QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Good morning, and welcome to the virtual fireside chat with Quidel. We have President and CEO, Doug Bryant, who I was told, had a great night sleep last night, so that's good. We have CFO of Rockford, Randy Steward with us and Director of Investor Relations, Ruben Argueta as well. My name is Brian Weinstein. I'm the analyst here at Blair covering Quidel and certain areas within diagnostics, life science tools or medical technology. Joining me is my associate, the team COO, Andrew Brackmann. A reminder, our team is hosting some events along with the conference. Team Weinstein hosted a Peloton ride yesterday morning. We just finished one this morning and are hosting another group ride tomorrow at 4:00 Central. We are also hosting a nightly recap for companies that are presenting, Andrew and I will give our thoughts on kind of what we heard throughout the day. We're calling that the Lido Lounge named after the Lido Shuffle, the official song of Team Weinstein, that takes place at 5:45 tonight. Dial-in information is in Back Street as well as the day 1 recap note that came out this morning. Finally, before jumping into the call, the least grumpy Compliance Officer in the business, Mr. Michael Besenjak has asked that I inform you that for a complete list of disclosures or conflicts, please visit our website at williamblair.com.

All right. All that now since out of the way, Doug, I'm glad you had a good night sleep last night. That's critical. Hopefully, that means that the business is in pretty good shape. So maybe you can update us on trends that you're seeing through May and early June and there's a lot to talk about slowdowns? Or are we seeing a second mini wave? Are you seeing any evidence of either one of those at this point?

Good morning, everybody. Good morning, Brian. Thanks for having us on the call. We're doing exceptionally well. I feel like I'm 10 years younger. Like I said earlier, for the first time in a long time. I'm sleeping extremely well. We've been running at this super hard for several months. And the thing that I'm focused really on -- right now, really, for the most part, is in securing supply chain, getting orders, taken contracts put in place and getting products shipped. We are now with the Lyra product at our max capacity and have been for several weeks now at 480,000 tests per week. We'll remain at that level until probably the October time frame when we've got some equipment coming in that will help us increase that capacity. That product line is going extremely well. We've shipped mainly U.S. customers, but we've got some pretty big demand from ex U.S. as well. Moving on to Sofia. I can just tell you that everything we make, we're shipping. We're at 1 million tests a week now. We have a huge number of contracts already in place. The number of takeaways from competitors on 3- to 5-year agreements has been surprisingly large. So we're just ramping up. And we can talk about contracts. We can talk about all that, all the detail you want, Brian. But right now, we're just going as fast as we can, shipping as much product as we can. Our distribution partners are super active at the moment. They're just now kicking in the gear. Early on, we were drop-shipping everything. And now I think we're almost at a stage where we can have them do the shipping for us. So overall, I mean, I can't give -- I can't be more excited than I am right now. So I'll just stop and answer whatever you'd like.

Yes. No, that's great. Happy to hear that things are going well. Can you discuss a little bit more about the manufacturing capacity considerations and where you think you can take the various products? You talked about October seeing some increase to capacity on Lyra specifically, what does that mean? And then on Sofia, where can that go? And how have you guys thought about adding additional capacity at this point? Have you thought about adding those additional lines at all? I know you thought about it, but where are you on it.

We have -- just with the current plant and equipment that we have today, we will ramp from 1 million tests to 1.5 million tests a week. We are manufacturing both antibodies. And once the second antibody is at the level that we need to be, we think we can get to that 1.5 million tests per week. And I think we have on the schedules to be somewhere close to that by just middle of July. So that's going extremely well. We have made a decision to put in line 7, 8, 9 and 10. 7, 8 are already in process. Certainly, before this time next year, we would imagine 7 and 8 will go up, we would be within an additional 60 million test capacity at that point. So that would put us somewhere north of 140 million tests there, and that each of Lines 9 and 10, we would add the same number again. So we believe that following this epidemic that we will have numerous Sofias out there, we will be shipping about 7,000 Sofia 2s a month in September. So at the end of all of this, with all the other assays that we're introducing, including things that you know about in the pipeline, Brian, and things that you don't know in the pipeline, we believe that we'll be able to use that capacity at that point. So that's the game plan right now. The capital required to do all that is not significant. After -- if we needed to get larger than that as a larger company someday, we're going to have to find a bigger building.

