Quidel Corp (QDEL) Q4 2018 Earnings Conference Call Transcript

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Quidel Corp  (NASDAQ:QDEL)
Q4 2018 Earnings Conference Call
Feb. 13, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation Fourth Quarter and Full-Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later instructions will be given for the question-and-answer session. (Operator Instructions) I’d now like to turn the call over to Mr. Ruben Argueta, Quidel’s Director of Investor Relations. Please go ahead.

Ruben ArguetaDirector of Investor Relations

Thank you, operator. Good afternoon everyone and thank you for joining today’s call. With me today is our President and Chief Executive Officer, Doug Bryant; Randy Steward, our Chief Financial Officer.

Our fourth quarter and full-year 2018 earnings release is now available on ir.quidel.com, our Investor Relations website. We will also post our prepared remarks on the Presentations tab of our IR website following the conclusion of this call on February 13th for a period of 24 hours.

Please note that this conference call will include forward-looking statements within the meaning of federal securities laws. It is possible that actual results and performance could differ significantly from these stated expectations. For a discussion of risk factors, please review Quidel’s annual report on Form 10-K, registration statements and subsequent quarterly reports on Form 10-Q as filed with the SEC.

Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 13, 2019. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law.

Today, Quidel released financial results for the three months and full year ended December 31, 2018. If you have not received our news release or if you’d like to be added to the Company’s distribution list, please contact me at 858-646-8023. Following Doug’s comments, Randy will briefly discuss our financial results. Then we’ll open the call to your questions. I’ll now hand the call over to Doug for his comments.

Douglas C. BryantPresident and Chief Executive Officer

Thank you, Ruben and good afternoon everyone. Thanks for listening in on the call. We have a lot to do this year, 2019, and there are many great exciting opportunities ahead of us. So I won’t spend too much time perhaps today looking in the rearview mirror. Having said that, Q4 2018 was a solid quarter for us and 2018 overall was extraordinary. Early in the year, at our Analyst Day in Chicago, we communicated several milestones, several expectations for the year. We said first that our commercial leadership and their teams could fully absorb the larger sales and marketing responsibilities, establishing a solid revenue baseline for the acquired Triage products while continuing to grow our legacy immunoassay and molecular businesses as we had in the past.

We said that we would do this by recruiting and installing the necessary people and infrastructure internationally, but would not need to add significant resources for the US. We said that we believed that we would reach $250 million for the combined Triage businesses globally. Instead, we did $267 million in revenue for the year. We said that we would deliver 10% in revenue growth for the base, driven by new Sofia and Solana placements. Instead, we did 11% (ph).

In terms of the integration of the newly acquired assets, we said that by the end of the year 95% of order-to-cash with the Triage businesses would be under our control and that we would achieve $10 million in annual run rate savings. By the end of Q1 2019, when the Chinese business goes live, we will be at 96% and at the end of 2018, our cost savings run rate was at $13.3 million. And finally in terms of financial performance, we said that we plan to reach 32% in terms of EBITDA as a percentage of revenue for the year, and that was cash and through a share exchange for our convertible debt, we intended to lower our leverage ratio to below 1.5 times. For 2018, EBITDA was 33% of revenue and our leverage ratio at year-end was at 0.9 times.

In summary, each of the key metrics that we announced at our Analyst Day was accomplished, except for a minor delay with bringing China on board and under our control. Before moving off 2018, allow me to mention a few other notable achievements. First, we placed nearly 10,000 Sofia instruments, net of replacements. Sofia truly is a flagship product for us and the franchise is doing extremely well. Second, the molecular franchise is gaining traction, with Solana reagent kit revenue doubling year-over-year, helped greatly by the newer products HSV, VZV, and C. difficile.

And third, our R&D and regulatory teams haven’t slowed down at all. Three products, Sofia Vitamin D, Sofia Lyme with the European (inaudible) and TriageTrue High Sensitivity Troponin I, each received the CE Mark and are cleared for sale in Europe. Four products, the CLIA-waived whole blood finger stick version of Sofia Lyme, the serum version of the lyme test, Solana Bordetella complete, which includes both pertussis and parapertussis and QuickVue influenza, which meets the FDA’s reclass guidelines were each FDA-cleared to be marketed in the United States, and we made progress on the 21 significant R&D programs that are currently funded, including Savanna reagents, the instrument and test cartridges.

Moving forward, as I’ve said earlier, 2019 is expected to be another highly productive year for us on many fronts. In addition to selling our current products, our global commercial teams will have new products to commercialize. The European team will be spending time on a limited targeted launch of TriageTrue Troponin I, as well as the Sofia vitamin D and lyme disease assays. And in the US, the commercial organization will be focused on adding Sofia Lyme to the thousands of Sofia 2 CLIA-waived sites starting this summer. Importantly, we will do all of that leveraging their current infrastructure as we did when we added the cardiovascular and toxicology portfolio, which continues to be a focus.

