QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Good morning, and welcome to day 2 of the Barclays Virtual Global Healthcare Conference. This is Jack Meehan with the life science tools and diagnostics team. I'm pleased to be kicking off today with Quidel, CEO, Doug Bryant; CFO, Randy Steward; Head of Investor Relations, Ruben Argueta. Maybe just to kick it off, Doug, would you like to make any introductory remarks?

Sure. Thanks, Jack, and good morning, everybody. I can say that the most important positive event was that it was easy for Randy and Ruben and I to find a parking spot here in our office in San Diego. In fact, Randy and I are right in front. So that's a positive for sure. But I did just want to mention that we're coming off a pretty good year, 2019. We had a great fourth quarter. Fourth quarter really we're a little bit better than we had expected to be at north of $152 million. We ended the year just right at $535 million in revenue, which was reasonable growth and in line with what we have expected for the year in total. We did complete the global integration of the Triage businesses that happened in November, which is pretty much on schedule and delivering about $20 million -- or north of $20 million actually in annual synergies, which admittedly was better than we had planned. We did reduce our debt by another $98.6 million, so almost $100 million there. That's just a little bit earlier than we had expected as well. The instrument systems and R&D and clin/reg groups did a nice job last year and put us in a position to have a pretty good 2020. Notably, during the year, we did achieve a couple of critical milestones with Savanna. We did complete the first 6 assay panels. If you follow our industry closely, you'll know that most people don't launch instruments with big menus; we will. And two, the cartridge design that allows all this to happen was finalized, and cartridges are now being manufactured as we do what I'll call the engineered confidence builds. These are the first instrument systems that will validate all these assays. We'll then go to an alpha unit, and we would plan to run the clinical trials on that before the end of the year. And then we'll go to a beta unit, which will be very close to the final product that we'll be launching early 2021. So that was a sign of relief, I would say, because we did struggle as most people know with a couple of aspects of the development of that instrument system. And we're very happy that a lot of that got accomplished. I did talk a little about Sniffles from time to time as we were out there. That's our next-generation Sofia platform. That's the internal name for the product, so nobody panic. We're not going to go market calling an instrument Sniffles. But -- and so overall, we had a really good year in 2019. And then in 2020, we're expecting increasing efficiency and productivity of the sales and marketing teams globally because we're going to expand the menu quite a bit. So that should be very helpful to the team. We are off to a very good start in Q1. I can talk more about that in detail, Jack, if you'd like. And so 2020 is shaping up to be another very good year. Just earlier this week, actually on Monday, the APACE study, APACE stands for Advantageous Predictors of Acute Coronary Syndromes Evaluation. The study is actually an ongoing prospective international multi-center study that includes 12 centers in 5 different countries and is aimed at advancing the early diagnosis of MI, a heart attack. That study went extremely well for us. We can talk in detail about that. But that publication came out on Monday in the journal of the Academy of Cardiology. And so that article and an editorial, both were published in that journal. And then 2 reviews -- no, 3 reviews so far that I read just since Monday come out talking about the product. So we're really excited about what that could do for us in Europe. And now we're officially launching TriageTrue in Europe with the publication of that -- those data from that study. We're going to continue to launch a toxin line and PLGF, which stands for placental growth factor. We haven't talked a lot about that. So I can help with what that means, if you want, Jack, as well. We will launch Sofia C. diff and several other Sofia GI assays later in the back half of this year. We're launching 2 upgraded products for our Graves' disease and Hashimoto's disease products, TSI and TBI. Talked already about the Savanna instrument developments. We will potentially begin U.S. clinical trials for our high-sensitivity troponin, if you're in the U.S. And then finally, and I know you're going to want to talk about this in some detail, Jack, we will talk today about what we're doing with the development of 3 different COVID-19 assays. And for each of those, we plan on filing for an Emergency Use Authorization, also known as EUA, and -- followed by clinical trials and a 510(k). We expect to do all that this year, too. So I'll stop. We've got a lot going on, and this is an exciting year. And we've never been better positioned as we end the first quarter of the year.

