QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Welcome to the 13th Annual Piper Sandler Med-Tech and Diagnostics California Bus Tour Meeting with Quidel Corp. It is now my pleasure to hand the call over to Mr. Steven Mah. You may go ahead.

Great. Thank you. So I'm Steven Mah, Senior Research Analyst at Piper Sandler covering diagnostics. I'm very pleased to have with us today, Doug Bryant, CEO; and Randy Steward, CFO from Quidel. I think everyone on the call knows Quidel. So we -- maybe we'll just skip straight into the fireside chat.

Obviously, we received a lot of questions from investors around the Abbott antigen test. So why don't we get to that right off the bat and then we'll pivot back to a business update.

Okay.

All right. So Doug, with regards to Abbott's BinaxNOW test, can you give us your take on the test and its use in the marketplace versus your antigen test?

Sure. First, thanks, Steve. Thanks for having us. It's great to be here. Good question, obviously, given the timing of the announcement last night. But before I go there, let me just say that I'm incredibly proud of the way the team at Quidel has risen to the challenge, first, developing assays very quickly, the PCR-based products, followed by our rapid antigen. Moving forward, a combination assay, the serology assay and now also the Solana isothermal molecular product, all of which will be in market by September. I'm just pleased to be with the team of people who has been working around the clock since March and really has stepped up. These are folks who believe they have a moral obligation to do what's right. And they're working super hard to get these tests out so that we can get as many people, the tests that they need and hopefully get our own lives back and get our grandmas and grandpas connected with their kids and grandkids. So we're in good shape. We feel great about where we're at. I would say that the announcement last night was interesting, but I would say that there was nothing that was unanticipated. We had, of course, anticipated that there would be a market. We, of course, anticipated that they would make the investment needed to scale up, which can be done pretty quickly on a real-to-real sort of platform with these visually red lateral flow products. We also anticipated that they would have a lower price than we would, given how we have competed with them in the flu space back when it was the Alere BinaxNOW card. So all of that was anticipated. I also thought that it was likely that the performance would be quite good given the fact that there's an abundance of virus in symptomatic patients who, within 5 days of the onset of symptoms, that's the sample that we're taking. I expected performance that was good. And I actually, to be honest with you, I'm pleased. Because at the end of the day, we want BD to have good performance, that we want them to have performance that's equivalent to ours. We want Abbott to have performance that's equivalent to ours because the biggest opportunity is not me competing with Abbott or me competing with BD or any other diagnostic company, it's us in the point-of-care space who have these rapid antigen tests. We've got to get over the hurdle of public health, and we've got to get people to thinking that these tests are viable, they are accurate, they are a good substitute for PCR in certain end -- use cases, particularly when frequency of testing is important. So we anticipated all that. I was surprised by the $5 price because that was lower than what we were thinking would be logical for a QuickVue-like product. We were -- for our product, we were thinking $10 to $12 would be an appropriate price. Now of course, as I've now learned that similar to a situation that we had a month or so ago, it appears as though Abbott has sold product that they will manufacture in the future to the government directly at $5 a test. So this reminded me immediately when I saw the announcement of the circumstance that we found ourselves in when we were negotiating initially with the NIH for the RADx agreement under which potentially we might receive $71 million in total and milestone payments related to our expansion. As part of the agreement, the government wanted to purchase -- it was suggested at a very low price, and that price was suggested to be $5. We elected instead to provide the product at no charge. And so as part of our agreement, what we did was we said we would provide, not nearly the product that Abbott is, but a pretty significant number of tests at no charge because we felt that was reasonable given the fact that we would be receiving $71 million over the period of time that we would be expanding in the Line 7, 8, 9 and 10. So -- and why did I do that? I did that because I didn't really want the $5 price out there. I didn't want to have to explain to my customers that I sold product to the government at $5, but I'm actually charging the same price to you that I had originally suggested. And just so everyone knows, we only have 2 effective prices in the marketplace. We have a price to end users that is fixed, and then we pay distribution to ship and build that product for us. And net of all that, we're in about the $20 range. The price that we sold the government, the product for the HHS agreement to deliver products in nursing homes is slightly lower than that. So there are really only effectively 2 prices, and we've maintained that. And my pricing integrity, given all the people negotiating with us, I felt like we had to have something that my guys could say, look, it doesn't matter whether you're buying one kit or 100,000 kits, it's the same price. We want to maintain price integrity across. So therefore, rightly or wrongly, I said to the federal government, I'd rather give it to you for free rather than have that price out there. So -- but it does sort of -- when I saw the announcement, I thought, oh, this seems familiar. So now I understand why that price is out there. I understand it's for a fixed number of tests, which they have to manufacture in the future. After that, I would expect that all of the competitors in the space will behave rationally and that we will have pricing that is at the lower end of the scale for visually red and then for products like the BD product and our product, which are instrumented, we expect a little bit higher price. So that's where we're at. We're in good shape. I don't expect it to affect our demand. As I put out in a press release earlier, another entrant into the segment doesn't change our plans to develop or manufacture any of the products in our pipeline, doesn't change our marketing plans and has no impact on our financial forecast at this time. So I'll stop, Steve, because I know you got other questions, but you can obviously tell that I have been thinking about this most of the morning.