In fact, as I mentioned earlier, 2018 revenues were $267 million. During the Q&A, Randy can take you through the puts and takes that created the lumpiness that we saw during the year, but at the end of the day we think that we have a handle on the overall growth rate regardless of when and in which quarter our distribution partners order products. For 2019, we expect to grow those businesses year-over-year, in total by 4%. In terms of near-term product development in 2019, we expect to initiate clinical trials for Sofia 2 Strep 98 and for Sofia 2 C. difficile in a month or so, both of which we plan to commercialize in early 2020, if not sooner, depending on the timing of FDA clearance.

Regarding Savanna, our excitement increases as we move closer toward product launch. There are always technical issues to resolve, but our confidence in our ability to launch an exceptional product is quite high. I said before that we intend to have a flawless launch with four or more multiplex assay cartridges, FDA-cleared and immediately available to our customers. Therefore, the timing of our launch is highly dependent on us conducting multiple clinical trials simultaneously, CE Mark and then review by the FDA, of course. And just so everyone knows, I will trade off timing of lunch just to hit a date for flawless execution and significant market impact with the initial global launches of Savanna. I think it’s that important to us.

Having said all that, notwithstanding a major obstacle that I’m not aware of, I see nothing that would have a material impact, favorable or unfavorable, on the 2023 forecast that we presented at our Analyst Day last year. Switching gears, it’s February and in fact the same Valentine’s Day week of the month in the last two years when influenza peaked before declining. So it’s probably a very good time to talk about flu this quarter.

Using data in our wide arena (ph) database and looking at the period ending Friday February 8th, we see a very slight reduction and positivity rates for a handful of states and a slight hint that influenza B may be starting to come up. There is still a lot of influenza A in the United States. However, I think we can expect the positivity rates to remain high for a few weeks — for a few more weeks. Therefore, people presenting with ILI should continue to be tested and we should expect little reduction and test rates.

Positivity rates for those patients tested in most states are at 25% to 35%, which is still very high. In terms of volumes of tests, it’s important to look at the states with larger populations with greater propensity to test. California and Florida positivity rates and volumes have been high for several weeks now and Texas is still climbing. New York and North Carolina are still quite high. There are some states with positivity rates above 40%, but those are lower volume states.

Another way to assess the magnitude of the season is to look graphically at out-sales by week from distribution to our customers over that last few seasons. Despite an apparent slower ramp up, the season versus last year, the last four weeks have shown an acceleration that is unprecedented. At this point the range of testing that we had suggested for this quarter, which — what was a reduction from last year’s Q1 seems appropriate and we are sticking with our internal projection for influenza testing revenue at this point.

Finally, before closing, I’ll comment briefly on the Beckman matter. With respect to the ongoing Beckman litigation, on January 18th of this year we filed our petition for a writ of mandate with the Court of Appeal seeking immediate appellate review of the Court’s December 7th, 2018 ruling. Whether the Court of Appeal will review the merits of the writ petition is discretionary and it’s common for the Court of Appeal to require the parties to complete the underlying trial court litigation before appellate review.

While we believe that our writ is well founded and should be granted now, we acknowledge that on most occasions Courts of Appeal prefer to hear all matters after the end of the entire case. On February 7th, 2019, the trial court stayed the remaining litigation on Beckman’s second cause of action, pending a decision from the Court of Appeal on whether it will hear the merits of quite else writ petition. The trial court also vacated all deadlines in the matter, including the trial date.

Once the Court of Appeal issues its decision on whether to review the merits of quite else writ petition, the parties are to report back to the trial court. We expect that to occur in the March or April time frame. And once again we remain extremely confident that at the end of this process that we will prevail and our agreements with Beckman will remain in effect.

In conclusion, what a quarter, what a year, and what a Company. 2018 was truly a year for the ages, a year not possible without the unbelievable talent and can-do attitude that we have across all of the Company’s functions. And importantly, a year that positions us for solid growth over the next several years. We’re excited, we’re productive and we are happy. Randy?

Randall J. StewardChief Financial Officer

Thank you, Doug. Good afternoon, everyone. As we reported earlier today, total revenues for the fourth quarter of 2018 were $132.6 million. This compares to $114.9 million in the fourth quarter of 2017. The 15% increase was primarily due to a 34% increase in Cardiac Immunoassay revenue, a 30% growth in Molecular Diagnostic Solutions and a 3% growth in Rapid Immunoassay. These increases were slightly offset by a 6% decline in our specialized diagnostics solutions.

Cardiac Immunoassay revenue was $62.9 million, a growth of 34% in the fourth quarter of 2018. Revenue growth for cardiac was mostly due to the incremental revenue in China as we returned to more consistent ordering patterns from our customers. Also in Q4 of 2017, we minimized shipments to China in order to reduce the amount of inventory at distribution. The total year-over-year cardiac revenue improvement in China was approximately $14 million. Of the $62.9 million in cardiac revenue, the split was $35.9 million for the Triage business and $27 million for the Beckman BNP business.