Yes. It's clear. A lot to be excited about, also a lot to dig in on. So let's start where you just ended with the coronavirus. Clearly, it's the topic du jour. Maybe just talk about how it's impacting, just an update on how it impacts your operations and then what you're seeing from a testing perspective? Is there more flu going on? And elaborate on those 3 tests. That would all be great.

Sure. I'll start by saying that we are unaffected for the most part by supply chain issues. We don't actually have product that we import from China that's used in our manufacturing processes. We do have one minor exception. There is an improvement to the test screening on Sofia 2 that we're working on, and then we have some -- have a couple of prototypes that we're expecting from China at some point. And that's, I have to say, delayed. Randy, do you remember what Karen said?

A couple of weeks.

A couple of weeks. But other than that -- which obviously doesn't affect our revenue at this stage. Other than that, we don't really have any issue with supply chain. On the other way, us shipping product to China, everything we've shipped so far has cleared customs. I do want to point out that with people not traveling and creating, I guess, what people are now calling social distance, a lot of folks aren't showing up for appointments with their health care providers either in China or the United States and/or in Europe. And I would say that is affecting, in particular, to a degree, our cardiovascular business. Randy had -- and I think I commented on it, too, had estimated that we could have an impact of about $5 million in the quarter. Could be slightly higher than that as we get more visibility to it, but that's pretty minor relative to how we're doing overall in the quarter. So I wouldn't suggest anybody look at their models differently because of the impact. Yes. And then I will have to say that I was asked -- we had made a decision, and I had informed my Board that we would not be developing these assays. But I got a call from somebody that I know quite well in Washington, and we were asked to please consider it. So we are engaged now, and we're not behind. But we've developed already a reverse transcriptase PCR for coronavirus, which is set up in the same way that we already do our Lyra PCR products for these respiratory viruses. And so the thermocycling conditions that we've set up for all those assays are identical to the coronavirus -- our PCR coronavirus assay. And our commercial team as of yesterday is out talking to customers who have certain thermocyclers in their labs about their needs and how we might supply those right now. We're in the optimization phase of the development, and we would expect to be able to complete the EUA package imminently. And then I think the turnaround time at the FDA will be also quite short. So we should be able to ship product as early as the end of this month to customers for coronavirus. Simultaneously, we're working on a Sofia assay, and we've got a couple of different formats there that we're looking at. We're looking for also potentially a unique plan for us to get access to samples that would be very helpful in the development. We expect to have that assay ready to go on an EUA basis as early as October. And then finally, we're also working at a serology-based assay for Sofia, which would detect both IgG and IgM. Serology assays are going to be really critical because we need to find out here in the U.S. and in the world, we need to find out who's already been exposed. And so that's the game plan. I can't really talk a lot more about -- in detail about all of this. But if you have a question, maybe I can answer it, Jack.

Yes. I guess just a couple of follow-ups. The first before getting the potential upside, just to clarify, the $5 million comment related to cardiovascular, I think you said in the context of the model. Just how should we interpret that? Could the potential rapid upside offset some of the pressure you're seeing in cardiovascular? Is that what you're trying to say?

Yes, it's exactly what I'm trying to say -- it's definitely what I am saying. The upside from the rest of the business more than offsets that.

Got it. Okay. And then that all sounds good. Is there a range that you feel better for -- maybe just talk specifically about flu testing in the season. Do you feel like you have better visibility on how the first quarter might shake out related to that?

We do. And I'll tell you what's happened, normally during the quarter, you see distributors, all the major ones, significantly reduce their inventories. And so when they see ILI begin to fall, they start managing that down, which they did, but then promptly, the following week, back at it and ordering significant volumes because it's still going pretty strong right now, and we're what? This is March 11. So this is shaping up to be a reasonable quarter. Randy, how would you compare that with 2 years ago Q1? We had a very good year. Remember, Jack, Q1 of what was that, 2018?

