QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Hi, welcome to the 40th Annual Canaccord Genuity Global Growth Conference. I'm Max Masucci, the lead diagnostics analyst at Canaccord. So I'm pleased to be joined by Quidel, the largest medical point-of-care diagnostics, pure play and a big winner in the COVID-19 testing market. The Quidel's operational execution has been outstanding since it diversified its business away from flu testing in 2017, following the acquisition of Alere's divested assets. And Quidel has a market-leading R&D engine, and they have several irons in the fire. So I'm really pleased to welcome back CEO, Doug Bryant; CFO, Randy Steward. Thanks again for joining us this year.

You're welcome, Max.

Good to be here.

Great. So just to kick off. It seems like we're seeing new COVID-19 contracts being signed almost every day, whether it's for the government-sponsored organization, state-run program or more. You're the first to earn Emergency Use Authorization for an antigen-based COVID-19 test to detect active infection. So let's just -- let's start there.

So first, how did your prior R&D experience, your manufacturing capabilities and just the nature of your end user allow you to develop and roll out a rapid 15-minute antigen test in such a short time? And why haven't we seen many additional antigen tests come to the market?

Well, there's a couple of factors there. One, we were already maxed manufacturing millions of influenza tests. And this product is in the identical same format. So that's one factor. The other is that, having a team of scientists that can develop, characterize and manufacture antibodies is not unique in our industry, but it's not common across companies, particularly a company our size, but we have that capability. And in fact, to capture antibody that we have in the SARS antigen product is one that scientists in Ohio had been working on 16 years ago. So we had a huge head start with an antibody that is truly terrific in terms of both affinity and avidity, and that gave us a little bit of a head start. Also, because we had automated our manufacturing in recent years, we bit the bullet and took the opportunity to upgrade our manufacturing. All of that on lines 5 and 6 is very much automated and very much high speed. So now with the ability to expand to lines 7, 8, 9 and 10, we're just basically duplicating what we had previously done. So I guess, from a company our size, you can see that we probably were uniquely positioned when this happened.

Absolutely. I can actually offer that I've been tested with your Sofia antigen test twice. The first time, I arrived at the test center about 30 minutes before it opened. I was the first person in line. The process was quick, received my results in about 15 to 20 minutes. And I returned for another test, maybe 2 to 3 weeks later, and I arrived again 30 minutes early. But this time, I was about the 30th person in line, and there was probably another 30 to 50 people behind me before the center opened up. So let's segue that into what you're seeing for demand for your antigen test, and how that pacing of demand has played out? And how you might be allocating your tests, with all of the tests that you can manufacture, to your customers?

Yes. That's -- this is a terrific topic these days. But -- because the demand for -- for our products from our currently served markets, in other words, those customers that we would typically sell influenza, Strep and other products, RSV into, the demand from that group alone is roughly 4x what we can currently manufacture kit and ship at this time. We are expanding into the nursing home segment which I think most folks would have seen as a result of an order from HHS, which makes it increasingly difficult to partner on a number of initiatives that we have actually been asked to participate in recently, including the announcement on the part of the coalition of 7 states, but I think it's now actually 9 states. So our ability to get to that, at least until we get closer to the end of the year, is quite limited. But at that time, I hope that we will have solved the swab shortfall that we're currently experiencing. And we can talk in a minute if you want, Max, about where we're at from a manufacturing perspective. But once we've solved this swab shortfall, and we'll be manufacturing around 10,000 instruments per month, I think, at that time, we can fully explore other unaddressed market segments. And in terms of other segments not yet addressed, I would say that frequently testing school children may be the most important priority for society as a whole. There are around 76 million school children in the U.S., and it's clear that testing in both the near term for antigen, whether by rapid antigen or by PCR, and in the longer term for serology, those tests are going to be critical. And here's why. Over 1 million test results from our Virena cloud through yesterday, or the day before, those data show that children between birth and the age of 18, those tests accounted for about 24% of all the tests. So that's not surprising. But what was very interesting is that, the positivity rate in that group, particularly in the younger children, was just as high as it is in all age groups, and which is not in keeping with the theory that younger kids are not getting or not being infected. So it does point to the fact that school testing is going to be needed for the immediate term and then, I would say, for probably the medium to longer term, even with a vaccination. I can imagine that, eventually, in addition to the elderly and the immune-compromised who should be vaccinated, preferentially, upfront, children will be vaccinated as well. And if the effectivity rate of those vaccinated is 50% or so, and it requires a booster over time, more kids may have immunity, but we don't know for how long at this point. And so whether we're going to continue doing antigen testing, or we're indeed going to determine the kids who have been vaccinated, actually, do they have antibodies, IgG to COVID, it's still going to require testing. But at -- as I was pointing out, I don't think we can get there at this time, at least until we can get lines 7 and 8 up and running by the end of this year, and we can get to that 10,000 or more instruments per month.

