QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to day 3 of the Virtual Vegas Bank of America Health Care Conference. My name is Ivy Ma. I'm on the life sciences tools and diagnostics team here at BofA. Here with us today, we are very glad to have Quidel joining us. And from Quidel, we have Doug Bryant, President and CEO; Randy Steward, Chief Financial Officer. Thank you once again for joining us. I think Doug has some prepared remarks to set the stage. Doug, all yours.

Sure. Thank you, Ivy, and hello, everyone. Good to be here. I'd rather be in Las Vegas, where we traditionally would be doing the Bank of America conference. We -- for us, it's one of our favorites, first of all, because it's easy to get to. And of course, who doesn't like hanging out in Las Vegas for a couple of days, right? But in any event, we got to do it this way. So we did just have our earnings call, and so there's not a whole lot new, although I do have one quick announcement to make here. And I'll make sure that I get that in because this is a public venue. So you saw in our press release for the first quarter that we had performance that was less than we had forecasted, obviously, but still when you consider relative to the prior year, was quite an increase, well over 100% increase in revenue, quite an improvement in gross profit. And a really large increase in net income and earnings per share compared with last year. We did launch new products in the quarter, most notably the QuickVue At-Home OTC rapid antigen test was approved at the very end of the quarter. And then the next day, actually, we had the same approval for our Sofia SARS Antigen product. We also had our Solana SARS, which is our isothermal molecular product approved for emergency use authorization as well. We did complete the construction of our distribution center. That distribution center was important in that we needed it to move the volume of product that we've been moving, but we also wanted to build for the future. We wanted the ability to enter potentially the OTC space for products, and that couldn't happen at the distribution center here in Summers Ridge or over at McKellar. And so that was an important achievement that occurred at the very end of the quarter, and we're up and running there now. We've continued to build our new manufacturing facility in Carlsbad. Again, important for addressing the immediate concern of volume that's needed to do testing for employers, sporting venues, schools, travel industry and retail pharmacy, shorter term. But longer term, we need that facility to address other markets that we've always dreamed that we might be in but never had the capacity. And we did a good job in 2020 with addressing the nation's concern for testing. We are the beneficiaries then of the cash that was generated. And some of that cash, about $200 million of that is being deployed to increase capacity for things like allergy testing for immune conditions and inflammation markers, in particular, but also for toxicology. And then ex U.S. for markets like chikungunya, dengue and malaria and things that we never could have gotten to had we not built this capacity. So well on our way to building that, made a lot of progress in the quarter. We did a fine job, I thought, in managing a very challenging supply chain. In order to make these products, there are several steps involved. You've got to laminate strips that contain the conjugate pad and the antibodies and the chemistries that are required to do these tests. And then you've got to cut those strips. And then finally, you have to pouch them. You have to take something that's manufactured in a dry room and you've got to put it in, seal it in a pouch so it can be used. Well, that was the biggest constraint. That now has been solved for the most part. In fact, we're running way ahead of where we thought we could be at this point in terms of pouching capacity, but now the other things that are necessary need to be increased as well. And the biggest one there, I would say, is probably the individualized liquid extraction reagent. That's the next phase of improvement in terms of our capacity, but quite a challenging supply chain. And then obviously, we've done a good job negotiating regulatory clearances. It helps when your package look good, and our team that handles our clinical trials and our regulatory engagement with the FDA based in Ohio has done a very, very good job with that as well. So that -- in the quarter, we continued to provide a foundation for what this company will look like in 2022 and beyond. So this couldn't have happened without an extraordinary team. I would just say that I've been in the industry for over 35 years, and the team that we have at the executive level and at the management level and then across the organization, cross-functionally, I've never been as pleased in my career with a group of people as I am with these folks. I should spend a couple of minutes and let you know that we're making steady progress on Savanna as well. We did submit our EUA for the respiratory panel. We are manufacturing cartridges, we are building instruments, and we would expect to be launching at the end of this year. I would say that conservatively, if we can pull that forward a couple of months, that would be terrific. But right now, we're suggesting that we'll be into -- to the major medical centers that are working with us early on, certainly by the end of this year. We expect to file for a 510(k) on the instrument before the end of the year as well. And then following that, we'll apply for CLIA waiver, and we expect to have that in 2022. We have 7 different panels. I won't go through each of them, but I'm pretty excited about the STI panel in particular. And the respiratory panel, obviously, will be important early on, but there's just a number of things. We're thinking about other categories now that we've got a platform and got 20 people in Beverly, Massachusetts that are doing a great job developing assays. Most recent project is a UTI project. And if we're able to pull that off, that would be another very large market that we could address moving forward. Just as a reminder, Savanna is expected to be our next flagship product. And this is a molecular analyzer that can handle a multiplex of up to 12 pathogens or targets plus controls in a single assay that runs under 25 minutes, built on our own PCR-developed techniques and technology. We think we're going to do pretty well. And as I said, we already have a submission into the FDA for the respiratory