QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Hello, and welcome to the 32nd Annual Piper Sandler Healthcare Conference. I'm Steven Mah, senior research analyst covering medical diagnostics. I'm very pleased to have today with us, Quidel. I want to introduce Doug Bryant, CEO; and Randy Steward, CFO. So maybe let's just jump right into it to make most use of our time. So obviously, we received a lot of questions from investors around your COVID-19 testing business. How the testing landscape will evolve with an effective vaccine, emerging tests, and we'll get to all of those. And then if we have time, we'll pivot and close with your broader business and long-range plan. But maybe first, let's start with your QuickVue COVID-19 business, which is an area where we get a lot of questions and discussions. So actually -- so yesterday, we actually hosted a COVID-19 testing panel. And the panelists were pretty passionate that one of the key challenges in testing right now is a lack of testing democratization, access of testing for small businesses, low-income communities and other use cases where you don't have a trained lab professional. Can you give us an update on the QuickVue at-home test, timing to approval, go-to-market strategy and your capacity?

Sure. First, thanks for having us, Steve. Great to be here with you and all your clients as well. It's pretty clear that an easier to use product is necessary in order to do what's needed to get people safely back-to-school, back in restaurants, back at work. And so I think QuickVue fits the bill. We submitted the initial data package on QuickVue SARS on October 16. We then had a number of follow-up questions and submission of further data. We conducted a user study. All that's in. We're looking for a few more positive samples, which we'll get this week. And then I expect we will be approved by the FDA with an EUA here. What is it now? It's now Wednesday. I'm going to guess Ruben's got the press release ready to go. So I think we'll probably be sending out a release sometime next week. That would be my guess. And then we also then we're in dialogue simultaneously with the FDA over what the protocol might look like for the at-home studies. Those are under IRB. Those IRBs have been approved. We're ready to roll. So as soon as we have the EUA on the point-of-care professional use segment, we will begin immediately the studies, and we expect to submit the package back to the FDA for at-home use by the end of the year. So I don't know how long it's going to take. I don't know what the interaction is going to be because we've never done this before. Somewhat hopeful that we can get in market early January. We have built inventory of the product at the pouch phase. So we have several million tests ready to be put in kits. We're working on the over-the-counter or the one you'd see on a shelf space in the retail segment. We're working on that packaging. I believe, we're finalized on the design, at least at this point. We're initially going to launch them at 2-pack. And I think we might explore something a little bit larger moving forward. But all that's ready to roll. We would begin manufacturing and kitted format about 1 million tests a week as soon as we have approval or I should say it differently, we will begin shipping at least 1 million tests per week what we're making, plus what we have an inventory as soon as we're approved. So that's where we're at, at this stage. We've also ordered a further equipment to ramp up to go much beyond the 1 million tests a week. With what we have incoming in terms of equipment, we're going to double that fairly quickly. And then the remainder of the equipment, we expect to have installed not later than April. So theoretically, we could be at 50 million tests per month sometime in 2021. But I should mention to the audience that 50 million tests a month is really just a starting place. We intend to go much further than that and already have plans to do that. We think we can get all that done for something less than $100 million in capital. And we think we'll be hiring just about 300 additional people to do the manufacturing. We primarily will do the manufacturing here in the county where we're at today. Potentially some additional work south of the border as well. We already kit there. We may manufacture some tests down there too as well. So that's QuickVue SARS. We're ready to roll. A lot of positive momentum on the operations side. The R&D guys did a terrific job. The antibodies and the product are new. And actually, they're better than the Sofia antibodies. We will be moving Sofia over to the new antibodies here surely as well. So I'll just stop there and see what else you have in mind, Steve?

Okay. Yes, great. Maybe just a follow-up on your testing manufacturing capabilities. I know you got RADx money for Sofia. I don't think you guys used all of that money. Can you use some of that money for the QuickVue manufacturing?

No. So let me review. I know you know most of this, Steve, but we were -- we entered into an agreement under which as we achieve certain milestones, the NIH will reimburse us through the RADx program. So it includes Lines 7, 8 and 9. And it includes the distribution center that we're standing up actually in between the 2 sites. We're in Summers Ridge. McKellar is approximately 3 miles away, and the distribution center is right down the middle of that. So we've added another 106,000 square feet of distribution space. That's being stood up now, and we will have that ready to roll in April, which will be perfect timing for the additional volume that we intend to manufacture it moving forward. So they are paying for Lines 7, 8, 9. We're going to build 10 on our own at that time. Around July or so we should be about 20 million to 25 million tests per month for Sofia cartridges. That's in addition to what we plan to do with QuickVue. But we did not ask for any money for QuickVue. So the $100 million that we're going to spend on the additional manufacturing capacity at least at this stage, we will be self-funding with cash.