Yes. Yes. We did about $64 million.

We did $64 million in flu in that quarter, and we expect to do slightly more.

Okay. Sounds good. Last question on coronavirus. I can understand developing the PCR-based test with a Lyra type approach. Can you maybe just elaborate a little bit more on the value of the Sofia assay? And then is that something you can test for using an immunoassay-based method? What's the differentiation there?

Well, immediately, we're doing the molecular assay because we were asked to. I think there's an expectation that all the big labs just got set up with their own PCR assays to handle some of the volume. They can't actually handle the volume. And there, you're just talking about molecular testing. So -- and molecular testing has tended to be somewhere around 8% of the total volume. With the trailing 12 in terms of what's publicly reported that rolls through distribution, the trailing 12 at the end of the third quarter of last year was 31-point-something million tests. That included a very bad Q1 of 2019. And now we're fourth quarter, first quarter this season. I would tell you that I would -- this is just my guess off the top of my -- just back of the napkin sort of calculation. I'm going to guess that when we see the real data for those 2 quarters, and obviously we're still in March, it's probably going to roll up closer to 50 million tests. So point-of-care testing is critical. It's critical, Jack, because right now, you're going to wait 2 or 3 days to get your answer versus waiting 12 to 15 minutes in a physician's office or at home or in a lobby or in an urgent care center or something closer to the patient. I can find out now. And then I don't wait 2 or 3 days and go shopping and doing whatever or getting on an airplane while I'm waiting for my test results, right? I found out I'm positive, I go home and stay there, right? So if we're going to curb this, the nation needs rapid point-of-care test. They don't just need me to develop test. They need other manufacturers as well because remember, if it's 50 million tests, I'm doing probably, what, Randy, north of 20 million? So I'm only 40% of the output out there. So we can handle the volume on Sofia because of lines 5 and 6, the 2 automated -- fully automated manufacturing lines that we have. Those 2 lines combined are somewhere around 50 million tests by themselves. So I can handle the volume. Plus, we have 40,000 Sofias out there, right? So it would be very convenient for us to develop a test. So therefore, even though I said I don't know what the model looks like, I have no business case for it, I don't know what the volume is going to be, I committed to the guys and I committed to folks I know at the FDA that we would do this, and we are. So honestly, I hope I don't have revenue.

Fair point. I wanted to...

But if there's an epidemic, and it goes into next year, the country is going to need the test, right?

Yes. Agreed. Okay. I wanted to skip ahead to something that you also talked about in the prepared remarks, which was the publication of the APACE study. Google tells me impact factor for the journal is 19. So that seems pretty good. I was wondering if you could just talk a little bit more about -- give us a little overview on the data, which was published, what was the primary end point? And what exactly did the data show?

Yes. So in this study, which we tested a couple of thousand samples, didn't we?

Yes.

This product, the TriageTrue, which is what we're calling it in Europe, high-sensitivity troponin, demonstrated very good accuracy, Jack, for the early risk assessment of patients who are suspected to be having a heart attack, myocardial infarction. And that was just published, volume 75 #10, in the Journal of the American College of Cardiology, okay? So referred to because it's actually, as you point out, it's actually quite well-known, this journal. So it's not -- it's a pretty high-impact journal. It's commonly referred to as JACC. So a single cut-off concentration less than 3 nanograms per liter, when these patients presented, identified 45% of patients at low risk with a negative predictive value of 100%, okay? That is -- well, first of all, it's...

Pretty good.

It's not -- it can't get better than that, right?

Right. It looks pretty good.