Right, right. Yes, thanks, Doug. I really appreciate all that color. Can you maybe touch upon your international plans?

At the moment, as far as I know, we've only had one significant shipment ex-U.S. We've done that on purpose. We were compelled to do so. We thought that there was an exigent need somewhere else outside the U.S. that we were persuaded to fill. But for our international customers, unfortunately, we just thought the need is so great here in the U.S. and again, back to the point, we have a moral obligation to get these tests out there and we've got people working super hard to do so to solve a problem in the U.S. I don't think it's hype the things we hear on the news. I think there really is significant need out there. And I got to tell you, my customer service department is doing a great job, they're probably very tired of telling people that we're on allocation, and we'll give them their product as soon as we can. I'm also moved by the idea recently. I had the situation, visiting my mom and my stepdad who suddenly passed, but they were living in isolation. And we're unable to see people. And the good news is they were at home. But for the folks who made decisions earlier to move into these nursing homes, I feel for these people. And so we feel obligated to work hard and get these products out.

Okay. Okay, great. Yes. Thanks about that. And then maybe we can talk about this later when we -- and I know you mentioned it earlier, your pipeline and the panel testing. But can you comment on the utility of a single COVID-19 test versus a respiratory panel?

The relative value of the respiratory panels that include the COVID versus the same arrangement?

Yes. That includes -- yes, yes, respiratory. Yes, exactly.

Yes. I think there is value on the panel, particularly during the influenza season. We certainly believe that a flu AB combo assay with SARS makes sense. You may have seen that we were also funded by BARDA to add RSV to the formula, and we've got a product in development that we hope to have in trials toward the end of this year in that regard. Also on our Savanna product, we've included now in that respiratory viral panel in that cartridge, the SARS 2 products. So I think when you're testing people that have symptoms, so you're running a symptomatic panel, it makes sense because the percentage of time that it's either going to be SARS or flu or any one or the other is -- it's not super high. So running -- to me, running a panel makes sense. So we will, moving forward, still have SARS available individually as a test, but we would like to move as many customers over once the flu season starts to the combination product, so that we can improve overall our capacity as we move forward and increase what we can ship.

Right. Right. And can you comment on maybe a physician preference, especially within flu season? We think physicians would prefer to have a respiratory panel with COVID-19 on it to kind of get, kind of, an answer right away as opposed to doing a COVID-19 test or a flu test and then reflexing to one of the other? And am I thinking about that right?

Well, I hope so. That's what we've speculated based on voice of customer analyses that we've done recently, it would suggest that there is going to be demand for a combination product.

Okay. Great. That's helpful. Okay. Well, great. So maybe just pivoting back to the core business. The next area of focus, I think investors have is if you can give us an update on your COVID-19 manufacturing status?

Sure. There's 2 factors that I think I want to be clear to make sure -- clear and make sure I explain well. There's the cartridge itself in a sense, you can call it the test. The cartridge manufacturing once performed is put into a pouch with a desiccant in order to maintain the product, which was manufactured in a dry run to maintain that lack of humidity, if you will. We are making about 1.9 million of those per week. Moving forward, by the middle of September, we should be at 2.1 million. And then by the 1st of January, we should be at 2.8 million. By the end of the -- well, by the end of February, early March, we should be at 3.5 million, although I think there's a little bit of upside, potentially, in that given our track record since we launched. By June 1, we would be at 4.3 million of those. And by July 30 of next year, we should be at 4.7 million. That's the schedule, and that's the most reliable part of the manufacturing process. The unreliable piece is all the other things that go in a kit. The one that's been the most constraining recently has been swabs. We've done some things to improve that, including working with our existing manufacturer of swabs, but identifying an additional manufacturer locally of swabs, also adding NP swabs to customers in the hospital segment who would be okay with that as well as working with HHS, who are also helping us with swabs. So right now, I would say that we are comfortable that for the rest of this quarter, we should be at least at 1.5 million tests that are kitted with swabs. And all the other stuff that we have in the kit, including the extraction reagent, the transfer pipettes, the positive control, negative control, all the other things that go in the kit are fine for the moment. Although any of those things, of course, as we move forward and we get larger and larger, we will have to work through those issues, too, I suppose. But for the moment, as we go through the end of this quarter into fourth quarter, we're in really good shape to do -- to kit at least 1.5 million tests per week. So I hope that was clear. I'm getting better at explaining it, I think. But that's where we're at the moment.

