QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Raymond James Human Health Innovation Conference. Thank you for joining us. I'm Andrew Cooper. I cover diagnostics here for Raymond James, and we're excited to have Quidel joining us this afternoon for a fireside chat. Just some quick housekeeping. I believe you should see a Q&A box. Please feel free to submit any questions you would like me to include in the conversation today. I'll do my best to get to them as they come in. With that, we've got CFO, Randy Steward, here with us as well as Kristin Caltrider, VP of Finance from Quidel. Lots to talk about here. So I'm going to open it up to you guys first to give us sort of the latest and greatest on the outlook and what's been going on over the last, really, few weeks on COVID and across the rest of the business. So I will turn it over to you, and then we'll jump right into some Q&A from there.

Yes. Great. Thanks, Andrew. Randy Steward here. Glad to participate in the conference. Thanks for inviting us, Andrew. And Kristin is going to give a quick update, and then we'll be happy to take your Q&A. So I'll turn it over to Kristin.

All right. Hi, guys, and thank you for having us today. We thought that we would use kind of a key communications or frequently asked questions, if you will, approach to this. So we could touch on the big topics. First, and likely the most frequently asked question we hear in Quidel, what's life like after COVID. So we believe Quidel is going to be -- come out of 2021, very, very strong. Our internal revenue projections for non-SARS products over a 5-year horizon show an 18% CAGR. Gross margins will remain strong and will benefit from increased production over time. EBITDA margins of greater than 30% should be sustainable. I'll quickly touch on some of the exciting things that help drive this performance. First, Sofia, we now have an installed base of over 70,000 instruments at customer sites, representing an increase in our customer base of approximately 60% over pre-COVID levels. Most of these customers have signed on with long-term agreements to buy multiple assays, representing a notable share gain from our competition. We have pivoted back to manufacturing all assays and expect to see the benefits in the form of increased Flu, Strep and RSV sales in the coming respiratory season. We're also excited about leveraging this large installed base as we launched new Sofia assays into the market, increasing asset utilization per box. Sofia Strep 98 is at the FDA, and we think we could get a claim that would clearly differentiate our product from the rest. And just as a reminder, the market for rapid Strep A testing in the U.S. is roughly 40 million tests a year. Sofia serology is expected to be submitted to the FDA this month. This assay is unique because it differentiates between those who have been infected naturally with the COVID-19 virus versus those who have been inoculated with the RNA-based vaccine. We've also developed a suite of gastrointestinal assays. And further down the road, we are looking to launch additional Sofia assays like toxicology, allergy and tests targeting inflammation markers. For QuickVue, while the demand thus far in our QuickVue At-Home COVID-19 test has been less than desired, we are excited about what this might mean for the future regulatory clearances in the retail channel. Quidel has been eyeing the retail market for quite a long time, and it appears as if the regulatory climate is changing and might be more open to a broader a range of OTC diagnostics. We're learning a lot about operating in the retail market as a result of the SARS pandemic. And we'll be poised to use that knowledge and the leverage -- leverage those relationships as we pursue regulatory clearance for other assays like Strep and Flu. We've been asked before if this would detract -- if the volume from this OTC would detract from the demand we see on the professional side, and we believe that the OTC demand is additive, much like what we see in the retail pregnancy market, where you have someone do a home test and then it is repeated, just confirmatory, in a professional setting. We also have Savanna, likely our next flagship product. It's nearing launch, and we're currently working on CE Mark for the instrument and the RVP4 panel, which will allow us for a European mark -- launch. And then U.S. FDA clinicals are right behind that, and we're still looking to launch in the U.S. before the end of the year. For Triage, we've begun the clinical trial for high-sense troponin. If we're successful in that clinical trial and launch a point-of-care high-sense troponin assay, we would have a product that addresses a $700 million market globally. And in the U.S., it could be north of $300 million. So this is a very important product to us, and we'll be keeping everyone up to speed as we progress through the clinical trial. We've increased capacity for Sofia products, which was partially funded by the federal government through their NIH RADx program. We're also in the process of greatly increasing our QuickVue manufacturing at our new Rutherford plant. And while we're doing all that, we're gearing up to manufacture Savanna instruments and cartridges. All of this is being funded by the profits generated by COVID. So from an operational perspective, we're much stronger than we were pre-COVID, and the timing of these launches could not be better. Another frequently asked question we hear is what are you doing with all the cash. We have over $700 million in cash on hand, and our major areas of focus are R&D development of new products and the clinical trials required to bring those products to market, completing the manufacturing buildout of our QuickVue and Sofia product capacity expansion, opportunistic share repurchases, and of course, M&A. In the latter category, we're looking at opportunities that are a strategic fit. Now that we've established a global commercial footprint, we're looking for assets that would provide for revenue growth or expansion into new markets or enhance our OUS geographic footprint. We are actively looking to do something in earnest, but we're disciplined in our approach, and we'll be patient until we find the right opportunity. And finally, we're routinely asked, what are you going to do with the expanded capacity. We have an internal team dedicated to evaluating opportunities to utilize the newly expanded capacity. And some of the areas that we're focused on are soon-to-be launched Sofia assays, additional rapid immunoassays for the OTC or retail markets, large volume opportunities in LMICs and OEM or private label opportunities. Individually, each of these can represent very large volumes. We're in the process of evaluating the options to prioritize and find the best fit for Quidel. So that's it for the prepared statements. Andrew, back to you.

