QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Good afternoon, everyone. And welcome to the second day of Bank of America 2020 Virtual Health Care Conference. This is Ivy Ma, Diagnostic Analyst here at BofA. For this session, I'm pleased to be joined by Quidel's CEO, Doug Bryant; CFO, Randy Steward; as well as Head of IR Ruben Argueta. Thank you so much for joining us this afternoon, and welcome. And just a quick reminder, everyone on the line, you can submit questions through the webcast. So Quidel had a good 1Q '20, which not many companies can say this day and perhaps, more importantly, just received EUA for the first antigen-based test last Friday. Doug, if you have any introductory remarks, you'd like to kick it off, and then we can go into questions. Thank you.

Sure. Wish we were in Vegas. I like the Wynn hotel and we enjoy every year the trip. So -- but here we are. I'll just be very brief and say that most folks since their earnings call and then earlier today have been asking us about the 3 key drivers to our business. Most of the conversation, of course, has been on what's happening with SARS 2, and we've also spent a little bit of time talking about longer term which includes our next flagship product, Savanna as well as people want to know how we're doing with high-sensitivity troponin, which could be a big, big opportunity for us as well. So I'll just stop because I think questions are more important than me going on and on here. So I'll stop and please ask whatever you like.

Absolutely. Thank you for the overview. So we'll just dive into the COVID-19 test questions. Can you update us on some of the recent pipeline development, I mean, including the 3 COVID-19 product offerings, but also beyond that, your other pipeline development recently?

So can I make sure I understand the question. You want me to give an overview of what we've done and what we're going to do with the COVID projects?

Right, timelines, capacity goals and all that.

Okay. Well, I'll start just by saying that we've been at this almost full-time since Randy and I got back from our meeting at the White House, on March 4. By March '17, we had not only already developed a PCR-based assay for our brand of PCR products called Lyra, but we've also received the EUA at that time. Since then, we spent a lot of time in March [ recurring ] our supply chain, and we ramped up some very low volumes to our ability to now manufacture 1,000 kits per day. That's roughly 480,000 tests per week. What we're doing there in Ohio from a manufacturing perspective is making just this product exclusively for 5 days and then on Saturday and Sunday, we make the remainder of our molecular requirement needs. So 480,000 tests per week, and then we also manufacture a smaller volume of test for the other Lyra products that we routinely ship to customers, mainly strep flu, the herpes 1+2/VZV product, et cetera. We've said there, though, that we -- now that we're at that capacity that as we exit June, we expect to be shipping to our customers roughly 2/3 of that volume. Based on our forecast and a by name customer forecast, we believe, will be at that level at that time. Pricing on the product is just slightly below $30, obviously, quite a high-margin product and all upside, obviously, at this stage. The next development there is we're in the process of securing an EUA in order to continue to ship products, our direct Lyra PCR assay, which instead of an extraction step, we replaced that with a heat step when we save the customer a lot of time, 50 minutes, and the time and effort to do the extraction as well. Moving forward, we've also simultaneously been working on the Sofia assays, those are significantly more complicated nevertheless, we were the first to recently get an EUA for our SARS antigen product that accrued on Friday, May 8, which is just this last Friday. We are manufacturing this week, 200,000 tests as we just built according to what the raw materials dictate that we can build, we intend to ship all of that product before the end of this week. We have now more orders for tests than we have manufactured. Moving to next week, we'll also manufacture 200,000 tests. I think we will have kitted all those by Wednesday. So we actually will run a couple of days ahead of our initial schedule. The 8 major items that are in the bill of materials for this product, we will have secured within the next few weeks, and we will ramp to about 1 million tests per week. And then after that, we will -- one of the 8 is a key item that we will be manufacturing ourselves, and that will enable us potentially to go from 1 million to about 1.5 million to 1.6 million tests with that product per week. The total manufacturing capacity that we have with the equipment that we have in place is about 84 million tests. So once we get to that 1.6 million tests per week, we will have taken up most -- well, the entirety of our capacity for some period of time, and then we'll have to evaluate what are the other products should we be making. In the meantime, we're just a few weeks out from our serology assay. I won't go into details there, but I will just say that at the time we get EUA for that product, our product will have some unique features that you have not yet seen with the serology assays that are out there. Today, I would just ask you to stand by. I'm not communicating specifically what those differences are just because I know that we have competitors that listen to these calls and read our transcripts as well. So that's the serology assay. After that, it's obvious that we should be looking to combine our flu and our COVID assays under 1 test cartridge. And I'll just say publicly today and it will be widespread that we intend to manufacture that products as well. That should give us additional capacity because we won't have to manufacture the 20 million flu tests in addition to what we're doing with the COVID tests. We've also announced that we're installing a line 7 and additional manufacturing line that would give us 30 million more tests capacity. And then we're in the process of reviewing whether we should immediately start installing lines 8, 9 and 10, each with an additional 30 million test capacity. We're going to evaluate that over the next several weeks. What I don't know yet that would be helpful to know is for these new customers, for the antigen tests, are they routinely screening health care providers? Let's say, at the frequency of every week or is it a onetime shot? We're going to get a much better feeling for what that first tranche of important customers that we need to supply, what that looks like? It really does seem like we probably will make the decision to move forward with those additional lines. Randy has already scoped out the floor plan for these additional lines, and we'll be able to accommodate that all within the infrastructure that we have here between the 2 plants in San Diego. So that was a long answer, but that's everything effectively that we have going on at this time. We do have an allocation plan. I reviewed that allocation plan with HHS yesterday. They seem to be satisfied with the fact that we're preferentially shipping customers who can do testing for health care providers, first responders to include military, also food service and food production, including meat packing plants, and to that list, we've now added our plant. So we're going to do our best to do the testing that we can immediately for that group of customers. Before we consider doing employment testing and all the nonessential things that are out there that people would like us to do. Including the travel industry, the entertainment industry and those sorts of things. We hope actually that some of our competitors will come behind us reasonably soon because this is not just about us and revenue and margin. This is about us as an industry doing the best that we can, doing what we can for the greater good to protect the public health and safety, and as long as we all just do that and do the right thing, I think we're all going to be okay. So I'll stop there and see what else we got in terms of the question.

