QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to day 2 of the Raymond James Institutional Investor Conference. Thanks for joining us. I'm Andrew Cooper. I cover diagnostics here for Raymond James, and we're excited to have Quidel joining us this morning for a fireside chat. Just some quick housekeeping. We do have a Q&A capability, and I'd love to include as many questions from the audience as we can. [Operator Instructions] With that, I'm joined by CEO, Doug Bryant; I think you saw CFO, Randy Steward, as well; and Ruben from IR might have been caught on camera, too.

But let's jump right into it. I think when I was getting ready for this, I think back to last year, right around this time, I think we were sitting literally in a breakout session with you, your phone rang and you sort of looked up and said, "I got to take this one," and you stepped out. And I think from the feedback that was a high up from DC sort of starting some of this conversation that put you down the past more than $1 billion of COVID revenue since then. I guess just to start, let's talk about what you've been seeing today. Last we heard from you on earnings, which I know wasn't that long ago, the start of February was maybe a little bit slower. You had some weather that played into it. What have the past few weeks sort of looked like? Is there any commentary you can give us on ordering getting back to the levels pre sort of the weather impacts or anything like that?

Sure. Let me start just by saying thanks for having us, Andrew, and it's a pleasure to be here. Very proud of our company and all the teams that have risen to the challenge of the pandemic. You're right, I did take a call from the White House right in the middle of a one-on-one meeting. I apologize that it was just one of those things. And then Randy and Ruben and I actually went to the airport to fly back home to San Diego, and then our flight was delayed. And I'll admit it, I had, had a couple of beers and so had you, Randy.

Yes, I did.

So -- because we were delayed, and had we not been delayed, we'd been on the air when the White House called back and said, "The Vice President wants to see you tomorrow morning in his office with a bunch of other guys." So you're right. That's how it started. And we, from there, just advanced quickly to do what we have done over 2020 and now into 2021. So again, thanks for having us. The comments I'm going to make with respect to demand are applicable to our entire industry, of course, but in particular to us top 3 that are responsible for most of the antigen testing that have been -- antigen tests that have been shipped. I would say demand is still out there, but it's at a pre-peak level. So it's fallen, and -- but that fall has subsided somewhat. And so I think we're at a reasonable underlying demand, but there's still inventory from Q4 at distribution and out there with our end-user customers in the professional market segment. So I'm not expecting a whole lot of help in Q1 from that segment. Plus, as I remarked in the last conference, we are not shipping the combo product, which has about a $10 delta between the combo and the SARS only. And as I commented previously in Q4, we shipped around 9 million combo tests. So right out of the bat in the traditional market segment that we are committed to and are serving and have served quite well, we do have that price headwind as well. So with that said, I think there still is demand out there, but -- and will likely increase throughout the year. But the volumes ordered over the next couple of quarters are going to be choppy. And as testing transitions from tests performed, looking for positives to tests performed, making sure that people are negative. And guidelines for employers, entertainment of all sorts, travel by air or sea and restaurants, et cetera, until those guidelines are established, the larger firms that had been doing a bulk of the testing, I'm afraid we're not going to see them make the transition to ordering or placing big orders until they understand exactly what they're getting into. So we're in this unique period of time where we're transitioning. We don't know whether we'll see another peak. I hope not, but it could happen. And then we're going to be committed to serving those customers that we traditionally have once again at higher volumes. But until then, I think there is an opportunity to move some of that testing into some of what we call new markets. And we're going to have to work with our larger customers. For example, 30% of our volume in 2020 was through urgent care centers, who really, for the most part, acted passively and just took people as they came into their urgent care centers. And some of those folks are still doing it and doing it that way, and they've seen their volumes fall. While others have taken some level of initiative and, I would say, have pivoted to doing testing for certain segments in the market that are in that category that I just talked about, the new markets. One very large organization, urgent care customer of ours in New York, for example, does a bulk of the states and the City of New York's testing. And so their volume has not fallen. So as people figure out how to pivot from testing people who are presymptomatic or potentially symptomatic into testing in order to get people back to work, as folks are able to do that, I think we'll see that we're able to address that demand. And in fact, there's a firm called Kalorama. I know you've seen that before, Andrew, but they're an IVD market research firm. They've estimated the market for this year to be at $38 billion by the end of the year -- by the end of 2021. And that our industry, all of us major manufacturers of these rapid antigen tests, will continue to manufacture in 2022, although they were reluctant to actually put a number to 2022 at this stage, which is understandable. The Biden administration is and will be promoting antigen testing in addition to masking, social distancing and vaccination, of course, as a means of getting back to work and as a means of getting the economy back on track. So I'm comfortable that the demand is at pre-peak levels. I wouldn't anticipate significantly more demand in the professional segment unless we see an uptick in prevalence. If we do, of course, that complicates what we're doing because we want to transition to some of these other opportunities, including ex U.S. But for the next couple of quarters, I think it's going to be choppy. We've said that it's unforecastable, but I would say I still think it's unfathomable and unforecastable. Having said that, Randy and I chatted last night on the phone, and we're going to -- either tomorrow or the next day, we're going to spend some time going through the LVE, and I think we're going to have to put a range out there, and that will be helpful to the folks that own our stock, and I think they'll appreciate that. And then we have a conference next week as well. I apologize to that firm because I can't remember who it is. But we have a conference next week, and I think maybe at that time, I'll try to give you more color, Andrew, on what that quarter looks like. But I would say, in summary, softening in demand in the professional segment offset by potential large opportunities that we could potentially ship in Q1, may not, but we could. And so we will be able to establish the range for you, but it's pretty clear that we're not going to get to Q4 peak levels in Q1. We're going to have a couple of top quarters, Q1, Q2, and then some of the stuff that we're working on comes to fruition, maybe guidelines come out. And we'll get back to -- back on track to more rapid growth in Q3, Q4.

