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Quidel (NASDAQ:QDEL)
Q3 2019 Earnings Call
Oct 30, 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 you to the Quidel Corporation third-quarter 2019 earnings conference call. [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 Argueta -- Director of Investor Relations

Thank you, operator. Good afternoon, everyone, and thank you for joining us today's call. With me today are our president and chief executive officer, Doug Bryant; and Randy Steward, our chief financial officer. Our third-quarter 2019 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 new IR website following the conclusion of this call on October 30, 2019, for a period of 30 days. 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, October 30, 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 ended September 30, 2019. If you have not received our news release or if you would 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 will now hand the call over to Doug for his comments.

Doug Bryant -- President and Chief Executive Officer

Thanks, Ruben, and good afternoon, everyone. As you saw in the press release, Quidel's third-quarter financial performance was solid and in line with our expectations. Total revenue was $126.5 million, up 8% over the prior-year quarter. Total Triage revenue at $66.8 million, including Triage MeterPro Cardiac and Toxicology assays and Triage BMP, was once again in the quarterly range of $64 million to $69 million that we suggested is appropriate for the business in advance of the impact of new product launches.

Total Influenza revenue for the quarter, which includes all immunoassay and molecular platforms, grew 36% to $29.3 million driven mainly by influenza test cartridge sales on existing, as well as new Sofia placements. Sofia placements, at under 2,000 in Q3, were typical for a nonflu quarter aided a bit by a couple hundred or so instruments shipped to new Sofia Lyme customers. Now regarding earnings for the quarter, as Randy will describe in more detail, there were no significant spending surprises. The overall gross margin profile was a little elevated due to the increase in flu sales, and the fall through to EPS was as anticipated, given slightly higher revenue and favorable product and geographic mix.

Moving forward, we expect modest traction in the fourth quarter in Europe with high sensitive -- excuse me, high-sensitivity troponin as we await the publication of a major study to demonstrate the clinical performance of our point-of-care high-sensitivity assay. We also expect to see progress with the launch of the new Triage Toxicology panel, although admittedly, our launch was delayed by about one quarter and sales in Q4 will not be as we had anticipated. I have no doubt that we will be as successful with this product as we have planned, but we did have, what I would call, a self-inflicted wound with the launch of this product as our commercial organization in the U.S. was simply not ready to execute.

They are executing, however, and I can explain more about this during the Q&A if you like. The big questions for the fourth quarter are: when the RSV and flu seasons will start? And will the flu season be early and severe enough to cause distributors to reorder product as they would typically do during the last three weeks of the quarter? At this point, I can't call it. In early October, we saw hints in our Virena data of the approaching respiratory season as test rates began to increase. But the increases in test rates, which were across every region of the U.S., were largely due to RSV and other viruses that mimic influenza and that often precede influenza by six to eight weeks.

We have seen increased testing and positivity rates for RSV in Florida, which has reached epidemic levels, but to be clear, the volume of RSV test data collected by Virena is not robust enough to be predictive in that -- in the way that millions of flu data points are across the season. At this point, we are continuing to model a normal season in terms of Influenza revenue for the next two quarters. Shifting gears, I will probably provide the final update on the status of the integration of the Alere assets. After just two years from the close of the transaction, we have effectively completed our integration process.

On July 1, we went live with the integration of our warehouse operations at our Summers Ridge facility, moving off Abbott's ordering and distribution system and realizing $2.6 million in annualized synergies. We also successfully migrated India and Brazil to our ERP on August 1, completing the order cash process for 88 of 89 countries. Japan, the final country, goes live November 1, which gives us control of 100% 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.

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

In the first half of 2020, we expect to introduce several new Sofia assays for C. diff toxins, Lyme Tier 2, a single fourplex Sofia cartridge for flu, RSV and human melanoma viruses; and simpler faster bioassays for TSI and TBI; assays for Graves' and Hashimoto's diseases. In the middle of the year, we plan to launch five more Sofia assays for lactoferrin, H. pylori, parasites Shiga toxin and Campylobacter.