Great. So let's stick with vaccines, and then we'll hop back over to manufacturing after. So yesterday, we heard from former FDA commissioner, Dr. Scott Gottlieb, during our keynote. We -- he spoke to a variety of subjects, including vaccines. And -- but we've been writing is that people need to understand that there are time lines associated with the development of a vaccine, of the manufacturing under quality control if you're giving it to such a large population, and then also the distribution of the vaccine. And so some of -- Dr. Gottlieb was saying that he thinks maybe we see a vaccine that earns EUA towards the end of the year but the broader distribution of the vaccine is likely to be seen more so in 2021. So we've heard from other diagnostics participants that, even with the presence of a vaccine, the COVID testing opportunity is looking like at least a 3-year opportunity. So maybe can you just spend another minute there talking about how vaccine, how the availability of a vaccine has been forming? How you think about the magnitude and the duration of your COVID testing opportunity across your portfolio there?

Sure. We've thought a lot about this, and I don't disagree at all with my colleagues in thinking that the testing opportunity appears, that horizon appears to be 3 years or more. I also don't question whether a vaccine is imminent. How effective will it be? At what dosage, such that it is still safe? Is 50% effectivity the right number to think about? Or is it closer to 30%, as it has been with flu? How long-lasting will the protection be, right? Will this recirculate -- this COVID-19 recirculate every year like other coronaviruses do, which cause the common cold? In other words, can we get it again and again? So there's a number of things to think about that actually point out the fact that there still will be some level of testing. You've got -- also got the issue with influenza-like illness. And you can see that a lot of us, diagnostic manufacturers, are looking at combination assays moving forward. And I'll just conclude with one final question, Max, and that is, if we strongly believe that the vaccine was the answer to stopping this pandemic in its tracks, then why is the government spending so much money, funding so many companies developing additional assays that can be run? Why is the government spending a lot of money, as they have done for us, wanting me to expand my manufacturing capacity to 200 million tests a year and trying to help us figure out how you get there faster than I would have before on my own? And so, again, I think the vaccines are imminent. I'm hopeful they're effective. But I don't know that, that's going to cause testing to decline much. And one thing to look at is when vaccinations are up for influenza, does the testing volume go down? And the answer is no. In fact, over the last several years, influenza testing volumes, as you know, even with better and better vaccines for influenza, the testing volume still continues to climb. So I'll just stop there. Obviously, we do a lot of thinking about, if we're modeling this, will it have an impact? And I'm not convinced that the vaccination is going to create this huge decrease in testing.

Yes. Absolutely makes sense. And just sticking there and hopping back to manufacturing. Your capacity appears to be the only thing that's constraining an additional 4x in COVID revenues. So could you just speak to some of your maybe quarter-end, year-end manufacturing targets and then bridge the necessary steps to get there? And then maybe just focus for a second on some of the key shortfalls and bottlenecks that you're seeing.