First let’s talk about Triage. From a geographical perspective, Triage revenue grew approximately $8 million in China from the fourth quarter of the prior year due to the discussed normalized ordering patterns. The US grew 17% from the fourth quarter of the prior year and Europe was down approximately 5%. With regard to the $27 million Beckman BNP business, this product grew 28% or $6 million as compared to last year, again, driven by China. In the quarter, both US and Europe, Middle East, Africa were down approximately 1%.

For the full year, Cardiac Immunoassay revenue grew to $266.5 million. Included in this amount, total Triage business revenue was $148.1 million and the geographic split for those Triage revenue was $65.5 million in the US, $33.6 million in China, and Europe, Middle East, Africa was $24.6 million. The remaining $24 million, approximately $12 million of that was in Asia, other than China, and the remaining $12 million was in Latin America and Canada.

The Beckman BNP business was $118.4 million for the year, consisting of $72.3 million in the US, $20.8 million in Europe, Middle East, Africa and $20.7 million in China. These three geographies make up more than 95% of the total BNP revenue. The Cardiac Immunoassay category is going to experience some lumpiness in revenues from quarter-to-quarter due to logistical and geographic factors, as well as timing and shipments of orders by distribution based on inventory levels. The big picture is that there is solid demand for the products and we are optimistic about our ability to grow the business.

As Doug stated previously, for 2019 we expect to grow the Cardiac Immunoassay business by about 4% to reach approximately $277 million for next year.

Rapid Immunoassay product revenues increased 3% to $50.4 million in the fourth quarter of 2018. This compares to $49.1 million in the previous year. Within this category, Sofia products grew 17% from the fourth quarter of 2017 to $33.9 million while QuickVue product revenues declined 19% to $15.4 million. Total influenza revenue, which includes rapid immunoassays, DHI respiratory and molecular diagnostics, grew 4% in the quarter to $34.9 million. The influenza rapid immunoassay revenue split was $26.3 million from Sofia versus $4.9 million from QuickVue. Total Strep revenue was up 2% and RSV was up 20%.

Revenue in the Specialized Diagnostic Solutions category decreased 6% in the fourth quarter to $13.4 million driven by a 5% decrease in our DHI revenues. On the Molecular Diagnostic Solutions category, it increased 30% in the quarter to $5.8 million due to a 71% growth in Solana. We continue to see strong growth with our Solana platform as Doug mentioned, specifically with the Strep A assay. We believe that we will continue to realize increasing demand for the Solana platform.

We expect to grow molecular revenue by minimum 20% in 2019, driven by incremental Sofia (ph) instrument placements and increased assay utilization. Gross profit in the fourth quarter of 2018 increased $23 million to $82.1 million. The dollar growth was due to increased sales volumes and improved product mix from Cardiac Immunoassay and Sofia products.

Gross profit margin in the fourth quarter of 2018 was approximately 62% as compared to 51% in the fourth quarter of 2017. Excluding acquisition-related costs, inventory step-up amortization and amortization of intangibles, the legacy Quidel business gross margin was 69%, Triage gross margin was 52% and the Beckman Coulter BNP business gross margin was 63%. For the full year, we achieved the upper end of our full year guidance, achieving a GAAP gross margin of 60%, a very solid performance.

R&D expense increased by $2 million in the fourth quarter as compared to last year. This increase is due to investments made toward our Savanna project. We expect that our R&D expense in 2019 should be similar to 2018 and be between the range of $50 million to $55 million as we continue to invest in Sofia menu expansion and Savanna. Sales and marketing expense in the fourth quarter of 2018 was in line with the fourth quarter of 2017. For the full-year 2019, we expect sales and marketing expense as a percentage of revenue to be between 50 and 100 basis points less than in 2018.

G&A expense increased by $3.6 million in the quarter primarily due to incremental cost associated with the globalization of our infrastructure. We expect G&A expense to be between $48 million and $50 million for the full year as we complete the globalization of that infrastructure. In the fourth quarter, interest expense was $4.5 million, a significant reduction from Q4 of last year. In 2018, we reduced our senior credit and revolving credit facility by $201.8 million and our convertible debt by $108.8 million, as well as making the first $48 million payment to Abbott on the BNP deferred and contingent consideration.

In the quarter, we recorded an income tax benefit of $9.7 million, mostly the result of reversing our tax valuation allowance. For the full year, we start with the enactment of the Tax Cuts and Jobs Act, the US federal corporate tax rate was reduced from 35% to 21% effective January 1 of 2018. In the year, the Company released $13.4 million of its valuation allowance against its net deferred tax asset balance, so it is more likely than not that a portion of these deferred tax assets will be utilized in the future before they expire.