Before year-end, we expect to introduce Sofia Strep 98, which has demonstrated superb analytical performance in studies thus far, and Sofia assays for the 2 commonly seen in community-acquired pneumonia infectious agents, Strep pneumonia and Legionella. Then, we'll head into 2021 anticipating the loss of Savanna which could be the most important product introduction in our history. And there's still more in the pipeline to come. Overall, it was a solid quarter both financially and operationally.

And although Q4 will provide the usual challenges we face every year, we'll end the year in good shape, very well positioned for 2020 and 2021. Randy?

Randy Steward -- Chief Financial Officer

Thank you, Doug. Good afternoon, everyone. As we reported earlier today, revenues for the third quarter of 2019 were $126.5 million. This compares to $117.4 million in the third quarter of 2018, an increase of 8%.

On a constant-currency basis, revenue growth was also 8%, reflecting the minimal negative impact of foreign exchange of $500,000 in the quarter. Rapid Immunoassay revenue increased 20% to $42.5 million from the third quarter of 2018 due to strong results for our -- from our Sofia franchise, which grew 35%. Flu revenue for the rapid category was $26.6 million, an increase of 37%, while Strep A increased 6% and RSV increased 10%. For the third quarter, Sofia revenue was $28.7 million, compared to $21.2 million in Q3 of the prior year, and QuickVue revenue was $12.7 million as compared to $13.1 million in Q3 of 2018.

Rapid Immunoassay inventory at distribution is up 7% from the third quarter of last year. More specifically, Influenza inventories and distribution were up 28% versus last year's third quarter and up 12% versus Q3 of 2017. In the Cardiac Immunoassay category, revenue totaled $66.8 million in the quarter versus $65.3 million in the same period last year, a 2% increase. On a constant-currency basis, Cardiac revenue for the third quarter was up 3%.

Within the category, Triage revenue was $33.8 million, a decline of 2% from the third quarter of 2018. On a constant-currency basis, Triage revenue was down 1% versus last year. As reported on a geographic basis, Triage realized 6% revenue growth in North America, growth in Asia-Pacific and Latin America, which was offset by declines in China, in Europe, Middle East, Africa. On the Beckman BNP side, revenue increased 7% over the third quarter of 2018 to $33 million.

And on a constant-currency basis, BNP was up 8%. Geographically, revenue growth for the Beckman business was realized in all geographies except for North America, which was down slightly by 2%. Revenue in the Specialized Diagnostic Solutions category increased 1% in the third quarter to $12.5 million as our cell culture business declined by 2% and our MicroVue, Bone Health and Complement business grew a combined 17% in the quarter. Our Molecular Diagnostic Solutions category increased 5% to $4.7 million driven by 20% growth from Solana assay revenue.

AmpliVue revenue declined 25% in the quarter as we continued to migrate the C. difficile and HSV customers over to the Solana platform. Gross profit in the quarter of 2019 increased $6.2 million to $75.9 million and was driven by higher sales volumes, improved product mix and lower scrap, partially offset by lower overhead factory absorption and a negative FX impact. Gross margin in the third quarter of 2019 was approximately 60% compared to 59% in the third quarter of 2018.

The increase was due to the factors described within the net gross profit improvement. Based on product mix and the prevalence of influenza, we estimate our Q4 gross margin to be in the range of 61% to 62%. R&D expense decreased by $1.1 million in the third quarter as compared to the same period last year. This decrease was due primarily to lower spending on projects related to cardiovascular and Solana platforms as they were largely completed in 2018.

Based on our current project priorities, we expect R&D spend to be in a range of $13 million to $14 million for Q4. Sales and marketing expense was $26.6 million in the quarter, roughly flat to the third quarter of last year. We expect sales and marketing spend for Q4 to be between 20% to 21% of revenue. G&A expense increased by $1.5 million in the quarter primarily due to increased facility costs from the expansion required to integrate the acquired cardiovascular business and professional service fees incurred in the period, partially offset by lower transition service fees.

