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Oxford Immunotec Global PLC (OXFD) Q4 2018 Earnings Conference Call Transcript

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Oxford Immunotec Global PLC  (NASDAQ: OXFD)
Q4 2018 Earnings Conference Call
March 11, 2019, 4:30 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 Oxford Immunotec's Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Karen Koski, Vice President, Strategy and Investor Relations. You may begin now.

Karen Koski -- Vice President, Strategy and Investor Relations

Good afternoon and thank you for joining us to review Oxford Immunotec's financial results for the -- fourth quarter and full year 2018. Joining me on today's call are Oxford Immunotec's Chief Executive Officer, Dr. Peter Wrighton-Smith and Chief Financial Officer, Rick Altieri.

Before we begin, I would like to caution listeners that comments made and financial information provided during this conference call as well as the presentation containing supplemental pro forma financials that has been posted to our website, includes certain statements and information that are estimate forward-looking and are subject to various risks and uncertainties.

This information is based on the best information available and assumptions that Management believes are factually supportable and reasonable. However, actual results could differ materially from those stated or implied by these forward-looking statements, due to the risks and uncertainties associated with our business. Including those under, the heading entitled, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018, which will be filed with the Securities and Exchange Commission later this week. For a discussion of these risks and uncertainties, I encourage you to review our SEC filings. The Company disclaims no -- any obligation to update or revise any forward-looking statements.

During the call, we'll also present certain financial information on a non-GAAP basis. We believe that non-GAAP financial measures, taken in conjunction with US GAAP financial measures, provide useful information for both us and investors to evaluate the Company's performance. These include pro forma revenue, gross margin, operating expenses, loss from operations and adjusted EBITDA. Reconciliations between certain US GAAP and non-GAAP results, such as adjusted EBITDA are presented in the tables accompanying our earnings release, which can be found on the Investor Relations section of our website and in the Form 8-K filed with the SEC this afternoon.

As a reminder, in early November we completed the sale of our US laboratory services business to Quest Diagnostics. As such, the NADA (ph) invested US laboratory services business is shown as discontinued operations in our press release and forthcoming 10-K. Amounts to the prior periods in the press release and our 10-K have been reclassified to conform to the presentation. The discussion of our results and business updates on today's call will be focused on our continuing operations and to assist investors in understanding underlying performance of the Company's continuing operations, we will be referencing certain pro forma non-GAAP financials.

These non-GAAP financials which were also filed as an exhibit on Form 8-K this afternoon reflects the Company's estimated revenue and cost of revenue as at the closing date of the sale of our US Laboratory Services business request had occurred prior to the respective period and that our long-term supply agreement with Quest had been in effect for the full respective periods. The pro forma adjustment in these tables are based on the best information available and again, assumptions that Management believes are factually supportable and reasonable. However, such adjustments were subject to change and the methodology used may not be indicative of our future consolidated results of operation or the future timing of revenue.

With that, it's my pleasure to turn the call over to Oxford Immunotec's Chief Executive Officer, Peter Wrighton-Smith.

Peter Wrighton-Smith -- Chief Executive Officer

Good afternoon. On today's call, I'll provide a brief overview of our operating performance for the fourth quarter and full year 2018, Rick will then take -- take over to discuss our financials before handing the call back to me to discuss our strategic priorities for 2019 and to provide our 2019 financial guidance. We'll then open up the line to take your questions.

Before I begin, as many of you may have seen, we filed an 8-K this afternoon, announcing that Rick Wenstrup has left the Company. Rick came to us with many years of experience in the US Laboratory Services business from his time at Myriad Genetics. He joined us to help prepare the Company for the next phase of growth, particularly within our own service business, with the Company having recently transformed to a pure play IVD products Company, Rick and I agree that it's the appropriate time for him to step down and pursue other interests. I'd like to thank Rick for his contributions to the Company and we wish him well in his future endeavors.

Turning to our 2018 fourth quarter and full Year results as Karen noted, I'll be referencing non-GAAP pro forma financial measures in some of my commentary. These non-GAAP measures will enable you to compare our performance in the fourth quarter and full year 2018 on a like-for-like basis to the pro forma financials that we filed with the SEC on Form 8-K on January the 7th, 2019.