Well we've always said Quidel is a bigger boat. It sounds like you guys need a bigger building, too. So talking about the expansion here of capacity and your confidence on going up to 140 million tests for Sofia in total and then the opportunity to add another 60 million to take you to 200 million, I guess, when you add in Lines 9 and 10, what gives you the confidence that you're going to see that kind of demand? Is that based off of contracts that you're signing for antigen testing today as it relates to COVID-19? Is it more around the competitive takeaways that you've talked about? I mean what gives you the confidence that, that's -- that you're going to actually need that capacity longer term?

Well I just see pretty significant collateral benefit on these analyzers. And so at this point, we were already at a stage where we were manufacturing 20 million flu tests. I think for this season, the combination assay will help with capacity issues. But when you look at just the volumes that are required today for the SARS, the flu, Strep, RSV. And then you look at Lyme, toxicology, allergy, things that we have in the works, we think it could be fairly significant. So building excess capacity doesn't cost much. So it's not necessarily harmful.

Okay. So I want to dig into a little bit about demand and how that is playing out, though. You've talked about being able to -- you're shipping everything that you're able to manufacture for Sofia today. And you'll be increasing kind of from 1 million to 1.5 million by mid-July. What type of demand are you seeing right now for antigen testing? And what can you tell us about the types and nature of the deals that you are signing right now to give investors confidence that this market is actually building as we have said this.

Well, as an example, I have 1 state, which will -- I can't mention on the call, but I've 1 state that if they actually do the volume that they've requested would take up half of my capacity on their own. We have university contracts, I've got one major customer that has 112 universities on contract to do testing. That's going to take up another chunk. We have some fairly large IDNs that are now ordering product, had a huge evaluation that was just completed last night, during which that large integrated delivery networks that we're moving forward in their study, they showed 88.9% in terms of sensitivity. States, urgent cares, retail, HHS. So the federal government has indicated to us directly, but also through documentation that they intend to buy both PCR and the Sofia products. So at this point in time, I would say it's pretty safe to say if what's being discussed right now is actually continues to be ordered. We're kind of done in terms of our ability to support more. So it was incredible, Brian. Within the first 10 days, we had over 1,000 sites.

Sorry, you broke up. I missed out on some comments, I think you broke up -- you had over 1,000 what in the first 10 days. I didn't hear that comment.

Within the first 10 days, we had over 1,000 sites.

Yes. Yes. How much of this is kind of theoretical versus contracts that you're actually signing. So is there a way for you to give us an idea about kind of what is signed to date versus these evaluations that are going on. And my other -- my follow-up kind of thought on that is, when these contracts are signed and people go live, do you lock them in for multiyear agreements? Or is this sort of a pay for 6 months, we're going to buy 200,000 test strips, and then we'll go from there. I mean how do these things all work out?

Yes. Let me start by saying on the PCR side, customers in these high complexity labs do evaluations. For 90-something percent of the sites that we're shipping for Sofia, there's no evaluation going up. They are live. So I have -- a couple of sites did -- do an evaluation like the one I just mentioned. And we do have some studies going on. But for the most part, we're live on the Sofia side. So -- and to your contract question, early on at this stage, we're not shipping anybody that's just strictly transactional. We're only shipping people who have signed an agreement, even in competitive situations where they didn't have a contract with our competitors. And they're not used to signing a contract, we are now getting 3- to 5-year contract.

That's great. And do those contracts extend to other types of testing besides COVID-19 antigen testing?

Yes. Because early on, we were shipping preferentially our influenza customers. So people who weren't formally an influenza customer had the opportunity to become one. And so that's what I was referring to in terms of the competitive takeaways, well over 100 or so within the first couple of weeks, contracts came in from customers that we never shipped before.

