Howard,
Companies such as Quidel have fixed and variable costs. Fixed costs must be paid whether the company manufactures and sells one or many product items; variable cost are incremental costs for each additional product item produced. Fixed costs include such thing as rents, utilities, personnel, and manufacturing equipment. Variable costs include such things as materials or expenses to produce and deliver each additional product item.
Quite simply (rounded off), Quidel's margin is about 50 percent. So about 50 cents of every revenue dollar pays for variable costs. Quidel's fixed costs are about $5 million per quarter, so out of the first $10 million of revenue in a quarter, the first $5 million pays the fixed costs, the second $5 million pays the variable costs. After the fixed costs are paid for, for each additional dollar in revenue, 50 percent "goes to the bottom line" or profit.
For Quidel, (rounded off) $40 million in annual sales produces no profit ($20 million fixed costs and $20 million variable costs). $80 million in sales produces a $20 million profit ($40 million variable costs, $20 million fixed costs, $20 million profit). $20 million in profit divided by $20 million shares equals $1 in EPS. A $1 EPS times a 30 P/E equals a $30 dollar stock. How long before Quidel sells $80 million in a year? Less than three years if sales increase 25 percent a year. Possible? - very possible in my opinion.
The beauty of an emerging, profitable company such as Quidel is that its profit growth, and therefore earnings growth, is much higher than its sales growth - and we know how excited Wall Street becomes with big earnings growth.
The details of the P&G "co-promotion" agreement were not disclosed; however, I'm sure P&G will only promote Quidel's H. pylori test, not sell it; therefore, Quidel will continue to market its H. pylori test under its own brand name. Remember, Quidel transitioned from an OEM to selling its products under its brand name. The benefit for Quidel is obvious - You can bet Quidel includes some glossy brochures, promoting its other products, along with the two samples H. pylori tests.
A little investigative reporting would be appreciated by all who read this thread. Why not call P&G's investor relations or better yet track down a P&G salesman and ask for details about the co-promotion arrangement and how the sales are doing. Let your fingers do the walking through the yellow pages and call a few doctors to see if they're aware of P&G's Helidac or Quidel's H. pylori test. You might also ask a few pharmacists in your area how well Helidac is selling.
Mike |
