QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. I'm Tycho Peterson of the Life Science team. It's my pleasure to introduce our next company, Quidel. [Operator Instructions] And with that, let me turn it over to Doug.

Thanks, Tycho. Good morning, everybody. This is Doug Bryant with Quidel Corporation. Joining me today on the phone are Randy Steward, our Chief Financial Officer; Rob Bujarski, who's our Chief Operating Officer; also from Ortho, Mike Iskra and Joe Busky, should we have any questions later on. But Scott, can we -- thank you. We'll be making forward-looking statements. Next slide. We've been committed to delivering strong performance by investing particularly -- is there somebody on speaking as well? We've been committed to delivering strong performance over several years. And I think most people know us as a technology company. We have best-in-class R&D and clinical and regulatory talent. I would say that our ability to develop and produce product that we've entered into the market has been prolific over the years. And on the bottom there, you see that we've had reasonable growth for a while, and then COVID happened, and that became something that we focused on and have benefited from. We did recently signed a definitive agreement to acquire Ortho. Prior to that, the biggest thing we had done in 2017, at the end of 2017, in fact, we had acquired the Triage and BNP businesses from Alere for, at the time, $680 million, which for us was a reasonably big number. We had done some other smaller acquisitions before and a number of small tuck-ins that are not listed here. But we've had over 30 FDA clearances, a number of CLIA waivers, also a number of EUAs for COVID. And generally speaking, we've been on the front end, either the first or second in the market on all of those products. So next slide, Scott. As a stand-alone, Quidel has been successful. These things I would call transformative. This acquisition of the Alere assets was really important for us in terms of global expansion. It was more -- less seasonal and less volatile, more predictable. We thought we could still grow it. And we liked what the company had done in terms of development of other products like high-sensitivity troponin. And also, we like the toxicology space as well. So out of that deal, we did harvest $20 million in synergies. And the thing I'd like to point out here is we assembled the team to do the integration in terms of team of people of around 30, internal, supported by a number of third parties, the usual suspects. And that was a really good experience for us. I would view the integration of Ortho to be even smoother and easier because we've acquired the company and the infrastructure that already exists. And then, of course, we had tremendous execution starting in 2020 with COVID-19 during the pandemic. We solidified our own core, professional-use market as a result because we had signed up for people -- excuse me, signed people up for Sofia on 3- to 5-year contracts that included COVID and our other products. So our instrument expansion was significant. We ended up with over 70,000 analyzers as we exited 2020. The capacity improvement has been remarkable. We're now manufacturing 10x what we did before in order to meet the demand. We recently stood up distribution centers that didn't exist before as well as an additional manufacturing facility. We were given a grant by the government to improve our Sofia manufacturing earlier and then obviously participated in the RADx program on improving our capacity to manufacture quickly with COVID. And then we'll get to this, but I believe this next move, the merger of our 2 companies, Ortho and Quidel, will be the most transformative thing that we've done thus far and I think positions us for success moving forward. Next slide, Scott. So we've done all this while at the same time maximizing our core business. On the Quidel side, we expect to grow mid-teens on a compounded basis over the LLP without COVID. And in the meantime, we've really stepped up and delivered and addressed the strong demand for the products that you're seeing out there today. We do anticipate some level of COVID moving forward. I think there is a possibility at least that this becomes endemic and becomes a bit like -- just like the other seasonal respiratory viruses, maybe with more impact, of course. Between December 2021 week 1 and week 4, the sell-through increased at retail at our 2 bigger firms roughly 10x. And we've increased manufacturing capacity in 2021 to meet that demand. By mid-February, we will be at, I believe, the level that we had set that we were attempting to get to, which is about 70 million tests per month. I will admit, though, that because of a couple of factors, one, it's increasingly more difficult to hire people, that has proven to be the case in standing up the Rutherford facility. We had to increase our base wage rate in order to attract the talent that we needed to go into that facility. And then at the same time, as Omicron is causing fits across the globe, but in particular, for us, we've got about 10% of our workforce out at the moment. I think the new OSHA guidelines here in the State of California will be helpful in that we can get people back into the plant more quickly once they test positive. But we're trying to ramp up and increase production at a time where we've got people falling out from time to time. Savanna will be our next flagship product, we believe. We've