QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Okay. Good afternoon. We're going to kick it off. Our next company this afternoon is Quidel. Before I turn it over to Doug, just a quick reminder. The website is the way to submit questions for the Q&A. And with that, I'll turn it over to Doug.

Thanks, Tycho. Before jumping into the presentation, I'll just make 3 very brief comments. First, Ruben has done a great job putting together a rather comprehensive deck. And it's -- I believe it's going to be very useful for current and potential investors in understanding the current state of our business. It's, again, dense and way too much for a brief 20-minute presentation. Particularly since some of you know I'm from Oklahoma, and this is actually as fast as I can talk. So I'll refer to a very brief number of slides and to the extent that the deck is helpful and raising other questions. Please send in, as Tycho said your questions, and we'll do our best. I'm going to leave as much time, given everything that's happening these days for questions rather than me going on and on with the presentation. Point number two, I just want to thank, again, as I have in years past JPMorgan for giving us the opportunity to present this conference. It's obviously the most attended Health Care Conference, and we're privileged to be involved. It's a pleasure to be here. I've been at Quidel now for 12 years. And so in one on ones and other formats, I've been asked consistently these days about my longevity. And my response is that I'm enjoying the company and our people and what we're doing in our contributions to helping out our communities throughout the country immensely. That's point number one. And point number two, I can't imagine leaving before we get Tycho to change his rating. So it seems I'll still be here for a little bit of time, but -- because we've got a lot to do. Point number three, is I hear from other of my colleagues in the industry who would either follow us into the point-of-care space as we've done since I've been here, being at least one of the leaders in what we do. And then I'm hearing more about the opportunity in the over-the-counter space, not just for COVID testing, but for the other products that would follow-on as a result of the ability to do infectious disease and the OTC and at-home testing space, where I believe we have tremendous technical capabilities and the potential for significant scale. And I'll talk a bit more about that as we move forward here in the next few minutes. And it's that belief beyond this COVID pandemic and the need for large-scale rapid testing, the future for our company actually will include a very significant contribution from an emerging OTC at-home testing market. And it's that belief that actually informs a lot of our decisions. And we did make a number of decisions at the end of the quarter, Q4, which not only affected what we did at the end of the quarter and where we ended up, but also where we will progress moving throughout 2021. So with all that, let's get started, and I'll just -- I understand you all are going through the slides on your own. So I'll just point out first on Slide 2. We will be making forward-looking statements. I can't actually read this without readers. So I can't say anything more than that. Slide 3 is a brief set of bullets that describes what we did in the year, a crazy year for our company. We did respond quickly to the pandemic. My team has responded and risen to the challenge in a way that goes beyond our company's size, but certainly fits within our wheelhouse with respect to our technical capabilities. We did develop a PCR assay very early. We were not first to market, but we were actually ahead of other larger companies that were developing PCR companies as well -- I'm sorry, assays as well. We were the first to develop a rapid antigen assay that was cleared on May 8. We've also developed an isothermal molecular assay that was also cleared at the end of the year as was our QuickVue product. And I would say, in that respect, QuickVue and the Sofia Q, and I think I actually have a Q here. This obviously is unbranded, but this is the actual Sofia Q, which we'll be launching in 2021. The analyzer that will further democratize testing, enabling us to get instrumented results into more -- to even more democratized settings closer to where each one of us lives. So QuickVue and Sofia Q SARS test, we hope will be in -- over-the-counter at-home sometime early in 2021. Total revenues for the year were up $1.1 billion, which is really nice and significant for us. We finished at $1.66 billion in revenue, that's a significant growth rate. Big contributor, of course, was Sofia SARS. We also had a couple of hundred million in PCR test revenue, which was good for us. And we did have only minimal QuickVue and Solana SARS revenues in 2020. On the QuickVue side, some of that was driven by decisions that I made at the end of the year, given what we thought was even more of an opportunity to go into the OTC space. And I'm happy to talk more about what drove those decisions later during the Q&A as you want. Core revenues like everywhere in med device in vitro diagnostic world were down. And in particular, early in the year, we had quite a bit of an impact in our Chinese cardiovascular business, which is a bit of a drag. I would say that as we went through the year that recovered in particular, the U.S. looks pretty strong as we exited 2020. So operating margins, we expect to, for the year, exceed 60%, which is good compared with 2019, which was at 17%. Sofia, as we placed as many as we could make. And we got to the point where we exited the year at about 10,000 instruments manufactured per month in the fourth quarter. We shipped over 23,000 instruments, bringing our total for the year for the entire installed base to somewhere around 65,000, which is significant. And early on, as we go into the launch with Solana, we're sitting on 1,350 analyzers that are out there already. We're building more and expect to and already have orders, and we'll be shipping more in the first quarter. We did spend a bit of money in terms of capital in the hopes of ramping up production, which we obviously did. We spent about $60 million during the year doing that. And then turning to the next slide, which is Slide 4. 