QUIDEL CORP /DE/ (QDEL) Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Results of Operations. The Company's financial results for the first quarter ended June 30, 1997
were adversely impacted by a 3% decline in sales and increased patent license royalty expense
and settlement costs associated with the Becton Dickinson ("BD") lawsuit, which resulted in a
net loss of $791,000 or $(.03) per share.
NET SALES TRENDS BY MAJOR SALES CHANNELS
INCREASE/
(DECREASE)
THREE MONTHS ENDED JUNE 30, (IN THOUSANDS) 1997 1996 AMOUNT PERCENT
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Domestic sales:
Professional sales .................... $ 5,523 $ 5,298 $ 225 4%
OTC sales ............................. 92 223 (131) (59%)
Clinical lab sales .................... 380 334 46 14%
OEM sales ............................. 87 208 (121) (58%)
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Total domestic sales ......... 6,082 6,063 19 --
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International sales:
Export sales .......................... 1,484 2,168 (684) (32%)
European subsidiary sales ............. 1,181 816 365 45%
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Total international sales .... 2,665 2,984 (319) (11%)
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Total net sales .............. $ 8,747 $ 9,047 $ (300) (3%)
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Overall sales for the first quarter declined $300,000 or 3% from the same period of the prior
year. The current quarter's sales were constrained, however, due to the inability to produce and
ship certain products due to production issues. This resulted in a $773,000 increase in the
amount of open unshipped orders at June 30, 1997 over the level at the beginning of the quarter.
The Company expects to resolve these production issues and to fill these backorders early in the
second fiscal quarter.
Total domestic sales were flat between years. Domestic professional sales improved slightly over
the prior year period due in part to increased H. Pylori product sales; however, this was offset
by reduced OTC and OEM sales volume.
International export sales declined principally as a result of reduced pregnancy product sales due
to price competition (these products are sold to distributors in U.S. dollars which results in a
higher local currency sales price when the dollar is strong) and the end of our contract with our
pregnancy distributor in Japan. This decline was partially offset by improved sales by the
Company's European subsidiaries in Germany and Spain.
Revenue from research contracts and royalties is principally related to revenue from the Glaxo
influenza product development program which commenced in March 1996 and is equal to the
sum of the program direct research cost (see Operating Expenses below) and allocated support
service cost.
COST OF SALES AND GROSS PROFIT
THREE MONTHS ENDED JUNE 30, (IN THOUSANDS) 1997 1996
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Direct Costs - material, labor and other variable cost ..... $3,186 $3,088
As a percentage of sales ................................... 36% 34%
Royalty Expense - patent licenses .......................... 395 82
As a percentage of sales ................................... 5% 1%
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Total direct cost .......................................... 3,581 3,170
As a percentage of sales ................................... 41% 35%
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Direct Margin - contribution per sales dollar .............. 59% 65%
Manufacturing overhead cost ................................ 1,136 1,100
As a percentage of sales ................................... 13% 12%
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Total cost of sales ............................... 4,717 4,270
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Gross profit ............................................... $4,030 $4,777
As a percentage of sales ................................... 46% 53%
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Gross profit as a percentage of sales declined seven percentage points to 46% of sales in the
current quarter from the prior year level. The most significant component of this change relates to
increased patent license royalty expense which commenced April 1, 1997 resulting from the
settlement of the BD patent lawsuit. This variable cost will be ongoing as long as the current
Generation III format products are sold. The direct cost of material, labor and other variable
cost also increased as a percentage of sales due in part to higher production variances and scrap
costs of certain products; these higher costs are not expected to continue.
OPERATING EXPENSES
THREE MONTHS ENDED JUNE 30, (IN THOUSANDS) 1997 1996
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Research and development
Quidel research projects .......................... $1,276 $1,147
As a percentage of sales .......................... 15% 13%
Contract research -- direct costs ................. 471 585
As a percentage of sales .......................... 5% 6%
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Total research and development ........... 1,747 1,732
As a percentage of sales ................. 20% 19%
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Sales and marketing
Domestic professional sales and marketing ......... 1,598 1,489
Domestic OTC sales and marketing .................. 55 137
International sales and marketing ................. 890 981
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Total sales and marketing ................ 2,543 2,607
As a percentage of sales ................. 29% 29%
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General and administrative ................................. 1,157 816
As a percentage of sales ................................... 13% 9%
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Total operating expenses ................................... $5,447 5,155
As a percentage of sales ................................... 62% 57%
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Total operating expenses excluding contract research ....... $4,976 $4,570
As a percentage of sales ................................... 57% 51%
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Operating expenses increased $292,000 (5.7%) in the current quarter over the prior year level.
Research and Development. Research and development expense reflects reduced contract
research expense due to the program start up expenses in the prior year period offset by
increased Quidel R&D and clinical project spending and increased patent amortization costs.
Sales and Marketing. Sales and marketing expense declined slightly from the prior year level as
increased domestic marketing expense due in part to the H. Pylori product promotion with
Procter & Gamble was offset with reduced OTC and international sales and marketing
expenses.
General and Administrative. General and administrative expense increased significantly in the
current quarter due to legal fees and other costs associated with the BD lawsuit settlement and
the estimated costs associated with other legal matters.
Net Income (Loss). The net loss for the quarter resulted from lower sales volume, reduced level
of gross profit due in part to higher royalty expenses which are ongoing, and higher legal
expenses related to the settlement of the BD lawsuit which are not ongoing expenses.
The Company's operating results may continue to fluctuate on a quarter-to-quarter basis as a
result of a number of factors, including the competitive and economic factors affecting the
Company's markets, actions of our major distributors, adverse actions or delays in product
reviews by the United States Food and Drug Administration, the degree of acceptance that our
new products achieve during the year, and seasonality.
Liquidity and Capital Resources. At June 30, 1997, the Company had cash and cash equivalents
of $8,396,000, compared to $10,096,000 at March 31, 1997. During the three months ended
June 30, 1997 the Company generated $2,131,000 in cash from operating activities. Net cash
used as a result of the net loss and increase in inventory was more than offset by reduction in
accounts receivable.
Net cash used for investment activities of $3,792,000 related to $1,429,000 in capital
expenditures for increased production capacity and product cost reduction and $2,363,000 paid
for patent licenses and capitalized patent application costs.
Net cash used in financing activities totaled $39,000, primarily related to debt repayment.
The Company has a domestic accounts receivable-based bank line of credit in an amount up to
$3,000,000 which provides for interest at the bank's prime rate plus two percent. The line of
credit expires August 5, 1998. As of June 30, 1997, there were no outstanding borrowings
under this line of credit.
QUIDEL's principal capital requirements are for working capital. These requirements fluctuate
as a result of numerous factors, such as the extent to which the Company uses or generates cash
in operations, progress in research and development projects, competition and technological
developments and the time and expenditures required to obtain governmental approval of its
products. Based on its current cash position and its current assessment of future operating
results, management believes that its existing sources of liquidity should be adequate to meet its
operating needs during fiscal 1998.
Except for the historical information contained herein, the matters discussed in this report are by
their nature forward-looking. For the reasons stated in this report or in the Company's Securities
and Exchange Commission filings, or for various unanticipated reasons, actual results may differ
materially. |
