2014 as compared to no reimbursement in the prior year. We also recognized a one-time $0.9 million rebate from a key service provider on the Savanna project, which reduced research and development expense for the three months ended June 30, 2014 . 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. 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 June 30, 2014 increased from $7.1 million to $9.4 million driven by an additional investment in our sales organization through expansion and training of a larger sales force in 2014 relative to 2013 resulting in increased costs of $2.0 million. Other key components of this expense relate to continued investment in customer marketing programs. General and Administrative Expense General and administrative expense for the three months ended June 30, 2014 decreased slightly from $5.9 million to $5.8 million due primarily to a reduction of $0.7 million in professional services related to business development activities. This was partially offset by an increase in the number of employees and related costs of $0.5 million. 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., BioHelix, and AnDiaTec. Amortization of intangible assets from acquired technology consists primarily of expense associated with purchased technology. Interest Expense, net Interest expense primarily relates to interest paid on fees associated with the unused portion of the Senior Credit Facility and interest paid on our lease obligation associated with our San Diego facility. Income Taxes Our effective tax rate for the three months ended June 30, 2014 and 2013 was 33% and 76%, respectively. We recognized an income tax benefit of $3.4 million and $5.6 million for the three months ended June 30, 2014 and 2013, respectively. 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. Additionally, on January 3, 2013, the American Taxpayer Relief Act of 2012 was signed into law reinstating the federal 17-------------------------------------------------------------------------------- Table of Contents research 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 was included in the 2013 full year effective tax rate. The federal research credit expired for costs incurred subsequent to December 31, 2013, and as a result, there was no such federal research credit for the three months ended June 30, 2014. Six months ended June 30, 2014 compared to the three months ended June 30, 2013 Total Revenues The following table compares total revenues for the six months ended June 30, 2014 and 2013 (in thousands, except percentages): For the six months ended June 30, Increase (Decrease) 2014 2013 $ % Infectious disease net product sales $ 54,099 $ 66,731 $ (12,632 ) (19 )% Women's health net product sales 16,821 16,994 (173 ) (1 )% Gastrointestinal disease net product sales 3,563 3,355 208 6 % Other net product sales 1,685 2,638 (953 ) (36 )% Royalty, license fees and grant revenue 1,993 1,983 10 1 % Total revenues $ 78,161 $ 91,701 $ (13,540 ) (15 )% For the six months ended June 30, 2014, total revenue decreased to $78.2 million from $91.7 million for the six months ended June 30, 2013. The decrease in total revenues was primarily due to a weak cold and flu season during the fourth quarter of 2013 and first quarter of 2014 adversely affecting sales of Influenza and Strep product sales by $11.1 million. The decrease in total revenues was also driven by $1.0 million lower veterinary product sales due to timing of customer orders. Royalty, license fees and grant revenue primarily relates to $1.3 million earned in both the six months ended June 30, 2014 and 2013, in conjunction with the Bill and Melinda Gates Foundation grant. Cost of Sales Cost of sales was $36.1 million, or 46% of total revenues for the six months ended June 30, 2014 compared to $33.2 million, or 36% of total revenues for the six months ended June 30, 2013. The increase in cost of sales as a percentage of total revenues is primarily driven by decreased volumes due to the weak cold and flu season during the fourth quarter of 2013 and the first quarter of 2014. Additional contributing factors included unfavorable product mix, lower production volumes resulting in a decreased leverage of fixed overhead costs, and increased depreciation expense related to Sofia instruments. Operating Expenses The following table compares operating expenses for the six months ended June 30 and 2013 (in thousands, except percentages): Six months ended June 30, 2014 2013 As a % of As a % of Operating total Operating total Increase (Decrease) expenses revenues expenses revenues $ % Research and development 17,208 22 % 15,469 17 % $ 1,739 11 % Sales and marketing 19,320 25 % 15,562 17 % $ 3,758 24 % General and administrative 13,070 17 % 13,264 14 % $ (194 ) (1 )% Amortization of intangible assets from acquired businesses and technology 4,416 6 % 3,786 4 % $ 630 17 % 18-------------------------------------------------------------------------------- Table of Contents Research and Development Expense Research and development expense for the six months ended June 30, 2014 increased from $15.5 million to $17.2 million primarily due to increases in spend on our molecular platforms, totaling $2.3 million. Also contributing to the increase was a reduction in the reimbursement of research and development costs associated with a third-party collaboration agreement of $0.7 million for the six months ended June 30, 2014 as compared to no reimbursement in the prior year. These increases were offset by a one-time $0.9 million rebate from a key service provider on the Savanna project, which reduced research and development expense in the second quarter of 2014. 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. 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 six months ended June 30, 2014 increased from $15.6 million to $19.3 million. $3.6 million of the increase was due to the expansion and training of a larger sales force in 2014 relative to 2013. Other key components of this expense relate to continued investment in customer marketing programs. General and Administrative Expense General and administrative expense for the six months ended June 30, 2014 decreased slightly from $13.3 million to $13.1 million related to decreases in medical device excise tax of $0.3 million and professional services related to business development activities of $0.7 million. These decreases were offset by increases in the number of employees and related costs of $0.9 million. 