QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

All right. Good morning, everyone. My name is Julia Qin. I work on the life science tools and diagnostics team at JPMorgan. It's my great pleasure to introduce you to our next company presentation today by Quidel. As a reminder, the breakout afterward is right next door in Elizabethan C. And with that, I'll turn it over to Doug. Welcome.

Thank you. Good morning, everyone. Again, I'm Doug Bryant with Quidel. With me here today are Ruben Argueta, our Director of Investor Relations; and also Randy Stewart, our Chief Financial Officer. This is our forward-looking statements. As always, nice job, Rob. The font is smaller, it's excellent. Well, Quidel is one of the few pure-play diagnostic companies in the space today, mainly focused at the point of care, although we span much of the continuum of diagnostic testing. Primarily, we're in infectious disease, that's where we started. That's where we developed our brand. More recently, through acquisition, we moved into the cardiometabolic space, and that's done extremely well for us. We can certainly talk more about that later during the Q&A as well. We, from a technology perspective, make assays that are based on immunoassay technology in a couple of different formats, but mainly on lateral flow. And also, we do both PCR and isothermal amplification for molecular testing. There are a number of drivers to -- demand in our space that's commonly known that improved performance in terms of sensitivity and accuracy, faster turnaround time, lower cost. Believe it or not, in health care, cost is becoming important. Easier to use is also a big factor in lab testing, particularly where we provide tests. So through the most recent acquisition, which we completed a couple of years ago, we became a much broader company geographically. And our global footprint is much larger. We're more globally diverse, of course, which informs now many decisions from product development. But also what we look at in terms of M&A, and I'll talk a little bit about M&A at the end as well. We, fortunately, are in a very good position relative to what the health care trends are these days, at least for diagnostic tests for routine conditions. And we've done extremely well as a result in both the urgent care segment as well as the emerging pharmacy segment. Health care is decentralizing. It is shifting closer to the patient. And reimbursement for molecular tests in large panels, I think, will potentially create different winners and losers in our space. And in that regard, we're perfectly placed, not only with our Sofia platforms, but also with a platform that we have in development called Savanna. So we've a reputation for being focused on the point of care segment and are certainly a leader in that category, but we actually fit across that continuum that I mentioned just a couple of minutes ago. And we compete, though more favorably on the right-hand side, where there are lower volumes per site, but there are many, many sites. There are more than other locations, the need for lower cost instrumentation is important, limited menu, but a menu that is very important. If you look at what we do in the urgent care space, for example, 45% of the diagnostic testing that is done in that urgent care space, we actually make a product for. So we do extremely well in that space with the products that we have. And we're perfectly positioned, again, at the right-hand side, which also, by the way, is a segment that's primarily dominated by products that are -- what are called CLIA-waived. So -- but cardiology, cardiometabolic broadens, where we compete pretty dramatically. You can see the new additions to what we do in green, significantly beyond what we did in the infectious disease space. And the reason this is important is because when you look at how we've done in the infectious disease space, we've done extremely well. We've done it with the technology called lateral flow, and our R&D organization has done extremely well testing the limits of what that technology can actually do. And I'm not going to suggest that we're at the end yet with what we can do, but we certainly are getting towards that. So when we think about infectious disease, we are going to make some product improvements, which enable us to get to multiplex formats for lateral flow. We think we can improve the product performance, particularly at the low end, to a certain extent. But there's still a lot out there that we can't get to with this particular technology. So leveraging what we have, this large installed base, is pretty important for us in the infectious disease space, but we also, in the future, have to look forward to how we might participate in the other categories, the other emerging markets, things like chikungunya, dengue and things you can't really get to if you're manufacturing in San Diego. So there's that -- there's other parts that fit with us. But at some stage, I think infectious disease for us could potentially, over the next 5 to 7 years, start to flatten out. And so leveraging what we have now is important, but also planning for the future, making investments in our next-generation technology for immunoassays, what we're doing there. And then the cardiovascular space, for us, I know that we got there through acquisition, but we love the space. We love the market. We love the fact that globally, the demand for biomarkers to diagnose cardiovascular disease is increasing dramatically. And diabetes and cardiovascular is a growing category, and things that we can do there to enlarge that opportunity is where we're focused at the moment. It'd be helpful if I advance the slide as I'm chatting with all of this. So here's sort of an estimate of what our addressable market, with the things that we have currently in development. At any moment in time, we try to maintain a development portfolio that has about 20 or so projects, and that's about where we're running right now, the total is about 20. I won't go through every single thing that we're working on. I'll just point out a few, the first of which is the GI opportunity. The first assay will deliver -- of 6 that we'll attempt to launch this year is the CDF product, which should launch midyear. There is a growing need for an inclusion of an immunoassay for toxins as part of the C. diff testing -- an algorithm that began with the molecular tests. And we think that the timing of this launch for us is particularly good. The other thing to point out, just