panel. The other big area that we have an interest is obviously our Cardiometabolic franchise. And we continue to make a lot of progress with our shortness of breath product globally, but we also do well with D-dimer here in the U.S. as a result of COVID. And we started our clinical trials for high-sense troponin. If that does get cleared, that would be a huge opportunity for us in the future. And then we are imminently submitting a de novo 510(k) for our placental growth factor assay, which could be an indicator of preeclampsia. And we've had a lot of success with that product ex U.S. And now if we can get some sort of claim here in the U.S., that would be super in that regard. And then I don't know what the forecast is for this particular product, but we think we have a unique opportunity on the serology side with the Sofia 2 coronavirus antibody tests. This particular test will test for an antibody semiquantitatively for the nucleocapsid protein, the spike 1 and spike 2 proteins as well. And what we're seeing in our data is that we've been able to show that we can distinguish it between people who have been infected naturally by COVID and those who have been vaccinated. And we can actually measure with their true antibody responses to those proteins. And we think that's going to be valuable moving forward because we're going to want to know, at least I would want to know I've been vaccinated, but I don't know, am I in the 90% category? I presume so. Or am I in the 10%? The 10% that it wasn't effective for. Yes, I hope not. But it once -- with a finger-stick assay and 12 minutes later, I can tell you for sure. And I think that will be important. So stand by, we've got a couple of papers. I think we actually submitted a paper recently on that. We also are about to submit those data to the FDA. And I think that could be an important product for us moving forward. We just have to see how well we do with that. Also, in the coming months, you can expect Sofia Q, that's the little handheld analyzer that uses the same Sofia cartridges for professional use and maybe potentially over-the-counter as well. The data on that analyzer are also at the FDA under active review at this time, and we think that's a great opportunity. Because of the lower cost, we think we can be super competitive here in the U.S., but it also enables us to potentially explore markets outside of the U.S. that are -- that have always been more price-sensitive. At-Home test for QuickVue SARS, obviously, we're focused a lot there. Happy to answer questions on that. But we see employer testing being quite significant. On June 2, a very large financial institution will be going live with QuickVue At-Home. And the plan is to do their employers -- excuse me, their employees weekly, at least a couple of times a week. Initially, I think they're going to bring 40% of their population back into their offices. And we're just pleased that we're able to partner with another institution in order to make that happen for them. And then there are others teed up right behind that, that will be using the same approach to doing the employer testing. We also have employers that will be doing on-site testing, and we have third parties that are helping us orchestrate all that. We're involved in sporting venues, most notably the podrace. Proud to be partnering with the podrace and also pleased that they're doing well because we're seeing them on TV. So we see there quite a logo quite often at least here locally. Some states are implementing statewide testing. Others are leading it to school superintendents. A number of states have gone with us exclusively without an RFP, several others have RFPs out there. Early in June, I'll be with the governor of one state in particular that will be making a public announcement on what they're doing. They may be the first at least to publicly announce exactly what they're doing in terms of testing. And travel industry, that's another big category for it. Standby for that. I don't want to say a whole lot more than that, but we are engaged at airports globally doing testing. And I just think there's going to be more opportunity moving forward. And then retail. Retail, e-commerce, we're going live this week with Walgreens.com, Walmart.com and Amazon.com. We were already up and running on Simply Medical. We're employing McKesson's Health Mart to get to another 5,000 independent pharmacies. And I don't know how that's going to turn out. There are other companies that have suggested that this is going to be a big category. We certainly have seen similar market research. I just don't know. We're going to get it out there. We're going to make it available. We're going to see what happens. But very active in that particular segment, and it's doing really well. I think that is about it for an overview of what's happening. And particularly since we just said in the earnings call, a lot of this has been already communicated. I do want to know -- I do want to point out that we've got a bit of cash on hand, and we've been asked routinely what we're doing with it. We are spending a couple of hundred million on the factory up in Carlsbad, and we do have potentially an acquisition that I would put it in sort of the smaller category that's potentially actionable soon. But outside of that, the larger things that we've been looking at aren't off the table, but they're just not actionable in the shorter time frame. So Randy and I just put in place the stock purchase -- repurchase agreement. It's effective today when the market opened. And we will buy the lesser of 25% of the daily volume and a number of shares at a certain stock price. And effectively, I guess, the way to say it is we have a 10b5 in place. And when the share price gets to that level, if indeed it does, we'll be active in the market. So we can buy up to, per approval by our Board, of up to $150 million worth of shares. It's not a lot, obviously, relative to our total. But given the fact that I don't have anything imminent to do with the cash. And frankly, I think we're getting tired of that being asked the question. So undervalued. And relative to current recent evaluation that we had done by a major bank for the Board, we've decided the Board and I, that we should be buying back shares at this time. If I had another acquisition that would take up a big chunk of the cash that we have on hand, of course, we wouldn't be doing this. But we feel that, that's prudent. And so Ivy, I'll stop there. And if you have a question or 2, happy to answer it.