So when you think about -- to kind of follow up on that, that was all very helpful. When you think about sort of the dynamics of 1Q, 2Q kind of getting to where you have some of those protocols in place, some of those kind of guidelines in place. I mean, do you view this as more of an air gap, where you are really starting to get to the point where you can think about these new markets? And the demand there is such that I think one of the comments I kind of focused in on was, hey, we still think we can sell everything we can make in the course of the year. Does it feel like that's timing because there's just some new channels that you haven't gone into aggressively before that we're still sort of figuring out and the time lines just haven't aligned for those starting up and the professional market sort of reaching a steady state?

I think that's true. To be succinct, I would say, we still believe that what we see as demand for our products specifically outstrips what we can make in the year. Of course, we are ramping, and we're going to get to a high volume by the end of the year. But where we are in that process is we're going to double QuickVue by the middle of the year. We have all the equipment coming in, in April that we had expected, some stuff coming in, in June. And then from August forward, the equipment manufacturer that I visited last week is going to deliver 1.2 pieces of equipment per week for the remainder of the year. So it should ramp pretty significantly. So -- and maybe a little bit more color there. We have one order, for example, a potential for 50 million tests. I can't deliver the 50 million tests right now. So that takes up a bunch of the capacity that we have moving forward. If it doesn't happen, then I've got other people that I can go to. So it really is a balancing act right now. I got to make sure that I don't get rid of all inventory such that a hospital that needs the product suddenly can't get it. But we do have these very large opportunities that we have to balance, and we actually can't supply them all. So we have to allocate. And so now we're having different sorts of meetings in our company. We're having update meetings on what's happening, and now we're having decision-making meetings. And we have to take the best available information and try to figure it out. But my problem really isn't on the demand side at this stage. It's figuring out -- although quarter-to-quarter, it's going to be somewhat choppy and ugly. But once I'm able to actually start delivering to these particular opportunities, I got to make sure I have inventory to satisfy all that.

I guess kind of along those lines, and I want to jump into OTC and QuickVue maybe after this question. But at a high level, you talked about sort of those dynamics and, hey, when we have the over-the-counter launch, we need to have a certain amount of capacity and supply to be able to do those things. You referenced a potential order for 50 million, but how do we think about what you need to be able to kind of really address that over-the-counter market or some of these new markets, especially when I think about QuickVue, where you're at 1 million tests per week, ramping to something, obviously, dramatically larger? Just help me balance sort of what you need to see to be able to go at those markets a little bit more in terms of that flat capacity over the professional markets.