For the fourth quarter of 2018, our global non-GAAP pro forma TB revenues were $15.6 million representing year-over-year growth of approximately 14% over the fourth quarter of 2017. Our performance was slightly ahead of our internal expectations and the qualitative commentary we provided on the last quarterly call.

Looking at TB revenue by geography, as anticipated US TB test volume demand remained strong with both volume and revenue growth in the mid teens to high teens. As expected, US TB for Asia TB revenues fell back sequentially from a strong Q3, more just because of order patterns but also due to the disruption and testing in Japan caused by the powerful typhoons. Nonetheless, Asia continue to show strong year-over-year revenue growth of 13%.

In Europe and rest of world, our expectations for a small sequential increase in absolute revenue and for the region's year-over-year growth rates pick up modestly from Q3 were exceeded. We posted a record quarter in Europe and rest of world TB revenues which grew 11% of another difficult comp. In summary, we are pleased to see that our TB business posted another strong quarter with double-digit pro forma revenue growth in all major geographies.

For the full year 2018, our global non-GAAP pro forma TB revenues were $63 million, representing year-over-year growth of approximately 13% over 2017. Pro forma US TB revenues grew in the mid teens with momentum and growth accelerating throughout the year. Asia TB revenues grew a 11% and Europe and rest of world TB revenues grew 15% of a difficult comp last year.

We sold nearly 3.5 million tests during the year, setting a new high watermark for TB volumes and bringing the cumulative number of tests, we've now sold to nearly $16 million. Broad based double-digit volume growth seen across all our major geographies continues to support our strategy of displacing the skin test and converting customers to our superior product. As a Management team, we're focused on growth. However, we also strive to ensure that such growth is sustainable. And therefore, we also advanced the Company toward profitability during 2018.

We continue to drive down TB cost of good through economies of scale and operational improvements and this coupled with the full year benefit from the reduction in royalty obligations negotiated in 2017 resulted in nearly 500 basis points of pro forma products gross margin expansion for the year. We also gained meaningful leverage across each of our operating expense lines, making significant progress toward profitability as measured by adjusted EBITDA. In summary, I was particularly pleased to see the core Company executed so well throughout the year on both the top and bottom lines alongside the very significant amount of work involved in successfully completing the Quest transaction.

I'll now hand it over to Rick, who'll give you some more detailed comments on the financials.

Richard Altieri -- Chief Financial Officer

Thank you, Peter. Our full year GAAP financial results are available in the press release that was issued earlier today. However, for the reasons that both Peter and Karen have described, I won't be referencing non-GAAP -- pro forma financial measures as filed with the SEC on Form 8-K this afternoon, in most of my commentary. This will enable the comparison of our fourth quarter results and full year 2018 financials, on a like-for-like basis to the -- pro forma financials filed on Form 8-K with the SEC on January 7th, 2019.

Starting with some comments on pricing and volume in our TB business, including both continuing and discontinued operations, to enable a comparison on a like-for-like basis, we sold nearly 275,000 tests in the US via both kits sales and test processed in the -- ODL service business. We sold nearly 600,000 tests in our OU -- in our OUS region, both be a kits sales and test processed in our UK ODL service business. In-country pricing generally remained stable for the fourth quarter, although ASPs for the OUS region as a whole, vary from quarter-to-quarter due to geographical revenue mix and foreign currency movements.

Shifting to the P&L, GAAP revenue for the fourth quarter of 2018 was $15.4 million. GAAP gross margin was 74.3% and the operating loss from continuing operations was $4.3 million. Due to the complexity of the accounting related to discontinued operations, we are still finalizing our GAAP numbers, including the allocation of the tax provision between continuing and discontinued operations. All final adjustments will be reflected in our 10-K which will be filed by the due date later this week.

Turning to the non-GAAP pro forma financials that represents the Company's estimated P&L, as if the closing date of the Quest transaction had occurred prior to the fourth quarter and our long-term supply agreement with Quest had been in effect for the full quarter. Pro forma revenue for the fourth quarter of 2018 was $15.9 million, representing a 7% increase from the fourth quarter of 2017 pro forma revenue of $14.9 million. Excluding but blood donor screening, pro forma revenue for the fourth quarter of 2018 was approximately $15.8 million, representing a 12% increase from the fourth quarter of 2017 revenue of $14.1 million. Overall, pro forma gross margin for the quarter was 71.2%, an increase of 190 basis points from the prior year period.