launched in EU with a respiratory panel, just the smaller one. We've had very, very nice customer feedback, particularly on the turnaround time, cost, panel size. One of the big drivers in the molecular space has been cost. And I would say that what you hear from other molecular manufacturers is this particular segment is still underpenetrated, particularly when you consider the lower volume segment of the diagnostic testing space. We're targeting revenues in excess of $300 million by year 3. And we think that the merger with Ortho will derisk that because we'll be able to launch in the global space much more efficiently. And I think they will be helpful in the United States as well. We do see flu popping up. I get this question all the time. I don't know what that will mean for the next couple of quarters. But we are making more flu product at the moment, both flu and the combo formula. And as I said before, as a consequence of the strong demand for Sofia, we ended up putting a lot of boxes into the market on 3-year contracts. Next slide. Digital health is something that we don't talk a great deal about. But nevertheless, we have been spending a great deal of time on it. Our integrated digital health and diagnostic solutions are currently focused on the enterprise and employee health. And I think there's a possibility to expand into the consumer use of the markets beyond COVID-19, notwithstanding whatever we have to do to get through the FDA process. At the end of the day, we have to demonstrate that individuals can collect properly, and that will be very helpful in clinical trials where we try to demonstrate the sensitivity and specificity necessary to meet the FDA's hurdles for OTC products. But that's very much on the forefront of our minds, and it's something we're working on. Behind the scenes, in addition to manufacturing QuickVue, we've been developing a self-test module for cell phones that we call QVue to report results in near real time. The guided testing reporting may be necessary over time for various different uses. I think it's going to be potentially something that is necessary in order to have a true over-the-counter product. We'll see. But we've got things in place to enable employees to interact with a live proctor through video chat and to get tested. We'll see how that particular segment shapes up. But obviously, we think that there's a possibility that, that will be required. So in-home testing, we developed a product called SofiaQ. At first, all we've had is effectively COVID. So I don't know that that's necessarily what we want to launch with, but we would love to be able to go into the home with this particular product. And it basically leverages the same technology that's on our Sofia and Sofia 2 analyzers. And then we continue to make investments with other third parties, partnerships and licensing agreements and particularly those with proprietary IP to develop new solutions to enable the expanding field of digital health. I do think a paradigm shift has occurred in the public. The average individual during a year, I'm told, has 5 respiratory infections. And for the most part, I don't think the public ever previously thought about being tested. But now with COVID, I think it has changed the way people think. And if they don't have COVID, they want to know what it is. And so I think there is an opportunity. And I think the timing is very good for that. Next slide, Scott. So then, the flagship, we are super proud of where we are with this product. I would say that we are significantly delayed. This is a program that I thought we were going to launch in 2015, 2016. But I'm very happy at the end of the day that we have a product that performs as well as it does. It will have multiplexing technology, 4 PCRs in each cartridge that enable 3 analytes plus a control. The amplification time is super quick, 45 cycles in 12 minutes. With extraction, you can do a cartridge and around 25-minute sample-to-answer. Fully integrated, very easy to use. We'll have both direct swab and liquid sample compatibility. Reagents stable at room temperature, which is a huge deal in particularly hospital labs. Scalable, just like many other platforms, but ours will be scalable as well. A lot of versatility around assay development, both qualitative and quantitative. And our intent is to have a pretty big menu as quickly as we can. As I said before, we're a technology company that develops products quite easily. Our R&D and clean reg organizations are first-in-class. And as I said, I'll use the prolific word one more time. I don't know another organization out there that has the same level of talent as we do, particularly on the infectious disease side. And so the menu at the bottom is the starting point. And we have a number of other ideas beyond that. Next slide. So this is the obligatory size of the price slide. You can see that, like the diagnostics, still underpenetrated, as I said. If you make a comparison, I think I saw in the presentation that Danaher did that Cepheid manufactured 19 million tests in the fourth quarter, while we did 65 million with QuickVue. And so we did 4 million or 5 million in Sofia as well. And what I would say is that while the promise of molecular has been significant, the companies that have participated and going after that segment haven't done as well as they would have hoped. And so there's a lot of growth still there to be had and I think ease-of-use, turnaround