Well, just to review, we're going from middle of the year at 2 million for the QuickVue SARS product, which is -- can address the professional market segment and then we're already shipping some of that now to the professional market segment. But it also has to address all the other opportunities. And maybe it would be better to talk about that particular strategy at this moment. I will have to have some level of inventory to be able to ship product to people's homes, and we think that we have a pretty good idea of what that initial inventory looks like. And in conversations with potential partners, they understand where we're at as well. But maybe it would be useful to just talk about that for a second because I'm pretty sure people are as confused as I was when I started thinking through how am I going to do this, where is it going to go, and how am I going to decide. With this prescription use claim that we just got yesterday, I would say we are evaluating a number of e-commerce options that will deliver product to homes under a blanket prescription. It was not the way we intended to launch, but we are considering doing that in the interim. And we did that because we wanted to be able to support the NIH at the time they needed it rather than risk not being ready to go with all the data in order to get an OTC claim, which would have made it easier for the NIH to do these studies. But -- so we agreed to go ahead and get the prescription use claim in order to do that. And I don't know if you've seen the press release from the NIH, but I just highlighted a couple of comments. There's -- a research team funded by the National Institute of Health has launched a study to assess performance and usability of a smartphone app paired with the Quidel QuickVue at-home COVID-19 test. This was in their press release yesterday. The home test was supported by the NIH through the Rapid Acceleration of Diagnostics, also known as RADx initiative, which has spurred the development and commercial availability of millions of COVID-19 tests over the past year. Well, this organization not only has been helpful with this particular product, but recall that they're also funding the expansion of Sofia capacity. And so we had announced that we've already received funds for line 7, which is up and running; and then we've got lines 8, 9 and 10 -- 8 and 9, they're funding. And then on our own, we're funding lines, 10 and 11. So we are obligated to these folks. And -- obviously, for that particular reason, but also because we want to do the right thing. So they've got one particular study that they're supporting using our test where there's more than 200 participants already enrolled, but they're going to be doing daily testing for 2 weeks. And they want to pair that with an app so they can look at how the app helps with the instructions and all that and helps with the readability. And so we wanted to be able to be in a position to support that and 2 other studies. And that's the reason -- one of the reasons why we felt like we needed to move forward with the prescription use claim. The conclusion in that particular part of the press release says, these technologies are supported by the National Institute for Biomedical Engineering and Bioengineering, the NIBIB, which is part of the NIH. Quidel intends to apply for an additional EUA from the FDA for sale of this test over-the-counter without a prescription, which is obviously true. So we're evaluating a number of e-commerce options that will help us support what they're doing, but also we'll potentially provide folks moving forward with testing that's delivered to the house under a blanket prescription. For example, a medical director could write a script for my employees. We actually have a medical director that's overseeing my current testing program. But this medical director instead could write a blanket script for everybody in my company, who would potentially log on to a site, an e-commerce site, with a code to have products shipped to their homes, where they would test themselves and potentially other family members if they deemed it appropriate, effectively taking charge of their family's health care and well-being as well as performing the testing that allows our company to safely do research and manufacture product as we do. So I could shift from what we do today, which is this -- we have a firm that comes on site, and we all get sampled. I guess that's the international symbol for getting swabbed. So -- but we all get swabbed twice a week, and they take the swabs and then they run Sofia in their lab somewhere nearby. And then they take charge of all the reporting and all that. And if we have positives, of course, we quarantine the individuals, we contact trace, we do all the things that are required by the state and county and all that. But we could switch and probably will to allow people to do it at home on their own and go from there. So we're going to explore in the short term are there opportunities to do that for folks? And if so, what do the volumes of that look like in advance of the OTC? And then OTC, I've got more options for how I actually go to market. So -- and then we have to figure out what that demand looks like. And we've been in discussions with some of the folks, and I would call them, major retail pharmacies in order to to do all that. But -- so right now, we have an extraordinary tool, a number of different options, and we're going to try to figure it out. And we have to figure out how to do all that at the same time, we're figuring out how to support that 50 million test order, the stuff we're now shipping ex U.S. and all that. So my problem, if I'm just completely transparent, is more about how do I figure out how to support all these people who are telling me they want the test. In the meantime, in the traditional market segment, they got inventory and they're like, woah, woah, woah, I don't need anything this quarter. So that's kind of where we're at. Did that answer your question? Or maybe I overdid it.