Turning to -- non-GAAP pro forma operating expenses, where we continue to drive operating leverage. Pro forma research and development expenses were $2.2 million in the fourth quarter, a 22% decrease compared to the fourth quarter of 2017. Our R&D expenses have come down, as we have exited the blood donor screening business and eliminated the expense associated with seeking BLA approvals for those tests. Our R&D spend is now centered around our new cycle of product innovation in TB as well as reducing TB kit manufacturing costs, so that we can continue our long track record of reducing cost of goods sold.

Pro forma sales and marketing expenses were $5.8 million in the fourth quarter, a 15% decrease compared to the fourth quarter of 2017. The decrease was due to the implementation of a leaner leadership structure and a reduction in overhead and related support costs, given that our US sales force is significantly smaller. Recall that some of our US commercial organization became employees of Quest as part of the sale of our US service laboratory. To create inside Quest a dedicated sales force, focused on and expert in T-SPOT.TB.

Pro forma general and administrative expenses excluding transaction expenses were $5.7 million in the fourth quarter of 2018, a 5% decrease from the prior year period, excluding transaction expenses, our pro forma operating loss from continuing operations for the fourth quarter of 2018 was approximately $3.5 million. A significant improvement versus a comparable net loss of approximately $12.8 million in the fourth quarter of 2017.

Capital expenditures for 2018 totaled approximately $5 million. This is about double what we'd expect on a go-forward basis, because in 2018, we completed a major CapEx program related to the opening of our new headquarters in Oxford. This new facility expands our manufacturing capacity substantially and we believe, we now have ample runway to meet the demand for several years to come without any significant facility investments. Fourth quarter 2018 depreciation and amortization expense was approximately $750,000, including a full quarter of depreciation related to the new facility. We believe the fourth quarter run rate is indicative of what we'd expect in 2019 on an annualized basis.

Pro forma adjusted EBITDA for the fourth quarter was a loss of $750,000 compared to an adjusted EBITDA loss of $3.4 million in the fourth quarter of 2017. As a reminder, adjusted EBITDA excludes share based compensation, unrealized foreign currency gains and losses and unusual items, both EBITDA and adjusted EBITDA and non-GAAP measures. We finished the fourth quarter with a very healthy balance sheet with $193 million of cash and cash equivalents.

Now, I'll hand it back to Peter, who will -- discuss our strategic priorities and financial guidance for 2019.

Peter Wrighton-Smith -- Chief Executive Officer

Thank you, Rick. 2018 was a transformational year for Oxford Immunotec and we exited the year a fundamentally changed Company with dramatically simplified operations, improved top and bottom line profitability and having significantly increased our financial and strategic flexibility with a markedly stronger balance sheet. We enter 2019 as a pure play diagnostics products Company focused on tuberculosis. Tuberculosis remains the world's deadliest infection and is a top 10 cause of death worldwide. There's growing recognition that the global TB epidemic can only be controlled through the expansion of programs to identify those who are carriers of latent TB infection.

2018 was an unprecedented year in regard to the number of guideline updates that support the important role IGRAs will play in the global battle to end TB. Highlights include a significant expansion by the WHO in the recommended populations for latent TB testing and treatment as well as a removal of a prior recommendation against the use of IGRAs in low and middle income countries.

The inclusion of IGRAs in the WHO's first ever list of essential in vitro diagnostics, updated guidelines from the American Academy of Pediatrics that include specific recommendations for the use of IGRAs and a lowering of the recommended age for IGRA used to two years old and the release of updated technical instructions to civil surgeons by the CDC -- requiring that an IGRA rather than a tuberculosis and skin tests be performed in all applicants for the two years of age or older.

Beyond these guideline updates, we've also seen renewed commitment from global organizations such as United Nations to scale up latent TB testing in an effort to get additional people on preventative treatments. The UN in fact just recently set an aggressive goal to get over 30 million people on to prevent the treatment by 2022. Together, we feel these guideline changes continue to add further tailwinds to the displacement of the antiquated skin test by newer IGRA technology.