time and cost. If we can get the cost down low enough, then I think that there will be further penetration. And so we've been asked, are you entering a crowded space where there are already many players out there? True enough. But with all the attributes necessary to actually further penetrate the market, maybe not. So yes, it's a crowded space, but there's not a lot of crowd that has the potential that the Savanna platform has. And you would expect that. It's newer. It's employing new technologies and the latest and greatest. And so it's a really good product. And you can see that the opportunity that we're chasing is pretty significant. And so one more Savanna slide. On the left-hand side, you can see a little bar chart that shows the number of analytes that you can get on a Savanna cartridge versus one of the leaders in the molecular space, the Cepheid product. This particular product fits really very nicely in between a 4-color PCR where you've got one individual cartridge. So a limited multiplexing capability. In the other end, very high multiplex solutions that are super costly and maybe not internally necessary. And so we think that there is an opportunity for our products to fit, and all the market research that we've done says that the product that we developed fits the needs of potential customers. And further to that, the customers that we've started up in Europe so far have come back and asked for more analyzers, so that they can further expand their reach into the clinics, et cetera. So we're very encouraged by what we see so far. And I think the biggest challenge right now will not necessarily be commercialization. At this stage, it will be how quickly can we ramp manufacturing, which sounds [indiscernible]. All right. Next slide. Yes, we'll skip this one again, Scott, so we should be on -- yes. Thank you very much. So this -- let me talk a little bit about our enthusiasm for putting these 2 companies together. Ortho, as a company, we looked at it a few years ago, and frankly, they were not where they are today. They've got a super strong executive team, a very focused strategy that has delivered results, one other guy and another larger company competing against the Kodak platform that was acquired by J&J. It was a tough product to compete with because of a number of things, including just the dry technology, and customers love it. The service is rated very highly, of course. But just to be honest, the product doesn't break, and it's phenomenal. So I'm not saying that service is easy. But when you have a great product like they do, it certainly makes the service aspect a little bit easier. But the combined company is now going to address a much larger segment. So I -- in my comment, we were quite limited in what we were going after. The clinical chemistry space is very interesting because a lot of the decisions in the lab are driven by clinical chemistry decisions just simply because of the volume. It's that same clinical lab directors that's making decisions on microbiology and other parts of the lab as well. So the combined company will be able to address a much, much larger total available market, if you will. Trailing 12 through Q3 was $3.9 billion for the combined company. We would have under -- just under 6,000 total employees globally. We're going after about $100 million in revenue synergies. And most of that to be upfront is due to the Savanna launch. But we also anticipate as we develop new products for other markets outside the United States on Sofia and other platforms, potentially QuickVue as well, that their reach will be very helpful. But for the deal, what we have in the model is primarily due to Savanna. So -- and then there's the cost synergies. And there's always execution risk on any deal. But I feel like the guys have been very -- Joe and Randy have been very conservative on how they've approached what they think they can do. And there's a lot of things that are not in the game plan right now that very well could be. And -- but we will leave that as upside. But we think that the $90 million is imminently achievable by the end of year 3, certainly. Next slide. So in terms of the detail, we're going to acquire Ortho for $24.68 a share and funded through a combination of cash, about $1.75 billion in cash, and stock. Total equity value of the deal is just under $6 billion. Ortho shareholders will receive just over $7 per common share and then 0.1055 of common stock for each common share that they own. Ortho shareholders will end up with about 38% of the overall company. And then, of course, Quidel stockholders will receive 1 share of the combined company for each Quidel share that they own. The management team will be combined. We will go through a process of looking across a number of executives throughout the company. But at the end of the day, we made a decision upfront that I would be the Chairman and CEO. Rob would be President and COO. Joe Busky will come onboard as Randy retires as Chief Financial Officer. And Mike Iskra will be our Chief Commercial Officer. In terms of the Board, it's a split that basically very much aligned around percentage of ownership. And so 8 of the directors will come from Quidel, and 4 will come from Ortho. So the thing that I think is the most impressive, you look at Quidel as a stand-alone and you say, without COVID, you guys said over the long-range plan that you think you can grow this thing 17% with the launch of Savanna, high sensitivity