Acquisition and integration costs in the third quarter were $4.5 million, up from $2.5 million in the third quarter last year, primarily due to the noncash impairment loss recorded for a facility lease as we move our company headquarters over to our Summers Ridge facility in November, as well as increase in professional service fees. Interest expense for the quarter was $3.2 million and includes $300,000 related to the convertible senior notes. $300,000 related to the senior credit facility and $1.9 million related to the deferred consideration associated with the purchase of the BNP business. On a trailing 12-month basis as compared to the prior period, we realized an $11.6 million reduction in interest expense due to the reduction in debt of approximately $168.4 million.

Over the last 12 months, we paid down our revolving credit facility by $75 million, reduced our convertible note by $45.4 million and paid $48 million on the deferred and contingent consideration. In the quarter, we recorded $1.3 million in an income tax provision. The expense for the quarter was favorably impacted by excess tax benefits from stock-based compensation. We believe our effective tax rate for full-year 2019 should be within the range of 18% to 20% of pre-tax income before consideration for discrete tax items.

And we continued to strengthen our balance sheet. In the quarter, we generated $6.4 million in free cash flow after spending $6.9 million in capital expenditures. We used a portion of the cash to pay down another $10 million on the revolving credit facility. Additionally, the remaining $8.2 million balance of the revolving credit facility was paid in full in October 2019.

In the quarter, we had depreciation of $4.8 million and amortization of $7.0 million. As of September 30, the company had $28.9 million in cash on the balance sheet and $13.1 million in principal amount outstanding related to the convertible notes. The outstanding principal balance on deferred and contingent consideration for the acquired cardiac assets remains at approximately $184 million. And with that, we conclude our formal comments for today.

Operator, we're now ready to open the call for questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Brian Weinstein with William Blair. Your line is open.

Brian Weinstein -- William Blair and Company -- Analyst

Hey, guys. Thanks for taking the question. I guess, Doug, I'll take you up on the opportunity to follow up on the commentary related to the delay on tox. If you can just give us a little bit more on the self-inflicted wounds and kind of what's going on there and then how you're dealing with those? And then I'll ask a second question in a second.

Doug Bryant -- President and Chief Executive Officer

Sure, of course. This is pretty straightforward. And we trained sales organization on toxicology very early in the year. Then due to the delay in the product launch, we made a commercial decision to train ourselves one more time.

And so instead of launching in the third quarter, as we normally would with a new product, some of the guys were working on things and waited after their training to actually send their reps out to the field. So I would say that's a pretty good definition of a self-inflicted wound. And the reason I mentioned it is because with all the 2020 products we have queued up, we can't launch products like that. We can't have guys waiting for a couple of months to be trained in order to go out and start talking to customers.

So we've had, recently, a pretty lengthy couple of days meetings where we discussed all that. And I think we have a pretty good understanding of how we are going to get that done. I don't know how many product launches, I think, are coming up, but I think it's at least five or six that we're going to do next year. And obviously we can't wait to have an all-hands-on-deck sort of sales training before we go out and start talking to customers.

So pretty straightforward, Brian.

Brian Weinstein -- William Blair and Company -- Analyst

Got it. OK. And with respect to Influenza in the levels of distribution, Randy, I think you gave some numbers that indicated that it was meaningfully higher at this point versus last year and even 2017. How should we think about what that might mean for the fourth quarter? Because flu numbers were obviously a little bit stronger than we thought here.

Should we be taking some out of the fourth quarter still and thinking about the overall season roughly the same? Any thoughts on that would be appreciated.

Doug Bryant -- President and Chief Executive Officer

I'll have Randy chime in as well if he likes. But as we exited the second quarter, we had fairly low, I -- it's not the lowest ever, but fairly low distributor inventory. So it was natural that they were some. I think some distributors ordered more product than they normally would, anticipating a large season.

There was a lot of rumors about flu in Australia and etc. I do think that there's at least a couple of million-dollar swing in any quarter that can move from one quarter to another. And I think what we have in this case is probably a couple of million more in Q3 than we might normally have. Although when you look year over year, it's only about 8% more versus Q3 last year that was ordered in.

So do you want to add something, Randy?

Randy Steward -- Chief Financial Officer

No, I think that's right.