Yes. This is an appropriate question because this is an evolving set of circumstances for us, and it's multifaceted. And we've been somewhat conservative in saying what we think that we could do, but we have demonstrated our ability to manufacture in pouch as many as 1.9 million Sofia SARS antigen cartridges per week in recent weeks. So I know that I said previously that our theoretical max capacity is -- was 1.8 million. But it's so -- such a complex exercise putting all this stuff together that I do recognize that Randy and the operations team have been -- I can see Randy smiling there, have been somewhat conservative. And I think that's appropriate. But in any event, we now know that we can get to 1.9 million, and I just -- I don't know what the end is here for us, but that's pretty good at this stage. The rate-limiting factor in producing the kits that we ship each week, though, has been a highly variable supply of nasal foam swabs. In other words, we don't get the same number of swabs every week. And in one week, our swab manufacturer reduced our allocation to roughly half of what we had expected. Since then, though, HHS has stepped in to help us, and they've been extremely helpful. So are they going to be able to do that routinely? I hope so. We expect that they will be -- because they have a vested interest in making sure that we get the swabs, we need to get the products. But -- so given the number of swabs that we have received to date and what we are forecasting for the remainder of the quarter, we believe that we will have kitted and shipped at least as many as Randy talked about on the earnings call. So in my original notes, I had actually -- I had a number, but I've been advised by Randy to please take it out. So I'll just tell you, we have a number in mind we think we're going to do. It's a good number. But I would just say, at this stage, what Randy communicated during the earnings call would be our minimum amount of -- that we would be able to achieve. We are highly confident that we'll get there. All the other components, saline vials, extraction tubes, transfer pipettes, and all the other components that go into the kit are completely fine for the moment. It's really just how many swabs will we get. And we're working diligently to do that. We've signed -- Randy signed an additional agreement with a third-party who will give us another 250,000 a week. So we're working on it. But I would say, until we get through the end of this quarter, it's going to be a little bit too variable for my taste. Also, Randy has secured a lease on an additional warehousing and distribution facility, which we will need moving forward, particularly when we consider that, by this time next year or perhaps earlier, lines 9 and 10 will be operational. And we would expect to have a capacity, as I mentioned before, at that time, which is somewhere around 220 million tests per year.

That's great. And let's round this out here, this discussion, and let's talk about the performance you've seen in -- for your antigen tests, and then maybe we'll move on to another subject. So in mid-July, you updated the performance data for the Sofia COVID-19 antigen tests to 96.7%, which I believe was up from somewhere in the mid- to high 80s. I may be wrong there. But that improvement and the reduction in potential false negatives might not be fully understood by somebody who hasn't gotten a COVID test. But I can tell you, personally, that it is a big comfort, even though I was -- I underwent 2 Sofia antigen tests, both negative, and I got a negative PCR test. And so there was confirmatory factors there. But the improvement in performance can be very comforting. So can you just, maybe speak to performance on the antigen and what you're seeing?

Yes. Actually, because of the performance, it actually expanded what I would call the use case for Sofia SARS antigen to include upfront testing of people presenting with symptoms. So if you present with symptoms, and it's within 5 days of the onset of symptoms, what we've shown in the data that are -- and the amended EUA is that we are in agreement with PCR 96.7% of the time. To decode that a little bit, in the studies that we did, we only had 1 sample that was positive by PCR that was negative by Sofia SARS antigen, and it was right at the cutoff. So that, I would say, is comparable for that window of the type of patient. And we're doing ongoing studies to determine performance on asymptomatic patients because that wasn't required for the -- by the template for the submission. But -- so we are going to see, though, with these tests, we are going to see false negatives, and we're going to see false positives. The question is, is the number significant? And in terms of sensitivity, I would say, we designed the test to be as sensitive as we could make it. And as demonstrated in the package insert, it looks quite good relative to PCR. And in the data set that we looked at, but again, these were symptomatic people, we were 100% specific, which is not -- it's not real. We know that, eventually, we will see false positives, particularly in the asymptomatic population. But that doesn't really matter how we get a false positive. A false positive still is not a desirable thing, even though it's expected. There are reasons for false positives linked mostly to customer process errors. Again, but it doesn't matter whether it's the instrument or the cartridge or it's the way that the example was processed. You will have seen, though, we did put out a press release recently talking about how we train nursing home -- our nursing homes. And so we have quite an ongoing effort to train our nontraditional customers. But if you look at our traditional market segment and folks who already had Sofias, already running influenza, those people aren't seeing a significant number of false positives, so -- which gives us a lot of comfort. And the final thing I would say regarding that is we've had 73 complaints logged into our quality management system versus over 7 million tests performed. And so, as a percentage, the number of false positives reported at this time is quite low.