No, that was great. It's -- I'm kind of just nodding my head. It's -- as much as nobody wants to have a challenge, it's a high-class challenge to be sitting in front of that. You have so many options to try to fulfill. I guess I don't want to spend all the time talking about COVID. I know we could go on for probably hours on the topic, but I want to talk about some of the other things in the pipeline that I think are exciting that make Quidel a good story after we get past the highest peaks of bolus testing and some of these things that are coming down the pipeline. So one that's sort of closely tied is that OTC, in general, I think my sense and the sense from folks I talk to as well is the FDA has sort of let the dog off the chain in that once OTC testing is out there, it's not going away. So obviously, COVID, there's a ton you can do there. But when we think about after COVID, when -- not that it goes away, but we're past the pandemic phase, what are some of the things that you think about in terms of potentially pushing into the home? Obviously, flu seems like it makes a ton of sense, strep, some of the infectious disease. But what else would you think might be well suited for those markets? And then how do we think about what the clinical pathways look like when there is a broad over-the-counter sort of market that exists, potentially before somebody goes to the doctor or instead of -- just help us think about what that might look like.

Sure. We're super excited, Andrew, about the opportunity, but I will say to the audience that this is not going to be easy. This is not a layup. I do -- the dog off the chain, it's an excellent metaphor. But at the same time, we will still have the challenges that concern the FDA of how do you ensure you get a proper sample? How do you ensure that the test is run properly? What do you do with the answer? And 10 years ago, we could not have possibly even considered this, I don't think, because all the technologies, the animation and the self-guided things that are out there to help people at home do this did not exist, but they do today. So in order for us to actually make this a go, we've got to do a few things. One is we already are working on things to improve our products in terms of sensitivity and specificity. We've got an ongoing initiative with influenza and COVID, and we think we'll improve the product performance with respect to just the test itself. But we also have to figure out how to make sure that people don't perform the test improperly. And then when they do perform the test properly that they get the right guidance from health care professionals and that whatever reporting mechanisms that are out there are in place. So what we've recently done is we did sign one agreement so far with an organization that I won't name right now, but that already has a broad platform that will enable 4 things. One, reading the strip with a vision system. Of course, Sofia 2 solves for that on its own. But if you went with a QuickVue format, which I do think has utility, having a vision system that actually reads and interprets that strip will be important and critical. The second thing is the appropriate YouTube-like animation to easily walk an individual how to take a swab and perform the test. And we were joking last night on a call that when -- in our cars now, we have these fobs, right? And inside is a little battery. And unless you get some instruction, it's very difficult to figure out how to take that fob before I can get in there and get the battery. Have you noticed that? So all of us are very familiar with that. We put in on our make and model, the year, and we go to some guy who has the fob in his hand and he's walking us through how to do that, right? So I've had to do it. You just did it, Randy. But it's that level of animation or YouTube instruction that I think needs to be there. Those 2 things are critical not just to COVID, but for flu, strep, RSV, Lyme. Whatever we do at home, allergy, toxicology, whatever is potentially going to be at home, it has to be so that the person running it can do it just like the change in the battery in their key fob. So -- and then the next 2, which are not critical now but are going to be critical if we consider OTC, are a reporting mechanism and some sort of telehealth to write a script, if indeed a script is necessary given the outcome of the product. Also, any sort of guidance because it's not just test and treat. There's also test, treat, manage the patient, answer questions, all those sorts of things. We don't really see ourselves as replacing that interface with the health care professional. We see ourselves as being able to augment what they do more efficiently in a new world where people don't really want to drive somewhere and sit in a lobby and wait and do all that. So does that -- is that helpful?

No, it definitely is. That's very helpful. And I think it will be interesting to see, to your point, there's a lot that, not just Quidel, what the market has to figure out of what that's going to look like. So certainly something that we'll be watching.

It's not going to be easy, though. I do realize that there are a number of smaller companies who have a technology and they want to get into the market, and they're talking about all this. But even companies like ours and some of the other bigger companies who are looking at this closely, you have to have the right mousetrap, and then you have to have the data that supports that it really is a good outcome, and we have to be able to convince the FDA of that. So again, huge opportunity for us to transform our business over time and be another segment that we address. But I just want to make sure that people don't think that we think it's easy because it's not.

