QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

So we're live now. I'm Luke Sergott. I work for Barclays. I cover life science tools and diagnostics here. It's my pleasure to introduce Doug Bryant and team from Quidel. I know that they want to give a couple of updates here and some background, and then we can get into Q&A. So Doug, I'll kick it over to you guys.

Great. Thanks, Luke. Good to be here. We're actually doing this live from our office, a small number of us coming in these days. And obviously, a lot of production and R&D staff as well here in San Diego. So a lot of questions around Q1, our expectations and then also what we're doing through the year. So if okay, with you, Luke, I'll just start by saying that demand for testing in February and so far, March, has softened significantly, down 30% to 40% versus Q4. That was a quarter that saw a spike in prevalence and maybe not known to everybody, but even greater demand from what I call the worried well. So you had the increase in testing naturally because people are symptomatic, but then you had all these people who thought with every symptom that they had that they needed to be tested. So you had this huge volume that occurred in the fourth quarter. And then because of people being concerned about allocation and receiving product and not knowing how long this was all going to last, you had very large customers and distributors ordering large volumes of product. And so with the product volumes in the various channels, we are not expecting any of the larger orders we saw in Q4. Internally, we did construct a revenue range for the quarter that has a number of very detailed assumptions and therefore, for us, internally, it's quite a big range. If we assume that none of those things that we have as upside to Q1 happen, we should do at least $450 million for the quarter. So we believe that is a conservative assumption and of course, as I just said, assumes nothing that we have in terms of opportunity between that and the other quarter. The next few weeks is going to be helpful. So $450 million would be the low end of the range of what we think is possible for the quarter. So we do have a forecast for the year as well. And I'll get to that number in a second, but I'll first walk you through some of the assumptions that we have in place and trying to figure out what the low end of the range for the year is as well. I'll start by saying that in the weekly update that I got from HHS, the one that -- for those who may get this, starts with "Dear Partner," so this is from the HHS Office of Intergovernmental and External Affairs, dated March 8, so that was Monday. One of the paragraphs says, case updates, 7-day average of 59,000 cases a day and 2,000 tests per day; cases and deaths are still too high and have plateaued for more than a week. When you are at that level of viral activity in a plateau, it almost invariably means that you are at risk for another spike. And then, in fact, many places in Europe have already seen this. We are asking to double down our prevention measures. We have seen it before when prevention measures, like mask mandates, are rolled back, cases go up. So there is reason to suspect that, potentially, some of the symptomatic testing that we saw in the fourth quarter could potentially reoccur. In our model, we assume not. We assume that, that does not happen. We also have thought through the idea that even if you did assume that it would happen, the things that cause people to over-order in the fourth quarter, I think, are less likely to reoccur. In other words, I don't see panic on the part of customers and distributors, making sure that they could get their allocation of product, everybody fighting for a fixed number of tests that were out there. And so even if we did, after spring break or some period of time, see some prevalence, I don't see the ordering that we saw in the fourth quarter. I do see, obviously, that we would have some number of cases. And I would see that our customers would bleed through their inventory potentially. But I don't see any massive ordering like we saw in the fourth quarter, at least in this year. And then on this topic of variance, there's a new paper out from the University of Washington that talks about 2 of the 3 major circulating variants have an issue at position E484K. There's a mutation there. And what they found with both folks who had been vaccinated or naturally had, had exposure and had been infected also with the monoclonal antibodies that are targeting these therapies that are targeting the original Wuhan variant, 2 of the 3 variants, the Brazil and the South African, do indeed have issues. And it's thought that a higher titer of antibody than is generated by these vaccines would be necessary to neutralize those viruses. I don't know what that is going to do in terms of testing. What I would say is we have assumed that nothing with respect to the less than perfect effectivity of the vaccine has any impact on testing. So we don't have any upside dialed into something wild and crazy like we're discovering that the vaccines don't work as well as perhaps they should. We do expect significant demand beginning in Q2 though and are highly confident in that as a result of the recent QuickVue SARS Rx clearance. Originally, I thought we were going to need OTC in the asymptomatic claim to make headway anytime soon, but I was wrong. The number of inbound calls that we've received from employers, from venues, sporting, entertainment, has been significant. And we are currently pursuing numerous opportunities to supply tests to very large employers, state governments and again, sports and entertainment venues, all of which seem actionable in the near term. And so we think that everything that we're doing in terms of QuickVue SARS, we ramped up in the first quarter, we're at the rate that we thought that we were going to be at, all that gets solved in Q2. We do expect, by the way, to sell QuickVue SARS in Q1. That's in our forecast already. So that's not an upside to that Q1. We have nothing in our model for cruise lines or schools, at least at this point. We do assume OTC clearance for QuickVue SARS at home, and I have a great deal of confidence that we will get there, which, for some medical directors, will be helpful. And it will enable access to the pharmacy channel, but I don't believe that that's incremental because you would be trading off things that we're shipping to employers and simply shifting it to the pharmacy channel. So I see no upside in terms of revenue as a result of the OTC clearance. I just see that it makes the lives of the medical directors who don't have to write a script off claim. And -- but it doesn't, I don't believe, affect the volume. So -- and I am confident in that opinion based on all the conversations that we had last week as a consequence of the approval that was announced on Monday. So we're not modeling any upside for pharmacy either. For QuickVue SARS, both professional and at home, via the Rx claim, we assume demand will be larger than we can supply. So we're back to that original thought where we're still at reasonably low manufacturing volumes. All of that is going to be taken up. For Sofia, we assume Sofia Q will receive EUA clearance in the near term for both professional and at home use under an Rx claim, which will be helpful in addressing the asymptomatic testing opportunities we are pursuing alongside those markets that I just talked about with QuickVue SARS. In our model, we assume that we will price products by segment and class of trade instead of one uniform price. That's what we did in 2020. And that we will see a modest decline in the overall blended price, but it will be reasonably commensurate with the improvement in our cost profile as we ramp up in volume and lower our cost per test. We see modest improvement in our cardio franchise. We do see some revenue under $20 million though for Savanna in the year and a normal start to an Influenza season in Q4. Some people have speculated that the flu season is going to be huge. We have not modeled that. And finally, while we pursue opportunities geographically as our capacity increases, we assume that international revenue stays flat for the remainder of the year. So for the year, we believe, at this time, that we will achieve revenue of at least, here's my model, hold on, we assume, at minimum, with none of the upsides that I talked about, we should be able to achieve revenue for 2021 of $2,483,329. So that just says something about my finance group that they are unbelievably precise. So -- but -- so we're assuming roughly $2.5 billion. Did I say that right? $2 billion? Or did I say, yes, $2,483,329,000. Yes. I may have said that wrong. Yes. $2.5 billion. I think I did say it wrong.