briefly, you'll see on the right-hand side, the reference to RVP, that's a respiratory viral panel. That particular assay has flu A, flu B, RSV and human metapneumo. That's obviously a multiplex product that includes 4 different viruses. I like the product, I like the opportunity. I think it's going to be useful for us. But more important, it demonstrates our ability to actually employ a new technology that we have for spotting. And with that technology, we think we can spot up to 12 different -- 12 to 15 different things on a test strip, which would give us access to all sorts of things in the future, like allergy and anything else that had multiple things to test where it wants. Tier 2 Lyme, I previously mentioned, is something they're working on. But there are other things, obviously, that would fit that particular technology. And RVP is the first of those. So our ability to actually get that done, manufacture it, get it approved into the market, I think, is a good milestone for us moving forward. I see -- moving down the list, you see toxicology. Toxicology, we recently launched a new panel there, but we also are going to be moving that because of the opportunity with the technology on this. Sofia, we're going to move that from Triage over. But in the near term, we think over the next, certainly 24 to 36 months, we can go from an $8 million or so run rate that we have in tox today to something closer to $30 million. And that's certainly something we're counting on in our long-range plan. Overall, I've said previously that in 2020, the incremental growth due to these launches is somewhere in the $10 million to $15 million range. Most of that, of course, is coming in the back half. So the bigger run rate will occur in 2021 when we have the full year impact of those launches. So overall, depending on how you count things, we could be introducing or could be getting through the FDA this year some number of assays, certainly north of $10 million. So this would be our most productive year in the history of the company in terms of product development and a very, very good demonstration that we truly are leveraging this asset called Sofia that we have out there. And by the way, in the quarter, we did place a large number of Sofia analyzers in Q4. That brought us to somewhere around 6,000 analyzers for the year. That is a little bit lower than the previous year. But remember that Q1 2018, we had quite a large influenza season, which drove a lot of placements, just as the large Q4 this year drove a significant number of placements. But as we get from 40,000 to 50,000 Sofia analyzers, our ability to leverage that asset will be pretty important to us and a pretty good value driver. Our strategic intent really hasn't changed since I've been here. It remains the same. And really, it's to build a broader-based diagnostic company. When we first started out, we had essentially 3 assays, and only one generated a lot of cash. And so we've been working for quite some time on broadening what we do, and we certainly have had some success with that. But at this stage, we want to build that broader-based diagnostic company that leverages our larger and growing infrastructure and our global footprint. We're going to have to, as Rub and I were chatting, just earlier today, we're going to have to update this slide. But he thought I would -- I should show it to you one more time. There are 3 main objectives in support of our strategic intent. The first one is to grow organically in Q4, certainly flu in terms of market share, but also just in revenue, grew significantly. Q4 flu volume -- flu revenue was $50 million. That's our largest Q4 in the flu category ever. And that portends well, I think, for us moving into Q1. Of course, who knows what the season will ultimately do in Q1, but it's looking like we should have some number that is somewhat similar in Q1 than we did in Q4. I think that's certainly the reasonable expectation. Molecular sales in the quarter, we were 7 -- north of $7 million. That's quite good for us. That's up more than -- or around 20% versus Q4 2018. So we are growing organically. We have things in development that should keep that going for some period of time. Moving right on the chart that says fully integrate the Triage and BNP businesses. Well, we finished that in October of 2019. So after just a short period of time, we were able to fully integrate these assets, which basically didn't come with the business. So we had to build out an infrastructure in China. We had to build a customer service center in Ireland. We had to set up distribution in the Netherlands. A number of things worldwide that we do today as a result of what we did over the last couple of years that set us up well moving forward. So Ruben, yes, the chart needs to change because we've done that. And then on the right-hand side, we've said for a couple of years now that we have an ambition to get to $1 billion of revenue in a reasonably short period of time. And in order to do that, we're going to have to do some M&A, and we're certainly working on that as well. So these are the 4 major categories, the platforms for growth that we have. And I won't spend a lot of time here other than just to say that we're comfortable that we can grow the cardiometabolic business 4%, and certainly are on track to keep that moving forward. And you see the contributors there in the box. The -- our historic legacy business, the immunoassay business on our QuickVue and our Sofia platforms, we believe that we can consistently grow north of 10% over the next several years. Our specialized diagnostic solutions, the cell-based assays, the virology, the complement business, all that group together, aren't growing very, very much, but at the same time, they're super profitable and they generate a lot of cash. And then on the right-hand side, I mentioned already that we had a nice quarter in terms of molecular. It's niche for us so far, but all this in advance of a product called Savanna that we expect to launch very soon. In fact, expect to be in clinical trials this year, by the end of the year, with that particular product. So $7 million in the quarter for Q4, and as I said before, up 20% versus the prior year quarter. This slide, I don't know if it's actually quite necessary other than to say that we have a pretty good track record in our ability to not only develop products, but to move those products through regulatory agencies, including the U.S. FDA. And so we've actually been quite