Additionally, this overall tax provision includes beneficial impacts of $9.3 million from equity compensation gains to employees that occurred during the year and $3.6 million from the generation of federal and state research credits. The significant drivers of year-over-year differences in the income tax provision are the increased profitability, offset by the change in the corporate tax rate, increased stock-based comp activity and the impact from the reversal of the valuation allowance.

Net income for the fourth quarter was $32.5 million or $0.82 per diluted share. This compares to net loss of $5.1 million or negative $0.15 per share for the fourth quarter of 2017. For the full year, we achieved net income of $74.2 million, GAAP EPS of $1.86 and non-GAAP EPS of $3.04, a very rewarding year.

As Doug mentioned previously, our capital deployment strategy in 2018 was to aggressively de-lever the business with the goal of reducing our leverage ratio from over 4 times to 1.5 times by year-end. As stated previously, we accelerated our debt reduction initiatives in 2018. The result is that we exceeded our internal target and are now under 1 times leverage.

As of today, we have paid down an additional $20 million on our revolving credit facility and now have an outstanding revolving credit facility obligation of $33 million with a borrowing capacity of approximately $142 million. From a balance sheet perspective, our Company is very strong and well positioned for M&A licensing or other partnership opportunities in support of our long-term growth objectives.

And with that, we conclude our formal comments for today. Operator, we’re now ready to open the call for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from John Hsu from Raymond James. Your line is now open.

John HsuRaymond James — Analyst

Good afternoon.

Douglas C. BryantPresident and Chief Executive Officer

Hi, John.

John HsuRaymond James — Analyst

If we could just start, Randy, with 2019 guidance, I apologize if I missed this, I got the growth of at least 20% in molecular and obviously the 4% growth in the cardiac business altogether. But can you just maybe break that apart a little bit as far as what you’re expecting for the BNP versus the Triage assets and then also for — from immunoassay or the legacy business, I might have missed it, but do you have any thoughts around what your expectation is there?

Douglas C. BryantPresident and Chief Executive Officer

Yeah. So, this is Doug, I’ll give you the overall and then Randy can break it down by each of the components. So our marketing guys basically reviewed ongoing run rate slipped at gains and losses, instrument placement rates and we rolled up a number that effectively for the year is about $276 million. Whether that’s an accurate number or not, John honestly, if we hit it precisely, I probably will promote all the marketing guys, but — so it’s going to be slightly under that or slightly over that. But right now I can tell you that just in January alone we placed more Triage instruments in North America than we did in the previous quarter.

So we’re pretty confident that what we’re seeing in terms of demand is real and we’re seeing similar experience across the globe. And so we’re pretty comfortable that the $276 million is a reasonable stab at what we think we’re going to do in 2019. And we don’t know each other that well, John. So I don’t know if I can joke with you or not. But we didn’t employ the Goldilocks methods of calculation, we didn’t say well, 3% too low and 5% too high and 4% is just right. What we did instead, as we rolled that bottoms-up, we said to $276 million is our number and then we divided that by the $267 million that we did in 2018 and that happens to be 4%.

There’s no magic to 4, it’s just a matter of dividing 276 by 267. And again, I can tell you for sure that if the marketing guys are precisely on the number, it would be the first time in my 33 — well, 35 years of trying to put a forecast together. But I think we have a reasonable number that we forecasted for it. And Randy, why don’t you break out the growth rates by the category?

Randall J. StewardChief Financial Officer

Sure. For Triage we’re looking at mid single-digits. We see growth both within the US and in Europe. We see China being pretty stable on a year-over-year basis, within the BNP business, we see that up approximately around 3%, again, growth in the US and in China. Europe, we are predicting a slight decline, that’s mostly due to kind of change in over from a direct through distribution to a certain degree.

So that’s kind of the geographic drivers for 2019. You had mentioned molecular, I think the other one is in the rapid immunoassay. As we’ve said, we anticipate a 10% plus growth, that’s somewhat offset by what your estimate is in Q1 of 2019 for year-over-year flu, which obviously is pretty significant — the consensus is pretty less versus Q1 of 2018. Those are the pieces, John.

John HsuRaymond James — Analyst

Okay, great. That’s very helpful. I guess, just if we could switch gears to the synergies. Congratulations, you hit on most of your targets, $13.3 million run rate, obviously better than even at the $11 million that you had been expecting. So how do we think about what’s left to do and maybe how the synergies roll in and maybe could there be potentially some upside to that $20 million number?

Douglas C. BryantPresident and Chief Executive Officer

The $20 million is by 2020. As we exit this year, as we explained initially at the Analyst Day, we expect the run rate as we exit 2019 to be at $15.5 million and again that’s some pretty serious forecasting accuracy. But we’re still working very hard in the factory to improve yields and most of that will come from there.

John HsuRaymond James — Analyst

Okay, great. And then just last one for me, you obviously gave some updated thoughts around the Beckman litigation. Just to be clear, within the numbers that you provided specifically to the cardiac business, is there any change or any impact to the 2019 operating plan associated with litigation?