Great. So despite the amazing opportunity that COVID-19 testing has presented, you do continue to advance the development of instruments and the key instruments and testing your pipeline. So Doug, I want to open this one up to you. What are you most excited about in the pipeline that's not COVID-oriented? And how should we be thinking of the timing of new key instrument and test launches in areas outside of COVID-19?

Well, I do think the most exciting near-term opportunity is going to be the launch of Savanna. We're expecting our first alpha units August 24. We're on schedule for the instrument closeout. We will move into clinical trials potentially at the end of the year, beginning of next, a worst-case scenario. So that looks good. And obviously, we're going to start clinical trials on a high-sense troponin. I do want to review the pipeline, though, for the SARS products, though, because I think it's important to understand that we've got a lot going on. First, there's the combination assay with coronavirus and flu. There's the serology assay. Both of those we expect this summer. We -- I'm announcing on this call that we expect Solana SARS to be cleared in September. I don't think we had mentioned before that we were working on that product. But the performance of the product is comparable to PCR, at least in our hands, at this time. The forecast for early demand is somewhere north of 700,000 tests per month. We think that's imminently achievable, given there's a lot of customer feedback. Our Solana customers have been asking us for it. So it will be an isothermal assay with PCR-like performance, isothermal line, just like Abbott's ID NOW, but I would suggest, perhaps, better performance. We're adding a second lyophilizer in Athens, Ohio in October, and that will increase our capacity for both Lyra and Solana. We're also working on Alere combo influenza and SARS assay, both extraction and extractionless. And I'm letting people know for the first time that we're also moving forward with our quick-to-use SARS antigen product, and we think we can build at least 5 million tests per quarter of that. We did get funding for improving manufacturing capacity and acceleration of the Savanna RVP12, which includes SARS, and we expect that shortly -- that funding shortly. And then you saw previously that BARDA also funded the Sofia combination assay, plus respiratory syncytial virus. So a lot going on, plus Savanna, and plus Strep 98 and also the high-sense troponin. So yes, our R&D guys are busy.

So it's been a nice, relaxing summer for everybody over at Quidel and on the West Coast? That's great.

Yes, we've got this excess time. That's what we've got on our hands. There's a lot of time.

Exactly. Randy, I'll open one to you, and we're coming up on time here. And so, yes, how has the profile of the P&L changed with all of these -- all of that with COVID-19 and, yes, margin spending? Anything you can offer about what we should expect going forward? And then we'll keep it there.

I believe, in the second quarter, you saw our ability to leverage our operating expenses. So with the COVID, the assays, the margin profile is significantly greater than any of our other products. So you saw our gross margins get close to 70%. You saw our leverage on operating expenses. So we saw great leverage, saw our EBITDA margin in the 50% and, certainly, we anticipate that going forward into Q3 and Q4 as well. So good profile for us as we get through the rest of this year.

Great. Well, a lot of great things going on. This could be a 2-hour fireside chat, and we'd probably get through about 25% of what we'd want to. So congrats on all the success and keep it up. It's always a pleasure to have you guys at the conference. So we'll look forward to your update soon.

Thanks, Max.

Yes. Thanks, Max.