Do you have any questions after that, Andrew?

No. Yes, that's it. We're done. We'll hop off now. That was great. Touched on all of the things I think we'll dive a little bit deeper on maybe in the Q&A. One that actually just came in, and I'll admit was on my agenda to ask already, and I know you guys are probably sick of answering, but can you give us just sort of the latest run rate on COVID? I know, a few weeks back, we had heard sort of $20 million to $25 million of monthly revenues was where you were sitting. So is there an update there? And then along with that, still waiting to hear a little bit on school programs, large employers. So just what is the latest and greatest? How have those conversations continued to progress? And how should we be thinking about those potential opportunities relative to that run rate that we're seeing today?

Yes. Well, I guess the good news is it's -- there's consistency in that number. So as we sit here today, we're still looking at that $20 million, $25 million a month, really starting for full Q2, going all the way through Q4, through the end of the year. So that's -- we see that run rate even -- and that's considering kind of what we see as the opportunities here within the employer group as well. Unknown is what that opportunity is on the school side, since we're still working through all that. Schools are still kind of trying to understand what programs they want to implement when the school year starts in September, so there's still little time. Trying to understand what the funding is, what -- kind of what -- we're finding more and more of the school systems kind of want a full service model, which says that you not only do the test, but you're actually taking the test for them, proctoring it, if required, doing all the reporting requirements. So there's a little different pricing grid for those services as well. The good news is, is that we've got a third party that we're working with that is -- has done this previously, and so it's a great partnership. And so we're finding some fairly good success with that. I mean we've talked to a lot of states and stuff. So more to come here as we move forward on that front. Employers, we did say we're going to announce an opportunity. We decided that there wasn't going to be a press release, but we are moving forward with shipping product. An employer wanted to make sure it was implemented fully across the board before we really said anything publicly, but that's underway. That's going very nicely. Again, a full service model, so it's not only -- it's mandatory testing, but it's also the reporting requirements and proctoring as required by the employees. And so we're learning a lot. And we really kind of like the models that we've developed here as we move forward to be very flexible to meet whatever that customer's requirements and demands are.

Okay. Great. That's super helpful. Maybe just one on the employer opportunity. I think you had said before, you did expect, at some point in the press release, if that made sense that they may want to kind of get it fully underway. But has that maintained at the same sort of scale and size that you had communicated and thought about previously? Have there been changes as COVID infections have declined? How do we think about that relative to sort of what the expectations were prior?

I think the expectations are still there. Priorities change depending on prevalence. Some countries, execution is a little easier, somewhere than other places, getting product into certain countries. But I think the expectation is there. You just don't know, and that's never been done before. So we're working very closely with them, and we're learning something new every week. But no, the expectation, I think -- I don't know, Kristin, if you know anything different. But no, we like the opportunity, and that's led to potentially a couple of other opportunities as well.

Word of mouth.

So word of mouth marketing there has helped.