Okay. Great. Yes. And yes, you mentioned on the QuickVue at home, you're prepping to go OTC. Can you comment on the need for a prescription? I know Lucira needs a prescription. But when we talked to the panelists yesterday, they thought really to maximize uses that you really shouldn't have a prescription and then trust people to sort of do it on -- do the right thing on their own. Can you comment on that, your thoughts on that? And then also for a true at-home use, can you comment on the robustness of the QuickVue test and maybe some of the things you built in on an internal control standpoint to kind of make it bulletproof for the lay person?

Sure. What was the first part of the question?

OTC versus Prescription.

Oh, yes. Yes, we don't know, Steve. Honestly, I've heard different comments from different audiences just, I think, as you have. When I was on the phone recently with the Biden transition team, I think I understood that their desire was to have a product that would not require a prescription. I didn't see the approval by the FDA at the Lucira product. I don't know the circumstances under which they required a prescription. We want to be prepared either way. I obviously, would prefer to be able to have a product that our shipper product that folks can at home do what I just did the other day, which is run a QuickVue test on myself and another individual. Get a result in 10 minutes, and I've -- there was no reporting requirement because I was negative, thankfully. But that would be our preference. But we are prepared in the event it does go the other way. We're building infrastructure so that we can interface with telehealth. And do all that efficiently so that the individual can run the test at home under the supervision, either direct or indirect of a health care provider. So it does complicate what we're working on. And we've bifurcated our project into 2 parts. One, QuickVue assuming that, that goes without a prescription. And then on the Sniffles side, which I think we're going to call Sofia Q when we launched the product. That particular product would be well situated to be product used to be interfaced with telemedicine. So short answer is, I don't know, but I think that we are going to be prepared either way.

Okay. Great. That's helpful. And then maybe your go-to-market strategy. In either case, I think you mentioned before, potential retail channels. Would you sell into the government similar to how Abbott did it?

We are working as if we are going through retail. We're being pulled through the process. Honestly, right now, folks out there are aware where we're at. To protect our product is under active review at the FDA. So we're getting pulled into meetings almost weekly, I would say, from a number of major obvious candidates and with 2 models in mind: one, folks wanting to give access to the product on their shelves; and two, people who want to use it as a vehicle to pull people through their pharmacy. I told our people, let's recommend -- we'll do both. We'll do either. Let's be prepared either way. I prefer the retail channel versus the government simply because I've witnessed inefficiencies in distribution of the product and use. From my perspective, I hate spending all this time and effort to manufacture a product that's in some states warehouse being unused. And my observation from what the government has done previously is that they purchase product -- well, and they purchased in fairness, some of the mine, too. They purchased product through HHS to be distributed to the nursing homes. BD did the same. BD then also shipped some product in the states. And I know that some of that product was not used. Abbott's Binax product was also shipped into a state that I had a conversation with just recently, one of the larger states, and they've got a lot of unused product, too. So it seems to me that there's such a demand for the testing. Get the testing in the hands of the people who need it, who want to test and let's be efficient about it. So I will do either. I'm okay. But I do want to make a case that I think the free market is a far more an efficient way to distribute this product.

Okay. Yes. All right. That's helpful, Doug. Yes, I appreciate the color on that. And yes maybe just adding on to your comments. So you mentioned you're talking to the Biden administration. Given all the buzz with the COVID-19 vaccines. Can you talk about how you think about COVID-19 testing demand? And how the country's need for testing will evolve especially with the incoming Biden administration?