2021, all be somewhat succinct here. We anticipate that everything that we make will get shipped every quarter. Currently our spotting, laminating and cutting processes are yielding about 3 million tests per week. And those 3 million tests now need to be allocated to both Sofia as well as QuickVue. Looking at the mix in the quarter has so many variables that it's going to be very difficult for me today to tell you a lot about how that looks in the quarter. We're also managing a complex supply chain, which has an impact, but we're doing fine in that regard. But the big driver now that wasn't as clear to me as it became in the last 3 weeks of December, was that we are now anticipating a QuickVue SARS OTC at-home approval, which would not require a prescription. We think that we need to be making an investment in this. We think it's the future of the company. And so we will be making some decisions. Those decisions entirely informed by a couple of things: One is the opportunity in front of us to address the OTC space, but also informed by the notion that as a company, we want to do the most good that we can for society. We, therefore, intend to manufacture as many OTC SARS tests as we can. And ultimately, as we ramp production dramatically to get the cost down so that the average family in America can afford to go to their retail pharmacy and pick up QuickVue SARS OTC for at-home use. They can bring that home, run tests on their family as they need to. And we want to make that contribution to society. And again, we want to do the right thing. So those 2 factors are driving our decisions moving forward. I'll talk a bit more about that moving forward as well. So again, OTC, although important, super important, we'll have a somewhat limited impact as we await the delivery of additional spotting, laminating and cutting equipment that by the middle of this year, we'll have doubled that capacity to manufacture, but then you'll see a strong ramp as we move out through the remainder of 2021. And we're really excited about the opportunity that that's going to afford us in the long term. We do expect to double revenue in 2021 from our 2020 level. Again, we did about $1.6 billion or so, expect to at least double that. The schedule for all that happens throughout the year will be slightly different than we had anticipated. As I said, until we had been informed of where we were at in the process and the confidence that we now have that we will be able to enter the OTC space with this product. And again that, that will lead to other things moving forward. So therefore, we won't be providing a lot of guidance this year just because of all the moving parts. But what I would say is that the first half of 2020, in particular, the first quarter won't look dramatically different than the fourth quarter. We expect to ship out about as many Sofia test cartridges as we did in the fourth quarter, that was about 26 million. We perhaps will do more than that and certainly have the capacity to manufacture those in terms of putting the strips into the cartridges. We have the capacity to do about 2.7 million of those a week, but we're going to make a decision to do less than that in order to build inventory to go into the OTC space. So we'll talk more about that moving forward. So moving to Slide 5. I just have one quick comment. We've always said our primary markets have been the physician office labs, hospitals, urgent care centers. I've now thrown an asterisk on that. And I'm saying that this is likely to evolve quickly and dramatically over time as testing is democratized through far greater access to tests for common or routine conditions, in particular, infectious disease like flu, RSV, Strep and even Lyme disease. Moving to Slide 6. We've done well since 2009. What I would just say is, before the pandemic, before COVID in 2020, we were already doing just fine. We were growing low double digits. We had what we like to say was a transformative acquisition in terms of the acquisition of the Alere assets from Abbott. That was extremely helpful. But again, we were doing just fine, prior to COVID. What I don't think people appreciated was the competency of this organization, the technical know-how, the customer relationships, the distribution capability and the ability to scale far greater than a company that you can imagine of our size. Stepping forward to Slide 8, that's effectively the things that we got done in 2020 and the time line. And I'll just point out a lot of people like to talk about the number of assays they have in the market and all that. And I would just say that I'm as proud of my guys as I can be for having risen with the challenge. We've been as successful on a technical side as any other company in our space. And I think it's a testimony to the R&D organization and the operations group as well as our customer service teams and even our commercial organization who are really doing a nice job supporting customers who effectively really aren't getting all the products that they want and deserve, and we're doing our best to help all of our customers out in that regard. Moving to Slide 9. We continue to transform ourselves. But what's happened with COVID is it's giving us an opportunity to do so at an increasing rate. So a lot of the things that we would hope to have happened, while I've been here, have now become accelerated. And now I think people are getting a view as to the talent of this organization. In 2017, we did complete the acquisition of those Alere assets, as I said, for $680 million. That was extremely helpful to the company. It enabled us to expand our global footprint. That informs a lot of things, including what we look at in terms of M&A opportunity. Does it fit? Well, now with the global infrastructure, a number of things that may have not been as interesting in the past seem like a good fit. And obviously, it pretty dramatically expanded that acquisition, our revenues and our earnings and our cash. In 2020, we had a number of firsts. It doesn't matter so much who's first or whatever, but for my R&D organization, it feels good. To be at the forefront to see the press release that says, "Hey, we got it done." So all the nights, all the weekends, all the pizzas and all that necessary to get stuff done in the R&D organization and then the cake they get at the end literally when they launch a product is what they're about. And so again, being first to second of the market, to us, business