Douglas C. BryantPresident and Chief Executive Officer

No, when we did the call earlier I said very specifically that we are not making a change to our 2019 target.

John HsuRaymond James — Analyst

Okay, very clear. Thank you so much.

Douglas C. BryantPresident and Chief Executive Officer

Thanks, John.

Operator

Our next question comes from Jack Meehan from Barclays. Your line is now open.

Jack MeehanBarclays — Analyst

Good afternoon. I agree; congrats on a great year. I have a multi-part question I want to start with on the cardiac side and appreciate all the granular detail you provided. The fourth quarter was a little lighter than we were expecting at $63 million. So my question is, is there any seasonal factors which drove the revenues below the recent baseline we’ve seen in previous quarters. And then the 4% growth you’re forecasting for 2019, just what pacing should we expect and what contribution from the new tox assay are you building in?

Douglas C. BryantPresident and Chief Executive Officer

Okay, I think I can remember all that. I think the underlying — actually on the $63 million specifically, there are a couple of drivers, I’ll let Randy address that, but they’re not demand related, they are distribution related. So, Randy?

Randall J. StewardChief Financial Officer

Yes. Jack, as I mentioned, in Europe, we gained control in Europe and in August and they had a go-to-direct market strategy, we’re pretty much used going through distribution. So that’s about a 10% haircut on that European business that we realized in Q4. The other piece was we did have a distributor in the US that we ended up shipping direct because of some shelf life and need for product, we ended up shipping direct, that had a slight impact, downward on the US business for Q4 as well.

Douglas C. BryantPresident and Chief Executive Officer

So theoretically the damage in the quarter was coupled $3 million, something like that. So, remember, when initially we were talking about this, we said $60 million to $62 million a quarter, that was our stab at the time based on what we had available to us. And then we started seeing some quarters that we’re higher than that. And I believe I said that, boy, it feels like even though we have just shipped I think $68 million in the first quarter, I said, you know, really it doesn’t feel like $68 million, it feels more to me like $65 million.

Again, we do our best to forecast based on the information we have. And then in the second quarter we did even more, which made my $65 million also look at. And then we had in Q3, Q4 offsets due to some distribution ordering patterns. And effectively instead of doing $65 million a quarter, we ended up doing just about $67 million per quarter on average and some of that could have been in the quarter at any time. We do feel like we have a handle on why the quarters look the way they do. But again, my $65 million was not right, we actually did something like $66.75 million I think on average.

And this is — to your point, also Jack, I can’t really fully predict for every quarter that it’s going to be shipped the way we think it’s going to be shipped through our distribution partners based on their orders and their inventory levels. But based on the underlying demand for instruments, and starting from a customer, individual customer, up and having that all accounting losses and offset by gains with new instrument placements, I’m pretty comfortable that we’re going to get to $276 million. The timing of each quarter is not exactly under our control.

So, I don’t like that quite yet, but at least I understand it. In our point right now, we are simply focused on how do we grow the demand for the product, what’s the most recent growing. I’m pretty pleased so far actually, as I said before, we’re actually shipping more instruments in North America or at least through this quarter, we’ve already shipped more than we have in any other previous quarter and that’s just through January. So, I’m pretty pleased how we’re doing and I hope that we haven’t undercut (ph) the number too much.

Jack MeehanBarclays — Analyst

Great. In terms of building out that demand, just an update on the timing of the tox approval with the FDA, you still think the second quarter and within the 4% growth, what contribution?

Douglas C. BryantPresident and Chief Executive Officer

I can’t speak specifically to FDA timing. I think our guys are confident that we will be through the process in the March-April time frame and that — I know the guys in the factory are gearing up to manufacture kits and the labeling and all that at this time. So I think we’re pretty comfortable with that first half estimates that we said before.

Jack MeehanBarclays — Analyst

Great. And then last one, Savanna, I agree with you. I’d prefer a flawless launch, maximum potential, but I have to ask, where do we stand with the cartridge design and preparation for the clinical trials? Do you think those start by mid-2019?

Douglas C. BryantPresident and Chief Executive Officer

It’s a great question because that’s the key to what we’re showing on Gantt chart. So right now we’ve got to finish the final cartridge design for manufacturability and we’ve got to start making a lot of cartridges because with each of the assays, we’re thinking we need in total tens of thousands of cartridges. And so we got to get started soon. And if that slips a little bit, fine, but I think my point that I’m trying to Jack is that, there is a tenancy in companies to say, I’m going to meet my timeline, I’m going to get an instrument with one assay cleared by the FDA and I’m going to count that as a launch. And we’re not going to do that.

I’m not going to actually start selling product until I have four or more things that I can immediately ship to customers and if that causes us to move back a month or so in order to do that (Technical Difficulty) within the first 120 days. And that’s pretty hard to do when you only have one thing on the analyzer. So that’s enough, I’ve been going on for too many minutes here on that topic, but I feel pretty passionately about the idea that we want four or five things on the instrument launch. And I’m hopeful that we can certainly see (inaudible) market, but if I don’t have the product, I’m not going to launch.