Sounds great. Thank you so much for the overview and definitely a lot of details to unpack there. So I do want to start with a quick big-picture question and a couple of other more specific ones and already started to get investor questions through the webcast. But so yes, first one is just, right now, people are definitely worried about the COVID cliff and the optics of difficult comps since you had such a fantastic year last year. I know you can't see into the future, but I mean, I also am aware that you're not giving the guide, but just wanted to see either based on recent investor debates or the one-on-one meetings you had so far at the conference. In your view, what The Street doesn't; appreciate enough about the current situation? And why invest in Quidel now? Basically, what's the key debates there? Any color would be helpful.

Yes. So what do people not know or what are they not focused on. I would suggest that, again, I'll say it much like I said it earlier. I would suggest that we did an excellent job as a small- to medium-sized company addressing the challenge of the pandemic, rising to that challenge by ramping up production in a way that we never expected to. And as a consequence of all that, we have been the beneficiary of that financially. And we want to be good stewards of that cash and the position that we have. We now have 70,000 Sofia analyzers on the ground, plus we have the ability to access capital above what we already have in cash. And so I think it provides us with an opportunity to do things that we wouldn't ordinarily have done or certainly couldn't have done without raising money and a lot of consternation by the Board and our shareholders. Here, it just seems natural that we build the capacity necessary to go do things that we've always wanted to do that makes sense. And in effect we can now, we think, compete with larger companies in a way that we never have before. So I would say that is something that I think is lost on The Street at the moment. Of course, I want to do well with the COVID products. Of course, we want to do our best to help out communities across the United States and globally. That's obvious. But what's not obvious is what does this do for us moving forward. And I can't forecast exactly what that will look like in terms of revenue, or I shouldn't say I can't, I shouldn't. We have an internal forecast though that we've presented to our Board that suggests that what we're doing moving forward. And I think the strategy makes a lot of sense. And I also have a team of people that's extraordinarily talented, particularly at the executive level that can get things done. We're not large enough in terms of our breadth and all of that. But at the same time, we are small enough to make good decisions and do so quickly, and we're doing that. So I think that's lost on The Street. And I think because of COVID, nobody is paying attention to what we're doing with Savanna. I don't think anybody is paying attention to what we're doing on the Cardiometabolic side. And I'll just say, in summary, we were already doing fine before COVID. I mean people thought we were doing great. And then we did a good job in 2020, and I think people are too focused on COVID. I don't think they're focused enough on what we're going to do post COVID. My view, just so everybody has it, is that we're going to do our best to do testing for -- whether it's by molecular or antigen, for people who need to be tested to determine if they have been infected. But beyond that, we're also going to provide a very unique and interesting serology product. So I would say that for us, this COVID wave, if you will, probably starts to subside in 2022. And as we exit 2022, I think we're going to be in just especially good position to exploit some of these other things that we've always wanted to do.

Great. Thank you so much for all those color there. And I want to go into specific questions from investors through the webcast. Question is asking, is there any update on trends in the professional segment? Basically -- and also the second part is on the pricing strategy. Have you lowered ASP into that channel given competitive dynamics?