guys, it doesn't really make a dramatic difference. But to my team, it really does. I just want to point out one more thing on this topic. We've got 1,300 employees. I think it's a little bit more than that now. I'm looking at Randy. I think we might be pushing 1,400 right now. But, call it, 1,300, call it 1,400, that goes into $1.66 billion of revenue, a lot of times. So in terms of revenue per headcount, we're doing fine. 2021, I mentioned OTC is a big thing for us. I would be remiss if I don't mention that we are also launching what probably is going to be the most important flagship product in the history of the company, which is called Savanna. It's a multiplex molecular analyzer that we think will decentralize multiplex testing across integrated delivery networks and the feedback we're getting from customers who are working with us on this is really -- is tremendous. And as I said to my guy, running the program just yesterday morning, he sees the finish line. So it's an artificial finish line because once you score a touchdown, you've got to score another touchdown, but I didn't go into that detail. But in any event, we will be launching in 2021, filing a product that we think is going to be superb. Moving to Slide 11. I don't think this is unknown to most of the folks who are our investors, but we're going to try to leverage this huge Sofia installed base to the extent we can by developing further products that fit into that market. And when you've got 65 going to who knows what the number will be at the end of 2021 in terms of Sofia placements and/or Sofia Q analyzers, it is just a -- it's a target-rich environment for the commercial organization, and it is a great asset base into which our R&D teams can put product. And we look forward to talking more about what those products are that we have on the drawing board at this stage. But we fully intend to leverage that asset also, as I said, leverage our global infrastructure. We have -- we may not have as many R&D guys as everybody else, the bigger companies have, but I would say, pound for pound. Our guys are tremendous and clearly punching above their body weight. And as we've said a couple of different times in different venues, we are all about expanding our manufacturing capacity at this stage. Savanna's big thing for us, high-sense troponin. I won't have an opportunity today to talk a lot about. But I think in the point-of-care space that's going to be valuable. And then again, OTC, I think, is the future of our company. We're going to deploy our capital. We do have a lot of cash. Of course, we're going to strengthen our supply chain, make those investments, meaningfully increasing production. And we do have a couple of things that we're looking at from an M&A perspective. The cash is not burning a hole in our pocket. We're not anxious to do something. But if something arises, we certainly have an opportunity to bring on board this footprint that we have other things that make sense over time. Moving to Slide 12. I think this is -- maybe now that I look at it a bit redundant, but we will be introducing an over-the-counter at-home product, which we intend to build a lot of as we exit 2021. It's a visually read lateral flow product that -- this is the main strip within a pouch, which when you peel out, ultimately, you put in a reagent tube and you read a positive in as little as a couple of minutes and a negative in 10 minutes. We think that we can deliver this product into the marketplace at an affordable price, given that there's very little difference between COGS and operating margin and except for freight. So I think that we can deliver an affordable product at high-volume end of the marketplace at a drop-through that is not significantly different than Sofia and/or QuickVue in the point-of-care space because we will not have those costs to service those markets. And we think it's the right thing to do. And that's what we intend to do moving forward. Down below, probably at a higher price point, you see the Sofia Q. I've got -- one that's not got the logo and all that. This is an R&D unit, but we're already manufacturing these. We'll be manufacturing a few thousand here in the next couple of months. And then ultimately, by some point in the first quarter, I think, we'll have around 100,000 of these manufactured. And these would be the lower cost replacement along with your cell phone. This would be the lower cost replacement for Sofia 2. We think that, that will enable expansion beyond the United States and to other markets. But here, we think that having an analyzer, much like you would have a diabetes glucose meter. You might have one of these at home, which would enable you to go to Rite Aid or CVS or whatever buy a flu kit, RSV strep, Lyme or whatever, might be a handy device for families to have at home. So that's our idea there. Moving to Slide 13. This is what we've got effectively in our long-range plan. We think that we can, beyond COVID, keep this thing going. We think that we can still deliver reasonably solid revenue growth. There's a CAGR there that looks mid- to high double digits. I think that is sustainable. That's what we have in our long-range plan. In the short term, we're going to leverage Sofia; in the medium term, we're launching Savanna and expect, if we're successful with clinical trials to have another flagship product in our high-sense troponin; long term, we'll continue to expand Savanna menu and then expand in the cardiovascular as well. On Slide 14. This is an easy one. We don't have debt. So I'll move on to Slide 16. And I'll finish up here by saying that these are effectively the larger goals for us in 2021. It's a lot, 1,300, 1,400. If we add another 400 people in order to drive the manufacturing facility, which we're just getting started with north of us in Carlsbad will still be only 1,800 employees or so. So it's a lot to do, but it's a terrific team. The most important thing we can do in 2021 to help our company, our shareholders and frankly, society is meet the production targets that we have in place. Successfully launch those products. We'll continue making R&D investment. We'll begin to commercialize Savanna. We'll have completed the high-sense troponin clinical trials, and we will continue to do diligence around M&A, things that we're continuing to look at. So Tycho, I'll stop there, and we can go to questions.