Great. Thank you for all the details. That's very helpful and actually touched on the number of topics I wanted to go into later on. But let's start on Lyra. So there are a lot of -- a number of PCR tests on the market and so I wanted to see if you could talk about how your test is stacking up against the other molecular tests out there? What are your advantages? And then what are you seeing on the test demand, the uptake so far?

Yes. I would say, first, that most of the PCR tests actually perform comparably. And so it's not really a matter necessarily as to how your test performs relative to others. Our test performs a lot like their Roche product, which performs a lot like the Abbott product, et cetera, which performs comparably to the Hologic Panther Fusion product. It's -- at this stage, a matter of ease-of-use access to swabs and extraction reagent, and we're filling in the gaps where we are competing where you wouldn't think we might be able to compete in these high complexity labs, where we don't have brand is in situations where customers are running out of extraction of the agent or they can't get consistent access to swabs. Our kit, we ship with the swabs necessary to run a test. Our kit comes with the master mix lyophilized so that it's -- it doesn't require to be shipped frozen. So it's fairly easy. It's fairly quick. We save on the direct kit about 50 minutes in time, as I mentioned just a minute ago. So I think the reason we're able to compete really is obviously not on brands compared with Roche and Abbott, but more on filling in a gas with customers who really are in a bit of a pinch. So they may already have Roche and Abbott and others in their lab, and they're asking us to supply in situations where they have difficulty with supply from these other manufacturers. So what it does tell you is there's certainly a lot of demand because if we're able to ship -- let's say, in the last week of June, if we were able to ship 320,000 tests in that last week, we're filling the need that basically the other big guys just at this stage can't fulfill. So that's kind of where we're fitting there as we're -- I hate to say it like this. It sounds odd, I'd say we're sort of living in the cracks, right? There's just so much that's going on out here and there's so much disconnection in terms of the supply chain that that we're able to create demand for our product. And I like it, though, because in the same customer base, they're getting to know us and our reliability, our customer service, our people, and I think that portends well for us as we think about the Savanna launch in early 2021.

Great. And I'd like to quickly remind investors, you can submit questions through the webcast, and I can ask those on your behalf if we have time. And then moving on to the antigen test. So this type of test has a quicker turnaround time, obviously, and cheaper to produce, but may not be as sensitive. So I wanted to pick your brains on what do you think is the role of this type of test in the overall COVID response? And what's the benefit for important value there. I'll stop there.