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., BioHelix, and AnDiaTec. Amortization of intangible assets from acquired technology consists primarily of expense associated with purchased technology. Interest Expense, net 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. Income Taxes For the six months ended June 30, 2014 and 2013, we recognized an income tax benefit of $4.3 million and $0.9 million, which represents an effective tax rate of 34% and (10)%, respectively. During the second quarter of 2013, the Company was notified by the Internal Revenue Service that the Congressional Joint Committee of Taxation had completed its review and proposed no changes to the Company's tax returns filed for the tax periods 2008 through 2010. As a result, the Company released tax reserves and related interest of approximately $3.5 million as a discrete item. Additionally, on January 3, 2013, the American Taxpayer Relief Act of 2012 was signed into law reinstating the federal research credit for the 2012 and 2013 years. Accordingly, the benefit related to the 2012 federal research 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 was included in the 2013 full year effective tax rate. The federal research credit expired for costs incurred subsequent to December 31, 2013, and as a result, there was no such benefit for the six months ended June 30, 2014. Liquidity and Capital Resources As of June 30, 2014 and December 31, 2013, the principal sources of liquidity consisted of the following (in thousands): 19-------------------------------------------------------------------------------- Table of Contents December 31, June 30, 2014 2013 Cash and cash equivalents $ 18,075 $ 8,388 Restricted cash included in prepaid expenses and other current assets - 969 Cash, cash equivalents, and restricted cash $ 18,075 $ 9,357 Working capital including cash, cash equivalents, and restricted cash $ 52,409 $ 54,610 Amount available to borrow under the Senior Credit Facility $ 37,400 $ 140,000 During the year ended December 31, 2013, the Company received cash, pursuant to a grant agreement, which was restricted as to use until expenditures contemplated in the grant were made. As of December 31, 2013, the Company recorded this restricted cash as a component of prepaid expenses and other current assets as the Company anticipated making expenditures under the grant in 2014. During the six months ended June 30, 2014, the Company made all of the expenditures contemplated in the grant, thereby reducing the restricted cash from $1.0 million to $0. 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 $17.3 million during the six months ended June 30, 2014. We had a net loss of $8.4 million, including non-cash charges of $13.7 million of depreciation and amortization of intangible assets and property and equipment and $3.5 million of stock-based compensation. We also had a decrease in accounts receivable of $12.7 million due to the seasonal nature of our business. Cash provided by operating activities was $29.3 million during the six months ended June 30, 2013. We had net income of $10.6 million, including non-cash charges of $16.2 million of depreciation and amortization of intangible assets and property and equipment, and stock-based compensation. Our investing activities used $6.7 million during the six months ended June 30, 2014 primarily related to the acquisition of production equipment, instruments available for lease and building improvements. Our investing activities used $22.0 million during the six months ended June 30, 2013 primarily related to the $9.2 million of net cash used for the acquisition of BioHelix. In addition, we used cash for investing activities associated with the acquisition of production and scientific equipment, and building improvements. We are planning approximately $5.0 million in capital expenditures for the remainder of 2014. The primary purpose for our capital expenditures is to acquire manufacturing and scientific equipment, implement facility improvements, and for the purchase or development of information technology. We plan to fund these capital expenditures with cash flow from operations and other available sources of liquidity. Cash used for financing activities of $0.9 million during the six months ended June 30, 2014 primarily related to repurchases of common stock of $2.0 million and payments on acquisition contingencies of $1.1 million, which were partially offset by proceeds from issuance of common stock of $2.4 million. Cash used for financing activities of $0.2 million during the six months ended June 30, 2013 primarily related to repayments under our Senior Credit Facility of $5.0 million, which were mostly offset by proceeds from issuance of common stock, net of repurchases of $4.9 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 June 30, 2014 and December 31, 2013, we had $1.0 million and $1.2 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 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 20-------------------------------------------------------------------------------- Table of Contents funded debt to adjusted EBITDA ratio. As of June 30, 2014 and December 31, 2013, the Company had no borrowing outstanding under the Senior Credit Facility. As of June 30, 2014, the Company was 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 June 30, 2014, 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. Recent Accounting Pronouncement In May 2014, the FASB issued guidance codified in ASC 606, Revenue Recognition - Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition. This guidance is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The guidance is effective for annual reporting periods beginning after December 15, 2016, with early adoption prohibited. The Company is currently evaluating the impact of this guidance and will adopt the standard in the first quarter of 2017. 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, bad debts, inventories, intangible assets, software development costs, stock-based compensation, restructuring, contingencies and litigation, contingent consideration, 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, 2013. |