Yes. Okay. Great. And then I know you guys were creating some new manufacturing and assembly lines. Those numbers you told us, those are -- assuming those come online shortly?

Yes. So Line 7 comes online at the end of this year. That's why I said that first week in January, we'll add -- and we'll be at 2.8 million during that first week.

Okay. That's great.

So that's with Line 7. And then what you see is Line 8 before the end of the first quarter for sure. Before the end of the first quarter, it gets us to 3.5 million. And then Line 9, we expect by June 1, Line 10 by the end of July. So exactly, Steve.

Okay. All right. Great. Perfect. And then maybe shifting over to the Sofia instrument manufacturing side. Could you let us know what the current capacity is right now?

Yes. I think we're doing 2,700 a month. We will be finished with our HHS deliveries, which will total 2,616 instruments. That will be done in the first week of September. So then instruments coming in that month will be available to other customers, which will be terrific because we've got thousands on order. Month of October, we should approach a number that's around 11,000. And I would anticipate staying at that number for a while, although there is room to go a little bit north of that and we're looking at that as well. In addition, although we haven't talked about this a lot, we are getting to the point where we're going to begin to manufacture of Sniffles and the Sniffles -- little Sniffles instruments we plan on doing a number upfront as we get to the end of the year, but it's our expectation that we would have manufactured 100,000 of those by -- do you remember what Donald has on the chart?

January.

By January, he's going to have 100,000, already?

Yes.

So I would just say, in January, at some point in time. I just can't remember the chart that I just saw. But I think in January, we'll have another 100,000 Sniffles. Sniffles is the product that is Sofia 2 miniaturized. The optics have been miniaturized into a product that has a circumference that's about the time -- the size of one of those little tiny Diet Cokes, the 7.5-ounce, if you can imagine that, only a little bit shorter. It connects Bluetooth to an iPhone, iPhone 8 or newer. And the iPhone is the brains for the product then and using an app and artificial intelligence, we capture the images and compare those images with known positives and negatives and render a result. Obviously, it has a great deal of appeal for the pharmacy segment, physicians' offices, et cetera. But it is our attempt, we think, to go for an at-home claim at some point. So that's our strategy moving forward in our attempt, I'm just going to say attempt because until we get to the end of the process, getting an at-home claim is just something we haven't done before. So there is a template for it that the FDA has published. We think that there's a pretty good chance that we could demonstrate the sort of performance necessary to get that claim and then Sniffles is our concept for getting there.

Okay. Got you. Yes. So you'd have to get a CLIA waiver on the instrument, yes. Okay. That's great.

This will be CLIA-waived instrument for at-home use.

Yes. Okay. And it's compatible with all your existing Sofia test now, right? You would have to add any test.

You wouldn't be adding cartridge in the -- yes obviously, we preferentially started with SARS, but we obviously also have flu and RSV and strep. And I think it will be a great product to rely on to.

Yes. Then that sounds really exciting. Okay. So yes, maybe -- yes, so continuing down COVID-19, you've updated us before that demand is 4 to 5x capacity. Has that demand diminished? Or can you give us some color on current demand?

No, we're still running about 4x what customers said that they were going to order, which is effectively 4x what we're building right now. And that's why we want to get to a point where we could do over 200 million tests a year. I think we have certainly a runway to get to that point, just in the traditional segment. And we would love to be able to help out more with nursing homes. We're just motivated to do whatever the most good is, and I think that's a big one. We also see a big need in schools. There's a lot of families that can't really handle having kids at home. Mom and dad both work and doing schooling virtually from home is not a good thing. And then young kids, in young kids, it's about learning things, but it's also about socialization. And you're going to have a generation of youngsters here that if we don't get them back at school, I don't know the outcome, but they're certainly not going to get the same socialization experience that kids before them have had. So I know a lot of moms that send their kids to Pre-K for that very reason. It's not about learning that A, B, C, they can teach them that at home. But it's about learning how to get along and to listen and behave oneself. And so I think nursing homes is number one. Number two is we got to get kids back in school. So to the extent that we can participate and help out with that. The problem is, though, as you know, Steve, is that there's 76 million school kids, and if you really go about it and you say, no, you really need to test them every couple of weeks at minimum, that's a lot of tests. And that's more than Abbott, BD and Quidel can do. When you consider that this is legitimate in the traditional segment, there's need to do that. Notwithstanding employers -- the number of employers that have approached is just -- it's innumerable. I used the word in fact but I'm not sure I can always say that correctly so.

Okay. Yes, maybe since you discussed nursing homes, I know there was an article the other day highlighting the lack of test kits available. There's obviously a pressing need on many different fronts for your tests. How exactly you are prioritizing customers?