troponin, toxicology, all these other things. Aren't you going to slow yourself down as a result of buying something that's a solid grower but at a lower rate? And the honest answer is sure. But at the same time, 9% to 11% compounded, which is in the deal model, is pretty darn good. And compared with other companies in our space, this would be one of the faster-growing diagnostic companies in the world. So even combining the 2 organizations, we'll still be able to sustain a reasonable growth rate at the same time while increasing our margin. So we'll still be above 30%, which is also unique in terms of EBITDA, EBITDA as a percentage of sales. There aren't too many companies, period, that have EBITDA as a percentage greater than 30%. And we will be accretive within 12 months of close. The ROIC is also acceptable. It's not over 10%, but it's certainly going to be in the high single digits at the end of the day. So this transaction was unanimously approved by both Boards of Directors, obviously, subject to approval by our shareholders. And we expect to close in the first half of this year. So next slide, Scott. I won't bore you with a lot of detail here. But when you just look at the addressable market, the growth rate, EBITDA, the accretion, cash flow and ROIC, it's all here on 1 page. This is a pretty good deal for both companies and both as the shareholders of [indiscernible] company moving forward. Next slide. So very complementary. There's not a whole lot of overlap. Of course, we're in point of care, which is unique. But we're also in clinical laboratories with our products and so as Ortho. I think there's a really nice commercial synergy there. And then, of course, the transfusion business, Ortho has been a leader in that space for a very, very long time, does extremely well. There's multiple drivers to the creation of value: scale; broader portfolio; the leverage, that's going to be phenomenal for us; enhanced R&D, I like the programs they have in place. They're a little bit further out. So the introduction of some products like Savanna, high sensitivity troponin and all that, while we continue to develop the other Ortho products, I think, is a nice fit in terms of timing. Next slide. This would give us a bit more scale, at the end of the day where each [ pretty fit ] with stack ranking. I'm not sure how important that is. But if we're starting at #7 and we have an idea of moving up in the rank, I don't think that's going to surprise anybody that we know who's ahead of us, we know who we're chasing. And I think most of our staff on both sides are pretty darn competitive. So let's see what we do here in the next couple of years. Ortho is good to offset our volatility in our seasonality factors. And I love the fact that their products are so robust that once customers have them onboard, they effectively stay with them for a very long time. So a very high percentage of their revenue is recurring. Their EBITDA for being in the clinical chemistry space as well as in immunoassays is quite good. And the installed base is really is impressive. I love the fact also that strong presence in emerging markets, and our products on the Quidel side could use a little bit of representation in those segments as well. So next slide. Together, we will be one of the larger pure-play diagnostic companies. And here are some ways to look at that global infrastructure, stable growing revenue on the Ortho side, combined with arguably one of the better technology companies in our space but one that had been perhaps undersized in terms of our commercial power. Next slide. This is how it splits by geography in terms of revenue and then by product category. And of course, this deck will be on the website, so you can look at this in more detail as you prefer. I'm going to get to the end, so Tycho can ask me questions here. Next slide. A lot of health indications that we could address. Both companies have very strong R&D teams, so I think we're going to be able to do some things that are meaningful. Global footprint, there's the globe for you. All right. Next slide. One of the biggest things we're focused on, of course, is integration. We know how to do this sort of a -- we've got an Executive Steering Committee and a number of folks already applying to the integration management team that will be absolutely solidified within the next days and weeks. And I like our chances of doing this very, very well. And I know that everybody thinks there's execution risk. Of course, there is. But I like my team, and I think that we've proven that we know what to do. Okay. So key takeaways. We're going to continue driving momentum in our core businesses. Not going to be distracted, by the way, too much by the next shiny object. We know what we need to do. We need to prioritize the integration. We need to grow organically. If, along the way, we spot something that's a good fit, maybe it's in digital health or some other category and it's opportunistic and we think that we can easily integrate it, then we might look at it. So there's always -- as I said to my guys, there's always a difference between sometimes whether you can or whether you should. We certainly will have the financial wherewithal to do other ideas that we want to pursue, but it's not going to be our central focus. We're going to be focused on the things that you see here [indiscernible] for you. Tycho, I'll just turn it over. I hope I left you with enough time for questions.