During the year, we also saw the publication of some notable studies which emphasized the superiority of our offering. In particular, there were two landmark publications in Lancet Infectious Disease that reported the results of our tests in comparison to others in large scale multi-year follow up studies where the accuracy of each test was assessed based on their ability to detect true infection as evidenced by the development of subsequent active TB disease and to correctly call, uninfected individuals as evidenced by participants remaining disease free. In these first of their client studies where test accuracy was assessed based on this gold standard T-SPOT.TB was found to be the most accurate of the three commercial tests.

During the year, we also saw the publication of a large scale study in over 40,000 children which provided strong evidence on the utility of T-SPOT.TB in this important patient group and the publication of another large scale study in over 600,000 subjects which provides strong support for the FDA approved borderline zone in T-SPOT.TB and this features impact on improving test reliability. We believe that the continued emergence of data like basis, an important constituent in driving further market share gains and asserting our best-in-class performance.

With IGRAs still representing only approximately 25% of the global market, we see tremendous headroom for continued growth through continuing to drive access to and adoption of T-SPOT.TB globally. Consequently, we remain focused on investing to drive continued revenue growth. There are three principle focus areas for 2019. Firstly, getting off to a strong start with our partnership with Quest and working with them to accelerate adoption of T-SPOT.TB in the US.

Secondly, further expansion of our commercial resources outside the US to meet and drive broadening demand for our tests. And thirdly, continuing to invest in product development initiatives that can further augment our unrivaled simplicity and logistics advantages for customers and enable further automation of our test.

Starting with the US, where our transaction with Quest has significantly increased to reach in competitiveness with T-SPOT.TB in the market. Since closing the transaction in early November, we've been working closely with Quest to integrate the acquired T-SPOT.TB service operations to Quest and implement on strategic collaboration agreement. The initial focus has been on bringing the former Oxford Immunotec operation onto the Quest platform. Key to that is connecting the Memphis lab operations to Quest software platform.

This will allow our physicians to order T-SPOT.TB directly from the EMR or Quest offering an ordering interface just like any other Quest test and received results the way they used to. This also opens our access to Quest managed care plans, patient service centers and logistics capabilities. We're making good progress and expect connectivity to be in place during Q2 and the other benefits to be implemented by the end of 2019. Once fully implemented, this will put this T-SPOT.TB on a level playing field with any other test ordered by our physician from Quest.

In parallel, we've been working closely with Quest sales and marketing teams to train them on the advantages T-SPOT.TB, we've been very pleased with the amount of commitment shown on the Quest side and the quality as a collaboration between the two Companies. However, it's still early and we're just starting to hit our stride here. All in all, the relationship is working well and we couldn't be more pleased with the high degree of engagement from Quest across all levels and functions. This great strategic logic of this transaction and we believe that both organizations will capture significant benefits from this partnership in 2019 and beyond.

Outside the US, we're already successful in developed markets such as Europe and Japan, where we're selling direct and which continue to grow. Over the past year, we strengthened our market leadership position in Japan and we recently added more sales resources in Europe to support the positive momentum we've seen in that region. In China, we help facilitate the growth and expansion of T-SPOT.TB by complementing our distributors efforts and guidelines, advocacy and medical education. We continue to see the Chinese market has a significant source of growth and are dedicated to getting a right in China. We'll be working with our distributor Foshan (ph) throughout 2019 to position us for future success and investing further in this market in order to do that.

And ever more countries adopt latent TB testing and treatment, we will continue to expand geographically. In 2019, we expect to evaluate and potentially execute on the addition of a direct presence and additional resources in multiple new countries. We'll also evaluate partnerships with the potential to give a significant reach in areas where it doesn't make sense for us to go direct in the near-term.

Beyond our commercial efforts and now that we can concentrate on only running one principal business model globally, we have the ability to focus our R&D efforts even more strongly on improvements to our T-SPOT.TB test such as our T-Cell Select reagents. As we roll it out, using T-Cell Select for the first time ever, customers will have a fully automated solution for T-SPOT.TB. This will simplify workflow, improve throughput, reduce hands on time and reduce labor costs in performing T-SPOT.TB. Furthermore, with T-Cell Select, blood samples collected in the single standard blood tube can be stored for up to 40 hours, 54 hours at room temperature before used in the test. This further extends an unrivaled simplicity and logistics advantages for customers.