Thanks, Doug. And just a reminder, people do submit questions on the website, if they have anything or want asked. I'll start with the preannouncement. If I kind of look, I mean, you're effectively selling everything you can make now. Is that right? I mean if we assume kind of the rate was $2.1 million in the fourth quarter. I know you're at $3 million now at $20, $25 a test, that math kind of implies you're selling everything. So is that the right assumption?

We -- for Sofias shipped 26 million tests. So everything that was kitted went out the door, including on the Sunday, the last shipping day that would have counted for those who were FOB destination -- no, no, FOB origin, excuse me. So yes, everything that was kitted went out the door, we did have inventory of these, the QuickVue SARS that were not kitted. And again, frankly, we need to build inventory in order to do 2 things: One, Tycho, is that we're going to support a very large study that I think will be announced at some stage soon. And I don't think I'm actually in a position to say more about that, but we need a lot of these in order to support the study, which we're actually going to supply at no charge, this product. And then we need to build inventory so that we can -- once we do finalize an agreement with one or more retailers that we can supply the volume that they think they need to do an effective launch, even if only regional. So I suspect that we will be doing somewhere between -- once we launch the OTC product somewhere around between 500,000 and 1 million tests a week initially. And then as the new spotting equipment gets installed, right now, the time line says midyear, we will double that, and we'll have the ability to do 2 million. So it's not a lot of tests early on. And hence, my comment, the bullet that was on one of the slides. It's not a big impact, but it's a big start. And as we then bring on the additional equipment, and we have 30 different pieces of equipment that are on order in order to get to the next phase. As those pieces of equipment come in, are installed and validated, that's when you'll see quite a dramatic ramp in terms of OTC SARS product that we can actually ship. But you are right, fourth quarter for Sofia, we shipped everything we kitted. We shipped and kitted. We kitted and shipped 26 million tests.