Jack MeehanBarclays — Analyst

Sure. That’s fair. Thank you.

Operator

Our next question comes from Brian Weinstein with William Blair. Your line is now open.

Brian WeinsteinWilliam Blair — Analyst

Hi guys. Thanks for taking the question. To keep on the cardiology theme here, can you talk about what spurred growth here, really kind of going forward, you kind of answered this I think in the last question, but specifically are there competitive wins here, is it new account, is it utilization and then with your comment about shipping more instruments in January than any other quarter, what specifically is going on that’s driving that at this point, is it sort of a new marketing campaign? I think Abbott had talked to maybe about a little bit of weakness in their business there, are you taking advantage of that, still a little bit more color on all of that would be great.

Douglas C. BryantPresident and Chief Executive Officer

Sure, about two-thirds of our business actually for Triage in the hospital segment and we continue to do well in the smaller hospitals. So that’s a factor, but the other side, I was actually a little bit surprised as you might be too, Brian, that’s a third of the business is in we grew best, POL and the POL category we include urgent cares. And so right now I think the chart I saw the other day Randy showed that, we in 4,700 urgent cares and most of those have a Triage MeterPro. So we’re doing extremely well and that’s probably the segment there. And I don’t know about other competitors and what they’re doing and what they’re not doing, but I — we’re pretty competitive in that space.

Brian WeinsteinWilliam Blair — Analyst

Okay. And then on flu, I want to make sure I heard this comment right, did you say that the last four weeks had shown an unprecedented acceleration. I just want to make sure that I heard that right?

Douglas C. BryantPresident and Chief Executive Officer

Yes, you heard it right. I was just looking at the chart this morning, I was a little bit surprised. So if you look at even last year, that was a phenomenal flu season and you look at out sales in the same week, they were higher those out sales for that period of time, but the slope of the weeks is pretty vertical right now and — but that’s — to be fair, that’s offsetting a pretty slow start, right? So I’m not changing our number for the quarter, but I do feel pretty comfortable we’re going to get to our number and I think that’s the most important thing.

Now the other factor is, anytime you see a chart of flu, you also realize the next week could be going back the other way. So — and it is Valentine’s week. I don’t know what that means, but the last couple of years, this week, it started going back the other way. So if it does start going back the other way, I still think that we’re going to make our number for the first quarter, but I would prefer to see a couple of weeks for it (inaudible) because at the end of the day I need obviously distribution partners to feel like their inventories are getting too low and I need them to feel that before we get too close to the end of March because before the end of March normally they don’t (inaudible) products. So — and I think you know that.

Brian WeinsteinWilliam Blair — Analyst

Yeah, absolutely. All right, great. I’ll just jump in. Thanks for answering my questions guys.

Douglas C. BryantPresident and Chief Executive Officer

Sure, Brian.

Randall J. StewardChief Financial Officer

Thanks, Brian.

Operator

Our next question comes from Tycho Peterson from JPMorgan. Your line is now open.

Tycho PetersonJ.P. Morgan — Analyst

Hi, thanks. A question I guess on the margins, Triage gross margin ticked down a bit to 53% I think for 57%, can you maybe just touch on that. And what’s your kind of expectation for Triage margins for ’19?

Douglas C. BryantPresident and Chief Executive Officer

Can you repeat that Tycho, we had a little problem on our end.

Tycho PetersonJ.P. Morgan — Analyst

It was a question is on Triage gross margin, which looks like it ticked down a bit. Can you maybe touch on that. And then what’s embedded in guidance for Triage margins for ’19?

Randall J. StewardChief Financial Officer

Yes, it’s more of just factory absorption, little more volume in Q3 than Q4 as a result of the holidays or some, but nothing other than that. As Doug mentioned, we exceeded our synergy number of which more than half of that was driven from factory yields. So, we anticipate for 2019 to see an incremental improvement in our gross margin over 2018, driven by new products as well as the continued yield improvements in the cardiovascular business.

Tycho PetersonJ.P. Morgan — Analyst

Okay. And then Doug on Sofia, can you talk on lyme, how the roll-out’s gone there, what’s kind of embedded in the outlook for this year and if we think about kind of pull-through to get to the 10,000 pull-through target, how important is Lyme to getting you there at Sofia?

Douglas C. BryantPresident and Chief Executive Officer

I think it’s pretty critical that we maximize the lyme launch. The timing of approval wasn’t ideal. But, as we have had in the summer particularly with activity in the Northeast, we’re hopeful that we can gain some noticeable traction. The other thing that I pointed out previously is that, interestingly, with each new lyme disease close that we experienced thus far, about 90% of those also came with flu, and Strep and RSV.