Yes.

Yes. Okay. So less than we had thought originally as we came out of Q4, not understanding things as precisely even as late as January, still seeing not the full drop-off that we saw, given what's happened, but also with the opportunity to pursue these new market opportunities, we think comfortably that we should do $2.5 billion, which is up from the $1.6 billion that we did in 2020. So in terms of capacity moving forward, I've had conversations with government officials who are really worried that manufacturers like us are going to start shutting down lines as we build all this capacity moving towards the end of the year. We have assured them that we're not. We have a small team of people specifically dedicated to looking at signing agreements to take advantage of that capacity. But what I would say is a factor is expanded geography as a factor. But also, I think I've told people in the past that as we've signed agreements for Sofia, for COVID, we've also signed up the same customers for other products, and 76% of the agreements that we wrote in 2020 had all the other products on them. So we've had an increase in the number of customers of 60%. So we have 60% more customers that we're shipping now than we had in 2019, and that bodes well for us as we move into this upcoming flu season and then to 2022. I think the most important thing I can say to the audience today is, yes, we're focused on doing what we can for our communities, ramping up manufacturing, hoping we do really good and help the economy get back on track. But after that, we're going to be super well-positioned from 2022 moving on. We've got Savanna, we're launching. We've got high-sense troponin, expanded capacity paid for by this COVID experience. So I feel terrific about 2022 and 2023. And to be honest with you, I spend most of my time thinking about all of that, and I'm less focused because I've got a great team. But I must focus on what's happening in 2021 because it's basically just running the play of solidifying supply chains and making as much product as we can at this time. And I'll just stop there, Luke. I took maybe a little bit more time for an intro, but maybe we can get a few questions then. I think you might be on mute?

Yes, I was. I was on mute, with my computer blowing up.

So let's start with the full year guide first, right? So you lowered it from $2.9 billion to $2.5 billion. Give us an idea of the $400 million delta there. What was the contributing? Is that mostly from large orders not coming in, and that's where you were expecting kind of that continued buyer demand? And all of a sudden, that becomes a little more rational. Just walk us through that delta there, and then we'll get into kind of the pacing of the year.