So if I think about the kind of the run rate targets, you've talked about 300 million-plus Sofia tests by mid-'21, and then kind of 600 million QuickVue by year-end in terms of capacity. How much inventory do you have to build in that ramp for the OTC launch?

Yes. So let me -- we're at 2.7 million tests per week for Sofia now, which includes Line 7, which actually just got validated this week. So moving forward, we would have that ability. Early on, with the 3 million tests that we can spot, laminate and cut, we would think a good estimate for what we would -- how we would allocate that as we would do a couple of million Sofia a week, and 1 million that would be available to be kitted in the OTC format. When we get to Line 10 by August, it's about 20 million Sofia tests per month. And I'm not sure I'm actually asking your question though, so. Can you...

Well, if you think about kind of the -- the real question is how much inventory do you have to build for the OTC launch relative to the manufacturing targets you've previously put out?

Yes. Well, first, I've got these now. And I think we said in our previous conference that we had around 4 million of these in inventory. I'm going to use some of that for the study. And then I'll have enough to launch the initial -- I'll have enough to put into the channel for whatever retailer we decide to go with. We'll be fine there. The question then as we ramp more quickly, how many other retailers can we bring on board? But the initial set, I think we'll have inventory, Tycho, to satisfy that. But that is -- I think some of our investors touch space with me after the pre-announcement to say, it doesn't sound like you shipped a lot of that QuickVue. And the answer is to those, yes. And the reason we did that is because in the last 3 weeks of the quarter, we -- I became significantly more confident that we indeed are going to be able to launch this OTC product that does not require a prescription. And I thought we needed to make a decision around building the inventory that would be necessary to go into retail.

One that came in on e-mail along those lines is, what is the manufacturing capacity trade-off between the commercial sector and the consumer sector? So how do you think about how much of the capacity is going to go to retail?

That's a tough one because we've got excess demand right now already with the professional segment. And so what I told the team is, gosh, let's not ramp back to a lower volume than we were already supplying. So I've already got, as I said, we shipped in 26 million. I don't know how quickly what we ship gets used, but there is no volume at distribution. So I suspect that -- and I know what was on order already as we exited. And as I think I implied, we had as much order that we could fill at the end of the fourth quarter as it was about 25% of what we shipped for the entire year. So the demand is incredible. So I don't want to tell our current customer base that I'm going to make a trade-off and ship them less than they already were getting. I think that's the first criteria. But there are other moving parts. What's the minimum volume necessary to start-up somebody in the regional retail setting? We're working through that with our potential retail partners. These conversations are happening every day. And we're having meetings and afternoon to convene and figure out who talk to who and what happened. And so it's moving quite quickly. It's a good question. Right now, I don't have a lot of flexibility, though. I can't really do more than support what I've got going on the professional segment and do a lot more than 1 million tests a week in the OTC segment. If indeed, for whatever reason, there's a delay in all of that, by the way, I'll just add this, Tycho, that whatever I don't ship OTC in the first quarter, I will ship to the professional segment. So there's no danger that I'm not going to ship everything that I make of the QuickVue SARS.

Well, another question that gets prompted is why push so quickly into the OTC setting when there's so much demand in the professional market, employers are subsidizing testing, insurers are covering it? What's the role of an antigen test in an OTC setting, is the demand really there, frankly?