Great. And how was pricing holding up both molecular and the antigen test? Is there any pushback on that? Is it steady?

Well, this is -- actually let me say this, Brian, because I had a lot of internal debate about volume and shouldn't we do this and do that. And I just said, look, let's just keep it simple. We have a price if you buy 1 test, it's that price, if you buy 1 million, it's that price. It has greatly simplified negotiation.

And there's been no pushback on that. Whatever that one price is. I mean, I think we've talked about what those numbers are, but there's been no pushback or anything that's caused you guys to move price up either down or have you been able to take price up at all versus kind of what your original expectations were?

None, whatsoever, actually. We've had some invitations internationally to do -- to ship product, get pricing mix less than what we want to do here, and we've just slightly declined.

Yes. Okay. We'll talk about international here in a minute. But one of the things that we hear is a pushback is around sensitivity of antigen testing and how that could be an issue for uptake. So can you address kind of what your sensitivity was? I know you had an update to that last night, and you just referenced the customer site with some numbers. But can you kind of step us through the progression on sensitivity? And how important sensitivity is when thinking about rapid antigen testing versus maybe something like molecular?

Yes. Well thanks for the question, actually. We do get it, we're the earliest who got it early on in discussions. And for the most part, most of those conversations where people were concerned about sensitivity ended in how many can I get? And when can you ship me? So although when you're talking to a traditional lab customer, they will want to know the issue really isn't sensitivity but rather frequency of the testing. Because at the end of the day, PCR actually misses a pretty routinely samples early and after 7 days. So for a number of days, difference between the 2 technologies is not so significant. But the real key issue is that people now recognize that since PCR misses on the front end and the back end, both technologies need frequency of testing in order to do what's necessary out there. So Sofia is best suited for that scenario. And the other thing is there's really not enough lab capacity in the U.S. to do PCR for screening and surveillance. So these rapid antigen tests are going to be required, and there's going be need then -- and we can't supply it all. So we need Abbott and others to come out with their assays. And hopefully, that will happen soon. There's just so much demand that it really -- it doesn't really excite me being the only guy out there so far because I know that I'm going to have to disappoint some people at some stage. So overall, there's another way to look at it, Brian. I'm at 89%, let's say, or 90% or whatever number happens when we finalize the sensitivity studies. Well let's just say that I'm 89% for the moment. And one of these other companies launches at 80%, right? I'm not going to be talking about how am I just more sensitive than 80%. Because at the end of the day, I know what their response is going to be. It doesn't matter because it's frequently depending on that. All these institutions that we're talking about, Brian, so far, have either said they're going to test every 2 weeks or they're going to test every week. I've got some people that are crazy to talk about early on testing every day, but there's just no way we can support that. So sensitivity in a traditional setting is a discussion topic. Certainly, specificity is important, too, maybe more so if I tell somebody they have SARS, they probably should have it. But right now, this is a different environment. This is an environment where I need to test people frequently in order to send people home who test positive, and I got to keep testing knowing that I'm going to be missing a couple of samples here or a couple of patients here and there. So again, it's all about frequency at this stage.

That makes sense. As we think about frequency, though, another area of pushback that we get about antigen testing is that, yes, it sounds great. And they may sell a bunch of tests into the market, but the logistics around it, really Quidel doesn't really control. So a back-to-office protocol, we'll just use William Blair, for example, if we were to bring something like that in, we'd have to go and find health care providers to go and take the sample. We'd have to find space to go in and run the test, we'd have to have some sort of a protocol for how we're going to test our employees, how often we're going to test them. So there's a lot of back-end stuff here that you guys don't control. How big of a deal is that when thinking about what the ultimate demand for antigen testing will be?