Yes. This is actually very similar to the flu market, where about 92% of the volume is done by these rapid tests, which are not as sensitive as PCR. And so what you see in the flu world is with patients who are admitted to a hospital; quite often, those tests are molecular. Either they are flu, flu RSV or they're in a multiplex panel like you see with BioFire. But those are almost all molecular tests for inpatients, whereas in the outpatient setting, almost all those steps are done by either rapid antigen or with Abbott's isothermal non-PCR molecular product. And the reason that, that's acceptable is the frequency with which you can test. And here, we have a thing where frequency is even more important. Frequency is more important with COVID-19 testing because we need to be able to test these health care providers and first responders on a routine basis. The full capacity of the labs in the United States, according to BCG, Boston Consulting group, goes from 150,000 tests per day today to not more than 400,000 or 500,000 tests per day moving forward. That's completely -- it's necessary, of course, but it's completely insufficient, relative to the testing that's going to be needed moving forward. So when you look at the numbers of health care providers at 12.8 million; first responders, another 1.8 million; you want to talk about school kids, you've got 76 million. Pretty soon, the millions start adding up. And so there's no way that the system here can do all that testing by PCR. And certainly, you can't do it such that you could do those people routinely and quickly. So there is a role. There's a role recognizing that with our particular assay, even when we demonstrate the true sensitivity that we have nearing 90%, you're still going to miss 10%. But that missing 10% is perfectly acceptable because of the fact that the trade-off is your ability to test many, many people and to do so frequently.

Great. Appreciate the color. And then maybe moving on to a bigger-picture question on the test market here. What do you think the market opportunity is? I mean there are a lot of unknowns, but curious to get your thoughts on what capacity expectations or need expectations you're eventually planning for? And how long do you think the level of viral testing would sustain? Because some of our other companies were expecting the molecular test to go at a high level through the next flu seasons. And then the serology side, it's a bit of more of a wild card. And since you're planning to have all 3 types of tests, so just curious to hear your thoughts here.

Well, I'll go on a reverse order and say that until we understand what the prevalence in the United States and the rest of the world, frankly. It's very difficult to determine the value of serology tests. So if you look at a test that's 90% sensitive, but 99% specific. In that situation, if the prevalence out there is only 1%, then your positive predictive value, in other words, your likelihood of being correct when you get a positive test result is only 47%. So you're actually going to be more accurate if you don't run the test, right? Now if -- as that prevalence increases, let's say, to 10%, then if you do that same math of that same assay we talked about, it goes up geometrically to 91 [Technical Difficulty] perfect, but you can see how the value of the serology test is really only good when we know the truly -- the true prevalence, not what you're hearing on the news. But the true prevalence out there in terms of people who have IgG antibody actually. So as that increases, there will be some utility for the serology assay. But until we know that, what you're going to see is a lot of PCR tests, and you're going to see a lot of rapid antigen tests. I do agree with the molecular players that whenever they can get to the volume they can get to which is really -- constrained really by what the labs can do that will go on for a couple of seasons, and that's what we forecasted in our LRP. We make an assumption that we're going to have to be testing a lot of people that are not necessarily affected yet with SARS in order to get people back to work, in order to get people comfortable to going to entertainment venues, whether it's NFL games or major league soccer games or television audiences. We've been -- somebody reached out and said, could we test all the audience for the television programs. So that's all going to happen over time, but it's not going to happen for a while. So I think there's going to be a bolus of testing that goes right through 2020 through 2021. And what we have in our model is that it subsides somewhat, and what we'll end up with is a world in which we're testing for flu and COVID-19, in our instance, hopefully on our Sofia combination assay, but the volumes would be probably somewhat higher than our flu testing world today. Today, we represent 40% of the influenza testing market and in the last 12 months, we did about 20 million tests. So that effectively is the market today. That could go up, I think, as we exit '22 and go into 2023. But we do model that it comes down quite a bit and becomes more of a routine diagnostic business over time following this big bonus that we're going to live through for probably a couple of years.

Great. Appreciate the color. And with less than 10 minutes to go, maybe let's move on to the rest of the business. Any COVID-19 update for the rest of the business lines and latest trends? And then what actions have you taken to mitigate the near-term impact from the pandemic as up there? And I have some follow-ups.