prolific in terms of our ability to get things approved by the FDA. We've had very few failings, actually, over the 11 years that I've been with the company. We've only had a couple of programs that didn't make it through the FDA. These are the immunoassay products that we have. The 2 on the left-hand side, of course, we developed, and then the one on the right-hand side, the cardiac, the Triage MeterPro, we -- we've gotten through acquisition. I'll just mention a couple of things. One is when we launched Sofia 1, we manufacture that instrument or we acquired that instrument at a cost of about $1,600 per product, including the ability to send the data to our cloud with the router. We've reduced that through the launch of Sofia 2 a couple of years ago down to about $500. And then we have in development a next-generation product, which we would hope to be down in the $7 to $10 range. So a major program, which is moving along nicely. Most people that I recognize in the room know that we call it sniffles. So we've had a program where we launched Sofia 1. We had a initiative to get the cost down and now we're moving to the next step, that with lower cost and improve our ability to democratize testing, particularly in the urgent care setting, where being able to test in the exam room would really reduce the amount of time that the patient would have to be in the urgent care center. And then these are our molecular products. We started through the acquisition of a company called BioHelix. We have an isothermal technology, that's how we got started. We had a novel product that merged the 2 technologies, immunoassay and isothermal amplification, into a device, a handheld device, which was unique. And we still have customers today. It does pretty well, but it's pretty niche, to be honest. We launched and using that same isothermal technology and instrumented system called Solana, and that's done actually quite nicely. And that's responsible for most of the greater than $20 million in revenue that we have on molecular sales today. So that's gone extremely well. We also do PCR assays, and we have for some time. The biggest sellers, I think, probably are influenza and HSV, VZV and a couple of things like that. But we've been making PCR for a while. The reason I mentioned that is that PCR will be the principal technology that's resident in our Savanna program. And we're moving along very nicely in terms of assay development. In fact, I think, Werner, are we now on 6 panels that we've completed?

Yes, 6.

Six so far. So we're doing quite nicely. I think we'll have a nice menu once we launch Savanna at the end of this year. Okay, we've got a number of shots on goal. I won't spend a lot. But clearly, we're not a one product company, we're not dependent on what -- any one program necessarily. I like it that way. I like the fact that our R&D organization is working on a number of things. There are some things that could be extremely valuable, but we're not necessarily dependent on those. So in our long-range plan, our 5-year plan, we significantly risk adjust those things, just simply because we're not reliant on any one thing to grow moving forward. When we did acquire the assets from -- were divested through Abbot's acquisition of Alere, the cardiometabolic products, we had an expectation that by this time, we would have generated $20 million in synergies. We did achieve that. We were already at that run rate by October of last year. And we still have more to go. So there are still things that we can do in the factory in terms of yield improvement, the reduction in scrap, just overall becoming more productive. We're working on those things. I don't know how many more millions we've got to go here, but we're still working on it, and we still think there's benefit in running those programs. And the integration team that we had on board throughout the entire process over the last couple of years is still on board and still working on these things. We're just now calling them business transformation instead of integration, but it's the same team. Okay. Well, this one is kind of a crazy slide now, but we don't have any debt. So we had debt. We were a little bit north of 4x for -- briefly when we did the acquisition. We are now down to about $13 million in the bonds that mature at the end of this year. So effectively, we have no debt, and yet we have access to capital markets. And so when we do M&A, we're going to be in pretty good shape. Here we go. So these targets are pretty consistent with what we've been saying all along with some minor adjustment. We've said all along that we want to achieve high single digits in annual revenue growth through product introductions for the most part. We hope to get to about a 7% revenue growth moving forward on a consistent basis. I think we can do that through a combination of the products that I mentioned and I showed you. But I think, additive to that would be the -- anything that we would do through acquisition. We will continue to invest in the development and commercialization of new products. We spent a great deal of time, resources and expense on our R&D programs. We will leverage our efficiencies and continue to move towards an EBITDA margin of 35% through the acquisition. That changed a little bit, but we're still -- even with the investments that we're making, we're still running north of 30%, which, in our space, if you were to compare other companies that are pure-play diagnostic, is significant. And I would suggest actually, relative to the other, is remarkable. And then maximize cash flow from our core business. Right now, we're doing about $100 million of free cash, and that's what we recently did again in 2019. And finally, we said that we were going to pay down the debt. And again, we probably should just take this off the slide because that was done. And then to get to $1 billion, we're going to need to do M&A. I can certainly try to address some of that as best I can in the Q&A. But I think we have a path forward that gets us to that $200 million to $250 million in revenue that would nick up the gap that we have, at least in the shorter-term, from just the purely organic side of things. And then what we're looking for and very -- a very brief description is just fit -- things that fit our infrastructure, fit in terms of either infectious disease or cardiometabolic, but also that we can say it would be accretive, certainly within 12 months. And, I think, I just ended precisely on time. Thanks very much.