Yes, that's why there's these companies all over the place that are actually doing this for you, Brian. I can give you the names if you guys need to be testing. We can make it very painless for you to do. Here in California, there's going to be a requirement shortly that you queue up outside your billing to come in and have your temperature taken before you walk in. And then as soon as you're in, you have to be -- you have to take the temperature as well. Should you have a -- you're supposed to take the temperature at home before you come into work, all these sorts of things, we can easily orchestrate a simple swap as well as people arrive. We're going to -- we're probably going to come up with different methodologies on how we're going to test all of our employees. But we concluded early on, Brian, and we're not doing it ourselves. First of all, we want a medical to director to say we're going to be testing the employee, we want somebody reviewing it. But we have no problem of finding people who will do it for us. Their companies are already out there. Urgent care centers are getting involved and doing that kind of testing, too. So it was just in a -- we're doing a pilot with a couple of private schools, one in the Washington, D.C. area and one out here, and they're collaborating and figuring out how do they're going to social distance within the school, how they're going to do testing and all that. And for both schools, we're actually employing a company out of Texas that has urgent care facilities here near the school in San Diego, and they're going to sort it out. They're going to figure out how to do it from time to time. They're going to do it in cohorts. And they're going to do certain classes at one time, certain classes at another. So they're going to work all that through and figure it out. So I think there's this perception that the people buying kits are going to run themselves, and that's not going to happen.

Yes, agreed on that. I guess another perspective we hear around this testing is, well what if a vaccine is developed? Won't that mean that there won't be as great of a need for testing. How do you think about testing in a world where a vaccine does become available?

Yes. First, a couple of comments. I'm not negative on the vaccine at all. I hope it's effective. But will it be more effective than the flu vaccine? I'm not sure. Will it be required by the government because there's parts of the country where moms don't want to have their kids vaccinated. And who's going to sign up? Am I going to sign up immediately and be one of the first people to get vaccinated. I don't think so. Not me personally, right? I got to stay away from everybody than be the guy who gets vaccinated and finds out later that maybe there was an issue. So again, I don't want to be negative about vaccines. I hope it all works out. But if it's like the flu experience, we're still doing 20 million -- I'm doing 20 million flu tests, I'm only 40% of the market. So what we model, Brian, just -- we can't say specifically what our LRP looks like. But I can just tell you that we've modeled a couple of years where there's a lot of testing. And then we flatten it out going into 2023, assuming that the combination of flu and SARS and whoever -- who knows what other respiratory virus, we'll be worried about at that time. Those probably are slightly larger than our existing flu testing market is today. In the meantime, I'm using those 2 years as a gap filler, if you will, I'm bridging the gap between now and the launch of Savanna. The launch of High sense Troponin, the launch of toxicology on Sofia. I've got Sniffles coming out. I've got Leapfrog, which, if we ever do have an Analyst Day, I'm more than happy to talk about what we're doing there in terms of a next-generation immunoassay platform that gets us down into the femtogram per milliliter range in terms of sensitivity. So I got all kinds of stuff working on this thing, we were going to have a couple of lean years in terms of growth, as you know, Brian. But here, this sort of fills the gap between now and when we really did have a couple of things that we thought that were going to be meaningful in the outer years of the LRP.

It does more than just fill the gap though, right? I mean, Randy, maybe you want to talk about kind of the margin profile that you guys are seeing on these types of tests. Because I think that, that's something that is probably not fully appreciated by the Street in terms of what that profitability actually can look like?

Yes, 90% gross margin, I haven't seen since I was the young guy.

Yes. Not that.

And you've seen my picture, Brian, I'm clearly not young anymore.

And that's for also Lyra and the antigen test. And the other ones we're going to come out with as well.

So in the short term, it is really beneficial. And maybe I under called it a little bit by calling a gap filler, but we're worried about what do we do after this thing goes away. And so we want to be able to leverage all the assets that we have on the ground. We'll have a huge installed base of Sofia, we'll have built a bigger brand because of Lyra, moving into the launch of Savanna. We'll have a customer base that we can sell into. And so there is a lot of benefit because it's high margin. We're generating a lot of cash. So things are true. But we're really more focused on 2023 and beyond and what happens with that. And so we're all focused on how we take advantage of the gift that has been given us. Of course, we had to make it happen. So I shouldn't call it a gift. But the ability to address this market is a huge benefit to us in the short term, meaning in the next couple of years. But beyond that, what we're trying to do is figure out how to leverage that.