Yes. So unfortunately, you've probably heard on the news that many patients that should be visiting their physician who have shortness of breath or other symptoms of cardiovascular disease are not showing up and our sales in the cardiovascular biomarker department are obviously affected by that, down by about 18% -- let's just call it, 18% to 20%. And we've modeled moving forward, at least through the remainder of this year that we would stay at that rate. So we probably will live in a world where our revenues for those cardiovascular biomarkers would be globally in the mid-50s, and let's just call it $55 million, maybe $55 million, slightly higher, $1 million per quarter, which is off from the $64 million to $69 million that we had previously been running. So that has an impact for us. Also, there's the opportunity cost of products that we would have launched. We were supposed to be in a clinical trial this season where we were on a Sofia cartridge doing flu Ab, RSV and human metapneumo, all in the same cartridge. We enrolled clinical trial sites, and then after a few weeks, we had one patient enrolled. So clearly, it's not possible to do clinical trials in this world. The other big driver to our revenue, at least what we said we would do in terms of incremental for this year was the introduction of the C. diff assay. We will still try to launch that, but I can tell you that most of the labs don't have a whole lot of capacity to take onboard new things and to do the evaluations that are necessary. So all in all, I would say we have the reduction in sales for cardiovascular. And on top of that, the incremental $10 million that we said we would do on the new Sofia products. We're not counting on that. So all in, you're talking about a reasonably significant impact, but obviously, more than offset by what we're going to be selling with both the PCR product as well as well as the new Sofia SARS antigen and serology products.

And that actually is a good segue into my next question. So I don't know -- there were a lot of discussions around significant second wave of infection later this year. So I'm curious to see relative to what we've seen with the initial outbreak and shutdown. How do you think about the impact to your business? Or that's a question regarding how do you think about Quidel's ability to grow through a long recession?

Can you repeat the question, please? I was just distracted by somebody on the call who said that part of the presentation may have been muted accidentally.

No. So I was trying to see if you have thought about a scenario analysis where there is a significant second wave of infection later this year? And relative to the initial outbreak and shutdowns, how do you think about the impact to cardio? And how do you think about your ability to grow through a prolonged recession, if that's the case?

Well, for us, I feel like we will have manufactured as much as we can and sold all of it, but that would be sad if that occurs. We will not have validated our new manufacturing line, so as we go into the fall and the winter quite yet. So we won't be able to take more advantage of the situation than we are in today. Cardiovascular seems to be at the rate that it is at this point. We are spending more money. If we have the shelter-in-place rules for California, in particular, but also Ohio and Massachusetts, where we have manufacturing. We are paying more money for our direct labor at the moment as we should. So that will have an impact. But overall, obviously, we're in a different situation than most businesses are.

Just want to touch on spending just now, can you talk about your use of cash and your M&A strategies at this point?

We had 2 M&A targets that we were working on pretty diligently earlier. One of them was a publicly held company. We probably won't pursue that for some time, given what's happened to the valuation of that company. And when I look at ones that are participating in our space, the valuations are too high and the other companies that aren't participating, valuations are probably too low, and those companies don't want to sell anymore. So the public market doesn't seem like it's something that's actionable for us right now. The other company we were looking at was private and it would have given us more manufacturing capacity, and we're going to look and see how they recover in Q3, Q4 this year, so we may be back at it with them at the end of the year. But that really is not going to be sufficient to take up a lot of our cash. And what we think about moving forward is, should we be making investments and things that are perhaps adjacent to what we do that could be helpful. I'll just give a couple of examples. Should we be looking at how we can partner with companies that are more entrenched in telehealth? Should we look at companies that we should partner with that may have a better strategy with respect to data management? Should we partner with companies that may have a clearer path towards over the counter? So I think we're going to have the cash that we need to make those sort of investments to enter into partnerships that give us access to not where we are today as a market, but where the market is going. So I think we're in a unique position to take advantage of that because of our product offerings and the fact that we're going to see testing, I believe, more democratized into pharmacies and closer to where patients actually are.

Great. I think that actually answered my last question of the long-term implication of the pandemic and how you see your business going forward. Anything else you want to touch on before we end the Q&A here?

No I just would say [Technical Difficulty] I wish we could have done this in Vegas. It would have been great. Just an awesome time for our company and I think the path ahead of us is pretty clear. We know what we have to do. And now it's just about execution.

Great. With that, we are out of time. Thank you for joining us, Doug, Randy and Ruben, and I want to thank everyone on the line for listening. Be safe and healthy and enjoy the rest of the conference.

Thanks, Ivy.

Thank you. Have a good one.