Doug Bryant -- President and Chief Executive Officer

Which is kind of where we're at. So yes, we probably you'll never know going into the last three weeks of the year whether all that inventory will be depleted, which would necessitate an order from particularly the bigger distributors. So I shouldn't say fingers crossed, we're hoping for more flu, but if we don't see an acceleration of flu, which sometimes happens, I could see how we might be $1 million or so heavy in the fourth quarter.

Brian Weinstein -- William Blair and Company -- Analyst

OK. That's great. We'll let some others jump in. Thank you.

Operator

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

Rachel Vatnsdal -- Piper Jaffray -- Analyst

This is Rachel on for Bill. Thanks for taking the questions. Do you have any potential -- do you have any thoughts on the potential Intergen mismatch between the vaccines and possible strains this year? We've seen a few press releases of late about it, so I was wondering your thoughts about that. And then I have a follow-up.

Doug Bryant -- President and Chief Executive Officer

Even on a best year, immunologists would tell you the effectivity of the flu vaccine is only about 30%. So it's not that I would not recommend that everybody get a flu vaccination. I certainly got mine. I think there's a concept of herd immunity is helpful, so please get your vaccination.

But whether we call the strains right or not, doesn't seem to have a great deal of impact. Really. Although there's a lot written about it. You certainly heard about the mismatch last year on one of the strains.

That's probably not super helpful, Rachel, but that's the reality. It's the vaccination rates and how precise the vaccine is against the viruses that are circulating, it doesn't seem to have a real big impact on severity this season or on the volume of testing.

Rachel Vatnsdal -- Piper Jaffray -- Analyst

That's helpful. And then last question, can you give us an update on the Beckman's courtroom litigation and where you guys are at with that and any next steps that you foresee?

Doug Bryant -- President and Chief Executive Officer

Sure. So regarding the Beckman litigation matter, I'll just provide a quick update. And then probably we'll not take -- not probably. I won't be taking follow-up questions.

Where we are is the Court of Appeal issued a written order regarding our writ petition, Quidel's writ petition on August 29 of this year ruling in our favor. Beckman then petitioned for rehearing by the same court, and that petition was denied on September 13. Beckman then filed a petition for review with the California Supreme Court challenging the Court of Appeals' order that granted Quidel's writ petition. Quidel has filed its answer, and we expect the court to decide whether to take the case by the end of the year.

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. 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.

Rachel Vatnsdal -- Piper Jaffray -- Analyst

Great. Thank you.

Operator

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

Jack Meehan -- Barclays -- Analyst

Thank you. Good afternoon. Doug, I appreciate all the excitement on the new product development. I was wondering if you can give us mark to market on the Savanna cartridge design and when you expect to start clinical trials.

Doug Bryant -- President and Chief Executive Officer

Yeah. We're in great shape with Savanna now, I'm happy to report. We have seven panels, assay panels that are well under way. Many are close to being ready to move into cartridge.

We do have a cartridge design that we are highly confident we can manufacture in millions of tests at very high yields. And now we're in the process of moving to the instrument development phase. So we should have instrument in at least one or more cartridge types ready for submission toward the end of next year just as we previously had said. And we're still anticipating being in the market in the United States [Inaudible] '21.

So compared with the last quarter, I would say our confidence level has gone up significantly.

Jack Meehan -- Barclays -- Analyst

And do you still expect --

Doug Bryant -- President and Chief Executive Officer

[Inaudible] yet. Pardon?

Jack Meehan -- Barclays -- Analyst

Do you still expect clinical trials to start by the end of the year, beginning of next year?

Doug Bryant -- President and Chief Executive Officer

This year?

Jack Meehan -- Barclays -- Analyst

Yes.

Doug Bryant -- President and Chief Executive Officer

No, no, no. We will be ready with a cartridge and the instrument toward the end of next year.

Jack Meehan -- Barclays -- Analyst

Sorry, I was referring to clinical trial.

Doug Bryant -- President and Chief Executive Officer

Well, the instrument's not developed yet, so we won't be in clinical trials until the end of 2020.

