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Quidel Touts Product Pipeline Despite Revenue Headwinds

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NEW YORK – Quidel highlighted a full pipeline of new products on Wednesday, which included plans to develop its point-of-care Lyme testing business.

On a conference call to discuss its its third quarter earnings results, Quidel also provided an update on its ongoing litigation with Beckman Coulter, and announced the completion of the integration of the Alere businesses which it acquired from Abbott two years ago. 

The San Diego-based firm also effectively lowered its guidance for the year. It had previously guided revenues of $535 million for full-year 2019, but on the call CEO Douglas Bryant outlined an currency-effect headwind of $5 million as well as a sales misstep in its toxicology business that would likely impact its 2019 earnings by about $4 million.

Bryant explained that early in the year Quidel had trained its sales team to sell a new toxicology product — the Triage TOX Drug Screen that detects metabolites of nine classes of drugs in urine using the firm's Triage MeterPro instrument. The test was granted clearance from the US Food and Drug Administration in June and the launch of the product was delayed, so the firm then scheduled a refresher round of sales training later in the year. Its sales teams apparently chose to wait to begin calling on customers until after the second training occurred, Bryant said, setting sales behind by about one quarter.

While he described this commercial misstep as "easily fixable," he also emphasized his frustration. "I was not happy. Because that shouldn't happen," he said, noting the firm has since held a days-long meeting to make sure it avoids a similar scenario in the future.

However, despite this "self-inflicted wound," Bryant was also emphatic that new product launches will boost Quidel's sales going forward.

"Never in my 10 years with this company has the opportunity for revenue growth been as exciting," he said. "At last, not only do we hear the wind blowing, but we can see the trees moving. Finally, we have become a product development company of significance, one with potential for revenue and margin growth driven in large part by the introduction of numerous new products," he added.

Specifically, in the first half of next year, Quidel expects to introduce Sofia assays for Clostridium difficile toxins, a Tier 2 Lyme test, and a four-plex Sofia cartridge for flu, respiratory syncytial virus, and human metapneumoviruses, as well as "simpler, faster" bioassays for Graves and Hashimoto's diseases.

By the middle of next year, the firm expects to launch five more assays. These include tests for gastrointestinal pathogens and conditions, including lactoferrin, Helicobacter pylori, parasites, Shiga toxin, and campylobacter.

By the end of 2020, the company plans to introduce a new Sofia Streptococcus A test called Sofia Strep 98, as well as assays for two community-acquired pneumonia infectious agents, Strep pneumo and legionella. 

Bryant also confirmed a previously announced timeline for the launch of the firm's Savanna molecular diagnostic product, which has been in development since approximately 2011. Last quarter, Bryant said the firm is developing "mini-panels" of multiplexed tests for the system and would hold off launching the instrument until it had a significant menu of assays.

Quidel has now developed seven assay panels for the instrument, Bryant said, and it has now finalized its cartridge design. Bryant said he is "highly confident" the design will enable manufacturing of "millions of tests at very high yields."

The firm is now in the process of moving to the instrument development phase, Bryant said. "We should have[the] instrument and at least one or more cartridge types ready for submission [to the FDA] toward the end of next year," he said, noting that the firm expects Savanna to enter the US market in 2021.

Bryant did not divulge the specifics of the panels. However, as previously reported, Quidel illustrated a Savanna assay pipeline at a recent analyst day presentation that included mini-panels for GI pathogens, sexually transmitted infections, respiratory viruses, pharyngitis, and vaginitis, as well as assays for HIV and methicillin-resistant Staphylococcus aureus. It also noted that the system is being designed for low-volume and potentially CLIA-waived settings, and will run either traditional PCR or the firm's helicase-dependent amplification chemistry for sample types that don't require extraction. In that presentation Savanna was described as a low-cost, fully integrated, "sample-to-answer" molecular diagnostic system, with target cartridge cost of below $5 and instrument cost of $10,000. 