We believe the multiple advantages brought by this latest evolution of our test will increase use of T-SPOT.TB by new and existing customers, enable testing in new locations and create more formidable barriers to entry long-term. We're just in the early beginnings of this product and our R&D efforts will remain focused on maximizing the reach of our technology and delivering all the benefits in this product innovation over the coming years. Another focus with an R&D is the execution of a robust pipeline of COGS reduction initiatives. For example, we're investing in further automation of our TB kits manufacturing so that we can continue our long track record of success in driving down the COGS.

On the spending side, we also expect to gain further leverage of our operating expenditures as we repurpose the spending and deployment of capital in the Company around our pure play product business. Collectively, our continued revenue growth, work on the COGS, leverage of OpEx will enable the Company to move to profitability. We expect adjusted EBITDA to get to break even once we've completed the remaining transition work for the -- US Laboratory Service business sold to Quest.

Additionally, in regard to 2019 priorities, we intend to capitalize on the options we have to utilize the cash from our balance sheet to improve returns to shareholders. In early January, we announced plans to seek shareholder approval for the ability to repurchase up to $100 million of the Company's shares over five years. This plan has Board of Director approval and underlines our commitment to drive returns to shareholders. But also signals our discipline about getting the Company to operating profitability.

The share purchase program will be presented for shareholder approval at our upcoming Annual General Meeting of our shareholders on Tuesday June 18th, 2019. Mostly outside of our TB business given the capabilities we have, there a lot of options to grow the business over the longer-term in new areas, both organically and inorganically.

We believe there are three broad adjacencies where it makes sense for us to look to build the Company over the longer-term. Adding additional products in the TB continuum of care, building our presence in immunology based of our T-SPOT.TB technology platform and our immunology expertise and leveraging our channel through products that can utilize our global quality and regulatory experience, our manufacturing capabilities and our global commercial channel. Having said all this, our primary focus will remain on a fantastic opportunity ahead of us in TB and we'll be very selective about executing on these opportunities.

Now turning to our financial guidance for 2019. For the full year 2019, we expect revenues in between $69 million and $72 million representing 5% to 9% year-over-year growth on a pro forma basis or 8% to 12% year-over-year growth on a pro forma basis when you exclude the blood donor screening revenue. Based on the midpoint of the annual guidance, we expect approx -- approximately 19% to 20% to full year revenues to fall in the first quarter.

As seen in prior years, Q1 is typically the weakest quarter of the year for Asia, although we still expect strong year-over-year growth due to the seasonal pattern, we expect revenues in Asia to fall back slightly sequentially in Q1 before picking up throughout the remainder of the year. We also expect Europe to post year-over-year growth, but for revenues to be roughly flat sequentially to Q4 given the Q4 was so strong in that region.

In the US because of-- we will be recognizing Quest revenue on kit shipments on a go-forward basis. We expect the seasonality of our revenue in the US to shift slightly due to order timing and fluctuations in inventory and/or inventory build. Under our supply agreement with Quest, we expect to have good visibility to these order patterns and that's reflected in our Q1 guidance.

To wrap up, I'm more excited about the Company and then I'd ever been in 16 years, I've had the privilege to be CEO and that's because through all the foundations we've laid, we have a leadership position in the world's deadliest infectious disease. This is a very large growing and underserved market. Our product in that market is based on world leading immunology technology. That's the foundation for growth in lots of different areas for the future.

We have well diversified revenue streams because of our geographical expansion but also we have a recurring revenue model. We have very attractive gross margins and through the ability to achieve expense leverage we now have a clear pathway to near-term profitability. And last but not least, we have a very strong balance sheet that creates additional opportunities to build value for shareholders both by investing in the business and returning cash to shareholders.

That concludes our formal prepared remarks. We'll now open up the line for questions.

Questions and Answers:

Operator

(Operator Instructions). Our first question comes from the line of Catherine Schulte from Baird. Your line is open.

Catherine Schulte -- Robert W. Baird -- Analyst

Hi. Thanks for the question. First just, Peter you mentioned talking about adding other potential tests to your offering, given your position now that as the kit business, are those pipeline tests something you consult with Quest on and their appetite to run those or is that a separate process?