Yes. I think what we're hearing, particularly with the President-elect speech on October 23 and other comments made by some of the folks he's appointed to these task force. I think there's a pretty good understanding that until second-generation vaccines are available, vaccines that -- in which an individual is inoculated with a subunit of a protein to generate antibodies. Until that occurs, testing, tracing and quarantining of people are going to remain the most powerful public health tool that we have. And it's pretty clear to me that the folks in the Biden administration are certainly signaling that. And so I'm comfortable whichever way this turns out because I feel like we're building capacity for the future. And if nothing else, if we have at-home testing for SARS, flu, RSV, Strep and other things, Lyme, as an example, I think that's going to be extremely useful for the country, but also puts us in a really good position moving forward. And so having that capacity to meet that need, I feel, is going to be really important for our company moving forward. In the meantime, based on what I know about what's being said about these messenger RNA viruses and what's likely to happen, what we don't know, I think we're going to be testing at least for the next couple of years at high volume. I think that our ramp rate will basically mirror our own manufacturing capacity increase until probably the back half of '22. And I see that abating but then being replaced by the respiratory season that now includes, in addition to flu and the other usual pathogens, I think it's going to include SARS moving forward. So in an interesting way, I think it restates the market at a price point that is higher than it is today in the traditional flu-only segment. So that's my read on it. Others can disagree with me, but I get paid to make the right choices, and I feel like we're making the right choice here by expanding manufacturing and doing what we can to put tests in the hands of people who are going to need them.

Yes, that's right. And then, I guess, maybe -- yes, now pivoting on to Sniffles as well because, yes, to your point, you are democratizing testing because you're making more tests available to more people. So talking about Sniffles, at your Investor Day, I mean, you spent a lot of time talking about that. And Sniffles really fits in kind of this new testing paradigm democratizing testing. But can you walk us through why someone would want to choose Sniffles versus Sofia? And then you also mentioned you have about 100,000 Sniffles instruments made for deployment early next year. Are those Sniffles instruments? Are they already spoken for? And kind of what has been your initial demand and interest of the Sniffles product then?

Well, let's rewind then and say that we have begun the product development for this product almost 2 years ago. And the idea was we don't know where the market is going to go, but let's be prepared in the event that the FDA signals that they would be more receptive to an at-home product for flu and strep. And we had done a significant amount of work on assessing the market, understanding pricing, looking at packaging. We had 2 different pharmaceutical companies want to jump on board with us. Spent a lot of time with a couple of different consulting companies. So we were moving into this saying, let's just develop a lower cost Sofia product that if in the event, we could move it into the at-home segment would be suitable there. So the idea was to build something that once we are at volume, we could get to somewhere around $10 to build the box. And so what Sofia Q or formerly known as Sniffles, is basically a miniaturized Sofia, where the expensive parts and the Sofia 2 instrument, all that intelligence has moved to a smart device and an app. So what you have is the same optics that you see in Sofia 2 miniaturized with the help of an engineering -- a couple of engineering firms into a footprint that's basically like a tiny Alexa with a place where you can put a Sofia cartridge. So what we saw if we could do this was the ability to put into the home a very low-cost product that mom or dad could buy the cartridges for and keep them in the event that during the 3 to 5 respiratory infections that a typical person has every year, you'd be able to test yourself at home. Since then, I think our thinking has expanded a little bit, Steve, because it's pretty clear to me that the retail segment and the pharmacy segment, there are 60,000 pharmacies in the U.S., we could certainly put Sofia 2s in 60,000 pharmacies given what we're doing now from a manufacturing perspective. But we've always been worried about the volume that goes through there relative to the cost of the analyzer. That worry now goes away. So we're thinking with this initial tranche that we're building of 100,000 Sniffles/Sofia Q instruments that we're going to be able to do what several folks that you can name out there have asked us to do, and we haven't done so far. So all of the major retailers that have asked us for very large instrument shipments of Sofia 2, we haven't shipped any of those. Now we're going to have the ability to keep meeting the need in our traditional segment that we had suggested before, which is taken up mainly by hospitals and urgent care. We're going to be able to expand beyond that, move Sofia 2 to where there is volume, where you're going to batch, but reserve the lower volume for Sniffles/Sofia Q. That's kind of the idea now at this point.

Okay. I appreciate it. So that's the final name? Sofia Q?

That's what the marketing guys tell me.

Is that official or...

I think you should go ahead. I don't think I can change their mind.

Today, it is.