So the authors who are well-known and actually involved with several other companies, Abbott, Siemens, Beckman and others, and Roche, they were same authors that did those studies for those companies. They derived and successfully validated a time 0 and 1 hour algorithm that demonstrated very high accuracy in the rule-out zone. So in other words, we have rule-in; higher elevation; and rule-out, 0 has got to really mean 0, right, with a negative predictive value of 100% and sensitivity of 100% while maintaining a positive predictive value of 76.8% overall. So overall, the 0, 1 hour algorithm, the accuracy was quite high. And that it assigned nearly 3/4 of patients to either rule-in or rule-out within an hour. And only 1/4 of patients were -- they need to observe beyond the hour, right? So when you think about the economic impacts of that in these European cardiovascular centers, that's huge. So patients ruled out by the algorithm had cumulative event rates of 0% at 30 days and 1.6% at 2 years. So this study confirmed these findings in a secondary analysis, including the high-sensitivity product on the -- on Abbott's ARCHITECT. So that ARCHITECT was used for, what I would call, central adjudication. So the point-of-care assay, our assay, TriageTrue, provides high diagnostic accuracy in patients with suspected MI with the clinical performance that is at least comparable to that of best validated central laboratory assays, in other words, the Roche Elecsys and the Abbott ARCHITECT, which are viewed to be the best products. So the availability of this product will further facilitate the implementation of early Triage algorithms. That's interesting. The product name is Triage, and we're talking about Triage algorithms so -- and thereby provide major benefit for both patients and health care systems. So all those comments I just made, Jack, we just took straight out of the publication. There is an editorial, and you can read about how this might be implemented in the market. We're highly encouraged. We think we're going to do well in Europe, and we're expecting to have a meet -- wait, we're not expecting -- well, we are expecting to have a meeting at the FDA. I assume it's in-person, I hope so. But we have an in-person meeting scheduled with the FDA to talk about how we might put together a trial here in the U.S. And so we'll know more. And I had expected to talk to everybody during our Analyst Day on April 8, and we certainly will be in a position to talk on that date about it. But given everybody's concern about travel and all of that, Ruben, Randy and I have made a decision to push the Analyst Day into the fall. And I don't know, did you pick a date yet, Ruben?

No, no.

No. We'll get a date out to everybody so you can plan. In the meantime, maybe we'll do something where we can do something virtual as a quick update on things. But I do think that it's probably prudent to do that. And further, we'll have completed some other stuff and probably have a more robust Analyst Day meeting anyway. So I guess we're announcing that on your call, Jack, for the first time that we have to -- we made a decision yesterday, right, to push this thing. And frankly, the folks from NASDAQ, where we were going to hold the meeting, were telling us that everybody is canceling everything. So all of their -- what do they call them, when you go -- just take a tour and all of that, their sessions that they normally hold for companies are being postponed and delayed as well. So that was a lot, Jack, sorry, but a pretty powerful publication. It couldn't have been better than that.

That's great. I have one final question hit on in the last minute, which is just capital deployment. Obviously, you've gotten the balance sheet in a really clean spot. Given some of the dislocation in the market, are you seeing some new opportunities to do deals? Or does it change your thinking at all around M&A and timing there?

I think that we're certainly in a good position to deploy capital at this point. And there are some unique and interesting opportunities that because of the global infrastructure that we put in place, because of the commercial organization that we've built throughout the globe that it would be a good fit for us at this time. But we have some pretty strict criteria, as you know. We like things to be accretive. We've committed to our shareholders that we're not going to do something dumb. And so we do a lot of work on due diligence. We make sure that we know exactly what we're getting. That proved to be the case when we did the recent acquisition. We also have the infrastructure in place to do rapid integration as well. So this would be a really good time for us. And I think there is an opportunity and there are a few things that we have looked at and are continuing to look at, at this time.

Great. Well, I think we're right at the end now. I think I only asked 4 questions. But as always, I learned so much over the last 25 minutes. So Doug, Randy, Ruben, really appreciate it, and appreciate you participating in the virtual conference.

Sure, of course. And any of the other questions that -- anybody on the line, if they have questions, they'd like us to get on the phone with them individually or however they want to do it, we're happy to do it.

Appreciate it. Okay. Have a good day.

Yes. You too, Jack. Good luck on your conference.

Thanks. See you.

All right. Bye.