So, it’s interesting that the collateral benefit of the lyme close, if you will, is larger in terms of revenue and margin than the lyme. So, right now I have to tell you that, just in the last few weeks I’m thinking about how can I resource this launch to an even greater extent. And so we’re going to be focused on it and I do think we have a pretty good chance of making a noticeable impact. And that makes us a lot more comfortable that moving toward that $10,000 per account is reasonable.

Tycho PetersonJ.P. Morgan — Analyst

Okay. And then last one on flu. I appreciate all kind of the real-time color here. As we think about market share, can you maybe touch on how you think about your market share versus last year. I know with the FDA reclass you picked up some shares, so how sustainable are some of the share gains that you experienced last year in your view?

Douglas C. BryantPresident and Chief Executive Officer

I think they are sticky because many of them were in large integrated delivery networks or urgent care centers where they value ILI data. So I think the stickiness is quite good. It’s hard for us to forecast at this stage. Believe it or not, what our actual gain is, it’s probably in the — it would modestly, I could say probably in the 3% to 5% share gain. It actually would surprise me if it’s more than that, but it’s very difficult for us to get enough data to actually judge what our share is. Previous years, we spent a lot of dollars during fourth — during surveys with customers to try to estimate, but we’ve stopped doing that because I’m not sure how accurate they are.

Tycho PetersonJ.P. Morgan — Analyst

Okay, thank you.

Douglas C. BryantPresident and Chief Executive Officer

Sure.

Operator

Our next question comes from Bill Quirk from Piper Jaffray. Your line is now open.

William QuirkPiper Jaffray — Analyst

Great, thanks. Good afternoon everybody. Just sticking on, I just kind of building off of Tycho’s last question, if we look at flu for the fourth quarter, it was up 4%. Look at the ILI data, it was down about 13% for the quarter. So I guess — help us I guess parse that out a little bit between, you know, clearly some of that was share gains, but was there any kind of weird behavior going on with the distributors at all in the quarter? Thanks.

Douglas C. BryantPresident and Chief Executive Officer

No, not really, not really. But you’re addressing an interesting perspective and it’s because of my inability to answer the market share question. If we were shipping directly to every end user, I’d know what my market share is, we figure it out. But here because the timing of orders and all that, it’s really hard for us to know precisely. But having said all that, we didn’t see anything unusual on how our distribution partners or the product last year.

William QuirkPiper Jaffray — Analyst

Okay. Understood, thank you. And then a couple of additional ones from me. Randy, thanks for the comments regarding of the debt repayments and also the comment regarding — you would look at smaller deals. I guess help us think about some of those capital priorities at this point, is it pretty much majority focused on additional transactions. And if so, kind of what’s the status of the potential deal flow that you guys are looking at present?

Randall J. StewardChief Financial Officer

Well, I’ll give the debt side and then I’ll let Doug talk about potential M&A stuff. From a capital perspective, we have a $48 million payment due on April 1 to Abbott. We still have a debt. So, short-term, in the next two to three quarters, we will focus on that, but certainly it does give us significantly more leverage than we had last year relating to potential M&A deals.

Douglas C. BryantPresident and Chief Executive Officer

We continue to look at things that are fit. I think what we’ve learned in the Alere asset acquisition is that fit probably is the most important criterion, we were able to fold in things, two asset categories into the existing infrastructure in North America and then we used the cash and all that to build out the infrastructure and our international team.

So, now moving forward, things that would fit into those two, the International and North American channels, makes a lot of sense to us. So, we continue to look at a lot of things and there are a couple of things that look interesting. I’ll just say that, but obviously if we are further down the path, then what I’ve just expressed we couldn’t talk about it. So — but there are some things that we think do fit and I think we proved that with the Alere asset acquisition that fit matters.

William QuirkPiper Jaffray — Analyst

Okay, got it. So it’s little bit like younger (inaudible) target scoring in the Champions League. It’s rare that you’ve closed on a deal, but obviously not heard — unheard of. Thank you. And last comment would be — a question rather, thinking about — you’ve talked historically about the legacy tox business at Biosite and the level that that was running at prior to some the assays coming off the market. How are you thinking given the FDA filing and how long it will take you to get back to those levels? Thanks guys.

Douglas C. BryantPresident and Chief Executive Officer

Yeah. Thanks, Bill. To be specific, we’ve modeled is that fourth year revenue will be in the 30s (ph). So, can we get there faster than that, maybe. So, I think we can do pretty well in the next couple of years because we think that there is pent-up demand for the product. Product — our customer demand that we could address before. So conservatively, I would say fourth year revenue post launch should be in the 30s.

William QuirkPiper Jaffray — Analyst

Perfect. Thanks guys. Appreciate it.

Douglas C. BryantPresident and Chief Executive Officer

Thanks, Bill.

Operator

Our next question comes from Alex Nowak from Craig-Hallum Capital. Your line is now open.

Alex NowakCraig-Hallum Capital — Analyst

Hey, it’s (inaudible). Good afternoon, everyone. Just on the bills and Tycho’s question, was there more inventory in the channel exiting 2018 compared to the end of 2017, you quantify this in other quarters, but I don’t believe you mentioned it on this call in particular.