Peter Wrighton-Smith -- Chief Executive Officer

So, I think well I understand the question. Would you mind repeating it?

Catherine Schulte -- Robert W. Baird -- Analyst

Yeah. So for your pipeline tests, are those something you consult with Quest on now that you're at kit business and their appetite for those tests or is your pipeline process just as a stand-alone Company?

Peter Wrighton-Smith -- Chief Executive Officer

Yeah. That's certainly a consideration in the strategic collaboration agreement we have with Quest. We have strong interaction across lots of different functions, sales, marketing, medical, affairs, managed care, but one of them is also on product development. And so we do certainly talk about things coming up in the future and that is definitely one of the considerations we would have in thinking about our pipeline but not exclusively obviously, because there may be other channels in the US and we also think globally as a business.

Catherine Schulte -- Robert W. Baird -- Analyst

Okay. And then, as we think about incremental volume opportunity from Quest, what kind of TB volume Quest ran last year. Do you have any sense of what portion of that business could convert key spot?

Peter Wrighton-Smith -- Chief Executive Officer

I'm not sure but it's public what volume of TB test Quest ran last year. So I don't think I should comment on that. That's something that Quest should comment on if they're willing to, I think it is clear however that they do run a significant volume of our competitors test and that may be reasons why they might prefer to run our tests in preference to that test. But that's certainly not something that we're banking on, it wasn't something that we assumed would happen been an ideal model and ultimately that's Quest's decision and their decision to make.

Catherine Schulte -- Robert W. Baird -- Analyst

Okay. And now with your strength -- strengthened balance sheet after the Quest deal, how should we think about investment priorities for you between R&D investing in commercial organization or M&A?

Peter Wrighton-Smith -- Chief Executive Officer

Yeah, I think, it should be it should be clear from my comments that we are very focused around the TB business. We will clearly make incremental sales and marketing investments in our business to drive further growth. We are sitting on a fantastic market opportunity here. And we'll continue to make judicious investments we think have a good payback period in sales and marketing. Equally we are also going to spend money on R&D in TB, because we think that clearly COG reductions have a very good payback in terms of adding shareholder value, but also in terms of this major new cycle of product innovation we think that could be very important for the Company in terms of share gains in the future. So those are clear priorities for business and we're definitely going to be investing in those. And as it relates to M&A, I think longer-term we clearly feel that they can make sense for the Company, but we will be very selective about that and making sure that doesn't distract us from our core execution in TB.

Catherine Schulte -- Robert W. Baird -- Analyst

Great. Thank you.

Peter Wrighton-Smith -- Chief Executive Officer

Thank you, Catherine.

Operator

Our next question comes from the line of Doug Schenkel from Cowen. Your line is open.

Chris -- Cowen and Company -- Analyst

Hey, thanks for taking a question. This is Chris (ph) on for Doug, today. I just want to start on that kind of you made, Peter when you finish -- would you expect to finish training Quest sales reps on T-SPOT.TB given that Quest was already selling within latent TB test. How much incremental work is there to do on training Quest reps? And just relatively when do you expect to see an acceleration in US volume growth as part of the Quest agreement?

Peter Wrighton-Smith -- Chief Executive Officer

Yeah, I think there is -- there are lot of things to do in training our new partner Quest or anybody else. Obviously we need to edge -- in the same way we're training our own reps, it takes time right. You need to educate about the product and then you need to build a pipeline of opportunities and you then -- as they execute obviously there are more detailed questions that come up and so I would view that training their reps as in training any rep just takes some time. It's not something that happens in days.

More generally, I would say that it will start to feel the full benefits of the partnership with Quest when T-SPOT.TB fully integrated into Quest channel. And as I said in my prepared remarks, we don't anticipate that being completed until the end of 2019. So we view 2019 as a year where we're focused on really seeding strong foundations in the partnership and are looking perhaps to 2020 before we start to see that meaningfully accelerate the US revenue growth.

Chris -- Cowen and Company -- Analyst

Okay. And then can you just elaborate on the strategic collaboration agreement with Quest, really what does that entail in context of sales and marketing investments? And I think you previously talked about implementing annual promotion plan requests? Any more details you can share on that plan?