Jack Meehan -- Barclays -- Analyst

OK. And then I was wondering if you could maybe just give us a review of the Lyme season and how much that contributed to Sofia. And what that was doing in terms of placement rates over the summer?

Doug Bryant -- President and Chief Executive Officer

Well, just overall, I would say where we're at with Lyme is we're busy growing and developing a physician office segment that doesn't exist today to include the urgent care space for a tier 1 assay. And I believe we'll get even more help with the introduction of the Tier 2 assay, which 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. So we think that will add some value.

We did ship a couple of hundred Sofias in Q3 to Lyme customers, 70% of which included flu and RSV on their contracts. We have hundreds of contracts right now, mainly in the northeast, but we're in the hundreds, not the thousands yet. So it's still early days. I didn't really think it was going to be an instant market.

I knew we had to spend some time developing the market. We have allocated several million dollars toward a number of marketing campaigns designed to create awareness in those areas of the country that had some level of prevalence. And so far, I'd say we're reasonably pleased with what's going on, although it's back to the wind blowing and the trees moving. So we hear the wind blowing, but the trees, Jack, are not moving yet at this point.

Jack Meehan -- Barclays -- Analyst

Sounds good. Thanks, Doug.

Operator

Your next question comes from Mark Massaro with Canaccord Genuity. Your line is open.

Mark Massaro -- Canaccord Genuity -- Analyst

Hey, thanks, guys, for the questions. Looking back at, what I would call, the mother of all flu seasons. This is about 2017 into 2018. And then looking back at other flu seasons in the last, call it, seven years, typically, Q4 has flu revenue of at least $5 million to $10 million of revenue above the Q3 level just on a sequential basis.

Yet you just reported a pretty big beat on flu here in Q3. But I guess the simple question is, do you expect a sequential increase in flu revenue in Q4? And do you think it can be similar to that range of estimates that I just mentioned?

Doug Bryant -- President and Chief Executive Officer

The short answer, Mark, it depends. I'll let Randy chime in, in a second, but let me give you a snapshot as of today of our Virena data. We look across the nation right now, we're running less than 15% positivity in virtually every region, except for the southeast and Louisiana and parts of Texas. If you were to go on map.quidel.com, you'll actually see the flu map and you can see where things are happening.

So it has started, and what you see is a pretty good beginning of a flu season there in Florida. Miami right now reporting positivity rates of 24%, so Miami actually is in a flu season now. Tampa's at 19%, and so they're just about right on the cusp of being an epidemic range as well. And Louisiana actually has spots as well as the two big markets in Texas.

So I don't know what's going to happen. It's got to go more than that obviously, but when it does go, it will ramp up quickly. If it does ramp up before the last three weeks of the year, again, those distributors got to reorder. So we've had years where 70%, 80% of the quarter, we're in the last three weeks of December.

And we've had years where that was absolutely not the case. So I get how you're trying to model going from one quarter and sequentially going to the next. I would say, normally you would be right, Mark. And I'm not telling you something different, I'm just telling you what we see so far.

We do see flu, we see it ramping up to epidemic proportions in a small number of areas.

Randy Steward -- Chief Financial Officer

And just to add on to that, Mark, consistently in Q4 and Q1 have been somewhere between 65%, 75% of our full flu season. So as you know, it can shift a little bit between Q4 and Q1 as well. And certainly for the last five Q3s, the flu revenue has been $20 million or north in any event. So we're kind of aligning the same way we have in several of the other previous years.

Mark Massaro -- Canaccord Genuity -- Analyst

Thank you. That's helpful.

Doug Bryant -- President and Chief Executive Officer

If it were normal, Mark, and we're seeing normal, if it were normal, it's going to be sequentially higher, yes.

Mark Massaro -- Canaccord Genuity -- Analyst

OK. A question on the guidance, I don't think you addressed it. But earlier in the year, you talked about a constant-currency basis revenue guide for the year of $535 million. With what you discussed with the toxicology delay, are you still on track to hit that?