Great. I've got a couple of others that have come in over e-mail to me, so I'm going to knock these out maybe before I get into some of the ones that I've got prepared. So maybe just one, we've seen a competitor appear, obviously, take numbers lower, but also as a part of that, talk about an inventory write-down. So just curious, with the way things have trended and as you had built inventory, is there anything to look out for there from Quidel in terms of inventory? I know you've got a pretty long-lived product on the shelf. So anything you could point to there, whether we should be looking out or not?

Yes. No, I think probably the biggest differential is that our shelf life is a little different than the competitors. And if I -- we have a 24-month shelf life. And so that gives us a lot of flexibility to take it through the next respiratory season. And so we're not quite up to a shelf life issue with our customers that the competitor has done. And so certainly, as you shutter a plant, that also has some implications around write-downs and those type of things that certainly we're not incurring either. So we like our position. I mean we all got -- who knew, 6 months ago, what that supply chain looked like. So we are working through it with our suppliers. And right now, we're pretty confident, a normal flu season, we should be in good shape.

Okay. Great. Now I suspect that with the shelf life dynamics, you would be all right there.

Yes.

One more from an e-mail here. But as we think about flu in the respiratory season and COVID, especially in the context of that sort of run rate through the end of the year you referenced, are we still thinking that, the patient that shows up sort of post-pandemic, is it a combo test? Is that the go-forward solution still? And then the clients also asked, can you give a little bit of color on your share in flu pre-pandemic and what you think maybe did or didn't change as we've seen more, particularly in molecular players, really try to move into this space, at least for COVID? So how do you view that competitive landscape maybe evolving post-COVID versus pre-COVID?

Yes. I think, first, we really like the combo test.

Yes.

We thought there was -- this past season, it was a great opportunity, but there were still so much symptomatic testing. They just want to know, yes or no, do I have COVID or not. This time around, we think if you show up with symptoms, you're going to want to rule out COVID first and then now, okay, well, do I have flu as a secondary. So we really like the combo. We have the capacity and capability now, so we'll be able to ramp up as the demand is there, but we're ready. So like I said, we do like that test. Pre-COVID, post-COVID, I would like to say we're in an incredibly strong position with our instrumented Sofia system, as Kristin mentioned, that we now have over 70,000 placements. If you remember, one of our strategies going into COVID was we wanted to make sure we maintained services to our professional customers. So before we added new customers, we wanted to make sure we maintained that customer on the professional side. So we continued to service the physician office, urgent care centers, hospitals. I don't think they've forgotten that, and we continue to supply them as well. So incrementally, the 25,000, a lot of those are under contract and are more than just one assay. And so I would tell you, we potentially could have increased our market share by up to maybe 10 percentage points over this time period. So we're very strong going into this respiratory season.

Okay. Great. And then it kind of leads into something I wanted to talk about there, which is I think one of the things that had gotten forgotten a little bit is the distinction between during the pandemic and life after the pandemic, the clinical market versus potentially OTC and retail and some of these other channels. And so I think as we go from a really supply-constrained environment, to one where we do have these considerations come back into play, how do you think about your positioning in terms of clinicians choosing, for example, Sofia over any other visually read option or even QuickVue in that market and your position, like you referenced kind of in terms of that market share, versus some of these competitors that have taken really big share in the pandemic? What does that look like post-pandemic? Do we go back to, if we look at your flu numbers, for example, sort of 80-20 visual-read versus instrument? And how do we think about what that might look like in the go-forward period?

Yes. No, again, we -- go ahead. Go ahead.

On this front, I think that there have been lots of new entrants that have gotten through the EUA process. But we see the FDA as a nice barrier to entry because, in the end, you don't have a flu test unless you've gotten the 510(k) on it. And so it comes back when we look at the rapids market, we say, "Okay, there's only really 3 players. There's us, there's Abbott, and there's BD." And I know they're Goliath and we're David, as Doug always says, but the reality is, we've been fighting those guys for years and years and years, and we've successfully been fighting them and we took away share in this past COVID time. So we're actually excited to see the respiratory season and be able to prove that this past -- what we chose to do, which was to serve the professional market, like you said, to serve our customers ahead of sending a bunch of stuff at $5 to the U.S. government, right, we chose to serve our market and show them that we're partnering with them. And we're encouraged and hopeful that this season will prove that, that was the right choice.