No, certainly not. That's great. I want to -- like I said, I want to make sure we hit on some of the pipeline pieces beyond -- maybe not as much related to COVID. Savanna, it's been a platform we've been talking about for a very long time, but it's closer than ever. You're in trials. You're expecting to get into the market in some capacity this year. You've got a pretty ambitious goal. I guess maybe first, just because I think we spent so much time talking about other things this year, remind folks exactly what the end market is that you're going after, that sort of ideal customer that this is a perfect fit for that's not being addressed in that -- in a way that Savanna will be able to. And then I'll follow-on from there.

Sure. Short answer is never been closer. It's a bigger market now than it was when we started, and I would say it's a multibillion-dollar opportunity. There are a couple of competitive targets that we are going after. If they're looking at the transcript later, they all know exactly who they are. But we think there's an opportunity to give our customers a better way to do what they're already doing, something that's quicker, more economical, more democratizable. That's not really a word, I just made it up. But more easily moved out to clinics within an IDN to address the things that those folks want to be tested closer to where the need actually is. Savanna, because of its really unique cartridge that tests for -- that does basically 4 PCRs simultaneously, the ability to do the amplification step super quickly, the ability to manufacture these products at a much lower cost than our competitors can do at the moment, I think, is advantageous. And our thinking, because we're not first to market, around how we actually develop products and which products we launch first and how many cartridges and different types of products that we launch has been carefully considered and then we think -- and adjusted over time has put us in a position where we think we're going to be successful. Now our launch plan is completely different now because we've got COVID and an EUA to go through. And maybe there's an advantage there, but it does delay us a little bit in terms of the other products that we would have launched normally in 2021. It definitely changed the order of what we thought we were launching first. We're obviously going to launch a respiratory viral panel that includes 4 pathogens. So what else? We're just super excited. We were supposed to launch this in 2015, remember, so we're a little bit delayed.

Look, the product has changed since then, and I think it's one that fits the market in a really interesting way. And so it was admittedly a little bit of a leading question there just to kind of take me to we've talked about some of what the goals are in terms of revenue. We've talked about some of the advantages of the product. But can you give us a little bit more flavor on the pricing and economics and on how you're thinking about this coming in and being, to your point, you've got a lower cost of goods, you've got a capability that can compete really well with some of these other players out there? So what should we be looking for when we think about $300 million by year 3? What does that mean in terms of placements? What's the sort of pull-through look like? Or what's the ASP? Any sort of context would be great.

Sure. Within year 1, we've got -- just this year, we're going to put out what?

1 million cartridges.

1 million cartridges or so. It's going to be low -- super low volume. And then we're in the process of figuring out how to go from that sort of manual manufacturing method to something that's significantly more scalable and more to what I would call mass production. So we're going to go through that phase between now and year-end. The good news is we have boxes, we have -- the clinical trial work has already started. And I think customers -- a small number of customers, who most people could name, will be our first set of customers. And I think they'll be excellent references. It will also inform us on mix and what that looks like across those institutions. And then we'll be -- we'll have something more granular that we can actually drill down so that we can explain to you how do we go from where we are today to the $300 million longer term. Yes, so you've got...

Maybe just at a high level on that. When you think about that $300 million, is that -- is it 3 panels out there in the marketplace? Is it something more? Just sort of what does that launch cadence look like in your head to get to a number in that ballpark?

Yes. We're at 6 to 7 products that we're going to take very quickly through the FDA now. I probably won't be able to name them all off the top of my head, but there's an STI panel, there's a couple of different GI panels, there's a vaginitis panel, there's MRSA and, like everybody else on the planet, we've got a C. diff. So -- but those are things you have to have in order to compete with folks who have these other boxes out there. So yes, total 6 or 7 at the moment. Everything actually looks pretty good. I think we have one more product that we're running to ground, still fiddling around with, but most of them are ready to go to trials now. So the issue for us is manufacture the number of cartridges necessary to address the clinical trials as we roll them out. Obviously, the clinical trial sites know who they are, and they have voiced their preferences for which they do first and all that. But in a nutshell, I would just say we're in great shape, we're on track, never been closer as I joked before. But please stand by. We will share more and more as we get moving throughout the year. I think it's an exciting opportunity. I think that's our next big flagship product. We have something queued up behind that, that we're calling Leapfrog as well. And those 2 things -- I love Sofia, but those 2 products are what's going to drive more value for our company than we ever have before, notwithstanding this COVID opportunity that we have in front of us.