Randall J. StewardChief Financial Officer

Yeah, no, we did not mention it, my oversight, but it’s pretty consistent with where it was in Q4 2017. So no significant changes in actually doing Strep, RSV and/or flu.

Alex NowakCraig-Hallum Capital — Analyst

Okay, that’s helpful. And then, Doug, I just want to make sure I got the timelines right here, the Beckman lawsuit, Is August still when we’re expecting to hear next on the original case and then the appellate review, could it be done in parallel or it be done after that main case and we’ll know about that here in March or April?

Douglas C. BryantPresident and Chief Executive Officer

Yeah, thanks for clarifying. I did mention that that date is no longer applicable. And so let me just walk through a couple of things that might be useful. First of all, the Court’s decision to stay the litigation and that’s what we’re talking about here, was not surprising because Courts typically stay litigation if they’re waiting to hear from an appellate court, if they think it would be more efficient to do it that way.

Courts typically vacate the trial date upon entry of the stay and that’s what happened here, they vacated the trial date. So there is no trial date right now. This is normal. The stay does not affect our petition to the Court of Appeal. So if anything, it actually enhances the likelihood that the Court of Appeal will consider the merits of the petition. In its application for the stay Beckman stated, it will urge the Court of Appeal to accept the petition for appellate review. So, Beckman has joined us and the idea of that hearing this sooner rather than later is a good idea.

The impact of the courts, if any, will be minimal. So if the Court of Appeal decides to hear the petition now, the order will have no effect because quite else in favor of the stay in that circumstance and if the Court of Appeals denies our petition, the only effect is a slight delay in the trial date which is going to happen and our subsequent appeal and we do not believe this delay will be lengthy. And again we’re confident the Court of Appeal will agree with our position, whether they hear the appeal now or whether they here after the trial. So, I’ve over-answered your question.

Alex NowakCraig-Hallum Capital — Analyst

No, I think I got that. I think just to summarize, the next thing — hearing will probably come in March or April and we should know more on the next path (inaudible).

Douglas C. BryantPresident and Chief Executive Officer

That’s right.

Alex NowakCraig-Hallum Capital — Analyst

Okay, all right, perfect. I appreciate it. Thank you very much and congrats on the good year.

Douglas C. BryantPresident and Chief Executive Officer

Thanks, Alex.

Operator

And our final question comes from Mark Massaro from Canaccord Genuity. Your line is now open.

Max MasucciCanaccord Genuity — Analyst

Hi, this is Max on for Mark. So it’s been about three months since (inaudible) decision for large respiratory panels became effective. I know that for the last few years you’ve been operating under the assumption that this would be the case. I guess how do you feel that the market is responding to the decision, if anything, versus your expectations?

Douglas C. BryantPresident and Chief Executive Officer

I don’t think I have an opinion quite yet. I mean I really haven’t looked at it, Max. So I shouldn’t opine on something I shouldn’t speculate. As we get closer to launch, of course we’re going to know about what customers are doing and all that, so I apologize, but I really don’t have a good answer for you.

Max MasucciCanaccord Genuity — Analyst

No problem. So, you have indicated you see the potential for 70,000 to 80,000 total Sofia placements over time. And I guess for the remaining 35,000 to 45,000 potential placements, what geographical regions would you be honing in on and is there a particular type of customer you’ll be targeting?

Douglas C. BryantPresident and Chief Executive Officer

Well, the US and Europe for sure are good markets for us. And I think China, once we’re approved there. The next wave of things that we’re launching will be gastrointestinal related. And we have a game plan that have I think five or six new targets done within the next couple of years. So that think it’s going to be helpful for us.

Max MasucciCanaccord Genuity — Analyst

Great, that’s it from me guys, thanks.

Douglas C. BryantPresident and Chief Executive Officer

Thanks, Max.

Operator

And that is all the questions we have for today. Please proceed with your presentation or any closing remarks.

Douglas C. BryantPresident and Chief Executive Officer

Well, thanks everyone for your support and for your interest in Quidel. We had a great year and we’re in terrific shape to achieve our growth objectives over the next few years. We know what to do from here and we have the right people to get the job done. Thanks again for being on the call.

Operator

Ladies and gentlemen, we thank you for your participation and we ask that you please disconnect your lines. Good-bye.

Duration: 56 minutes

Call participants:

Ruben ArguetaDirector of Investor Relations

Douglas C. BryantPresident and Chief Executive Officer

Randall J. StewardChief Financial Officer

John HsuRaymond James — Analyst

Jack MeehanBarclays — Analyst

Brian WeinsteinWilliam Blair — Analyst

Tycho PetersonJ.P. Morgan — Analyst

William QuirkPiper Jaffray — Analyst

Alex NowakCraig-Hallum Capital — Analyst

Max MasucciCanaccord Genuity — Analyst

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