Peter Wrighton-Smith -- Chief Executive Officer

Yeah, certainly that document is, I believe, public but with some reductions. So generally speaking, what this strategic collaboration agreement is a document that government held at how the two Companies are going to interact together to promote T-SPOT.TB. So there's a few elements of that I think are worth mentioning. The first is, it establishes close functional collaboration between various functions in the two organizations that to develop joint plans to work together to promote to T-SPOT.TB, so that sales, marketing, medical affairs, managed care, et cetera. And secondly, it sets out a governance structure by administering that collaboration. And we also will be working together on joint sales and marketing plans for the year. So that's a very top level what that agreement covers.

Chris -- Cowen and Company -- Analyst

Okay. And then maybe just lastly, the -- all going back to the acceleration in volume growth. Should we see that more meaningfully in the physician office market or do you expect that to be meaningful in the hospital segment as well?

Peter Wrighton-Smith -- Chief Executive Officer

Well, I think it's worthwhile pointing out that we've been very -- we had been very successful historically in the hospital segment and I see no reason why that success can't continue. But equally one of the great advantages of the partnership with Quest from our perspective is, they have a relationship with over 50% of doctors in the US and they have a very large sales force they would call on that. And so certainly, we're looking forward to this partnership enabling us to access parts of the market that we were unable to do ourselves before.

Chris -- Cowen and Company -- Analyst

Okay. And sorry, truly a last question. Could you quantify the impact of the Japan typhoon. And do you expect to recapture the lost volume in 2019 at all?

Peter Wrighton-Smith -- Chief Executive Officer

I don't have a number to give you -- specific number to give you what I can tell you is that, it did interrupt testing in a number of cities for a couple of weeks. Generally, we are history in these types of weather disruptions is the testing just gets deferred, it doesn't kind of catch up. So our expectation is that, just lost.

Chris -- Cowen and Company -- Analyst

Okay. Great. Thanks for taking my questions.

Peter Wrighton-Smith -- Chief Executive Officer

Thanks, Chris.

Operator

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

Julia -- JPMorgan -- Analyst

Hi, good afternoon. This is Julia (ph) for Tycho today. Thanks for taking the question. So first off maybe could you give us an updated view on the expected seasonality and when do you think you'll have better visibility into the stocking dynamics from Quest? And do you expect a significant uptick in volume starting 2Q?

Peter Wrighton-Smith -- Chief Executive Officer

Yeah, so I think it's a little bit early to answer that question. What I can tell you is that we do have obviously a near-term visibility on orders and that's reflected in our Q1 guidance. But exactly what the seasonal pattern will be yeah, it's a little bit unclear at this point in time, it really depends on, we obviously know from our past history that Q3 is the highest quarter in terms of testing the test performance. The question is, is that going to feed into Q3 being the highest in terms the kits shipments or a quick shipment -- kits shipments going to kind of precede that and if so does that mean that, some of those going to ship to Q2. Yeah, these are all conceivable but we don't have -- we would like to play out a little bit before I comment more definitively.

Julia -- JPMorgan -- Analyst

Okay. And then on gross margin, 74.3% and I think that's the highest -- level we've seen and also higher than the 70% product gross margin that you previously carved out. So, just wondering outside of the sales and services that obviously how should we think about the path toward further gross margin expansion?

Richard Altieri -- Chief Financial Officer

Yeah. So if you look at 74.3% was our GAAP reported financials and the GAAP numbers did include some allocations between continuing and discontinued operations. That's why we've directed you to the pro forma numbers which we believe are more indicative of what the business will look like going forward. We'd expect our product gross margins to be in the neighborhood of 70% on a go-forward basis.

Karen Koski -- Vice President, Strategy and Investor Relations

And just to clarify Julia, the pro forma gross margin was 71.2% in a quarter, so not a huge variance but that's kind of the level we think it makes sense going forward.

Julia -- JPMorgan -- Analyst

Got you. And lastly from me regarding OUS expansion, I know you highlighted going through a distributor in China. But could you maybe elaborate on the efforts more broadly, in which countries China or including China have you made the most progress? Are there any sort of imminent pending guideline expansions like tenders on the horizon and how much of that is currently embedded in your guidance?