For the point-of-care Lyme testing market Quidel is attempting to cultivate with its CLIA-waived Sofia Lyme test that launched last year, Bryant downgraded his metaphoric enthusiasm somewhat. "We hear the wind blowing, but the trees are not moving yet at this point," he said.

Quidel is "busy growing and developing a physician office segment [for Lyme] that doesn't exist today," Bryant said. He referred to the cleared test as a Tier 1 assay, noting that the market being cultivated for this test includes urgent care settings. The aforementioned Tier 2 assay in development "would be effectively a confirmatory assay and also a replacement for Western blot, all of which could be done in a physician's office while the patient waits." 

In Q3, the firm shipped "a couple of hundred" Sofia systems to Lyme customers, mainly in the Northeastern US, Bryant said, noting that 70 percent of these customers also included flu and RSV tests in their contracts.

"We're in the hundreds, not the thousands yet, so it's still early days. I didn't think it was an instant market; I knew we had to spend some time developing the market," he added, noting that Quidel has "allocated several million dollars towards a number of marketing campaigns to create awareness in areas of the country that have some level of [Lyme] prevalence."

Regarding the Beckman Coulter litigation, Bryant said that a state appeals court in California had issued a written order regarding Quidel's writ petition on August 29 of this year, ruling in the firm's favor. Beckman petitioned for a rehearing by the same court, and the petition was denied on September 13. Beckman then filed a petition for review by the Supreme Court of California challenging the appeal court's order that granted Quidel's writ petition. Quidel has filed its answer, and expects the court to decide whether to take the case by the end of the year, Bryant said.

"Because of certain developments in another case regarding the same business law, we understand that there is a significant possibility the court will grant review to clarify the law in this area," he said. "If that happens, we remain confident that we will prevail. If the court, on the other hand, does not grant the review, we will return to the trial court where we also are highly confident that we will prevail."

And, regarding the integration of the Alere business which Quidel acquired from Abbott two years ago, Bryant said the firm has effectively completed its integration process.

The firm integrated the warehouse operations at its Summers Ridge facility in San Diego in July, moving off Abbott's ordering and distribution system, "and realizing $2.6 million in annualized synergies," Bryant said. It also successfully migrated India and Brazil to its billing in August, completing the order process for 88 of the 89 countries it sells to, with Japan, the final country, expected to go live November 1, giving the firm 100 percent control of the business.

"At this point, we are on track to deliver $20.4 million in synergies by year-end, slightly better than we had planned," Bryant said.

Investment banks were cautious about Bryant's overall message. JP Morgan analyst Tycho Peterson wrote in a research note that he continues to believe that the organic growth that Quidel aspires to, greater than than 10 percent "remains a 'show-me' story." He maintained a Neutral rating on Quidel's stock, and will look for evidence of successful commercialization of pipeline assets and stable or accelerating cardiac assay performance as the key to a more constructive view.

At Barclays, Jack Meehan was also focused on Quidel's growth drivers and "healthy pipeline," but the delay of the toxicology product stymied a better outlook. He lowered Barclay's price target for Quidel's shares to $70 from $77.

Additionally, Meehan said he is "taking a more cautious outlook on the timing of the Savanna launch," since he understands Quidel to have slid slightly in its timeline from a previously suggested start of US clinical trials for Savanna at the end of 2019 to now late in 2020. However, "Strategically, we continue to see significant value in Quidel's positioning in point-of-care testing, and reiterate our Overweight rating," Meehan wrote.

Brian Weinstein at William Blair reiterated an Outperform rating "despite acknowledging frustration with the string of small little nicks that have put a weight on growth this year," and said that the accumulated adjustments over the year have "kept results in check and … kept the company off the radar screen of most investors."

Canaccord Genuity analyst Mark Massaro reiterated a Buy rating for Quidel and a price target of $70. He noted that a strengthening balance sheet suggests some M&A deal making appears to be on the horizon and reminded investors that Quidel is focusing on about three to five potential targets with the goal of acquiring $150 million to $250 million of revenue.

In mid-afternoon trading on the Nasdaq Thursday, shares of Quidel were down nearly 5 percent to $55.72.