Doug Bryant -- President and Chief Executive Officer

No, and that was about $4 million in the fourth quarter. So we're short there. We've got obviously some FX headwinds, but you'll allow me not to count that by your question, asking for constant currency. But -- So we've got what we said what we would do minus FX, minus that toxicology delay.

Mark Massaro -- Canaccord Genuity -- Analyst

OK. And maybe on a reported basis, would that look similar to $530 million?

Doug Bryant -- President and Chief Executive Officer

We've got about $5 million FX.

Mark Massaro -- Canaccord Genuity -- Analyst

OK. I want to go back to the question that Brian asked about -- just the rationale for the delay. So based on my understanding of your comments, Doug, you talked about how you did two trainings. You trained them early in the year and then you trained them again.

I could maybe use some clarification as to why they were trained a second time and why they didn't go out the first time.

Doug Bryant -- President and Chief Executive Officer

Because of the delay, there was too much time between the training and when we launched. So I was actually at, arguably our best region of the country and one unexpecting to perform at a very high level. I went to their meeting. They were trained at that meeting and they hadn't served any calls yet.

So I was a little bit -- what's the right word? Disappointed? No, that doesn't sound strong enough, does it? I was not happy. So -- because that shouldn't happen. We were trained once. I do understand, "Let's have a big splash and all that." But at the same time, there was so much going on in Q3 that these people push back their meetings to when they could get it done and etc., etc., etc.

I'm just -- I shared with you all that detail because it's easily fixable and I don't expect it to affect the longer-term prospects for the product, but it was definitely a self-inflicted wound.

Mark Massaro -- Canaccord Genuity -- Analyst

OK. And then one last one for me, you talked a lot about the trees moving. Can you speak whether or not the trees are moving on the M&A fronts? You recently talked about three to five targets potentially on your plate with the goal of acquiring $150 million to $250 million of revenue. So should we think about achieving that potentially with one or two deals? Or do you see a larger number of smaller deals?

Randy Steward -- Chief Financial Officer

It's certainly easier to do deals that would have bigger chunks of that $150 million. The integration of a smaller company is not any easier than a larger one. And so I would say a smaller number would be preferred, Mark.

Mark Massaro -- Canaccord Genuity -- Analyst

OK. Thank you.

Randy Steward -- Chief Financial Officer

It's a lot of tiny lens to get there.

Operator

[Operator instructions] Your next question comes from Alex Nowak with Craig-Hallum Capital. Your line is open.

Alex Nowak -- Craig-Hallum Capital Group LP -- Analyst

Great. Good afternoon, everyone. Doug, just kind of following up on that, with the toxicology delayed to next year, can you kind of ballpark what the contribution here could be for new products including tox, Lyme, troponin, plus all the new Sofia assets that you mentioned? What sort of contribution those can have in 2020?

Doug Bryant -- President and Chief Executive Officer

That's a terrific question. We have done a first pass of our 2020 plan, but we're still modeling and forecasting. We'll present to our Board here in a few weeks. And so probably it would be bad form if I gave you a number now before I ramp on my Board.

But certainly, we will be prepared to discuss the impacts of these new products when we present at JPMorgan in January.

Alex Nowak -- Craig-Hallum Capital Group LP -- Analyst

OK. Got it, understood. And then just going back to one of the core tenets here, the Triage acquisition. Now two years removed, one of the things with moving legacy Quidel products into the market outside the U.S.

So I would say, as you mentioned, all the infrastructure's now in place. You're launching a number of tests here in the next 12 months. How should we be thinking about that potential expansion into new geographies?

Doug Bryant -- President and Chief Executive Officer

We just got approval for -- are you whispering to me, Randy?

Randy Steward -- Chief Financial Officer

Yeah. Sorry.

Doug Bryant -- President and Chief Executive Officer

We just got approval in China for Sofia. For example, we've got a couple of things we're working on in Japan as another example. Plus, we're actually leveraging infrastructure we put in place. If you look at China right now, we've -- we're up 84% Q3 2019 over Q3 2018 in China with our legacy products, in part because we've got a larger commercial organization representing those products.