Peter Wrighton-Smith -- Chief Executive Officer

For competitive reasons, I'd prefer not to get into too much detail there, other than to say that, we see obviously China and Japan have been strong growth drivers for the business historically and we continue to see them as strong growth drivers for the business going forward, but outside of that we see multiple opportunities in wider Asia and in fact, all over the world as the WHO has started to change so significantly on IGRAs further growth, and we'll be looking at each of those in a disciplined way and then thinking about where it makes sense to put our own resources and where it may make sense actually to use partners.

Julia -- JPMorgan -- Analyst

Okay, thank you.

Peter Wrighton-Smith -- Chief Executive Officer

Thank you.

Operator

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

William Quirk -- Piper Jaffray -- Analyst

Great. Thanks. Good afternoon, everyone.

Peter Wrighton-Smith -- Chief Executive Officer

Good afternoon, Bill.

William Quirk -- Piper Jaffray -- Analyst

So, first question Peter is just thinking about the nature of the Quest relationship going forward and the comment that 2019 is going to be a big kind of integration and training year for them, help us think I guess, two-part question is, help us think about the -- I guess the confidence that they're giving to you in terms of forecasting for 2019 given that there are a fair amount of moving parts vis-a-vis the integration? And then maybe just kind of a longer-term question is, how to think about again integrating Quest into the forecast is, are they giving you some kind of annual numbers, are they giving you quarterly forecasts. Just try and understand better the visibility on that relationship? Thank you.

Peter Wrighton-Smith -- Chief Executive Officer

Yeah. So I think our visibility is in two main areas, under the supply agreement, we do get a forward forecast of expected purchases. And obviously, as in any such forecast, the numbers that are way out at the end of the forecast and less reliable than the ones right in front of us. But we do at least have some visibility going out beyond the current quarter. And the second thing we do is, under the strategic collaboration agreement we have data sharing so we have some indication of sell through volumes or testing volumes in the market and that also enables us to kind of triangulate how things are going which gives us a secondary check on whether the kit purchasing forecasts are tracking in line with what the growth is in the end market.

So those are two things that we'll have and obviously it will take some time for us to triangulate those things and to learn -- to work together to get those things in sync. But we feel in a relatively good place as it stands in terms of the guidance we set for this year, but it's clear that also we'll learn more as we -- as the relationship matures.

William Quirk -- Piper Jaffray -- Analyst

Okay. Very good. And then secondly is just again have a bigger picture question. Given the transition, she talked a little bit about the mood internally at the Company. I presume the employees are kind of engaged in the business transformation but would love to hear your comments and certainly appreciate your comment at the end of the prepared remarks about this being the most excited you've been in the 15 years you've been running Oxford (Technical Difficulty).

Peter Wrighton-Smith -- Chief Executive Officer

Yeah, I think when we announced the transaction internally, there wasn't a single person who didn't get it and understand the logic of doing this, because it's really one of those rare situations where one plus one equals three. This is great for Quest, it's great for us. It's great for T-SPOT.TB, it's great for patients, it's great for TB control. So, it's just all around a great thing for the Company, for our products and our future. And we're really excited about building that new future together.

William Quirk -- Piper Jaffray -- Analyst

Very good. Thanks guys.

Peter Wrighton-Smith -- Chief Executive Officer

Thank you, Bill.

Operator

(Operator Instructions) As there are no further question at this time, I would now like to turn the conference back to Mr. Peter Wrighton-Smith.

Peter Wrighton-Smith -- Chief Executive Officer

Yeah. Thank you all for joining us to discuss our fourth quarter and full year 2018 results. We look forward to updating you on our next quarterly call. Thank you.

Operator

This concludes today's conference call. Thank you for joining. Have a wonderful day. You may all disconnect.

Duration: 43 minutes

Call participants:

Karen Koski -- Vice President, Strategy and Investor Relations

Peter Wrighton-Smith -- Chief Executive Officer

Richard Altieri -- Chief Financial Officer

Catherine Schulte -- Robert W. Baird -- Analyst

Chris -- Cowen and Company -- Analyst

Julia -- JPMorgan -- Analyst

William Quirk -- Piper Jaffray -- Analyst

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