Yes. We got like 6 minutes, but we'll make the most of it. Good presentation, Doug. I think one of the things when you see a deal get announced December 23, why now? Like were there other players involved that made deal timing announcement more pressing? Can you just give a little bit of background on the competitive process?

There weren't, as far as I know. Maybe it's a question for Chris Smith as well. I don't know what I don't know. But I'm not aware that other folks were involved in the discussion. And I guess, because it started more as a collaborative idea, can we sell your products ex U.S., particularly the molecular is how we started the conversation. But in doing our diligence and looking at things and lining up various scenarios, it became clear that we should start with the idea of an MOE. And that's the way it got started. So I'm not aware that this was a competitive process. I think the timing of the deal announcement -- there were a number of factors. But at the end of the day, what I can say, Tycho, is that for the 2 companies to be put together at this time is a really good time. They've got excellent R&D, but they had a little bit of a window between now and [indiscernible] next-generation products. We, at the same time, are launching probably the most important product in company's history with Savanna and probably don't have the commercial wherewithal to do it as well as they could. So when you look at things and how they line up and where they're at and to the fact that there's very little overlap on the product side, it was just really good timing. So other than we just wanted to get it done before the holiday and then move on and get going.

And one of the maybe areas of pushback is the pro forma debt. You're going from net cash per deal to over $3 billion in net debt. If you strip out the COVID revenue impact on EBITDA or moderate it, how do you think about the deleveraging profile? How fast can consolidated -- the consolidated business delever?

Well, I'll let Randy hand over to Joe to jump in very quickly. But at the end of the day, we see ourselves as refining the debt in a couple of different tranches here in a short period of time. And I think we're going to be able to delever. What would you say, Randy, 1 turn here or...

Yes. I'd say, Doug, 0.5 turn to 1 turn and as you showed on your slide. But the combined entities are generating more than $700 million in cash flow a year or so. We're going to be able to deleverage here very quickly.

Okay. A couple other things, I guess. Has anything changed in terms of your thinking about '22 as a mid-single-digit growth story ex COVID for kind of the base business for you guys?

No. But what I would say is we've derisked that a bit by engaging a much larger commercial organization. We thought we would get to $300 million of revenue over the long-range plan with Savanna on our own. And we've obviously got a conservative idea of what they could do on top of that. But at the end of the day, being able to launch globally in the way that they're going to be able to do probably says that we, for a short period of time, will effectively sell everything we can make. So the real constraint right now, Tycho, on my side, to be really honest, is how fast can we ramp up instrument manufacturing, how fast can we ramp up cartridge manufacturing.

And just so we're clear, where are you currently on number of tests per day? And when do you get to the 70 million?

On the COVID side?

Yes.

We're doing pretty safely north of 40 million QuickVue tests per month. And at least that's been the run rate in the last few weeks. We think we'll get to the total 50 million plus 20 million Sofia by mid-February.

Okay. You mentioned yesterday on the integration, back to the deal for a minute, that you wouldn't be integrating your R&D teams. I'm just curious about that decision. Is that something longer term you might consider doing? And then what's the opportunity to kind of port over some of the Quidel menu to legacy Ortho products?

Yes. Perhaps what I said was not received the way I had intended, Tycho. What I would say is there will be integration of the 2 teams. But I'm -- in our model, we haven't determined that we're going to cut out costs. But there should be molecular products that we can put on, thermocyclers that would be useful in their customer settings. We certainly could do some menu development for their next-generation immunoassay analyzers as well. And so our guys have met with their guys pretty extensively already and have a number of -- like all good R&D guys, they all have a lot of ideas already on what can be done. So not integrating is probably not what I had intended to say. What I meant to say was I don't see, for some period of time, us having a strong desire to cut out costs from the R&D organization.

Okay. Can you talk on Sofia? 4 million tests was a big decel relative to 16 million in the third quarter. And just talk about timing dynamics and the outlook for 2022 for Sofia and COVID.

Yes. We kidded disproportionately the QuickVue product, that's for sure. And I would tell you that I've got hospital customers screaming for Sofia. Our distribution partners now have -- therefore, have now ordered. And so as we went into January, the run rate was already more than what we had been previously experiencing. So I don't think it's a demand thing necessarily. But I think it is true that even some customers, particularly those who didn't want to worry about CLIA waiver and all that, went straight to QuickVue. So a lot of the new volume went straight to QuickVue versus Sofia. But we are hearing, I'm told, from some pretty irate large hospital customers that we need to be making more Sofia. So we're certainly addressing that.

Maybe last one. I know we're at time. But it's a pricing question, and maybe I could ask Joe to chime in if he's willing. We've heard some pretty big numbers on the pricing cuts in China around some of these tenders, kind of 25%, 30%. Are you able to comment on the pricing dynamic that you're seeing on tenders, Joe?

Yes, Tycho. There was one tender process in one province in China that we participated in. And we ended up being a net winner on that tender. There were some price cuts, nothing like you mentioned just there right now. But we did pick up volume. So we were a net winner. And we've heard rumors that there could be other tenders in other provinces. But that's just rumors at this point based on the info from our team on the ground there.

Okay. We'll leave it at that. We ran 1 minute over. So thanks for taking the time. It's good to catch up, and congrats on the deal.

Yes. Thank you. Thanks, Tycho. Good to see you.

Okay.