Well, sure. I think it's obvious, the biggest delta is what's happened in Q1. We didn't see the continued level of demand for the symptomatic testing that we had in the fourth quarter, and we do have product in the channel. So moving forward, I think we're equally encouraged as we were when we put together the forecast initially, that we will have these new market opportunities. That looks pretty solid. Very, very confident on the QuickVue SARS side, in the Rx claim. Sofia, obviously, has a little bit more risk because we obviously are not through the FDA with Sofia Q. And we do need Sofia Q in that Rx claim, I think, to address some of the new market opportunities, not all, but some of them. And I think that will be helpful. So I think it's reasonable to assume that we'll have success with Sofia Q, but there's always the risk of timing and how quickly I can get through the FDA. So if assuming we are on schedule with Sofia Q and we roll that out in a timely fashion and we continue to ramp up manufacturing capacity for Sofia cartridges, I think that $2.5 billion is a fairly solid number.

Okay. All right. So -- and then as you think about the -- so the first quarter, you were talking about the -- that being the biggest delta. And then as you kind of laid out that -- as I get the sense, your guidance is conservative, right? This is what you can -- you think that you guys can hit. And then you provided several opportunities for upside. Can you give us an idea of what those upside opportunities might represent to maybe getting back to that $2.9 billion?

I can give some general thoughts. I would say that we have, for example, a game plan that would get us to increase capacity faster. And it's more dependent actually identifying the right customer than it is identifying something that we need to do differently. So we have a methodology that, internally, that would help us with the kitting process. And if we can find the right set of customers that are able to do larger volume screening, we can increase our capacity there. We've been encouraged strongly not to ship ex U.S. Well, obviously, we could consider some of those opportunities. And our international team is chomping at the bit and would love for me to let them lose. So there's that as an upside. But again, I'm not counting on it. In fact, indeed, I said that we have scheduled international business almost precisely flat across the remainder of this year. So I've got nothing in there for that. Certainly, there would be upside if we had another quarter where you had higher prevalence. And I'll be honest with you, I don't want that to occur because I would have to go back to that original professional segment, and I have an obligation, right? Because the most important thing we can do is test asymptomatic people and get all that taken care of and those people who are their contacts and all that. So -- but I hope that doesn't happen because I really would like to transfer to this idea of "Let's do testing on asymptomatics like we're doing here in my company to get people back to work." The only way I'm able to do what we do in this building and the one down the street here is because we test our entire population that are coming into work twice a week. And we're going to increase that to 3x a week shortly. And we're trying to sort through how we actually ship the product now to their homes so that they don't even come in here. So if I didn't have that in place, there's no way I could be manufacturing at the level that I'm manufacturing right now. So what I really hope that we can do is make a full move to testing asymptomatic people in order to get people back to school and back to work. So that would be great and disruptive if I had another spike because I would have to start shipping product back into the professional segment again. So those are just a handful of upsides. I mean randy and Kristin and the team have a very detailed set of things that could be better, but it's so speculative. And the timing is so unforecastable that I would rather just come out and say, "Look, at minimum, at this stage, we think we can do the following."

Yes. That makes sense. I mean -- and just from those instances, you laid out an upside, right? But it's even more so just from a testing paradigm. How is the asymptomatic testing paradigm going to look? Is it going to be -- if you go to an event, are you going to require a molecular assay 2 days before and then an antigen assay going into the event 15 minutes early, right? So -- and you clearly don't have, you mentioned, entertainment and travel, and those are the likes that are not in your guidance. And so as that kind of plays out, you'll be able to provide us a little more color and visibility.

I think that's right because any one of these major employers that we're in contact with right now would be significant enough that we would -- it would be material. And we would obviously normally announce those things. So once we actually get agreements in place, and I know that my -- all of my volume is taken up, I think it's -- which I'm hoping happens in Q2, I -- obviously, we would communicate that to our shareholders and to the public. But I think it's safe to say that we will have to make some decisions here because any 1 of the top 3 that we're talking to would take up almost all the volume and make it not possible for me to serve the other 2. Also, doing sports venues or entertainment venues, a lot of those things are in the works. We've signed with one professional sports team so far to do the testing of the fans. And we're working through that now. That season hasn't started yet, but I do see that as a pretty big opportunity, and we have been approached by several. So this is going to happen. People are going to figure out how to get their fans back into these stadiums, in the music venues and all these other things. At the same time, we've got schools. I'm not counting on any school volume. We've got pharmacy. And we could do pharmacy with the OTC claim, but it doesn't add anything because I think my volume is already going to be taken up in total with these other opportunities. So it's so much that when you look at the diagnostic industry, we're not even there yet in terms of the volume. It's just a matter of timing. And what I've said to the team is let's do first come, first serve. Let's just sign up the volume. And let's just make sure, to the extent we can, that everything we've made and we will make going into -- through Q2 that we can ship. And then if we can increase capacity, as I discussed, earlier than I had planned, then obviously, that would be upside to that. So...