Yes. I mean we build up a stronger brand than we had pre-COVID. We've been out in the marketplace for 30 years. And remember, Binax has been out there for multiple years as well. We've competed nicely against them. I mean the professional market understands Binax when they went to a class -- to reclass for flu several years ago, Binax was taken off the market. So there's -- we're going to give them no reason to change at the end of the day. We've been there for them. We continue to deliver quality products. So we're going to make sure it's -- there's -- they have no reason to change from continuing to be a customer of ours.

Okay. Super helpful. And maybe moving to -- you announced the EUA on the Sofia Q, I think, a little over a week ago, if I recall my timing correctly. How does that fit in today? And I think you said in the release, primarily to kind of that professional market to start today, but how does that fit today? How does it help today? And then longer term, where does the Q fit? Is that something I'm going to have stocked in my drawer for when I wake up feeling lousy?

That's exactly right.

What's the vision there? And when can we get there?

Call us when it's in your drawer because that means we are very, very successful with that product. But no, I think we initially developed it as an alternative on the OTC, longer-term play, because you're using the cartridge of our Sofia instrumented system. So all the assays we're developing going forward. Kristin talked about gastrointestinal and stuff, you can run it on the Q. And you really can't do that within the QuickVue visually read system. And so with OTC as we get Flu at it, if we get Strep at it and we get Lyme, gastro, all those things, makes that instrumented system a lot more robust and also, with smaller employer groups, with the $25 system. But again, we see it really playing nicely OTC longer-term, and it just gives us another platform. And as we said, it's more -- we believe it's more incremental because it's going into markets that we are playing in today. We really don't see it in the professional arena. We still see the instrument and Sofia system still being the choice. But as you reach out into kind of more of that OTC and other markets, that gives us another opportunity, another system to sell.

Okay. And just to update on, I think we had last heard 100,000 by May, and I assume you sort of got to roughly that bogey. How has that manufacturing capability progressed there? And are you ready to hit the ground running as you really can push this into new locations and new markets down the road?

Yes. We're ramping up manufacturing. I don't know the exact number, but yes, we're kind of on a run rate to get to that 100,000. Before we go too much further, we want to really understand how it plays with our -- within our existing customer base and expansion as we move forward and stuff. So to me, it's not the volume today, what it looks like here over the next 24 months or so. So we're looking at several different opportunities, employer -- within employers, professional and the OTC arena. And so, like I said, a lot more to come as we look out over the next 6 to 12 months, what that opportunity looks like.

Great. And maybe now, look, I don't want to talk just about kind of COVID and COVID-related, I want to get into some of the exciting things like Savanna and Strep 98 and troponin. But maybe to start down that path, when we think about that 18% CAGR, what do we think about the pacing of growth in that non-COVID business in 2022? And maybe can you help us break down the drivers a little bit in terms of Savanna really just starting to ramp, troponin likely not really in the base, at least certainly not in the U.S., but how do we think about how you get to that number in 2022 and what that growth might look like in that particular year as opposed to the full '19 to '24 time frame?

Yes. I think one of the assumptions that I think has played out nicely for us is the installed base. So that obviously is very critical for us. So we really now have a lot stronger installed base. We got to continue to add assays. The gastrointestinal is important. Strep 98 is going to be important. Savanna, obviously, is important because I think, in that 5-year time period, by the third full year of launch, it's over $300 million in revenue contribution. So that's important. High-sense troponin isn't as significant. I think it's a little less than $100 million in its third year of rollout. So that really doesn't hit its full potential until the '24, '25 time period. But I think our installed base, I mean, there's really no COVID revenue numbers in there. So that was all non-COVID-driven. So right now, even if we maintain a run rate that we're looking at, $20 million to $25 million a month, that just is kind of incremental to that long-range plan, opportunities. So there's a lot, and Kristin mentioned the R&D pipeline. That's critical for us. So we got a lot of assays, a lot of panels we got to get out under Savanna here in the next 18 months. So a lot of clinical studies and a lot of those panels were -- pretty much have developed, but getting that all the way through CE Mark and 510(k) takes a lot of work. So -- but it's all in front of it, and we kind of control that. So that's the exciting part.