And then we've got the infrastructure there. So I'm not telling you we're hitting it out of the park yet, but we clearly are taking advantage of the infrastructure that we're putting in place and have put in place across the globe.

Alex Nowak -- Craig-Hallum Capital Group LP -- Analyst

OK. Got it. Just lastly, can you provide some details on the Serosep EntericBio deal that was announced a couple of weeks ago? I didn't see a press release from you, but it looks like you will be commercializing or be distributing their GI assay through your channel. Just curious how that's going to compete with the Sofia GI test that you're developing.

Doug Bryant -- President and Chief Executive Officer

Well, this is a different segment than anything else we do today. It's more in line with how we go to market with our Alere products where we targeted the larger institution that has a high complexity lab. And so the number of facilities out there is fewer. Therefore, we're mainly using our molecular sales force, a small team there to represent the product.

We do have a model. Obviously, we wouldn't have done a deal without a model. But we're using the team now to explore actually what opportunities are out there that are actionable in the 2020 time frame. And we'll be putting those numbers into our plan for 2020.

And we should have a forecast for that shortly, but I couldn't really speak to the magnitude at this point. I would say, though, that with each of the ones that I know about, that we've been talking to, the opportunities are fairly significant. So then the question becomes, which account actually is going to close and when are they going to close in 2020. And it should be reasonably easy to model, but it's also reasonably easy to get wrong if you're -- if you model some big account, and you don't get it.

So stand by. We think it's an interesting opportunity. We think it's an interesting segment, and I'm glad we did the deal.

Alex Nowak -- Craig-Hallum Capital Group LP -- Analyst

OK. Understood. Thank you.

Operator

Your next question comes from Tycho Peterson with JP Morgan. Your line is open.

Eleni Apostolatos -- J.P. Morgan -- Analyst

Hi, thanks. This is Eleni on for Tycho. Going back to your questions on Triage. I was wondering, you called out some declines in China, the Middle East and Africa.

Could you talk about the dynamics you're seeing there?

Doug Bryant -- President and Chief Executive Officer

Go ahead, Randy.

Randy Steward -- Chief Financial Officer

Yes. Kind of -- I mean there's nothing significantly different from prior quarters. Again, in China, we're going through 37 different distributors and stuff. So you kind of see quarter to quarter some variances.

Overall, I think in China, we're seeing on the Triage business mid-single-digit growth on a year-to-date basis, so that continues to be a good growth area for us. Europe, Middle East, Africa, it's been pretty flat for the year and that kind of continues plus or minus 1%, 2%.

Doug Bryant -- President and Chief Executive Officer

So then on China. So the Triage business is what it is, on the Triage BMP portion, they're actually growing quite rapidly. So it's a bit of a mix right now in China.

Eleni Apostolatos -- J.P. Morgan -- Analyst

OK. That's helpful. And then in terms of Sofia placements, you saw strong placements this quarter. And you mentioned 8500 or so from the new Sofia Lyme customers.

I was wondering how we should expect the cadence going forward.

Doug Bryant -- President and Chief Executive Officer

Well, I'm hoping we get somewhat of a stair-step move when we introduce the product in some of the larger urgent care centers in the northeast and in the upper Midwest. I don't see it as sort of a linear progression. And I think also with word of mouth, I'm certainly hoping for a big jump in awareness. And instead of going from a couple of hundred in a quarter to maybe double that the next quarter, etc., I expect that we'll hit an inflection point and it will be in the thousands.

It will go from hundreds to thousands pretty quickly if we're successful. I think that's more in line with what we would expect. We certainly saw, when we introduced Sofia initially, we were moving along quite slowly. Then boom, we had awareness and it jumped.

So I'm hoping we see the same thing to line.

Eleni Apostolatos -- J.P. Morgan -- Analyst

And then going back to your comments on contributions from toxicology and troponin in the second half of this year, you had previously mentioned $3 million to $5 million. I know you said because of the delay that will impact. You probably won't see contributions in this range. But I was just wondering given the pent-up demand and the large customer list you mentioned for particularly toxicology last quarter, if there is any potential upside there.