Yes. Okay. That's really helpful to think about. So just to finish up here, I'm looking at my question list, it's completely moot now.

Well, that's why I wanted to go first, Luke.

Yes. No, I'm glad you did. I'm glad you did. So when you think about -- 1Q is really the nadir of the path here in the cadence that you see it. And then as the quarter progresses or the year progresses, we're going to get more updates on that. So how do you balance between who gets that capacity? I understand you said the line about first come, first serve. And you've always said that we're always going to ship whatever we can manufacture. And you guys are -- at your size, you can't just manufacture infinity. So how does the pricing dynamic work out on that ultimately?

Well, we are going to price by class and trade market segment. I do think that, for example, the country is going to need product that's priced reasonably low for schools. Every community doesn't have the funds to do that. I do recognize that we're going to get funding through the federal government potentially through states, to school districts, but it's going to need to be priced lower. So in tenders that we would respond to for the federal government, which we're not prepared to do just because we can't get to the volume yet, we would have priced at a lower price point for them in order to service schools. But we're not there, and I don't have anything in the plan for that. Pharmacy is a little bit more expensive for the end user, and you've seen the price points for some of the people that are over-the-counter. We would be below that. We would try to be below that significantly, but that means that we would be in the low teens with our products in order to do that. So -- and then employers, that's new to me. So I can't really comment so much. But if somebody comes in and they had, oh, I don't know, 0.5 million employees and they wanted to test them so every week or twice a week or whatever they want to do, I would imagine we're going to have to get into a discussion about how much that's going to cost. So I have forecasted for the remainder of the year a modest decline in price. But as I said, I also am forecasting to improve my cost profile.

Yes. Okay. So I just had several inbounds on here. If you could just give us the Q1 range again. I think you gave us the bottom end of the range, but I don't know if you gave us the high end. And then just restate your full year range, what you're expecting.

Yes. I'm not giving a range for Q1. I'm giving the bottom only...

Yes. You've given the bottom...

I did say that when the finance team rolled up all the things that could happen, I have assumed none of it. So -- but the range is big enough that it's just -- again, it's not forecastable. So I just don't want to disappoint. And so therefore, I'm giving a number that I believe is achievable based on what we've done so far. And for the year, $2.5 billion, it's still a big number, still a lot has to happen. And we have to succeed both in the marketplace and in manufacturing. And -- but I think that, that number, based on pretty detailed analysis, is what we should count on for the year. Could it be higher? I hope so. And we will endeavor to make that so. But I just felt like this would be an appropriate time to sort of reframe this now that we've come out of fourth quarter, and we really do have a feeling for what's happened in the first quarter and what the testing landscape looks like. So I don't have a range that we've announced. I just gave the bottom end of the range.

Okay. And then just the last one here. Fulgent is -- they've been consistently growing. They're seeing no drop-off in demand. Is that -- is it just something to do with the types of orders that you guys had in Q4? Just kind of give us why you're seeing the little things differently.

Are you talking about Q1 now, Luke?

Yes. Yes. Q1. Why? They haven't really...

Well, we have fewer people getting tested as a consequence of having symptoms. And as I read to you from the HHS report, we now know over a couple of weeks that that's plateaued. So now that CDC is worried about it, but at the same time, that is the underlying demand. And at that demand rate, there's still inventory in the channel and not just for us, for all manufacturers. So it's going to have to bleed through. And so this is sort of the counter to what happened in the fourth quarter.

Yes. Okay. That's helpful. And unfortunately, that's the last minute we had. I got to jump over here to the other -- to another one. But thank you again, Doug. Thanks, everybody, for jumping on here. Plenty more follow-up, and happy to shoot over some questions for you. I'm sure that you're going to get plenty.

Okay. Great. Thank you, Luke.

All right. Thank you, guys. Take care.

Thank you.

All right.

Bye.