Yes. And as we think about 2023 and beyond, even something that's going to be impactful in the short term. I'm sorry, it's going to have both benefits to you is the idea of this combo test, right, the Flu A B plus COVID, and I don't know if you're planning to putting RSV on there or not. But just this -- can you talk through the importance of that combo test? I mean you talked about it already from a manufacturing standpoint and sort of simplifying things for you there. But is that one of the lasting sort of benefits here is that you basically are going to have a Flu A B Test that's always going to have a COVID component on it, meaning you're going to be able to kind of drive pricing and margin benefits kind of longer-term as a result of flu always going to be tested with COVID. Are we thinking about that right? And isn't that a big benefit for '20, '21 and well into the future?

The short answer, Brian, is yes. And we're doing it in 2 phases for a reason. Phase 1 is be simply on the same unidirectional Sofia assay format, we're simply adding SARS under our Flu A B assay. And we've already manufactured tens of thousands of those cartridges. We're using the tens of thousands of cartridges to do studies, those studies are ongoing. We finalized the plan that we will work with the FDA on this last weekend. And so we would -- we are going to try really hard, Brian, to be in market this fall with that combination of assay. And the reason we're doing that right away is because we know that we can make that in high volumes. And I don't have any risk whatsoever in terms of my ability to manufacture that product. The other assay you talked about that you saw that we got BARDA funding for was a similar concept, but we had been working on that concept for quite some time now. We were already about to go into clinical trials when this COVID situation came up. So what we decided to do, given the inability to really do the clinical trial during this respiratory season as we decided to go Flu A B, RSV and SARS 2. And that will require a different spotting technology that we've had resident here for a few years now. I just wasn't comfortable that I could get to the high millions in terms of manufacturing capacity while all this SARS epidemic was going on. So that's the next step. We did an interim step, obviously, with this assay that we're going to try to launch in the fall. And then what we will do is be in clinical trials with that 4 plex, this upcoming season.

You say that you hope to be in the market this fall. What would be the reason that you wouldn't be? Is there something that's technically a massive hurdle for kind of getting this up and going? Or is it just simply, hey, we're already in June and fall is just a couple of months away, is it that simple?

No, just -- only just the regulatory path. I have reason to believe that the FDA will be receptive. And we just haven't finalized all the studies that will be required to move forward. Clearly, we have a competitor that announced trying to do a combo assay also just recently. And the only difference between us and them is we didn't think we needed to do a press release.

Okay. All right. I hear you on that. All right. And then the comment -- the other comment we get about is competition, whether it's Becton or Abbott. And I think that you've talked about the need for multiple players to be in this market. And you've also talked about your ability to kind of take market share from them. So I'm guessing that, again, you don't see competition is a reason to think that Quidel would be limited in being able to take advantage of the opportunities that's in front of them.

Yes. I think we're going to continue to do well, Brian. There is an advantage of being first, of course. But I would say the changes we're making to Virena are going to be extremely helpful. HHS just held a call, I think it was early last week to tell all labs about the 18 things that they want to -- data that they want submitted. And I just had a discussion with our Head of IT and Business Transformation, and she's working on upgrading Virena in order to accommodate that. So we think that combination of the performance of our products, the contracts that we're putting in place, the Virena data and the management of those data, supplementing what -- or replacing what customers would need to do manually or have to figure out on their own, might be helpful. So I'm not suggesting that we're going to own the entire space. We can't service it anyway. But I don't think I'm worried too much about competition. And actually, I welcome those guys being out there because -- I'd love to be able to push some of these requests over to that.

It's a unique but enviable position to be in. So sounds terrific. Well listen, these 30 minutes always fly by. I wish that we had an hour or 1.5 hours with you, but we don't. So we're going to have to wrap it up there, but I want to thank you guys for taking the opportunity to speak with us. And congrats on all the success that you've had, we'll be looking for updates out of you.

Yes. Thanks, Brian. Thanks for having us on.

Okay. Thanks guys, have a good day.