First, I don't think I'm saying anything that the audience won't already know, but we have a lowering prevalence of disease, which has now plateaued. And in some instances, we're seeing spikes in 4 states. But generally, there's a lower level of infectivity that seems now to be somewhat stable, and that generates some testing volume. And because of that, we've now bled through the inventory that was accumulated in the fourth quarter at our end user sites. And so although it is not at a super high level, there is an underlying demand that is creating now the need by our distribution partners to now start ordering product, and that has been going for about the last 2 weeks. And I think that it should remain reasonably at that rate and predictable unless there's some sort of resurgence, which I'm not expecting to happen. So I think there's this underlying demand in the segment. And because of that and because these people are on long-term agreements, I'm not competing against a competitor for new sites. I already have the sites that I have, and they're on 3-year agreements. So I don't really have a lot of price pressure, if that's what the question is. But now on these new segments, like school testing, employer testing, travel industry testing, that is more competitive. And so the prices there are lower. I would say generally, we aim to be slightly higher than our competitors, but not dramatically so. We think we have advantages with our tests and that we should be priced slightly higher. So we're not going to chase it all the way down in some instances, but we will be competitive. And I think from a turnkey operation, whether it's employer testing or school testing, we've been able to demonstrate that we're pretty competitive overall, test plus the cost to administer, perform the test, do other reporting, that whole turnkey program, I think, we're super competitive right now.

Great. Thanks, Doug. Since we're touching on the pricing strategy here a little bit, I also wanted to ask about the OTC market. And you mentioned some exciting opportunities with getting online into Amazon and all that and the big-box retailers. So wanted to see how -- what differentiates you from the competitors in this market? And then also, is the pricing strategy different here? Or it's just generally in line with what you talked about?

Yes. Our product is a 10-minute test in a market that has 15-minute test. So we're faster, we're easier to perform, easier to read. And frankly, I just think it's a more compelling product. And I don't know the reasons why the NIH chose us for the study in Tennessee and North Carolina, but they did. I think it's generally viewed by those who know these tests to be the better performing and easier product to use. So this is why we think we should be priced slightly higher. And so into the retail segment, the next nearest competitor, the large guys are at $23.99. We've said that we wanted to be above $24 and under $25. In some instances, we're probably right there with our competitor in terms of pricing. I think it's reasonable. You've got a 2 pack at $24, let's say, which basically is $12 a test. I think it's imminently affordable by most, for most but we'll have to see. So we're right in line. Effectively, we're -- the other -- where the other big competitor is. I hope that answered the question.

Great. And I got another question on capital deployment since you were talking about the share repurchase program there. Is there anything more you could share in terms of just more details and general terms of the repurchase program?

No.

Thought that I could try.

It's a 10b5 that has a floor. And the rules of purchasing are typical in the category, we can only purchase up to x per day. So that's in place, and that went into effect when the market opened this morning. So I do know that a lot of people were asking us about this and some people even asking if we thought that we are well below where we think we should be valued, and the answer to that is yes. And since I don't have an immediate use for the cash, based on recommendations of several of my larger shareholders and several of the analysts, we -- in consultation with our Board, we decided to put in place effective today.

Got it. And I do want to touch on beyond the COVID side. On your Analyst Day, you guided to core revenue to grow 18% CAGR from '19 to '24. And with all these new markets you're entering to and product launches you talked about, is there any upside to the long-term growth target?

Upside to 18% CAGR.

I mean that is already done and tested but...

My gosh. Yes. I suppose anything is possible. The 18% is mainly driven by Savanna and high-sense troponin, and those are the biggest chunks. Plus, obviously, we factored in with the new assays that we're planning on launching on Sofia platform. And to a lesser extent, we've factored in some for Sofia Q. So is there upside to that? I would say the upside will be more about timing than it would be more things that we can do, because if you were able to see some of everything that we're doing, you would see, it's quite large. So we're quite full.

Got it. We are at time, but I do want to squeeze in one on the flu market. So we host some other earlier sections with clinical labs and lab experts. And obviously, this flu season is basically nonexistent, but definitely curious to get your view on the next one and maybe what's your opportunity there?

As an American, I hope we don't see flu in the fall. I think it would be very hard. As a guy who has inventory of combo assay, margins are slightly different. But the only thing I can point to factually is we're seeing an uptick. I would actually say a pretty big resurgence of RSV in the Southern Hemisphere and RSV and RNA virus for which there is no vaccine. I think what you're seeing is we missed the season. And now that there is RSV, the population does not have the same ability to respond from an immune perspective, and you're seeing a lot of disease. How does that portend for influenza there? I don't know. Will that be the same here? Again, I don't know. I can just say factually, we are seeing a lot of RSV in the Southern Hemisphere right now. And I do understand the epidemiologists' concerns. Again, as a human, I hope it doesn't happen. As a guy with inventory that we could provide, clearly, we're here to help if that happens with our combo product.

Great. Thank you so much for joining us. And with that, we are set up. And thanks again for both Quidel and investors for joining us. Have a great rest of the meeting. Thank you.

Thank you, Ivy.