Yes. Let me just say that, that article, for the most part, was correct. What you have is 2 different companies who have 2 different issues. One is, I don't have 7,500 analyzers that I can shift to half of the nursing homes. What I do have is the ability to service the 2,616 that is being proposed. There is a little bit of a disconnect with our distribution partners, and we're addressing that. One in particular that I won't name did tell a customer and that they couldn't reorder, and that actually was not true. So we are in a position where we can fill the small number of nursing homes that were either already shipped or that were about to ship. So we're in pretty good shape to make sure that we can handle the volume that we're being asked to fulfill. So it's about 1.2 million tests is what we're being asked for every couple of weeks, and that's about 25% of our volume. So for us, even though the article was, you couldn't refuse what was being said that there are some customers that, for whatever reason, they were told they couldn't reorder, we have to fix that. BD, on the other hand, has ample supply of instruments we're told, but we're also told that their capacity to manufacture is being taken up just with that initial set of orders that they have to ship because they're shipping a lot more instruments. And so I do think it's true that for a moment in time, BD is probably struggling with handling reorders, but I would imagine they'll sort that out over time. So we're all of this together, by the way. We are competitors but we're also colleagues with a mission and our industry in total, as colleagues, we all need to address this. And I'm happy that once Abbott gets through this initial stocking order that they have for the federal government, they're going to be able to help us out here. So there's nursing homes that we got to solve that and they got to be tested every other week. And I'm also very happy that Abbott is participating because we've got to get by state. Everybody there agree that it's okay to use these tests in the nursing homes. And that's not universal quite yet. So...

Right. Yes. Maybe that's good segue then. Yes. So we've got a lot of investor questions regarding like quality concerns around COVID-19 testing and that recent article about concerns in Vermont about discordance of test results. Maybe just give us some color on what gives people conviction by using these point-of-care testing in sort of these screening settings?

Yes. We've shipped well over 10 million tests, I should say it this way. Our customers have run well over 10 million tests so far, and the number of discrepant results has been very low. Feedback from customers has been super positive, which gives us confidence that the test is performing as expected, just as we saw in our studies. It is indeed highly accurate. No test, though, whether PCR or rapid antigen, is perfect. We've seen other products that are PCR, a couple of different manufacturers have issues that have caused either warning letters or recalls or whatever. Errors in sample handling or in processing a test can occur, but whether it's PCR or rapid antigen, those occasions are actually relatively rare. The key to solving the COVID challenge is what we call the democratization of testing, giving people immediate access to accurate testing frequently, no matter where they live. And I think that is going to be critical moving forward. There are some issues that come up, and I would tell you that we run every single customer inquiry or complaint to ground. We follow our quality management system, we attempt to determine root cause analysis. And in the case of Vermont, we worked with the FDA closely. And it was determined at the end in a meeting held by the FDA and the Vermont Public Health and the Manchester Medical Center and my team in that joint meeting, all alongside to CDC who convened the discussion, it was determined that the Vermont Public Health should not have called those positive results. They should not have called them false positive. And in fact, the Vermont Medical Center now is in the process of reaching back out to those patients and apologizing and saying, we are sorry that you indeed were positive and now we're going to have to do contact tracing and all that. The Vermont Public Health still has not backed down, which, again, it's back to this, we need to team up with BD and Abbott and others because at the end of the day, we've got this perspective in public health that PCR is always right and that's not always true. So here, we investigated, we sent a field application specialists in to watch how they run the test, they performed it perfectly just as they should have. We also took their samples back to our lab in Ohio, and we ran them and guess what? They were positive, both by our antigen test and our PCR. So again, there's a lot of press out there. I love the fact that Abbott and its huge PR machine is alongside us and BD and others now because we've got to put this notion that these tests are inaccurate to both.

Yes. Yes. I appreciate that color. Maybe just sneak in one last one before we wrap up. Can you give us a sense about your contracts. Give us some color maybe on how long they're for? Just any sort of color for us.

Two to 3, depending on whether it was a new contract or if it were an amendment with somebody that's been on board with us for a long time. For some of those long-term customers, we extended their agreement with an amendment that included SARS and flu and other products by 2 years. The new customers are almost all with 3 years. So it's a bit of a mix. We've got a long way to go. There's still lot of analyzers out there that we can bring on board, and there's a lot more analyzers to ship to new customers, too.

Okay. All right. Well, appreciate that. I think we're running out of time, and I appreciate you guys joining us once again, on the Bus Tour and congratulations on all the progress.

Yes. Thanks, Steve. We appreciate it. And again, I just want to say it because I know that we'll have my team listening in, I'm proud of these guys, what they've accomplished and having risen to the challenge. Thanks, again.

Great. Thank you so much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.