Yes. I believe so. And what I would say is what folks are missing is that there is a theory that says, if I am able to allow you and your family to test at home as you feel you need to be. And if you're positive, you stay at home. Or you were in contact, you stay at home for 7 days, you've had no symptoms, and now you want to test to make sure that you can leave home. By doing that and particularly in dense communities, I can achieve the same reduction and prevalence of the disease as a full down lockdown, nobody leave their houses. So there have been studies, one recently published in collaboration with the London School of Hygiene & Tropical Medicine, that's in a free print out there now. I think what you're going to see is by testing asymptomatic populations and those that then develop symptoms and then stay home, that you're going to be able to get people back to work. So I think there's more value to society in having an over-the-counter product. And you're right, I could not launch it at all, and I would have higher revenues in the first quarter. That's for sure. But I'm choosing not to do that for 2 reasons: One is we're going to do the right thing. The thing that we're being told is best for society. And if that's true, that's great. And at the end of the day, we're going to be fine. We're still going to be growing. We're still going to be generating a ton of revenue and margin. And -- I'm sorry?

To build a brand.

Yes. I just think longer term, the brand is important. But as I've alluded to earlier, if indeed, Tycho, this leads to an over-the-counter infectious disease market. For all the other things that we do, we will have greatly expanded our market size. And this will be far more valuable to the company in the longer term, by being involved early in the OTC space, being seen as a leader. I suppose you can debate with me on this, but I firmly believe in doing the right thing and doing the right thing for the company longer term.

I guess a couple of rapid-fire in the last couple of minutes, but do you think people will accept an at-home antigen test as proof-of-negative COVID status. We saw the Buffalo Bills last weekend. They required a PCR test. Even JPMorgan will send you a kit, but it's a PCR test. So is that going to be deemed as good enough, given the press around antigen testing? And then the follow-up, I've been getting on e-mail is what is the pricing of the OTC product? And then how are you thinking about pricing pressure on the Sofia antigen test in the professional...

A low-cost product like QuickVue SARS antigen at-home enables frequency of testing. And so judging by the folks in my neighborhood who are running the test and even employees who would have tested positive, and we send them home with a kit so that they can test their family and they can test themselves daily. I think this is going to be successful. I can't find anybody that doesn't want to do this at-home. And I already have anecdotal examples of where it did work very nicely, where the person was asymptomatic. They were negative, they were negative. And then they turned positive. And then the next day, they had symptoms. That's why we do these large studies, though. Because it's not about anecdotal data, it's about large data. And I think that -- there's certainly value in PCR testing. There's nothing wrong but it's just -- it's a better tool in some circumstances, PCR. But for what we're trying to accomplish here, enabling people to feel comfortable that if they're negative, the odds are that they are negative in an asymptomatic setting. I think it's going to work.

Okay. And pricing?

I'm not going to talk pricing at this stage. I would say that we have a price point in mind at launch early on that still will be affordable. It will become increasingly affordable as we ramp up volume, of course. And I did give the NIH an idea of where I thought we could get to relative to the reduction in cost over time. So again, I want to make this as economical as possible, with still a reasonable drop-through that makes it obviously interesting for our shareholders. But I don't think, given the cost to serve that market being so low that we're not going to be still quite profitable at a low price point. Not willing at this stage though, to disclose that.

And then just last one, in Sofia pricing, how do you see that kind of trending over the next year? Is that going to drift down?

I wouldn't say never. So far, there hasn't been any pressure to do so. I do think there are other lower-cost alternatives that potentially could cause that to occur. But on the other hand, most of our competitors are actually priced higher than we are. So the other leading or one of the other leading brands, and I don't know if their volume is out there, but they're dramatically higher priced than Sofia is now. And all the things that I'm hearing from the other company are also pointing to prices that are slightly higher. So right now, given the demand, I don't see any immediate price pressure, but I'm not naive as we have competitive entrants. Yes, we'll cross that bridge when we need to.

Great. Well, hit the end of the session. Doug, I want to thank you for taking the time.

Yes. Yes. Thanks for having us.

Yes. Yes, good to see you. Enjoy...

Me too. All right.