I would add.

Yes, go ahead.

One other thing, and that is another benefit we got from the COVID experience was the brand recognition on our molecular products. So we will see some lift on the Solana, and also the Lyra, we're expecting to see some lift there too with the customers that we gained with COVID. So we earned a good -- we were known as the one that could deliver in molecular when small reference labs could not get the time of day from some of the bigger players. And so we -- I think that we've got some good relationships that we've built that will help some of that also add. Not as big as of Sofia. Sofia for sure is going to be the biggest driver in 2022, but we do have that benefit also.

Okay. No, that makes sense. To certainly build those relationships, especially with Savanna near that launch. Maybe to keep going on Savanna, and I do want to circle back on Sofia one more time. But you mentioned you're still on track for launch this year. And like you said, a lot of new products -- or not -- a lot of FDA approvals that will need to come in the next 18 months or so. When we think about RVP4 and 10 and then pushing into -- I think you've talked about STI and GI and some of these different panels, I guess just -- how do we think about -- to me, I think we've talked about GI and STI as some of the ones that are more exciting for decentralizing, but what's -- if there's one menu item where you can point to and say, hey, I think this is what's going to help us really hit the ground running with placements, what's the menu item there? Where is there, that need, that's just not fulfilled by any of the products out there today that you really feel Savanna can fill a nice spot in the portfolio for a health system?

I may answer that a little differently, Andrew, in the fact that I think the robustness of our menu more than anything else because it depends on the customer and what they're currently doing. But with, let's say, 6 different panels, that gives us a lot of the customer -- our commercial team a lot of flexibility as they go into their customer and say, "Okay, do you need an STI panel or a pharyngitis panel or a vaginitis panel? Or how does all that work?" To me, one of the most powerful things is it's truly sample-in, result-out. So we are not only going to pursue 510(k), but also CLIA waiver. And with the CLIA waiver designation, that really broadens the opportunity, even within a hospital or a small hospital or a high-volume clinic setting. It means a lot of different types of people can run it consistently. So you're seeing a lot of hospitals say, "We can push this out, standardize it across all of our clinics, satellite clinics outside the hospital arena, and we can standardize it on one system because we have a lot of different panels and options and stuff." So I think more of the multitude of panels rather than one specific one, I think, is really is going to help us.

No. That makes sense. And it kind of ties into my next question here, which -- feel free to include Sofia in as well. But I think if we take a step back from everything that has gone on in terms of COVID, but sort of talk about a 3-year or a 5-year time horizon from R&D, is there anything you can point to where, "Hey, because we've added capacity, we've got added installations. We got, frankly, the internal funding on the R&D side depress a little bit faster?" Obviously, COVID sent you down a different pathway for a little while, but -- are there some menu items that you're able to address bigger, faster, stronger than you would have thought without COVID? Because now you're going to wake up where you've got the capacity online to push more into R&D and you've added R&D teams. Just how do we think about potentially actually seeing some acceleration thanks to this as opposed to COVID being a disruption, to some degree, to the sort of baseline R&D that was going on prior?

Well, the R&D team certainly doesn't have to fight over time on the manufacturing line to try to test the product, that's for sure. I mean that's small, but it is one factor.

Yes.

More than anything, I think it just allows us to expand our menu maybe quicker. There's a global market out there now. I know our international friends, our commercial team has loved to get their hands on chikungunya or dengue or some of this other stuff that is high-volume, maybe not your sexy 80% margins, but it plays nicely and complements what some of our customers would like to do. So short-term, as Kristin talked about, I think it helps us with that, solidify customer relationships, private label opportunities and those types of things. So again, it gives us a global platform we've never had before. So I think more than anything else, I can't -- so I can't think specifically on the R&D side of a specific assay, but I'm sure this will definitely help them as well.

Okay. Well, we are right at the end of the session here. You guys saw my list of questions, and obviously, we could talk for a lot longer than this, but we'll have to cut it here and appreciate the time and look forward to certainly paying attention to a lot more that's going to go on in a really dynamic period right now. So thanks for joining us this afternoon.

Yes. Thanks for having us, Andrew.

Yes.

And morning for you, I suppose.

Yes. All the best.

Take care.