The role of the CEO is only CEO. All right. All right. Perfect. So why don't we move to Sofia? So we've gotten a lot of questions about the sensitivity of antigen test for asymptomatic populations. There was a recent New England Journal Medicine article on Thanksgiving, from Harvard Public Health, suggesting that rapid antigen testing, despite having a less sensitivity than RT-PCR would be a more effective COVID-19 filter. And similar to yesterday, we hosted a panel member from -- she's the Head of Pac-12 student athlete testing. And she's using a hybrid approach where she's using Sofia 6 days a week, so every day and then RT-PCR once a day. And they're -- she said that they're finding they're getting that RT-PCR picks up infection probably 1 day earlier than antigen, but that they like antigen because they can get the test results immediately and immediately act on it to quarantine the individual and stop the spread. So maybe made a little comment on that.

Yes. Let me jump in, Steven, and help with the word infection. You mentioned infection. I don't think Dr. Harmon would say the PCR picks up infection earlier. I think what she would say is that there is a gap between when RNA is detected or fragments of RNA is detected and when you can actually detect actual virus by rapid antigen in the person's nostril. The difference between the 2 technologies and actual fact is more like hours than it is a day based on the analysis that my head of R&D has done because of the doubling time of the virus. So what she is saying, though, is true. You will be able to detect somebody who has been around that virus earlier than when they're actually infectious. So what the folks at the University of Arizona have concluded was that, yes, you can detect by PCR hours or perhaps a day earlier, a student who might be have been exposed, but they've determined that, that student may not actually be infectious given the Ct count of the PCR. So I think what you're going to find moving forward is a public acceptance of the fact that despite what all the molecular companies have put out there, there's very little difference in testing asymptomatics between testing with PCR and testing with at least our antigen product. My daughter, for example, we're all going tomorrow to North Carolina for a soccer match -- soccer tournament, actually. We're going to come back. She's supposed to be tested before she goes back-to-school. She says, Dad, I want to go on and get tested on Monday, so I don't miss anything, and I said we're -- it's not enough time. Whether you're going to test by PCR or antigen, you've got to wait 3 or 4 days, maybe 5 days. So you're going to stay home. And then we're going to test and she says, but I'll have missed the test at school, and I said, well, the good news is your dad knows somebody who can get a test. So -- but explaining to people and having them understand that if I have been in contact with somebody who's infected, it will be a few days, whether you test by PCR or by antigen before you're able to be detected, and it is now becoming a belief by epidemiologists who know that once you are detectable by antigen, you're actually detecting the protein from the actual virus that was in your anterior nares, in other words, you're nostril, you're infectious. And I think the public really needs to understand that, get comfortable with that and I think that is occurring. Early on, obviously, people are making a big deal about PCR being more sensitive. And obviously, as I stated before, months ago, that doesn't matter so much. The difference isn't that great.

Right, right. Yes. There's a misconception as well, yes. I'm glad you corrected me on the infectious point, yes, because, yes, you can have the RT-PCR tail where you're detecting it, but you're not infectious. Yes. So that's a common misconception as well. So in the last 30 seconds, maybe just a quick follow-up. So is that how most people are using Sofia is the way Dr. Harmon is doing it in a sort of a hybrid approach, or is it really kind of a very specific use case?

Pac-12, the Big Ten, all have similar protocols as the SEC, ACC are a little bit different. There, you're talking about exclusively people who are presumed asymptomatic or at least have not reported a symptom. Early on, I would have said, most of the tests that we would do would be symptomatic. But now I'm pretty convinced that most of the testing that we're doing is asymptomatic. The ACC -- AACC did a webinar, during which use cases were discussed and reviewed. I think they had experts from Barnes-Jewish Hospital in St. Louis part of, obviously, the head -- the lead hospital and a big network there, talk about how they use the test. And rapid antigen tests now in these centers are used mainly on, say, asymptomatics. So if you get admitted to the hospital or you get tested it on discharge, it's PCR. If it's preop, or somebody out of the ED going into OP, they're almost exclusively using antigen tests. So -- and clearly, urgent cares, most of that testing is asymptomatic at this stage. So I'd have to -- no, I don't know the answer. We should try to figure it out, but super high percentage now of our testing is done on asymptomatics.

Yes. Okay. Yes. No, that makes sense, yes. That's my understanding as well. Thanks for confirming that. Well, I'm getting pinged that we're running out of time, unfortunately. Yes. So Doug, as always a pleasure speaking with you again, and thank you for participating in our conference again this year.

Yes. Thanks for having us, Steve. Thanks, everybody.

All right. Thank you. Appreciate it.