Okay. Great. And we're going to wind down here in the last 5 minutes. So I'm going to maybe jump to just a little bit of conversation on the financials. I think, clearly, the power of the model has been demonstrated here. When I look at sort of the 2020 numbers, 86% of the revenue growth has flowed straight down to EBITDA, which is -- it's a huge number, given you are reinvesting in that period, driving clinical trials for COVID. So really, we see that power of sort of the razorblade model with Sofia. But where do you think you end up -- when we think about flowing in some of the mix of whether it's Savanna and kind of coming to a more normalized rate, what are you thinking about for kind of the right goalpost to try to hit on the margin side long term in terms of a more normal environment?

Well, my target will be higher than Randy's.

Sorry, Andrew.

So he will not like me if I tell him what I think. So...

No, go ahead.

What do you think longer term?

Well, our -- pre-COVID, we've always targeted a 65%.

Yes.

New products that we're launching are going to be incremental to that. So they're going to be north of 70%. So certainly, I know your target is probably around that 70% mark.

Yes. And the reason that I have hoped that, that is achievable is that this company has demonstrated its ability to leverage the employee base in a way that I have not experienced before. And a lot of times, what I've seen in my history is you grow fast and then your HR department gets crazy on you. And it's not their fault. They get requests to hire more and more people. And to the extent that we can maintain our discipline, and we will need to hire more people, but if we do it at a reasonable rate, then I think that this organization, the people are leverageable. And in addition, of course, you've got all the product that flows through the existing infrastructure, and your absorption is better and better and better. So I just think that this is a company that has 1,300 employees, right? We'll add some more employees. But if we can do it at a reasonable rate, then I just see the productivity. And that's a big -- wages are a big part of our expense, right?

Yes, yes.

So I think we're highly leverageable, Andrew.

Great. No, I think it's a good sort of color just at a high level to have. Last 2 minutes, I wanted to talk about M&A a little bit. I'll stay away from some of the chatter that's been out there in terms of specifics. But I think the reality is...

Thank you.

We're in a scenario right now where there's -- no problem, where there's just a lot of cash that's already been generated, that will be generated for a lot of -- for you, for your peers, and there's a lot of targets out there that are emerging as well. So just what are you sort of seeing in the landscape? And I kind of frame this from the perspective of, you know, I've said it for years, you guys sat on cash for a little while and probably took some heat for it before you found the Triage assets that I think you got a great bargain on. So just sort of what are you seeing in the market? And how do you balance staying disciplined versus a little bit of a sense of urgency as cash starts to build, which again, is a very high-class problem, but it's certainly something investors are going to be pushing on?

Yes. Some of it's the personality of our company, Randy and me together. I've been accused of throwing nickels around like they're manhole covers. And so you're right, we sat on cash for a while before we pulled the trigger. Having said that, I think people should know there's rumors and rumors and rumors, but we -- you got to kiss a lot of frogs to find the prince, right? So -- and lately, we've been kissing all the frogs. So everything that you've seen that was acquired recently, we looked at and said no. Having said that, we do have some things that I am interested in and our company and our Board are interested, and we are pursuing those things. Will they -- will this activity result in something that's imminent? Possibly. But we're not afraid to get to the end and say, it doesn't look or feel like we thought it was going to, and I'm sorry, but we're not going to do it. We've done it so many times now. We -- honestly, though, I tried very hard to look at every opportunity as if there is merit and there's something that is of value, but we have a process. We run through that process. And when we find things that don't actually fit strategically or that I can't justify to my shareholders, we discontinue. So again, we -- right now, we're kissing all the frogs and everything has been a frog at the end of the day. But we do have a couple of things that we're highly interested in at the moment. I just -- I can't tell you the probability of them being actionable. I can just say, I like what I see so far in a couple of things that we're looking at.

Great. Well, with that, we are 1 minute over. So I'll stop there. Like I said, we really appreciate the time, and thank you for being here, and we'll stop there.

Well, I hope next year, we'll be there in Orlando.

Looking forward to it.

Yes. Thanks, Andrew.

Thanks, Andrew.