Doug Bryant -- President and Chief Executive Officer

Sure, there's upside. I suppose we're guilty of being somewhat conservative. That's probably our reputation, but all things being equal, if we don't see it jump from a couple of very large customers, you might end up being down by about 4 million relative to what we had forecasted. But could we do better than that? Possibly, but there's not a lot of time between now and the end of year.

Eleni Apostolatos -- J.P. Morgan -- Analyst

Thank you.

Operator

Your next question comes from John Hsu with Raymond James. Your line is open.

John Hsu -- Raymond James -- Analyst

Good afternoon. So staying on Sofia, could you give us a sense or snapshot where you are in terms of placements at this point, and maybe just a level set on the annualized annuity replacement?

Doug Bryant -- President and Chief Executive Officer

Sure, that's a great question. We were just asking ourselves this morning, "Where we were going to be at the end of the year?" I think we're going to exceed 40,000. So you don't have to wait till JPMorgan for me to say that. We're going to beat 40,000.

John Hsu -- Raymond James -- Analyst

OK. Great. And then on the annuity replacement, I think you said at different times that you're kind of tracking in that $4,000 range or so annualized. Is that a good way to think about kind of where we are now as we level set for next year with all the new menu coming on?

Doug Bryant -- President and Chief Executive Officer

Yeah. It's hard, and I hope you're not modeling by taking the number of boxes times and trying to figure it out because we can't do it that way. What's happening is we're moving at different segments with different box. Urgent care, you're going to end up with big numbers, but at the same time realizing the cost of Sofia 2 is dramatically less than originally the Sofia 1.

We're now moving into smaller accounts that we weren't in before. So -- and those are less than the $4,000. So I would say over time, we would hope to have Sofia placements more decentralized, which would mean that on a per-unit basis, the pricing would be higher, but it might be lower in volume. So I would suggest it's probably going to move down from $4,000.

John Hsu -- Raymond James -- Analyst

OK. Got it. And then sounds like the integration is largely complete here with the last country coming on in November. Can you just remind us what's left in cost synergies? I think there's a tail into 2020.

And then, clearly, the team has done a nice job. Are there other projects that you can outline for us as we think about margin expansion from here looking into 2020?

Doug Bryant -- President and Chief Executive Officer

Well, what we said was we'll be at $20 million by year three. And year two, we're already at $20 million. So I know that you're hopeful, but I would suggest that we've gotten where we thought we were going to be approximately a year earlier. And I'm looking at Randy, he's saying, "Please, don't tell him that there's more."

Randy Steward -- Chief Financial Officer

Sorry, John.

Doug Bryant -- President and Chief Executive Officer

So I don't know where we would get it. It doesn't mean it's not there. We do have, what we call, business transformation group that's looking for lots of different ways that we can improve the way we do things. I'll give you just an example.

We're looking at our cost to process an order globally. We think we're a little high and we think there's things we can do to get back down. But I would say that's more business transformation across the entirety of the business. Now that I've got the infrastructure at the tip of the integration, we're now repurposing those people to continue to look for other things.

So that's a very long answer to say that I think there's more to do, but it wouldn't be directly related to that recent acquisition, if that makes sense.

John Hsu -- Raymond James -- Analyst

Thank you so much.

Operator

That is all the time we have today. Please proceed with your presentation or any closing remarks.

Doug Bryant -- President and Chief Executive Officer

Well, thanks, everyone, for your support and of course, your interest in Quidel. Q3 was another solid quarter and we're in good shape as we finish out the year and head into 2020. Thanks again, everybody.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Ruben Argueta -- Director of Investor Relations

Doug Bryant -- President and Chief Executive Officer

Randy Steward -- Chief Financial Officer

Brian Weinstein -- William Blair and Company -- Analyst

Rachel Vatnsdal -- Piper Jaffray -- Analyst

Jack Meehan -- Barclays -- Analyst

Mark Massaro -- Canaccord Genuity -- Analyst

Alex Nowak -- Craig-Hallum Capital Group LP -- Analyst

Eleni Apostolatos -- J.P. Morgan -- Analyst

John Hsu -- Raymond James -- Analyst

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